-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O0Gn739lLhTylSrn2rjBdSO1mtaKTXh9AquY0qwQWu+hrFs3KqETWUOG+72sxwgf i8BeiwHljXKSSuTUg2Vt/A== 0000950144-96-008123.txt : 19961118 0000950144-96-008123.hdr.sgml : 19961118 ACCESSION NUMBER: 0000950144-96-008123 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19961114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEGO MORTGAGE CORP CENTRAL INDEX KEY: 0001023334 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS BUSINESS CREDIT INSTITUTION [6159] IRS NUMBER: 880286042 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-12443 FILM NUMBER: 96663116 BUSINESS ADDRESS: STREET 1: 1000 PARKWOOD CIRCLE STREET 2: SUITE 500 CITY: ATLANTA STATE: GA ZIP: 30339 BUSINESS PHONE: 7027373700 MAIL ADDRESS: STREET 1: 4310 PARADISE RD CITY: LAS VEGAS STATE: NV ZIP: 89109 S-1/A 1 MEGO MORTGAGE FORM S-1 AMENDMENT #3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 14 1996 REGISTRATION NO. 333-12443 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- AMENDMENT NO. 3 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 MEGO MORTGAGE CORPORATION (Name of Registrant as Specified in its Charter) --------------------- DELAWARE 6162 88-0286042 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
--------------------- 1000 PARKWOOD CIRCLE, SUITE 500 ATLANTA, GEORGIA 30339 (770) 952-6700 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) --------------------- JAMES L. BELTER EXECUTIVE VICE PRESIDENT MEGO MORTGAGE CORPORATION 1000 PARKWOOD CIRCLE, SUITE 500 ATLANTA, GEORGIA 30339 (770) 952-6700 (Name, address, including zip code, and telephone number, including area code, of agent for service) COPY OF COMMUNICATIONS TO: GARY EPSTEIN, ESQ. STEVEN R. FINLEY, ESQ. FERN S. WATTS, ESQ. GIBSON, DUNN & CRUTCHER LLP GREENBERG, TRAURIG, HOFFMAN, 200 PARK AVENUE LIPOFF, ROSEN & QUENTEL, P.A. NEW YORK, NEW YORK 10166 1221 BRICKELL AVENUE (212) 351-4000 MIAMI, FLORIDA 33131 (FACSIMILE) (212) 351-4035 (305) 579-0500 (FACSIMILE) (305) 579-0717
--------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED NOVEMBER 14, 1996 2,000,000 SHARES MEGO MORTGAGE CORPORATION [LOGO] COMMON STOCK ------------------------ All of the 2,000,000 shares of Common Stock offered hereby (the "Offering") are being sold by Mego Mortgage Corporation (the "Company"). Mego Financial Corp. ("Mego Financial") currently owns 100% of the outstanding Common Stock. Upon completion of the Offering, Mego Financial will own approximately 83.3% of the Company's outstanding Common Stock (approximately 81.3% if the Underwriters exercise their over-allotment option in full). The sale of the Common Stock offered hereby is contingent upon the completion of a concurrent offering by the Company (the "Note Offering") of an aggregate of $40,000,000 of % Senior Subordinated Notes due 2001. Prior to the Offering, there has been no public trading market for the Common Stock, and there can be no assurance that any active trading market will develop. It is currently anticipated that the initial public offering price will be between $11.00 and $13.00 per share. See "Underwriting" for information relating to the factors to be considered in determining the initial public offering price. The Common Stock has been approved for quotation on The Nasdaq National Market ("Nasdaq") under the symbol "MMGC." SEE "RISK FACTORS" ON PAGES 8 THROUGH 18 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
- ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) - ------------------------------------------------------------------------------------------------------ Per Share........................... $ $ $ Total(3)............................ $ $ $ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------
(1) See "Underwriting" for information concerning indemnification of the Underwriters and other information. (2) Before deducting expenses of the Offering estimated at $675,000 payable by the Company. (3) The Company has granted the Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to 300,000 additional shares of Common Stock for the purpose of covering over-allotments, if any. If the Underwriters exercise such option in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------------ The shares of Common Stock are offered by the Underwriters when, as and if delivered to and accepted by them, subject to their right to withdraw, cancel or reject orders in whole or in part and subject to certain other conditions. It is expected that delivery of certificates representing the shares of Common Stock will be made against payment on or about , 1996, at the office of Oppenheimer & Co., Inc., Oppenheimer Tower, World Financial Center, New York, New York 10281. ------------------------ OPPENHEIMER & CO., INC. FRIEDMAN, BILLINGS, RAMSEY & CO., INC. The date of this Prospectus is , 1996 3 MEGO MORTGAGE CORPORATION MAP MAP OF THE CONTINENTAL UNITED STATES SHOWING TOP SIX STATES, HEADQUARTERS AND BRANCH OFFICES. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Each prospective investor is urged to read this Prospectus in its entirety. Unless otherwise indicated, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option to purchase from the Company up to an additional 300,000 shares of Common Stock and (ii) gives effect to a 1,600-for-1 stock split effected in October 1996. THE COMPANY Mego Mortgage Corporation (the "Company") is a specialized consumer finance company that originates, purchases, sells and services consumer loans consisting primarily of home improvement loans secured by liens on the improved property. Through its network of independent correspondent lenders ("Correspondents") and home improvement construction contractors ("Dealers"), the Company initially originated only home improvement loans insured under the Title I credit insurance program ("Title I Loans") of the Federal Housing Administration (the "FHA"). The Title I program provides for insurance of 90% of the principal balance of the loan, and certain other costs. The Company began offering conventional uninsured home improvement loans and debt consolidation loans ("Conventional Loans") through its Correspondents in May 1996. For the three months ended August 31, 1996, such loans totalled $11.2 million and constituted 22.5% of the Company's total loan originations. The Company's borrowers are individuals who own their home and have verifiable income but may have limited access to traditional financing sources due to insufficient home equity, limited credit history or high ratios of debt service to income. These borrowers require or seek a high degree of personalized service and prompt response to their loan applications. As a result, the Company's borrowers generally are not averse to paying higher interest rates that the Company charges for its loan programs as compared to the interest rates charged by banks and other traditional financial institutions. The Company has developed a proprietary credit index profile that includes as a significant component the credit evaluation score methodology developed by Fair, Isaac and Company to classify borrowers on the basis of likely future performance. The other components of the Company's scoring system include debt to income ratio, employment history and residence stability. The Company charges varying rates of interest based upon the borrower's credit profile and income. For the year ended August 31, 1996, the loans originated by the Company had a weighted average interest rate of 14.03%. The Company's loan originations increased to $139.4 million during the year ended August 31, 1996 from $87.8 million during the year ended August 31, 1995 and $8.2 million during the six months in which it originated loans in the year ended August 31, 1994. The Company's revenues increased to $25.0 million for the year ended August 31, 1996 from $13.6 million for the year ended August 31, 1995 and $751,000 for the year ended August 31, 1994. For the year ended August 31, 1996, the Company had net income of $6.9 million compared to $3.6 million for the year ended August 31, 1995. As a result of its substantial growth in loan originations, the Company has operated since March 1994, and expects to continue to operate for the foreseeable future, on a negative cash flow basis. The Company sells substantially all the loans it originates through either whole loan sales to third party institutional purchasers or securitizations at a yield below the stated interest rate on the loans, retaining the right to service the loans and receive any amounts in excess of the yield to the purchasers. The Company completed its first two securitizations of Title I Loans in March and August 1996 totalling $133.0 million and expects to sell a substantial portion of its loan production through securitizations in the future. At August 31, 1996, the Company serviced $209.5 million of loans it had sold, and $4.7 million of loans it owned. The Company's strategic plan is to continue to expand its lending operations while maintaining its credit quality. The Company's strategies include: (i) offering new loan products; (ii) expanding its network of Correspondents and Dealers; (iii) entering new geographic markets; (iv) realizing operational efficiencies through economies of scale; and (v) using securitizations to sell higher volumes of loans on more favorable 3 5 terms. At August 31, 1996, the Company had developed a network of approximately 310 active Correspondents and approximately 435 active Dealers. The Company's Correspondents generally offer a wide variety of loans and its Dealers typically offer home improvement loans in conjunction with debt consolidation. By offering a more diversified product line, including Conventional Loans, and maintaining its high level of service, the Company has increased the loan production from its existing network of Correspondents. The Company also intends to increase its number of active Correspondents and Dealers by greater penetration of existing markets, because of its broader product line, and through expansion into new geographic markets. The Company anticipates that as it expands its lending operations it will realize economies of scale, thereby reducing its average loan origination costs and enhancing its profitability. In addition, the Company intends to continue to sell its loan production through securitizations as opportunities arise. Through access to securitization, the Company believes that it has the ability to sell higher volumes of loans on more favorable terms than through whole loan sales. See "Business -- Business Strategy." The Company was incorporated under the laws of the State of Delaware in 1992. The Company's principal executive offices are located at 1000 Parkwood Circle, Suite 500, Atlanta, Georgia 30339, and its telephone number is (770) 952-6700. RELATIONSHIP WITH MEGO FINANCIAL Mego Financial Corp. ("Mego Financial"), a publicly traded company, currently owns 100% of the outstanding Common Stock. Upon completion of the Offering, Mego Financial will own approximately 83.3% of the outstanding Common Stock (approximately 81.3% if the Underwriters exercise their over-allotment option in full). As a result of its ownership interest, upon completion of the Offering, Mego Financial will have voting control on all matters submitted to stockholders of the Company, including the election of directors and the approval of extraordinary corporate transactions. See "Principal Stockholders." In order to fund the Company's past operations and growth, and in conjunction with filing consolidated tax returns, the Company incurred debt and other obligations ("Intercompany Debt") to Mego Financial and its subsidiary Preferred Equities Corporation ("PEC"). The amount of Intercompany Debt was $8.5 million at August 31, 1995 and $12.8 million at August 31, 1996. The Company intends to use a portion of the aggregate net proceeds from the Offering and the Note Offering to repay Intercompany Debt. It is not anticipated that Mego Financial will continue to provide funds to the Company or guarantee the Company's indebtedness following consummation of the Offering. The Company also has agreements with PEC for the provision of management services and loan servicing and an agreement with Mego Financial for tax sharing. See "Use of Proceeds" and "Certain Transactions." THE OFFERING Common Stock offered by the Company............................. 2,000,000 shares Common Stock to be outstanding after the Offering........................ 12,000,000 shares(1) Use of proceeds..................... The Company intends to use the aggregate net proceeds of the Offering and the Note Offering to provide capital to originate and securitize loans, to repay Intercompany Debt and to pay down the amounts outstanding under the Company's lines of credit. See "Use of Proceeds." Proposed Nasdaq symbol.............. MMGC - --------------- (1) Does not include 925,000 shares of Common Stock reserved for issuance upon exercise of stock options to be granted under the Company's 1996 Employee Stock Option Plan (the "Stock Option Plan"). See "Management -- Company Stock Option Plan." 4 6 RISK FACTORS Investment in the Common Stock offered hereby involves a high degree of risk. Each prospective investor should carefully consider all of the matters described herein under "Risk Factors," including, among others, risks relating to control by Mego Financial; risks relating to changes in interest rates; risks relating to the Company's dependence on securitization transactions; the fact that the Company has operated, and expects to continue to operate, on a negative cash flow basis; risks relating to possible termination of servicing rights; contingent risks including the risks relating to losses from loan delinquencies and other loan defaults; risks relating to the Company's limited operating history; risks inherent in the implementation of the Company's growth strategy; risks relating to the Company's dependence on continued access to adequate credit facilities; risks relating to the Note Offering; risks relating to the Company's concentration of operations in California and Florida; legislative and regulatory risks; risks relating to the Company's dependence on management, Mego Financial and PEC; risks associated with competition; the fact that purchasers of the Common Stock in the Offering will experience substantial dilution; restrictions on dividends; the absence of a public market for the Common Stock; and factors inhibiting a takeover of the Company. CONCURRENT OFFERING OF SUBORDINATED NOTES Concurrent with the Offering, the Company is offering $40.0 million aggregate principal amount of % Senior Subordinated Notes due 2001 (the "Notes") by a separate prospectus. The consummation of the Offering and the Note Offering are conditioned upon each other. Upon the consummation of the Note Offering, the Company will be significantly leveraged. As of August 31, 1996, after giving effect to the Note Offering and application of the net proceeds therefrom as described in "Use of Proceeds," the Company would have had outstanding indebtedness of approximately $40.9 million. The Company will be required to make scheduled payments of principal and interest regardless of the Company's cash flow from operations. The Company's ability to make payments of principal and interest on the Notes depends on its future operating performance and its ability to obtain financing in the future. See "Description of Note Offering." 5 7 SUMMARY FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The summary financial information set forth below should be read in conjunction with the financial statements, related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Prospectus.
YEAR ENDED AUGUST 31, --------------------------- 1994(1) 1995 1996 ------- ------- ------- STATEMENT OF OPERATIONS DATA: Revenues: Gain on sale of loans........................................... $ 579 $12,233 $17,994 Net unrealized gain on mortgage related securities(2)........... -- -- 2,697 Loan servicing income........................................... -- 873 3,348 Interest income, net of interest expense of $107, $468 and $1,116....................................................... 172 473 988 -------- ------- ------- Total revenues.................................................... 751 13,579 25,027 Total costs and expenses.......................................... 2,262 7,660 13,872 -------- ------- ------- Income (loss) before income taxes(3).............................. (1,511) 5,919 11,155 Income taxes(3)................................................... -- 2,277 4,235 -------- ------- ------- Net income (loss)................................................. $(1,511) $ 3,642 $ 6,920 ======== ======= ======= Pro forma net income per share(4)................................. $ 0.60 =======
AS OF AUGUST 31, AS OF AUGUST 31, 1996 ----------------- ------------------------ 1994(1) 1995 ACTUAL AS ADJUSTED(5) ------- ------- ------- -------------- STATEMENT OF FINANCIAL CONDITION DATA: Loans held for sale, net.............................. $1,463 $ 3,676 $ 4,610 $ 4,610 Excess servicing rights............................... 904 14,483 12,121 12,121 Mortgage related securities(2)........................ -- -- 22,944 22,944 Total assets.......................................... 5,122 24,081 50,606 86,173 Total liabilities..................................... 983 13,300 32,905 46,827 Total stockholder's equity............................ 4,139 10,781 17,701 39,346
YEAR ENDED AUGUST 31, ---------------------------- 1994(1) 1995 1996 ------- ------- -------- OPERATING DATA: Loans originated.............................................. $8,164 $87,751 $139,367 Weighted average interest rate on loans originated............ 14.18 % 14.55% 14.03% Servicing portfolio (end of year): Company-owned loans......................................... $1,471 $ 3,720 $ 4,698 Sold loans.................................................. 6,555 88,566 209,491 ------ ------- -------- Total............................................... $8,026 $92,286 $214,189 ====== ======= ======== Delinquency period(6): 31-60 days past due......................................... 2.06 % 2.58% 2.17% 61-90 days past due......................................... 0.48 0.73 0.85 91 days and over past due................................... 0.36 0.99 4.53(7) 91 days and over past due, net of claims filed(8)........... 0.26 0.61 1.94 Claims filed with HUD(9)...................................... 0.10 0.38 2.59 Amount of FHA insurance available (end of year)............... $ 813 $ 9,552 $ 21,205(10) Amount of FHA insurance available as a percentage of loans serviced (end of year)...................................... 10.13 % 10.35% 9.90% Ratio of earnings to fixed charges(11)........................ N/A 7.69x 2.29x(12)
6 8 - --------------- (1) The Company commenced originating loans in March 1994. (2) Mortgage related securities consist of certificates representing interests retained by the Company in securitization transactions. (3) The results of operations of the Company are included in the consolidated federal income tax returns filed by Mego Financial, the Company's sole stockholder. Mego Financial allocates income taxes to the Company calculated on a separate return basis. See "Certain Transactions." (4) Shares used in computing pro forma net income per share include the weighted average of common stock outstanding during the period. There were no common stock equivalents. Historical per share data is not included because the data is not considered relevant or indicative of the ongoing operations of the Company. Net income utilized in the calculation of pro forma net income per share has been reduced by an estimated pro forma interest expense in the amount of $1,544,000 and a related tax benefit of $587,000 based upon the application of a 13% interest rate to the Company's average balance of non-interest bearing debt payable to Mego Financial. Pro forma net income per share would change by $0.01 with a 1% change in the interest rate utilized. (5) As adjusted to give effect to (i) the sale of the shares of Common Stock offered hereby (at an assumed initial public offering price of $12.00 per share and after deducting underwriting discounts and estimated expenses of the Offering), (ii) the sale of the Notes pursuant to the Note Offering (after deducting underwriting discounts and estimated expenses of the Note Offering) and (iii) the application of the estimated net proceeds from the Offering and the Note Offering as described under "Use of Proceeds." (6) Represents the dollar amount of delinquent loans as a percentage of total dollar amount of loans serviced by the Company (including loans owned by the Company) as of the date indicated. (7) During fiscal 1996, the processing and payment of claims filed with HUD were delayed. See "Business -- Loan Servicing." (8) Represents the dollar amount of delinquent loans net of delinquent Title I Loans for which claims have been filed with HUD and payment is pending as a percentage of total dollar amount of loans serviced by the Company (including loans owned by the Company) as of the date indicated. (9) Represents the dollar amount of delinquent Title I Loans for which claims have been filed with HUD and payment is pending as a percentage of total dollar amount of loans serviced by the Company (including loans owned by the Company) as of the date indicated. (10) If all claims filed with HUD had been processed and paid as of period end, the amount of FHA insurance available would have been reduced to $16,215,000, which as a percentage of loans serviced would have been 7.77%. (11) Earnings include pretax income, the portion of rents representative of the interest factor and interest on debt. Fixed charges include interest on indebtedness, prepaid commitment fees and the portion of rents representative of the interest factor. (12) Ratio computed giving pro forma effect for the total additional interest expense resulting from the proposed issuance by the Company of $40,000,000 of Notes at an assumed interest rate of 13% in lieu of the interest expense recorded by the Company under its existing lines of credit intended to be repaid with the proceeds of the Offering and the Note Offering. 7 9 RISK FACTORS Investment in the Common Stock offered hereby involves a high degree of risk, including the risks described below. Each prospective investor should carefully consider the following risk factors inherent in and affecting the business of the Company and this offering before making an investment decision. This Prospectus contains forward-looking statements which involve risks and uncertainties. Discussions containing such forward-looking statements may be found in the material set forth under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as in the Prospectus generally. Actual events or results may differ as a result of various factors, including, without limitation, the risk factors set forth below and the matters set forth in the Prospectus generally. CONTROL BY MAJORITY STOCKHOLDER Upon completion of the Offering, the Company's current sole stockholder, Mego Financial, will beneficially own approximately 83.3% of the outstanding shares of Common Stock (approximately 81.3% if the Underwriters' over-allotment option is exercised in full) and will therefore be able to elect the entire Board of Directors and control all matters submitted to stockholders for a vote, all fundamental corporate matters, including the selection of management and key personnel, whether the Company engages in any mergers, acquisitions or other business combinations or whether Mego Financial, at some time in the future, divests all or any portion of its interest in the Company by means of a distribution to its stockholders or otherwise. The Offering has been structured in such a way as to facilitate the ability of Mego Financial, should it so determine in the future, to effect a subsequent tax free distribution of all or a portion of Mego Financial's shares in the Company to its shareholders, although there is no assurance that any such distribution will occur. The Company has been advised that Mego Financial may seek a ruling from the Internal Revenue Service, as is customary, that such a distribution would be tax free. There is no assurance that it will obtain such a ruling. Pursuant to the Amended and Restated Certificate of Incorporation of the Company (the "Certificate of Incorporation") and an agreement between Mego Financial and the Company, no additional shares of Common Stock may be issued by the Company that would reduce Mego Financial's interest below 80% without Mego Financial's written approval, so long as Mego Financial owns at least 80% of the issued and outstanding Common Stock of the Company (the "Eighty Percent Period"). In addition, although the Certificate of Incorporation provides for the issuance of one or more series of preferred stock from time to time, during the Eighty Percent Period no shares of any other class of capital stock may be issued without Mego Financial's written approval during such period, nor may the Company invest in or form any corporation without such approval. Amendments to the Company's bylaws and changes to the Board are also subject to such approval during the Eighty Percent Period. Any decision as to whether any transactions of the type mentioned above ultimately occur will be solely within the discretion of Mego Financial. See "Principal Stockholders" and "Description of Capital Stock." INTEREST RATE RISKS Changes in interest rates affect the Company's business in a variety of ways, including decreased demand for loans during periods of higher interest rates, fluctuations in profits derived from the difference between short-term and long-term interest rates and increases in prepayment rates during periods of lower interest rates. The profits realized by the Company from home improvement loans are, in part, a function of the difference between fixed long-term interest rates, at which the Company originates its home improvement loans, and adjustable short-term interest rates, at which the Company finances such loans until the closing of the sale of such loans. Generally, short-term rates are lower than long-term rates and the Company benefits from the positive interest rate differentials during the time the loans are held by the Company pending the closing of the sale of such loans. During the period from 1994 through the present, the interest rate differential was high and this fact contributed significantly to the Company's net interest income. The interest rate differential may not continue at such favorable levels in the future. Changes in interest rates during the period between the time an interest rate is established on a loan and the time such loan is sold affect the revenues realized by the Company from loans. In connection with the origination of loans, the Company issues loan commitments for periods of up to 45 days in the case of 8 10 Correspondents and 90 days in the case of Dealers. Furthermore, the period of time between the closing on a loan and the sale of such loan generally ranges from 10 to 90 days. Increases in interest rates during these periods will result in lower gains (or even losses) on sales of loans than would be recorded if interest rates had remained stable or had declined. Changes in interest rates after the sale of loans also affect the profits realized by the Company with respect to loan sale transactions in which the yield to the purchaser is based on an adjustable rate. During the years ended August 31, 1995 and 1996, the Company sold loans under an agreement which provides for the yield to the purchaser to be adjusted monthly to a rate equal to 200 basis points over the one-month London Interbank Offered Rate ("LIBOR"). An increase in LIBOR would result in a decrease in the Company's future income from such sold loans resulting in a charge to earnings in the period of adjustment. Although through August 31, 1996 the Company has not suffered losses in connection with the sale of Title I Loans or Conventional Loans as a result of interest rate changes, there can be no assurance that such losses will not occur in the future. To date, the Company has not hedged its interest rate risk, although it may do so in the future. To the extent that the Company engages in hedging transactions, there can be no assurance that it will be successful in mitigating the adverse impact of changes in interest rates. Interest rate levels also affect the Company's excess servicing spread. The Company generally retains the servicing rights to the loans it sells. The yield to the purchaser is generally lower than the average stated interest rates on the loans, as a result of which the Company earns an excess servicing spread on the loans it sells. Increases in interest rates or competitive pressures may result in reduced servicing spreads, thereby reducing or eliminating the gains recognized by the Company upon the sale of loans in the future. CAPITALIZED EXCESS SERVICING RIGHTS AND VALUATION OF MORTGAGE RELATED SECURITIES At August 31, 1996, the Company's statement of financial condition reflected excess servicing rights of $12.1 million, mortgage related securities of $22.9 million and mortgage servicing rights of $3.8 million. The Company derives a significant portion of its income by realizing gains upon the sale of loans due to the excess servicing rights associated with such loans recorded at the time of sale and the capitalization of mortgage servicing rights recorded at origination. Excess servicing rights as capitalized on the Company's statement of financial condition represent the excess of the interest rate payable by an obligor on a loan over the interest rate passed through to the purchaser acquiring an interest in such loan, less the Company's normal servicing fee and other applicable recurring fees. The Company records gains on sale of loans through securitizations and whole loan sales based in part on the estimated fair value of the mortgage related securities (residual and interest only securities) retained by the Company and on the estimated fair value of retained mortgage servicing rights related to such loans. When loans are sold, the Company recognizes as current revenue the present value of the excess servicing rights expected to be realized over the anticipated average life of loans sold less future estimated credit losses relating to the loans sold. Mortgage related securities consist of certificates representing the excess of the interest rate payable by an obligor on a sold loan over the yield on pass-through certificates sold pursuant to a securitization transaction, after payment of servicing and other fees. The capitalized excess servicing rights, and capitalized mortgage servicing rights and valuation of mortgage related securities are computed using prepayment, default and interest rate assumptions that the Company believes are reasonable. The amount of revenue recognized upon the sale of loans will vary depending on the assumptions utilized. The weighted average discount rate used to determine the present value of the balance of capitalized excess servicing rights and capitalized mortgage servicing rights reflected on the Company's statement of financial condition at August 31, 1995 and 1996 was approximately 12%. Capitalized excess servicing rights are amortized over the lesser of the estimated or actual remaining life of the underlying loans as an offset against the excess servicing rights component of servicing income actually received in connection with such loans. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Although the Company believes that it has made reasonable estimates of the fair value of the mortgage related securities, the excess servicing rights and mortgage servicing rights likely to be realized, the rate of prepayment and the amount of defaults utilized by the Company are estimates and actual experience may vary from its estimates. The gain recognized by the Company upon the sale of loans and unrealized gain on mortgage related securities will have been overstated if prepayments or defaults are greater than anticipated. 9 11 Higher levels of future prepayments could result in excess servicing rights and mortgage servicing rights amortization expense exceeding realized excess servicing rights and mortgage servicing rights, thereby adversely affecting the Company's servicing income and resulting in a charge to earnings in the period of adjustment. Similarly, if delinquencies or liquidations were to be greater than initially assumed, excess servicing rights and mortgage servicing rights amortization would occur more quickly than originally anticipated, which would have an adverse effect on loan servicing income in the period of such adjustment. The Company periodically reviews its prepayment assumptions in relation to current rates of prepayment and, if necessary, reduces the remaining asset to the net present value of the estimated remaining future excess servicing rights. Rapid increases in interest rates or competitive pressures may result in a reduction of excess servicing income recognized by the Company upon the sale of loans in the future, thereby reducing the gains recognized by the Company upon such sales. Higher levels of prepayments than initially assumed would result in a charge to earnings in the period of adjustment. Increases in interest rates or higher than anticipated rates of loan prepayments or credit losses on the underlying loans of the Company's mortgage related securities or similar securities may require the Company to write down the value of such mortgage related securities and result in a material adverse impact on the Company's results of operations and financial condition. The Company is not aware of an active market for the mortgage related securities, excess servicing rights or mortgage servicing rights. No assurance can be given that the mortgage related securities, capitalized excess servicing rights or mortgage servicing rights could in fact be sold at their carrying value, if at all. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." In order to provide availability under its warehouse line of credit, during the years ended August 31, 1995 and 1996, the Company sold an aggregate of approximately $175.8 million of loans under an agreement which provides for the yield to the purchaser to be adjusted monthly to a rate equal to 200 basis points over LIBOR. The Company is not obligated to reacquire and the purchaser is not obligated to resell such loans. In March 1996 and August 1996, in order to fix the yield on such loans, the Company reacquired $77.7 million and $36.2 million, respectively, of such loans and included the loans in pools of loans sold in its first two securitization transactions. As a result of the reacquisitions and subsequent sales in the securitization transactions, the gains on sale and excess servicing rights recognized upon the initial sales of the loans in such periods were recalculated without any material adverse effect on the Company's earnings. The Company anticipates that in the future it may sell and then reacquire loans to be resold pursuant to securitizations, which will result in recalculation of the initial gain on sale and excess servicing rights. Any such recalculation in such periods could have a material adverse effect on the Company's earnings in the period of recalculation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." LIQUIDITY -- DEPENDENCE ON SECURITIZATION TRANSACTIONS The values of and markets for the sale of the Company's loans are dependent upon a number of factors, including general economic conditions, interest rates and government regulations. Adverse changes in those factors may affect the Company's ability to originate or sell loans in the secondary market for acceptable prices within reasonable time frames. The ability of the Company to sell loans in the secondary market is essential for continuation of the Company's loan origination activities. A reduction in the size of the secondary market for home improvement loans would adversely affect the Company's ability to sell its loans in the secondary market with a consequent adverse impact on the Company's profitability and future originations. The Company entered into its first two securitization transactions, which involve the pooling and sale of loans, in March 1996 and August 1996 and intends to continue to sell loans through securitization transactions from time to time as opportunities arise. Pursuant to these securitizations, pass-through certificates evidencing interests in the pools of loans were sold in public offerings. There can be no assurance that the Company will be able to securitize its loan production efficiently. Securitization transactions may be affected by a number of factors, some of which are beyond the Company's control, including, among other things, conditions in the securities markets in general, conditions in the asset-backed securitization market, the conformity of loan pools to rating agency requirements and, to the extent that monoline insurance is used, the requirements of 10 12 such insurers. Adverse changes in the securitization market could impair the Company's ability to originate and sell loans through securitizations on a favorable or timely basis. Any such impairment could have a material adverse effect upon the Company's results of operations and financial condition. Furthermore, the Company's quarterly operating results can fluctuate significantly as a result of the timing and level of securitizations. LIQUIDITY -- NEGATIVE CASH FLOW As a result of the substantial growth in loan originations, the Company has operated since March 1994, and expects to continue to operate for the foreseeable future, on a negative cash flow basis. During the year ended August 31, 1996, the Company operated on a negative cash flow basis using $15.3 million in operations that was funded primarily from borrowings, due primarily to an increase in loans originated and the Company's sale of loans. In connection with whole loan sales and securitizations, the Company recognizes a gain on sale of the loans upon the closing of the transaction and the delivery of the loans, but does not receive the cash representing such gain until it receives the excess servicing spread, which is payable over the actual life of the loans sold. The Company incurs significant expenses in connection with securitizations and incurs tax liabilities as a result of the gain on sale. The Company must maintain external sources of cash to fund its operations and pay its taxes and therefore must maintain warehouse lines of credit and other external funding sources. If the capital sources of the Company were to decrease, the rate of growth of the Company would be negatively affected. See "-- Dependence on Mego Financial and PEC." The pooling and servicing agreements relating to the Company's securitizations require the Company to build over-collateralization levels through retention within each securitization trust of excess servicing distributions and application thereof to reduce the principal balances of the senior interests issued by the related trust or cover interest shortfalls. This retention causes the aggregate principal amount of the loans in the related pool to exceed the aggregate principal balance of the outstanding investor certificates. Such over-collateralization amounts serve as credit enhancement for the related trust and therefore are available to absorb losses realized on loans held by such trust. The Company continues to be subject to the risks of default and foreclosure following the sale of loans through securitizations to the extent excess servicing distributions are required to be retained or applied to reduce principal or cover interest shortfalls from time to time. Such retained amounts are predetermined by the entity issuing the guarantee of the related senior interests and are a condition to obtaining insurance and an AAA/Aaa rating thereon. In addition, such retention delays cash distributions that otherwise would flow to the Company through its retained interest, thereby adversely affecting the flow of cash to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." POSSIBLE TERMINATION OF SERVICING RIGHTS The pooling and servicing agreements relating to the Company's securitization transactions contain provisions with respect to the maximum permitted loan delinquency rates and loan default rates, which, if exceeded, would allow the termination of the Company's right to service the related loans. At September 30, 1996, the default rates on the pool of loans sold in the March 1996 securitization transaction exceeded the permitted limit set forth in the related pooling and servicing agreement. Accordingly, this condition could result in the termination of the Company's servicing rights with respect to that pool of loans by the trustee, the master servicer or the insurance company providing credit enhancement for that transaction. The mortgage servicing rights on this pool of loans were approximately $1.4 million at August 31, 1996. Although the insurance company has indicated that it, and to its knowledge the trustee and the master servicer, has no present intention to terminate the Company's servicing rights, no assurance can be given that one or more of such parties will not exercise its right to terminate. In the event of such termination, there would be an adverse effect on the valuation of the Company's mortgage servicing rights. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Possible Termination of Servicing Rights." CONTINGENT RISKS Loan delinquencies and other loan defaults by obligors expose the Company to risks of loss and reduced net earnings. The loan delinquency and default risks to which the Company's business is subject become more acute in an economic slowdown or recession. During such periods, loan delinquencies and other defaults 11 13 generally increase. In addition, significant declines in market values of the properties that secure loans serviced by the Company reduce homeowners' equity in their homes and their borrowing power, thereby increasing the likelihood of delinquencies and defaults. Because most of the Company's borrowers generally lack significant equity in their homes, the likelihood of default may be further increased. This lack of equity also increases the risk that, upon the occurrence of a customer default, the Company would be unlikely to recover more than the amount insured (if any). Although the Company sells substantially all loans which it originates on a limited recourse basis, the Company retains some degree of risk on substantially all loans sold. In connection with whole loan sales, the excess servicing payable to the Company is subordinated to the payment of scheduled principal and interest due to the purchasers of such loans. The Company is required under the loan sale documentation to establish reserves which are typically based on a percentage of the principal balances of such loans and funded from the excess servicing spread received by the Company. If a reserve falls below the required level, the Company is obligated under the loan sale documentation to restore the reserve from the servicing spread received by the Company, thereby reducing the stream of revenue from the servicing spread. Similarly, in connection with loan securitizations, the residual certificates retained by the Company are subordinated to the payment of scheduled principal and interest on the senior certificates issued by the securitization trust. In the event that payments received on the loans are insufficient to make scheduled payments of principal and interest on the senior certificates, the amounts otherwise distributable with respect to the residual certificates will be used to cover the shortfall, thereby reducing the stream of revenues from such residual certificates. Although the Company believes it maintains adequate reserves for potential losses from delinquencies and defaults, there can be no assurance that such levels of reserves will be adequate in the future. In addition, documents governing the Company's securitizations and whole loan sales require the Company to commit to reacquire or replace loans that do not conform to the representations and warranties made by the Company at the time of sale. When borrowers are delinquent in making monthly payments on loans included in a securitization trust, the Company is required to advance interest payments with respect to such delinquent loans to the extent that the Company deems such advances ultimately recoverable. These advances require funding by the Company but have priority of repayment from the succeeding month's collections. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources," "Business -- Loan Servicing -- Sale of Loans" and Note 2 of Notes to Financial Statements. During the period of time that loans are held pending sale, the Company is subject to the various business risks associated with the lending business, including the risk of borrower default, the risk of foreclosure and the risk that a rapid increase in interest rates would result in a decline in the value of loans to potential purchasers. To date, 95% of the loans originated by the Company qualify under Title I of the National Housing Act pursuant to which 90% of the principal balances of such loans are insured by the FHA; however, the Company bears the risk of delinquencies and defaults with respect to the uninsured portion of such loans. Moreover, even as to the insured portion, the amount of reimbursement to which the Company is entitled pursuant to Title I is limited to the amount of insurance coverage in its reserve account established by the FHA. The amount of insurance coverage in a lender's reserve account is equal to 10% of the original principal amount of all Title I Loans originated and reported for insurance coverage by the lender less the amount of all insurance claims approved for payment in connection with losses on such loans and less amounts transferred in connection with sales of loans. The Company also would sustain a loss on loans if defaults occur that are not cured and proceeds from FHA insurance or the foreclosure on and disposition of property securing a defaulted loan are less than the amounts due on the loan plus carrying and other costs. Furthermore, Title I sets forth requirements to be satisfied by the lender in connection with the origination of Title I Loans and the submission of claims for insurance. The exhaustion of the reserves or the Company's failure to comply with Title I requirements could result in denial of payment by FHA. As a percentage of the total serviced portfolio, the principal balance of loans contractually past due 91 days or more has increased from 0.99% as of August 31, 1995 to 4.53% as of August 31, 1996. This rise in delinquencies, all of which pertain to the portfolio of Title I Loans, represents an expected seasoning of the portfolio. This increase includes approximately 2.59% of the serviced portfolio pursuant to which claims have been filed with HUD. As of August 31, 1996, the Company had received payment on 83 claims filed with 12 14 HUD aggregating $1.3 million. As of August 31, 1996, none of the Company's Conventional Loans were more than 30 days contractually past due. The Company began originating Conventional Loans through its Correspondents in May 1996. For the three months ended August 31, 1996, such loans totalled $11.2 million and constituted 22.5% of the Company's total loan originations. During the period of time that such loans are held for sale, the Company bears the risk of delinquencies and defaults with respect to the entire principal amount of and interest on such loans and the risk that the realizable value of the property securing such loans will not be sufficient to repay the borrower's obligations to the Company. Significant defaults under these loans could have a material adverse effect on the Company's results of operations and financial condition. The Company's Conventional Loan program provides for loan amounts up to $60,000 with fixed rates of interest and terms up to 20 years. The proceeds of these loans are utilized to pay for home improvements and for consolidation of existing debt. The Company has focused on those borrowers who have demonstrated excellent payment history on their existing credit. Heavier reliance in the approval of these loans has been placed on the credit worthiness of the borrowers as opposed to underlying collateral value of the properties. The Company takes a lien, generally junior in priority, on each of the properties, however on average the total debt to market value, including the Company's loan, has been 110%. In the ordinary course of its business, the Company is subject to claims made against it by borrowers and private investors arising from, among other things, losses that are claimed to have been incurred as a result of alleged breaches of fiduciary obligations, misrepresentations, errors and omissions of employees, officers and agents of the Company (including its appraisers), incomplete documentation and failures by the Company to comply with various laws and regulations applicable to its business. The Company believes that liability with respect to any currently asserted claims or legal actions is not likely to be material to the Company's results of operations or financial condition; however, any claims asserted in the future may result in legal expenses or liabilities which could have a material adverse effect on the Company's results of operations and financial condition. LIMITED OPERATING HISTORY The Company began originating Title I Loans in March 1994 and began offering Conventional Loans in May 1996. The Company's prospects must be considered in light of the risks, delays, expenses and difficulties frequently encountered in connection with an early-stage business in a highly-regulated, competitive environment. No assurance can be given that the Company will successfully implement any of its plans or develop its current operations in a timely or effective manner or whether the Company will be able to continue to generate significant revenues or operate profitably. RISKS RELATING TO GROWTH STRATEGY The Company's strategic plan contemplates the continued expansion of its mortgage lending operations. The Company's ability to continue implementing its expansion strategy depends on its ability to increase the volume of loans it originates while maintaining credit quality and managing its resulting growth. The Company's ability to increase its volume of loans will depend on, among other factors, its ability to (i) obtain and maintain increasingly larger lines of credit, (ii) securitize pools of loans for sale, (iii) offer attractive products to prospective borrowers, (iv) attract and retain qualified underwriting, servicing and other personnel, (v) market its loan products successfully and (vi) establish and maintain relationships with Correspondents and Dealers in states in which the Company is currently active and in additional states. The Company's ability to manage growth as it pursues its expansion strategy will be dependent upon, among other things, its ability to (i) maintain appropriate procedures, policies and systems to ensure that the Company's loan portfolio does not have an unacceptable level of credit risk and loss, (ii) satisfy its need for additional financing on reasonable terms, (iii) manage the costs associated with expanding its infrastructure and (iv) continue operating in competitive, economic, regulatory and judicial environments that are conducive to the Company's business activities. As part of its expansion strategy, the Company has begun to offer a more diversified product line, including Conventional Loans which expose the Company to greater risks than Title I Loans. There can be no assurance that the Company will be able to continue to grow successfully. See "Business -- Business Strategy." 13 15 DEPENDENCE ON CREDIT ENHANCEMENT In order to gain access to the securitization market, the Company has relied on credit enhancements provided by a monoline insurance carrier to guarantee outstanding senior interests in the related securitization trusts to enable it to obtain an AAA/Aaa rating for such interests. The Company has not attempted to structure a mortgage loan pool for sale through a securitization based solely on the internal credit characteristics of the pool or the Company's credit. In the absence of such credit enhancements, the Company would be unable to market its loans through securitizations at reasonable rates. Any substantial reductions in the size or availability of the securitization market for the Company's loans, or the unwillingness or inability of insurance companies to insure the senior interests in the Company's loan pools, could have a material adverse effect on the Company's results of operations and financial condition. Furthermore, a downgrading of the insurer's credit rating or its withdrawal of credit enhancement could have a material adverse effect on the Company's results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." DEPENDENCE ON FINANCING; NEED FOR ADDITIONAL FINANCING The Company's business operations require continued access to adequate credit facilities. The Company is dependent on the availability of credit facilities for the origination of loans prior to their sale. The Company has a financing arrangement for the financing of Title I and Conventional Loan originations prior to the sale of such loans, which provides for a warehouse line of credit of up to $20.0 million which expires in August 1997. At August 31, 1996, an aggregate of $3.3 million was outstanding under such line of credit and $16.7 million was available for borrowing. In addition, at August 31, 1996, the Company had a $10.0 million facility for the financing of excess servicing rights and mortgage related securities, of which $10.0 million was outstanding on that date. The revolving loan has an 18-month revolving credit period expiring in December 1997, followed by a 30-month amortization period. In September 1996, the Company entered into a repurchase agreement with a financial institution pursuant to which it pledged the interest only certificates from its two 1996 securitizations in exchange for a $3.0 million advance. In November 1996, the Company entered into an agreement with the same financial institution for the purchase of $2.0 billion of loans over a five-year period. The Company has also received a commitment from the financial institution for up to $11.0 million, reduced by any amounts advanced under the repurchase agreement, for the financing of the interest only and residual certificates from future securitizations. In the event that the proceeds received by the Company from the Offering and the Note Offering together with cash flow from operations and its existing credit facilities prove to be insufficient to meet the Company's capital requirements, the Company may be required to seek additional financing. There can be no assurance that such financing will be available on favorable terms, or at all. To the extent that the Company were not successful in maintaining or replacing existing financing or obtaining additional financing, or selling its loans or receivables, it would have to curtail its activities, which would have a material adverse effect on the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 11 of Notes to Financial Statements. RISKS RELATED TO THE NOTE OFFERING The ability of the Company to make payments of interest and principal on the Notes will depend on the cash reserves and other liquid assets held by the Company and any proceeds from any future financings. If the Company were unable to make such payments, it would result in a default under the Indenture governing the Notes (the "Indenture"), as well as a default under certain of the Company's other agreements, which would have a material adverse effect on the Company's financial condition. The Indenture also includes certain covenants that, among other things, restrict: (i) the incurrence of indebtedness; (ii) the creation of liens, other than certain permitted liens; (iii) consolidations, mergers and the sale of assets; (iv) certain transactions with affiliates; (v) the incurrence of indebtedness and issuance of preferred stock by subsidiaries; (vi) the making of restricted payments (including restrictions on the payment of dividends on the Common Stock); (vii) the 14 16 imposition of certain distribution restrictions on subsidiaries; and (viii) the making of guarantees by subsidiaries. If the Company does not comply with these covenants, the holders of the Notes will be entitled, under certain circumstances, to declare the Notes immediately due and payable, which would have a material adverse effect on the Company's financial condition. In addition, the Indenture provides that, upon certain events constituting a change of control of the Company, the holders of the Notes would be entitled to require the Company to repurchase up to all of the outstanding Notes, plus accrued and unpaid interest, if any, to the date of repurchase. The Company's failure to repurchase the Notes would result in a default under the Indenture, which would have a material adverse effect on the Company's financial condition. INCOME TAXES The Company files a consolidated federal income tax return with its parent, Mego Financial. Income taxes for the Company are provided for on a separate return basis. As part of its former tax sharing arrangement, the Company recorded a liability to Mego Financial for federal income taxes applied to the Company's financial statement income after giving consideration to applicable income tax law and statutory rates. Under a new tax sharing agreement with Mego Financial, the Company will record a liability to Mego Financial calculated on a separate company basis. The Company accounts for taxes under SFAS No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), which requires an asset and liability approach. The provision for income taxes includes deferred income taxes, which result from reporting items of income and expense for financial statement purposes in different accounting periods than for income tax purposes. The Company also provides for state income taxes at the rate of 6% of income before income taxes. CONCENTRATION OF OPERATIONS Approximately 36.2% of the dollar volume of the Company's servicing portfolio at, and approximately 28.5% of the dollar volume of loans originated by the Company during the year ended, August 31, 1996 were secured by properties located in California. Although the Company is expanding its network nationally, significant portions of the Company's servicing portfolio and loan originations are likely to remain concentrated in California for the foreseeable future. Consequently, the Company's results of operations and financial condition are dependent upon general trends in the California economy and its residential real estate market. The California economy has experienced a slowdown or recession over the last several years that has been accompanied by a sustained decline in the California real estate market. Residential real estate market declines may adversely affect the value of the properties securing loans to the extent that the principal balances of such loans, together with any primary financing on the mortgaged properties, will equal or exceed the value of the mortgaged properties. In addition, California historically has been vulnerable to certain natural disaster risks, such as earthquakes and erosion-caused mudslides, which are not typically covered by the standard hazard insurance policies maintained by borrowers. Uninsured disasters may adversely impact borrowers' ability to repay loans made by the Company. The existence of adverse economic conditions or the occurrence of such natural disasters in California could have a material adverse effect on the Company's results of operations and financial condition. In addition, approximately 12.5% of the dollar volume of the Company's servicing portfolio at, and approximately 15.0% of the dollar volume of loans originated by the Company during the year ended, August 31, 1996 were secured by properties located in Florida. As a result, the Company's results of operations and financial condition are dependent upon general trends in the Florida economy and its residential real estate market. LEGISLATIVE AND REGULATORY RISKS Members of Congress and government officials from time to time have suggested the elimination of the mortgage interest deduction for federal income tax purposes, either entirely or in part, based on borrower income, type of loan or principal amount. Because many of the Company's loans are made to borrowers for the purpose of consolidating consumer debt or financing other consumer needs, the competitive advantages of tax deductible interest, when compared with alternative sources of financing, could be eliminated or seriously 15 17 impaired by such government action. Accordingly, the reduction or elimination of these tax benefits would have a material adverse effect on the demand for loans of the kind offered by the Company. The Company's business is subject to extensive regulation, supervision and licensing by federal, state and local governmental authorities and is subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of its operations. The Company's consumer lending activities are subject to the Federal Truth-in-Lending Act and Regulation Z (including the Home Ownership and Equity Protection Act of 1994), the Federal Equal Credit Opportunity Act and Regulation B, as amended ("ECOA"), the Fair Credit Reporting Act of 1970, as amended, the Federal Real Estate Settlement Procedures Act ("RESPA") and Regulation X, the Home Mortgage Disclosure Act and the Federal Debt Collection Practices Act, as well as other federal and state statutes and regulations of, and examinations by, the Department of Housing and Urban Development ("HUD") and state regulatory authorities with respect to originating, processing, underwriting, selling, securitizing and servicing loans. These rules and regulations, among other things, impose licensing obligations on the Company, establish eligibility criteria for mortgage loans, prohibit discrimination, provide for inspections and appraisals of properties, require credit reports on loan applicants, regulate assessment, collection, foreclosure and claims handling, investment and interest payments on escrow balances and payment features, mandate certain disclosures and notices to borrowers and, in some cases, fix maximum interest rates, fees and mortgage loan amounts. Failure to comply with these requirements can lead to loss of approved status, termination or suspension of servicing contracts without compensation to the servicer, demands for indemnification or mortgage loan repurchases, certain rights of rescission for mortgage loans, class action lawsuits and administrative enforcement actions. Although the Company believes that it has systems and procedures to facilitate compliance with these requirements and believes that it is in compliance in all material respects with applicable local, state and federal laws, rules and regulations, there can be no assurance that more restrictive laws, rules and regulations will not be adopted in the future that could make compliance more difficult or expensive. See "Business -- Government Regulation." To date, a substantial portion of the loans originated by the Company have been Title I Loans. Accordingly, a substantial part of the Company's business is dependent on the continuation of the Title I Loan program, which is federally funded. In August 1995, bills were introduced in both houses of the United States Congress that would, among other things, abolish HUD, of which the FHA is a part, reduce federal spending for housing and community development activities and eliminate the Title I Loan program. Other changes to HUD have been proposed, which, if adopted, could affect the operation of the Title I Loan program. Discontinuation of or a significant reduction in the Title I Loan program or the Company's authority to originate loans under the Title I Loan program could have a material adverse effect on the Company's results of operations and financial condition. DEPENDENCE ON MANAGEMENT Certain of the Company's loan agreements with financial institutions contain provisions to the effect that if at least three of the four senior members of management of the Company do not continue to hold such positions or control the Company, whether due to death, disability, resignation or otherwise, the lenders have the right to declare the loans in default. In addition, one of such agreements also provides that the lender has the right to declare the loan in default upon the death of, or any reduction of the management responsibility of, more than one of these four senior managers. In such event, there is no assurance that the lenders will consider replacement managers acceptable to them and not declare such instruments in default. The Company has not entered into employment agreements with any of such senior managers. DEPENDENCE ON MEGO FINANCIAL AND PEC The Company has been dependent on Mego Financial to provide, among other things, (i) funds for operations without interest and (ii) guarantees of the Company's financing arrangements. The Company anticipates that no further financing or guarantees will be made by Mego Financial following the completion of the Offering. There can be no assurance that the absence of such financing or guarantees will not have a 16 18 material adverse effect on the Company, particularly as the Company seeks to grow. In addition, the Company has been dependent on its affiliate, PEC, to provide management services, routine loan collection services and management information systems, including services of certain of its executive officers. There can be no assurance that PEC will continue to provide such services. The loss of such services could have a material adverse effect on the Company if suitable replacements are not made. COMPETITION The consumer finance industry is highly competitive. Competitors in the consumer finance business include mortgage banking companies, commercial banks, credit unions, thrift institutions, credit card issuers and finance companies. Certain of the Company's competitors are substantially larger, have greater name recognition and have more capital and other resources than the Company. Competition in the home improvement and debt consolidation loan business can take many forms including convenience in obtaining a loan, customer service, marketing and distribution channels and interest rates. In addition, the current level of gains realized by the Company and its existing competitors on the sale of loans could attract additional competitors to this market with the possible effect of lower gains on loan sales resulting from increased loan origination competition. According to a report issued by HUD, the Company was the fourth largest lender of Title I Loans, based on volume of loans originated, for the quarter ended June 30, 1996. Due to the variance in the estimates of the size of the conventional home improvement loan market, the Company is unable to accurately estimate its competitive position in that market. The Company depends largely on its Correspondents and Dealers for its originations of loans. The Company's competitors also seek to establish relationships with the Company's Correspondents and Dealers, none of whom are required to deal exclusively with the Company. The Company's future results may become more exposed to fluctuations in the volume and cost of its loans resulting from competition from other purchasers of such loans, market conditions and other factors. PORTION OF PROCEEDS TO BENEFIT MAJORITY STOCKHOLDER The Company intends to use a portion of the aggregate net proceeds of the Offering and the Note Offering to repay Intercompany Debt owed to Mego Financial. See "Use of Proceeds." DILUTION Purchasers of Common Stock in the Offering will experience immediate and substantial dilution in net book value per share of Common Stock from the public offering price per share of Common Stock. See "Dilution." NO DIVIDENDS The Company has not paid any cash dividends to date and does not intend to pay cash dividends in the foreseeable future. In addition, certain agreements to which the Company is a party, including the Indenture, restrict the Company's ability to pay dividends on the Common Stock. The Company intends to retain earnings to finance the development and expansion of its business. See "Dividend Policy." ABSENCE OF PUBLIC MARKET; POSSIBLE FLUCTUATIONS OF STOCK PRICE Prior to the Offering, there has been no public market for the Common Stock. There can be no assurance that an active trading market for the Common Stock will develop or that, if developed, it will be sustained after the Offering or that it will be possible to resell the shares of Common Stock at or above the initial public offering price. The market price of the Common Stock could be subject to significant fluctuations in response to the Company's operating results and other factors. In addition, the stock market in recent years has experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of companies. Such fluctuations, and general economic and market conditions, may adversely affect the market price of the Common Stock. See "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Underwriting." 17 19 SHARES ELIGIBLE FOR FUTURE SALE Upon consummation of the Offering, the Company will have 12,000,000 shares of Common Stock outstanding (12,300,000 shares if the over-allotment option granted to the Underwriters is exercised in full). Of these shares, 2,000,000 shares (2,300,000 shares if the over-allotment option granted to the Underwriters is exercised in full) will be freely tradeable without restriction or registration under the Securities Act of 1933, as amended (the "Securities Act"), unless held by affiliates of the Company. All of the remaining 10,000,000 shares of Common Stock held by Mego Financial will be "restricted securities" as that term is defined in Rule 144 promulgated under the Securities Act. All of such shares will become eligible for sale under Rule 144 commencing 90 days after the consummation of the Offering. Mego Financial has agreed not to sell any such shares of Common Stock for 180 days from the date of this Prospectus without the prior written consent of Oppenheimer & Co., Inc. and Friedman, Billings, Ramsey & Co., Inc. on behalf of the Underwriters. See "Underwriting." Additionally, upon consummation of the Offering, 925,000 shares of Common Stock will be reserved for issuance under the Company's Stock Option Plan. The Company intends to register under the Securities Act all shares reserved for issuance under its Stock Option Plan. Shares covered by such registration will be eligible for resale in the public market, subject to Rule 144 limitations applicable to affiliates. See "Management -- Company Stock Option Plan." Future sales of substantial amounts of Common Stock in the public market, or the availability of such shares for future sale, could impair the Company's ability to raise capital through an offering of securities and may adversely affect the then-prevailing market prices. See "Shares Eligible for Future Sale." FACTORS INHIBITING TAKEOVER As Mego Financial will continue to own in excess of 80% of the Common Stock after the Offering, no takeover would be successful without its consent. Changes in the management or ownership of Mego Financial or a reduction in the number of shares owned by Mego Financial, however, could have an effect on the likelihood of a takeover. However, the Certificate of Incorporation provides that no additional shares of Common Stock may be issued that would reduce Mego Financial's interest below 80% without its written approval during the Eighty Percent Period. In addition, although the Certificate of Incorporation provides for the issuance of one or more series of preferred stock from time to time, during the Eighty Percent Period no shares of any other class of capital stock may be issued without Mego Financial's written approval. Even in the event that at some later date Mego Financial's percentage ownership in the Company is significantly reduced, certain provisions of the Company's Certificate of Incorporation and Amended and Restated Bylaws (the "Bylaws") may be deemed to have anti-takeover effects and may delay, defer or prevent a takeover attempt that a stockholder might consider in its best interest. The Company's Certificate of Incorporation authorizes the Board to determine the rights, preferences, privileges and restrictions of unissued series of preferred stock and to fix the number of shares of any series of preferred stock and the designation of any such series, without any vote or action by the Company's stockholders. Thus, the Board may authorize and issue shares of preferred stock with voting or conversion rights that could adversely affect the voting or other rights of holders of the Common Stock. In addition, the issuance of preferred stock may have the effect of delaying, deferring or preventing a change of control of the Company, since the terms of the preferred stock that might be issued could potentially prohibit the Company's consummation of any merger, reorganization, sale of substantially all of its assets, liquidation or other extraordinary corporate transaction without the approval of the holders of the outstanding shares of the preferred stock. Other provisions of the Company's Certificate of Incorporation and Bylaws (i) provide that special meetings of the stockholders may be called only by the Board of Directors or upon the written demand of the holders of not less than 30% of the votes entitled to be cast at a special meeting and (ii) establish certain advance notice procedures for nomination of candidates for election as directors by stockholders and for stockholder proposals to be considered at annual stockholders' meetings. Mego Financial could also vote to amend the Company's Certificate of Incorporation or Bylaws without the vote of any other holders of the Common Stock. 18 20 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered hereby, based upon an assumed initial public offering price of $12.00 per share and after deducting underwriting discounts and estimated expenses of the Offering, are estimated to be approximately $21.6 million ($25.0 million if the Underwriters' over-allotment option is exercised in full). The net proceeds to the Company from the Note Offering, after deducting underwriting discounts and estimated expenses of the Note Offering, are estimated to be approximately $37.6 million. The Company currently intends to use approximately $12.8 million of the aggregate net proceeds received by the Company from the Offering and the Note Offering to repay Intercompany Debt which does not bear interest and is due on demand and approximately $13.3 million to reduce the amounts outstanding under the Company's warehouse and revolving lines of credit, which currently bear interest at rates ranging from 1.0% to 2.0% over the prime rate and which expire in August 1997 and December 1997, respectively. The remaining net proceeds will be used to provide capital to originate and securitize loans. Pending such use, the net proceeds received by the Company will be invested in high quality, short term interest-bearing investment and deposit accounts. DIVIDEND POLICY The Company has not paid any cash dividends to date. The Company intends to retain any future earnings for the operation and expansion of its business and does not currently anticipate paying cash dividends on the Common Stock in the foreseeable future. Any future determination as to the payment of such cash dividends would depend upon a number of factors, including future earnings, results of operations, capital requirements, the Company's financial condition and any restrictions under credit agreements, including the Indenture, existing from time to time, as well as such other factors as the Board of Directors might deem relevant. No assurance can be given that the Company will pay any dividends in the future. 19 21 DILUTION The net book value of the Company's Common Stock as of August 31, 1996 was $17.7 million or approximately $1.77 per share. Net book value per share represents the amount of the Company's stockholder's equity divided by 10,000,000 shares of Common Stock outstanding. Net book value dilution per share represents the difference between the amount per share paid by purchasers of shares of Common Stock in the Offering and the pro forma net book value per share of Common Stock immediately after completion of the Offering. After giving effect to the sale by the Company of 2,000,000 shares of Common Stock in the Offering at an assumed initial public offering price of $12.00 per share and the application of the estimated net proceeds therefrom, the pro forma net book value of the Company as of August 31, 1996 would have been $39.3 million or $3.28 per share. This represents an immediate increase in net book value of $1.51 per share to the existing stockholder and an immediate dilution in net book value of $8.72 per share to purchasers of Common Stock in the Offering, as illustrated in the following table. Assumed public offering price per share.................................. $ 12.00 Net book value per share as of August 31, 1996......................... $ 1.77 Increase per share attributable to new investors....................... 1.51 Pro forma net book value per share after the Offering.................... 3.28 -------- Net book value dilution per share to new investors....................... $ 8.72 ========
The following table sets forth as of August 31, 1996 the difference between the existing stockholder and the purchasers of shares in the Offering with respect to the number of shares purchased from the Company, the total consideration paid and the average price per share paid:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ---------------------- ----------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE ---------- ------- ----------- ------- --------- Existing stockholder.......... 10,000,000 83.3% $ 8,000,000 25.0% $ 0.80 New investors................. 2,000,000 16.7 24,000,000 75.0 12.00 ---------- ----- --------- ----- Total............... 12,000,000 100.0% $32,000,000 100.0% ========== ===== ========= =====
20 22 CAPITALIZATION The following table sets forth the capitalization of the Company at August 31, 1996, and as adjusted as of such date to give effect to (i) the sale of the 2,000,000 shares of Common Stock offered hereby at an assumed initial public offering price of $12.00 per share (after deducting underwriting discounts and estimated expenses of the Offering), (ii) the sale of the Notes pursuant to the Note Offering (after deducting underwriting discounts and estimated expenses of the Note Offering) and (iii) the application of the net proceeds from the Offering and the Note Offering as described under "Use of Proceeds." This table should be read in conjunction with the financial statements, the related notes and the other financial information appearing elsewhere in this Prospectus.
AUGUST 31, 1996 ------------------- AS ACTUAL ADJUSTED ------- ------- (IN THOUSANDS) Debt: Warehouse line of credit............................................... $ 3,265 $ --(1) Revolving line of credit............................................... 10,000 --(1) Other notes and contracts payable...................................... 932 932 % senior subordinated notes due 2001................................. -- 40,000 Intercompany debt...................................................... 12,813 -- ------- ------- Total debt..................................................... 27,010 40,932 ------- ------- Stockholder's equity: Preferred stock, $.01 par value; 5,000,000 shares authorized; no shares issued and outstanding.............................................. $ -- $ -- Common stock, $.01 par value; 50,000,000 shares authorized; 10,000,000 shares issued and outstanding, actual and 12,000,000 shares issued and outstanding, as adjusted(2)..................................... 100 120 Additional paid-in capital............................................. 8,550 30,175 Retained earnings...................................................... 9,051 9,051 ------- ------- Total stockholder's equity............................................. 17,701 39,346 ------- ------- Total capitalization........................................... $44,711 $80,278 ======= =======
- --------------- (1) The Company intends to use a portion of the net proceeds of the Offering and the Note Offering to reduce the amounts outstanding under these lines of credit. Such lines of credit may remain available for future use. (2) Does not include 925,000 shares of Common Stock reserved for issuance upon the exercise of stock options available to be granted under the Company's Stock Option Plan or 300,000 shares of Common Stock issuable pursuant to the Underwriters' over-allotment option. See "Management -- Company Stock Option Plan," "Underwriting" and "Description of Capital Stock." 21 23 PRO FORMA SELECTED FINANCIAL DATA The following table sets forth selected financial data for the year ended August 31, 1996 on a pro forma basis to give effect to the estimated pro forma interest expense of the Company's proposed offering of $40,000,000 of Notes at an assumed interest rate of 13% in lieu of the interest expense recorded by the Company under its existing notes and contracts payable without giving effect for any earnings factor on funds not applied to pay off existing debt.
FOR THE YEAR ENDED AUGUST 31, 1996 ------------------- PRO ACTUAL FORMA ------- ------- (IN THOUSANDS EXCEPT PER SHARE AMOUNT) STATEMENT OF OPERATIONS DATA: Revenues: Interest income, net................................................... $ 988 $ 2,104 Other revenues......................................................... 24,039 24,039 ------- ------- Total revenues................................................. 25,027 26,143 ------- ------- Costs and expenses: Other interest......................................................... 167 5,200 Other costs and expenses............................................... 13,705 13,705 ------- ------- Total costs and expenses....................................... 13,872 18,905 ------- ------- Income before income taxes............................................... 11,155 7,238 Income taxes............................................................. 4,235 2,750 ------- ------- Net income............................................................... $ 6,920 $ 4,488 ======= ======= Net income per share..................................................... $ 0.45 =======
22 24 SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The selected Statement of Operations data and Statement of Financial Condition data set forth below have been derived from the financial statements of the Company. The financial statements as of and for the years ended August 31, 1994, 1995 and 1996 have been audited by Deloitte & Touche LLP, independent auditors, and are included elsewhere in this Prospectus. The selected financial information set forth below should be read in conjunction with the financial statements, the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Prospectus.
YEAR ENDED AUGUST 31, --------------------------- 1994(1) 1995 1996 ------- ------- ------- STATEMENT OF OPERATIONS DATA: Revenues: Gain on sale of loans........................................... $ 579 $12,233 $17,994 Net unrealized gain on mortgage related securities(2)........... -- -- 2,697 Loan servicing income........................................... -- 873 3,348 Interest income, net of interest expense of $107, $468 and $1,116....................................................... 172 473 988 ------- ------- ------- Total revenues.......................................... 751 13,579 25,027 ------- ------- ------- Costs and expenses: Provision for credit losses..................................... 96 864 1,510 Depreciation and amortization................................... 136 403 394 Other interest.................................................. 22 187 167 General and administrative: Payroll and benefits......................................... 975 3,611 5,031 Commissions and selling...................................... 13 552 2,013 Professional services........................................ -- 177 732 Servicing fees paid to affiliate............................. 13 232 709 Management services by affiliate............................. 442 690 671 FHA insurance................................................ 11 231 572 Other........................................................ 554 713 2,073 ------- ------- ------- Total costs and expenses................................ 2,262 7,660 13,872 ------- ------- ------- Income (loss) before income taxes(3).............................. (1,511) 5,919 11,155 Income taxes(3)................................................... -- 2,277 4,235 Net income (loss)................................................. $(1,511) $ 3,642 $ 6,920 ======= ======= ======= Pro forma net income per share(4)................................. $ 0.60 =======
AS OF AUGUST 31, AS OF AUGUST 31, 1996 ---------------- ------------------------ 1994(1) 1995 ACTUAL AS ADJUSTED(5) ------ ------- ------- -------------- STATEMENT OF FINANCIAL CONDITION DATA: Loans held for sale, net.............................. $1,463 $ 3,676 $ 4,610 $ 4,610 Excess servicing rights............................... 904 14,483 12,121 12,121 Mortgage related securities(2)........................ -- -- 22,944 22,944 Total assets.......................................... 5,122 24,081 50,606 86,173 Total liabilities..................................... 983 13,300 32,905 46,827 Total stockholder's equity............................ 4,139 10,781 17,701 39,346
23 25
YEAR ENDED AUGUST 31, ------------------------------- 1994(1) 1995 1996 ------ ------- -------- OPERATING DATA: Loans originated......................................... $8,164 $87,751 $139,367 Weighted average interest rate on loans originated....... 14.18% 14.55% 14.03% Servicing portfolio (end of year): Company-owned loans.................................... $1,471 $ 3,720 $ 4,698 Sold loans............................................. 6,555 88,566 209,491 ------ ------- ------- Total.......................................... $8,026 $92,286 $214,189 ====== ======= ======= Delinquency period(6): 31-60 days past due.................................... 2.06% 2.58% 2.17% 61-90 days past due.................................... 0.48 0.73 0.85 91 days and over past due.............................. 0.36 0.99 4.53(7) 91 days and over past due, net of claims filed(8)...... 0.26 0.61 1.94 Claims filed with HUD(9)................................. 0.10 0.38 2.59 Amount of FHA insurance available (end of year).......... $ 813 $ 9,552 $ 21,205(10) Amount of FHA insurance available as a percentage of loans serviced (end of year)........................ 10.13% 10.35% 9.90%(10) Ratio of earnings to fixed charges(11)................... N/A 7.69x 2.29x(12)
- --------------- (1) The Company commenced originating loans in March 1994. (2) Mortgage related securities consist of certificates representing interests retained by the Company in securitization transactions. (3) The results of operations of the Company are included in the consolidated federal income tax returns filed by Mego Financial, the Company's sole stockholder. Mego Financial allocates income taxes to the Company calculated on a separate return basis. See "Certain Transactions." (4) Shares used in computing pro forma net income per share include the weighted average of common stock outstanding during the period. There were no common stock equivalents. Historical per share data is not included because the data is not considered relevant or indicative of the ongoing operations of the Company. Net income utilized in the calculation of pro forma net income per share has been reduced by an estimated pro forma interest expense in the amount of $1,544,000 and a related tax benefit of $587,000 based upon the application of a 13% interest rate to the Company's average balance of non-interest bearing debt payable to Mego Financial. Pro forma net income per share would change by $0.01 with a 1% change in the interest rate utilized. (5) As adjusted to give effect to (i) the sale of the shares of Common Stock offered hereby (at an assumed initial public offering price of $12.00 per share and after deducting underwriting discounts and estimated expenses of the Offering), (ii) the sale of the Notes pursuant to the Note Offering (after deducting underwriting discounts and estimated expenses of the Note Offering) and (iii) the application of the estimated net proceeds from the Offering and the Note Offering as described under "Use of Proceeds." (6) Represents the dollar amount of delinquent loans as a percentage of total dollar amount of loans serviced by the Company (including loans owned by the Company) as of the date indicated. (7) During fiscal 1996, the processing and payment of claims filed with HUD were delayed. See "Business -- Loan Servicing." (8) Represents the dollar amount of delinquent loans net of delinquent Title I Loans for which claims have been filed with HUD and payment is pending as a percentage of total dollar amount of loans serviced by the Company (including loans owned by the Company) as of the date indicated. (9) Represents the dollar amount of delinquent Title I Loans for which claims have been filed with HUD and payment is pending as a percentage of total dollar amount of loans serviced by the Company (including loans owned by the Company) as of the date indicated. (10) If all claims filed with HUD had been processed and paid as of period end, the amount of FHA insurance available would have been reduced to $16,215,000, which as a percentage of loans serviced would have been 7.77%. (11) Earnings include pretax income, the portion of rents representative of the interest factor and interest on debt. Fixed charges include interest on indebtedness, prepaid commitment fees and the portion of rents representative of the interest factor. (12) Ratio computed giving pro forma effect for the total additional interest expense resulting from the proposed issuance by the Company of $40,000,000 of Notes at an assumed interest rate of 13% in lieu of the interest expense recorded by the Company under its existing lines of credit intended to be repaid with the proceeds of the Offering and the Note Offering. 24 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Financial Statements, including the notes thereto, contained elsewhere in this Prospectus. GENERAL The Company began originating loans on March 1, 1994 and, accordingly, the Company's results of operations for the years ended August 31, 1995 and 1996 include full years of operations, while results for the year ended August 31, 1994 include only six months of loan originations. The Company recognizes revenue from the gain on sale of loans, interest income and servicing income. Interest income, net, represents the interest received on loans in the Company's portfolio prior to their sale, net of interest paid under its credit agreements. The Company continues to service all loans sold to date. Net loan servicing income represents servicing fee income and other ancillary fees received for servicing loans less the amortization of capitalized mortgage servicing rights. Mortgage servicing rights are amortized over the estimated net future servicing fee income. The Company sells its loans through whole loan sales to third party purchasers, retaining the right to service the loans and to receive any amounts in excess of the guaranteed yield to the purchasers. In addition, the Company has commenced the sale of loans through securitizations. Certain of the regular interests of the related securitizations are sold, with the interest only and residual class securities retained by the Company. Gain on sale of loans includes the gain on sale of mortgage related securities and loans held for sale. The gain on sale of mortgage related securities is determined by an allocation of the cost of the securities based on the relative fair value of the securities sold and the securities retained. The Company generally retains an interest only strip security and residual interest security. The fair value of the interest only strip and residual interest security is the present value of the estimated cash flows to be received after considering the effects of estimated prepayments and credit losses, net of FHA insurance recoveries. The net unrealized gain on mortgage related securities represents the difference between the allocated cost basis of the securities and the estimated fair value. As the holder of the residual securities, the Company is entitled to receive certain excess cash flows. These excess cash flows are calculated as the difference between (a) principal and interest paid by borrowers and (b) the sum of (i) pass-through interest and principal to be paid to the holders of the regular securities and interest only securities, (ii) trustee fees, (iii) third-party credit enhancement fees, (iv) servicing fees and (v) estimated loan pool losses. The Company's right to receive the excess cash flows is subject to the satisfaction of certain reserve requirements which are specific to each securitization and are used as a means of credit enhancement. The Company carries interest only and residual securities at fair value. As such, the carrying value of these securities is affected by changes in market interest rates and prepayment and loss experiences of these and similar securities. The Company estimates the fair value of the interest only and residual securities utilizing prepayment and credit loss assumptions the Company believes to be appropriate for each particular securitization. To the Company's knowledge, there is no active market for the sale of these interest only and residual securities. The range of values attributable to the factors used in determining fair value is broad. Although the Company believes that it has made reasonable estimates of the fair value of the mortgage related securities, the rate of prepayments and default rates utilized are estimates, and actual experience may vary from its estimates. The present value of expected net cash flows from the sale of loans is recorded at the time of sale as excess servicing rights and mortgage related securities. Excess servicing rights are amortized as a charge to income, as payments are received on the retained interest differential over the estimated life of the underlying loans. The expected cash flows used to determine the excess servicing rights asset and mortgage related securities have been reduced for potential losses, net of FHA insurance recoveries, under recourse provisions 25 27 of the sales agreements. The allowance for credit losses on loans sold with recourse represents the Company's estimate of losses to be incurred in connection with the recourse provisions of the sales agreements. To determine the fair value of the mortgage servicing rights and excess servicing rights, the Company projects net cash flows expected to be received over the life of the loans. Such projections assume certain servicing costs, prepayment rates and credit losses. These assumptions are similar to those used by the Company to value the residual securities. As of August 31, 1996, mortgage servicing rights totaled $3.8 million, excess servicing rights totaled $12.1 million and mortgage related securities totaled $22.9 million. There can be no assurance that the Company's estimates used to determine the fair value of mortgage and excess servicing rights will remain appropriate for the life of the loans. If actual loan prepayments or credit losses exceed the Company's estimates, the carrying value of the Company's mortgage and excess servicing rights may have to be written down through a charge against earnings. The Company will not write up such assets to reflect slower than expected prepayments, although slower prepayments may increase future earnings as the Company will receive cash flows in excess of those anticipated. The Company discounts cash flows on its loan sales at the rate it believes an independent third-party purchaser would require as a rate of return. The cash flows were discounted to present value using discount rates which averaged 12.0% for the years ended August 31, 1994, 1995 and 1996. The Company has developed its assumptions based on experience with its own portfolio, available market data and ongoing consultation with its financial advisors. Total costs and expenses consist primarily of general and administrative expenses, depreciation and amortization, and provision for credit losses. PEC, a wholly-owned subsidiary of Mego Financial, provides loan servicing and management services to the Company the costs of which are charged to general and administrative expenses. See "Certain Transactions" and Note 14 of Notes to Financial Statements. The Company continues to implement its business growth strategy through both product line and geographic diversification and expansion of its Correspondent and Dealer operations, in an effort to increase both loan origination volume and servicing volume. See "Business -- Business Strategy." Implementation of this strategy has increased the Company's total assets through growth in excess servicing rights, mortgage servicing assets and mortgage related securities and has been funded through increased borrowings. While this growth has increased the Company's revenues through increased gain on sales of loans, loan servicing income and net interest income, it has also increased the general and administrative expense and provision for credit losses associated with the growth in loans originated and serviced. Continued increases in the Company's total assets and increasing earnings can continue only so long as origination volumes continue to exceed paydowns of loans serviced and previous period origination volumes. Additionally, the fair value of mortgage related securities, mortgage servicing rights and excess servicing rights owned by the Company may be adversely affected by changes in the interest rate environment which could affect the discount rate and prepayment assumptions used to value the assets. Any such adverse change in assumptions could have a material adverse effect on the Company's results of operations and financial condition. RESULTS OF OPERATIONS Fiscal 1996 Compared to Fiscal 1995 The Company originated $139.4 million of loans during fiscal 1996 compared to $87.8 million of loans during fiscal 1995, an increase of 58.8%. The increase is a result of the overall growth in the Company's business, including an increase in the number of active Correspondents and Dealers and an increase in the number of states served. At August 31, 1996, the Company had approximately 310 active Correspondents and 435 active Dealers, compared to approximately 150 active Correspondents and 170 active Dealers at August 31, 1995. Of the $139.4 million of loans originated in fiscal 1996, $11.6 million were Conventional Loans. The Company did not originate Conventional Loans in fiscal 1995. 26 28 The following table sets forth certain data regarding loans originated by the Company during fiscal 1995 and 1996.
YEAR ENDED AUGUST 31, ------------------------------------------------ 1995 1996 --------------------- ---------------------- Principal amount of loans: Correspondents: Title I.................................... $63,792,680 72.7% $ 82,596,197 59.3% Conventional............................... -- -- 11,582,108 8.3 ----------- ----- ----------- ----- Total Correspondent................... 63,792,680 72.7 94,178,305 67.6 ----------- ----- ----------- ----- Dealers -- Title I............................ 23,957,829 27.3 45,188,721 32.4 ----------- ----- ----------- ----- Total................................. $87,750,509 100.0% $139,367,026 100.0% =========== ===== =========== ===== Number of loans: Correspondents: Title I.................................... 3,437 59.1% 4,382 50.9% Conventional............................... -- -- 392 4.6 ----------- ----- ----------- ----- Total Correspondent................... 3,437 59.1 4,774 55.5 ----------- ----- ----------- ----- Dealers -- Title I............................ 2,381 40.9 3,836 44.5 ----------- ----- ----------- ----- Total................................. 5,818 100.0% 8,610 100.0% =========== ===== =========== =====
See Notes 2 and 5 of Notes to Financial Statements. Total revenues increased 84.3% to $25.0 million for fiscal 1996 from $13.6 million for fiscal 1995. The increase was primarily the result of the increased volume of loans originated and the sale of such loans. The following table sets forth the principal balance of loans sold or securitized and related gain on sale data for fiscal 1995 and 1996.
YEAR ENDED AUGUST 31, ------------------ 1995 1996 ------- -------- (IN THOUSANDS) Principal amount of loans sold: Title I................................................................. $85,363 $127,414 Conventional............................................................ -- 10,494 ------- -------- Total........................................................... $85,363 $137,908 ======= ======== Gain on sale of loans..................................................... $12,233 $ 17,994 Net unrealized gain on mortgage related securities........................ -- 2,697 ------- -------- Gain on sale of loans and unrealized gain on mortgage related securities.............................................................. $12,233 $ 20,691 ======= ======== Gain on sale of loans as a percentage of principal balance of loans sold.................................................................... 14.3% 13.0% Gain on sale of loans and unrealized gain on mortgage related securities as a percentage of principal balance of loans sold...................... 14.3% 15.0%
See Note 2 of Notes to Financial Statements. Loan servicing income increased 283.5% to $3.3 million for fiscal 1996 from $873,000 for fiscal 1995. The increase was primarily the result of a 61.6% increase in the amount of loan sale activity in fiscal 1996 with the servicing rights retained by the Company, to $137.9 million for fiscal 1996 from $85.4 million for fiscal 1995. Interest income on loans held for sale and mortgage related securities, net of interest expense, increased 108.9% to $988,000 during fiscal 1996 from $473,000 during fiscal 1995. The increase was primarily the result of the increase in the average size of the portfolio of loans held for sale, and the increased mortgage related securities portfolio. 27 29 The Company intends to consider strategies to mitigate the interest rate risks associated with the loan origination/warehousing function, funding its portfolio of mortgage related securities, excess servicing rights, mortgage servicing rights, and valuation of these assets. Implementation of interest rate risk management strategies may decrease spreads, decrease gain on sale of loans, or otherwise decrease revenues from that which might otherwise occur in a stable interest rate environment without such strategies in place. The Company intends to thoroughly analyze the cost of such strategies compared to the risks which would be mitigated prior to implementation of any strategy. The provision for credit losses increased 74.8% to $1.5 million for fiscal 1996 from $864,000 for fiscal 1995. The increase in the provision was directly related to the increase in volume of loans originated in fiscal 1996 compared to fiscal 1995. The provision for credit losses is based upon periodic analysis of the portfolio, economic conditions and trends, historical credit loss experience, borrowers' ability to repay, collateral values, and estimated FHA insurance recoveries on loans originated and sold. As the Company increases its mix of Conventional Loan originations as compared to Title I Loan originations, the provision for credit losses as a percentage of loans originated can be expected to increase due to the increased credit risk associated with Conventional Loans. Servicing costs on a per loan basis may also increase as problem Conventional Loans may require greater costs to service. Total general and administrative expenses increased 90.2% to $11.8 million for fiscal 1996 from $6.2 million for fiscal 1995. The increase was primarily a result of increased payroll related to the hiring of additional underwriting, loan processing, administrative, loan quality control and other personnel in contemplation of the expansion of the Company's business and costs related to the opening of additional offices. Payroll and benefits expense increased 39.3% to $5.0 million for fiscal 1996 from $3.6 million for fiscal 1995. The number of employees increased from 105 as of fiscal year end 1995 to 170 as of fiscal year end 1996, due to increased staff necessary to support the business expansion and improve quality control. Commissions and selling expenses increased 264.7% to $2.0 million for fiscal 1996 from $552,000 for fiscal 1995 while loan originations increased by $51.6 million from fiscal 1995 to 1996. The sales network expanded to substantially all states, adding new personnel and offices to further the loan origination growth strategy. Professional services increased 313.6% to $732,000 for fiscal 1996 from $177,000 for fiscal 1995 due primarily to increased audit and legal services and consultation fees. Servicing fees paid to affiliate increased 205.6% to $709,000 for fiscal 1996 from $232,000 for fiscal 1995. The increase was a result of the increase in the size of the loan portfolio serviced by PEC. Management services by affiliate decreased 2.9% to $671,000 for fiscal 1996 from $690,000 for fiscal 1995. These expenses represent services provided by PEC, including executive, accounting, legal, management information, data processing, human resources, advertising and promotional materials. During fiscal 1995 and 1996, the Company incurred interest expense to PEC of $5,000 and $29,000, respectively, which amounts were included in other interest expense. During fiscal 1995 and 1996, the Company paid PEC for developing certain computer programming, incurring costs of $36,000 and $56,000, respectively. See Note 14 of Notes to Financial Statements. FHA insurance increased 147.6% to $572,000 for fiscal 1996 from $231,000 for fiscal 1995. The increase was primarily attributable to the increased volume of loan originations and loans serviced. Other general and administrative expenses increased 190.7% to $2.1 million for fiscal 1996 from $713,000 for fiscal 1995 primarily due to increased expenses related to expansion of facilities and increased communications expense. The Company is enhancing its loan production systems. These enhancements are expected to cost approximately $50,000 and will be funded from the Company's normal operating cash flow. See "Business -- Loan Production Technology Systems." Income before income taxes increased 88.5% to $11.2 million for fiscal 1996 from $5.9 million for fiscal 1995. 28 30 As a result of the foregoing, net income increased 90.0% to $6.9 million for fiscal 1996 from $3.6 million for fiscal 1995. Fiscal 1995 Compared to Fiscal 1994 The Company commenced originating loans in March 1994. Total revenues increased 1,708.1% to $13.6 million for fiscal 1995 from $751,000 for fiscal 1994. The increase was primarily the result of the increased volume of loans originated and the sale of such loans. The Company originated $87.8 million of loans during fiscal 1995 compared to $8.2 million of loans during fiscal 1994, an increase of 974.9%. The increase was a result of the overall growth in Company's business. At August 31, 1995, the Company had approximately 150 active Correspondents and 170 active Dealers in 34 states, compared to approximately 14 active Correspondents and 30 active Dealers in 14 states at August 31, 1994. The following table sets forth certain data regarding Title I Loans originated by the Company during fiscal 1994 and 1995.
YEAR ENDED AUGUST 31, ------------------------------------------ 1994 1995 ------------------ ------------------- Principal amount of loans: Correspondents...................................... $5,251,647 64.3% $63,792,680 72.7% Dealers............................................. 1,492,318 18.3 23,957,829 27.3 Bulk purchase....................................... 1,420,150 17.4 -- -- ---------- ----- ----------- ----- Total....................................... $8,164,115 100.0% $87,750,509 100.0% ========== ===== =========== ===== Number of loans: Correspondents...................................... 338 47.4% 3,437 59.1% Dealers............................................. 164 23.0 2,381 40.9 Bulk purchase....................................... 211 29.6 -- -- ---------- ----- ----------- ----- Total....................................... 713 100.0% 5,818 100.0% ========== ===== =========== =====
The Company sold $85.4 million in principal balance of loans during fiscal 1995, recognizing a gain on sale of loans of $12.2 million. The Company sold $6.6 million in principal balance of loans during fiscal 1994 recognizing a gain on sale of loans of $579,000. As a percentage of loans sold, gain on sale of loans was 14.3% during fiscal 1995 compared to 8.8% during fiscal 1994. The increase in gain on sale was primarily a result of increased volume of loans sold and a wider differential between the stated interest rate on the loans and the yield to purchasers. The weighted average gross excess spread on sold loans was 5.6% and 6.2% for fiscal 1994 and 1995, respectively. The weighted average discount rate used in the determination of the gain on sale for both periods was 12%. Loan servicing income was $873,000 during fiscal 1995. This income was the result of the sale of $85.4 million of Title I Loans, with the right to service the loans being retained by the Company. The Company had no loan servicing income in fiscal 1994 because the Company did not sell any loans until August 31, 1994. Interest income, net of interest expense, increased 175.0% to $473,000 during fiscal 1995 from $172,000 during fiscal 1994. The increase was primarily the result of the growth in the size of the portfolio of loans held for sale of 151.3% to $3.7 million at August 31, 1995 from $1.5 million at August 31, 1994. The provision for credit losses increased 800.0% to $864,000 for fiscal 1995 from $96,000 for fiscal 1994 due to increased loan originations. Provision for credit losses relating to unsold loans is recorded as expense in amounts sufficient to maintain the allowance at a level considered adequate to provide for anticipated losses resulting from liquidation of outstanding loans. The provision for credit losses is based upon periodic analysis of the portfolio, economic conditions and trends, historical credit loss experience, borrowers' ability to repay, collateral values, and estimated FHA insurance recoveries on Title I Loans. 29 31 Depreciation and amortization expense increased 196.3% to $403,000 for fiscal 1995 from $136,000 for fiscal 1994 as a result of the purchase of additional equipment, the expansion of the Company's facilities and additional software development costs. Other interest expense increased 750.0% to $187,000 for fiscal 1995 from $22,000 for fiscal 1994 as a result of increased capitalized lease obligations. Total general and administrative expenses increased 209.1% to $6.2 million for fiscal 1995 from $2.0 million for fiscal 1994. The increase was primarily a result of increased payroll related to the hiring of additional personnel in contemplation of the expansion and projected growth of the Company's business and costs related to the opening of additional offices. Commissions and selling expenses increased to $552,000 for fiscal 1995 from $13,000 for fiscal 1994 due to the expansion of the sales network and facilities to support increased loan origination growth. Included in general and administrative expenses were servicing fees paid to PEC in the amount of $13,000 and $232,000 for fiscal 1994 and 1995, respectively, and management fees paid to PEC in the amount of $442,000 and $690,000 for fiscal 1994 and 1995, respectively. See Note 14 of Notes to Financial Statements. FHA insurance expense increased to $231,000 for fiscal 1995 from $11,000 for fiscal 1994 due to increased volume of Title I Loan originations. Income (loss) before income taxes increased to income of $5.9 million for fiscal 1995 from a loss of $1.5 million for its six months of operations in fiscal 1994. Effective September 1, 1994, the Company adopted SFAS No. 122 which requires that a mortgage banking enterprise recognize as separate assets the rights to service mortgage loans for others, regardless of how those servicing rights are acquired. The effect of adopting SFAS No. 122 on the Company's financial statements was to increase income before income taxes by $1.1 million for fiscal 1995. As a result of the foregoing, net income (loss) increased to net income of $3.6 million for fiscal 1995 from a net loss of $1.5 million for fiscal 1994. FINANCIAL CONDITION August 31, 1996 Compared to August 31, 1995 Cash decreased 41.1% to $443,000 at August 31, 1996 from $752,000 at August 31, 1995 primarily as a result of the timing of loan originations, sales, and borrowings. Restricted cash deposits increased 76.7% to $4.5 million at August 31, 1996 from $2.5 million at August 31, 1995 due to increased volume of loans serviced for others pursuant to agreements which restrict a small percentage of cash relative to the volume of loans serviced, as well as loan payments collected from borrowers. Loans held for sale, net increased 25.4% to $4.6 million at August 31, 1996 from $3.7 million at August 31, 1995 primarily as a result of increased loan originations from $87.8 million for fiscal 1995 to $139.4 million for fiscal 1996, and the timing of loan sales. Excess servicing rights decreased 16.3% to $12.1 million at August 31, 1996 from $14.5 million at August 31, 1995. Excess servicing rights are calculated using prepayment, default and interest rate assumptions that the Company believes market participants would use for similar rights. The Company believes that the excess servicing rights recognized at the time of sale do not exceed the amount that would be received if such rights were sold at fair market value in the marketplace. The decrease in excess servicing rights was primarily a result of loans sold with excess servicing rights recognized which were reacquired and included in the fiscal 1996 securitizations as well as normal amortization of such excess servicing rights. The excess cash flow created through securitization which had been recognized as excess servicing rights on loans reacquired and securitized are included in the cost basis of the mortgage related securities. Mortgage related securities were $22.9 million at August 31, 1996 as a result of the Company's securitization transactions during fiscal 1996. There was no corresponding asset at August 31, 1995. See Note 2 of Notes to Financial Statements. 30 32 Mortgage servicing rights increased 255.7% to $3.8 million at August 31, 1996 from $1.1 million at August 31, 1995 as a result of additional sales of mortgage originations and the resulting increase in sales of loans serviced from $85.4 million during fiscal 1995 to $137.9 million during fiscal 1996. Property and equipment, net, increased 101.6% to $865,000 at August 31, 1996 from $429,000 at August 31, 1995 due to increased purchases of office equipment related to facility expansion. Notes and contracts payable increased 873.7% to $14.2 million at August 31, 1996 from $1.5 million at August 31, 1995 due to increased levels of mortgage servicing rights and mortgage related securities created through loan securitization which were available for financing to meet the Company's cash requirements. The Company has a $10.0 million revolving facility for the financing of mortgage related securities. Accounts payable and accrued liabilities increased 81.6% to $4.1 million at August 31, 1996 from $2.2 million at August 31, 1995, primarily as a result of increases in accrued payroll, interest and other unpaid operational costs. Allowances for credit losses and for loans sold with recourse increased slightly by 3.8% to $920,000 at August 31, 1996 from $886,000 at August 31, 1995. Loans sold with recourse which were reacquired and included in the 1996 securitizations decreased the need for this allowance while increased loan sales increased the allowance requirements. Recourse to the Company on sales of loans is governed by the agreements between the purchasers and the Company. The allowance for credit losses on loans sold with recourse represents the Company's estimate of its probable future credit losses to be incurred over the lives of the loans considering estimated future FHA insurance recoveries on Title I Loans. No allowance for credit losses on loans sold with recourse is established on loans sold through securitizations, as the Company has no recourse obligation under those securitization agreements. Estimated credit losses on loans sold through securitizations are considered in the Company's valuation of its residual interest securities. Due to parent company increased 41.9% to $12.0 million at August 31, 1996 from $8.5 million at August 31, 1995. The increase was primarily attributable to the increase in the federal tax provision owed to Mego Financial as a result of the filing of a consolidated federal tax return. Stockholder's equity increased 64.2% to $17.7 million at August 31, 1996 from $10.8 million at August 31, 1995 as a result of net income of $6.9 million during fiscal 1996. August 31, 1995 Compared to August 31, 1994 Cash decreased 8.7% to $752,000 at August 31, 1995 from $824,000 at August 31, 1994 primarily as a result of the timing of loan originations, sales and borrowings. Restricted cash deposits were $2.5 million at August 31, 1995 due to activity on loans serviced for others pursuant to agreements which restrict a small percentage of cash relative to the volume of loans serviced, as well as loan payments collected from borrowers. There was no corresponding asset at August 31, 1994. Loans held for sale, net, increased 151.3% to $3.7 million at August 31, 1995 from $1.5 million at August 31, 1994 primarily as a result of timing of loan sales and growth in loan originations. Excess servicing rights increased 1,502.1% to $14.5 million at August 31, 1995 from $904,000 at August 31, 1994. Excess servicing rights are calculated using prepayment, default and interest rate assumptions that the Company believes market participants would use for similar rights. The Company believes that the excess servicing rights recognized at the time of sale do not exceed the amount that would be received if such rights were sold at fair market value in the marketplace. The increase in excess servicing rights was primarily a result of increases in loans sold with excess servicing rights. Mortgage servicing rights were $1.1 million at August 31, 1995 as a result of sales of loans which resulted in an increase in the principal balance of sold loans serviced and implementation of SFAS No. 122. There was no corresponding asset at August 31, 1994. 31 33 Notes and contracts payable increased 128.9% to $1.5 million at August 31, 1995 from $637,000 at August 31, 1994 due to increased borrowings under the Company's warehouse line of credit and the timing of loan sales. Accounts payable and accrued liabilities increased 699.6% to $2.2 million at August 31, 1995 from $280,000 at August 31, 1994, primarily as a result of increases in accrued payroll, interest and other operational costs, due to expansion and growth of the Company. Allowances for credit losses and for loans sold with recourse increased to $886,000 at August 31, 1995 from $66,000 at August 31, 1994, primarily due to increased loans held for sale and loans sold under recourse provisions. Recourse to the Company on sales of loans is governed by the agreements between the purchasers and the Company. The allowance for credit losses on loans sold with recourse represents the Company's estimate of its probable future credit losses to be incurred over the lives of the loans, considering estimated future FHA insurance recoveries on Title I Loans. Due to parent company was $8.5 million at August 31, 1995. There was no corresponding liability at August 31, 1994. Advances from Mego Financial plus income tax provisions owed to Mego Financial were the primary components of this liability. See Note 14 of Notes to Financial Statements. Stockholder's equity increased 160.5% to $10.8 million at August 31, 1995 from $4.1 million at August 31, 1994 as a result of net income of $3.6 million during fiscal 1995, compared to a net loss of $1.5 million in 1994. LIQUIDITY AND CAPITAL RESOURCES The Company had cash of $443,000 at August 31, 1996 compared to cash of $752,000 at August 31, 1995. The Company's cash requirements arise from loan originations, payments of operating and interest expenses and deposits to reserve accounts related to loan sale transactions. Loan originations are initially funded principally through the Company's $20.0 million warehouse line of credit pending the sale of loans in the secondary market. Substantially all of the loans originated by the Company are sold. Net cash used in the Company's operating activities for the years ended August 31, 1995 and 1996 was approximately $11.8 million and $15.3 million, respectively. This use was funded primarily from the reinvestment of proceeds from the sale of loans in the secondary market totaling approximately $85.0 million and $135.5 million for the years ended August 31, 1995 and 1996, respectively. The loan sale transactions required the subordination of certain cash flows payable to the Company to the payment of scheduled principal and interest due to the loan purchasers. In connection with certain of such sale transactions, a portion of amounts payable to the Company from the excess interest spread is required to be maintained in a reserve account to the extent of the subordination requirements. The subordination requirements generally provide that the excess interest spread is payable to the reserve account until a specified percentage of the principal balances of the sold loans is accumulated therein. Excess interest spread payable to the Company is subject to being utilized first to replenish cash paid from the reserve account to fund shortfalls in collections of interest from borrowers who default on the payments on the loans until the Company's deposits into the reserve account equal the specified percentage. The excess interest required to be deposited and maintained in the respective reserve accounts is not available to support the cash flow requirements of the Company. At August 31, 1996, amounts on deposit in such reserve accounts totaled $4.5 million. Adequate credit facilities and other sources of funding, including the ability of the Company to sell loans in the secondary market, are essential for the continuation of the Company's loan origination operations. At August 31, 1996, the Company had a $20.0 million warehouse line of credit (the "Warehouse Line") for the financing of loan originations which expires in August 1997. At August 31, 1996, $3.3 million was outstanding under the Warehouse Line and $16.7 million was available. The Warehouse Line bears interest at the prime rate plus 1.0% per year and is secured by loans prior to sale. The agreement with the lender requires the Company to maintain a minimum tangible net worth of $12.5 million plus 50% of the Company's cumulative 32 34 net income after May 1, 1996, and a minimum level of profitability of at least $500,000 per rolling six month period. In addition, the Company had a $10.0 million revolving credit facility from the same lender, with respect to which $10.0 million was outstanding on that date. This facility was secured by a pledge of the Company's excess servicing rights and the interest only and residual class certificates ("Certificates") relating to securitizations carried as "Mortgage related securities" on the Company's statements of financial condition, payable to the Company pursuant to its securitization agreements. The revolving loan has an 18-month revolving credit period followed by a 30-month amortization period, and requires the Company to maintain a minimum tangible net worth of $12.5 million plus 50% of the Company's cumulative net income after May 1, 1996, and a minimum level of profitability of at least $500,000 per rolling six month period. Borrowings under the revolving loan cannot exceed the lesser of (i) 40% of the Company's excess servicing rights and Certificates or (ii) six times the aggregate of the excess servicing rights and Certificate payments actually received by the Company over the most recent three-month period. While the Company believes that it will be able to maintain its existing credit facilities and obtain replacement financing as its credit arrangements mature and additional financing, if necessary, there can be no assurance that such financing will be available on favorable terms, or at all. From time to time, the Company has sold loans through whole loan sales. In August 1994, the Company entered into an agreement with a bank pursuant to which an aggregate of $38.3 million in principal amount of loans had been sold at December 31, 1995, for an amount equal to their remaining principal balance and accrued interest. Pursuant to the agreement, the purchaser is entitled to receive interest at a rate equal to the sum of 187.5 basis points and the yield paid on four-year Federal Government Treasury obligations at the time of the sale. The Company retained the right to service the loans and the right to receive the difference (the "Excess Interest") between the sold loans' stated interest rate and the yield to the purchaser. The Company is required to maintain a reserve account equal to 1.0% of the declining principal balance of the loans sold pursuant to the agreement funded from the Excess Interest received by the Company less its servicing fee to fund shortfalls in collections from borrowers who default in the payment of principal or interest. In April 1995, the Company entered into a continuing agreement with a financial institution pursuant to which an aggregate of approximately $175.8 million in principal amount of loans had been sold at August 31, 1996 for an amount equal to their remaining principal balances. Pursuant to the agreement, the purchaser is entitled to receive interest at a variable rate equal to the sum of 200 basis points and the one-month LIBOR rate as in effect from time to time. The Company retained the right to service the loans and the right to receive the Excess Interest. The Company is required to maintain a reserve account equal to 2.5% of the proceeds received by the Company from the sale of loans pursuant to the agreement plus the Excess Interest received by the Company less its servicing fee to fund shortfalls in collections from borrowers who default in the payment of principal or interest. In May 1995 and June 1995, the Company reacquired an aggregate of approximately $25.0 million of such Title I Loans for an amount equal to their remaining principal balance, which were sold to a financial institution. In March 1996 and August 1996, the Company reacquired an additional $77.7 million and $36.2 million, respectively, of the Title I Loans in connection with its first two securitization transactions. In September 1996, the Company entered into a repurchase agreement with the financial institution pursuant to which the Company pledged the interest only certificates from its two 1996 securitizations in exchange for a $3.0 million advance. In November 1996, the Company entered into an agreement with the same financial institution, providing for the purchase of up to $2.0 billion of loans over a five-year period. Pursuant to the agreement, Mego Financial issued to the financial institution four-year warrants to purchase 1,000,000 shares of Mego Financial's common stock at an exercise price of $7.125 per share. The agreement also provides (i) that so long as the aggregate principal balance of loans purchased by the financial institution and not resold to third parties exceeds $100.0 million, the financial institution shall not be obligated to purchase, and the Company shall not be obligated to sell, loans under the agreement and (ii) that the percentage of conventional loans owned by the financial institution at any one time and acquired pursuant to the agreement shall not exceed 65% of the total amount of loans owned by the financial institution at such time and acquired pursuant to the agreement. The value of the warrants, estimated at $3.0 million (0.15% of the commitment amount) as of the commitment date, will be charged to the Company and amortized as the commitment for the purchase of loans is utilized. The financial institution has also committed to provide the Company with a separate one-year facility of up to $11.0 million, less any amounts 33 35 advanced under the repurchase agreement, for the financing of the interest only and residual certificates from future securitizations. In May 1995, the Company entered into an agreement with a bank pursuant to which an aggregate of $25.0 million in principal amount of loans had been sold at June 30, 1995 for an amount equal to their remaining principal balance. Pursuant to the agreement, the purchaser is entitled to receive interest at a rate equal to the sum of 190 basis points and the yield paid on four-year Federal Government Treasury obligations at the time of the sale. The Company retained the right to service the loans and the right to receive the Excess Interest. The agreement requires the Company to maintain a reserve account equal to 1.0% of the declining principal balance of the loans sold pursuant to the agreement funded from the Excess Interest received by the Company less its servicing fee to fund shortfalls in collections from borrowers who default in the payment of principal or interest. In furtherance of the Company's strategy to sell loans through securitizations, in March 1996 and August 1996, the Company completed its first two securitizations pursuant to which it sold pools of $84.2 million and $48.8 million, respectively, of Title I Loans. The Company previously reacquired at par $77.7 million and $36.2 million of such loans, respectively. Pursuant to these securitizations, pass-through certificates evidencing interests in the pools of loans were sold in a public offering. The Company continues to subservice the sold loans and is entitled to receive from payments in respect of interest on the sold loans a servicing fee equal to 1.25% of the balance of each loan with respect to the March transaction and 1.0% with respect to the August transaction. In addition, with respect to both transactions, the Company received certificates (carried as "Mortgage related securities" on the Company's statement of financial condition), representing the interest differential, after payment of servicing and other fees, between the interest paid by the obligors of the sold loans and the yield on the sold certificates. The Company may be required to repurchase loans that do not conform to the representations and warranties made by the Company in the securitization agreements. During fiscal 1995 and fiscal 1996, the Company used cash of $11.8 million and $15.3 million, respectively, in operating activities. During fiscal 1995 and fiscal 1996, the Company provided cash of $12.0 million and $15.6 million, respectively, in financing activities. During fiscal 1995 and fiscal 1996, the Company used cash of $274,000 and $637,000, respectively, in investing activities, which was substantially expended for office equipment and furnishings and data processing equipment. The Company believes that funds from operations and financing activities, borrowings under its existing credit facilities and the net proceeds from the Offering and the Note Offering will be sufficient to satisfy its contemplated cash requirements for at least twelve months following the consummation of the Offering. POSSIBLE TERMINATION OF SERVICING RIGHTS As described in Note 8 of Notes to Financial Statements, the pooling and servicing agreements relating to the Company's securitization transactions contain provisions with respect to the maximum permitted loan delinquency rates and loan default rates, which, if exceeded, would allow the termination of the Company's right to service the related loans. At September 30, 1996, the default rates on the pool of loans sold in the March 1996 securitization transaction exceeded the permitted limit set forth in the related pooling and servicing agreement. Accordingly, this condition could result in the termination of the Company's servicing rights with respect to that pool of loans by the trustee, the master servicer or the insurance company providing credit enhancement for that transaction. The mortgage servicing rights on this pool of loans were approximately $1.4 million at August 31, 1996. Although the insurance company has indicated that it has, and to its knowledge, the trustee and the master servicer have, no present intention to terminate the Company's servicing rights, no assurance can be given that one or more of such parties will not exercise its right to terminate. In the event of such termination, there would be an adverse effect on the valuation of the Company's mortgage servicing rights and the results of operations in the amount of the mortgage servicing rights ($1.4 million before tax and $870,000 after tax at August 31, 1996) on the date of termination. The Company has taken certain steps designed to reduce the default rates on this pool of loans as well as its other loans. These steps include the hiring of a divisional manager in charge of collection of delinquent loans, the 34 36 hiring of additional personnel to collect delinquent accounts, the assignment of additional personnel specifically assigned to the collection of this pool of loans and the renegotiation of the terms of certain delinquent accounts in this pool of loans within the guidelines promulgated by HUD. EFFECTS OF CHANGING PRICES AND INFLATION The Company's operations are sensitive to increases in interest rates and to inflation. Increased borrowing costs resulting from increases in interest rates may not be immediately recoverable from prospective purchasers. The Company's loans held for sale consist primarily of fixed-rate long term installment contracts that do not increase or decrease as a result of changes in interest rates charged to the Company. In addition, delinquency and loss exposure may be affected by changes in the national economy. See Note 4 of Notes to Financial Statements. RECENT ACCOUNTING PRONOUNCEMENTS At August 31, 1995, effective September 1, 1994, the Company adopted SFAS No. 122, which requires that a mortgage banking enterprise recognize as separate assets the rights to service mortgage loans for others, regardless of how those servicing rights are acquired. The effect of adopting SFAS No. 122 on the Company's financial statements was to increase income before income taxes by $1.1 million for the year ended August 31, 1995. The fair value of capitalized mortgage servicing rights was estimated by taking the present value of expected net cash flows from mortgage servicing using assumptions the Company believes market participants would use in their estimates of future servicing income and expense, including assumptions about prepayment, default and interest rates. Capitalized mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income. The estimate of fair value was based on a 100 basis points per year servicing fee, reduced by estimated costs of servicing, and using a discount rate of 12% in 1995. The Company has developed its assumptions based on experience with its own portfolio, available market data and ongoing consultation with its investment bankers. The Financial Accounting Standards Board (the "FASB") has issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS No. 121"). SFAS No. 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS No. 121 is effective for fiscal years beginning after December 15, 1995. The Company has not determined the effect upon adoption on its results of operation or financial condition. The FASB has issued Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which establishes financial accounting and reporting standards for stock-based employee compensation plans and for transactions in which an entity issues its equity instruments to acquire goods or services from nonemployees. SFAS No. 123 is generally effective for fiscal years beginning after December 15, 1995. The Company intends to provide the pro forma and other additional disclosures about stock-based employee compensation plans in its 1997 financial statements as required by SFAS No. 123. SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 125") was issued by the FASB in June 1996. SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. This statement also provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. It requires that liabilities and derivatives incurred or obtained by transferors as part of a transfer of financial assets be initially measured at fair value. SFAS No. 125 also requires that servicing assets be measured by allocating the carrying amount between the assets sold and retained interests based on their relative fair values at the date of transfer. Additionally, this statement requires that the servicing assets and liabilities be subsequently measured by (a) amortization in proportion to and over the period of estimated net servicing income and (b) assessment for asset impairment or increased obligation based on their fair values. The statement will require that the Company's existing and future excess servicing receivables be measured at fair market value and be reclassified as interest only strip securities and accounted for in accordance with SFAS No. 115. As required by the statement, the Company will adopt the new 35 37 requirements effective January 1, 1997. It is not anticipated that upon implementation, the statement will have any material impact on the financial statements of the Company, as the book value of the Company's excess servicing rights and mortgage related securities approximates fair value. SEASONALITY Home improvement loan volume tracks the seasonality of home improvement contract work. Volume tends to build during the spring and early summer months, particularly with regard to pool installations. A decline is typically experienced in late summer and early fall until temperatures begin to drop. This change in seasons precipitates the need for new siding, window and insulation contracts. Peak volume is experienced in November and early December and declines dramatically from the holiday season through the winter months. Debt consolidation and home equity loan volume are not impacted by seasonal climate changes and, with the exclusion of the holiday season, tend to be stable throughout the year. 36 38 BUSINESS GENERAL The Company is a specialized consumer finance company that originates, purchases, sells and services consumer loans consisting primarily of home improvement loans secured by liens on the improved property. Through its network of Correspondents and Dealers, the Company initially originated only Title I Loans. The Title I program provides for insurance of 90% of the principal balance of the loan, and certain other costs. The Company began offering Conventional Loans through its Correspondents in May 1996. For the three months ended August 31, 1996, such loans totalled $11.2 million which represents 22.5% of the Company's total loan originations for that quarter. The Company's borrowers are individuals who own their home and have appropriate verifiable income but may have limited access to traditional financing sources due to insufficient home equity, limited credit history or high ratios of debt service to income. These borrowers require or seek a high degree of personalized service and prompt response to their loan applications. As a result, the Company's borrowers generally are not averse to paying higher interest rates that the Company charges for its loan programs as compared to the interest rates charged by banks and other traditional financial institutions. The Company has developed a proprietary credit index profile that includes as a significant component the credit evaluation score methodology developed by Fair, Isaac and Company to classify borrowers on the basis of likely future performance. The other components of the Company's scoring system include debt to income ratio, employment history and residence stability. The Company charges varying rates of interest based upon the borrower's credit profile and income. The Company quotes higher interest rates for those borrowers exhibiting a higher degree of risk. The borrowers' credit standing and/or lack of collateral may preclude them from obtaining alternative funding. For the year ended August 31, 1996, the loans originated by the Company had a weighted average interest rate of 14.03%. The credit evaluation methodology developed by Fair, Isaac and Company takes into consideration a number of factors in the borrower's credit history. These include, but are not limited to, (i) the length of time the borrower's credit history has been on file with the respective credit reporting agency, (ii) the number of open credit accounts, (iii) the amount of open revolving credit availability, (iv) the payment history on the open credit accounts and (v) the number of recent inquiries for the borrower's credit file which may indicate additional open credit accounts not yet on file. Based on this information Fair, Isaac and Company will assign a score to the borrower's credit file which is updated periodically. Based on their statistical analysis, this score will indicate the percentage of borrowers in that score range expected to become 90 days delinquent on an additional loan. The score ascribed by Fair, Isaac and Company weighs heavily in the Company's approval process; however its effects, whether positive or negative, can be mitigated by the other factors described above. The Company's loan originations increased to $139.4 million during the fiscal year ended August 31, 1996 from $87.8 million during the fiscal year ended August 31, 1995 and $8.2 million during the six months in which it originated loans in the fiscal year ended August 31, 1994. The Company's revenues increased to $25.0 million for the year ended August 31, 1996 from $13.6 million for the fiscal year ended August 31, 1995 and $751,000 for the fiscal year ended August 31, 1994. For the year ended August 31, 1996, the Company had net income of $6.9 million compared to $3.6 million for the year ended August 31, 1995. As a result of the substantial growth in loan originations, the Company has operated since March 1994, and expects to continue to operate for the foreseeable future, on a negative cash flow basis. The Company sells substantially all the loans it originates through either whole loan sales to third party institutional purchasers or securitizations at a yield below the stated interest rate on the loans, retaining the right to service the loans and receive any amounts in excess of the guaranteed yield to the purchasers. The Company completed its first two securitizations of Title I Loans in March and August 1996 totalling $133.0 million and expects to sell a substantial portion of its loan production through securitizations in the future. At August 31, 1996, the Company serviced $209.5 million of loans it had sold, and $4.7 million of loans it owned. 37 39 HOME IMPROVEMENT LOAN INDUSTRY According to data released by the Commerce Department's Bureau of the Census, expenditures for home improvement and repairs of residential properties have exceeded $100.0 billion per year since 1992 with 1995 expenditures estimated at $112.6 billion. The Company targets the estimated $40.0 billion of those expenditures which are for owner-occupied single-family properties where improvements are performed by professional remodelers. As the costs of home improvements escalate, home owners are seeking financing as a means to improve their property and maintain and enhance its value. The National Association of Home Builders Economics Forecast in 1995 estimates that home improvement expenditures will exceed $200.0 billion by the year 2003. Two types of home improvement financing are available to borrowers, the Title I program administered by the FHA, which is authorized to partially insure qualified lending institutions against losses, and uninsured loans where the lender relies more heavily on the borrower's creditworthiness, debt capacity and the underlying collateral. Both types of loans are generally secured with a real estate mortgage lien on the property improved. The conventional home improvement financing market continues to grow, as many homeowners have limited access to traditional financing sources due to insufficient home equity, limited credit history or high ratios of debt service to income. Conventional loan proceeds can be used for a variety of improvements such as large remodeling projects, both interior and exterior, kitchen and bath remodeling, room additions and in-ground swimming pools. Borrowers also have the opportunity to consolidate a portion of their outstanding debt in order to reduce their monthly debt service. According to the FHA, the amount of single family Title I Loans originated has grown from $375.0 million during 1988 to $1.3 billion during 1995. Based on FHA data, the Company estimates that it had an 8.6% market share of the property improvement Title I loan market in calendar 1995. Out of approximately 3,100 lenders participating in the program in 1995, according to FHA data, the Company was the third largest originator of property improvement Title I Loans. Under Title I, the payment of approximately 90% of the principal balance of a loan is insured by the United States of America in the event of a payment default. The Title I program generally limits the maximum amount of the loan to $25,000 and restricts the type of eligible improvements and the use of the loan proceeds. Under Title I, only property improvement loans to finance the alteration, repair or improvement of existing single family, multifamily and non-residential structures are allowed. The FHA does not review individual loans at the time of approval. In the case of a Title I Loan less than $7,500, no equity is required in the property to be improved and the loan may be unsecured. BUSINESS STRATEGY The Company's strategic plan is to continue to expand its lending operations while maintaining its credit quality. The Company's strategies include: (i) offering new loan products ; (ii) expanding its existing network of Correspondents and Dealers; (iii) entering new geographic markets; (iv) realizing operational efficiencies through economies of scale; and (v) using securitizations to sell higher volumes of loans on more favorable terms. At August 31, 1996, the Company had developed a nationwide network of approximately 310 active Correspondents and approximately 435 active Dealers. The Company's Correspondents generally offer a wide variety of loans and its Dealers typically offer home improvement loans in conjunction with debt consolidation. By offering a more diversified product line, including Conventional Loans, and maintaining its high level of service, the Company has increased the loan production from its existing network of Correspondents. The Company anticipates that as it expands its lending operations, it will realize economies of scale thereby reducing its average loan origination costs and enhancing its profitability. In addition, the Company intends to continue to sell its loan production through securitizations as opportunities arise. Through access to securitization, the Company believes that it has the ability to sell higher volumes of loans on more favorable terms than in whole loan sales. Product Extension and Expansion The Company intends to continue to review its loan programs and introduce new loan products to meet the needs of its customers. The Company will also evaluate products or programs that it believes are 38 40 complementary to its current products for the purpose of enhancing revenue by leveraging and enhancing the Company's value to its existing network of Correspondents and Dealers. The Company believes that its introduction of new loan products will enhance its relationship with its Dealers and Correspondents and enable it to become a single source for their various financing needs. Since it commenced operations, the Company has originated Title I Loans from both its Dealers and Correspondents. In May 1996, the Company broadened these activities to include non-FHA insured home improvement loans and combination home improvement and debt consolidation loans. To date, these non-FHA insured loans have been originated solely through Correspondents. All of these loans, which permit loan amounts up to $60,000 with fixed rates and 20-year maturities, are secured by a lien, generally junior in priority, on the respective primary residence. The Company intends to offer pure debt consolidation loans in the first quarter of fiscal 1997. The Company also intends to offer non-FHA insured loans through its Dealer division in the first quarter of 1997 and to make direct debt consolidation loans to borrowers originated by the Dealer division in conjunction with home improvement financing. Expansion of Correspondent Operations The Company seeks to increase originations of loans from select Correspondents. The Company has expanded its product line to include Conventional Loans to meet the needs of its existing network of Correspondents. Prior to May 1996, the Company originated only Title I Loans. This limited its ability to attract the more sophisticated Correspondent that offered a multitude of loan products and, accordingly, limited the Company's market penetration. The Company began offering Conventional Loans to existing select Correspondents in May 1996. In order to maintain the Company's customer service excellence, the Company has gradually increased the number of Correspondents to which it has offered Conventional Loans. Since the Company commenced offering Conventional Loans, the loan production of the Company's Correspondent division has significantly increased. The Company believes that it is well positioned to expand this segment without any material increase in concentration or quality risks. Expansion of Dealer Operations The Company seeks to expand its Dealer network and maximize loan originations from its existing network by offering a variety of innovative products and providing consistent and prompt service at competitive prices. The Company will provide conventional products as well as its existing Title I product to its Dealers in order to meet the needs of the diverse borrower market. The Company targets Dealers that typically offer financing to their customers and attempts to retain and grow these relationships by providing superior customer service, personalized attention and prompt approvals and fundings. The Company has been unable to fully meet the needs of its Dealers because of Title I program limits on the amount and types of improvements which may be financed. The Company intends to meet the needs of its Dealers with new Conventional Loan programs. These programs allow for more expensive project financing such as in-ground swimming pools and substantial remodeling as well as financing for creditworthy borrowers with limited equity who are in need of debt consolidation and borrowers with marginal creditworthiness and substantial equity in their property. With this strategy, the Company believes it can achieve further market penetration of its existing Dealer network and gain new Dealers and market share in areas in which the Title I product is less successful because of its restrictions. Nationwide Geographic Expansion The Company intends to continue to expand its Correspondent and Dealer network on a nationwide basis and to enhance its value to its existing network. The Company's strategy involves (i) focusing on geographic areas that the Company currently underserves and (ii) tailoring the Company's loan programs to better serve its existing markets and loan sources. Maximization of Flexibility in Loan Sales The Company employs a two-pronged strategy of disposing of its loan originations primarily through securitizations and, to a lesser extent, through whole loan sales. By employing this dual strategy, the Company 39 41 has the flexibility to better manage its cash flow, diversify its exposure to the potential volatility of the capital markets and maximize the revenues associated with the gain on sale of loans given market conditions existing at the time of disposition. The Company has recently been approved by FNMA as a seller/servicer of Title I Loans, as a result of which the Company is eligible to sell such loans to FNMA on a servicing retained basis. LOAN PRODUCTS The Company originates Title I and Conventional Loans. Both types of loans are typically secured by a first or junior lien on the borrower's principal residence, although the Company occasionally originates and purchases unsecured loans with borrowers that have an excellent credit history. Borrowers use loan proceeds for a wide variety of home improvement projects, such as exterior/interior remodeling, structural additions, roofing and plumbing, as well as luxury items such as in-ground swimming pools, and for debt consolidation. The Company lends to borrowers of varying degrees of creditworthiness. See "Loan Processing and Underwriting." Conventional Loans A Conventional Loan is a non-insured home improvement or home equity loan typically undertaken to pay for a home improvement project, home improvement and debt consolidation combination or a debt consolidation. Substantially all of the Conventional Loans originated by the Company are secured by a first or junior mortgage lien on the borrower's principal residence. Underwriting for Conventional Loans varies according to the Company's evaluation of the borrower's credit risk and income stability as well as the underlying collateral. The Company will rely on the underlying collateral and equity in the property for borrowers judged to be greater credit risks. The Company targets the higher credit quality segment of borrowers. The Company has begun originating Conventional Loans through its Correspondent Division and plans to begin offering such loan products to its Dealer Division. The Company has focused its Conventional Loan program on that segment of the marketplace with higher credit quality borrowers who may have limited equity in their residence after giving effect to the amount of senior liens. The portfolio of Conventional Loans generated through August 31, 1996 indicates on average that the borrowers have received an A grade under the Company's proprietary credit index profile, have an average debt-to-income ratio of 38% and the subject properties are 100% owner occupied. On average, the market value of the underlying property is $123,000 without added value from the respective home improvement work, the amount of senior liens of $107,000 and the loan size is $28,500. Typically, there is not enough equity in the property to cover a junior lien in the event that a senior lender forecloses on the property. More than 99% of the loans comprising the Company's Conventional Loan portfolio are secured by junior liens. Title I Loan Program The National Housing Act of 1934 (the "Housing Act"), Sections 1 and 2(a), authorized the creation of the FHA and the Title I credit insurance program ("Title I"). Under the Housing Act, the FHA is authorized to insure qualified lending institutions against losses on certain types of loans, including loans to finance the alteration, repair or improvement of existing single family, multi-family and nonresidential real property structures. Under Title I, the payment of approximately 90% of the principal balance of a loan and certain other amounts is insured by the United States of America in the event of a payment default. Title I and the regulations promulgated thereunder establish criteria regarding (i) who may originate, acquire, service and sell Title I Loans, (ii) Title I Loan eligibility of improvements and borrowers, (iii) the principal amounts and terms of and security for Title I Loans, (iv) the use and disbursement of loan proceeds, (v) verification of completion of improvements, (vi) the servicing of Title I Loans in default and (vii) the processing of claims for Title I insurance. The principal amount of a secured Title I Loan may not exceed $25,000, in the case of a loan for the improvement of a single family structure, and $60,000, in the case of a loan for the improvement of a multi-family structure. Loans up to a maximum of $7,500 in principal amount may qualify as unsecured Title I Loans. 40 42 Title I Loans are required to bear fixed rates of interest and, with limited exceptions, be fully amortizing with equal weekly, bi-weekly, semi-monthly or monthly installment payments. Title I Loan terms may not be less than six months nor more than 240 months in the case of secured Title I Loans or 120 months in the case of unsecured Title I Loans. Subject to other federal and state regulations, the lender may establish the interest rate to be charged in its discretion. Title I generally provides for two types of Title I Loans, direct loans ("Direct Title I Loans") and dealer loans ("Dealer Title I Loans"). Direct Title I Loans are made directly by a lender to the borrower and there is no participation in the loan process by the contractor, if any, performing the improvements. In the case of Dealer Title I Loans, the Dealer, a contractor performing the improvements, assists the borrower in obtaining the loan, contracts with the borrower to perform the improvements, executes a retail installment contract with the borrower and, upon completion of the improvements, assigns the retail installment contract to the Title I lender. Each Dealer must be approved by the Title I lender in accordance with HUD requirements. Direct Title I Loans are closed by the lender in its own name with the proceeds being disbursed directly to the borrower prior to completion of the improvements. The borrower is generally required to complete the improvements financed by a Direct Title I Loan within six months of receiving the proceeds. In the case of Dealer Title I Loans, the lender is required to obtain a completion certificate from the borrower certifying that the improvements have been completed prior to disbursing the proceeds to the Dealer. The FHA charges a lender an annual fee equal to 50 basis points of the original principal balance of a loan for the life of the loan. A Title I lender or Title I sponsored lender is permitted to require the borrower to pay the insurance premium with respect to the loan. In general, the borrowers pay the insurance premiums with respect to Title I Loans originated through the Company's Correspondents but not with respect to Title I Loans originated through the Company's Dealers. Title I provides for the establishment of an insurance coverage reserve account for each lender. The amount of insurance coverage in a lender's reserve account is equal to 10% of the original principal amount of all Title I Loans originated or purchased and reported for insurance coverage by the lender less the amount of all insurance claims approved for payment. The amount of reimbursement to which a lender is entitled is limited to the amount of insurance coverage in the lender's reserve account. LENDING OPERATIONS The Company has two principal divisions for the origination of loans, the Correspondent Division and the Dealer Division. The Correspondent Division represents the Company's largest source of loan originations. Through its Correspondent Division, the Company originates loans through a nationwide network of Correspondents including financial intermediaries, mortgage companies, commercial banks and savings and loan institutions. The Company typically originates loans from Correspondents on an individual loan basis, pursuant to which each loan is pre-approved by the Company and is purchased immediately after the closing. The Correspondent Division conducts operations from its headquarters in Atlanta, Georgia, with a vice president of operations responsible for underwriting and processing and five account executives supervised by the Vice President-National Marketing responsible for developing and maintaining relationships with Correspondents. At August 31, 1996, the Company had a network of approximately 310 active Correspondents. In addition to purchasing individual Direct Title I Loans and Conventional Loans, from time to time the Correspondent Division purchases portfolios of loans from Correspondents. In March 1994, the Company purchased a portfolio of Direct Title I Loans originated by another financial institution, which consisted of 211 loans with an aggregate remaining principal balance of $1.4 million. The Dealer Division originates Dealer Title I Loans through a network of Dealers, consisting of home improvement construction contractors approved by the Company, by acquiring individual retail installment contracts ("Installment Contracts") from Dealers. An Installment Contract is an agreement between the Dealer and the borrower pursuant to which the Dealer performs the improvements to the property and the borrower agrees to pay in installments the price of the improvements. Before entering into an Installment Contract with a borrower, the Dealer assists the borrower in submitting a loan application to the Company. If 41 43 the loan application is approved, the Dealer enters into an Installment Contract with the borrower, the Dealer assigns the Installment Contract to the Company upon completion of the home improvements and the Company, upon receipt of the requisite loan documentation (described below) and completion of a satisfactory telephonic interview with the borrower, pays the Dealer pursuant to the terms of the Installment Contract. The Dealer Division maintains 13 branch offices located in Montvale, New Jersey, Kansas City, Missouri, Las Vegas, Nevada, Austin, Texas, Oklahoma City, Oklahoma, Seattle, Washington, Waterford, Michigan, Columbus, Ohio, Elmhurst, Illinois, Philadelphia, Pennsylvania, Denver, Colorado, Woodbridge, Virginia and Bowie, Maryland through which it conducts its marketing to Dealers in the state in which the branch is located as well as certain contiguous states. The Dealer Division is operated with a vice president of operations responsible for loan processing and underwriting, two regional managers, and 13 field representatives supervised by the Vice President-National Marketing who are responsible for marketing to Dealers. At August 31, 1996, the Company had a network of approximately 435 active Dealers doing business in 32 states. The Company intends to commence offering Conventional Loans through its Dealer Division. Correspondents and Dealers qualify to participate in the Company's programs only after a review by the Company's management of their reputations and expertise, including a review of references and financial statements, as well as a personal visit by one or more representatives of the Company. Title I requires the Company to reapprove its Dealers annually and to monitor the performance of those Correspondents that are sponsored by the Company. The Company's compliance function is performed by a director of compliance and loan administration, whose staff performs periodic reviews of portfolio loans and Correspondent and Dealer performance and may recommend to senior management the suspension of a Correspondent or a Dealer. The Company believes that its system of acquiring loans through a network of Correspondents and Dealers and processing such loans through a centralized loan processing facility has (i) assisted the Company in minimizing its level of capital investment and fixed overhead costs and (ii) assisted the Company in realizing certain economies of scale associated with evaluating and acquiring loans. The Company does not believe that the loss of any particular Correspondent or Dealer would have a material adverse effect upon the Company. See "Loan Processing and Underwriting." The Company pays its Correspondents premiums on the loans it purchases based on the credit score of the borrower and the interest rate on the respective loan. Additional premiums are paid to Correspondents based on the volume of loans purchased from such Correspondents in a monthly period. During fiscal 1996 the Company originated $94.2 million of loans from Correspondents and paid total premiums of $2.8 million or 3.0% of such loans. None of the Company's arrangements with its Dealers or Correspondents is on an exclusive basis. Each relationship is documented by either a Dealer Purchase Agreement or a Correspondent Purchase Agreement. Pursuant to a Dealer Purchase Agreement, the Company may purchase from a Dealer loans that comply with the Company's underwriting guidelines at a price acceptable to the Company. With respect to each loan purchased, the Dealer makes customary representations and warranties regarding, among other things, the credit history of the borrower, the status of the loan and its lien priority if applicable, and agrees to indemnify the Company with respect to such representations and warranties. Pursuant to a Correspondent Purchase Agreement, the Company may purchase loans through a Correspondent, subject to receipt of specified documentation. The Correspondent makes customary representations and warranties regarding, among other things, the Correspondent's corporate status, as well as regulatory compliance, good title, enforceability and payments and advances of the loans to be purchased. The Correspondent covenants to, among other things, keep Company information confidential, provide supplementary information, maintain government approvals with respect to Title I Loans and to refrain from certain solicitations of the Company's borrowers. The Correspondent also agrees to indemnify the Company for misrepresentations or non-performance of its obligations. The Company originates and acquires a limited variety of loan products, including: (i) fixed rate, secured Title I Loans, secured by single family residences, with terms and principal amounts ranging from 60 to 240 months and approximately $3,000 to $25,000, respectively; and (ii) fixed rate, unsecured Title I Loans with terms and principal amounts ranging from 36 to 120 months and approximately $2,500 to $7,500, respectively. As part of the Company's strategic plan, the Company has commenced originating non-FHA insured Conventional Loans utilizing its established network of Correspondents. 42 44 The following table sets forth certain data regarding loan applications processed and loans originated by the Company during the periods indicated.
YEAR ENDED AUGUST 31, ----------------------------------------------------------------- 1994 1995 1996 ------------------ ------------------- -------------------- Total Loan Applications: Number processed....................................... 3,512 27,608 42,236 Number approved........................................ 1,984 15,956 20,910 Approval ratio......................................... 56.5% 57.8% 49.5% Loan Originations: Principal balance of loans: Correspondents: Title I.............................................. $5,251,647 64.3% $63,792,680 72.7% $ 82,596,197 59.3% Conventional......................................... -- -- -- -- 11,582,108 8.3 ---------- ----- ----------- ----- ------------ ----- Total Correspondents............................. 5,251,647 64.3 63,792,680 72.7 94,178,305 67.6 ---------- ----- ----------- ----- ------------ ----- Dealers................................................ 1,492,318 18.3 23,957,829 27.3 45,188,721 32.4 Bulk purchase.......................................... 1,420,150 17.4 -- -- -- -- ---------- ----- ----------- ----- ------------ ----- Total............................................ $8,164,115 100.0% $87,750,509 100.0% $139,367,026 100.0% ========== ===== =========== ===== ============ ===== Number of Loans: Correspondents: Title I.............................................. 338 47.4% 3,437 59.1% 4,382 50.9% Conventional......................................... -- -- -- -- 392 4.6 ---------- ----- ----------- ----- ------------ ----- Total Correspondents............................. 338 47.4 3,437 59.1 4,774 55.5 ---------- ----- ----------- ----- ------------ ----- Dealers................................................ 164 23.0 2,381 40.9 3,836 44.5 Bulk purchase.......................................... 211 29.6 -- -- -- -- ---------- ----- ----------- ----- ------------ ----- Total............................................ 713 100.0% 5,818 100.0% 8,610 100.0% ========== ===== =========== ===== ============ ===== Average principal balance of loans..................... $ 11,430 $ 15,083 $ 16,187 Weighted average interest rate on loans originated..... 14.18% 14.55% 14.03% Weighted average term of loans originated (months)..... 175 188 198
LOAN PROCESSING AND UNDERWRITING The Company's loan application and approval process generally is conducted over the telephone with applications usually received at the Company's centralized processing facility from Correspondents and Dealers by facsimile transmission. Upon receipt of an application, the information is entered into the Company's system and processing begins. All loan applications are individually analyzed by employees of the Company at its loan processing headquarters in Atlanta, Georgia. The Company has developed a proprietary credit index profile ("CIP") as a statistical credit based tool to predict likely future performance of a borrower. A significant component of this customized system is the credit evaluation score methodology developed by Fair, Isaac and Company ("FICO"), a consulting firm specializing in creating default predictive models through a high number of variable components. The other components of the CIP include debt to income analysis, employment stability, self employment criteria, residence stability and occupancy status of the subject property. By utilizing both scoring models in tandem, all applicants are considered on the basis of their ability to repay the loan obligation while allowing the Company to maintain its risk based pricing for each loan. Based upon FICO score default predictors and the Company's internal CIP score, loans are classified by the Company into gradations of descending credit risks and quality, from "A" credits to "D" credits, with subratings within those categories. Quality is a function of both the borrowers creditworthiness, and the extent of the value of the collateral, which is typically a second lien on the borrower's primary residence. "A+" credits generally have a FICO score greater than 680. An applicant with a FICO score of less than 620 would be rated a "C" credit unless the loan-to-value ratio was 75% or less which would raise the credit risk to the Company to a "B" or better depending on the borrower's debt service capability. Depending on loan size, typical loan-to-value ratios for "A" and "B" credits range from 90% to 125%, while loan-to-value ratios for "C" and "D" credits range from 60% up to 90% with extraordinary compensating factors. The Company's underwriters review the applicant's credit history, based on the information contained in the application as well as reports available from credit reporting bureaus and the Company's CIP score, to determine the applicant's acceptability under the Company's underwriting guidelines. Based on the under- 43 45 writer's approval authority level, certain exceptions to the guidelines may be made when there are compensating factors subject to approval from a corporate officer. The underwriter's decision is communicated to the Correspondent or Dealer and, if approved, fully explains the proposed loan terms. The Company endeavors to respond to the Correspondent or Dealer on the same day the application is received. The Company issues a commitment to purchase a pre-approved loan upon the receipt of a fully completed loan package. Commitments indicate loan amounts, fees, funding conditions, approval expiration dates and interest rates. Loan commitments are generally issued for periods of up to 45 days in the case of Correspondents and 90 days in the case of Dealers. Prior to disbursement of funds, all loans are carefully reviewed by funding auditors to ensure that all documentation is complete, all contingencies specified in the approval have been met and the loan is closed in accordance with Company and regulatory procedures. Conventional Loans The Company has implemented policies for its Conventional Loan program that are designed to minimize losses by adhering to high credit quality standards or requiring adequate loan-to-value levels. The Company will only make Conventional Loans to borrowers with an "A" or "B" credit grade using the CIP. Through August 31, 1996, the Company's portfolio of Conventional Loans originated through its Correspondent Division had been evaluated as an "A" credit risk and had a weighted average (i) FICO score of 661, (ii) gross debt to income ratio of 38%, (iii) interest rate of 14.04% and (iv) loan-to-value ratio of 110%, as well as an average loan amount of $28,569. Substantially all of the Conventional Loans originated to date by the Company are secured by first or second mortgage liens on single family, owner occupied properties. Terms of Conventional Loans made by the Company, as well as the maximum loan-to-value ratios and debt service to income coverage (calculated by dividing fixed monthly debt payments by gross monthly income), vary depending upon the Company's evaluation of the borrower's creditworthiness. Borrowers with lower creditworthiness generally pay higher interest rates and loan origination fees. As part of the underwriting process for Conventional Loans, the Company generally requires an appraisal of the collateral property as a condition to the commitment to purchase. The Company requires independent appraisers to be state licensed and certified. The Company requires that all appraisals be completed within the Uniform Standards of Professional Appraisal Practice as adopted by the Appraisal Standards Board of the Appraisal Foundation. Prior to originating a loan, the Company audits the appraisal for accuracy and to insure that the appraiser used sufficient care in analyzing data to avoid errors that would significantly affect the appraiser's opinion and conclusion. This audit includes a review of economic demand, physical adaptability of the real estate, neighborhood trends and the highest and best use of the real estate. In the event the audit reveals any discrepancies as to the method and technique that are necessary to produce a credible appraisal, the Company will perform additional property data research or may request a second appraisal to be performed by an independent appraiser selected by the Company in order to substantiate further the value of the subject property. The Company also requires a title report on all subject properties securing its loans to verify property ownership, lien position and the possibility of outstanding tax liens or judgments. In the case of larger loan amounts or first liens, the Company requires a full title insurance policy in compliance with the American Land Title Association. Title I Loans The Title I Loans originated by the Company are executed on forms meeting FHA requirements as well as federal and state regulations. Loan applications and Installment Contracts are submitted to the Company's processing headquarters for credit verification. The information provided in loan applications is first verified by, among other things, (i) written confirmations of the applicant's income and, if necessary, bank deposits, (ii) a formal credit bureau report on the applicant from a credit reporting agency, (iii) a title report, (iv) if necessary, a real estate appraisal and (v) if necessary, evidence of flood insurance. Appraisals for Title I Loans, when necessary, are generally prepared by pre-approved independent appraisers that meet the Company's standards for experience, education and reputation. Loan applications are also reviewed to 44 46 ascertain whether or not they satisfy the Company's underwriting criteria, including loan-to-value ratios (if non-owner occupied), borrower income qualifications, employment stability, purchaser requirements and necessary insurance and property appraisal requirements. The Company will make Title I Loans to borrowers with an "A" to "C" credit grade based on CIP score and lien position. Since the implementation of the CIP scoring system in February 1996, through August 31, 1996, the Company's portfolio of Title I Loans originated through its Correspondent and Dealer Divisions had been evaluated as a "C+" and "B" credit risk, respectively, and had a weighted average FICO score of 637 and 645, respectively. The Company's underwriting guidelines for Title I Loans meet FHA's underwriting criteria. Completed loan packages are sent to the Company's Underwriting Department for predisbursement auditing and funding. Subject to underwriting approval of an application forwarded to the Company by a Dealer, the Company issues a commitment to purchase an Installment Contract from a Dealer upon the Company's receipt of a fully completed loan package and notice from the borrower of satisfactory work completion. Subject to underwriting approval of an application forwarded to the Company by a Correspondent, the Company issues a commitment to purchase a Title I Loan upon the Company's receipt of a fully completed and closed loan package. The Company's underwriting personnel review completed loan applications to verify compliance with the Company's underwriting standards, FHA requirements and federal and state regulations. In the case of Title I Loans being acquired from Dealers, the Company conducts a prefunding telephonic interview with the property owner to determine that the improvements have been completed in accordance with the terms of the Installment Contract and to the owner's satisfaction. The Company utilizes a nationwide network of independent inspectors to perform on-site inspections of improvements within the timeframes specified by the Title I program. Since the Company does not currently originate any Title I Loans with an original principal balance in excess of $25,000, the FHA does not individually review the Title I Loans originated by the Company. QUALITY CONTROL The Company employs various quality control personnel and procedures in order to insure that loan origination standards are adhered to and regulatory compliance is maintained while substantial growth is experienced in the servicing portfolio. In accordance with Company policy, the Quality Control Department reviews a statistical sample of loans closed each month. This review is generally completed within 60 days of funding and circulated to appropriate department heads and senior management. Finalized reports are maintained in the Company's files for a period of two years from completion. Typical review procedures include reverification of employment and income, re-appraisal of the subject property, obtaining separate credit reports and recalculation of debt-to-income ratios. The statistical sample is intended to cover 10% of all new loan originations with particular emphasis on new Correspondents and Dealers. Emphasis will also be placed on those loan sources where higher levels of delinquency are experienced, physical inspections reveal a higher level of non-compliance, or payment defaults occur within the first six months of funding. On occasion, the Quality Control Department may review all loans generated from a particular loan source in the event an initial review determines a higher than normal number of exceptions. The account selection of the Quality Control Department is also designed to include a statistical sample of loans by each underwriter and each funding auditor and thereby provide management with information as to any aberration from Company policies and procedures in the loan origination process. Under the direction of the Vice President of Credit Quality and Regulatory Compliance, a variety of review functions are accomplished. On a daily basis, a sample of recently approved loans are reviewed to insure compliance with underwriting standards. Particular attention is focused on those underwriters who have developed a higher than normal level of exceptions. In addition to this review, the Company has developed a staff of post-disbursement review auditors which reviews 100% of recently funded accounts, typically within two weeks of funding. All credit reports are analyzed, debt-to-income ratios recalculated, contingencies monitored and loan documents inspected. Exception reports are forwarded to the respective Vice Presidents of 45 47 Production as well as senior management. The Company also employs a Physical Inspection Group that is responsible for monitoring the inspection of all homes which are the subject of home improvement loans. Non-compliance is tracked by loan source and serves as another method of evaluating a loan source relationship. The Company has expended substantial amounts in developing its Quality Control and Compliance Department. The Company recognizes the need to monitor its operations continually as it experiences substantial growth. Feedback from these departments provides senior management with the information necessary to take corrective action when appropriate, including the revision and expansion of its operating policies and procedures. LOAN PRODUCTION TECHNOLOGY SYSTEMS The Company utilizes a sophisticated computerized loan origination tracking system that allows it to monitor the performance of Dealers and Correspondents and supports the marketing efforts of the Dealer and Correspondent Divisions by tracking the marketing activities of field sales personnel. The system automates various other functions such as Home Mortgage Disclosure Act and HUD reporting requirements and routine tasks such as decline letters and the flood certification process. The system also affords management access to a wide range of decision support information such as data on the approval pipeline, loan delinquencies by source, and the activities and performance of underwriters and funders. The Company uses intercompany electronic mail, as well as an electronic-mail link with its affiliate, PEC, to facilitate communications and has an electronic link to PEC that allows for the automated transfer of accounts to PEC's servicing system. The Company is enhancing this system to provide for the automation of the loan origination process as well as loan file indexing and routing. These enhancements will include electronic routing of loan application facsimile transmissions, automated credit report inquiries and consumer credit scoring along with on-screen underwriting and approval functions. Where feasible the system will interface with comparable systems of the Company's Dealers and Correspondents. The Company expects that these enhancements will (i) increase loan production efficiencies by minimizing manual processing of loan documentation, (ii) enhance the quality of loan processing by use of uniform electronic images of loan files and (iii) facilitate loan administration and collections by providing easier access to loan account information. The implementation of these enhancements is expected to be substantially completed prior to December 1996. These enhancements to improve loan production systems are expected to cost approximately $50,000 and will be funded from the Company's normal operating cash flows. LOAN SERVICING The Company's strategy has been to retain the servicing rights associated with the loans it originates. The Company's loan servicing activities include responding to borrower inquiries, processing and administering loan payments, reporting and remitting principal and interest to the whole loan purchasers who own interests in the loans and to the trustee and others with respect to securitizations, collecting delinquent loan payments, processing Title I insurance claims, conducting foreclosure proceedings and disposing of foreclosed properties and otherwise administering the loans. The Company's various loan sale and securitization agreements allocate a portion of the difference between the stated interest rate and the interest rate passed through to purchasers of its loans to servicing revenue. Servicing fees are collected by the Company out of monthly loan payments. Other sources of loan servicing revenues include late charges and miscellaneous fees. The Company uses a sophisticated computer based mortgage servicing system that it believes enables it to provide effective and efficient administering of Conventional and Title I Loans. The servicing system is an on-line real time system developed and maintained by the Company's affiliate, PEC. It provides payment processing and cashiering functions, automated payoff statements, on-line collections, statement and notice mailing along with a full range of investor reporting requirements. The Company has entered into a subservicing agreement with PEC for the use of the system and continuous support. The monthly investor reporting package includes a trial balance, accrued interest report, remittance report and delinquency reports. Formal written procedures have been established for payment processing, new loan set-up, customer service, tax and insurance monitoring. 46 48 The Company is a HUD approved lender and a FNMA approved seller/servicer. As such, it is subject to a thorough due diligence review of its policies, procedures, and business, and is qualified to underwrite, sell and service Title I Loans on behalf of the FHA and FNMA. The Company's loan collection functions are organized into two areas of operation: routine collections and management of nonperforming loans. Routine collection personnel are responsible for collecting loan payments that are less than 60 days contractually past due and providing prompt and accurate responses to all customer inquiries and complaints. These personnel report directly to the Company's Vice President of Loan Administration. Borrowers are contacted on the due date for each of the first six payments in order to encourage continued prompt payment. Generally, after six months of seasoning, collection activity will commence if a loan payment has not been made within five days of the due date. Borrowers usually will be contacted by telephone at least once every five days and also by written correspondence before the loan becomes 60 days delinquent. With respect to loan payments that are less than 60 days late, routine collections personnel utilize a system of mailed notices and telephonic conferences for reminding borrowers of late payments and encouraging borrowers to bring their accounts current. Installment payment invoices and return envelopes are mailed to each borrower on a monthly basis. The Company has bilingual customer service personnel available. Once a loan becomes 30 days past due, a collection supervisor generally analyzes the account to determine the appropriate course of remedial action. On or about the 45th day of delinquency, the supervisor determines if the property needs immediate inspection to determine if it is occupied or vacant. Depending upon the circumstances surrounding the delinquent account, a temporary suspension of payments or a repayment plan to return the account to current status may be authorized by the Vice President of Loan Administration. In any event, it is the Company's policy to work with the delinquent customer to resolve the past due balance before Title I claim processing or legal action is initiated. Nonperforming loan management personnel are responsible for collecting severely delinquent loan payments (over 60 days late), filing Title I insurance claims or initiating legal action for foreclosure and recovery. Operating from the Company's headquarters in Atlanta, Georgia, collection personnel are responsible for collecting delinquent loan payments and seeking to mitigate losses by providing various alternatives to further actions, including modifications, special refinancing and indulgence plans. Title I insurance claim personnel are responsible for managing Title I insurance claims, utilizing a claim management system designed to track insurance claims for Title I Loans so that all required conditions precedent to claim perfection are met. In the case of Conventional Loans, a foreclosure coordinator will review all previous collection activity, evaluate the lien and equity position and obtain any additional information as necessary. The ultimate decision to foreclose, after all necessary information is obtained, is made by an officer of the Company. Foreclosure regulations and practices and the rights of the owner in default vary from state to state, but generally procedures may be initiated if: (i) the loan is 90 days (120 days under California law) or more delinquent; (ii) a notice of default on a senior lien is received; or (iii) the Company discovers circumstances indicating potential loss exposure. Net loan servicing income was $873,000 and $3.3 million for the years ended August 31, 1995 and 1996, respectively, constituting 6.4% and 13.4%, respectively, of the Company's total revenues in such periods. As of August 31, 1996, the Company had increased the size of the loan portfolio it services to approximately $214.2 million from approximately $92.3 million as of August 31, 1995, an increase of approximately $121.9 million or 132.1%. The Company's loan servicing portfolio is subject to reduction by normal amortization, prepayment of outstanding loans and defaults. 47 49 The following table sets forth certain information regarding the Company's loan servicing for the periods indicated:
YEAR ENDED AUGUST 31, ------------------------------- 1994(1) 1995 1996 ------ ------- ------------ (IN THOUSANDS) Servicing portfolio at beginning of year................ $ -- $ 8,026 $ 92,286 Additions to servicing portfolio........................ 8,164 87,751 139,367 Reductions in servicing portfolio(2).................... 138 3,491 17,464 ------ ------- -------- Servicing portfolio at end of year...................... $8,026 $92,286 $214,189 ====== ======= ======== Servicing portfolio (end of year): Company-owned loans................................... 1,471 3,720 4,698 Sold loans............................................ 6,555 88,566 209,491 ------ ------- -------- Total......................................... $8,026 $92,286 $214,189 ====== ======= ========
- --------------- (1) The Company commenced originating loans in March 1994. (2) Reductions result from scheduled payments, prepayments and write-offs during the period. The following table sets forth the delinquency and Title I insurance claims experience of loans serviced by the Company as of the dates indicated:
AUGUST 31, ------------------------------------ 1994(1) 1995 1996 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Delinquency period(2) 31-60 days past due................................... 2.06% 2.58% 2.17% 61-90 days past due................................... 0.48 0.73 0.85 91 days and over past due............................. 0.36 0.99 4.53(3) 91 days and over past due, net of claims filed(4)..... 0.26 0.61 1.94 Claims filed with HUD(5)................................ 0.10 0.38 2.59% Number of Title I insurance claims...................... 1 23 255 Total servicing portfolio at end of period.............. $8,026 $ 92,286 $ 214,189 Amount of FHA insurance available....................... 813 9,552 21,205(6) Amount of FHA insurance available as a percentage of loans serviced (end of year).......................... 10.13% 10.35% 9.90%(6) Losses on liquidated loans(7)........................... $ -- $ 16.8 $ 32.0
- --------------- (1) The Company commenced originating loans in March 1994. (2) Represents the dollar amount of delinquent loans as a percentage of total dollar amount of loans serviced by the Company (including loans owned by the Company) as of the date indicated. (3) During the year ended August 31, 1996, the processing and payment of claims filed with HUD was delayed. (4) Represents the dollar amount of delinquent loans net of delinquent Title I Loans for which claims have been filed with HUD and payment is pending as a percentage of total dollar amount of loans serviced by the Company (including loans owned by the Company) as of the date indicated. (5) Represents the dollar amount of delinquent Title I Loans for which claims have been filed with HUD and payment is pending as a percentage of total dollar amount of loans serviced by the Company (including loans owned by the Company) as of the date indicated. (6) If all claims with HUD had been processed as of period end, the amount of FHA insurance available would have been reduced to $16,215,000, which as a percentage of loans serviced would have been 7.77%. (7) A loss is recognized upon receipt of payment of a claim or final rejection thereof. Claims paid in a period may relate to a claim filed in an earlier period. Since the Company commenced its Title I lending operations in March 1994, there has been no final rejection of a claim by the FHA. Aggregate losses on 48 50 liquidated Title I Loans related to 83 of the 338 Title I insurance claims made by the Company since commencing operations through August 31, 1996. Losses on liquidated loans will increase as the balance of the claims are processed by HUD. The Company has received an average payment from HUD equal to 90% of the outstanding principal balance of such Title I Loans, plus appropriate interest and costs. The Company has received an average amount equal to 96.87% of the outstanding principal balance of Title I Loans for which claims have been made, each payment including certain interest and costs. The processing and payment of claims filed with HUD have been delayed for a number of reasons including (i) furloughs experienced by HUD personnel in December 1995 and January 1996, (ii) the growth in the volume of Title I Loans originated from approximately $750 million in 1994 to $1.3 billion in 1995 without a corresponding increase in HUD personnel to service claims and (iii) the transition of processing operations to regional centers during the second and third quarters of 1996. It is expected that once appropriate staffing and training have been completed at HUD regional centers, the timeframe for payment of HUD claims will be significantly shortened. Sale of Loans The Company customarily sells the loans it originates to third party purchasers or, in the case of a third party purchaser not eligible to own a Title I Loan, sells Title I Loan participation certificates backed by Title I Loans. Whether the Company sells a loan or a loan participation, the Company typically retains the right to service the loans for a servicing fee. The Company typically sells loans for an amount approximating the then remaining principal balance. The purchasers are entitled to receive interest at yields below the stated interest rates of the loans. In connection with such sales, the Company is typically required to deposit into a reserve account the excess servicing spread received by it, less its servicing fee, up to a specified percentage of the principal balance of the loans, to fund shortfalls in collections that may result from borrower defaults. To date, the purchasers in whole loan sales have been two banks and another financial institution. The following table sets forth certain data regarding Title I Loans sold by the Company during the periods indicated:
YEAR ENDED AUGUST 31, ----------------------------------- 1994(1) 1995 1996 ------ ------- ------------ (DOLLARS IN THOUSANDS) Principal amount of loans sold to third party purchasers........................................ $6,555 $85,363 $137,908(2) Gain on sales of loans to third party purchasers.... 579 12,233 17,994 Net unrealized gain on mortgage related securities........................................ -- -- 2,697 Weighted average stated interest rate on loans sold to third party purchasers......................... 14.15% 14.53% 14.09% Weighted average pass-through interest rate on loans sold to third party purchasers.................... 8.54 8.36 7.50 Weighted average excess spread retained on loans sold.............................................. 5.61 6.17 6.59
-------------------- (1) The Company commenced originating loans in March 1994. (2) Includes $10.5 million of Conventional Loans. At August 31, 1995 and 1996, the Company's statement of financial condition reflected excess servicing rights of approximately $14.5 million and $12.1 million, respectively. The Company also retains mortgage related securities through securitization transactions. At August 31, 1996, the Company's statement of financial condition reflected $22.9 million of mortgage related securities. The Company derives a significant portion of its income by realizing gains upon the sale of loans and loan participations due to the excess servicing rights associated with such loans. Excess servicing rights represent the excess of the interest rate payable by a borrower on a loan over the interest rate passed through to the purchaser of an interest in the loan, less the Company's normal servicing fee and other applicable recurring fees. Mortgage related securities consist of certificates representing the excess of the interest rate payable by an obligor on a sold loan over the yield on pass through certificates sold pursuant to a securitization transaction, after payment of servicing and 49 51 other fees. When loans are sold, the Company recognizes as current revenue the present value of the excess servicing rights expected to be realized over the anticipated average life of the loans sold less future estimated credit losses relating to the loans sold. The capitalized excess servicing rights and valuation of mortgage related securities are computed using prepayment, default and interest rate assumptions that the Company believes are reasonable based on experience with its own portfolio, available market data and ongoing consultation with industry participants. The amount of revenue recognized by the Company upon the sale of loans or loan participations will vary depending on the assumptions utilized. The weighted average discount rate used to determine the present value of the balance of capitalized excess servicing rights reflected on the Company's statement of financial condition at August 31, 1995 and 1996 was approximately 12.0%. Capitalized excess servicing rights are amortized over the lesser of the estimated or actual remaining life of the underlying loans as an offset against the excess servicing rights component of servicing income actually received in connection with such loans. Although the Company believes that it has made reasonable estimates of the excess servicing rights likely to be realized, the rate of prepayment and the amount of defaults utilized by the Company are estimates and experience may vary from its estimates. The gain recognized by the Company upon the sale of loans will have been overstated if prepayments or defaults are greater than anticipated. Higher levels of future prepayments would result in capitalized excess servicing rights amortization expense exceeding realized excess servicing rights, thereby adversely affecting the Company's servicing income and resulting in a charge to earnings in the period of adjustment. Similarly, if delinquencies or liquidations were to be greater than was initially assumed, capitalized excess servicing rights amortization would occur more quickly than originally anticipated, which would have an adverse effect on servicing income in the period of such adjustment. The Company periodically reviews its prepayment assumptions in relation to current rates of prepayment and, if necessary, reduces the remaining asset to the net present value of the estimated remaining future excess servicing income. Rapid increases in interest rates or competitive pressures may result in a reduction of future excess servicing income, thereby reducing the gains recognized by the Company upon the sale of loans or loan participations in the future. At August 31, 1995 and 1996, the Company's statement of financial condition reflected mortgage servicing rights of approximately $1.1 million and $3.8 million, respectively. The fair value of capitalized mortgage servicing rights was estimated by taking the present value of expected net cash flows from mortgage servicing using assumptions the Company believes market participants would use in their estimates of future servicing income and expense, including assumptions about prepayment, default and interest rates. Capitalized mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income. The estimate of fair value was based on a range of 100 to 125 basis points per year servicing fee, reduced by estimated costs of servicing, and using a discount rate of 12% in the years ended August 31, 1995 and 1996. The Company has developed its assumptions based on experience with its own portfolio, available market data and ongoing consultation with industry participants. In furtherance of the Company's strategy to sell loans through securitizations, in March 1996 and August 1996, the Company completed its first two securitizations pursuant to which it sold pools of $84.2 million and $48.8 million, respectively, of Title I Loans. The Company previously reacquired at par $77.7 million and $36.2 million of such loans, respectively. Pursuant to these securitizations, pass-through certificates evidencing interests in the pools of loans were sold in a public offering. The Company continues to subservice the sold loans and is entitled to receive from payments in respect of interest on the sold loans a servicing fee equal to 1.25% of the balance of each loan with respect to the March transaction and 1.0% with respect to the August transaction. In addition, with respect to both transactions, the Company received certificates (carried as "Mortgage related securities" on the Company's balance sheet), representing the interest differential, after payment of servicing and other fees, between the interest paid by the obligors of the sold loans and the yield on the sold certificates. The Company may be required to repurchase loans that do not conform to the representations and warranties made by the Company in the securitization agreements. The Company typically earns net interest income during the "warehouse" period between the closing or assignment of a loan and its delivery to a purchaser. On loans held for sale, the Company earns interest at long-term rates, financed by lines of credit which bear interest at short-term interest rates. Normally, short-term interest rates are lower than long-term interest rates and the Company earns a positive spread on its loans 50 52 held for sale. The average warehouse period for a loan ranges from six to 90 days, and the balance of loans in warehouse was approximately $3.7 million and $4.6 million as of August 31, 1995 and 1996, respectively. The Company's interest income, net of interest expense was $473,000 and $988,000 for the years ended August 31, 1995 and 1996, respectively. SEASONALITY Home improvement loan volume tracks the seasonality of home improvement contract work. Volume tends to build during the spring and early summer months, particularly with regard to pool installations. A decline is typically experienced in late summer and early fall until temperatures begin to drop. This change in seasons precipitates the need for new siding, window and insulation contracts. Peak volume is experienced in November and early December and declines dramatically from the holiday season through the winter months. Debt consolidation and home equity loan volume are not impacted by seasonal climate changes and, with the exclusion of the holiday season, tend to be stable throughout the year. COMPETITION The consumer finance industry is highly competitive. Competitors in the home improvement and debt consolidation loan business include mortgage banking companies, commercial banks, credit unions, thrift institutions, credit card issuers and finance companies. Certain of the Company's competitors are substantially larger and have more capital and other resources than the Company. The Company faces substantial competition within both the home improvement and debt consolidation loan industry. The home improvement and debt consolidation loan industry is dominated by widely diversified mortgage banking companies, commercial banks, savings and loan institutions, credit card companies, financial service affiliates of Dealers and unregulated financial service companies, many of which have substantially greater personnel and financial resources than those of the Company. At present, these types of competitors dominate the home improvement and debt consolidation loan industry; however, no one lender or group of lenders dominates the industry. According to a report issued by HUD, the Company was the fourth largest lender of Title I Loans, based on volume of loans originated, for the quarter ended June 30, 1996. Due to the variance in the estimates of the size of the conventional home improvement loan market, the Company is unable to accurately estimate its competitive position in that market. The Company believes that Greentree Financial Corp., The Money Store, First Plus Financial Inc., Associates First Capital Corporation and Empire Funding Corp. are some of its largest direct competitors. The Company competes principally by providing prompt, professional service to its Correspondents and Dealers and, depending on circumstances, by providing competitive lending rates. Competition can take many forms including convenience in obtaining a loan, customer service, marketing and distribution channels, amount and term of the loan, and interest rates. In addition, the current level of gains realized by the Company and its existing competitors on the sale of loans could attract additional competitors into this market with the possible effect of lowering gains on future loan sales owing to increased loan origination competition. GOVERNMENT REGULATION The Company's consumer lending activities are subject to the Federal Truth-in-Lending Act and Regulation Z (including the Home Ownership and Equity Protection Act of 1994), ECOA, the Fair Credit Reporting Act of 1970, as amended, RESPA and Regulation X, the Home Mortgage Disclosure Act, the Federal Debt Collection Practices Act and the Housing Act, as well as other federal and state statutes and regulations affecting the Company's activities. Failure to comply with these requirements can lead to loss of approved status, termination or suspension of servicing contracts without compensation to the servicer, demands for indemnifications or mortgage loan repurchases, certain rights of rescission for mortgage loans, class action lawsuits and administrative enforcements actions. The Company presently is subject to the rules and regulations of, and examinations by, HUD, FHA and other federal and state regulatory authorities with respect to originating, underwriting, funding, acquiring, 51 53 selling and servicing consumer and mortgage loans. In addition, there are other federal and state statutes and regulations affecting such activities. These rules and regulations, among other things, impose licensing obligations on the Company, establish eligibility criteria for loans, prohibit discrimination, provide for inspection and appraisals of properties, require credit reports on prospective borrowers, regulate payment features and, in some cases, fix maximum interest rates, fees and loan amounts. The Company is required to submit annual audited financial statements to various governmental regulatory agencies that require the maintenance of specified net worth levels. The Company's affairs are also subject to examination, at all times, by the Federal Housing Commissioner to assure compliance with FHA regulations, policies and procedures. For more information regarding regulation of the Company under Title I, see "Title I Loan Program." The Company is a HUD approved Title I mortgage lender and is subject to the supervision of HUD. The Company is also a FNMA approved seller/servicer and is subject to the supervision of FNMA. In addition, the Company's operations are subject to supervision by state authorities (typically state banking or consumer credit authorities), many of which generally require that the Company be licensed to conduct its business. This normally requires state examinations and reporting requirements on an annual basis. The Federal Consumer Credit Protection Act ("FCCPA") requires a written statement showing an annual percentage rate of finance charges and requires that other information be presented to debtors when consumer credit contracts are executed. The Fair Credit Reporting Act requires certain disclosures to applicants concerning information that is used as a basis for denial of credit. ECOA prohibits discrimination against applicants with respect to any aspect of a credit transaction on the basis of sex, marital status, race, color, religion, national origin, age, derivation of income from public assistance program, or the good faith exercise of a right under the FCCPA. The interest rates which the Company may charge on its loans are subject to state usury laws, which specify the maximum rate which may be charged to consumers. In addition, both federal and state truth-in-lending regulations require that the Company disclose to its customers prior to execution of the loans, all material terms and conditions of the financing, including the payment schedule and total obligation under the loans. The Company believes that it is in compliance in all material respects with such regulations. EMPLOYEES As of August 31, 1996, the Company had 170 employees, including six executive officers, 78 managerial and staff professional personnel, 13 marketing and sales specialists and 73 general administrative and support personnel and loan processors. None of the Company's employees is represented by a collective bargaining unit. The Company believes that its relations with its employees are satisfactory. PROPERTIES In order to accommodate the Company's growth, a lease of new corporate headquarters was executed in April 1996 for 45,950 square feet at 1000 Parkwood Circle, Atlanta, Georgia. This lease is for an initial six year term expiring August 2002 with a conditional option to extend the term to August 2007. After an initial partial rent abatement period of six months, monthly rentals will be $73,711 plus a pro rata share of any operating expense increase. This lease rate will escalate 2% per year throughout the term of the lease. The Company also leases 10,478 square feet of office space at its prior headquarters location in Atlanta, Georgia, at a rental of $13,193 per month, pursuant to a lease that expires in March 1999. The Company intends to sublease this office space for the remaining term of its lease. The Company also leases office space on short-term or month-to-month leases in Kansas City, Missouri, Austin, Texas, Montvale, New Jersey, Oklahoma City, Oklahoma, Seattle, Washington, Waterford, Michigan, Columbus, Ohio, Elmhurst, Illinois, Philadelphia, Pennsylvania, Denver, Colorado, Woodbridge, Virginia and Bowie, Maryland. LEGAL PROCEEDINGS In the ordinary course of its business, the Company is, from time to time, named in lawsuits. The Company believes that it has meritorious defenses to these lawsuits and that resolution of these matters will not have a material adverse effect on the business or financial condition of the Company. 52 54 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information with respect to the directors and executive officers of the Company.
NAME AGE POSITION - ------------------------------------------- --- ------------------------------------------- Jerome J. Cohen............................ 68 Chairman of the Board and Chief Executive Officer Jeffrey S. Moore........................... 38 President, Chief Operating Officer and Director James L. Belter............................ 49 Executive Vice President and Chief Financial Officer Michael G. Ebinger......................... 40 Vice President, National Marketing David A. Cleveland......................... 39 Vice President and Chief Accounting Officer Robert Nederlander......................... 63 Director Herbert B. Hirsch.......................... 60 Director Don A. Mayerson............................ 69 Director Spencer I. Browne.......................... 46 Director Nominee Jeremy Wiesen.............................. 54 Director Nominee
Jerome J. Cohen has been Chairman of the Board of the Company since April 1995 and Chief Executive Officer of the Company since June 1992. Mr. Cohen has been the President and a Director of Mego Financial since January 1988. Since April 1992, Mr. Cohen has been a Director of Atlantic Gulf Communities Inc., formerly known as General Development Corporation, a publicly held company engaged in land development, land sales and utility operations in Florida and Tennessee. Mr. Cohen does not currently serve on a full time basis in his capacities with the Company. Jeffrey S. Moore has been the President of the Company since April 1995 and Chief Operating Officer since December 1993. In addition, Mr. Moore has served as a director of the Company since June 1992. Prior to being elected President, Mr. Moore served as an Executive Vice President of the Company from June 1992 to March 1995. Mr. Moore was the founder and from August 1984 until March 1992, served as President, Chief Executive Officer and a director of Empire Funding Corp., a privately-held, nationwide consumer finance company specializing in originating, purchasing, selling and servicing FHA Title I and other home improvement mortgage loans. Mr. Moore serves as a director of the Title One Home Improvement Lenders Association and is a member of its Legislative and Regulatory Affairs Committee. James L. Belter has been Executive Vice President of the Company since April 1995 and Chief Financial Officer since September 1996. Prior to joining the Company, from May 1989 to September 1993, Mr. Belter served as the President, Chief Operating Officer and a director of Del-Val Capital Corporation, a commercial finance company. From April 1985 to April 1989, Mr. Belter served as Executive Vice President of Security Capital Credit Corporation, a commercial finance company, where he was responsible for the formation of the company's installment receivable lending division. From November 1976 to April 1985, Mr. Belter served as a corporate Vice President of Barclays Business Credit, Inc. where he managed a unit specializing in financing portfolios of consumer contracts including residential second mortgages, home improvement contracts, timeshare and land sales. Michael G. Ebinger has served as Vice President of National Marketing since June 1995. From January 1995 to June 1995, Mr. Ebinger served as Director of National Accounts of the Correspondent Division. From 1989 to 1994, Mr. Ebinger served as Director of National Accounts for the home improvement division of Greentree Financial Corporation, where he developed and managed the national account program which created a network of over 1,000 home improvement contractors. From 1987 to 1989, he served as West Coast Regional Manager for VIPCO, a division of Crane Plastics, a manufacturer of replacement vinyl siding. From 1986 to 1987, he served as National Accounts Manager for Security Pacific Financial Services Corporation in 53 55 its Manufacturer Funding Division and was responsible for the marketing of its indirect home improvement loan programs to home improvement contractors. David A. Cleveland has been Vice President and Chief Accounting Officer of the Company since October 1996. Mr. Cleveland has been Chief Accounting Officer of Mego Financial since October 1996. From June 1990 to July 1996, Mr. Cleveland served as Senior Vice President and Controller of PriMerit Bank, a federal savings bank. Mr. Cleveland does not currently serve on a full time basis in his capacities with the Company. Robert Nederlander has been a Director of the Company since September 1996. Mr. Nederlander has been the Chairman of the Board and Chief Executive Officer of Mego Financial since January 1988. Mr. Nederlander has been Chairman of the Board of Riddell Sports Inc. since April 1988 and was Riddell Sports Inc.'s Chief Executive Officer from April 1988 through March 1993. From February 1992 until June 1992, Mr. Nederlander was also Riddell Sports Inc.'s interim President and Chief Operating Officer. Since November 1981, Mr. Nederlander has been President and a Director of the Nederlander Organization, Inc., owner and operator of one of the world's largest chains of legitimate theaters. He served as the Managing General Partner of the New York Yankees from August 1990 until December 1991, and has been a limited partner since 1973. Since October 1985, Mr. Nederlander has been President of the Nederlander Television and Film Productions, Inc.; Vice Chairman of the Board from February 1988 to early 1993 of Vacation Spa Resorts, Inc., an affiliate of Mego Financial; and Chairman of the Board of Allis-Chalmers Corp. from May 1989 to 1993, when he became Vice Chairman. In 1995, Mr. Nederlander became a director of HFS Incorporated. In October 1996, Mr. Nederlander became a director of News Communications, Inc., a publisher of community oriented free circulation newspapers. Mr. Nederlander was a senior partner in the law firm of Nederlander, Dodge and Rollins in Detroit, Michigan, from 1960 to 1989. Herbert B. Hirsch has been a Director of the Company since the Company's formation in June 1992. Mr. Hirsch has been the Senior Vice President, Chief Financial Officer, Treasurer and a Director of Mego Financial since January 1988. Mr. Hirsch served as Vice President and Treasurer of the Company from June 1992 to September 1996. Don A. Mayerson has been a Director of the Company since the Company's formation in June 1992. Mr. Mayerson has been the Secretary of Mego Financial since January 1988 and the Executive Vice President and General Counsel of Mego Financial since April 1988. Mr. Mayerson served as Vice President, General Counsel and Secretary of the Company from June 1992 to September 1996. Spencer I. Browne has been nominated and has agreed to become a Director of the Company upon consummation of the Offering. For more than five years prior to September 1996, Mr. Browne held various executive and management positions with several publicly traded companies engaged in businesses related to the residential and commercial mortgage loan industry. From August 1988 until September 1996, Mr. Browne served as President, Chief Executive Officer and a director of Asset Investors Corporation ("AIC"), a New York Stock Exchange ("NYSE") traded company he co-founded in 1986. He also served as President, Chief Executive Officer and a director of Commercial Assets, Inc., an American Stock Exchange traded company affiliated with AIC, from its formation in October 1993 until September 1996. In addition, from June 1990 until March 1996, Mr. Browne served as President and a director of M.D.C. Holdings, Inc., an NYSE traded company and the parent company of a major homebuilder in Colorado. Jeremy Wiesen has been nominated and has agreed to become a Director of the Company upon consummation of the Offering. Mr. Wiesen has been an Associate Professor of Business Law and Accounting at the Leonard N. Stern School of Business at New York University since 1972. The Company's officers are elected annually by the Board of Directors and serve at the discretion of the Board of Directors. The Company's directors hold office until the next annual meeting of stockholders and until their successors have been duly elected and qualified. The Company reimburses all directors for their expenses in connection with their activities as directors of the Company. Directors of the Company who are also employees of the Company do not receive additional compensation for their services as directors. Members of the Board of Directors of the Company who are not employees of the Company receive an annual fee of $20,000 for four Board meetings per year plus $2,500 for each additional meeting attended in person and $1,000 for each additional telephonic meeting attended. Directors are also reimbursed for their expenses incurred in attending meetings of the Board of Directors and its committees. 54 56 Upon the effective date of the Registration Statement of which this Prospectus forms a part, the Company will have an Audit Committee, Executive Committee and Stock Option Committee. The following is a brief description of the Company's committees and identification of the members thereof: Audit Committee. The members of the Audit Committee will initially be Robert Nederlander, Jeremy Wiesen and Spencer I. Browne. The Audit Committee's functions include recommending to the Board the engagement of the Company's independent certified public accountants, reviewing with the accountants the plan and results of their audit of the Company's financial statements and determining the independence of the accountants. Executive Committee. The members of the Executive Committee will initially be Jerome J. Cohen, Jeffrey S. Moore and Robert Nederlander. The Executive Committee will have the authority to exercise all of the powers of the Board to the extent permitted by the Delaware General Corporation Law. Stock Option Committee. The members of the Stock Option Committee will initially be Jeremy Wiesen and Spencer I. Browne. The Stock Option Committee will have the authority to approve the grant of options under the Company's Stock Option Plan to any employee of the Company who, on the last day of the taxable year of the Company, is (i) the Chief Executive Officer of the Company or who is acting in such capacity, (ii) among the four highest compensated officers of the Company and its affiliates (other than the Chief Executive Officer), or (iii) otherwise considered to be a "Covered Employee" within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended. Mego Financial and the Company have restated certain of their previously issued financial statements, including certain financial statements upon which their independent auditors had rendered unqualified opinions. See Note 16 of Notes to Financial Statements. As a result of the restatement of Mego Financial's financial statements and certain trading in Mego Financial's common stock, the Commission has commenced a formal investigation to determine, among other things, whether Mego Financial, and/or its officers and directors, violated applicable federal securities laws in connection with the preparation and filing of Mego Financial's previously issued financial statements or such trading. Certain of such officers and directors are also officers and/or directors of the Company. Possible penalties for violation of federal securities laws include civil remedies, such as fines and injunctions, as well as criminal sanctions. There can be no assurance that Mego Financial and/or its officers and directors will not be found to have violated the federal securities laws or that the Company will not be affected by the investigation or any sanction. KEY EMPLOYEES Robert Bellacosa -- Mr. Bellacosa, age 54, has served as Vice President -- Financial Management since October 1993 and Secretary since September 1996. From May 1989 to October 1993, Mr. Bellacosa served as Senior Vice President of Accounting for Del-Val Capital Corp. From May 1985 to May 1989, he served as Vice President of Security Capital Credit Corp. where he was responsible for loan administration of commercial real estate and term receivable lending functions. From 1974 to 1985, he served as Vice President for Aetna Business Credit, Inc. which was purchased by Barclays American Business Credit, Inc. and was responsible for the management of loan administration for special term receivables. Jack Elrod -- Mr. Elrod, age 40, has served as Vice President -- Loan Administration since May 1995. From March 1994 to May 1995, Mr. Elrod served as a Senior Underwriter for ITT Financial Corporation. From March 1993 to March 1994, he served as Branch Manager for Commercial Credit Corporation and from January 1977 to February 1993, he served as Assistant Vice President and District Manager of Household Finance Corporation. Samuel Schultz -- Mr. Schultz, age 47, has served as Vice President -- Credit Quality since June 1996 and as Vice President of the Company's Dealer Division Operations from December 1993 until June 1996. Mr. Schultz was a consultant to the Company from June 1993 until December 1993. From September 1990 to June 1993, he served as Vice President of Underwriting for Empire Funding Corp., a nationwide consumer finance company specializing in the purchase of FHA Title I and other home improvement mortgage loans. From February 1988 to September 1990, he served as a Senior Manager for Avco Financial Services. From 55 57 October 1985 to February 1988, he served as a Department Manager for Associates Financial Services Inc. Prior to 1985, and since 1971, Mr. Schultz's experience includes collections and originations of consumer finance loans for Postal Finance, Turner Mortgage and other consumer finance companies. Yancy Lockie -- Mr. Lockie, age 33, has served as Vice President -- Dealer Division Operations since July 1996. From September 1993 to June 1996, Mr. Lockie served as Manager of Real Estate Underwriting for NationsCredit Financial Services and was responsible for underwriting of real estate and indirect home improvement loans for 245 branches and from December 1990 to August 1993, he served as Branch Manager for NationsCredit Financial Services. From 1987 to November 1990, he served as a Senior Assistant Manager and Senior Underwriter for Household Finance Corporation. John Kostelich -- Mr. Kostelich, age 33, has served as Vice President -- Project Management since June 1996 and is responsible for developing and implementing the Company's policies and procedures for new and diversified loan products. From June 1995 to June 1996, Mr. Kostelich served as Director of Compliance for the Company. From 1985 to 1995, he served in various positions for ITT Consumer Financial Corporation, including Director of Quality Control and Correspondent Support Operations, Senior Compliance Officer, in which he managed special projects for the Chairman of the company, Regional Manager and Branch Manager. EXECUTIVE COMPENSATION The following table sets forth information concerning the annual and long-term compensation earned by the Company's chief executive officer and each of the three other executive officers whose annual salary and bonus during the fiscal years presented exceeded $100,000 (the "Named Executive Officers"). As of August 31, 1996, no stock options had been granted or were outstanding. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS ----------------------------------------------- ------------------------ OTHER NUMBER OF FISCAL ANNUAL OPTIONS ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) GRANTED(2) COMPENSATION - ------------------------------ ------ -------- ------- --------------- --------- ------------ Jerome J. Cohen(3)............ 1994 $ 75,000 $ -- $ -- -- $ -- Chairman of the Board and 1995 64,388 -- -- -- -- Chief Executive Officer 1996 65,748 -- -- -- -- Jeffrey S. Moore.............. 1994 $126,771 $ -- $ 5,400 25,000 $ -- President and Chief 1995 200,003 -- 13,963 -- -- Operating Officer 1996 200,003 86,084 13,625 -- -- James L. Belter............... 1994 $ 98,079 $ -- $ -- 15,000 $ -- Executive Vice President and 1995 150,003 50,000 1,510 -- -- Chief Financial Officer 1996 159,080 50,000 4,330 -- -- Michael G. Ebinger............ 1994 $ -- $ -- $ -- -- $ -- Vice President 1995 55,320 -- 5,609 15,000 -- 1996 110,011 11,500 -- -- --
- --------------- (1) Other annual compensation consists of car allowances, contributions to 401(k) plans and moving expenses. (2) Represents options to purchase shares of Mego Financial's common stock paid as compensation for services rendered to the Company. (3) Mr. Cohen's compensation is included in the management fees paid to PEC. See "Certain Transactions." EMPLOYMENT AGREEMENT The Company has entered into an employment agreement with Jeffrey S. Moore which expires on December 31, 1998 and which provides for an annual base salary of $200,000. In addition, Mr. Moore is to 56 58 receive an incentive bonus each calendar year equal to 1.5% of the Company's after tax income, provided that certain scheduled sales goals are met, as well as deferred compensation of 1% of the gain on sale from sales of loans during such year, payable in 48 equal installments. In the event payments of the incentive bonus and deferred compensation due in any year exceed $500,000, then the excess over $500,000 is only payable with the approval of the Company's Board of Directors. COMPANY STOCK OPTION PLAN Under the Company's Stock Option Plan (the "Plan"), which will be effective upon the consummation of the Offering, 925,000 shares of Common Stock will be reserved for issuance upon exercise of stock options. The options, even if vested, may not be exercised without the written approval of Mego Financial during the Eighty Percent Period. Such shares will be accompanied by stock appreciation rights which will become exercisable as determined by the Board, or a Committee thereof, only if Mego Financial does not give approval to the exercise of the option. The Plan is designed as a means to retain and motivate key employees and directors. The Company's Board of Directors, or a committee thereof, administers and interprets the Plan and is authorized to grant options thereunder to all eligible employees and directors of the Company, except that no incentive stock options (as defined in Section 422 of the Internal Revenue Code) may be granted to a director who is not also an employee of the Company or a subsidiary. The Plan will provide for the granting of both incentive stock options and nonqualified stock options. Options will be granted under the Plan on such terms and at such prices as determined by the Company's Board of Directors, or a committee thereof, except that the per share exercise price of incentive stock options cannot be less than the fair market value of the Common Stock on the date of grant. Each option is exercisable after the period or periods specified in the related option agreement, but no option may be exercisable after the expiration of ten years from the date of grant. Options granted to an individual who owns (or is deemed to own) at least 10% of the total combined voting power of all classes of stock of the Company must have an exercise price of at least 110% of the fair market value of the Common Stock on the date of grant and a term of no more than five years. The Plan also authorizes the Company to make or guarantee loans to optionees to enable them to exercise their options. Such loans must (i) provide for recourse to the optionee, (ii) bear interest at a rate no less than the prime rate of interest, and (iii) be secured by the shares of Common Stock purchased. The Board of Directors has the authority to amend or terminate the Plan, provided that no such action may impair the rights of the holder of any outstanding option without the written consent of such holder, and provided further that certain amendments of the Plan are subject to stockholder approval. Unless terminated sooner, the Plan will continue in effect until all options granted thereunder have expired or been exercised, provided that no options may be granted ten years after commencement of the Plan. 57 59 The following table sets forth information with respect to options to be granted under the Plan upon consummation of the Offering to (i) each Named Officer and (ii) each director and nominee for director. All of the options are incentive stock options (other than the options being granted to Spencer I. Browne and Jeremy Wiesen), are being granted with an exercise price equal to the offering price, are subject to the consummation of the Offering and are being granted in 1996.
NAME OF GRANTEE NUMBER OF SHARES - ----------------------------------------------------------------------------- ---------------- Robert Nederlander........................................................... 25,000 Jerome J. Cohen.............................................................. 100,000 Jeffrey S. Moore............................................................. 300,000 James L. Belter.............................................................. 100,000 Herbert B. Hirsch............................................................ 25,000 Don A. Mayerson.............................................................. 25,000 Michael G. Ebinger........................................................... 50,000 Spencer I. Browne............................................................ 25,000 Jeremy Wiesen................................................................ 25,000 ---------------- Total.............................................................. 675,000 =============
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company does not currently have a Compensation Committee. Mr. Cohen participated in deliberations concerning compensation of executive officers during fiscal 1996. Mr. Cohen's compensation was determined by the Board of Directors of Mego Financial. BONUS PLAN The Company does not currently have a bonus plan but anticipates it may adopt a bonus plan pursuant to which an aggregate of not in excess of 2 1/2% of pretax income will be distributed to officers and key employees. PRINCIPAL STOCKHOLDERS Mego Financial currently owns 10,000,000 shares of Common Stock (after giving effect to the 1,600-for-one stock split), representing 100% of all the issued and outstanding Common Stock of the Company. After giving effect to the issuance of the Common Stock pursuant to the Offering, Mego Financial will own approximately 83.3% of the issued and outstanding Common Stock of the Company (approximately 81.3% if the Underwriters' over-allotment option is exercised in full). The following table sets forth, as of the date of this Prospectus, information with respect to the beneficial ownership of the common stock of Mego Financial by (i) each person known by the Company to be the beneficial owner of more than 5% of the outstanding shares of common stock of Mego Financial, (ii) each director and director nominee of the Company, (iii) each of the Named Executive Officers and (iv) all directors, director nominees and executive officers of the Company as a group. Unless otherwise noted, the 58 60 Company believes that all persons named in the table have sole voting and investment power with respect to all shares of common stock of Mego Financial beneficially owned by them.
PERCENTAGE OWNERSHIP ATTRIBUTABLE TO THE COMPANY ------------------- AMOUNT AND NATURE OF BEFORE AFTER NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP OFFERING OFFERING - ----------------------------------------------------------- -------------------- -------- -------- Robert Nederlander(2)...................................... 2,133,697 11.4% 9.5% Eugene I. Schuster and Growth Realty Inc. ("GRI")(3)....... 1,933,634 10.4 8.7 Jerome J. Cohen(4)......................................... 1,127,823 6.1 5.1 Jeffrey S. Moore(5)........................................ 15,000 * * James L. Belter(6)......................................... 9,000 * * Michael G. Ebinger(7)...................................... 3,000 * * Herbert B. Hirsch(8)....................................... 1,699,623 9.1 7.6 Don A. Mayerson(9)......................................... 824,414 4.4 3.7 Spencer I. Browne(10)...................................... 10,000 * * Jeremy Wiesen(11).......................................... -- -- -- All executive officers and directors of the Company as a group (9 persons)(12).......................................... 5,822,557 30.2 25.2
- --------------- * Less than 1%. (1) A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from the date of this Prospectus upon the exercise of options and warrants. Each beneficial owner's percentage ownership is determined by assuming that options and warrants that are held by such person (but not those held by any other person) and that are exercisable within 60 days from the date of this Prospectus have been exercised. (2) 810 Seventh Avenue, 21st Floor, New York, New York 10019. Includes 21,000 shares issuable under an option granted pursuant to the Mego Financial Stock Option Plan, to the extent exercisable within the next 60 days, and 250,000 shares issuable upon the exercise of warrants held by an affiliate of Mr. Nederlander which are presently exercisable. (3) 321 Fisher Building, Detroit, Michigan 48202. Consists of 1,683,634 shares held of record by GRI, a wholly-owned subsidiary of Venture Funding, Ltd. of which Mr. Schuster is a principal shareholder, Director and Chief Executive Officer, and 250,000 shares issuable upon the exercise of warrants held by an affiliate of Mr. Schuster which are presently exercisable. (4) 1125 N.E. 125th Street, Suite 206, North Miami, Florida 33161. Includes 21,000 shares issuable under an option granted pursuant to the Mego Financial Stock Option Plan, to the extent exercisable within the next 60 days, and 200,000 shares issuable upon the exercise of warrants held by Mr. Cohen which are presently exercisable. Excludes 103,503 shares owned by Mr. Cohen's spouse and 500,000 shares owned by a trust for the benefit of his children over which Mr. Cohen does not have any investment or voting power, as to which he disclaims beneficial ownership. (5) 1000 Parkwood Circle, Suite 500, Atlanta, Georgia 30339. Includes 15,000 shares issuable under an option granted pursuant to the Mego Financial Stock Option Plan, to the extent exercisable within the next 60 days. (6) 1000 Parkwood Circle, Suite 500, Atlanta, Georgia 30339. Includes 9,000 shares issuable under an option granted pursuant to the Mego Financial Stock Option Plan, to the extent exercisable within the next 60 days. (7) 1000 Parkwood Circle, Suite 500, Atlanta, Georgia 30339. Includes 3,000 shares issuable under an option granted pursuant to the Mego Financial Stock Option Plan, to the extent exercisable within the next 60 days. (8) 230 East Flamingo Road, Las Vegas, Nevada 89109. Includes 21,000 shares issuable under an option granted pursuant to the Mego Financial Stock Option Plan, to the extent exercisable within the next 60 days, and 200,000 shares issuable upon the exercise of warrants held by Mr. Hirsch which are presently exercisable. Excludes 10,000 shares held by the daughter of Mr. Hirsch as custodian for a 59 61 minor child as to which he disclaims beneficial ownership, and 21,666 shares held by a family trust, as to which he disclaims beneficial ownership. (9) 1125 N.E. 125th Street, Suite 206, North Miami, Florida 33161. Includes 21,000 shares issuable under an option granted pursuant to the Mego Financial Stock Option Plan, to the extent exercisable within the next 60 days, and 100,000 shares issuable upon the exercise of warrants held by Mr. Mayerson which are presently exercisable. Excludes 56,667 shares owned by Mr. Mayerson's spouse, as to which he disclaims beneficial ownership. (10) 1660 Holly Street, Denver, Colorado 80220. (11) 254 East 68th Street, New York, New York 10021. (12) See Notes (2)-(11). CERTAIN TRANSACTIONS The Company has entered into the following transactions with its affiliates in the past three years. The Company believes that each of these transactions is on terms at least as favorable to the Company as those which could have been negotiated with an unaffiliated third party. TAX SHARING AND INDEMNITY AGREEMENT After the Offering, the results of operations of the Company will continue to be included in the tax returns filed by Mego Financial's affiliated or combined group for federal income tax purposes. The members of the group, including the Company, currently are parties to a tax allocation arrangement that allocates the liability for those taxes among them. Effective on consummation of the Offering, the Company and Mego Financial will enter into a tax allocation and indemnity agreement. Under that agreement, for periods ending after the Offering, the tax liability of the Company will be allocated pursuant to a method that would impose on the Company liability for an amount that corresponds to the liability that the Company would incur if it filed a separate tax return. In addition, the agreement provides that the Company and Mego Financial each will indemnify the other under certain circumstances. MANAGEMENT AGREEMENT WITH PEC The Company and PEC were parties to a management services arrangement (the "Management Arrangement") pursuant to which certain executive, accounting, legal, management information, data processing, human resources, advertising and promotional personnel of PEC provide services to the Company on an as needed basis. The Management Arrangement provided for the payment by the Company of a management fee to PEC in an amount equal to the direct and indirect expenses of PEC related to the services rendered by its employees to the Company, including an allocable portion of the salaries and expenses of such employees based upon the percentage of time such employees spend performing services for the Company. For the years ended August 31, 1994, 1995 and 1996, $442,000, $690,000 and $671,000, respectively, of the salaries and expenses of certain employees of PEC were attributable to and paid by the Company in connection with services rendered by such employees to the Company. In addition, during the years ended August 31, 1994, 1995 and 1996, the Company paid PEC for developing certain computer programming, incurring costs of $130,000, $36,000 and $56,000, respectively. The Company has entered into a formal management agreement with PEC, effective as of September 1, 1996, pursuant to which PEC has agreed to provide the following services to the Company for an aggregate annual fee of approximately $967,000 payable monthly: strategic planning, management and tax; accounting and finance; legal; management information systems; insurance management; human resources; and purchasing. Either party has the right to terminate all or any of these services upon 90 days' notice with a corresponding reduction in fees. 60 62 SERVICING AGREEMENT WITH PEC The Company had an arrangement with PEC pursuant to which it paid servicing fees of 50 basis points of the principal balance of loans serviced per year. For the years ended August 31, 1994, 1995 and 1996, the Company paid servicing fees to PEC of $13,000, $232,000 and $709,000, respectively. The Company has entered into a servicing agreement with PEC, effective as of September 1, 1996, providing for the payment of servicing fees of 50 basis points of the principal balance of loans serviced per year. For the years ended August 31, 1995 and 1996, the Company incurred interest expense in the amount of $85,000 and $29,000, respectively, related to fees payable to PEC for these services. The interest rates were based on PEC's average cost of funds and equalled 11.8% in 1995 and 10.68% in 1996. FUNDING AND GUARANTEES BY MEGO FINANCIAL In order to fund the Company's past operations and growth, and in conjunction with filing consolidated returns, the Company incurred Intercompany Debt to Mego Financial. For the years ended August 31, 1995 and 1996, the amount of Intercompany Debt owed to Mego Financial was $8.5 million and $12.0 million, respectively. Mego Financial has guaranteed the Company's obligations under the Warehouse Line, the Revolving Loan and the Company's new office lease. Such guarantees currently extend for the term of the loans and the lease. The Company has not paid any compensation to Mego Financial for such guarantees. It is not anticipated that Mego Financial will continue to provide funds to the Company or guarantee the Company's indebtedness or other obligations following consummation of the Offering. DESCRIPTION OF NOTE OFFERING Concurrent with the Offering, the Company is offering the Notes by a separate prospectus pursuant to the Note Offering. The following summary of the principal terms of the Notes does not purport to be complete and is qualified in its entirety by reference to all of the provisions of the Indenture governing the Notes and the Notes, copies of which will be filed as exhibits to the Registration Statement governing the Notes. Capitalized terms not otherwise defined herein have the meanings specified in the Indenture. The Notes will be limited in aggregate principal amount to $40.0 million and will mature on , 2001. The Notes will be general unsecured obligations of the Company, subordinated in right of payment to all Senior Indebtedness of the Company. Interest on the Notes will accrue at a rate of % per year and will be payable in cash semi-annually on and of each year, commencing , 1997. Upon the occurrence of a Change of Control (as defined in the Indenture), each holder of Notes will have the right to require that the Company repurchase all or a portion of such holder's Notes at a purchase price in cash equal to % of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase. The Indenture governing the Notes will contain certain covenants, including limitations on the incurrence of indebtedness, the incurrence of indebtedness and issuance of preferred stock by subsidiaries, the making of restricted payments (including restrictions on the payment of dividends on the Common Stock), the imposition of certain distribution restrictions on subsidiaries, transactions with affiliates, the existence of liens, the making of guarantees by subsidiaries, mergers and sales of assets. The Offering is conditioned upon the consummation of the Note Offering. 61 63 DESCRIPTION OF CAPITAL STOCK GENERAL The Company's authorized capital stock consists of 50,000,000 shares of Common Stock, $.01 par value, and 5,000,000 shares of Preferred Stock, par value $.01 per share. No shares of Preferred Stock have been issued to date. The following brief description of the Company's capital stock does not purport to be complete and is subject in all respects to applicable law and the provisions of the Company's Certificate of Incorporation and Bylaws, copies of which have been filed as exhibits to the Registration Statement of which this Prospectus is a part. COMMON STOCK The holders of Common Stock are entitled to one vote for each share held of record on all matters to be voted on by stockholders. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voted for the election of directors can elect all of the directors. The holders of Common Stock are entitled to receive dividends when, as and if declared by the Board of Directors out of funds legally available therefor. In the event of liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision has been made for each class of stock, if any, having preference over the Common Stock. Upon completion of the Offering, the Company's existing sole stockholder will beneficially own approximately 83.3% of the outstanding shares of Common Stock (approximately 81.3% if the Underwriters' over-allotment option is exercised in full) and will therefore be able to elect the entire Board of Directors and control all matters submitted to stockholders for a vote. During the Eighty Percent Period, no additional shares of Common Stock may be issued that would reduce Mego Financial's ownership interest in the Common Stock below 80% of the issued and outstanding shares of Common Stock without Mego Financial's written approval, and no shares of any other class of capital stock may be issued without Mego Financial's written approval. The shares of Common Stock offered hereby will be, when issued and paid for, fully paid and non-assessable. PREFERRED STOCK Although the Company has no present plans to issue shares of Preferred Stock, Preferred Stock may be issued from time to time in one or more classes or series with such designations, powers, preferences, rights, qualifications, limitations and restrictions as may be fixed by the Company's Board of Directors. The Board of Directors, without obtaining stockholder approval other than written approval from Mego Financial during the Eighty Percent Period, could issue the Preferred Stock with voting and/or conversion rights and thereby dilute the voting power and equity of the holders of Common Stock and adversely effect the market price of such stock. The issuance of Preferred Stock could also be used as an antitakeover measure by the Company without any further action by the stockholders. PAYMENT OF DIVIDENDS The Company has never paid any cash dividends on its capital stock. The Company intends to retain all of its future earnings to finance its operations and does not anticipate paying cash dividends in the foreseeable future. In addition, certain agreements to which the Company is a party, including the Indenture, restrict the Company's ability to pay dividends on the Common Stock. CERTAIN PROVISIONS OF DELAWARE LAW The Company is a Delaware corporation and is subject to Section 203 of the Delaware General Corporation Law. In general, Section 203 prevents an "interested stockholder" (defined generally as a person owning 15% or more of the Company's outstanding voting stock) from engaging in a "business combination" 62 64 (as defined in Section 203) with the Company for three years following the date that person became an interested stockholder unless: (i) before that person became an interested stockholder, the Board approved the transaction in which the interested stockholder became an interested stockholder or approved the business combination; (ii) upon completion of the transaction that resulted in the interested stockholders becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the Company outstanding at the time the transaction commenced (excluding stock held by directors who are also officers of the Company and by employee stock plans that do not provide employees with the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer); or (iii) on or following the date on which that person became an interested stockholder, the business combination is approved by the Company's Board and authorized at a meeting of stockholders by the affirmative vote of the holders of at least 66 2/3% of the outstanding voting stock of the Company not owned by the interested stockholder. Under Section 203, these restrictions also do not apply to certain business combinations proposed by an interested stockholder following the announcement or notification of one of certain extraordinary transactions involving the Company and a person who was not an interested stockholder during the previous three years or who became an interested stockholder with the approval of a majority of the Company's directors, if that extraordinary transaction is approved or not opposed by a majority of the directors (but not less than one) who were directors before any person became an interested stockholder in the previous three years or who were recommended for election or elected to succeed such directors by a majority of such directors then in office. Pursuant to Section 162 of the Delaware General Corporation Law, the Board of Directors of the Company can, without stockholder approval, issue shares of capital stock, which may have the effect of delaying, deferring or preventing a change of control of the Company. Other than pursuant to the Offering, the Company has no plan or arrangement for the issuance of any shares of capital stock other than in the ordinary course pursuant to the Stock Option Plan. CERTAIN CHARTER AND BYLAW PROVISIONS The Company's Certificate of Incorporation contains certain provisions that could discourage potential takeover attempts and make more difficult attempts by stockholders to change management. The Company's Certificate of Incorporation provides that no additional shares of Common Stock may be issued that would reduce Mego Financial's interest below 80% without its written approval during the Eighty Percent Period. In addition, although the Certificate of Incorporation provides for the issuance of one or more series of preferred stock from time to time, during the Eighty Percent Period no shares of any other class of capital stock may be issued without Mego Financial's written approval. Even in the event that at some later date Mego Financial's percentage ownership in the Company is significantly reduced, certain provisions of the Company's Certificate of Incorporation and Bylaws may be deemed to have anti-takeover effects and may delay, defer or prevent a takeover attempt that a stockholder might consider in its best interest. The Certificate of Incorporation and Bylaws provide (i) that special meetings of stockholders may be called only by the Board of Directors or upon the written demand of the holders of not less than 30% of the votes entitled to be cast at a special meeting and (ii) establish certain advance notice procedures for nomination of candidates for election as directors by stockholders and for stockholder proposals to be considered at annual stockholders' meetings. The Certificate of Incorporation permits the Board of Directors to create new directorships and the Company's Bylaws permit the Board of Directors to elect new directors to serve the full term of the class of directors in which the new directorship was created. The Bylaws also provide that the Board of Directors (or its remaining members, even though less than a quorum) is empowered to fill vacancies on the Board of Directors occurring for any reason for the remainder of the terms of the class of directors in which the vacancy occurred. TRANSFER AGENT The transfer agent and registrar for the Common Stock will be American Stock Transfer & Trust Company. 63 65 SHARES ELIGIBLE FOR FUTURE SALE Upon consummation of the Offering, the Company will have 12,000,000 shares of Common Stock outstanding (12,300,000 shares if the Underwriters' over-allotment option is exercised in full). Of those shares, the 2,000,000 shares sold in the Offering (2,300,000 shares if the Underwriters' over-allotment option is exercised in full) will be freely transferable without restriction or registration under the Act, unless purchased by persons deemed to be "affiliates" of the Company (as that term is defined under the Act). The remaining 10,000,000 shares of Common Stock to be outstanding immediately following the Offering ("restricted shares") may only be sold in the public market if such shares are registered under the Act or sold in accordance with Rule 144 promulgated under the Act. In general, under Rule 144 a person (or persons whose shares are aggregated) including an affiliate, who has beneficially owned his shares for two years, may sell in the open market within any three-month period a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of the Company's Common Stock (approximately 120,000 shares immediately after the Offering, 123,000 shares if the over-allotment option is exercised in full) or (ii) the average weekly trading volume in the Common Stock in the over-the-counter market during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain limitations on the manner of sale, notice requirements and availability of current public information about the Company. A person (or persons whose shares are aggregated) who is deemed not to have been an "affiliate" of the Company at any time during the 90 days preceding a sale by such person and who has beneficially owned his shares for at least three years, may sell such shares in the public market under Rule 144(k) without regard to the volume limitations, manner of sale provisions, notice requirements or availability of current information referred to above. Restricted shares properly sold in reliance upon Rule 144 are thereafter freely tradeable without restrictions or registration under the Act, unless thereafter held by an "affiliate" of the Company. The Company has reserved an aggregate of 925,000 shares of Common Stock for issuance pursuant to the Stock Option Plan and the Company intends to register such shares on Form S-8 following the Offering. Subject to restrictions imposed pursuant to the Stock Option Plan, shares of Common Stock issued pursuant to the Stock Option Plan after the effective date of any Registration Statement on Form S-8 will be available for sale in the public market without restriction to the extent they are held by persons who are not affiliates of the Company, and by affiliates pursuant to Rule 144. See "Management -- Stock Option Plan." Prior to the Offering, there has been no trading market for the Common Stock. No prediction can be made as to the effect, if any, that future sales of shares pursuant to Rule 144 or otherwise will have on the market price prevailing from time to time. Sales of substantial amounts of the Common Stock in the public market following the Offering could adversely affect the then prevailing market price. All of the 10,000,000 shares of Common Stock held by Mego Financial will be eligible for sale under Rule 144 commencing 90 days after consummation of the Offering. Mego Financial has agreed that it will not sell or otherwise transfer any shares of Common Stock to the public for 180 days after the Offering without the prior written consent of Oppenheimer & Co., Inc. and Friedman, Billings, Ramsey & Co., Inc., on behalf of the Underwriters. See "Underwriting." 64 66 UNDERWRITING Subject to the terms and conditions set forth in the Underwriting Agreement among the Company and the underwriters named below (the "Underwriters"), for whom Oppenheimer & Co., Inc. ("Oppenheimer") and Friedman, Billings, Ramsey & Co., Inc. are acting as representatives (the "Representatives"), each of the Underwriters has severally agreed to purchase from the Company, and the Company has agreed to sell to the Underwriters, the respective numbers of shares of Common Stock set forth opposite their names below:
NUMBER OF NAME SHARES -------------------------------------------------------------------------- --------- Oppenheimer & Co., Inc. .................................................. Friedman, Billings, Ramsey & Co., Inc. ................................... --------- Total........................................................... 2,000,000 =========
The Underwriting Agreement provides that the obligations of the several Underwriters thereunder are subject to approval of certain legal matters by counsel and to various other conditions. The Underwriters are committed to purchase and pay for all of the above shares of Common Stock if any are purchased. The Underwriters have advised the Company that the Underwriters propose initially to offer the shares of Common Stock directly to the public at the initial public offering price set forth on the cover page of this Prospectus, and to certain dealers at such price less a concession not in excess of $ per share of Common Stock. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share of Common Stock on sales to certain other dealers. After the initial public offering, the public offering price and other selling terms may be changed by the Underwriters. Prior to the Offering, there has been no public trading market for the Common Stock. Although the Common Stock has been approved for quotation on Nasdaq, there can be no assurance that any active trading market will develop for the Common Stock or, if developed, will be maintained. The initial public offering price will be determined through negotiations among the Company and the Representatives. The factors to be considered in determining the initial public offering price will include the history of and the prospects for the industry in which the Company competes, the ability of the Company's management, the past and present operations of the Company, the historical results of operations of the Company, the prospects for future earnings of the Company, the general condition of the securities markets at the time of the Offering and the recent market prices of securities of generally comparable companies. The Company has granted the Underwriters a 30-day over-allotment option to purchase up to an aggregate of 300,000 additional shares of Common Stock at the public offering price less the underwriting discount. If the Underwriters exercise such over-allotment option, the Underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof as the number of shares of Common Stock offered hereby. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of the shares of Common Stock offered hereby. The Company and Mego Financial have agreed that they will not, without the prior written consent of the Representatives, directly or indirectly, offer, sell, grant any option to purchase or otherwise dispose (or announce the offer, sale, grant of any option to purchase or other disposition) of any shares of Common Stock or any securities convertible into or exchangeable or exercisable for shares of Common Stock for a period of 180 days after the date of this Prospectus. The Representatives have informed the Company that the Underwriters do not intend to confirm sales to any accounts over which they have discretionary authority. 65 67 The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments that the Underwriters may be required to make in respect thereof. Oppenheimer has provided from time to time, and expects to provide in the future, investment banking and financial services to the Company and its affiliates, for which Oppenheimer has received and will receive customary fees and commissions. LEGAL MATTERS The legality of the shares of Common Stock offered hereby will be passed upon for the Company by Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A., Miami, Florida. Gibson, Dunn & Crutcher LLP, New York, New York has acted as counsel for the Underwriters in connection with the Offering. EXPERTS The financial statements included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein and elsewhere in the registration statement, and are so included in reliance upon their authority as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 (together with all amendments, exhibits and schedules thereto, the "Registration Statement") under the Securities Act, with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement. For further information with respect to the Company and the Common Stock offered hereby, reference is hereby made to such Registration Statement. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete and, in each instance, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. Copies of the Registration Statement, including all exhibits thereto, may be obtained from the Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of the fees prescribed by the Commission, or may be examined without charge at the offices of the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, as well as the Commission's regional offices at Seven World Trade Center, Suite 1300, New York, New York 10048, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. In addition, copies of the Registration Statement and related documents may be obtained from the Commission's web site at http://www.sec.gov. Upon completion of the Offering, the Company will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith will file annual and quarterly reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information may be inspected, and copies of such material may be obtained upon payment of prescribed fees, at the Commission's Public Reference Section at the addresses set forth above. The Company intends to furnish its stockholders with annual reports containing audited financial statements of the Company which have been certified by its independent public accountants. 66 68 MEGO MORTGAGE CORPORATION INDEX TO FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report.......................................................... F-2 Financial Statements: Statements of Financial Condition -- August 31, 1995 and 1996....................... F-3 Statements of Operations -- Years Ended August 31, 1994, 1995 and 1996.............. F-4 Statements of Cash Flows -- Years Ended August 31, 1994, 1995 and 1996.............. F-5 Statements of Stockholder's Equity -- Years Ended August 31, 1994, 1995 and 1996.... F-6 Notes to Financial Statements......................................................... F-7
F-1 69 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholder of Mego Mortgage Corporation Las Vegas, Nevada We have audited the accompanying statements of financial condition of Mego Mortgage Corporation (a wholly owned subsidiary of Mego Financial Corp.) (the "Company") as of August 31, 1995 and 1996, and the related statements of operations, stockholder's equity and of cash flows for each of the three years in the period ended August 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements referred to above present fairly, in all material respects, the financial position of the Company as of August 31, 1995 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 1996 in conformity with generally accepted accounting principles. As discussed in Note 16 to the financial statements, the accompanying 1994 financial statements have been restated. As discussed in Note 2 to the financial statements, the Company adopted Statement of Financial Accounting Standards No. 122, Accounting for Mortgage Servicing Rights effective September 1, 1994. DELOITTE & TOUCHE LLP Las Vegas, Nevada October 28, 1996 F-2 70 MEGO MORTGAGE CORPORATION STATEMENTS OF FINANCIAL CONDITION (IN THOUSANDS OF DOLLARS)
AUGUST 31, ----------------- 1995 1996 ------- ------- ASSETS Cash....................................................................... $ 752 $ 443 Cash deposits, restricted.................................................. 2,532 4,474 Loans held for sale, net of allowance for credit losses of $74 and $95..... 3,676 4,610 Mortgage related securities, at fair value................................. -- 22,944 Excess servicing rights.................................................... 14,483 12,121 Mortgage servicing rights.................................................. 1,076 3,827 Other receivables.......................................................... 142 59 Property and equipment, net of accumulated depreciation of $108 and $279... 429 865 Organizational costs, net of amortization.................................. 675 482 Other assets............................................................... 316 781 ------- ------- TOTAL ASSETS..................................................... $24,081 $50,606 ======= ======= LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Notes and contracts payable.............................................. $ 1,458 $14,197 Accounts payable and accrued liabilities................................. 2,239 4,066 Allowance for credit losses on loans sold with recourse.................. 886 920 Due to parent company.................................................... 8,453 11,994 Due to affiliated company................................................ -- 819 State income taxes payable............................................... 264 909 ------- ------- Total liabilities................................................ 13,300 32,905 ------- ------- Stockholder's equity: Common Stock -- $.01 par value per share Authorized -- 50,000,000 shares Issued and outstanding -- 10,000,000 shares........................... 100 100 Additional paid in capital............................................... 8,550 8,550 Retained earnings........................................................ 2,131 9,051 ------- ------- Total stockholder's equity....................................... 10,781 17,701 ------- ------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY....................... $24,081 $50,606 ======= =======
See notes to financial statements. F-3 71 MEGO MORTGAGE CORPORATION STATEMENTS OF OPERATIONS (THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED AUGUST 31, --------------------------------------- 1994 1995 1996 ----------- ------- ----------- (AS RESTATED -- NOTE 16) REVENUES Gain on sale of loans................................ $ 579 $12,233 $ 17,994 Net unrealized gain on mortgage related securities... -- -- 2,697 Loan servicing income................................ -- 873 3,348 Interest income, net of interest expense of $107, $468, and $1,116.................................. 172 473 988 ------- ------- ------- Total revenues............................... 751 13,579 25,027 ------- ------- ------- COSTS AND EXPENSES Provision for credit losses.......................... 96 864 1,510 Depreciation and amortization........................ 136 403 394 Other interest....................................... 22 187 167 General and administrative: Payroll and benefits.............................. 975 3,611 5,031 Commissions and selling........................... 13 552 2,013 Professional services............................. -- 177 732 Servicing fees paid to affiliate.................. 13 232 709 Management services by affiliate.................. 442 690 671 FHA insurance..................................... 11 231 572 Other............................................. 554 713 2,073 ------- ------- ------- Total costs and expenses..................... 2,262 7,660 13,872 ------- ------- ------- INCOME (LOSS) BEFORE INCOME TAXES...................... (1,511) 5,919 11,155 INCOME TAXES........................................... -- 2,277 4,235 ------- ------- ------- NET INCOME (LOSS)...................................... $(1,511) $ 3,642 $ 6,920 ======= ======= ======= PRO-FORMA NET INCOME PER SHARE (Note 2) (Unaudited).... $ 0.60 ======= Weighted average number of common shares outstanding (Note 2)............................................. 10,000,000 ==========
See notes to financial statements. F-4 72 MEGO MORTGAGE CORPORATION STATEMENTS OF CASH FLOW (IN THOUSANDS OF DOLLARS)
FOR THE YEARS ENDED AUGUST 31, ----------------------------------- 1994 1995 1996 ------------- -------- -------- (AS RESTATED-- NOTE 16) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).............................................................. ($1,511) $ 3,642 $ 6,920 -------- -------- -------- Adjustments to reconcile net income (loss) to net cash used in operating activities: Additions to mortgage servicing rights....................................... -- (1,176) (3,306) Additions to excess servicing rights......................................... (904) (14,098) (20,563) Net unrealized gain on mortgage related securities........................... -- -- (2,697) Provisions for estimated credit losses....................................... 96 864 1,510 Deferred income taxes........................................................ -- 230 673 Depreciation and amortization expense........................................ 136 403 394 Amortization of excess servicing rights...................................... -- 519 2,144 Amortization of mortgage servicing rights.................................... -- 100 555 Accretion of residual interest in mortgage related securities................ -- -- (243) Repayments of mortgage related securities.................................... -- -- 92 Loans originated for sale, net of loan fees.................................. (8,164) (87,751) (139,367) Repayments on loans held for sale............................................ 116 131 504 Proceeds from sale of loans.................................................. 6,397 84,952 135,483 Changes in operating assets and liabilities: Increase in cash deposits, restricted...................................... -- (2,532) (1,942) (Increase) decrease in other assets, net................................... (342) 375 1,248 Increase in state income taxes payable..................................... -- 264 670 Increase in other liabilities, net......................................... 279 1,959 1,827 Additions to due to affiliated company..................................... 1,547 3,581 2,100 Payments on due to affiliated company...................................... (2,052) (3,305) (1,281) -------- -------- -------- Total adjustments....................................................... (2,891) (15,484) (22,199) -------- -------- -------- Net cash used in operating activities................................... (4,402) (11,842) (15,279) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment............................................. (263) (274) (637) -------- -------- -------- Net cash used in investing activities................................... (263) (274) (637) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings on notes and contracts payable........................ 6,275 77,178 146,448 Payments on notes and contracts payable........................................ (5,638) (76,357) (133,709) Additions in due to parent company............................................. -- 10,836 8,368 Payments on due to parent company.............................................. -- (2,613) (5,500) Receipt of common stock subscription........................................... 4,500 -- -- Increase in additional paid-in capital......................................... -- 3,000 -- -------- -------- -------- Net cash provided by financing activities............................... 5,137 12,044 15,607 -------- -------- -------- NET INCREASE (DECREASE) IN CASH.................................................. 472 (72) (309) CASH -- BEGINNING OF YEAR........................................................ 352 824 752 -------- -------- -------- CASH -- END OF YEAR.............................................................. $ 824 $ 752 $ 443 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest..................................................................... $ 38 $ 618 $ 964 ======== ======== ======== Income taxes................................................................. $ -- $ 3 $ 25 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: In connection with the securitization of loans and creation of mortgage related securities, the Company retained an interest only security and a residual interest security............................................................ $ -- $ -- $ 20,096 ======== ======== ======== In connection with the organization of the Company, the Company's parent issued 475,000 shares of its Common Stock to an unrelated entity for services rendered..................................................................... $ 650 $ -- $ -- ======== ======== ========
See notes to financial statements. F-5 73 MEGO MORTGAGE CORPORATION STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE YEARS ENDED AUGUST 31, 1994 AND 1995 AND 1996 (IN THOUSANDS OF DOLLARS)
COMMON STOCK ADDITIONAL RETAINED ------------------- PAID IN EARNINGS SHARES AMOUNT CAPITAL DEFICIT TOTAL ---------- ------ ---------- -------- ------- BALANCE AT SEPTEMBER 1, 1993................... 10,000,000 $100 $4,900 $ -- $ 5,000 Additional paid-in capital..................... -- -- 650 -- 650 Net loss for the year ended August 31, 1994 (as restated -- Note 16)......................... -- -- -- (1,511) (1,511) ---------- ---- ------ ------- ------- BALANCE AT AUGUST 31, 1994 (AS RESTATED -- NOTE 16).......................................... 10,000,000 100 5,550 (1,511) 4,139 Additional paid-in capital..................... -- -- 3,000 -- 3,000 Net income for the year ended August 31, 1995......................................... -- -- -- 3,642 3,642 ---------- ---- ------ ------- ------- BALANCE AT AUGUST 31, 1995..................... 10,000,000 100 8,550 2,131 10,781 Net income for the year ended August 31, 1996......................................... -- -- -- 6,920 6,920 ---------- ---- ------ ------- ------- BALANCE AT AUGUST 31, 1996..................... 10,000,000 $100 $8,550 $ 9,051 $17,701 ========== ==== ====== ======= =======
See notes to financial statements. F-6 74 MEGO MORTGAGE CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 1994, 1995 AND 1996 1. NATURE OF OPERATIONS Mego Mortgage Corporation (the Company) was incorporated on June 12, 1992, in the State of Delaware. The authorized capital stock of the Company is 50,000,000 shares of Common Stock with a par value of $.01 per share. The Company issued a total of 10,000,000 shares of its capital stock to Mego Financial Corp. (Mego Financial), a New York corporation, for $5,000,000 and became a wholly-owned subsidiary of Mego Financial. The Company, through its loan correspondents and home improvement contractors, is primarily engaged in the business of originating, selling, servicing and pooling home improvement loans, which qualify under the provisions of Title I of the National Housing Act which is administered by the U.S. Department of Housing and Urban Development (HUD). Pursuant to that program, 90% of the principal balances of the loans are U.S. government insured (Title I Loans), with cumulative maximum coverage equal to 10% of all Title I Loans originated by the Company. In May 1996, the Company commenced the origination of conventional home improvement and equity loans through its network of loan correspondents. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash Deposits, Restricted -- Restricted cash represents cash on deposit which is restricted in accordance with the loan sale agreements and untransmitted funds received from collection of loans which have not as yet been disbursed to the purchasers of such loans in accordance with the loan sale agreements. Loans Held for Sale -- Loans held for sale are carried at the lower of aggregate cost or market value in the accompanying Statements of Financial Condition, net of allowance for credit losses. Loan origination fees and direct origination costs are deferred until the loan is sold. Mortgage Related Securities -- In 1996, the Company securitized a majority of loans originated into the form of a REMIC. A REMIC is a trust issuing multi-class securities with certain tax advantages to investors and which derives its cash flow from a pool of underlying mortgages. Certain of the senior classes of the REMICs are sold, and an interest only strip and a subordinated residual class are retained by the Company. The subordinated residual class is in the form of residual certificates and are classified as residual interest securities. The documents governing the Company's securitizations require the Company to establish initial overcollateralization or build overcollateralization levels through retention of distributions by the REMIC trust otherwise payable to the Company as the residual interest holder. This overcollateralization causes the aggregate principal amount of the loans in the related pool and/or cash reserves to exceed the aggregate principal balance of the outstanding investor certificates. Such excess amounts serve as credit enhancement for the related REMIC trust. To the extent that borrowers default on the payment of principal or interest on the loans, losses will reduce the overcollateralization and cash flows otherwise payable to the residual interest security holder to the extent that funds are available. If payment defaults exceed the amount of overcollateralization, as applicable, the insurance policy maintained by the related REMIC trust will pay any further losses experienced by holders of the senior interests in the related REMIC trust. The Company does not have any recourse obligations for credit losses in the REMIC trust. The residual interests are amortized to operations over the contractual lives of the loans, considering future estimated prepayments utilizing an amortization method which approximates the level yield method. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115) on September 1, 1995. There was no cumulative financial statement impact as a result of adopting SFAS 115. In accordance with the provisions of SFAS 115, the Company classifies residual interest securities and interest only securities as trading securities which are recorded at fair value with any unrealized gains or losses recorded in the results of operations in the period of the change in fair value. Valuations at origination and at each reporting period are based on discounted cash flow analyses. The cash flows are estimated as the excess F-7 75 MEGO MORTGAGE CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) of the weighted average coupon on each pool of loans securitized over the sum of the pass-through interest rate, servicing fees, a trustee fee, an insurance fee and an estimate of annual future credit losses, net of FHA insurance recoveries, related to the loans securitized, over the life of the loans. These cash flows are projected over the life of the loans using prepayment, default, and loss assumptions that the Company believes market participants would use for similar financial instruments and are discounted using an interest rate that the Company believes a purchaser unrelated to the seller of such a financial instrument would require. The Company utilized prepayment assumptions of 14%, estimated loss factor assumptions of 1%, and weighted average discount rates of 12%. The valuation includes consideration of characteristics of the loans including loan type and size, interest rate, origination date, and term. The Company also uses other available information such as externally prepared reports on prepayment rates and industry default rates of the type of loan portfolio under review. To the Company's knowledge, there is no active market for the sale of these mortgage related securities. The range of values attributable to the factors used in determining fair value is broad. Although the Company believes that it has made reasonable estimates of the fair value of the mortgage related securities, the rate of prepayments and default rates utilized are estimates, and actual experience may vary. Revenue Recognition-Gain on Sale of Loans -- Gain on sale of loans includes the gain on sale of mortgage related securities and the gain on sale of loans held for sale. In accordance with Emerging Issues Task Force (EITF) Issue No. 88-11, the gain on sale of mortgage related securities is determined by an allocation of the cost of the securities based on the relative fair value of the securities sold and the securities retained. The Company retains an interest only strip security and a residual interest security. The present value of expected net cash flows from the sale of loans are recorded at the time of sale as excess servicing rights. Excess servicing rights are amortized as a charge to income, as payments are received on the retained interest differential over the estimated life of the underlying loans. Excess servicing rights are recorded at the lower of unamortized cost or estimated fair value. The expected cash flows used to determine the excess servicing rights asset have been reduced for potential losses, net of FHA insurance recoveries, under recourse provisions of the sales agreements. The allowance for losses on loans sold with recourse represents the Company's estimate of losses, net of FHA insurance recoveries, to be incurred in connection with the recourse provisions of the sales agreements and is shown separately as a liability in the Company's Statements of Financial Condition. In discounting cash flows related to loan sales, the Company defers servicing income at annual rates of 1% to 1.25% and discounts cash flows on its sales at the rate it believes a purchaser would require as a rate of return. The cash flows were discounted to present value using discount rates which averaged 12% for the years ended August 31, 1994, 1995, and 1996. The Company has developed its assumptions based on experience with its own portfolio, available market data and ongoing consultation with its investment bankers. In determining expected cash flows, management considers economic conditions at the date of sale. In subsequent periods, these estimates may be revised as necessary using the original discount rate, and any losses arising from prepayment and loss experience will be recognized as realized. Mortgage Servicing Rights -- At August 31, 1995, effective September 1, 1994, the Company adopted the provisions of SFAS No. 122 "Accounting for Mortgage Servicing Rights -- an amendment of SFAS No. 65" (SFAS 122) which requires that a mortgage banking enterprise recognize as separate assets the rights to service mortgage loans for others however those servicing rights are acquired. The effect of adopting SFAS No. 122 on the Company's financial statements was to increase income before income taxes by $1,076,000 for the year ended August 31, 1995. The fair value of capitalized mortgage servicing rights is estimated by calculating the present value of expected net cash flows from mortgage servicing using assumptions the Company believes market participants would use in their estimates of future servicing income and expense, including assumptions about prepayment, default and interest rates. Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income. The estimate of fair value was based on F-8 76 MEGO MORTGAGE CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) a 125 basis points per annum servicing fee reduced by estimated costs of servicing using a discount rate of 12% for the year ended August 31, 1996, and a 100 basis points per annum servicing fee reduced by estimated costs of servicing using a discount rate of 12% for the year ended August 31, 1995. At August 31, 1995 and August 31, 1996, the book value of mortgage servicing rights approximated fair value. The Company periodically reviews mortgage servicing rights to determine impairment. This review is performed on a disaggregated basis, based upon date of origination. Impairment is recognized in a valuation allowance for each pool in the period of impairment. The Company has developed its assumptions based on experience with its own portfolio, available market data and ongoing consultation with its investment bankers. Allowance for Credit Losses -- Provision for credit losses relating to unsold loans is recorded as expense in amounts sufficient to maintain the allowance at a level considered adequate to provide for anticipated losses resulting from liquidation of outstanding loans. The provision for credit losses is based upon periodic analysis of the portfolio, economic conditions and trends, historical credit loss experience, borrowers' ability to repay, collateral values, and estimated Federal Housing Authority (FHA) insurance recoveries on Title I Loans. Property and Equipment -- Property and equipment is stated at cost and is depreciated over its estimated useful life (generally five years) using the straight-line method. Costs of maintenance and repairs that do not improve or extend the life of the respective assets are recorded as expense. Organizational Costs -- Organizational costs associated with the commencement of originating, purchasing, selling and servicing of Title I Loans are being amortized over a five year period which commenced on March 1, 1994. Such amortization is included in depreciation and amortization expense on the Statements of Operations. Accumulated amortization related to organizational costs was $289,000 and $482,000 at August 31, 1995 and 1996, respectively. Loan Origination Costs and Fees -- Loan origination costs and fees including non-refundable loan origination fees and incremental direct costs associated with loan originations are deferred and amortized over the lives of the loans. Unamortized loan origination costs and fees are recorded as expense or income upon the sale of the related loans. Allowance for Credit Losses on Loans Sold with Recourse -- Recourse to the Company on sales of loans is governed by the agreements between the purchasers and the Company. The allowance for credit losses on loans sold with recourse represents the Company's estimate of its probable future credit losses to be incurred over the lives of the loans, considering estimated future FHA insurance recoveries on Title I Loans. No allowance for credit losses on loans sold with recourse is established on loans sold through securitizations, as the Company has no recourse obligation under those securitization agreements. Estimated credit losses on loans sold through securitizations are considered in the Company's valuation of its residual interest securities. Proceeds from the sale of loans with recourse provisions were $6,397,000, $84,952,000, and $118,082,000 for the years ended August 31, 1994, 1995, and 1996, respectively. Interest Income -- Interest income is recorded as earned. Interest income represents the interest earned on loans held for sale during the period prior to their securitization or other sale, mortgage related securities, and short term investments. In accordance with EITF Issue No. 89-4, the Company computes an effective yield based on the carrying amount of each mortgage related security and its estimated future cash flow. This yield is then used to accrue interest income on the mortgage related security. During the period that a Title I Loan is 30 days through 270 days delinquent, the Company accrues interest at the HUD guaranteed rate of 7% in lieu of the contractual rate of the loan. When a Title I Loan becomes over 270 days contractually delinquent, it is placed on non-accrual status and interest is recognized only as cash is received. Interest income on conventional loans greater than 90 days delinquent is generally to be recognized on a cash basis. F-9 77 MEGO MORTGAGE CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Loan Servicing Income -- Fees for servicing loans originated or acquired by the Company and sold with servicing rights retained are generally based on a stipulated percentage of the outstanding principal balance of such loans and are recognized when earned. Interest received on loans sold, less amounts paid to investors, is reported as loan servicing income. Capitalized mortgage servicing rights and excess servicing rights are amortized systematically to reduce loan servicing income to an amount representing normal servicing income and the present value discount. Late charges and other miscellaneous income are recognized when collected. Costs to service loans are recorded to expense as incurred. Income Taxes -- The Company files a consolidated federal income tax return with its parent, Mego Financial. Income taxes for the Company are provided for on a separate return basis. As part of a tax sharing arrangement, the Company has recorded a liability to Mego Financial for federal income taxes applied to the Company's financial statement income after giving consideration to applicable income tax law and statutory rates. The Company accounts for taxes under SFAS No. 109, "Accounting for Income Taxes" (SFAS 109), which requires an asset and liability approach. The provision for income taxes includes deferred income taxes, which result from reporting items of income and expense for financial statement purposes in different accounting periods than for income tax purposes. The Company also provides for state income taxes at the rate of 6% of income before income taxes. Recently Issued Accounting Standards -- The Financial Accounting Standards Board (the FASB) has issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS 121). SFAS 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS 121 is effective for fiscal years beginning after December 15, 1995. The Company does not anticipate any material effect upon adoption on results of operations or financial condition. In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which establishes financial accounting and reporting standards for stock-based employee compensation plans. Those plans include all arrangements by which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of the stock. This statement also applies to transactions in which an entity issues its equity instruments to acquire goods or services from nonemployees. Those transactions must be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. SFAS 123 is effective for fiscal years beginning after December 15, 1995. The Company intends to provide the pro forma and other additional disclosure about stock-based employee compensation plans in its 1997 financial statements as required by SFAS 123. SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 125) was issued by FASB in June 1996. SFAS 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. This statement also provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. It requires that liabilities and derivatives incurred or obtained by transferors as part of a transfer of financial assets be initially measured at fair value. SFAS 125 also requires that servicing assets be measured by allocating the carrying amount between the assets sold and retained interests based on their relative fair values at the date of transfer. Additionally, this statement requires that the servicing assets and liabilities be subsequently measured by (a) amortization in proportion to and over the period of estimated net servicing income and (b) assessment for asset impairment or increased obligation based on their fair values. The statement will require that the Company's existing and future excess servicing receivables be measured at fair market value and be reclassified as interest only strip securities and accounted for in accordance with F-10 78 MEGO MORTGAGE CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) SFAS 115. As required by the statement, the Company will adopt the new requirements effective January 1, 1997. It is not anticipated that upon implementation, the statement will have any material impact on the financial statements of the Company, as the book value of the Company's excess servicing rights and mortgage related securities approximates fair value. Stock Split -- The accompanying financial statements retroactively reflect a 1,600 for 1 stock split, an increase in authorized shares of common stock to 50,000,000, and the establishment of a $.01 par value per share effective October 28, 1996. Pro Forma Net Income Per Share (Unaudited) -- Shares used in computing pro forma net income per share include the weighted average of common stock outstanding during the period, adjusted for the 1,600 for 1 stock split. There were no common stock equivalents. Historical per share data is not included on the Statements of Operations because the data is not considered relevant or indicative of the ongoing operations of the Company. Net income utilized in the calculation of pro forma net income per share has been reduced by an estimated pro forma interest expense in the amount of $1,544,000 and a related tax benefit of $587,000 based upon the application of a 13% interest rate to the Company's average balance of non-interest bearing debt payable to Mego Financial. Pro forma net income per share would change by $0.01 with a 1% change in the interest rate utilized. Reclassification -- Certain reclassifications have been made to conform prior years with the current year presentation. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. FAIR VALUES OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosure about Fair Value of Financial Instruments" (SFAS 107), requires disclosure of estimated fair value information for financial instruments, whether or not recognized in the Statement of Financial Condition. Fair values are based upon estimates using present value or other valuation techniques in cases where quoted market prices are not available. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. F-11 79 MEGO MORTGAGE CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Estimated fair values, carrying values and various methods and assumptions used in valuing the Company's financial instruments at August 31, 1996 are set forth below (thousands of dollars):
CARRYING ESTIMATED FAIR VALUE VALUE -------- -------------- Financial Assets: Cash(a)...................................................... $ 443 $ 443 Loans held for sale, net(b).................................. 4,610 5,371 Mortgage related securities(c)............................... 22,944 22,944 Excess servicing rights(c)................................... 12,121 12,121 Mortgage servicing rights(c)................................. 3,827 3,827 Financial Liabilities: Notes and contracts payable(d)............................... 14,197 14,197
- --------------- (a) Carrying value was used as the estimate of fair value. (b) Since it is the Company's business to sell loans it originates, the fair value was estimated by using outstanding commitments from investors adjusted for non-qualified loans and the collateral securing such loans. (c) The fair value was estimated by discounting future cash flows of the instruments using discount rates, default, loss and prepayment assumptions based upon available market data, opinions from investment bankers and portfolio experience. (d) Notes payable generally are adjustable rate, indexed to the prime rate; therefore, carrying value approximates fair value. Contracts payable represent capitalized equipment leases with a weighted average interest rate of 9.48%, which approximates fair value. At August 31, 1996, the Company had $59,597,000 in outstanding commitments to originate and purchase loans and no other off-balance sheet financial instruments. A fair value of the commitments was estimated at $6.8 million by calculating a theoretical gain or loss on the sale of a funded loan adjusted for an estimate of loan commitments not expected to fund, considering the difference between investor yield requirements and the committed loan rates. The estimated fair value is not necessarily representative of the actual gain to be recorded on such loan sales in the future. The fair value estimates made at August 31, 1996 were based upon pertinent market data and relevant information on the financial instruments at that time. These estimates do not reflect any premium or discount that could result from the sale of the entire portion of the financial instruments. Because no market exists for a substantial portion of the financial instruments, fair value estimates may be based upon judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based upon existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For instance, the Company has certain fee-generating business lines (e.g., its loan servicing operations) that were not considered in these estimates since these activities are not financial instruments. In addition, the tax implications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. F-12 80 MEGO MORTGAGE CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. CONCENTRATIONS OF RISK Availability of Funding Source -- The Company funds substantially all of the loans which it originates or purchases with borrowings through its financing facilities and internally generated funds. These borrowings are in turn repaid with the proceeds received by the Company from selling such loans through loan sales or securitizations. Any failure to renew or obtain adequate financing under its financing facilities, or other borrowings, or any substantial reduction in the size of or pricing in the markets for the Company's loans, could have a material adverse effect on the Company's operations. To the extent that the Company is not successful in maintaining or replacing existing financings, it would have to curtail its loan production activities or sell loans earlier than is optimal, thereby having a material adverse effect on the Company's results of operations and financial condition. Dependence on Securitizations -- In 1996, the Company pooled and sold through securitizations an increasing percentage of the loans that it originated. The Company derives a significant portion of its income by recognizing gains on sale of loans through securitizations which are due in part to the fair value, recorded at the time of sale, of residual interests and interest only securities retained. Adverse changes in the securitization market could impair the Company's ability to sell loans through securitizations on a favorable or timely basis. Any such impairment could have a material adverse effect upon the Company's results of operations and financial condition. The Company has relied on credit enhancement and overcollateralization to achieve the "AAA/Aaa" rating for the senior interests in its securitizations. The credit enhancement has generally been in the form of an insurance policy issued by an insurance company insuring the timely repayment of senior interests in each of the REMIC trusts. There can be no assurance that the Company will be able to obtain credit enhancement in any form from the current insurer or any other provider of credit enhancement on acceptable terms or that future securitizations will be similarly rated. A downgrading of the insurer's credit rating or its withdrawal of credit enhancement could have a material adverse effect on the Company's results of operations and financial condition. Geographic Concentrations -- The Company's servicing portfolio and loans sold with recourse are geographically diversified within the United States. The Company services mortgage loans in 47 states and the District of Columbia. At August 31, 1996, 36% of the dollar value of loans serviced had been originated in California, and 13% in Florida. No other state accounted for more than 10% of the servicing portfolio. The risk inherent in such concentrations is dependent upon regional and general economic stability which affects property values and the financial stability of the borrowers. Credit Risk -- The Company is exposed to on-balance sheet credit risk related to its loans held for sale and mortgage related securities. The Company is exposed to off-balance sheet credit risk related to loans which the Company has committed to originate and loans sold under recourse provisions. The outstanding balance of loans sold with recourse provisions totaled $88,566,000 and $81,458,000 at August 31, 1995 and 1996, respectively. Off-Balance Sheet Activities -- These financial instruments consist of commitments to extend credit to borrowers and commitments to purchase loans from others. As of August 31, 1995 and 1996, the Company had outstanding commitments to extend credit or purchase loans in the amounts of $53,447,000 and $59,597,000, respectively. These commitments do not represent the expected total cash outlay of the Company, as historically only 40% of these commitments result in loan originations or purchases. The prospective borrower or seller is under no obligation as a result of the Company's commitment. The Company's credit and interest rate risk is therefore limited to those commitment which result in loan originations and purchases. The commitments are made for a specified fixed rate of interest, therefore the Company is exposed to interest rate risk, to the extent changes in market interest rates change prior to the origination and prior to the sale of the loan. F-13 81 MEGO MORTGAGE CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Interest Rate Risk -- The Company's profitability is in part determined by the difference, or "spread," between the effective rate of interest received on the loans originated or purchased by the Company and the interest rates payable under its financing facilities during the warehousing period and yield required by investors on loan sales and securitizations. The spread can be adversely affected after a loan is originated or purchased and while it is held during the warehousing period by increases in the interest rate demanded by investors in securitizations or sales. In addition, because the loans originated and purchased by the Company have fixed rates, the Company bears the risk of narrowing spreads because of interest rate increases during the period from the date the loans are originated or purchased until the closing of the sale or securitization of such loans. Additionally, the fair value of mortgage related securities, mortgage servicing rights and excess servicing rights owned by the Company may be adversely affected by changes in the interest rate environment which could effect the discount rate and prepayment assumptions used to value the assets. Any such adverse change in assumptions could have a material adverse effect on the Company's results of operations and financial condition. 5. LOANS HELD FOR SALE, ALLOWANCE FOR CREDIT LOSSES, LOAN ORIGINATIONS, AND LOANS SERVICED Loans held for sale, net of allowance for credit losses, consisted of the following (thousands of dollars):
AUGUST 31, --------------- 1995 1996 ------ ------ Loans held for sale.................................................. $3,750 $4,705 Less allowance for credit losses..................................... (74) (95) ------ ------ Total...................................................... $3,676 $4,610 ====== ======
The Company provides an allowance for credit losses, in an amount which in the Company's judgment will be adequate to absorb losses after FHA insurance recoveries on the loans, that may become uncollectible. The Company's judgment in determining the adequacy of this allowance is based on its continual review of its portfolio of loans which utilizes historical experience and current economic factors. These reviews take into consideration changes in the nature and level of the portfolio, current and future economic conditions which may affect the obligors' ability to pay, collateral values and overall portfolio quality. Changes in the allowance for credit losses for loans consisted of the following (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, --------------------- 1994 1995 1996 ---- ---- ------- Balance at beginning of year.................................... $-- $ 96 $ 960 Provisions for credit losses.................................... 96 864 1,510 Reductions due to reacquisition and securitization.............. -- -- (1,455) --- ---- ------ Balance at end of year.......................................... $96 $960 $ 1,015 === ==== ====== Allowance for credit losses..................................... $30 $ 74 $ 95 Allowance for credit losses on loans sold with recourse......... 66 886 920 --- ---- ------ Total................................................. $96 $960 $ 1,015 === ==== ======
During 1996, $113,917,000 of loans sold under recourse provisions were repurchased and securitized as further described in Note 2. Reductions due to reacquisition and securitization represent the allowance for credit losses on loans sold with recourse transferred to the cost basis of the mortgage related securities as a result of these transactions. F-14 82 MEGO MORTGAGE CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Loans serviced and originated consisted of the following (thousands of dollars):
AUGUST 31, ------------------ 1995 1996 ------- -------- Amount of Title I Loan originations............................... $87,751 $127,785 Amount of conventional loan originations.......................... -- 11,582 ------- -------- Total................................................... $87,751 $139,367 ======= ======== Loans serviced (including loans securitized, loans sold to investors and loans held for sale) Title I Loans................................................... $92,286 $202,766 Conventional loans.............................................. -- 11,423 ------- -------- Total................................................... $92,286 $214,189 ======= ========
6. MORTGAGE RELATED SECURITIES Mortgage related securities consist of interest only strips and residual interest certificates of FHA Title I Loan asset-backed securities collateralized by loans originated, purchased and serviced by the Company. Mortgage related securities are classified as trading securities and are recorded at estimated fair value. Changes in the estimated fair value are recorded in current operations. As of August 31, 1996 mortgage related securities consisted of the following (thousands of dollars): Interest only securities................................................... $ 4,602 Residual interest securities............................................... 18,342 ------- Total............................................................ $22,944 =======
No mortgage related securities were owned during 1995. Activity in mortgage related securities consisted of the following for the year ended August 31, 1996 (thousands of dollars): Balance at beginning of year............................................... $ -- Additions due to securitizations, at cost.................................. 20,096 Net unrealized gain........................................................ 2,697 Accretion of residual interest............................................. 243 Principal reductions....................................................... (92) ------- Balance at end of year........................................... $22,944 =======
7. EXCESS SERVICING RIGHTS Activity in excess servicing rights consisted of the following (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, ------------------------- 1994 1995 1996 ---- ------- -------- Balance at beginning of year................................ $ -- $ 904 $ 14,483 Plus additions.............................................. 904 14,098 20,563 Less amortization........................................... -- (519) (2,144) Less amounts related to loans repurchased, securitized and transferred to mortgage related securities................ -- -- (20,781) ---- ------- ------- Balance at end of year............................ $904 $14,483 $ 12,121 ==== ======= =======
F-15 83 MEGO MORTGAGE CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) As of August 31, 1994, 1995 and 1996, excess servicing rights consisted of excess cash flows on serviced loans totaling $6,555,000, $88,566,000 and $81,458,000, yielding weighted average interest rates of 12.9%, 13.3% and 12.8%, and net of normal servicing and pass-through fees with weighted average pass-through yields to the investor of 8.5%, 8.4% and 8.1%, respectively. These loans were sold under recourse provisions as described in Note 2. During 1996, $113,917,000 of loans sold were repurchased and securitized as further described in Note 2. Excess servicing rights related to the loans repurchased and securitized of $20,781,000 were transferred to the cost basis of the mortgage related securities as a result of these transactions. Of the Title I Loans sold in the year ended August 31, 1995, $56,922,000 of such loans were sold to a purchaser, in a series of sales commencing on April 21, 1995, under a continuing sales agreement which provides for the yield to the purchaser to be adjusted monthly to a rate equal to 200 basis points (2%) per annum over the one-month London Interbank Offered Rate (LIBOR). LIBOR was 5.875% per annum at August 31, 1996. The principal balance of loans subject to the LIBOR adjustment was $29,255,000 at August 31, 1996. The effect of an increase or decrease in LIBOR of 100 basis points (1%) applied to those loans would be a decrease or increase, respectively, to the Company's future pre-tax income of approximately $956,000. 8. MORTGAGE SERVICING RIGHTS Activity in mortgage servicing rights consisted of the following (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, ---------------------- 1994 1995 1996 ---- ------ ------ Balance at beginning of year................................... $ -- $ -- $1,076 Plus additions................................................. -- 1,176 3,306 Less amortization.............................................. -- (100) (555) ---- ------ ------ Balance at end of year............................... $ -- $1,076 $3,827 ==== ====== ======
As indicated in Note 2, the Company adopted the provisions of SFAS 122 effective September 1, 1994. The Company had no valuation allowance for mortgage servicing rights during 1994, 1995 and 1996, as the cost basis of mortgage servicing rights approximated fair value. The pooling and servicing agreements relating to the securitization transactions contain provisions with respect to the maximum permitted loan delinquency rates and loan default rates, which, if exceeded, would allow the termination of the Company's right to service the related loans. At September 30, 1996, the default rates on one pooling and servicing agreement exceeded the permitted level. The mortgage servicing rights for this agreement were approximately $1.4 million at August 31, 1996. In the event of such termination, there would be an adverse effect on the valuation of the Company's mortgage servicing rights. F-16 84 MEGO MORTGAGE CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 9. PROPERTY AND EQUIPMENT Property and equipment consisted of the following (thousands of dollars):
AUGUST 31, -------------- 1995 1996 ----- ------ Office equipment and furnishings..................................... $ 337 $ 640 EDP equipment........................................................ 166 470 Vehicles............................................................. 34 34 ----- ------ 537 1,144 Less accumulated depreciation........................................ (108) (279) ----- ------ Total property and equipment, net.......................... $ 429 $ 865 ===== ======
10. OTHER ASSETS Other assets consisted of the following (thousands of dollars):
AUGUST 31, -------------- 1995 1996 ----- ------ Deferred borrowing costs............................................. $ 129 $ 216 Software costs, net of amortization (See Note 14).................... 127 154 Other................................................................ 60 411 ---- ---- Total...................................................... $ 316 $ 781 ==== ====
11. NOTES AND CONTRACTS PAYABLE Notes and contracts payable consisted of the following (thousands of dollars):
AUGUST 31, ---------------- 1995 1996 ------ ------- Note payable -- warehouse line of credit............................ $1,039 $ 3,265 Note payable -- revolving line of credit............................ -- 10,000 Other............................................................... 419 932 ------ ------- Total..................................................... $1,458 $14,197 ====== =======
Notes payable at August 31, 1996 included $3,265,000 of borrowings outstanding under a Warehousing Credit and Security Agreement with a lender that provides available credit facilities up to $20,000,000. The outstanding borrowings bear interest at the bank's prevailing prime rate plus 1% (9.25% at August 31, 1996) and are collateralized by security interests in the Company's loans held for sale. The warehouse line of credit matures on August 9, 1997. At August 31, 1996, the Company had a $10,000,000 revolving line of credit with the same lender maturing on June 30, 2000, bearing interest at the bank's prevailing prime rate plus 2% (10.25% at August 31, 1996). This facility was secured by a pledge of the Company's excess servicing rights and mortgage related securities. The facility has an 18 month revolving credit period expiring on approximately December 31, 1997, followed by a 30 month payment period. Borrowings under this facility cannot exceed the lesser of (a) 40% of the Company's excess servicing rights and mortgage related securities or (b) 6 times the aggregate of the excess servicing rights and mortgage related securities payments actually received by the Company over the most recent 3 month period. The agreement contains certain restrictions, including but not limited to, restrictions on additional indebtedness and restrictions on capital distributions, through minimum tangible net worth requirements of $12.5 million plus 50% of cumulative net income since May 1, 1996 (50% of cumulative net income for the period May 1, 1996 to August 31, 1996 was $1.1 million). F-17 85 MEGO MORTGAGE CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Both the warehouse line of credit and the revolving line of credit are subject to a requirement of the maintenance of a minimum tangible net worth of $12,500,000 plus 50% of cumulative net income since May 1, 1996 and a minimum level of profitability of at least $500,000 per rolling six month period. Both lines of credit have been guaranteed by Mego Financial. At August 31, 1995 and 1996, contracts payable consisted of $419,000 and $932,000, respectively, in obligations under lease purchase arrangements secured by property and equipment, bearing a weighted average interest rate of 9.48%. Scheduled maturities of the Company's contracts payable of $932,000 at August 31, 1996 are as follows (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, ---------------------------------------- TOTAL 1997 1998 1999 2000 2001 ----- ---- ---- ---- ---- ---- $ 932 $255 $272 $221 $179 $5
12. ADDITIONAL PAID-IN CAPITAL In 1995, Mego Financial contributed $3,000,000 to the Company as additional paid-in capital. During fiscal 1994, Mego Financial contributed $650,000 to the Company as additional paid-in capital through the issuance of 475,000 shares of common stock of Mego Financial. The Mego Financial common stock was issued to an unrelated company for its services in obtaining the necessary HUD approval, state licensing and other matters in connection with the organization of the Company. The value of the Mego Financial stock was based upon the closing bid price of Mego Financial stock as of the date of the agreement with the third party, reduced by (a) an estimate of the costs which would be incurred to register the stock to allow its sale to the public; and (b) an estimate of the discount a seller would incur upon selling a large block of shares. The Company reduced the due to parent company account as a result of this transaction. 13. COMMITMENTS AND CONTINGENCIES The Company leases an office under the terms of an operating lease that expires March 31, 1999. During fiscal 1994, 1995 and 1996, the Company's rent expense related to this lease was $54,000, $154,000 and $164,000, respectively. In April 1996, the Company executed an operating lease for its main offices in a second location which it will occupy in late 1996. The 1996 lease commences September 1, 1996, expires August 31, 2002, and is guaranteed by Mego Financial. Future minimum rental payments under these operating leases are set forth below (thousands of dollars): FOR THE YEARS ENDED AUGUST 31, 1997........................................................................ $ 943 1998........................................................................ 1,071 1999........................................................................ 1,005 2000........................................................................ 939 2001........................................................................ 957 Thereafter.................................................................. 978 ------ Total............................................................. $5,893 ======
In the general course of business the Company, at various times, has been named in lawsuits. The Company believes that it has meritorious defenses to these lawsuits and that resolution of these matters will not have a material adverse affect on the business or financial condition of the Company. F-18 86 MEGO MORTGAGE CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 14. RELATED PARTY TRANSACTIONS During the years ended August 31, 1994, 1995, and 1996, Preferred Equities Corporation (PEC), a wholly-owned subsidiary of Mego Financial, provided certain services to the Company including loan servicing and collection for a cost of $13,000, $232,000, and $709,000, respectively. In addition, the affiliate provided services including executive, accounting, legal, management information, data processing, human resources, advertising and promotional materials (management services) totaling $442,000, $690,000, and $671,000 which amounts were included in general and administrative expenses for the years ended August 31, 1994, 1995, and 1996, respectively. Included in other interest expense for the years ended August 31, 1995 and 1996, are $85,000 and $29,000 related to advances from PEC. During the years ended August 31, 1994, 1995 and 1996, the Company paid PEC for developing certain computer programming (see Note 10), incurring costs of $130,000, $36,000 and $56,000, respectively. The Company is amortizing these costs over a five year period. During fiscal 1994, 1995 and 1996, amortization of $13,000, $26,000 and $29,000, respectively, was included in expense. The Company's agreement with PEC regarding loan servicing and collection services charges the Company an annual rate of 0.5% of outstanding loans serviced by PEC calculated and paid on a monthly basis. The costs charged to the Company for management services provided by PEC represent an estimate of the costs incurred by PEC which would have been incurred by the Company had it been operating as a stand alone entity. Management believes the allocation methodologies for services performed by PEC is reasonable and is representative of an approximation of the expense the Company would incur if it operated as a stand alone entity, unrelated to PEC. At August 31, 1995 and 1996, the Company had a non-interest bearing liability to Mego Financial of $8,453,000 and $11,994,000, respectively, for federal income taxes and cash advances, which is due on demand and has not as yet been paid. At August 31, 1996, the Company had a non-interest bearing liability to PEC of $819,000 relating to charges for services to the Company. Activity in due to parent company consisted of the following (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, -------------------------- 1994 1995 1996 ------ ------- ------- Balance at beginning of year............................... $ -- $ -- $ 8,453 Provision for federal taxes................................ -- 2,013 3,566 Cash advances from parent.................................. -- 9,053 5,475 Repayments of advances..................................... -- (2,613) (5,500) ------ ------- ------- Balance at end of year........................... $ -- $ 8,453 $11,994 ====== ======= ======= Average balance during the year............................ $ -- $ 2,275 $11,874 ====== ======= =======
The Company anticipates issuing common stock and subordinated debt to the public to support its cash flow needs in the future. Subsequent to these transactions, it is not anticipated that Mego Financial will continue to provide funds to the Company or guarantee its indebtedness. At August 31, 1996, Mego Financial has no contractual obligation to provide such support other than its guaranty of the warehouse line of credit, revolving credit loan and operating leases described in Notes 11 and 13. F-19 87 MEGO MORTGAGE CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 15. INCOME TAXES As described in Note 2, the Company records a liability to Mego Financial for federal income taxes at the statutory rate (currently 34%). State income taxes are computed at the appropriate state rate (6%) net of any available operating loss carryovers and are recorded as state income taxes payable. For the years ended August 31, 1994, 1995 and 1996, income tax expense has been computed as follows (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, -------------------------- 1994 1995 1996 ------- ------ ------- Income (loss) before income taxes.......................... $(1,511) $5,919 $11,155 ======= ====== ======= Federal income taxes at 34% of income...................... $ -- $2,013 $ 3,793 State income taxes, net of federal income tax benefit...... -- 264 442 ------- ------ ------- Income tax expense......................................... $ -- $2,277 $ 4,235 ======= ====== =======
Income tax expense is comprised of the following (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, ------------------------- 1994 1995 1996 ------- ------ ------ Current..................................................... $ -- $2,047 $3,562 Deferred.................................................... -- 230 673 ------- ------ ------ Total............................................. $ -- $2,277 $4,235 ======= ====== ======
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, (b) temporary differences between the timing of revenue recognition for book purposes and income tax purposes and (c) operating loss and tax credit carryforwards. The tax effects of significant items comprising the Company's net deferred tax liability, included in due to parent company, as of August 31, 1995 and 1996 are as follows (thousands of dollars):
AUGUST 31, ------------- 1995 1996 ---- ------ Deferred tax liabilities: Difference between book and tax carrying value of assets............ $ -- $ 98 Unrealized gain on mortgage related securities...................... -- 1,025 Mortgage servicing rights........................................... 591 164 Other............................................................... 16 2 ---- ------ 607 1,289 ---- ------ Deferred tax assets: Allowances for credit losses........................................ 366 386 Difference between book and tax carrying value of assets............ 11 -- ---- ------ 377 386 ---- ------ Net deferred tax liability.................................. $230 $ 903 ==== ======
16. RESTATEMENT Subsequent to the issuance of its financial statements for the year ended August 31, 1994, the Company determined that certain adjustments were required to be made to the previously reported amounts as of and for the year ended August 31, 1994. F-20 88 MEGO MORTGAGE CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Company accounts for its sales of loans under SFAS No. 65, "Accounting for Certain Mortgage Banking Activities" and SFAS No. 91 which require that certain estimates and assumptions (such as the impact of prepayments, cancellations and the discount period and rate) be made in order to compute the present value of the income stream to be received over the estimated lives of the loans sold by the Company. The Company determined that the estimates and assumptions it used previously required revision. The net effect of the restatement for the year ended August 31, 1994 was a decrease in income before income taxes of $421,000. The effect on the Statement of Financial Condition at August 31, 1994, was primarily a reduction of excess servicing rights. The Company determined that it erroneously included certain expenses in deferred organizational costs related to the fiscal year ended August 31, 1994. Accordingly, costs and expenses were understated by $725,000 and amortization of the organizations costs was overstated by $3,000. The effect of this restatement on the Statement of Operations was to reduce income before income taxes in 1994 by $722,000. The effect of this restatement on the Statement of Financial Condition of the Company at August 31, 1994, was to reduce other assets by $722,000. The restatement also included other miscellaneous adjustments. A summary of the effect of the restatement on the Statement of Operations for the year ended August 31, 1994 is as follows (thousands of dollars):
AS PREVIOUSLY REPORTED AS RESTATED ------------- ----------- Gain on sale of loans......................................... $ 1,206 $ 579 Interest income............................................... 298 279 Interest expense.............................................. 57 107 Provision for credit losses................................... 133 96 Depreciation and amortization................................. 189 136 Commissions and selling....................................... -- 13 General and administrative.................................... 1,471 1,995 Net loss...................................................... (368) (1,511)
17. SUBSEQUENT EVENT (UNAUDITED) In September 1996, the Company received a commitment from a financial institution providing for the purchase of up to $2.0 billion of loans over a five year period. Upon closing of the final agreement, Mego Financial will issue to the financial institution four-year warrants to purchase 1,000,000 shares of Mego Financial's common stock at an exercise price of $7.125 per share. The value of the warrants, estimated at $3.0 million (0.15% of the commitment amount) as of the commitment date, will be recorded as a commitment fee and charged to expense as the commitment is utilized. The financial institution has also agreed to provide the Company a separate one year facility of up to $11.0 million, less any amounts advanced under a separate $3.0 million repurchase agreement, for the financing of the interest only and residual certificates from future securitizations. F-21 89 - ------------------------------------------------------ - ------------------------------------------------------ NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE. --------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................ 3 Risk Factors.............................. 8 Use of Proceeds........................... 19 Dividend Policy........................... 19 Dilution.................................. 20 Capitalization............................ 21 Pro Forma Selected Financial Data......... 22 Selected Financial Data................... 23 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 25 Business.................................. 37 Management................................ 53 Principal Stockholders.................... 58 Certain Transactions...................... 60 Description of Note Offering.............. 61 Description of Capital Stock.............. 62 Shares Eligible for Future Sale........... 64 Underwriting.............................. 65 Legal Matters............................. 66 Experts................................... 66 Additional Information.................... 66 Index to Financial Statements............. F-1
--------------------- UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ 2,000,000 SHARES MEGO MORTGAGE CORPORATION COMMON STOCK MEGO (LOGO) ------------------------ PROSPECTUS ------------------------ OPPENHEIMER & CO., INC. FRIEDMAN, BILLINGS, RAMSEY & CO., INC. , 1996 ------------------------------------------------------ ------------------------------------------------------ 90 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The Registrant estimates that expenses in connection with the offering described in this registration statement will be as follows: Securities and Exchange Commission registration fee....................... $ 11,104 NASD filing fee........................................................... 3,720 Nasdaq National Market listing fee........................................ 47,500 Printing expenses......................................................... 100,000 Accounting fees and expenses.............................................. 280,000 Legal fees and expenses................................................... 175,000 Fees and expenses (including legal fees) for qualifications under state securities laws......................................................... 5,000 Transfer agent's fees and expenses........................................ 15,000 Miscellaneous............................................................. 37,676 -------- Total........................................................... $675,000 ========
All amounts except the Securities and Exchange Commission registration fee, the NASD filing fee and the Nasdaq listing fee are estimated. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145(a) of the Delaware General Corporation Law (the "GCL") provides that a Delaware corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise, against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no cause to believe his or her conduct was unlawful. Section 145(b) of the GCL provides that a Delaware corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person acted in any of the capacities set forth above, against expenses actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if he or she acted under similar standards, except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his or her duty to the corporation unless and only to the extent that the court in which such action or suit was brought shall determine that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to be indemnified for such expenses which the court shall deem proper. Section 145 of GCL further provides that to the extent a director or officer of a corporation has been successful in the defense of any action, suit or proceeding referred to in subsection (a) and (b) or in the defense of any claim, issue or matter therein, such officer or director shall be indemnified against expenses actually and reasonably incurred by him or her in connection therewith; that indemnification provided for by Section 145 shall not be deemed exclusive of any other rights to which the indemnified party may be entitled; and that the corporation may purchase and maintain insurance on behalf of a director or officer of the II-1 91 corporation against any liability asserted against such officer or director and incurred by him or her in any such capacity or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liabilities under Section 145. As permitted by Section 102(b)(7) of the GCL, the Company's Amended and Restated Certificate of Incorporation provides that a director shall not be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director. However, such provision does not eliminate or limit the liability of a director for acts or omissions not in good faith or for breaching his or her duty of loyalty, engaging in intentional misconduct or knowingly violating a law, paying a dividend or approving a stock repurchase which was illegal, or obtaining an improper personal benefit. A provision of this type has no effect on the availability of equitable remedies, such as injunction or rescission, for breach of fiduciary duty. The Company's Bylaws require the Company to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that he is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, that he had reasonable cause to believe that his conduct was unlawful. In addition, the Company's Bylaws require the Company to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Company to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Company unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Any indemnification (unless ordered by a court) made by the Company may be only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct as set forth above. Such determination must be made (i) by the Board by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (ii) if such a quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders. To the extent that a director, officer, employee or agent of the Company has been successful on the merits or otherwise in defense of any covered action, suit or proceeding, or in defense of any covered claim, issue or matter therein, he will be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Expenses incurred by an officer or director in defending a civil or criminal action, suit or proceeding may be paid by the Company in advance of the final disposition of such action, suit or proceeding as authorized by II-2 92 the Board in the specific case upon receipt of an undertaking by or on behalf of the director or officer to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Company as authorized in the Amended and Restated Certificate of Incorporation. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board deems appropriate. The Company presently maintains policies of directors' and officers' liability insurance in the amount of $30.0 million. Pursuant to the Underwriting Agreement to be filed as Exhibit 1.1 to this Registration Statement, the Underwriters have agreed to indemnify the directors, officers and controlling persons of the Registrant against certain civil liabilities that may be incurred in connection with the Offering, including certain liabilities under the Securities Act of 1933, as amended. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. No securities that were not registered under the 1933 Act have been issued or sold by the Registrant within the past three years. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits:
EXHIBIT NUMBER DESCRIPTION - ------- ---------------------------------------------------------------------------------- 1.1 -- Underwriting Agreement. 3.1* -- Amended and Restated Certificate of Incorporation of the Registrant. 3.2* -- By-laws of the Registrant, as amended. 4.1 -- Specimen Common Stock Certificate. 5.1 -- Opinion of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A. 10.1 -- Stock Option Plan 10.2(1) -- Agreement for Line of Credit and Commercial Promissory Note between the Registrant and First National Bank of Boston, dated January 4, 1994. 10.3(1) -- Agreement between the Registrant and Hamilton Consulting, Inc., dated January 31, 1994. 10.4(1) -- Loan Purchase and Sale Agreement dated March 22, 1994, between the Registrant as Buyer, and Southwest Beneficial Finance, Inc. as Seller. 10.5(1) -- Master Loan Purchase and Servicing Agreement dated as of August 26, 1994, between the Registrant as Seller, and First National Bank of Boston, as Purchaser. 10.6(2) -- Master Loan Purchase and Servicing Agreement dated April 1, 1995, by and between Greenwich Capital Financial Products, Inc. and the Registrant. 10.7(2) -- Participation and Servicing Agreement dated May 25, 1995, by and between Atlantic Bank, N.A. and the Registrant. 10.8(2) -- Warehousing Credit and Security Agreement, dated as of August 11, 1995, between the Registrant and First National Bank of Boston. 10.9 -- Form of Tax Allocation and Indemnity Agreement to be entered into between the Registrant and Mego Financial Corp. 10.10 -- Loan Program Sub-Servicing Agreement between the Registrant and Preferred Equities Corporation dated as of September 1, 1996. 10.11* -- Servicing Agreement by and among Mego Mortgage FHA Title I Loan Trust 1996-1, First Trust of New York, National Association, as Trustee, Norwest Bank Minnesota, N.A., as Master Servicer and the Registrant, as Servicer dated as of March 21, 1996. 10.12* -- Loan Purchase Agreement between Financial Asset Securities Corp., as Purchaser, and the Registrant, as Seller, dated as of March 21, 1996. 10.13(3) -- Indemnification Agreement among MBIA Insurance Corporation, as Insurer, the Registrant, as Seller and Greenwich Capital Markets, Inc. as Underwriter, dated as of March 29, 1996.
II-3 93
EXHIBIT NUMBER DESCRIPTION - ------- ---------------------------------------------------------------------------------- 10.14* -- Pooling and Servicing Agreement, dated as of March 21, 1996, among the Registrant, Financial Asset Securities Corp., as Depositor, First Trust of New York, National Association, as Trustee and Contract of Insurance Holder and Norwest Bank Minnesota, N.A., as Master Servicer. 10.15(3) -- Insurance Agreement among MBIA Insurance Corporation, as Insurer, Norwest Bank Minnesota, N.A., as Master Servicer, the Registrant, as Seller, Servicer and Claims Administrator, Financial Asset Securities Corp., as Depositor, Greenwich Capital Financial Products, Inc., and First Trust of New York, National Association, as Trustee and Contract of Insurance Holder, dated as of March 21, 1996. 10.16(3) -- Credit Agreement dated as of June 28, 1996 between the Registrant and First National Bank of Boston as Agent. 10.17* -- Loan Purchase Agreement dated as of August 1, 1996 between Financial Asset Securities Corp., as Purchaser, and the Registrant, as Seller. 10.18* -- Pooling and Servicing Agreement dated as of August 1, 1996 between Financial Asset Securities Corp., as Purchaser, and the Registrant, as Seller. 10.19(3) -- Amendment No. 1 to Warehousing Credit and Security Agreement dated as of August 9, 1996 between the Registrant and First National Bank of Boston. 10.20 -- Office Lease by and between MassMutual and the Registrant dated April 1996. 10.21(3) -- Amendment to Master Loan Purchase and Servicing Agreement between Greenwich Capital Financial Products, Inc. and the Registrant dated February 1, 1996. 10.22(3) -- Amendment No. 2 to Master Loan Purchase and Servicing Agreement between Greenwich Capital Financial Products, Inc. and the Registrant dated July 1, 1996. 10.23 -- Services and Consulting Agreement between the Registrant and Preferred Equities Corporation dated as of September 1, 1996. 10.24(3) -- Employment Agreement between the Registrant and Jeffrey S. Moore dated January 1, 1994. 10.25(3) -- Form of Indenture to be entered into between the Registrant and the Indenture Trustee. 10.26 -- Master Repurchase Agreement dated as of September 4, 1996 between the Registrant and Greenwich Capital Markets, Inc. 10.27 -- Letter agreement dated October 1, 1996 between the Registrant and Greenwich Capital Markets, Inc. 10.28 -- Amended and Restated Master Loan Purchase and Servicing Agreement dated as of October 1, 1996 among the Registrant, Mego Financial Corp. and Greenwich Capital Markets, Inc. 10.29 -- Form of Agreement to be entered into between the Registrant and Mego Financial Corp. 10.30 -- Commitment letter between the Registrant and Greenwich Capital Markets, Inc. dated September 17, 1996. 12.1 -- Computation of Ratio of Earnings to Fixed Charges. 21.1* -- Subsidiaries of the Registrant. 23.1 -- Consent of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A. (included in its opinion filed as Exhibit 5.1). 23.2 -- Consent of Deloitte & Touche LLP. 23.3* -- Consent of Director Nominees. 24.1* -- Power of Attorney. 27.1* -- Financial Data Schedule (for SEC use only)
- --------------- * Previously filed. (1) Filed as part of the Form 10-K for the fiscal year ended August 31, 1994 of Mego Financial Corp. and incorporated herein by reference. (2) Filed as part of the Form 10-K for the fiscal year ended August 31, 1995 of Mego Financial Corp. and incorporated herein by reference. (3) Filed as part of the Registration Statement on Form S-1 filed by the Company, as amended (File No. 333-13421), and incorporated herein by reference. II-4 94 ITEM 17. UNDERTAKINGS. (a) The undersigned registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (c) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 95 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment No. 3 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Atlanta, State of Georgia, on November 13, 1996. MEGO MORTGAGE CORPORATION By: /s/ JEROME J. COHEN ------------------------------------ Jerome J. Cohen, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 3 to the Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE - --------------------------------------------- --------------------------- ------------------- /s/ JEROME J. COHEN Chairman of the Board and November 13, 1996 - --------------------------------------------- Chief Executive Officer Jerome J. Cohen /s/ JEFFREY S. MOORE* President, Chief Operating November 13, 1996 - --------------------------------------------- Officer and Director Jeffrey S. Moore /s/ JAMES L. BELTER* Executive Vice President November 13, 1996 - --------------------------------------------- and Chief Financial James L. Belter Officer /s/ ROBERT NEDERLANDER* Director November 13, 1996 - --------------------------------------------- Robert Nederlander /s/ HERBERT B. HIRSCH* Director November 13, 1996 - --------------------------------------------- Herbert B. Hirsch /s/ DON A. MAYERSON Director November 13, 1996 - --------------------------------------------- Don A. Mayerson *By: /s/ JEROME J. COHEN - --------------------------------------------- Jerome J. Cohen Attorney-in-fact
II-6 EX-1.1 2 UNDERWRITERS AGREEMENT 1 EXHIBIT 1.1 2,000,000 Shares MEGO MORTGAGE CORPORATION Common Stock UNDERWRITING AGREEMENT , 1996 ----------- Oppenheimer & Co., Inc. Friedman, Billings, Ramsey & Co., Inc. c/o Oppenheimer & Co., Inc. Oppenheimer Tower World Financial Center New York, New York 10281 On behalf of the Several Underwriters named on Schedule I attached hereto. Ladies and Gentlemen: Mego Mortgage Corporation, a Delaware corporation (the "Company"), proposes to issue and sell to you and the other underwriters named on Schedule I to this Agreement (the "Underwriters"), for whom you are acting as Representatives, an aggregate of 2,000,000 shares (the "Firm Shares") of the Company's common stock, $0.01 par value (the "Common Stock"). In addition, the Company proposes to grant to the Underwriters an option to purchase up to an additional 300,000 shares (the "Option Shares") of Common Stock from it for the purpose of covering over-allotments in connection with the sale of the Firm Shares. The Firm Shares and the Option Shares are together called the "Shares." 1. Sale and Purchase of the Shares. On the basis of the representations, warranties and agreements contained in, and subject to the terms and conditions of, this Agreement: (a) The Company agrees to sell to each of the Underwriters and each of the Underwriters, severally and not jointly, agrees to purchase from the Company the respective number of Firm Shares (subject to such adjustment as you may determine to avoid fractional shares) which bears the same proportion to the number of Firm Shares 2 to be sold by the Company as the number of Firm Shares set forth opposite the name of such Underwriter on Schedule I to this Agreement bears to the total number of Firm Shares to be sold by the Company, in each case at a purchase price of $___ per share (the "Initial Price"). (b) The Company grants to the several Underwriters an option to purchase, severally and not jointly, all or any part of the Option Shares at the Initial Price. The number of Option Shares to be purchased by each Underwriter shall be the same percentage (adjusted by the Representatives to eliminate fractions) of the total number of Option Shares to be purchased by the Underwriters as such Underwriter is purchasing of the Firm Shares. Such option may be exercised only to cover over-allotments in the sales of the Firm Shares by the Underwriters and may be exercised in whole or in part at any time on or before 12:00 noon, New York City time, on the business day before the Firm Shares Closing Date (as defined below), and only once thereafter within 30 days after the date of this Agreement, in each case upon written or telegraphic notice, or oral or telephonic notice confirmed by written or telegraphic notice, by the Representatives to the Company no later than 12:00 noon, New York City time, on the business day before the Firm Shares Closing Date or at least two business days before the Option Shares Closing Date (as defined below), as the case may be, setting forth the number of Option Shares to be purchased and the time and date (if other than the Firm Shares Closing Date) of such purchase. 2. Delivery and Payment. Delivery by the Company of the Firm Shares to the Representatives for the respective accounts of the Underwriters, and payment of the purchase price by certified or official bank check or checks payable in same day funds to the Company, shall take place at the offices of Gibson, Dunn & Crutcher LLP, 200 Park Avenue, New York, New York 10166, at 10:00 a.m., New York City time, on the third (fourth, if pricing occurs after 4:30 p.m. New York City time) business day following the date of this Agreement, or at such time on such other date, not later than ten business days after the date of this Agreement, as shall be agreed upon by the Company and the Representatives (such time and date of delivery and payment are called the "Firm Shares Closing Date"). In the event the option with respect to the Option Shares is exercised, delivery by the Company of the Option Shares to the Representatives for the respective accounts of the Underwriters and payment of the purchase price by certified or official bank check or checks payable in same day funds to the Company shall take place at the offices of Oppenheimer & Co., Inc. specified above at the time and on the date (which may be the same date as, but in no event shall be earlier than, the Firm Shares Closing Date) specified in the notice referred to in Section 1(b) (such time and date of delivery and payment are called the "Option Shares Closing Date"). The Firm Shares Closing Date and the Option Shares Closing Date are called, individually, a "Closing Date" and, together, the "Closing Dates." Certificates evidencing the Shares shall be registered in such names and shall be in such denominations as the Representatives shall request at least two full business days before the Firm Shares Closing Date or, in the case of Option Shares, on the day of notice of 2 3 exercise of the option as described in Section l(b) and shall be made available to the Representatives for checking and packaging, at such place as is designated by the Representatives, on the full business day before the Firm Shares Closing Date (or the Option Shares Closing Date in the case of the Option Shares). 3. Registration Statement and Prospectus; Public Offering. The Company has prepared in conformity with the requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the published rules and regulations thereunder (the "Rules") adopted by the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (No. 333-12443), including a preliminary prospectus relating to the Shares, and has filed with the Commission the registration statement and such amendments thereof as may have been required to the date of this Agreement. Copies of such registration statement (including all amendments thereof) and of the related preliminary prospectus have heretofore been delivered by the Company to you. The term "preliminary prospectus" means any preliminary prospectus (as described in Rule 430 of the Rules) included at any time as a part of the registration statement. The Registration Statement as amended at the time and on the date it becomes effective (the "Effective Date"), including all exhibits and information, if any, deemed to be part of the Registration Statement pursuant to Rule 424(b) and Rule 430A of the Rules, is called the "Registration Statement." The term "Prospectus" means the prospectus in the form first used to confirm sales of the Shares (whether such prospectus was included in the Registration Statement at the time of effectiveness or was subsequently filed with the Commission pursuant to Rule 424(b) of the Rules). The Company understands that the Underwriters propose to make a public offering of the Shares, as set forth in and pursuant to the Prospectus, as soon after the Effective Date and the date of this Agreement as the Representatives deem advisable. The Company hereby confirms that the Underwriters and dealers have been authorized to distribute or cause to be distributed each preliminary prospectus and are authorized to distribute the Prospectus (as from time to time amended or supplemented if the Company furnishes amendments or supplements thereto to the Underwriters). 4. Representations and Warranties of the Company. The Company hereby represents and warrants to, and agrees with, each Underwriter as follows: (a) On the Effective Date the Registration Statement complied, and on the date of the Prospectus, on the date any post-effective amendment to the Registration Statement shall become effective, on the date any supplement or amendment to the Prospectus is filed with the Commission and on each Closing Date, the Registration Statement and the Prospectus (and any amendment thereof or supplement thereto) will comply, in all material respects, with the applicable provisions of the Securities Act and the Rules and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the Commission thereunder; the Registration Statement did not, as of the Effective Date, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein 3 4 not misleading; and on the other dates referred to above neither the Registration Statement nor the Prospectus, nor any amendment thereof or supplement thereto, will contain any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. When any related preliminary prospectus was first filed with the Commission (whether filed as part of the registration statement or any amendment thereto or pursuant to Rule 424(a) of the Rules) and when any amendment thereof or supplement thereto was first filed with the Commission, such preliminary prospectus as amended or supplemented complied in all material respects with the applicable provisions of the Securities Act and the Rules and did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Notwithstanding the foregoing, the Company makes no representation or warranty as to information furnished in writing by the Representatives on behalf of the several Underwriters specifically for inclusion in the Registration Statement, any preliminary prospectus or the Prospectus, which includes only the last paragraph on the cover page, the paragraph with respect to stabilization on the inside front cover page of the Prospectus and the statements contained under the caption "Underwriting" in the Prospectus. (b) All contracts and other documents required to be filed as exhibits to the Registration Statement have been filed with the Commission as exhibits to the Registration Statement. (c) The financial statements of the Company (including all notes and schedules thereto) included in the Registration Statement and Prospectus present fairly the financial position, the results of operations and cash flows and the shareholders' equity and the other information purported to be shown therein of the Company at the respective dates and for the respective periods to which they apply; and such financial statements have been prepared in conformity with generally accepted accounting principles, consistently applied throughout the periods involved, and all adjustments necessary for a fair presentation of the results for such periods have been made. (d) Deloitte & Touche LLP, whose reports are filed with the Commission as a part of the Registration Statement, are and, during the periods covered by their reports, were independent public accountants as required by the Securities Act and the Rules. (e) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware. The Company is duly qualified and in good standing as a foreign corporation in each jurisdiction in which the character or location of its assets or properties (owned, leased or licensed) or the nature of its business makes such qualification necessary except for such jurisdictions where the failure to so qualify would not have a material adverse effect on the assets or properties, business, results of operations or financial condition of the 4 5 Company and in each jurisdiction in which it originates or purchases loans. Except as disclosed in the Registration Statement and the Prospectus, the Company does not own, lease or license any material asset or property or conduct any business outside the United States of America. The Company has all requisite corporate power and authority, and all necessary authorizations, approvals, consents, orders, licenses, certificates and permits of and from all governmental or regulatory bodies or any other person or entity, to own, lease and license its assets and properties and conduct its business as now being conducted and as described in the Registration Statement and the Prospectus except for such authorizations, approvals, consents, orders, licenses, certificates and permits the failure to so obtain would not have a material adverse effect upon the assets or properties, business, results of operations, prospects or condition (financial or otherwise) of the Company; no such authorization, approval, consent, order, license, certificate or permit contains a materially burdensome restriction other than as disclosed in the Registration Statement and the Prospectus; and the Company has all such corporate power and authority, and such authorizations, approvals, consents, orders, licenses, certificates and permits to enter into, deliver and perform this Agreement and to issue and sell the Shares (except as may be required under the Securities Act and state and foreign Blue Sky laws). (f) The Company owns or possesses adequate and enforceable rights to use all trademarks, trademark applications, trade names, service marks, copyrights, copyright applications, licenses, know-how and other similar rights and proprietary knowledge (collectively, "Intangibles") necessary for the conduct of its business as described in the Registration Statement and the Prospectus. The Company has not received any notice of, nor to its best knowledge is aware of, any infringement of or conflict with asserted rights of others with respect to any Intangibles which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect upon the assets or properties, business, results of operations, prospects or condition (financial or otherwise) of the Company. (g) The Company has good title to each of the items of personal property which are reflected in the financial statements referred to in Section 4(c) or are referred to in the Registration Statement and the Prospectus as being owned by it and valid and enforceable leasehold interests in each of the items of real and personal property which are referred to in the Registration Statement and the Prospectus as being leased by it, in each case free and clear of all liens, encumbrances, claims, security interests and defects, other than those described in the Registration Statement and the Prospectus and those which do not and will not have a material adverse effect upon the assets or properties, business, results of operations or financial condition of the Company. (h) Except as disclosed in the Registration Statement and the Prospectus with respect to the Commission's investigation of Mego Financial Corp. (the Company's parent), there is no litigation or governmental or other proceeding or investigation before any court or before or by any public body or board pending or, to the best knowledge 5 6 of the Company, threatened (and the Company does not know of any basis therefor) against, or involving the assets, properties or business of, the Company which would materially adversely affect the value or the operation of any such assets or properties or the business, results of operations, prospects or condition (financial or otherwise) of the Company. (i) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, except as described therein, (1) there has not been any material adverse change in the assets or properties, business, results of operations, prospects or condition (financial or otherwise), of the Company, whether or not arising from transactions in the ordinary course of business; (2) the Company has not sustained any material loss or interference with its assets, businesses or properties (whether owned or leased) from fire, explosion, earthquake, flood or other calamity, whether or not covered by insurance, or from any labor dispute or any court or legislative or other governmental action, order or decree; and (3) and since the date of the latest balance sheet included in the Registration Statement and the Prospectus, except as reflected therein, the Company has not (a) issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money, except such liabilities or obligations incurred in the ordinary course of business, (b) entered into any transaction not in the ordinary course of business or (c) declared or paid any dividend or made any distribution on any shares of its stock or redeemed, purchased or otherwise acquired or agreed to redeem, purchase or otherwise acquire any shares of its stock. (j) There is no document or contract of a character required to be described in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement which is not described or filed as required. Each agreement listed in the Exhibits to the Registration Statement is in full force and effect and is valid and enforceable by and against the Company in accordance with its terms, assuming the due authorization, execution and delivery thereof by each of the other parties thereto. Except as disclosed in the Registration Statement and the Prospectus with respect to the possible termination of servicing rights, neither the Company, nor to the best knowledge of the Company, any other party is in default in the observance or performance of any term or obligation to be performed by it under any such agreement, and no event has occurred which with notice or lapse of time or both would constitute such a default, in any such case which default or event would have a material adverse effect on the assets or properties, business, results of operations, prospects or condition (financial or otherwise) of the Company. No default exists, and no event has occurred which with notice or lapse of time or both would constitute a default, in the due performance and observance of any term, covenant or condition, by the Company of any other agreement or instrument to which the Company is a party or by which it or its properties or business may be bound or affected which default or event would have a material adverse effect on the assets or properties, business, results of operations, prospects or condition (financial or otherwise) of the Company. 6 7 (k) The Company is not in violation of any term or provision of its charter or bylaws or of any franchise, license, permit, judgment, decree, order, statute, rule or regulation, where the consequences of such violation would have a material adverse effect on the assets or properties, business, results of operations, prospects or condition (financial or otherwise) of the Company. (l) Neither the execution, delivery and performance of this Agreement by the Company nor the consummation of any of the transactions contemplated hereby (including, without limitation, the issuance and sale by the Company of the Shares) will give rise to a right to terminate or accelerate the due date of any payment due under, or conflict with or result in the breach of any term or provision of, or constitute a default (or an event which with notice or lapse of time or both would constitute a default) under, or require any consent or waiver under, or result in the execution or imposition of any lien, charge or encumbrance upon any properties or assets of the Company pursuant to the terms of, any indenture, mortgage, deed of trust or other agreement or instrument to which the Company is a party or by which it or any of its respective properties or businesses is bound, or any franchise, license, permit, judgment, decree, order, statute, rule or regulation applicable to the Company or violate any provision of the charter or bylaws of the Company, except for such consents or waivers which have already been obtained and are in full force and effect. (m) The Company has an authorized and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus. All of the outstanding shares of Common Stock have been duly and validly issued and are fully paid and nonassessable and were not issued in violation of any preemptive or other similar right. The Company has no subsidiaries. The Shares, when issued and sold pursuant to this Agreement, will be duly and validly issued, fully paid and nonassessable and none of them will be issued in violation of any preemptive or other similar right. Except as disclosed in the Registration Statement and the Prospectus, there is no outstanding option, warrant or other right calling for the issuance of, and there is no commitment, plan or arrangement to issue, any share of stock of the Company or any security convertible into, or exercisable or exchangeable for, such stock. The Common Stock and the Shares conform in all material respects to all statements in relation thereto contained in the Registration Statement and the Prospectus. (n) No holder of any security of the Company has the right to have any security owned by such holder included in the Registration Statement or to demand registration of any security owned by such holder during the period ending 180 days after the date of this Agreement. The sole shareholder of the Company has delivered to the Representatives its enforceable written agreement that it will not, for a period of 180 days after the date of this Agreement, offer for sale, sell, distribute, grant any option for the sale of, or otherwise dispose of, directly or indirectly, or exercise any registration rights with respect to, any shares of Common Stock (or any securities 7 8 convertible into, exercisable for, or exchangeable for any shares of Common Stock) owned by it, without the prior written consent of the Representatives. (o) All necessary corporate action has been duly and validly taken by the Company to authorize the execution, delivery and performance of this Agreement and the issuance and sale of the Shares by the Company. This Agreement has been duly and validly authorized, executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except (A) as the enforceability hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles and (B) to the extent that rights to indemnity or contribution under this Agreement may be limited by Federal and state securities laws or the public policy underlying such laws. (p) The Company is not involved in any labor dispute nor, to the knowledge of the Company, is any such dispute threatened, which dispute would have a material adverse effect on the assets or properties, business, results of operations, prospects or condition (financial or otherwise) of the Company. (q) No transaction has occurred between or among the Company and any of its officers or directors or any affiliate or affiliates of any such officer or director that is required to be described in and is not described in the Registration Statement and the Prospectus. (r) The Company has not taken, nor will it take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of any of the Shares. (s) The Company or its parent, Mego Financial Corp., has filed all Federal, state, local and foreign tax returns which are required to be filed by the Company through the date hereof, or has received extensions thereof, and has paid all taxes shown on such returns and all assessments received by it to the extent that the same are material and have become due. (t) The Shares have been duly authorized for quotation on The Nasdaq National Market System. (u) The Company has prepared and filed with the Commission a registration statement on Form S-1 (No. 333-13421) including a prospectus (including any amendments or supplements thereto, the "Note Registration Statement") registering up to $40.0 million of the Company's __% Senior Subordinated Notes due 2001 (the "Notes") in connection with the proposed public offering of the Notes. 8 9 (v) The Company is not, and will not become upon the issuance and sale of the Shares as herein contemplated and the application of net proceeds therefrom as described in the Prospectus under the caption "Use of Proceeds," an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended (the "1940 Act"). 5. Conditions of the Underwriters' Obligations. The obligations of the Underwriters under this Agreement are several and not joint. The respective obligations of the Underwriters to purchase the Shares are subject to each of the following terms and conditions: (a) The Prospectus shall have been timely filed with the Commission in accordance with Section 6(a)(i) of this Agreement. (b) No order preventing or suspending the use of any preliminary prospectus or the Prospectus shall have been or shall be in effect and no order suspending the effectiveness of the Registration Statement shall be in effect and no proceedings for such purpose shall be pending before or threatened by the Commission, and any requests for additional information on the part of the Commission (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of the Representatives. (c) The representations and warranties of the Company contained in this Agreement and in the certificates delivered pursuant to Section 5(d) shall be true and correct when made and on and as of each Closing Date as if made on such date and the Company shall have performed all covenants and agreements and satisfied all the conditions contained in this Agreement required to be performed or satisfied by it at or before such Closing Date. (d) The Representatives shall have received on each Closing Date a certificate, addressed to the Representatives and dated such Closing Date, of the chief executive or chief operating officer and the chief financial officer or chief accounting officer of the Company to the effect that the signers of such certificate have carefully examined the Registration Statement, the Prospectus and this Agreement and that the representations and warranties of the Company in this Agreement are true and correct on and as of such Closing Date with the same effect as if made on such Closing Date and the Company has performed all covenants and agreements and satisfied all conditions contained in this Agreement required to be performed or satisfied by it at or prior to such Closing Date. (e) The Representatives shall have received on the Effective Date, at the time this Agreement is executed and on each Closing Date a signed letter from Deloitte & Touche LLP addressed to the Representatives and dated, respectively, the Effective Date, the date of this Agreement and each such Closing Date, in form and substance reasonably satisfactory to the Representatives, confirming that they are 9 10 independent accountants within the meaning of the Securities Act and the Rules, that the response to Item 10 of the Registration Statement is correct insofar as it relates to them and stating in effect that: (i) in their opinion the audited financial statements and financial statement schedules included in the Registration Statement and the Prospectus and reported on by them comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the Rules; (ii) on the basis of a reading of the amounts included in the Registration Statement and the Prospectus under the headings "Summary Financial Data" and "Selected Financial Data," carrying out certain procedures (but not an examination in accordance with generally accepted auditing standards) which would not necessarily reveal matters of significance with respect to the comments set forth in such letter, a reading of the minutes of the meetings of the stockholders and directors of the Company, and inquiries of certain officials of the Company who have responsibility for financial and accounting matters of the Company as to transactions and events subsequent to the date of the latest audited financial statements, except as disclosed in the Registration Statement and the Prospectus, nothing came to their attention which caused them to believe that: (A) the amounts in "Summary Financial Data," and "Selected Financial Data" included in the Registration Statement and the Prospectus do not agree with the corresponding amounts in the audited and unaudited financial statements from which such amounts were derived; or (B) with respect to the Company, there were, at a specified date not more than three business days prior to the date of the letter, any changes in the capital stock or long- term indebtedness of the Company or any decreases in net income, total assets, working capital, total revenues or stockholders' equity of the Company, as compared with the amounts shown on the Company's audited balance sheet for the fiscal year ended August 31, 1996 included in the Registration Statement; and (iii) they have performed certain other procedures as a result of which they determined that certain information of an accounting, financial or statistical nature (which is limited to accounting, financial or statistical information derived from the general accounting records of the Company) set forth in the Registration Statement and the Prospectus and reasonably specified by the Representatives agrees with the accounting records of the Company. 10 11 References to the Registration Statement and the Prospectus in this paragraph (e) are to such documents as amended and supplemented at the date of the letter. (f) The Representatives shall have received on each Closing Date from Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A., counsel for the Company, an opinion, addressed to the Representatives and dated such Closing Date, and stating in effect that: (i) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware. The Company is duly qualified and in good standing as a foreign corporation in each jurisdiction in which the character or location of its assets or properties (owned, leased or licensed) or the nature of its business makes such qualification necessary, except for such jurisdictions where the failure to so qualify would not have a material adverse effect on the assets or properties, business, results of operations, prospects or condition (financial or otherwise) of the Company. (ii) The Company has all requisite corporate power and authority to own, lease and license its assets and properties and conduct its business as now being conducted and as described in the Registration Statement and the Prospectus; and the Company has all requisite corporate power and authority and all necessary authorizations, approvals, consents, orders, licenses, certificates and permits to enter into, deliver and perform this Agreement and to issue and sell the Shares other than those required under the Securities Act and state and foreign Blue Sky laws. (iii) The Company has authorized and issued capital stock as set forth in the Registration Statement and the Prospectus; the certificates evidencing the Shares are in due and proper legal form and have been duly authorized for issuance by the Company; all of the outstanding shares of Common Stock of the Company have been duly and validly authorized and, to the best of such counsel's knowledge, have been duly and validly issued and are fully paid and nonassessable and none of them was issued in violation of any preemptive or other similar right. To the best of such counsel's knowledge, the Company has no subsidiaries. The Shares when issued and sold pursuant to this Agreement will be duly and validly issued, outstanding, fully paid and nonassessable and will not have been issued in violation of any preemptive or other similar right. To the best of such counsel's knowledge, except as disclosed in the Registration Statement and the Prospectus, there is no outstanding option, warrant or other right calling for the issuance of, and no commitment, plan or arrangement to issue, any share of stock of the Company or any security convertible into, exercisable for, or exchangeable for stock of the Company. The Common Stock and the Shares conform in all material respects to the 11 12 descriptions thereof contained in the Registration Statement and the Prospectus. (iv) The agreement of the Company's sole stockholder stating that for a period of 180 days from the date of this Agreement it will not, without the prior written consent of the Representatives, sell, grant any option for the sale of, or otherwise dispose of, directly or indirectly, any shares of Common Stock (or any securities convertible into, exercisable for, or exchangeable for any shares of Common Stock) owned by it has been duly and validly delivered by it and constitutes the legal, valid and binding obligation of it enforceable against it in accordance with its terms, except as the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles. (v) All necessary corporate action has been duly and validly taken by the Company to authorize the execution, delivery and performance of this Agreement and the issuance and sale of the Shares. This Agreement has been duly and validly authorized, executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms except (A) as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles and (B) to the extent that rights to indemnity or contribution under this Agreement may be limited by Federal or state securities laws or the public policy underlying such laws. (vi) Neither the execution, delivery and performance of this Agreement by the Company nor the consummation of any of the transactions contemplated hereby (including, without limitation, the issuance and sale by the Company of the Shares) will give rise to a right to terminate or accelerate the due date of any payment due under, or conflict with or result in the breach of any term or provision of, or constitute a default (or any event which with notice or lapse of time, or both, would constitute a default) under, or require consent or waiver under, or result in the execution or imposition of any lien, charge or encumbrance upon any properties or assets of the Company pursuant to the terms of any indenture, mortgage, deed of trust, note or other agreement or instrument of which such counsel is aware and to which the Company is a party or by which it or any of its properties or businesses is bound, except for such consents and waivers which have already been obtained, or any franchise, license, 12 13 permit, judgment, decree, order, statute, rule or regulation of which such counsel is aware or violate any provision of the charter or bylaws of the Company. (vii) To the best of such counsel's knowledge, except as disclosed in the Registration Statement and the Prospectus with respect to the possible termination of servicing rights, no default exists, and no event has occurred which with notice or lapse of time, or both, would constitute a default, in the due performance and observance of any term, covenant or condition by the Company of any indenture, mortgage, deed of trust, note or any other agreement or instrument to which the Company is a party or by which it or any of its assets or properties or businesses may be bound or affected, where the consequences of such default would have a material and adverse effect on the assets, properties,business, results of operations, prospects or condition (financial or otherwise) of the Company. (viii) To the best of such counsel's knowledge, the Company is not in violation of any term or provision of its charter or bylaws or any franchise, license, permit, judgment, decree, order, statute, rule or regulation, where the consequences of such violation would have a material and adverse effect on the assets or properties, businesses, results of operations, prospects or condition (financial or otherwise) of the Company. (ix) No consent, approval, authorization or order of any court or governmental agency or body is required for the performance of this Agreement by the Company or the consummation of the transactions contemplated hereby, except such as have been obtained under the Securities Act and such as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the several Underwriters. (x) To the best of such counsel's knowledge, except as disclosed in the Registration Statement and the Prospectus with respect to the Commission's investigation of Mego Financial Corp., there is no litigation or governmental or other proceeding or investigation, before any court or before or by any public body or board pending or threatened against, or involving the assets, properties or businesses of, the Company which would have a material adverse effect upon the assets or properties, business, results of operations, prospects or condition (financial or otherwise) of the Company. (xi) The statements in the Prospectus under the captions "Description of Capital Stock," "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources," "Business-Government Regulation," "Shares Eligible for Future Sale," "Management-Employment Agreement," "Management-Company Stock Option Plan," and "Certain Transactions," insofar as such statements constitute 13 14 a summary of documents referred to therein or matters of law, are fair summaries in all material respects and accurately present the information called for with respect to such documents and matters. To the best of such counsel's knowledge, all contracts and other documents required to be filed as exhibits to, or described in, the Registration Statement have been so filed with the Commission or are fairly described in the Registration Statement, as the case may be. (xii) The Registration Statement, all preliminary prospectuses and the Prospectus and each amendment or supplement thereto (except for the financial statements and schedules and other financial and statistical data included therein, as to which such counsel expresses no opinion) comply as to form in all material respects with the requirements of the Securities Act and the Rules. (xiii) The Registration Statement has become effective under the Securities Act, and, to the best of such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are threatened, pending or contemplated. (xiv) The Shares to be sold under this Agreement to the Underwriters are duly authorized for quotation on The Nasdaq National Market. (xv) The Company is not, and will not become upon and as a result of the sale of the Shares and the application of the net proceeds therefrom as described in the Prospectus under the caption "Use of Proceeds," an "investment company," as such term is defined in the 1940 Act. To the extent deemed advisable by such counsel, they may rely as to matters of fact on certificates of responsible officers of the Company and public officials and on the opinions of other counsel satisfactory to the Representatives as to matters which are governed by laws other than the laws of the States of Florida or New York, the General Corporation Law of the State of Delaware and the Federal laws of the United States; provided that such counsel shall state that in their opinion the Underwriters and they are justified in relying on such other opinions. Copies of such certificates and other opinions shall be furnished to the Representatives and counsel for the Underwriters. In addition, such counsel shall state that such counsel has participated in conferences with officers and other representatives of the Company, representatives of the Representatives and representatives of the independent certified public accountants of the Company, at which conferences the contents of the Registration Statement and the Prospectus and related matters were discussed and, although such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus 14 15 (except as specified in the foregoing opinion), on the basis of the foregoing, no facts have come to the attention of such counsel which lead such counsel to believe that the Registration Statement at the time it became effective (except with respect to the financial statements and notes and schedules thereto and other financial data, as to which such counsel need express no belief) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus as amended or supplemented (except with respect to the financial statements and notes schedules thereto and other financial data, as to which such counsel need make no statement) on the date thereof contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (g) All proceedings taken in connection with the sale of the Firm Shares and the Option Shares as herein contemplated shall be reasonably satisfactory in form and substance to the Representatives and their counsel and the Underwriters shall have received on each Closing Date from Gibson, Dunn & Crutcher LLP a favorable opinion, addressed to the Representatives and dated such Closing Date, with respect to the Shares, the Registration Statement and the Prospectus, and such other related matters, as the Representatives may reasonably request, and the Company shall have furnished to Gibson, Dunn & Crutcher LLP such documents as they may reasonably request for the purpose of enabling them to pass upon such matters. (h) The Representatives shall have received on each Closing Date a certificate, addressed to the Representatives, and dated such Closing Date, of an executive officer of the Company to the effect that as of such Closing Date, neither the Company nor any of its affiliates does business with the government of Cuba or with any person or affiliate located in Cuba. (i) The Note Registration Statement registering the Notes shall have become effective under the Securities Act, and no stop order suspending the effectiveness of the Note Registration Statement has been issued and no proceedings for that purpose shall have been instituted or be threatened, pending or contemplated, and the offering of the Notes, in an aggregate amount not to exceed $40.0 million, shall have been consummated as contemplated in the Note Registration Statement on the Firm Closing Date. 6. Covenants of the Company. (a) The Company covenants and agrees with each Underwriter as follows: (i) The Company shall prepare the Prospectus in a form approved by the Representatives and file such Prospectus pursuant to Rule 424(b) under the Securities Act not later than the Commission's close of business on the 15 16 second business day following the execution and delivery of this Agreement, or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Securities Act, and shall promptly advise the Representatives (A) when any amendment to the Registration Statement shall have become effective, (B) of any request by the Commission for any amendment of the Registration Statement or the Prospectus or for any additional information, (C) of the prevention or suspension of the use of any preliminary prospectus or the Prospectus or of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the institution or threatening of any proceeding for that purpose and (D) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose. The Company shall not file any amendment of the Registration Statement or supplement to the Prospectus unless the Company has furnished the Representatives a copy for its review prior to filing and shall not file any such proposed amendment or supplement to which the Representatives reasonably object. The Company shall use its best efforts to prevent the issuance of any such stop order and, if issued, to obtain as soon as possible the withdrawal thereof. (ii) If, at any time when a prospectus relating to the Shares is required to be delivered under the Securities Act and the Rules, any event occurs as a result of which the Prospectus as then amended or supplemented would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein in the light of the circumstances under which they were made not misleading, or if it shall be necessary to amend or supplement the Prospectus to comply with the Securities Act or the Rules, the Company promptly shall prepare and file with the Commission, subject to the second sentence of paragraph (i) of this Section 6(a), an amendment or supplement which shall correct such statement or omission or an amendment which shall effect such compliance. (iii) The Company shall make generally available to its security holders and to the Representatives as soon as practicable, but not later than 45 days after the end of the 12-month period beginning at the end of the fiscal quarter of the Company during which the Effective Date occurs (or 90 days if such 12-month period coincides with the Company's fiscal year), an earning statement (which need not be audited) of the Company, covering such 12-month period, which shall satisfy the provisions of Section 11(a) of the Securities Act or Rule 158 of the Rules. (iv) The Company shall furnish to the Representatives and counsel for the Underwriters, without charge, signed copies of the Registration Statement (including all exhibits thereto and amendments thereof) and to each 16 17 other Underwriter a copy of the Registration Statement (without exhibits thereto) and all amendments thereof and, so long as delivery of a prospectus by an Underwriter or dealer may be required by the Securities Act or the Rules, as many copies of any preliminary prospectus and the Prospectus and any amendments thereof and supplements thereto as the Representatives may reasonably request. (v) The Company shall cooperate with the Representatives and their counsel in endeavoring to qualify the Shares for offer and sale under the laws of such jurisdictions as the Representatives may designate and shall maintain such qualifications in effect so long as required for the distribution of the Shares; provided, however, that the Company shall not be required in connection therewith, as a condition thereof, to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction or subject itself to taxation as doing business in any jurisdiction. (vi) For a period of five years after the date of this Agreement, the Company shall supply to the Representatives, and to each other Underwriter who may so request in writing, copies of such financial statements and other periodic and special reports as the Company may from time to time distribute generally to the holders of any class of its capital stock and to furnish to the Representatives a copy of each annual or other report it shall be required to file with the Commission (including the Report on Form SR required by Rule 463 of the Rules). (vii) Without the prior written consent of the Representatives, for a period of 180 days after the date of this Agreement, the Company shall not issue, sell or register with the Commission (other than on Form S-8 or on any successor form), or otherwise dispose of, directly or indirectly, any equity securities of the Company (or any securities convertible into or exercisable or exchangeable for equity securities of the Company), except for the issuance of the Shares pursuant to the Registration Statement and the issuance of shares pursuant to the Company's existing stock option plan. In the event that during this period, (A) any shares are issued pursuant to the Company's existing stock option plan or (B) any registration is effected on Form S-8 or on any successor form, the Company shall obtain the written agreement of such grantee or purchaser or holder of such registered securities that, for a period of 180 days after the date of this Agreement, such person will not, without the prior written consent of the Representatives, offer for sale, sell, distribute, grant any option for the sale of, or otherwise dispose of, directly or indirectly, or exercise any registration rights with respect to, any shares of Common Stock (or any securities convertible into, exercisable for, or exchangeable for any shares of Common Stock) owned by such person. 17 18 (viii) On or before completion of this offering, the Company shall make all filings required under applicable securities laws and by The Nasdaq National Market System (including any required registration under the Exchange Act). (b) The Company agrees to pay, or reimburse if paid by the Representatives, whether or not the transactions contemplated hereby are consummated or this Agreement is terminated, all costs and expenses incident to the public offering of the Shares and the performance of the obligations of the Company under this Agreement including those relating to: (i) the preparation, printing, filing and distribution of the Registration Statement including all exhibits thereto, each preliminary prospectus, the Prospectus, all amendments and supplements to the Registration Statement and the Prospectus, and the printing, filing and distribution of this Agreement; (ii) the preparation and delivery of certificates for the Shares to the Underwriters; (iii) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the various jurisdictions referred to in Section 6(a)(v), including the reasonable fees and disbursements of counsel for the Underwriters in connection with such registration and qualification and the preparation, printing, distribution and shipment of preliminary and supplementary Blue Sky memoranda; (iv) the furnishing (including costs of shipping and mailing) to the Representatives and to the Underwriters of copies of each preliminary prospectus, the Prospectus and all amendments or supplements to the Prospectus, and of the several documents required by this Section to be so furnished, as may be reasonably requested for use in connection with the offering and sale of the Shares by the Underwriters or by dealers to whom Shares may be sold; (v) the filing fees of the National Association of Securities Dealers, Inc. in connection with its review of the terms of the public offering; (vi) the furnishing (including costs of shipping and mailing) to the Representatives and to the Underwriters of copies of all reports and information required by Section 6(a)(vi); (vii) inclusion of the Shares for quotation on The Nasdaq National Market; and (viii) all transfer taxes, if any, with respect to the sale and delivery of the Shares by the Company to the Underwriters. Subject to the provisions of Section 9, the Underwriters agree to pay, whether or not the transactions contemplated hereby are consummated or this Agreement is terminated, all costs and expenses incident to the performance of the obligations of the Underwriters under this Agreement not payable by the Company pursuant to the preceding sentence, including, without limitation, the fees and disbursements of counsel for the Underwriters. 7. Indemnification. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act against any and all losses, claims, damages and liabilities, joint or several (including any reasonable investigation, legal and other expenses incurred in connection with, and any amount paid in 18 19 settlement of, any action, suit or proceeding or any claim asserted), to which they, or any of them, may become subject under the Securities Act, the Exchange Act or other Federal or state law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, the Registration Statement or the Prospectus or any amendment thereof or supplement thereto, or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that such indemnity shall not inure to the benefit of any Underwriter (or any person controlling such Underwriter) on account of any losses, claims, damages or liabilities arising from the sale of the Shares to any person by such Underwriter if such untrue statement or omission or alleged untrue statement or omission was made in such preliminary prospectus, the Registration Statement or the Prospectus, or such amendment or supplement, in reliance upon and in conformity with information furnished in writing to the Company by the Representatives on behalf of any Underwriter specifically for use therein, which includes only the statements contained in the last paragraph of the cover page, in the paragraph relating to stabilization on the inside front cover page of the Prospectus and the statements contained under the caption "Underwriting" in the Prospectus. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, each director of the Company, and each officer of the Company who signs the Registration Statement, to the same extent as the foregoing indemnity from the Company to each Underwriter, but only insofar as such losses, claims, damages or liabilities arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission with respect to such Underwriter which was made in any preliminary prospectus, the Registration Statement or the Prospectus, or any amendment thereof or supplement thereto, in reliance upon and in conformity with information furnished in writing to the Company by the Representatives on behalf of any Underwriter specifically for use therein, which includes only the statements contained in the last paragraph of the cover page, in the paragraph relating to stabilization on the inside front cover page of the Prospectus and the statements contained under the caption "Underwriting" in the Prospectus; provided, however, that the obligation of any Underwriter to indemnify the Company (including any controlling person, director or officer thereof) shall be limited to the net proceeds received by the Company from such Underwriter. (c) Any party that proposes to assert the right to be indemnified under this Section will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim is to be made against an 19 20 indemnifying party or parties under this Section, notify each such indemnifying party of the commencement of such action, suit or proceeding, enclosing a copy of all papers served. No indemnification provided for in Section 6(a) or 6(b) shall be available to any party who shall fail to give notice as provided in this Section 6(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was prejudiced by the failure to give such notice but the omission so to notify such indemnifying party of any such action, suit or proceeding shall not relieve it from any liability that it may have to any indemnified party for contribution or otherwise than under this Section. In case any such action, suit or proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in, and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and the approval by the indemnified party of such counsel, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses, except as provided below and except for the reasonable costs of investigation subsequently incurred by such indemnified party in connection with the defense thereof. The indemnified party shall have the right to employ its counsel in any such action, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the employment of counsel by such indemnified party has been authorized in writing by the indemnifying parties, (ii) the indemnified party shall have reasonably concluded that there may be a conflict of interest between the indemnifying parties and the indemnified party in the conduct of the defense of such action (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party) or (iii) the indemnifying parties shall not have employed counsel to assume the defense of such action within a reasonable time after notice of the commencement thereof, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying parties. An indemnifying party shall not be liable for any settlement of any action, suit, proceeding or claim effected without its written consent. 8. Contribution. In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in Section 7(a) is due in accordance with its terms but for any reason is held to be unavailable from the Company, the Company and the Underwriters shall contribute to the aggregate losses, claims, damages and liabilities (including any investigation, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claims asserted, but after deducting any contribution received by the Company from persons other than the Underwriters, such as persons who control the Company within the meaning of the Securities Act, officers of the Company who signed the Registration Statement and directors of the Company, who may also be liable for contribution) to which the Company and one or more of the Underwriters may be subject in such proportion as is appropriate to reflect the relative 20 21 benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Shares or, if such allocation is not permitted by applicable law or indemnification is not available as a result of the indemnifying party not having received notice as provided in Section 7 hereof, in such proportion as is appropriate to reflect not only the relative benefits referred to above but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Underwriters shall be deemed to be in the same proportion as (x) the total proceeds from the offering (net of underwriting discounts but before deducting expenses) received by the Company, as set forth in the table on the cover page of the Prospectus, bear to (y) the underwriting discounts received by the Underwriters, as set forth in the table on the cover page of the Prospectus. The relative fault of the Company or the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact related to information supplied by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this Section 8, (i) in no case shall any Underwriter (except as may be provided in the Agreement Among Underwriters) be liable or responsible for any amount in excess of the underwriting discount applicable to the Shares purchased by such Underwriter hereunder, and (ii) the Company shall be liable and responsible for any amount in excess of such underwriting discount; provided, however, that no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person, if any, who controls an Underwriter within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act shall have the same rights to contribution as such Underwriter, and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to clauses (i) and (ii) in the immediately preceding sentence of this Section 8. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties under this Section, notify such party or parties from whom contribution may be sought, but the omission so to notify such party or parties from whom contribution may be sought shall not relieve the party or parties from whom contribution may be sought from any other obligation it or they may have hereunder or otherwise than under this Section. No party shall be liable for contribution with respect to any action, suit, proceeding or claim settled without its written consent. The Underwriter's obligations to contribute pursuant to this Section 8 are several in proportion to their respective underwriting commitments and not joint. 21 22 9. Termination. This Agreement may be terminated with respect to the Shares to be purchased on a Closing Date by the Representatives by notifying the Company at any time: (a) in the absolute discretion of the Representatives at or before any Closing Date: (i) if on or prior to such date, any domestic or international event or act or occurrence has materially disrupted, or in the opinion of the Representatives will in the future materially disrupt, the securities markets; (ii) if there has occurred any new outbreak or material escalation of hostilities or other calamity or crisis the effect of which on the financial markets of the United States is such as to make it, in the judgment of the Representatives, inadvisable to proceed with the offering; (iii) if there shall be such a material adverse change in general financial, political or economic conditions or the effect of international conditions on the financial markets in the United States is such as to make it, in the judgment of the Representatives, inadvisable or impracticable to market the Shares; (iv) if trading in the Shares has been suspended by the Commission or trading generally on the New York Stock Exchange, Inc. or on the American Stock Exchange, Inc. has been suspended or limited, or minimum or maximum ranges for prices for securities shall have been fixed, or maximum ranges for prices for securities have been required, by said exchanges or by order of the Commission, the National Association of Securities Dealers, Inc., or any other governmental or regulatory authority; or (v) if a banking moratorium has been declared by any state or Federal authority, or (b) at or before any Closing Date, that any of the conditions specified in Section 5 shall not have been fulfilled when and as required by this Agreement. If this Agreement is terminated pursuant to any of its provisions, the Company shall not be under any liability to any Underwriter, and no Underwriter shall be under any liability to the Company, except that (y) if this Agreement is terminated by the Representatives or the Underwriters because of any failure, refusal or inability on the part of the Company to comply with the terms or to fulfill any of the conditions of this Agreement, the Company will reimburse the Underwriters for all out-of-pocket expenses (including the reasonable fees and disbursements of their counsel) incurred by them in connection with the proposed purchase and sale of the Shares or in contemplation of performing their obligations hereunder and (z) no Underwriter who shall have failed or refused to purchase the Shares agreed to be purchased by it under this Agreement, without some reason sufficient hereunder to justify cancellation or termination of its obligations under this Agreement, shall be relieved of liability to the Company or to the other Underwriters for damages occasioned by its failure or refusal. 10. Substitution of Underwriters. If one or more of the Underwriters shall fail (other than for a reason sufficient to justify the cancellation or termination of this Agreement under Section 9) to purchase on any Closing Date the Shares agreed to be purchased on such Closing Date by such Underwriter or Underwriters, the Representatives may find one or more substitute underwriters to purchase such Shares or make such other 22 23 arrangements as the Representatives may deem advisable or one or more of the remaining Underwriters may agree to purchase such Shares in such proportions as may be approved by the Representatives, in each case upon the terms set forth in this Agreement. If no such arrangements have been made by the close of business on the business day following such Closing Date, (a) if the number of Shares to be purchased by the defaulting Underwriters on such Closing Date shall not exceed 10% of the Shares that all the Underwriters are obligated to purchase on such Closing Date, then each of the nondefaulting Underwriters shall be obligated to purchase such Shares on the terms herein set forth in proportion to their respective obligations hereunder; provided, that in no event shall the maximum number of Shares that any Underwriter has agreed to purchase pursuant to Section 1 be increased pursuant to this Section 10 by more than one-ninth of such number of Shares without the written consent of such Underwriter, or (b) if the number of Shares to be purchased by the defaulting Underwriters on such Closing Date shall exceed 10% of the Shares that all the Underwriters are obligated to purchase on such Closing Date, then the Company shall be entitled to an additional business day within which it may, but is not obligated to, find one or more substitute underwriters reasonably satisfactory to the Representatives to purchase such Shares upon the terms set forth in this Agreement. In any such case, either the Representatives or the Company shall have the right to postpone the applicable Closing Date for a period of not more than five business days in order that necessary changes and arrangements (including any necessary amendments or supplements to the Registration Statement or Prospectus) may be effected by the Representatives and the Company. If the number of Shares to be purchased on such Closing Date by such defaulting Underwriter or Underwriters shall exceed 10% of the Shares that all the Underwriters are obligated to purchase on such Closing Date, and none of the nondefaulting Underwriters or the Company shall make arrangements pursuant to this Section within the period stated for the purchase of the Shares that the defaulting Underwriters agreed to purchase, this Agreement shall terminate with respect to the Shares to be purchased on such Closing Date without liability on the part of any nondefaulting Underwriter to the Company and without liability on the part of the Company, except in both cases as provided in Sections 6(b), 7, 8 and 9. The provisions of this Section shall not in any way affect the liability of any defaulting Underwriter to the Company or the nondefaulting Underwriters arising out of such default. A substitute underwriter hereunder shall become an Underwriter for all purposes of this Agreement. 11. Miscellaneous. The respective agreements, representations, warranties, indemnities and other statements of the Company or its officers and of the Underwriters set forth in or made pursuant to this Agreement shall remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of the officers, directors or controlling persons referred to in Sections 7 and 8 hereof, and shall 23 24 survive delivery of and payment for the Shares. The provisions of Sections 6(b), 7, 8 and 9 shall survive the termination or cancellation of this Agreement. This Agreement has been and is made for the benefit of the Underwriters and the Company and their respective successors and assigns, and, to the extent expressed herein, for the benefit of persons controlling any of the Underwriters or the Company, and directors and officers of the Company, and their respective successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include any purchaser of Shares from any Underwriter merely because of such purchase. All notices and communications hereunder shall be in writing and mailed or delivered or by telephone or telegraph if subsequently confirmed in writing, (a) if to the Representatives, c/o Oppenheimer & Co., Inc., Oppenheimer Tower, World Financial Center, New York, New York 10281 Attention: Mark C. Biderman and (b) if to the Company, to its agent for service as such agent's address appears on the cover page of the Registration Statement. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflict of laws. 24 25 This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. Please confirm that the foregoing correctly sets forth the agreement among us. Very truly yours, MEGO MORTGAGE CORPORATION By: -------------------------- Title: Confirmed: OPPENHEIMER & CO., INC. FRIEDMAN, BILLINGS, RAMSEY & CO., INC. Acting severally on behalf of themselves and as representative of the several Underwriters named in Schedule I annexed hereto. By: OPPENHEIMER & CO., INC. By: ------------------------------ Title: 25 26 SCHEDULE I NUMBER OF FIRM SHARES NAME TO BE PURCHASED - ----------------------------------------------------------- ---------------- Oppenheimer & Co., Inc. . . . . . . . . . . . . . . . . . . Friedman, Billings, Ramsey & Co., Inc. . . . . . . . . . . ------------- Total . . . . . . . . . . . . . . . . . . . . . . 2,000,000 ============= 26 EX-4.1 3 SPECIMEN COMMON STOCK CERTIFICATE 1 EXHIBIT 4.1 NUMBER MEGO MORTGAGE CORPORATION SHARES Incorporated Under the Laws of the State of Delaware SEE REVERSE FOR CERTAIN DEFINITIONS CUSIP 585165 10 3 This Certifies that ------------------------------------------------------------ - -------------------------------------------------------------------------------- Is the Registered Holder of ----------------------------------------------------- - -------------------------------------------------------------------------------- FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: Vice President and Secretary Chairman and Chief Executive Officer 2 MEGO MORTGAGE CORPORATION The Corporation is authorized to issue Common Stock and Preferred Stock. The Board of Directors of the Corporation has authority to fix the number of shares and the designation of any series of Preferred Stock and to determine or alter the rights, preferences, privileges, and restrictions granted to or imposed upon any unissued series of Preferred Stock. This certificate and the shares represented hereby shall be subject to all of the provisions of the Certificate of Incorporation of this Corporation and of the amendments thereto, by all of which the holder by acceptance hereof is bound. The Corporation will furnish without charge to the holders hereof upon request a statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights as established, from time to time, by the Certificate of Incorporation of the Corporation and by any certificate of designation, and the number of shares constituting each such class and series. Any such request should be made at the principal office of the Corporation. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common TEN ENT -- as tenants by the entireties JT TEN -- as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT -- (Cust) _______________ Custodian (Minor) __________ under Uniform Gift to Minors Act (State)__________ Additional abbreviations may also be used though not in the above list. For Value Received _________________________________________ hereby sells, assigns and transfers unto_______________________________________________ ________________________________________________________________________________ PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ________________________________________________________________________________ (PLEASE PRINT OR TYPE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE) ___________ shares of the capital stock represented by the ___________________________________ within Certificate and does hereby irrevocably constitute and appoint ______________________________________ Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. DATED:_____________________________ SIGNED:________________________________ 3 SIGNED:_________________________________ NOTICE: The signature to this assignment must correspond with the name as written upon the face of the certificate, in every particular, without alteration or enlargement or any change whatsoever. SIGNATURE(S) GUARANTEED: SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM, PURSUANT TO S.E.C. RULE 17Ad-15. EX-5.1 4 OPINION OF GREENBERG TRAURIG 1 Exhibit 5.1 November 13, 1996 Mego Mortgage Corporation 1000 Parkwood Circle, Suite 500 Atlanta, Georgia 30339 Gentlemen: On September 20, 1996, Mego Mortgage Corporation, a Delaware corporation (the "Company"), filed with the Securities and Exchange Commission a Registration Statement on Form S-1 (Registration No. 333-12443) (the "Registration Statement") under the Securities Act of 1933, as amended (the "Act"). The Registration Statement relates to the sale by the Company of up to 2,000,000 shares of the Company's Common Stock, par value $.01 per share (the "Common Stock"), and an additional 300,000 shares upon the exercise of the underwriters' overallotment option (such shares of Common Stock are hereinafter collectively referred to as the "Shares"). We have acted as counsel to the Company in connection with the preparation and filing of the Registration Statement. In connection with the Registration Statement, we have examined, considered and relied upon copies of the following documents (collectively, the "Documents"): (i) the Company's Amended and Restated Certificate of Incorporation and Bylaws; (ii) resolutions of the Company's Board of Directors authorizing the offering and the issuance of the Shares to be sold by the Company and related matters; (iii) the Registration Statement and all amendments and exhibits thereto; and (iv) such other documents and instruments that we have deemed necessary for the expression of the opinions herein contained. In making the foregoing examinations, we have assumed without investigation the genuineness of all signatures and the authenticity of all documents submitted to us as originals, the conformity to authentic original documents of all documents submitted to us as copies, and the veracity of the Documents. As to various questions of fact material to the opinion expressed below, we have relied, to the extent we deemed reasonably appropriate, upon the representations or certificates of officers and/or directors of the Company and upon documents, records and instruments furnished to us by the Company, without independently verifying the accuracy of such certificates, documents, records or instruments. Based upon the foregoing examination, and subject to the qualifications set forth below, we are of the opinion that the Shares have been duly and validly authorized, and when issued and 2 Mego Mortgage Corporation November 13, 1996 Page 2 delivered in accordance with the terms of the Underwriting Agreement filed as Exhibit 1.1 to the Registration Statement, will be validly issued, fully paid and non-assessable. Although we have acted as counsel to the Company in connection with the preparation and filing of the Registration Statement, our engagement has been limited to certain matters about which we have been consulted. Consequently, there exist matters of a legal nature involving the Company in which we have not been consulted and have not represented the Company. This opinion letter is limited to the matters stated herein and no opinions may be implied or inferred beyond the matters expressly stated herein. The opinions expressed herein are given as of this date, and we assume no obligation to update or supplement our opinions to reflect any facts or circumstances that may come to our attention or any change in law that may occur or become effective at a later date. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our name under the caption "Legal Matters" in the prospectus comprising a part of the Registration Statement. In giving such consent, we do not thereby admit that we are included within the category of persons whose consent is required under Section 7 of the Act or the rules and regulations promulgated thereunder. Sincerely, GREENBERG, TRAURIG, HOFFMAN, LIPOFF, ROSEN & QUENTEL, P.A. EX-10.1 5 STOCK OPTION PLAN 1 EXHIBIT 10.1 --------------------------------------- MEGO MORTGAGE CORPORATION 1996 STOCK OPTION PLAN --------------------------------------- 1. Purpose. The purpose of this Plan is to advance the interests of Mego Mortgage Corporation, a Delaware corporation (the "Company"), by providing an additional incentive to attract, retain and motivate qualified and competent persons who are key to the Company and its Subsidiaries, including employees, officers and directors, and upon whose efforts and judgment the success of the Company is largely dependent, through the encouragement of stock ownership in the Company by such persons. 2. Definitions. As used herein, the following terms shall have the meaning indicated: (a) "Affiliate" shall mean any corporation other than the Company that is a member of an affiliated group of corporations, as defined in Section 1504 (determined without regard to Section 1504(b)) of the Code, of which the Company is a member. (b) "Board" shall mean the Board of Directors of the Company. (c) "Code" shall mean the Internal Revenue Code of 1986, as amended. (d) "Committee" shall mean the committee appointed to administer the Plan with respect to Covered Employees pursuant to Section 14(b) hereof. (e) "Common Stock" shall mean the Company's Common Stock, par value $0.01 per share. (f) "Company" shall refer to Mego Mortgage Corporation, a Delaware corporation. (g) "Covered Employee" shall mean any individual who, on the last day of the taxable year of the Company, is (i) the Chief Executive Officer of the Company or is acting in such capacity (the "CEO") and (ii) among the four highest compensated officers (other than the CEO) of the Company. The determination of whether an individual is the CEO or among the four highest compensated officers shall be determined pursuant to Section 162(m) of the Code and the regulations promulgated thereunder. (h) "Director" shall mean a member of the Board or of the Board of Directors of any Subsidiary. 2 (i) "Effective Date" shall mean the commencement date of the Company's initial public offering of Common Stock as contemplated by the Company's Registration Statement on Form S-1 (Registration No. 333-12443) initially filed with the Securities and Exchange Commission on September 20, 1996. (j) "Eighty Percent Control" shall refer to control of the Company within the meaning of Section 368(c) of the Code, that is ownership of at least 80% of the total combined voting power of all classes of stock entitled to vote for directors of the Company and at least 80% of the total number of shares of each other class of stock of the Company, all as defined in Section 368(c) of the Code. (k) "Eighty Percent Holder" shall refer to Mego Financial. (l) "Eighty Percent Period" shall refer to that period during which the Eighty Percent Holder has Eighty Percent Control. (m) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (n) "Fair Market Value" of a Share on any date of reference shall be the "Closing Price" (as defined below) of the Common Stock on the business day immediately preceding such date or on such date, unless the Board shall determine otherwise in a fair and uniform manner. For the purpose of determining Fair Market Value, the "Closing Price" of the Common Stock on any business day shall be (i) if the Common Stock is listed or admitted for trading on any United States national securities exchange, or if actual transactions are otherwise reported on a consolidated transaction reporting system, the last reported sale price of Common Stock on such exchange or reporting system, as reported in any newspaper of general circulation, (ii) if the Common Stock is quoted on the National Association of Securities Dealers Automated Quotations System ("Nasdaq"), or any similar system of automated dissemination of quotations of securities prices in common use, the last reported sale price of Common Stock for such day on such system, or (iii) if neither clause (i) or (ii) is applicable, the mean between the high bid and low asked quotations for the Common Stock as reported by the National Quotation Bureau, Incorporated if at least two securities dealers have inserted both bid and asked quotations for Common Stock on at least five of the ten preceding days. If neither (i), (ii), or (iii) above is applicable, then Fair Market Value shall be determined in good faith by the Board in a fair and uniform manner. (o) "Incentive Stock Option" shall mean an incentive stock option as defined in Section 422 of the Code. (p) "Mego Financial" shall refer to Mego Financial Corp., a New York corporation and majority stockholder of the Company. - 2 - 3 (q) "Non-Employee Director" shall refer to a Director who is not an employee of the Company or any Affiliate. (r) "Non-Qualified Stock Option" shall mean an Option which is not an Incentive Stock Option. (s) "Option" (when capitalized) shall mean any option granted under this Plan. (t) "Optionee" shall mean a person to whom a stock option is granted under this Plan or any person who succeeds to the rights of such person under this Plan by reason of the death of such person. (u) "Outside Director" shall mean a member of the Board who (i) is not a current employee of the Company or any Affiliate, (ii) is not a former employee of the Company or any Affiliate who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year; (iii) has not been an officer of the Company or any Affiliate; (iv) does not receive Remuneration either directly or indirectly, in any capacity other than as a director; and (v) satisfies any other conditions that shall from time to time be required to qualify as an "outside director" under Section 162(m) of the Code and the regulations thereunder and as a "Non-Employee Director" under Rule 16b-3 promulgated under the Exchange Act. For this purpose, "Remuneration" shall have the meaning afforded that term pursuant to Treasury Regulations issued under Section 162(m) of the Code, and shall exclude any de minimis remuneration excluded under those Treasury Regulations. (v) "Plan" shall mean this 1996 Stock Option Plan for the Company. (w) "Restricted Option" shall mean an Option the exercisability of which is restricted pursuant to Section 9 hereof. (x) "SAR" shall mean a stock appreciation right granted in tandem with a Restricted Option pursuant to Section 9 hereof. (y) "Share(s)" shall mean a share or shares of the Common Stock. (z) "Subsidiary" shall mean any corporation (other than the Company) in any unbroken chain of corporations beginning with the Company if, at the time of the granting of the Option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 3. Shares and Options. The Board may grant to Optionees from time to time, Options to purchase an aggregate of up to 925,000 Shares from authorized and unissued Shares. If any Option granted under the Plan shall terminate, expire, or be canceled or surrendered as to any Shares, new Options may thereafter be granted covering such Shares. An Option granted - 3 - 4 hereunder shall be either an Incentive Stock Option or a Non-Qualified Stock Option as determined by the Board at the time of the grant of such Option and shall clearly state whether it is an Incentive Stock Option or Non-Qualified Stock Option. All Incentive Stock Options shall be granted within 10 years from the effective date of this Plan. 4. Dollar Limitation. Options otherwise qualifying as Incentive Stock Options hereunder will not be treated as Incentive Stock Options to the extent that the aggregate Fair Market Value (determined at the time the Option is granted) of the Shares, with respect to which Options meeting the requirements of Code Section 422(b) are exercisable for the first time by any individual during any calendar year (under all plans of the Company and any Subsidiary), exceeds $100,000. 5. Conditions for Grant of Options. (a) Each Option shall be evidenced by an option agreement that may contain any term deemed necessary or desirable by the Board, provided such terms are not inconsistent with this Plan or any applicable law. Optionees shall be those persons selected by the Board who are employees and/or Directors of the Company or any Subsidiary. (b) In granting Options, the Board shall take into consideration the contribution the person has made to the success of the Company or its Subsidiaries and such other factors as the Board shall determine. The Board shall also have the authority to consult with and receive recommendations from officers and other personnel of the Company and its Subsidiaries with regard to these matters. The Board may, from time to time in granting Options, prescribe such other terms and conditions concerning such Options as it deems appropriate, including, without limitation, (i) prescribing the date or dates on which the Option becomes exercisable, (ii) providing that the Option rights accrue or become exercisable in installments over a period of years, upon termination of the Eighty Percent Period with the consent of the Eighty Percent Holder, and/or upon the attainment of stated goals, or (iii) relating an Option to the continued employment of the Optionee for a specified period of time, provided that such terms and conditions are not more favorable to an Optionee than those expressly permitted herein. (c) The Options granted to employees under this Plan shall be in addition to regular salaries, pension, life insurance or other benefits related to their employment with the Company or its Subsidiaries. Neither the Plan nor any Option granted under the Plan shall confer upon any person any right to employment or continuance of employment by the Company or its Subsidiaries. (d) Notwithstanding any other provision of this Plan, and in addition to any other requirements of this Plan, the aggregate number of Options granted to any one Optionee may not exceed 35% of the total number of options that may be granted under the Plan. (e) Notwithstanding any other provision of this Plan, and in addition to any other requirements of this Plan, Options may not be granted to a Covered Employee unless the - 4 - 5 grant of such Option is authorized by, and all of the terms of such Options are determined by, a Committee that is appointed in accordance with Section 14 of this Plan and all of whose members are Outside Directors. (f) Incentive Stock Options may not be granted to any person who is not an employee of the Company or of its parent or subsidiary, as those terms are defined in Section 424 of the Code, at the date of grant. 6. Option Price. The option price per Share of any Option shall be any price determined by the Board, but shall not be less than the par value per Share; provided, however, that in no event shall the option price per Share of any Incentive Stock Option be less than the Fair Market Value of the Shares underlying such Option on the date such Option is granted. 7. Exercise of Options. An Option shall be deemed exercised when (i) the Company or the Board has received written notice of such exercise in accordance with the terms of the Option, (ii) full payment of the aggregate option price of the Shares as to which the Option is exercised has been made, and (iii) arrangements that are satisfactory to the Board in its sole discretion have been made for the Optionee's payment to the Company of the amount that is necessary for the Company or Subsidiary employing the Optionee to withhold in accordance with applicable Federal or state tax withholding requirements. Unless further limited by the Board in any Option, the option price of any Shares purchased shall be paid in cash, by certified or official bank check, by money order, with Shares owned by the Optionee (including the withholding of Shares issuable upon exercise of the Option so long as such transaction does not violate the requirements of Rule 16b-3 promulgated under the Exchange Act) or by a combination of the above; provided further, however, that the Board in its sole discretion may accept a personal check in full or partial payment of any Shares. If the exercise price is paid in whole or in part with Shares, the value of the Shares surrendered shall be their Fair Market Value on the date the Option is exercised. The Company in its sole discretion may, on an individual basis or pursuant to a general program established in connection with this Plan, and subject to applicable law, lend money to an Optionee, guarantee a loan to an Optionee, or otherwise assist an Optionee to obtain the cash necessary to exercise all or a portion of an Option granted hereunder or to pay any tax liability of the Optionee attributable to such exercise. If the exercise price is paid in whole or part with Optionee's promissory note, such note shall (i) provide for full recourse to the maker, (ii) be collateralized by the pledge of the Shares that the Optionee purchases upon exercise of such Option, (iii) bear interest at a rate no less than the prime rate of the Company's principal lender, and (iv) contain such other terms as the Board in its sole discretion shall reasonably require. No Optionee shall be deemed to be a holder of any Shares subject to an Option unless and until a stock certificate or certificates for such Shares are issued to such person(s) under the terms of this Plan. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as expressly provided in Section 11 hereof. - 5 - 6 8. Exercisability of Options. Except as provided in Section 9 hereof or otherwise provided in this Section 8, any Option shall become exercisable in such amounts, at such intervals and upon such terms as the Board shall provide in such Option; provided, however, no Option or portion thereof shall be exercisable until six months from the date of grant. (a) The expiration date of an Option shall be determined by the Board at the time of grant, but in no event shall an Option be exercisable after the expiration of 10 years from the date of grant of the Option. (b) Unless otherwise provided in any Option, each outstanding Option shall become immediately fully exercisable: (i) if there occurs any transaction (which shall include a series of transactions occurring within 60 days or occurring pursuant to a plan), that has the result that stockholders of the Company immediately before such transaction cease to own at least 51% of the voting stock of the Company or of any entity that results from the participation of the Company in a reorganization, consolidation, merger, liquidation or any other form of corporate transaction; (ii) if the stockholders of the Company shall approve a plan of merger, consolidation, reorganization, liquidation or dissolution in which the Company does not survive (unless the approved merger, consolidation, reorganization, liquidation or dissolution is subsequently abandoned); or (iii) if the stockholders of the Company shall approve a plan for the sale, lease, exchange or other disposition of all or substantially all the property and assets of the Company (unless such plan is subsequently abandoned); provided, however, that this Section 8(b) shall not apply to accelerate the exercisability of any Option as a result of the distribution of all or part of the shares in the Company owned by Mego Financial to the stockholders of Mego Financial or to any of its affiliates, regardless of the manner in which such shares are distributed. (c) Subject to the restrictions of Section 9, the Board may in its sole discretion accelerate the date on which any Option may be exercised and may accelerate the vesting of any Shares subject to any Option. 9. Restrictions on Grant and Exercise of Options During Eighty Percent Period; Issuance of SARs in Tandem with Restricted Options. (a) Options granted pursuant to the Plan may not be exercised at any time during the Eighty Percent Period without the prior written consent of the Eighty Percent Holder (the "Restricted Options"). An Optionee desiring to exercise Restricted Options must send written notice (the "Optionee's Notice") to the Company and the Eighty Percent Holder of his desire to - 6 - 7 exercise a Restricted Option. The Eighty Percent Holder shall, in its sole and absolute discretion, notify the Optionee in writing whether it will permit the exercise of all or a portion of a Restricted Option or require that the Restricted Option remain subject to the restrictions contained in this Section 9. In the event that the Eighty Percent Holder shall fail to provide its written consent within 10 days after receipt of the Optionee's Notice, the Optionee's request shall be deemed to have been denied. (b) Each grant of a Restricted Option shall be accompanied by a grant of an SAR in tandem with the Restricted Option. If and only to the extent that any Optionee's request to exercise a Restricted Option is denied pursuant to Section 9(a), then the Optionee may exercise the SARs that were issued in tandem with the Restricted Option the exercise of which has been so denied. Upon the Optionee's exercise of an SAR, the Optionee shall be paid, in cash, an amount equal to the product of (i) the amount by which the Fair Market Value per share of Common Stock on the date on which the SAR is exercised exceeds the exercise price per share of Common Stock for the Restricted Option with which the SAR has been granted in tandem, multiplied by (ii) the number of shares subject to the SAR that have been exercised. Any exercise of an SAR by an Optionee shall only occur during the period beginning on the third business day following the release by the Company of its quarterly or annual financial results and ending on the last business day of the quarter in which such release was made. Upon an Optionee's exercise of an SAR, the Restricted Option with respect to which the SAR was issued in tandem shall terminate to the extent of the number of shares with respect to which the SAR was exercised. (c) Each SAR issued in tandem with a Restricted Option may be exercised in the same manner and shall be subject to the same provisions and restrictions applicable to Options under this Plan. In the event that any Optionee's employment by the Company or any Subsidiary or service as a Director shall terminate, any SARs held by such Optionee on the date of termination may be exercised if and to the extent otherwise permitted under Section 9(b) hereof during the same period, by the same person or persons, and to the same extent as the Options with respect to which they were issued in tandem could have been exercised by such Optionee but for the restrictions set forth in Section 9(a). (d) An Option shall cease to be subject to the restrictions set forth in Section 9(a), and thus shall cease to be a Restricted Option, upon the expiration of the Eighty Percent Period, at which time any unexercised SAR's issued in tandem with such Option shall terminate. 10. Termination of Option Period. (a) The unexercised portion of any Option granted to an Optionee who is not a Non-Employee Director shall automatically and without notice terminate and become null and void at the time of the earliest to occur of the following: (i) three months after the date on which the Optionee's employment with the Company and/or a Subsidiary is terminated for any reason other than by reason - 7 - 8 of (A) Cause, which shall mean "Cause" under such Optionee's employment agreement, if any, and which, solely for purposes of this Plan, also shall mean the termination of the Optionee's employment with the Company and/or a Subsidiary (or, in the case of an Optionee who is a Director but not an employee of the Company or any Subsidiary, the removal of the Optionee as a Director) by reason of any act or any failure to act, by the Optionee that constitutes (1) misfeasance or malfeasance in connection with the performance by him of his duties and responsibilities as an employee or Director of the Company or any Subsidiary; (2) fraud, embezzlement or breach of trust; (3) any criminal act other than minor traffic infractions; or (4) the willful or knowing refusal by the Optionee to perform substantially all or any portion of his duties and responsibilities as an employee or Director of the Company or any Subsidiary; (B) the Optionee's mental or physical disability (within the meaning of Code Section 22(e)) as determined by a medical doctor satisfactory to the Board, or (C) the Optionee's death; (ii) immediately upon the termination of the Optionee's employment with the Company or a Subsidiary (or in the case of an Optionee who is a Director but not an employee of the Company or any Subsidiary, the removal of the Optionee as a Director) for Cause; (iii) twelve months after the date on which the Optionee's employment with the Company or any Subsidiary, or service as a Director, is terminated by reason of mental or physical disability (within the meaning of Code Section 22(e)) as determined by a medical doctor satisfactory to the Board; or (iv) (A) twelve months after the date of the Optionee's death or (B) three months after the date of the Optionee's death if such death shall occur during the one year period specified in Subsection 10(a)(iii) hereof; provided, however, that the Board may provide for Restricted Options to terminate at such other times as the Board may, in its sole discretion, determine. (b) The unexercised portion of any Option granted to an Optionee who is a Non-Employee Director shall automatically and without notice terminate and become null and void at the time of the earliest to occur of the following: (i) immediately upon the termination of the Optionee's service as a Non-Employee Director for Cause, which shall mean the removal of the Optionee as a Director by reason of any act or any failure to act, by the Optionee that constitutes (A) misfeasance or malfeasance in connection with the performance by him of his duties and responsibilities as a Director; (B) fraud, embezzlement or breach of trust; (C) any criminal act other than minor traffic infractions; or (D) the willful or knowing refusal by the Optionee to perform substantially all or any portion of his duties and responsibilities as a Director; - 8 - 9 (ii) at the expiration of the term of the Option, if (A) the Optionee fails to be re-elected as a Non-Employee Director, notwithstanding the Optionee's willingness to serve as such, (B) the Optionee ceases to be a Non-Employee Director by reason of mental or physical disability (within the meaning of Code Section 22(e)) as determined by a medical doctor satisfactory to the Board or (C) the Optionee ceases to be a Non-Employee Director as a result of his death. (iii) three months after the date on which the Optionee's service as a Non-Employee Director is terminated for any reason other than a reason set forth in Subsections 10(b)(i) or 10(b)(ii) hereof. (c) Notwithstanding the foregoing, the Board, in its sole discretion, may extend the term of any Non-Qualified Stock Option granted under the Plan. (d) If the exercise term of an Option otherwise would expire while the Option is a Restricted Option, then neither the Option (nor the SAR issued in tandem therewith,) shall terminate until three months after the date on which the Option is no longer a Restricted Option. (e) The Board, in its sole discretion, may by giving written notice (the "Cancellation Notice") cancel, effective upon the date of the consummation of any corporate transaction described in Subsections 8(b)(ii) or (iii) hereof, any Option that remains unexercised on such date. Such Cancellation Notice shall be given a reasonable period of time prior to the proposed date of such cancellation and may be given either before or after approval of such corporate transaction. 11. Adjustment of Shares. (a) If at any time while the Plan is in effect or unexercised Options are outstanding, there shall be any increase or decrease in the number of issued and outstanding Shares through the declaration of a stock dividend or through any recapitalization resulting in a stock split-up, combination or exchange of Shares, then and in such event: (i) appropriate adjustment shall be made in the maximum number of Shares available for grant under the Plan, so that the same percentage of the Company's issued and outstanding Shares shall continue to be subject to being so optioned; and (ii) appropriate adjustment shall be made in the number of Shares and the exercise price per Share thereof then subject to any outstanding Option, so that the same percentage of the Company's issued and outstanding Shares shall remain subject to purchase at the same aggregate exercise price. (b) Subject to the specific terms of any Option, the Board may change the terms of Options outstanding under this Plan, subject to written approval of the Eighty Percent Holder during the Eighty Percent Period, including with respect to the option price or the number - 9 - 10 of Shares subject to the Options, or both, when, in the Board's sole discretion, such adjustments become appropriate by reason of a corporate transaction described in Subsections 8(b)(ii) or (iii) hereof. (c) Except as otherwise expressly provided herein, the issuance by the Company of shares of its capital stock of any class, or securities convertible into shares of capital stock of any class, either in connection with direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to the number of or exercise price of Shares then subject to outstanding Options granted under the Plan. (d) Without limiting the generality of the foregoing, the existence of outstanding Options granted under the Plan shall not affect in any manner the right or power of the Company to make, authorize or consummate (i) any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business; (ii) any merger or consolidation of the Company; (iii) any issue by the Company of debt securities or preferred or preference stock that would rank above the Shares subject to outstanding Options; (iv) the dissolution or liquidation of the Company; (v) any sale, transfer or assignment of all or any part of the assets or business of the Company; or (vi) any other corporate act or proceeding, whether of a similar character or otherwise; although the foregoing shall remain subject to the provisions in the Company's Amended and Restated Certificate of Incorporation. 12. Transferability of Options. (a) No Incentive Stock Option, and unless the Board's prior written consent is obtained and the transaction does not violate the requirements of Rule 16b-3 promulgated under the Exchange Act no Non-Qualified Stock Option, shall be subject to alienation, assignment, pledge, charge or other transfer other than by the Optionee by will or the laws of descent and distribution, and any attempt to make any such prohibited transfer shall be void. Each Option shall be exercisable during the Optionee's lifetime only by the Optionee, or in the case of a Non-Qualified Stock Option that has been assigned or otherwise transferred with the Board's prior written consent, only by the assignee consented to by the Board. (b) Unless the Board's prior written consent is obtained and the transaction does not violate the requirements of Rule 16b-3 promulgated under the Exchange Act, no Shares acquired by an Officer, as that term is defined under Rule 16b-3, of the Company or Director pursuant to the exercise of an Option may be sold, assigned, pledged or otherwise transferred prior to the expiration of the six-month period following the date on which the Option was granted. - 10 - 11 13. Issuance of Shares. (a) Notwithstanding any other provision of this Plan, the Company shall not be obligated to issue any Shares unless it is advised by counsel of its selection that it may do so without violation of the applicable Federal and State laws pertaining to the issuance of securities, and may require any stock so issued to bear a legend, may give its transfer agent instructions, and may take such other steps, as in its judgment are reasonably required to prevent any such violation. (b) As a condition of any sale or issuance of Shares upon exercise of any Option, the Board may require such agreements or undertakings, if any, as the Board may deem necessary or advisable to assure compliance with any such law or regulation including, but not limited to, the following: (i) a representation and warranty by the Optionee to the Company, at the time any Option is exercised, that he is acquiring the Shares to be issued to him for investment and not with a view to, or for sale in connection with, the distribution of any such Shares; and (ii) a representation, warranty and/or agreement to be bound by any legends that are, in the opinion of the Board, necessary or appropriate to comply with the provisions of any securities law deemed by the Board to be applicable to the issuance of the Shares and are endorsed upon the Share certificates. 14. Administration of the Plan. (a) Except as set forth in Section 14(b) below, the Plan shall be administered by the Board. (b) In the case of Options granted to Covered Employees, the Plan shall be administered by the Committee, which shall consist of not less than two Directors, each of whom shall be Outside Directors. In the case of Options granted to Covered Employees, the Committee shall have all of the powers of the Board with respect to the Plan and all references herein to the Board shall refer to the Committee with respect to the Options granted by the Committee. Any member of the Committee may be removed at any time, with or without cause, by resolution of the Board, and any vacancy occurring in the membership of the Committee may be filled by appointment of the Board. (c) The Board, from time to time, may adopt rules and regulations for carrying out the purposes of the Plan. The Board's determinations and its interpretation and construction of any provision of the Plan shall be final and conclusive. - 11 - 12 (d) Any and all decisions or determinations of the Board shall be made either (i) by a majority vote of the members of the Board at a meeting or (ii) without a meeting by the unanimous written approval of the members of the Board. 15. Incentive Options for 10% Stockholders. Notwithstanding any other provisions of the Plan to the contrary, an Incentive Stock Option shall not be granted to any person owning directly or indirectly (through attribution under Section 424(d) of the Code) at the date of grant, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company (or of its parent or subsidiary, as those terms are defined in Section 424 of the Code, at the date of grant) unless the option price of such Option is at least 110% of the Fair Market Value of the Shares subject to such Option on the date the Option is granted, and such Option by its terms is not exercisable after the expiration of five years from the date such Option is granted. 16. Interpretation. (a) As it is the intent of the Company that the Plan comply in all respects with Rule 16b-3 promulgated under the Exchange Act ("Rule 16b-3"), any ambiguities or inconsistencies in construction of the Plan shall be interpreted to give effect to such intention, and if any provision of the Plan is found not to be in compliance with Rule 16b-3, such provision shall be deemed null and void to the extent required to permit the Plan to comply with Rule 16b-3. The Board may from time to time adopt rules and regulations under, and amend, the Plan in furtherance of the intent of the foregoing. (b) The Plan shall be administered and interpreted so that all Incentive Stock Options granted under the Plan will qualify as Incentive Stock Options under section 422 of the Code. If any provision of the Plan should be held invalid for the granting of Incentive Stock Options or illegal for any reason, such determination shall not affect the remaining provisions hereof, but instead the Plan shall be construed and enforced as if such provision had never been included in the Plan. (c) This Plan shall be governed by the laws of the State of Delaware. (d) Headings contained in this Plan are for convenience only and shall in no manner be construed as part of this Plan. (e) Any reference to the masculine, feminine, or neuter gender shall be a reference to such other gender as is appropriate. 17. Amendment and Discontinuation of the Plan. The Board may from time to time amend the Plan or any Option granted hereunder which is not granted to or held by a Covered Employee. Additionally, the Committee may from time to time amend any Option granted to or held by a Covered Employee. Notwithstanding the foregoing, except to the extent provided in Section 11, no such amendment may, without approval by the stockholders of the Company, - 12 - 13 (i) increase the number of securities which may be issued under the Plan, (ii) modify the requirements as to eligibility for participation in the Plan or (iii) increase the aggregate number of Options that may be granted to any one Optionee; provided, however, that, except to the extent provided in Section 10, no amendment or suspension of the Plan or any Option issued hereunder shall substantially impair any Option previously granted to any Optionee without the consent of such Optionee. 18. Effective Date and Termination Date. The Plan shall be effective upon the Effective Date and shall terminate on the 10th anniversary of the Effective Date. - 13 - EX-10.9 6 TAX ALLOCATION AND INDEMNITY PLAN 1 EXHIBIT 10.9 TAX ALLOCATION AND INDEMNITY AGREEMENT Agreement dated as of , 1996, between Mego Financial Corp., a New York corporation ("Parent"), and Mego Mortgage Corporation, a Delaware corporation ("MMC"). WITNESSETH WHEREAS, the parties hereto (along with wholly owned subsidiaries of Parent) are members of an affiliated group as defined in section 1504(a) of the Internal Revenue Code of 1986, as amended (the "Code") of which Parent is the common parent (the "Affiliated Group"); and WHEREAS, the Affiliated Group has filed consolidated Federal income tax returns for prior taxable years and will be required to file a consolidated Federal income tax return for its taxable year ending February 28, 1997 and for subsequent taxable years; and WHEREAS, MMC contemplates acquiring new shareholders unrelated to members of the Affiliated Group that will own not more than 20 percent of the total voting power or total value of its stock; and WHEREAS, it is the intent of the parties hereto that an agreement be entered into (i) to allocate the consolidated Federal income tax liability of the Affiliated Group between, on the one hand, Parent, on behalf of itself and its wholly owned subsidiaries other than the Company (collectively, "Parent Group"), and, on the other hand, MMC pursuant to a method specified in regulations of the Treasury Department that would impose on Parent and MMC, for the period beginning March 1, 1996 through February 28, 1997 and for subsequent periods, liability for an amount that approximates the liability that Parent Group and MMC each would incur if (a) Parent Group filed Federal income tax returns as a separate affiliated group as defined in Code section 1504(a) and (b) MMC filed separate Federal income tax returns and (ii) to provide that Parent and MMC each shall bear its agreed portion of the liability of the Affiliated Group for consolidated Federal income tax in respect of prior periods. NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein, the parties hereto agree as follows: 1. FILING OF CONSOLIDATED RETURNS. A consolidated Federal income tax return shall be filed by Parent for the taxable year ending February 28, 1997, and for each subsequent taxable period in respect of which this Agreement is in effect and for which the Affiliated Group is required or permitted to file a consolidated Federal income tax return. 2 2. CURRENT AND FUTURE TAXABLE PERIODS. For the taxable year of the Affiliated Group ending February 28, 1997 and for each taxable period thereafter, the Affiliated Group shall be divided into Parent Group and MMC (referred to hereafter as two separate "groups"). It being the parties' intent, among other things, that MMC pay to Parent in respect of each taxable year in which MMC would be liable for Federal income tax if it filed a separate Federal income tax return an amount approximately equal to its Federal income tax liability computed on a separate company basis, the consolidated Federal income tax liability of the Affiliated Group shall be allocated between Parent, on behalf of Parent Group, and MMC in accordance with the method set forth in Treasury regulation sections 1.1552-1(a)(2) and 1.1502-33(d)(3) (using a fixed percentage of 100%) by considering Parent Group and MMC each as a member of an affiliated group consisting of two members, except that (i) modifications to the separate taxable income of each corporation will be made in accordance with Treasury regulation section 1.1552-1(a)(2)(ii)(a) through (i) in the same manner as if all corporations were members of a single affiliated group, (ii)(a) carryforwards of losses and credits shall not be taken into account to the extent those items are deemed absorbed in allocating the tax liability of the Affiliated Group for prior taxable years, and (b) carrybacks of losses and credits shall be taken into account only to the extent those items are deemed absorbed in allocating the tax liability of the Affiliated Group for the taxable year. The corporate surtax exemption shall be allocated among all members of the Affiliated Group in proportion to their relative taxable incomes computed without regard to the surtax exemption. Any liability of the Affiliated Group for alternative minimum tax, environmental tax or any other Federal income tax imposed on the Affiliated Group on a consolidated basis by any section of the Code other than Code section 11 shall be allocated in accordance with any reasonable method that is consistent with the principles of this Agreement and the provisions of any governing Treasury regulations or other administrative pronouncements of the Internal Revenue Service. In no event shall MMC pay more Federal income tax in any period of one or more taxable years than MMC would have paid for the same period if it had filed a separate consolidated Federal income tax return, and any taxes not paid by reason of this limitation shall be paid by Parent. 3. PAYMENTS. MMC shall pay to Parent installments of estimated tax, computed pursuant to the principles set forth in section 2 above, no later than the due dates for payments of estimated tax by the Affiliated Group. Any payments of estimated tax by MMC to Parent shall be taken into account in determining the payment due from MMC pursuant to section 2, and any overpayment of estimated tax shall be refunded to MMC. A refund or payment of tax, calculated on the basis of the amount of tax payable for the taxable year as calculated by Parent as of the due date (without regard to extensions) for the Federal income tax return of the Affiliated Group, shall be paid no later than that due date, and any adjustment to the amount of refund or payment of tax, calculated on the basis of the amount of tax payable for that taxable year as shown on the Federal income tax return of the Affiliated Group as of the due date (with regard to extensions), shall be paid no later than that due date. 4. PRIOR TAXABLE PERIODS. For the taxable year of the Affiliated Group ending February 29, 1996 and for each taxable period prior thereto to which applies an oral understanding among the members of the Affiliated Group regarding payments among members of the Affiliated Group in respect of Federal income tax, pursuant to which Preferred Equities Corporation, a Nevada corporation, and MMC each paid Parent an amount each year equal to the product of its book income for the prior year and the relevant marginal corporate Federal income 2 3 tax rate (the "Prior Agreement"), the Federal income tax liability of the Affiliated Group shall be allocated among the members of the Affiliated Group in accordance with the Prior Agreement. For purposes of this Agreement, references to Parent Group shall be treated, in respect of taxable periods to which the Prior Agreement applies, as references to the members of the Affiliated Group that are members of Parent Group. 5. ADJUSTMENTS TO TAX LIABILITY. If the consolidated Federal income tax liability of the Affiliated Group is adjusted for any taxable period, whether by means of an amended return or claim for refund or after an audit by the Internal Revenue Service, or if there is any other adjustment relevant to the computation of the liability of any member of the Affiliated Group pursuant to the Prior Agreement, the Federal income tax liability of MMC pursuant to section 2 or section 4 of this Agreement shall be recomputed, if necessary, to give effect to those adjustments as if they had been part of the original computation pursuant to section 2 or section 4. The obligation to make any payment of additional Federal income tax or the right to receive any refund of Federal income tax shall be allocated between Parent and MMC accordingly, provided, however, that in no event shall MMC be required to make any payment to Parent if and to the extent that payment, combined with amounts previously paid by MMC with respect to the taxable year in question, would be inconsistent with the last sentence of section 2 of this Agreement. Any additional tax that MMC is obligated to pay shall be paid to Parent, and any refund of tax to which MMC is entitled to receive shall be paid by Parent, within ten days of, respectively, the date MMC receives notice from Parent or the date Parent receives the refund from the Treasury Department. 6. APPOINTMENT OF PARENT AS AGENT. Parent shall prepare and file the consolidated Federal income tax returns of the Affiliated Group and any other returns, documents or statements required to be filed with the Internal Revenue Service. In its sole discretion, Parent shall have the right in connection with any of those returns, documents or statements to determine (i) the manner in which the return, document or statement shall be prepared and filed, including, without limitation, the manner in which any item of income, gain, loss, deduction, credit or any other item shall be reported, (ii) whether any extension shall be requested and (iii) the elections that will be made by the Affiliated Group or any members thereof. Each member of the Affiliated Group shall execute and file those consents, elections, appointments, powers of attorney and other documents that Parent determines may be necessary or appropriate for the proper filing of those returns, documents or statements. Each member of the Affiliated Group shall provide Parent or any other member of the Affiliated Group any data necessary for the proper and timely filing of returns, documents or statements and otherwise shall cooperate as necessary to carry out the purposes of this Agreement. 7. PAYMENTS BY PARENT. Parent shall cause distributions or other payments to be made to it by one or more of its wholly owned subsidiaries of amounts sufficient if necessary to enable Parent to meet its obligations to MMC under this Agreement. 3 4 8. INDEMNIFICATION a. GENERAL PRINCIPLES. It is the intent of this Agreement that Parent and MMC each be liable for an amount in respect of Federal income tax of the Affiliated Group as that amount is determined pursuant to this Agreement or the Prior Agreement and that Parent and MMC each receive its respective share, as so allocated, of any reduction in Federal income tax liability of the Affiliated Group. b. INDEMNIFICATION. Parent shall be responsible for, and shall protect, defend, indemnify and hold harmless MMC from, any amount in respect of Federal income tax allocable to Parent pursuant to this Agreement or the Prior Agreement. MMC shall be responsible for, and shall protect, defend, indemnify and hold harmless Parent from, any amount in respect of Federal income tax allocable to MMC pursuant to this Agreement or the Prior Agreement. 9. RETENTION OF BOOKS AND RECORDS. No member of the Affiliated Group shall destroy or permit the destruction of any books, records or files pertaining to any other member of the Affiliated Group without first having offered in writing to deliver those books, records and files to the other member, and the other member shall have the right upon prior notice to inspect and to copy the same at any time during business hours for any proper purpose. 10. OTHER INCOME AND FRANCHISE TAXES. The liability of Parent, on behalf of Parent Group, and of MMC in respect of state, local and foreign income and franchise taxes that are computed pursuant to provisions applicable to affiliated, combined, unitary or other groups shall be determined and paid in a manner consistent with the provisions of this Agreement used to determine the liability of Parent, on behalf of Parent Group, and of MMC in respect of Federal income tax. Calculation of the separate liability of Parent Group and of MMC for these other taxes shall conform to the appropriate state, local and foreign income and franchise tax provisions governing affiliated, combined, unitary or other groups. 11. ENTIRE UNDERSTANDING. This Agreement constitutes the entire agreement of the parties concerning the subject matter hereof and, effective as of the date hereof and for the taxable periods to which this Agreement applies, supersedes all other agreements. This Agreement shall allocate the tax liabilities of the Affiliated Group for the period March 1, 1996 through February 28, 1997, and all subsequent taxable years unless Parent and MMC agree to terminate this Agreement. Notwithstanding its termination, this Agreement shall continue in effect with respect to any payment or refund due for any taxable periods prior to termination. 12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of any successor, whether by statutory merger, acquisition of assets or otherwise, to any of the parties hereto, to the same extent as if the successor had been an original party to the Agreement. 4 5 13. EXPENSES. Parent and MMC each shall bear any and all expenses that arises from its obligations under this Agreement. 14. NOTICES. All notices and other communications hereunder shall be in writing and shall be delivered by hand or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other addresses for a party as shall be specified by like notice) and shall be deemed given on the date on which the notice is received. If to Parent: Mego Financial Corp. 1125 N.E. 125 Street Suite 206 North Miami, Florida 33161 Attention: Jerome J. Cohen If to MMC: Mego Mortgage Corporation 1000 Parkwood Circle Suite 500 Atlanta, Georgia 30339 Attention: Jeffrey S. Moore President 15. RESOLUTION OF DISPUTES. Any dispute between the parties with respect to this Agreement shall be resolved by a public accounting firm or a law firm reasonably satisfactory to Parent and MMC or pursuant to an alternative dispute arrangement agreed to by the parties. 16. LEGAL ENFORCEABILITY. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall be ineffective as to that jurisdiction to the extent of that prohibition or unenforceability without invalidating the remaining provisions hereof. Any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable that provision in any other jurisdiction. Without prejudice to any rights or remedies otherwise available to any party hereto, each party hereto acknowledges that damages would be an inadequate remedy for any breach of the provisions of this Agreement and agrees that the obligations of the parties hereunder shall be specifically enforceable. 5 6 17. CONTROLLING LAW. This Agreement shall be governed by the laws of the State of Florida. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the date first written above. Mego Financial Corp. by_______________________________ [Name] [Title] Mego Mortgage Corporation by_______________________________ [Name] [Title] 6 EX-10.10 7 LOAN PROGRAM SUB SERVING AGREEMENT 1 EXHIBIT 10.10 LOAN PROGRAM SUB-SERVICING AGREEMENT THIS AGREEMENT ("Agreement"), made and entered into as of September 1, 1996, by and between PREFERRED EQUITIES CORPORATION, a Nevada corporation ("PEC") and MEGO MORTGAGE CORPORATION, a Delaware corporation, ("MMC"). WHEREAS, MMC, pursuant to its Loan Program ("LP"), originates or purchases real estate secured and unsecured loans made under the U.S. Department of Housing and Urban Development's ("HUD"), Federal Housing Administration ("FHA"), Title One Insurance Program and also originates or purchases real estate secured loans not insured by any governmental agency, (hereinafter collectively referred to as "Loans"); and WHEREAS, MMC desires that PEC shall perform certain accounting, payment processing, and other administrative services in connection with such loans, ("SERVICING"). NOW, THEREFORE, MMC AND PEC MUTUALLY AGREE AS FOLLOWS: ARTICLE 1. WARRANTIES AND REPRESENTATIONS OF PARTIES A. PEC hereby makes the following warranties and representations: the obligations of PEC under this Agreement have been duly authorized by the Board of Directors of PEC, or are within the scope and coverage of a general authorization adopted by its Board, which is in full force and effect; the officers of PEC signatory hereto are authorized to sign this agreement; and upon execution and deliver of this Agreement by PEC, the obligations of PEC under this Agreement will be the legal, valid and binding obligations of PEC, enforceable in accordance with the terms of this Agreement. PEC is not subject to any charter, by-law, indenture, mortgage, lien, lease, agreement, instrument, order, judgment or decree, or any other restriction of any kind or character, which would prevent the consummation of the transactions contemplated by this Agreement. The execution of this Agreement and the consummation of the transactions contemplated by this Agreement will not constitute a default under the provisions of any of the foregoing or result in a violation of any law, rule, regulation, order, judgment or decree to which PEC or its property is subject. There is no litigation pending or, to PEC's knowledge, threatened, which, if determined adversely to PEC, would adversely affect the execution, delivery or enforceability of this Agreement, or the ability of PEC to perform all of its obligations under this Agreement or which would have a material adverse effect on PEC's financial condition. PEC holds all federal, state and other licenses, authorizations, approvals, orders and contents, including, without limitation, those required by FHA, as are reasonably necessary to PEC'S performance under this Agreement in 1 2 compliance with applicable laws and secondary market requirements. PEC is duly organized, validly existing, and in good standing under the laws of the State of Nevada. The representations and warranties given herein will be deemed to be made anew at the time of transfer of any Loans to PEC for servicing hereunder. In the event of any occurrence which would make any of the representations or warranties above untrue or misleading, PEC agrees to notify MMC, in writing, within five (5) business days of that occurrence. B. MMC hereby makes the following warranties and representations, which MMC acknowledges are a material inducement to PEC to enter into this Agreement and which will be relied upon by PEC. The execution of this Agreement by MMC and the performance of the obligations of MMC under this Agreement have been duly authorized by the Board of Directors of MMC, or are within the scope and coverage of a general authorization adopted by its Board, which is in full force and effect and the application of which includes the officers of MMC's signatory hereto. Upon execution and delivery of this Agreement by MMC, the obligations of MMC under this Agreement will be the legal, valid and binding obligations of MMC, enforceable in accordance with the terms of this Agreement. MMC is not subject to any charter, by-law, indenture, mortgage, lien, lease, agreement, instrument, order, judgment or decree, or any other restriction of any kind or character, which would prevent the consummation of the transactions contemplated by this Agreement; and the execution of this Agreement and the consummation of the transactions contemplated by this Agreement will not constitute a default under the provisions of any of the foregoing or result in a violation of any law, rule, regulation, order, judgment or decree to which MMC or its property is subject. There is no litigation pending or, to MMC's knowledge, threatened, which ,if determined adversely to MMC, would adversely affect, the execution, delivery or enforceability of this Agreement, or the ability of MMC to perform all of its obligations under this Agreement or which would have a material adverse effect on MMC's financial condition. MMC holds all federal, state and other licenses, authorizations, approvals, orders and contents, including, without limitation, those required by FHA, as are reasonably necessary to its performance under this Agreement in compliance with applicable law and secondary market requirements. MMC is duly organized, validly existing, and in good standing under the laws of the State of Delaware. The representations and warranties given herein will be deemed to be made anew at the time of transfer of any Loans from MMC to PEC for servicing hereunder. In the event of any occurrence which would make any of the representations or warranties above untrue or misleading, MMC agrees to notify PEC, in writing, within five (5) business days of that occurrence. 2 3 ARTICLE 2. DELIVERY OF LOAN INFORMATION MMC has delivered and will deliver to PEC, a reconciliation with respect to each Loan to be serviced by PEC. ARTICLE 3. SERVICING OF LOAN PORTFOLIOS A. On the day of receipt of such Loan information, PEC shall enter such Loans into its computer system. B. PEC shall mail to each borrower a monthly statement which shall set forth the amount due and the due date for each payment. Each initial monthly statement shall advise each borrower that PEC has been retained to service such Loans on behalf of MMC and directing borrowers to make payments by check or money order payable as directed. C. PEC shall diligently service and use its best efforts to obtain on behalf of MMC each such payment when due, or as soon thereafter as possible. The obligation to contact Obligors will be assumed by MMC on loans that are more than sixty (60) days delinquent. PEC shall use only such methods as are acceptable to MMC and are in accord with the provisions of the Fair Debt Collection Practices Act, and MMC shall have the right at any time to review such methods. All interest calculations shall be made in conformance with the terms and conditions set forth in MMC's Title I Note or non-Title I Note. E. PEC shall promptly after receipt of any payment, but in no case later than the next business day following the receipt of such payment, deposit same in bank accounts established by MMC for such purpose. These accounts shall be opened in the name of MMC and PEC shall be authorized to make deposits thereto only. F. PEC shall deposit the received monies due MMC into said MMC accounts. PEC shall record the date, amount and type of these deposits in the computer generated loan data compiled for the benefit of MMC, such deposits to include the following: 1. All principal and interest payments received by PEC on behalf of MMC. 2. "NSF" fees received by PEC on behalf of MMC. 3. Late fees received by PEC on behalf of MMC. 4. Any and all other monies received by PEC on behalf of MMC. 5. HUD Impounds. 3 4 G. PEC shall not waive or vary the terms of any loan in any manner whatsoever or consent to a postponement of compliance by the borrower with any of the terms or provisions thereof, or in any manner grant an indulgence, reduction or forgiveness of the amount due on such Loan to the borrower, except as directed in writing by MMC. PEC shall make a diligent effort to collect any Loan in default for a period not to exceed sixty (60) days; thereafter, PEC shall turn over any such Loan to MMC for further collection. All such Loans shall remain in the principal balance of Loans PEC is Servicing until such time any such Loan is (i) reinstated, in which case it shall be returned to PEC for collection in the ordinary course and remain in the principal balance calculation of Loans being serviced or (ii) until foreclosed upon or submitted to HUD for claim by MMC, at which time any such Loan will be removed from the principal balance calculation of Loans PEC is Servicing. H. With respect to Loans insured by FHA and/or HUD, PEC shall satisfy and comply with, and use its best efforts to obtain compliance by the borrower with all applicable provisions and requirements of any laws relating to FHA and/or HUD, and all rules and regulations promulgated pursuant thereto, including the prompt and timely giving of all notices required to be given by FHA and/or HUD. PEC shall be liable for damages for any insurance claims rejected by FHA and/or HUD where such rejection arises out of PEC's grossly negligent failure to perform any of its duties and obligations under this Agreement or under FHA and/or HUD requirements. I. PEC shall deliver to each borrower, after the end of each calendar year, but not later than January 31, a statement indicating the total amount of interest paid by each borrower during the calendar year. PEC shall deliver to MMC a complete listing of such statements, including the principal balance of each account as of December 31, and totals for both principal and interest. Such listing shall be provided to MMC no later than January 31 following the end of the year which is the subject matter of this statement. J. PEC shall prepare all reports as required by FHA, HUD, or the Internal Revenue Service and reports as customary to such servicing agreements and reasonably required by MMC. K. PEC shall maintain such facilities, equipment, and personnel as are at all times adequate for the performance of PEC'S duties hereunder. L. PEC shall maintain adequate books and records setting forth payments received and disbursements, if any, made pursuant to this Agreement, which books and records shall clearly state the respective interest and principal payments of each borrower. Said books shall be available for examination and audit by MMC at any time during normal business hours. MMC shall exercise good faith efforts to give PEC advance notice of MMC'S desire to examine/audit said records in order to minimize the 4 5 disruption of the business operations of PEC. All such records shall be maintained by PEC in accordance with generally accepted accounting practices. M. PEC shall furnish to MMC within one hundred twenty (120) days after the end of PEC'S fiscal year (August 31) a certified audit relating to PEC'S financial statements, as well as the statements of any subsidiaries of PEC which perform services for MMC. N. PEC shall handle any borrower inquiries and correspondence received with copies to MMC in disputed matters, other than for Loans turned over to MMC for collection after sixty (60) days of delinquency. O. PEC shall service all Loans in the same diligent manner in which it services its own receivables. P. PEC shall, with the written consent of MMC, have the right to subcontract any of its duties and responsibilities under this Agreement to a duly licensed third party; however, no such subcontracting shall limit PEC's liability under this Agreement. ARTICLE 4. COMPENSATION PEC shall bill MMC monthly for Servicing of Loans performed hereunder. MMC shall pay PEC within ten (10) days of receipt of such billing, a monthly servicing fee of one twelfth (1/12) of one half of one percent (0.50%) of the outstanding principal balance of all Loans being serviced on the first day of the prior month. A. The parties agree that payment pursuant to this Article represents full compensation to PEC for all duties and responsibilities required under this Agreement. B. Under no circumstances shall PEC have the right to assert any lien or encumbrance against any of MMC'S Loans or have any right to deprive MMC of title to or ownership of MMC Loans under this Agreement. ARTICLE 5. INSURANCE A. PEC shall maintain throughout the terms of this Agreement Fidelity Coverage (or furnish a Direct Surety Bond issued in favor of MMC) on policy forms normally used by servicers of the same class as PEC. Such coverage shall be in the amount at least equal to a percentage of its total servicing portfolio as set forth in the schedule below, and to be in compliance with HUD and/or Fannie Mae requirements. (Total servicing portfolio shall mean loans serviced by PEC for itself, MMC or others). 5 6 0.4% First $ 50,000,000.00 of principal serviced 0.2% Next 50,000,000.00 of principal serviced 0.15% Next 400,000,000.00 of principal serviced 0.125% Next 500,000,000.00 of principal serviced 0.1% Over 1,000,000,000.00 of principal serviced
A deductible clause in the amount of $5,000.00 or 0.1% of the face amount of Fidelity Coverage, whichever is higher, is permissible. Deviations from foregoing requirements will be considered by PEC upon request. B. PEC shall maintain throughout the term of this Agreement errors and omissions insurance in the amount of $1,000,000.00 on those of its employees having access to the Loan documents or to any amounts paid by MMC borrowers. C. PEC shall maintain throughout the term of this Agreement valuable papers insurance in amounts sufficient to protect against loss of documents transmitted to PEC by MMC. D. PEC shall forward to MMC evidence of payment by the renewal date of each policy and within thirty (30) days of each policy renewal date insurance renewal certificates to certify that such insurance remains in full force and effect. E. PEC shall promptly notify MMC if any insurance required by this Agreement is canceled for any reason within ten (10) business days of PEC'S knowledge of the cancellation. PEC shall promptly notify MMC of any insurer's refusal to renew any insurance at the expiration of the premium period. PEC shall also notify MMC of any more restrictive terms required by an insurer as a condition for renewal. ARTICLE 6. LOAN DATA PROPERTY OF MMC Only the data relating to MMC's Loans contained in the computer files of PEC is the property of MMC. PEC'S software is owned exclusively by PEC. PEC agrees to furnish such data to MMC on a computer printout, or other appropriate format, with instructions necessary to enable MMC to use such data. Such data shall be furnished as required within four weeks following a special request by MMC. ARTICLE 7. INDEMNIFICATION A. PEC agrees to indemnify, defend and hold harmless MMC for any loss, damage, reasonable expense, claims, and/or causes of action that may be asserted against MMC as a result of any gross negligence or willful misconduct on the part of PEC, its agents or employees in the performance of the services required by this Agreement. 6 7 B. PEC shall, within 48 hours, report to MMC all cases of embezzlement or other fraudulent, criminal or dishonest acts by the officers, employees or agents of PEC in the servicing of any Loans of MMC or others by PEC. ARTICLE 8. DURATION AND TERMINATION OF AGREEMENT A. This Agreement shall be in effect for one (1) year from the date hereof unless terminated sooner pursuant to paragraphs B through F below. Unless written notice is provided by either party hereto not less than ninety (90) days prior to the expiration of this one (1) year term, and the Agreement is not otherwise terminated pursuant hereto, this Agreement shall be extended until terminated under paragraphs B through F below. B. This Agreement may be terminated in whole or in part at any time by mutual written agreement of MMC and PEC. C. This Agreement may be terminated in whole or in part by MMC at any time with or without cause upon ninety (90) days advance written notice to PEC. D. This Agreement may be terminated in whole or in part by PEC at any time with or without cause upon ninety (90) days advance written notice to MMC. E. MMC and PEC each retain the right to terminate this Agreement immediately upon the occurrence of any of the following events affecting either PEC or MMC: 1. The insolvency of either company; 2. The filing by or against either company of a petition under any provision of bankruptcy law, or of an assignment for the benefit of creditors; 3. The appointment by any public or supervisory authority of any person or firm in charge of either company or its assets; 4. A material breach by either company of any covenant, representation, or warranty contained herein which breach is not cured within ten (10) business days of receipt by the breaching party of written notice thereof from the party asserting that a breach has occurred; 5. The issuance by an appropriate public monitoring or supervisory authority of a cease and desist order or its equivalent involving the safety, soundness or financial 7 8 liability of either company or against either company's directors and officers. 6. If MMC becomes delinquent in paying PEC; delinquency shall be defined as any amounts which are thirty (30) days past due. F. Upon termination of this Agreement, PEC shall promptly deliver to MMC all Loan payments received and supply all such reports, Loan documents and information as may be required by MMC, to any person or entity designated by MMC and shall use its best efforts to effect the orderly and efficient transfer of administration to a new servicer designated by MMC including preparation of accounting statements, and/or computer tapes, in such form as may be reasonably requested by MMC. PEC shall in no event have the right to assert a lien or claim on, or offset against, any Loan documents or Loan payments. ARTICLE 9. GENERAL PROVISIONS A. Loan shall mean a loan, evidenced by a Note, purchase contract or otherwise originated by MMC under the FHA Title I Program of the National Housing Act, or any other insured or uninsured lending programs. B. There shall be no modification of this Agreement unless agreed to by both parties in writing. C. No waiver by either party of any covenant or condition of this Agreement shall be valid unless in writing and signed by the party so waiving. D. This Agreement shall be governed by the laws of the State of Georgia. E. Invalidation of any one of the provisions of this Agreement, by judgment or court order, shall in no way affect any other provisions herein contained, which provisions shall remain in full force and effect. F. PEC contracts with MMC hereunder as an independent contractor. G. PEC may not assign this Agreement or its duties hereunder without the prior written consent of MMC, provided however that PEC may delegate/assign one or more of the Servicing duties set forth in this Agreement to one of PEC's wholly owned subsidiaries or to an agent(s) of PEC. H. This Agreement and all obligations and rights arising hereunder shall bind and inure to the benefit of MMC and PEC and their respective successors in interest and permitted assigns. 8 9 I. Headings to sections of this Agreement are for convenience of reference only and shall not be considered in the interpretation or performance of this Agreement. J. This Agreement shall be executed on one or more copies, but such counterparts shall together constitute but one and the same Agreement. K. In the event any Trustee or loan purchaser terminates MMC's authority to service any of the Loans covered hereby, this Agreement shall terminate as to such Loans. L. All notices, requests and demands to or upon the respective parties shall be deemed to have been given or made when personally delivered or when deposited in the mail, first class, mail registered or certified, return receipt requested and post prepaid as follows: 8.2.1 If to PEC, to: Preferred Equities Corporation 4310 Paradise Road Las Vegas, Nevada 89109 Attention: Frederick H. Conte, Executive Vice President and Chief Operating Officer 8.2.2 If to MMC, to: Mego Mortgage Corporation 1000 Parkwood Circle, Suite 500 Atlanta, Georgia 30339 Attention: James L. Belter, Executive Vice President, Treasurer and Chief Financial Officer
or to such other address as either such party shall notify the other. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers, as of the date hereof. MEGO MORTGAGE CORPORATION PREFERRED EQUITIES CORPORATION /s/ James L. Belter /s/ Frederick H. Conte - ------------------------------- ------------------------------ By: James L. Belter By: Frederick H. Conte Executive Vice President Executive Vice President _______________________________ _______________________________ DATE DATE 9 EX-10.20 8 OFFICE LEASE - MASSMUTUAL 1 EXHIBIT 10.20 Office Lease by and between MassMutual and MEGO MORTGAGE CORPORATION For: 1000 Parkwood 1000 Parkwood Circle Atlanta, GA 30339 A "MassMutual" Property 2 MM Equity No. 9201 OFFICE LEASE THIS LEASE, is made as of this 9th day of April, 1996 by and between MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY, a Massachusetts corporation ("Landlord") through its agent CORNERSTONE REAL ESTATE ADVISERS, INC., having an address at 1050 Crown Pointe Parkway, Suite 1780, Atlanta, Georgia 30338 and MEGO MORTGAGE CORPORATION, a Delaware corporation ("Tenant") having its principal office at 1000 Parkwood Circle, Suite 500, Atlanta GA 30339. INDEX Article Title 1. Basic Provisions 2. Premises, Term and Commencement Date 3. Rent 4. Operating Expenses 5. Landlord's Work, Tenant's Work, Alterations and Additions 6. Use 7. Services S. Insurance 9. Indemnification 10. Casualty Damage 11. Condemnation 12. Repair and Maintenance 13. Inspection of Premises 14. Surrender of Premises 15. Holding Over 16. Subletting and Assignment 17. Subordination, Attornment and Mortgagee Protection 18. Estoppel Certificate 19. Defaults 20. Remedies of Landlord 21. Quiet Enjoyment 22. Accord and Satisfaction 23. Security Deposit 24. Brokerage Commission 25. Force Majeure 26. Parking 27. Hazardous Materials 28. Additional Rights Reserved by Landlord 29. Defined Terms 30. Miscellaneous Provisions EXHIBITS Exhibit A Plan Showing Property and Premises Exhibit B Landlord's Work Exhibit C Tenant's Work Exhibit D Building's Rules and Regulations; Janitorial Specifications Exhibit E Commencement Date Confirmation Exhibit F Special Stipulations Exhibit G Guaranty 3 ARTICLE 1. BASIC PROVISIONS A. Tenant's Tradename: MEGO MORTGAGE CORPORATION B. Tenant's Address: 1000 Parkwood Circle, Suite 500, Atlanta, GA 30339 C. Office Building Name: 1000 PARKWOOD Address: 1000 Parkwood Circle Atlanta, GA 30339 D. Premises: Suites: 500 and 600 Approximate Square feet (Rentable): 45,950 E. Landlord: Massachusetts Mutual Life Insurance Company F. Landlord's Address: c/o: Cornerstone Real Estate Advisers, Inc. 1050 Crown Pointe Parkway, Suite 1780 Atlanta, GA 30338 G. Building Manager/Address: CARTER & ASSOCIATES 1275 Peachtree St., Atlanta, GA 30367-1801 H. Commencement Date: July 1. 1996 1. Expiration Date: June 30, 2002 J. Options to Extend: See Special Stipulations K. Security Deposit: $ 73,711.46 L. Monthly Rent: $73, 711.46 M. Operating Expenses Base: 1996 Actual Expenses (To Be Determined) N. Tenant's Pro Rata Share: 21.86 %. Tenant's Pro Rata Share shall be determined by and adjusted by Landlord from time to time (but shall not be readjusted sooner than the commencement of the second Lease year), by dividing the Tenant's Rentable Square Feet of the Premises by the rentable area of the Building and multiplying the resulting quotient, to the second decimal place, by one hundred. 0. Normal Business Hours of Building: Monday through Friday: 7:00 a.m. to 7:00 p.m. Saturday- 8:00 a.m. to 1:30 p.m. Sunday: a. m. to p.m.
P. Prepaid Rent: None Q. Parking Spaces: 184 Fee (parking spaces x rate/per month): $0.00 for Initial Term R. Brokers: Carter & Associates, L.L.C. (Agent for Landlord) Koll Management Services, Inc. (Agent for Tenant) 4 The foregoing provisions shall be interpreted and applied in accordance with the other provisions of this Lease set forth below. In the event of any ambiguity or dispute in interpretation, the foregoing provisions shall control. The capitalized terms, and the terms defined in Article 29, shall have the meanings set forth herein or therein (unless otherwise modified in the Lease) when used as capitalized terms in other provisions of the lease. ARTICLE 2. PREMISES, TERMS AND COMMENCEMENT DATE Landlord hereby leases and demises to the Tenant and Tenant hereby takes and team from Landlord that certain space identified in Article 1 and shown on a plan attached hereto as Exhibit A ("Premises") for a term ("Term") commencing on the Commencement Date and ending on the Expiration Date set forth in Article 1, unless sooner terminated as provided herein, subject, to the provisions herein contained. The Commencement Date set forth in Article 1 shall be advanced to such earlier date as Tenant commences occupancy of the Premises for the conduct of its business. Such date shall be confirmed by execution of the Commencement Date Confirmation in the form as set forth in Exhibit E. If Landlord delays delivering possession of the Premises or substantial completion of any Landlord's Work under Exhibit B, this Lease shall not be void or voidable, except as provided in Article 5. and Landlord shall have no liability for loss or damage resulting therefrom. ARTICLE 3. RENT A. Monthly Rent. Tenant shall pay Monthly Rent in advance on or before the first day of each month of the Term. If the Term shall commence and end on a day other than the first day of a month, the Monthly Rent for the first and last partial month shall be prorated on a per diem basis. Upon the execution of this Lease, Tenant shall pay one installment of Monthly Rent for the first full month of the Term and a prorated Monthly Rent for any partial month which may precede it. B. Additional Rent. All costs and expenses which Tenant assumes or agrees to pay and any other sum payable by Tenant pursuant to this Lease, including, without limitation, its share of Operating Expenses, shall be deemed Additional Rent. C. Rent. Monthly Rent, Additional Rent and Operating Expenses and any other amounts which Tenant is or becomes obligated to pay Landlord under this Lease are herein referred to collectively as 'Rent', and all remedies applicable to the nonpayment of Rent shall be applicable thereto. Landlord may apply payments received from Tenant to any obligations of Tenant then accrued, without regard to such obligations as may be designated by Tenant. D. Place of Payment, Late Charge. Rent and other charges required to be paid under this Lease, no matter how described, shall be paid by Tenant to Landlord at the Building Manager's address listed in Article 1, or to such other person and/or address as Landlord may designate in writing, without any prior notice or demand therefor and, other than as may be allowed by state or local law, without deduction or set-off or counterclaim and without relief from any valuation or appraisement laws. In the event Tenant fails to pay Rent due under this Lease within Ten (10) days of due date of said Rent, Tenant shall pay to Landlord a late charge of ten percent (10%) on the amount overdue. ARTICLE 4. OPERATING EXPENSES A. Payment of Operating Expenses. It is agreed that during each Lease Year beginning with the first month of the second Lease Year and each month thereafter during the original Lease Term, or any extension thereof, Tenant shall pay to Landlord as Additional Rent, at the same time as the Monthly Rent is paid, an amount equal 5 to one-twelfth (1/12) of Landlord's reasonable estimate of Tenant's Pro Rata Share of any projected increase in the Operating Expenses for a particular Lease Year in excess of the Operating Expenses Base (the "Estimated Escalation Increase"). A final adjustment (the "Escalation Reconciliation") shall be made between the parties as soon as practicable following the end of each Lease Year, but in no event later than ninety (90) days after the end of each Lease Year. In computing the Estimated Escalation Increase for any particular Lease Year, Landlord shall take into account any prior increases in Tenant's Pro Rata Share of Operating Expenses. If during any Lease Year the Estimated Escalation Increase is less than the Estimated Escalation Increase for the previous Lease Year on which Tenant's share of Operating Expenses were based for said year, such Additional Rent payments, attributable to Estimated Escalation Increase, to be paid by Tenant for the new Lease Year shall be decreased accordingly; provided, however, in no event will the Rent paid by Tenant hereunder ever be less than the Monthly Rent, its Pro Rata Share of the Operating Expenses Base, plus all other amounts of Additional Rent. As soon as practicable following the end of each Lease Year during the initial Lease Term, or any extension thereof, including the first Lease Year, Landlord shall submit to Tenant a statement prepared by Landlord, setting forth the Estimated Escalation Increase, if any. Beginning with the second Lease Year, the statement shall also set forth the Escalation Reconciliation for the Lease Year just completed. To the extent that the Operating Expense Escalation is different from the Estimated Escalation Increase upon which Tenant paid Rent during the Lease Year just completed, Tenant shall pay Landlord the difference in cash within thirty (30) days following receipt by Tenant of such statement from Landlord, or receive a credit on the next payment of Rent owing hereunder as the case may be. Until Tenant receives such statement, Tenant's Rent for the new Lease Year shall continue to be paid at the rate being paid for the particular Lease Year just completed, but Tenant shall commence payment to Landlord of the monthly installment of Additional Rent on the basis of said statement beginning on the first day of the month following the month in which Tenant receives such statement. In addition to the above, if, during any particular Lease Year, there is a change in the information on which Landlord based the estimate upon which Tenant is then making its estimated payment of Operating Expenses so that such Estimated Escalation Increase furnished to Tenant is no longer accurate, Landlord shall be permitted to revise such Estimated Escalation Increase by notifying Tenant, and there shall be such adjustments made in the Additional Rent on the first day of the month following the serving of such statement on Tenant as shall be necessary by either increasing or decreasing, as the case may be, the amount of Additional Rent then being paid by Tenant for the balance of the Lease Year (but in no event shall any such decrease result in a reduction of the rent below the Monthly Rent, Tenant's Pro Rata Share of the Operating Expenses Base, plus all other amounts of Additional Rent), as well as a payment by Tenant or credit to the Tenant as appropriate based upon the amount theretofore paid by Tenant during such particular Lease Year pursuant to the prior estimate. Landlord's and Tenant's responsibilities with respect to the Operating Expense adjustment described herein shall survive the expiration or early termination of this Lease. If the Building is not fully occupied during any particular Lease Year, Landlord shall adjust those Operating Expenses which are affected by Building occupancy for the particular Lease Year, or portion thereof, as the case may be, to reflect an occupancy of not less than ninety-five percent (95%) of all such rentable area of the Building. B. Disputes Over Operating Expenses. If Tenant disputes the amount of an adjustment or the proposed estimated increase or decrease in Operating Expenses, Tenant shall give Landlord written notice of such dispute within thirty (30) days after Landlord advises Tenant of such adjustment or proposed increase or decrease. Tenant's failure to give such notice shall waive its right to dispute the amounts so determined. If Tenant timely objects, Tenant shall have the right if Landlord disagrees with Tenant, to engage its own Accountants or experts ("Tenant's Accountants") for the purpose of verifying the accuracy of the statement in dispute, or the reasonableness of the adjustment or estimated increase or decrease. If Tenant's Accountants determine that an error has been made, Landlord and Tenant's Accountants shall endeavor to agree upon the matter, failing which Landlord and Tenant's Accountants shall jointly select an independent certified public accounting firm (the "Independent Accountant") which firm shall conclusively determine whether the adjustment or estimated increase or decrease is reasonable, and if not. what amount is reasonable. Both parties shall be bound by such 6 determination. If Tenant's Accountants do not participate in choosing the Independent Accountant within 20 days notice by Landlord, then Landlord's determination of the adjustment or estimated increase or decrease shall be conclusively determined to be reasonable and Tenant shall be bound thereby. All costs incurred by Tenant in obtaining Tenant's Accountants and the cost of the Independent Accountant shall be paid by Tenant unless Tenant's Accountants disclose an error, acknowledged by Landlord (or found to have conclusively occurred by the Independent Accountant), of more than ten percent, (10%) in the computation of the total amount of Operating Expense as set forth in the statement submitted by Landlord with respect to the matter in dispute; in which event Landlord shall pay the reasonable costs incurred by Tenant in obtaining such audits. Tenant shall continue to timely pay Landlord the amount of the prior year's adjustment and adjusted Additional Rent determined to be incorrect as aforesaid until the parties have concurred as to the appropriate adjustment or have deemed to be bound by the determination of the Independent Accountant in accordance with the preceding terms. Landlord's delay in submitting any statement contemplated herein for any Lease Year shall not affect the provisions of this Paragraph, nor constitute a waiver of Landlord's rights as set forth herein for said Lease Year or any subsequent Lease Years during the Lease Term or any extensions thereof. ARTICLE 5. LANDLORD'S WORK, TENANT'S WORK, ALTERATIONS AND ADDITIONS A. Landlord's Work. Landlord shall diligently proceed to construct the Premises in accordance with Landlord's obligations as set forth in the work letter attached hereto as Exhibit B, and hereinafter referred to as "Landlord's Work". Landlord will deliver the Premises to Tenant with all of Landlord's Work completed to Tenant's reasonable satisfaction (except for minor and non-material punch list items which Landlord shall diligently work to complete and which in Landlord's reasonable judgment will not delay completion of Tenant's Work, as defined in subparagraph B of this Article) on or before the number of days specified in Exhibit B and Tenant agrees thereupon to commence and complete Tenant's Work on or before the Commencement Date. If Landlord is delayed in completing Landlord's Work by strike, shortages of labor or materials, delivery delays or other matters beyond the reasonable control of Landlord, then Landlord shall give notice thereof to Tenant and the date on which Landlord is to turn the Premises over to Tenant for Tenant's Work and the Commencement Date shall be postponed for an equal number of days as the delay as set forth in the notice. Providing, however, if such delays exceed ninety (90) days, then either Landlord or Tenant upon notice to the other shall have other shall have the right to terminate this Lease without liability to either party. If the Commencement Date is postponed as aforesaid, Tenant agrees upon request of Landlord to execute a writing confirming the Commencement Date on such form as set forth in Exhibit E attached hereto. B. Tenant's Work. On and after the date specified in the immediately preceding subparagraph A for delivery of the Premises to Tenant for Tenant's Work, Tenant, at its sole cost and expense, shall perform and complete all other improvements to the Premises (herein called "Tenant's Work") including, but not limited to, all improvements, work and requirements required of Tenant under the foregoing work letter. Tenant shall complete all of Tenant's Work in good and workmanlike manner, fully paid for and free from liens, in accordance with the plans and specifications approved by Landlord and Tenant as provided in Exhibit C, on or prior to the scheduled Commencement Date. Tenant shall also have the right during this period to come onto the Premises to install its mixtures and prepare the Premises for the operation of Tenant's business. Notwithstanding the fact that foregoing activities by Tenant will occur prior to the scheduled Commencement Date, Tenant agrees that all of Tenant's obligations provided for in this Lease shall apply during such period with the exception of any obligation to pay Rent. C. Alterations. Except as provided in the immediately preceding subparagraph, Tenant shall make no alterations or additions to the Premises without the prior written consent of the Landlord, which consent Landlord shall not unreasonably withhold. D. Liens. Tenant shall give Landlord at least ten (10) days prior written notice (or such additional time as may be necessary under applicable laws) of the commencement of any Tenant's Work, to afford Landlord the 7 opportunity of posting and recording notices of nonresponsiblity. Tenant will not cause or permit as a result of Tenant's work any mechanic's, materialman's or similar liens or encumbrances to be filed or exist against the Premises or the Building or Tenant's interest in this Lease in connection with work done by Tenant under this Article. A Tenant may contest such lien but shall nonetheless remove any such lien or encumbrance by bond or otherwise within twenty (20) days from the date of their existence. If Tenant fails to do so, Landlord may pay the amount or take such other action as Landlord deems reasonably necessary to remove any such lien or encumbrance, without being responsible to investigate the validity thereof. The amounts so paid and costs incurred by Landlord shall be deemed Additional Rent under this Lease and payable in full upon demand. ARTICLE 6. USE A. Use. Tenant shall use the Premises for general office purposes, and for no other purpose whatsoever, subject to and in compliance with all other provisions of this Lease, including without limitation the Building's Rules and Regulations attached as Exhibit D hereto. Tenant and its invitees shall also have the nonexclusive right along with other tenants of the Building and others entitled to use the same and subject to such rules and regulations as Landlord in its discretion may impose from time to time to use the Common Areas. B. Restrictions. Tenant shall not at any time use or occupy, or suffer or permit anyone to use or occupy, the Premises or do or permit anything to be done in the Premises which: (a) causes or is liable to cause injury to persons, to the Building or its equipment, facilities or systems; (b) impairs or tends to impair the character, reputation or appearance of the Building as a first class office building; (c) impairs or tends to impair the proper and economic maintenance, operation and repair of the Building or its equipment, facilities or systems; or, (d) annoys or inconveniences or tends to annoy or inconvenience other tenants or occupants of the Building. C. Compliance with Laws. Tenant shall keep and maintain the Premises, its use thereof and its business in compliance with all governmental laws, ordinances, rules and regulations. Tenant shall comply with all Laws relating to the Premises and Tenant's use thereof, including without limitation, Laws requiring the Premises to be closed on Sundays or any other days or hours and Laws in connection with the health. safety and building codes, and any permit or license requirements. Landlord makes no representation that the Premises are suitable for Tenant's purposes. ARTICLE 7. SERVICES A. Climate Control. Landlord shall provide climate control to the Premises during Normal Business Hours of Building as set forth in Article 1 as required in Landlord's reasonable judgment for the comfortable use and occupation of the Premises. If Tenant requires climate control at any other time, Landlord shall use reasonable efforts to furnish such service upon reasonable notice from Tenant, and Tenant shall pay all of Landlord's actual costs therefore on demand. The performance by Landlord of its obligations under this Article is subject to Tenant's compliance with the conditions of occupancy and connected electrical load established by Landlord. Use of the Premises or any part thereof in a manner exceeding the heating, ventilating or air-conditioning ("HVAC") design conditions including occupancy and connected electrical load), including rearrangement of partitioning which interferes with normal operation of the HVAC in the Premises, or the use of computer or data processing machines or other machines or equipment, may require changes in the HVAC or plumbing systems or controls servicing the Premises or portions thereof, in order to provide comfortable occupancy. Any such required change shall be made by Landlord at Tenant's expense as alterations in accordance with the provisions of Article 5, but only to the extent permitted and upon the conditions set forth in that Article. 8 B. Elevator Service. If the Building is equipped with elevators, Landlord, during Normal Business Hours of Building, shall furnish elevator service to the premises to be used in common with others. At least one elevator shall remain in service during all hours that are not Normal Business Hours of the Building. Landlord may designate a specific elevator for use as a service elevator. C. Janitorial Services. Landlord shall make janitorial and cleaning services available to the Premises. Tenant shall pay to Landlord on demand the costs incurred by Landlord for (i) extra cleaning in the Premises required because of (A) misuse or neglect on the part of Tenant or Tenant's agents, contractors, invitees, employees and customers, (B) the use of portion of the Premises for special purposes requiring greater or more difficult cleaning work than office areas, (C) interior glass partitions or unusual quantities of interior glass surfaces, and (D) non-building standard materials or finishes installed by Tenant or at its request; and (ii) removal from the Premises of any refuse and rubbish of Tenant in excess of that ordinarily accumulated in general office occupancy or at times other than Landlord's standard cleaning times. D. Water and Electricity. Landlord shall make available domestic water in reasonable quantities to the common areas ( and to the Premises if so designated in Exhibit B) and cause electric service equivalent to the watt load to be supplied for lighting the Premises and for the operation of Ordinary Office Equipment. "Ordinary Office Equipment" shall mean office equipment wired for 120 volt electric service and rated and using less than 6 amperes or 750 watts of electric current. Landlord shall have the exclusive right to make any replacement of lamps, fluorescent tubes and lamp ballasts in the Premises. Landlord may adopt a system of relamping and ballast replacement periodically on a group basis in accordance with good management practice. Tenant's use of electric energy in the Premises shall not at any time exceed the capacity of any of the risers, piping, electrical conductors and other equipment in or serving the Premises. In order to insure that such capacity is not exceeded and to avert any possible adverse effect upon the Building's electric system, Tenant shall not, without Landlord's prior written consent in each instance, connect appliances or heavy duty equipment, other than ordinary office equipment, to the Building's electric system or make any alteration or addition to the Building's electric system. Should Landlord grant its consent in writing, all additional risers, piping and electrical conductors or other equipment therefor shall be provided by Landlord and the cost thereof shall be paid by Tenant within 10 days of Landlord's demand therefor. As a condition to granting such consent, Landlord may require Tenant to agree to an increase in Monthly Rent by the expected cost to Landlord of such additional service, that is, the cost of the additional electric energy to be made available to Tenant based upon the estimated additional capacity of such additional risers, piping and electrical conductors or other equipment. If Landlord and Tenant cannot agree thereon, such cost shall be determined by an independent electrical engineer, to be selected by Landlord and paid equally by both parties. E. Separate Meters. Landlord may install separate meters for the Premises to register the usage of all or any one of the utilities and in such event Tenant shall pay for the cost of electricity usage as metered which is in excess of the reasonable watt load (as established by the Landlord), or in the case of other utilities, the metered usage in excess of that usage reasonably anticipated by Landlord. Tenant shall reimburse Landlord for the cost of installation of meters if such usage exceeds the watt load (or such anticipated usage, as the case may be) by more than 10 percent. In any event, Landlord may require Tenant to reduce its consumption to the watt load or such anticipated usage. F. Interruptions. Landlord does not warrant that any of the services referred to above, or any other services which Landlord may supply, will be free from interruption and Tenant acknowledges that any one or more of such services may be suspended by reason of accident, repairs, inspections, alterations or improvements necessary to be made, or by strikes or lockouts, or by reason of operation of law, or causes beyond the reasonable control of Landlord. Any interruption or discontinuance of service shall not be deemed an eviction or disturbance of Tenant's use and possession of the Premises, or any part thereof, nor render Landlord liable to Tenant for damages, nor relieve Tenant from performance of Tenant's obligations under this Lease. Notwithstanding, should such interruption or discontinuance of service continue for ten (10) consecutive business days, Tenant shall be entitled to abate Rent for each day thereafter that such service is not restored. Landlord shall however, exercise reasonable diligence to restore any service so interrupted. G. Utilities Provided by Tenant. Tenant shall make application in Tenant's own name for all utilities not provided by Landlord and shall: (i) comply with all utility company regulations for such utilities, including requirements for 9 the installation of meters, and (ii) obtain such utilities directly from, and pay for the same when due directly to, the applicable utility company. The term "utilities" for purposes hereof shall include but not be limited to electricity, gas, water, sewer, steam, fire protection, telephone and other communication and alarm services, as well as HVAC, and all taxes or other charges thereon. Tenant shall install and connect all equipment and lines required to supply such utilities to the extent not already available at or serving the Premises, or at Landlord's option shall repair, alter or replace any such existing items. Tenant shall maintain, repair and replace all such items, operate the same, and keep the same in good working order and condition. Tenant shall not install any equipment or fixtures, or use the same, so as to exceed the safe and lawful capacity of any utility equipment or lines serving the same. The installation, alteration, replacement or connection of any utility equipment and lines shall be subject to the requirements for alterations of the Premises set forth in Article 5. Tenant shall ensure that all HVAC equipment is installed and operated at all times in a manner to prevent roof leaks, damage, or noise due to vibrations or improper installation, maintenance or operation. ARTICLE 8 INSURANCE A. Required Insurance. Tenant shall maintain insurance policies, with responsible companies licensed to do business in the state where the Building is located and satisfactory to Landlord, naming Landlord, Landlord's Building Manager or agent, Tenant and any Mortgagee of Landlord, as their respective interest may appear, at its own cost and expense including (i) "all risk" property insurance which shall be primary on the lease improvements referenced in Article 5 and Tenant's property, including its goods, equipment and inventory, in an amount adequate to cover their replacement cost; (ii) income loss coverage, (iii) comprehensive general liability insurance on an occurrence basis with limits of liability in an amount not less than $1,000,000 (One Million Dollars) combined single limit for each occurrence. The comprehensive general liability policy shall include contractual liability which includes the provisions of Article 9 herein. On or before the Commencement Date of the Lease, Tenant shall furnish to Landlord and its Building Manager, certificates of insurance evidencing the aforesaid insurance coverage, including naming Landlord and Landlord's Building Manager or agent as additional insureds. Renewal certificates shall be furnished at least thirty (30) days prior to the expiration date of such insurance policies showing the above coverage to be in full force and effect. All such insurance shall provide that it cannot be canceled except upon thirty (30) days prior written notice to Landlord or designated property manager or agent. Tenant shall comply with all rules and directives of any insurance board, company or agency determining rates of hazard coverage for the Premises, including but not limited to the installation of any equipment and/or the correction of any condition necessary to prevent any increase in such rates. B. Subrogation. Landlord and Tenant each agree that neither Landlord nor Tenant will have any claim against the other for any loss, damage or injury which is covered by insurance carried by either party and for which recovery from such insurer is made, notwithstanding the negligence of either party in causing the loss. This release shall be valid only if the insurance policy in question permits waiver of subrogation or if the insurer agrees in writing that such waiver of subrogation will not affect coverage under said policy. Each party agrees to use its best efforts to obtain such an agreement from its insurer if the policy does not expressly permit a waiver of subrogation. C. Waiver of Claims. Except for claims arising from Landlord's intentional or grossly negligent acts that are not covered by Tenant's insurance hereunder, Tenant waives all claims against Landlord for injury or death to persons, damage to property or to any other interest of Tenant sustained by Tenant or any party claiming, through Tenant resulting from: (i) any occurrence in or upon the Premises, (ii) leaking of roofs, bursting, stoppage or leaking of water, gas, sewer or steam pipes or equipment, including sprinklers, (iii) wind, rain, snow, ice, flooding, freezing, fire, explosion, earthquake, excessive heat or cold, or other casualty, (iv) the Building, Premises, or the operating and mechanical systems or equipment of the Building, being defective, out of repair, or failing, and (v) vandalism, malicious mischief, theft or other acts of omission of any other parties including without limitation, other tenants, contractors and invitees at the Building. Subject to claims arising from Landlord's intentional or grossly negligent 10 acts, Tenant agrees that Tenant's property loss risks shall be borne by its insurance, and Tenant agrees to look solely to and seek recovery only from its insurance carriers in the event of such losses. For purposes hereof, any deductible amount shall be treated as though it were recoverable under such policies. ARTICLE 9. INDEMNIFICATION Except for claims arising from Landlord's intentional or grossly negligent acts or for claims asserted directly by Landlord against Tenant or vice versa, Tenant shall indemnify and hold harmless Landlord and its agents, successors and assigns, including its Building Manager, from and against all injury, loss, costs, expenses, claims or damage (including attorney's fees and disbursements) to any person or property arising from, related to, or in connection with any use or occupancy of the Premises by or any act or omission (including, without limitation, construction and repair of the Premises arising out of Tenant's Work or subsequent work) of Tenant, its agents, contractors, employees, customers, and invitees, which indemnity extends to any and all claims arising form any breach or default in the performance of any obligation on Tenant's part to be performed under the terms of this Lease. This indemnification shall survive the expiration or termination of the Lease Term., for any action or proceeding brought within one (1) year of any such expiration or termination. Landlord shall not be liable to Tenant for any damage by or from any act or negligence of any co-tenant or other occupant of the Building, or by any owner or occupants of adjoining or contiguous property. Landlord shall not be liable for any injury or damage to persons or property resulting in whole or in part from the criminal activities of others. To the extent not covered by all risk property insurance, Tenant agrees to pay for all damage to the Building, as well as all damage to persons or property of other tenants or occupants thereof, caused by the negligence, fraud or willful misconduct of Tenant or any of its agents, contractors, employees, customers and invitees. Landlord shall be liable to Tenant or shall indemnify Tenant for any damage incurred by Tenant resulting from Landlord's gross negligence, fraud or willful misconduct or for any default by Landlord in the observance or performance by Landlord of any of the terms, covenants and conditions of this Lease on Landlord's part to be observed or performed and Landlord fails to cure such default within the time frames called for in this Lease or a reasonable time. ARTICLE 10. CASUALTY DAMAGE Tenant shall promptly notify Landlord or the Building Manger of any fire or other casualty to the Premises or to the extent it knows of damage, to the Building. In the event the Premises or any substantial part of the Building is wholly or partially damaged or destroyed by fire or other casualty, the Landlord will proceed to restore the same to substantially the same condition existing immediately prior to such damage or destruction unless such damage or destruction is incapable of repair or restoration within one hundred twenty (120) days, in which event Landlord may, at Landlord's option and by written notice given to Tenant within thirty (30) days of such damage or destruction, declare this Lease terminated as of the happening of such damage or destruction. To the extent after fire or other casualty that Tenant shall be deprived of the use and occupancy of the Premises or any portion thereof as a result of any such damage, destruction or the repair thereof, providing Tenant did not cause the fire or other casualty, Tenant shall be relieved of the same ratable portion of the fixed rental hereunder as the amount of damaged or useless space in the Premises as reasonably determined by Landlord and Tenant. ARTICLE 11. CONDEMNATION In the event of a condemnation or taking of the entire Premises by a public or quasi-public authority, this Lease shall terminate as of the date title vests in the public or quasi-public authority. In the event of a taking or condemnation of fifteen percent (15%) or more (but less than the whole) of the Building and without regard to 11 whether the Premises are part of such taking or condemnation, Landlord may elect to terminate this Lease by giving notice to Tenant within sixty (60) days of Landlord receiving notice of such condemnation. In the event of a condemnation or taking of twenty-five percent (25%) or more of the Premises, which taking or condemnation results in (i) the Premises being no longer accessible by Tenant, or (ii) utility services no longer being provided to the Premises, either of which events prevent Tenant from operating its business in the ordinary course and if Landlord is unable to provide reasonably acceptable alternative space to Tenant within thirty (30) days from the date of the court order authorizing such condemnation or taking then Tenant may elect to terminate this Lease by giving Landlord thirty (30) days prior written notice after the thirty (30) day relocation period. All compensation awarded for any condemnation shall be the property of Landlord, whether such damages shall be awarded as a compensation for diminution in the value of the leasehold or to the fee of the Premises, and Tenant hereby assigns to Landlord all of Tenant's right, title and interest in and to any and all such compensation. Providing, however that in the event this Lease is terminated, Tenant shall be entitled to a separate claim available to Tenant for loss of leasehold improvements (including fixtures paid for by Tenant), the taking of Tenant's personal property and for costs of moving. Notwithstanding the foregoing to the contrary, any condemnation award to Tenant shall be available only to the extent such award is payable separately to Tenant and does not diminish the award available to Landlord or any Lender of Landlord and such award shall be limited to the amount of Rent actually paid by Tenant to Landlord for the period of time for which the award is given. Any additional portion of such award shall belong to Landlord. ARTICLE 12. REPAIR AND MAINTENANCE A. Tenant's Obligations. Tenant shall keep the Premises in good working order, repair and condition (which condition shall be neat, clean and sanitary, and free of pests and rodents) and in compliance with all Laws now or hereafter adopted pertaining to the Premises and shall diligently maintain and repair all nonstructural aspects of the Premises not included in Landlord's obligations below. B. Landlord's Obligations. Landlord shall maintain (i) the foundations, roof, perimeter walls and exterior windows, and all structural aspects of the Building, and (ii) all nonstructural aspects of the Building which relate to the Common Areas or to more than one tenant's premises, or which no tenant of the Building is required to maintain and repair, including all systems and facilities necessary for the operation of the Building and the provision of services and utilities as required herein (except to the extent that any of the foregoing items are installed by or on behalf of, or are the property of, Tenant). Landlord shall also make any routine or ordinary necessary repairs to the Building standard mechanical, HVAC, electrical, and Plumbing systems in or servicing the Premises (the cost of which shall be included in Operating Expenses under Article 4, unless such costs are capital in nature), excluding repairs required to be made by Tenant pursuant to this Article. Landlord shall have no responsibility to make any repairs unless and until Landlord receives written notice of the need for such repair or Landlord otherwise is aware that repairs are needed. Landlord shall have thirty (30) days in which to make such repairs or maintenance after receiving notice from Tenant or otherwise becoming aware of the need, unless such repairs or maintenance cannot be completed within such thirty (30) day period. In such case, Landlord shall diligently commence and pursue the completion of such repairs and/or maintenance within such thirty (30) day period. If such repairs and maintenance cannot be completed with thirty (30) days or a reasonable time thereafter so long as Landlord is diligently pursuing completion of same, then Tenant's Rent shall abate commencing on the forty-fifth (45th) day after Landlord commences the repair and maintenance for each day until completion. Landlord shall make every reasonable effort to perform all such repairs or maintenance in such a manner (in its judgment) so as to cause minimum interference with Tenant and the Premises but Landlord shall not be liable to Tenant for any interruption or loss of business pertaining to such activities. Landlord shall have the right to require that any damage caused by the willful misconduct of Tenant or any of Tenant's agents, contractors, employees, invitees or customers, be paid for and performed by the Tenant (without limiting Landlord's other remedies herein). C. General Obligations. Alterations to the Premises required from time to time to comply with applicable laws, requirements of any board of property insurance underwriters or similar entity, or reasonable requirements of Landlord's or Tenant's insurers shall be made by the party to this Lease responsible for maintaining and repairing 12 the applicable aspect of the Premises hereunder. Notwithstanding the foregoing, in the event that Landlord is required to make any such alteration as the result of any use of the Premises by Tenant (i) which was not contemplated at the time this Lease was signed and (ii) which is not common to 50% or more of the tenants of the Building, Tenant shall reimburse Landlord upon demand for all expenses reasonably incurred by Landlord in connection therewith, plus 10% of such expenses to cover Landlord's internal administrative costs. If reasonably necessary to comply with changes in applicable laws and requirements, Landlord may take back a portion or portions of the Premises provided that the Monthly Rent and Additional Rent shall be abated in proportion to any resulting impairment of Tenant's use of the Premises; and provided further that, if such impairment (in the aggregate) exceeds impairment of Tenant's use of the Premises; and provided further that, if such impairment (in the aggregate) exceeds 5%. Tenant shall be entitle to terminate this Lease by irrevocable written notice to Landlord within 20 business days following the date of such taking. Landlord warrant to Tenant that, as of the Commencement Date, all aspects of the Premises comprising Landlord's Work, if any, shall comply with all applicable laws, with the requirements of Landlord's insurers, and with the requirements of all boards of property insurance underwriters and similar entities. D. Signs and Obstructions. Tenant shall not obstruct or permit the obstruction of light, halls, Common Areas, roofs, parapets, stairways or entrances to the Building or the Premises and will not affix, paint, erect or inscribe any sign, projection, awning, signal or advertisement of any kind to any part of the Building or the Premises, including the inside or outside of the windows or doors, without the written consent of Landlord. Landlord shall have the right to withdraw such consent at any time and to require Tenant to remove any sign, projection, awning, signal or advertisement to be affixed to the Building or the Premises. If such work is done by Tenant through any person, firm or corporation not designated by Landlord, or without the express written consent of Landlord, Landlord shall have the right to remove such signs, projections, awnings, signals or advertisements without being liable to the Tenant by reason thereof and to charge the cost of such removal to Tenant as Additional Rent, payable within ten (10) days of Landlord's demand therefor. E. Outside Services. Landlord shall provide for and Tenant shall not otherwise permit, except by a person or company reasonably satisfactory to and approved by Landlord: (i) the extermination of vermin in, on or about the Premises; (ii) the servicing of heating, ventilating and air conditioning equipment; (iii) the collection of rubbish and trash other than in compliance with local government health requirements and in accordance with the rules and regulations established by Landlord, which shall minimally provide that Tenant's rubbish and trash shall be kept in containers located so as not to be visible to members of the public and in a sanitary and neat condition; or (iv) the window cleaning, janitorial services or similar work in the Premises. In the remaining 180 days of the initial Lease Term or any extended term, Tenant shall permit the Landlord, the Building Manager and its authorized representatives to enter the Premises to show the Premises during Normal Business Hours of Building. Tenant shall allow the Landlord's Building Manager and its authorized agents reasonable access to the Premises to inspect the Premises and to make such repairs, improvements or additions in the Premises or in the Building of which they are a part as may be necessary or appropriate. Landlord shall make every effort to perform all such repairs, improvements and additions in such a manner (in its judgment) so as to cause minimum interference with Tenant and the Premises but so long as Landlord performs same during reasonable hours Landlord shall not be liable to Tenant for any interruption or loss of business pertaining to such activities. ARTICLE 14. SURRENDER OF PREMISES Upon the expiration of the Term, or sooner termination of the Lease, Tenant shall quit and surrender to Landlord the Premises, broom clean, in good order and condition, normal wear and tear and damage by fire and other casualty excepted. All leasehold improvements that are not fixtures, and fixtures that can be removed by Tenant with the Premises repaired to its original condition, reasonable wear and tear excepted, such as light fixtures and HVAC equipment, wall coverings, carpeting and drapes, in or serving the Premises, whether installed by Tenant or Landlord, shall be Tenant's property. Any property not removed upon expiration of the Term, or soon termination 13 of the Lease, shall be deemed to have been abandoned by Tenant and may be retained or disposed of by Landlord at Tenant's expense free of any and all claims of Tenant, as Landlord shall desire. All property not removed from the Premises by Tenant may be handled or stored by Landlord at Tenant's expense and Landlord shall not be liable for the value, preservation or safekeeping thereof. At Landlord's option all or part of such property may be conclusively deemed to have been conveyed by Tenant to Landlord as if by bill of sale without payment by Landlord. The Tenant hereby waives to the maximum extent allowable the benefit of all laws now or hereafter in force in this state or elsewhere exempting property from liability for rent or for debt. ARTICLE 15. HOLDING OVER Tenant shall pay Landlord 200% of the amount of Rent then applicable prorated on a per diem basis for each day Tenant shall retain possession of the Premises or any part thereof after expiration or earlier termination of this Lease, together with all damages sustained by Landlord on account thereof. The foregoing provisions shall not serve as permission for Tenant to hold-over, nor serve to extend the Term (although Tenant shall remain bound to comply with all provisions of this Lease until Tenant vacates the Premises) and Landlord shall have the right at any time thereafter to enter and possess the Premises and remove all property and persons therefrom. ARTICLE 16. SUBLETTING AND ASSIGNMENT Tenant shall not, without the prior written consent of Landlord (which shall not be unreasonably withheld so long as such proposed replacement tenant meets the criteria, in Landlord's sole discretion, as set forth below), endorsed thereon, list the Premises or any part thereof as available for assignment or sublease with any broker or agent or otherwise advertise, post, communicate or solicit prospective assignees or subtenants through any direct or indirect means, nor assign this Lease or any interest thereunder, or sublet Premises or any part thereof, or permit the use of Premises by any party other than Tenant. In the event that during the term of this Lease, Tenant desires to sublease and introduces Landlord to a proposed replacement tenant for Tenant, which replacement tenant is of financial strength at least equal to that of Tenant (as determined by Landlord in its reasonable discretion) and has a use for Premises and a number of employees reasonably consistent with that of Tenant's operation, the Landlord may consider such replacement tenant and promptly notify Tenant as to Landlord's choice, at Landlord's sole discretion, of the following: (1) That Landlord consents to a subleasing of Premises to such replacement tenant provided that Tenant shall remain fully liable for all of its obligations and liabilities under this Lease and provided further that Landlord shall be entitled to any profit obtained by Tenant from such subletting or assignment; or; (2) That upon such replacement tenant's entering into a mutually satisfactory new Lease for the Premises with Landlord, then Tenant shall be released from all further obligations and liabilities under this Lease (excepting only unpaid rentals or any unperformed covenants then past due under this Lease or any guarantee by Tenant of replacement tenant's obligations); or (3) That Landlord declines to consent to such sublease or assignment due to failure to adequately establish the proposed replacement Tenant's financial strength and proposed use of and operations upon Premises. Tenant shall submit or cause to be submitted audited financial statements or financial statements certified by an executive officer or general partner of the proposed subtenant or assignee in order to validate such entity's financial strength. Without the prior written consent of Landlord, Tenant may not assign any options to sublessee(s) or assignee(s) hereunder, all such options being deemed personal to Tenant only. Consent by Landlord hereunder shall in no way operate as a waiver by Landlord of, or to release or discharge Tenant from, any liability under this Lease or be 14 construed to relieve Tenant from obtaining Landlord's consent to any subsequent assignment, subletting, transfer, use of occupancy. ARTICLE 17. SUBORDINATION, ATTORNMENT AND MORTGAGEE PROTECTION Subject to Tenant receiving and executing a satisfactory subordination, nondisturbance and attornment agreement from a proposed Lender ("SNDA"), this Lease shall be subject and subordinate to all Mortgages now or hereafter placed upon the Building, and all other encumbrances and matters of public record applicable to the Building, including without limitation, any reciprocal easement or operating agreements, covenants, conditions and restrictions and Tenant shall not act or permit the Premises to be operated in violation therefore. Subject to Tenant's receipt and execution of a satisfactory SNDA, if any foreclosure or power of sale proceedings initiated by any Lender or a deed in lieu is granted (or if any ground lease is terminated), Tenant agrees, upon written request of any such Lender or any purchaser at such foreclosure sale, to attorn and pay Rent to such party and to execute and deliver any instruments necessary or appropriate to evidence or effectuate such attornment. In the event of attornment, no Lender shall be: (i) liable for any act or omission of Landlord, or subject to any offsets or defenses which Tenant might have against Landlord (prior to such Lender becoming Landlord under such attornment), (ii) liable for any security deposit or bound by any prepaid Rent not actually received by such Lender, or (iii) bound by any future modification of this Lease not consented to by such Lender who becomes Landlord. Any Lender may elect to make this Lease prior to the lien of its Mortgage, and if the Lender under any prior Mortgage shall require, this Lease shall be prior to any subordinate Mortgage; such elections shall be effective upon written notice to Tenant. Provided Lender has given its address for notices to Tenant, Tenant agrees to give any Lender by certified mail, return receipt requested, a copy of any notice of default served by Tenant upon Landlord, provided that prior to such notice Tenant has been notified in writing (by way of service on Tenant of a copy of any assignment of leases, or otherwise) of the name and address of such Lender. Tenant further agrees that if Landlord shall have failed to cure such default within the time permitted Landlord for cure under this Lease, any such Lender whose address has been so provided to Tenant shall have an additional period of thirty (30) days in which to cure (or such additional time as may be required due to causes beyond such Lender's control, including time to obtain possession of the Building by power of sale or judicial action or deed in lieu of foreclosure). The provisions of this Article shall be self-operative; however, Tenant shall execute such documentation as Landlord or any Lender may request from time to time in order to confirm the matters set forth in this Article in recordable form. To the extent not expressly prohibited by Law, Tenant waives the provisions of any Law now or hereafter adopted which may give or purport to give Tenant any right or election to terminate or otherwise adversely affect this Lease or Tenant's obligations hereunder if such foreclosure or power of sale proceedings are initiated, prosecuted or completed. ARTICLE 18. ESTOPPEL CERTIFICATE Tenant shall from time to time, upon written request by Landlord or Lender, deliver to Landlord or Lender, within ten (10) days after from receipt of such request, a statement in writing on a form prepared by Landlord and/or Lender and delivered with any such written request certifying: (i) that this Lease is unmodified and in full force and effect (or if there have been modifications, identifying such modifications and certifying that the Lease, as modified, is in full force and effect); (ii) the dates to which the Rent has been paid; (iii) that Landlord is not in default under any provision of this Lease (or if Landlord is in default, specifying each such default); and, (iv) the address to which notices to Tenant shall be sent; it being understood that any such statement so delivered may be relied upon in connection with any lease, mortgage or transfer. Tenant's failure to deliver such statement within such time shall be conclusive upon Tenant that: (i) this Lease is in full force and effect and not modified except as Landlord may represent; (ii) not more than one month's Rent has been paid in advance; (iii) there are no defaults by Landlord; and, (iv) notices to Tenant shall be sent to Tenant's Address as set forth in Article 1 of this Lease. Notwithstanding the presumptions of this Article, Tenant shall not be relived of its obligation to deliver said statement. 15 ARTICLE 19. DEFAULTS If Tenant: (i) fails to pay within five (5) days of the date due any installment or other payment of Rent, or to keep in effect any insurance required to be maintained; or (ii) becomes insolvent, makes an assignment for the benefit of creditors, files a voluntary bankruptcy or any involuntary petition in bankruptcy is filed against Tenant which petition is not dismissed within sixty (60) days of its filing, or (iv) fails to perform or observe any of the other covenants, conditions or agreements contained herein on Tenant's part to be kept or performed and such failure shall continue for thirty (30) days after notice thereof given by or on behalf of Landlord, or (v) if the interest of Tenant shall be offered for sale or sold under execution or other legal process if Tenant makes any transfer, assignment, conveyance, sale, pledge, disposition of all or a substantial portion of Tenant's property, then any such event or conduct shall constitute a "default" hereunder. Should Tenant vacate or abandon the Premises at any time during the initial Lease Term or any extension thereof and cease paying Rent, then Landlord shall have all rights and remedies provided for in this Lease and at law. Should Tenant continue paying Rent in accordance with the terms of this Lease, then Landlord shall have the right to market, show and re-lease the Premises or any portion thereof to another Tenant. Landlord shall give Tenant no less than thirty (30) days written notice prior to re-letting the Premises or any portion thereof to another tenant and Tenant shall have such thirty (30) day period in which to remove all of its personal property and to repair any and all damage to the Premises or any portion thereof being leased. Tenant shall deliver the Premises or such portion to landlord in its original condition, reasonable wear and tear excepted. Landlord's leasing of a portion of the Premises only shall not release Tenant from its obligations hereunder to continue to pay Rent for the remaining portion of the Premises not leased. Rent shall be prorated based on the amount of the Premises remaining to be leased. If Tenant shall file a voluntary petition pursuant to the United States Bankruptcy Reform Act of 1978, as the same may be from time to time be amended (the "Bankruptcy Code"), or take the benefit of any insolvency act or be dissolved, or if an involuntary petition be filed against Tenant pursuant to the Bankruptcy Code and said petition is not dismissed within thirty (30) days after such filing, or if a receiver shall be appointed for its business or its assets and the appointment of such receiver is not vacated within thirty (30) days after such appointment, or if it shall make an assignment for the benefit of its creditors, then Landlord shall have all of the rights provided for in the event of nonpayment of the Rent. ARTICLE 20. REMEDIES OF LANDLORD The remedies provided Landlord under this Lease are cumulative. (a) Upon the occurrence of any default, Landlord may serve notice on Tenant that the Term and the estate hereby vested in Tenant and any and all other rights of Tenant hereunder shall cease on the date specified in such notice and on the specified date this Lease shall cease and expire as fully and with the effect as if the Term had expired for passage of time. (b) Without terminating this Lease in case of a default or if this Lease shall be terminated for default as provided herein, Landlord may re-enter the Premises, remove Tenant, or cause Tenant to be removed from the Premises in such manner as Landlord may deem advisable, with legal process in accordance with all applicable laws, and using such reasonable force as may be necessary. In the event of re-entry without terminating this Lease, Tenant shall continue to be liable for all rents and other charges accruing or coming due under this Lease. (c) If Landlord, without terminating this Lease, shall re-enter the Premises or if this Lease shall be terminated as provided in paragraph (a) above: 16 (i) All Rent due from Tenant to Landlord shall thereupon become due and shall be paid up to the time of re-entry, dispossession or expiration, together with reasonable costs and expenses (including, without limitation, attorney's fees) of Landlord; (ii) Landlord, without any obligation to do so, may re-let the Premises or any part thereof for a term or terms which may be at Landlord's option be less than or exceed the period which would otherwise have constituted the balance of the Term and may grant such concessions in re-letting as Landlord, in the exercise of its reasonable business judgment, deems desirable. In connection with such re-letting, Tenant shall be liable for all costs of the re-letting including, without limitation, free rent, leasing commissions, legal fees and alteration and remodeling costs; (iii) If Landlord shall have terminated this Lease, Tenant shall also be liable to Landlord for all damages provided for in law and under this Lease resulting from Tenant's breach including, without limitation, the difference between the aggregate rentals reserved under the terms of this Lease for the balance of the Term together with all other sums payable hereunder as Rent for the balance of the Term, less the fair rental value of the Premises for that period determined as of the date of such termination. For purposes of this paragraph, tenant shall be deemed to include any guarantor or surety of the Lease. (d) In addition to the above, Landlord shall have any and all other rights provided a Landlord under law or equity for breach of a lease or tenancy by a Tenant. ARTICLE 21. QUIET ENJOYMENT Landlord covenants that subject to the conditions and limitations set forth in this Lease, Tenant, upon paying the Rent and performing all of its other obligations under this Lease, shall peacefully and quietly have, hold and enjoy the Premises throughout the Term or until this Lease is otherwise terminated as herein provided. ARTICLE 22. ACCORD AND SATISFACTION No payment by Tenant or receipt by Landlord of an amount less than full payment of rent then due and payable shall be deemed to be other than on account of the Rent then due and payable, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy provided for in this Lease or available at law or in equity. ARTICLE 23. SECURITY DEPOSIT To secure the faithful performance by Tenant of all of the covenants, conditions and agreements set forth in this Lease to be performed by it, including, without limitation, foregoing such covenants, conditions and agreements in this Lease which become applicable upon its termination by re-entry or otherwise, Tenant has deposited with Landlord the sum shown in Article 1 as a "Security Deposit" on the understanding: (a) that the Security Deposit or any portion thereof may be applied to any default that may exist, without prejudice to any other remedy or remedies which the Landlord may have on account thereof, and upon such application Tenant shall pay Landlord on demand the amount of the Security Deposit so applied which shall be added to the remaining Security Deposit so the same will be restored to its original amount; 17 (b) that should the Premises be conveyed by Landlord, the Security Deposit or any balance thereof may be turned over to the Landlord's grantee, and if the same be turned over as aforesaid, Tenant hereby releases Landlord from any and all liability with respect to the Security Deposit and its application or return, and Tenant agrees to look solely to such grantee for such application or return; and, (c) that Landlord may commingle the Security Deposit with other funds and not be obligated to pay Tenant any interest; (d) that other than as may be applied by Landlord against any rent then due, the Security Deposit shall not be considered as advance payment of Rent or a measure of damages for any default by Tenant, nor shall it be a bar or defense to any actions by Landlord against Tenant; (c) that if Tenant shall faithfully perform all of the covenants and agreements contained in this Lease on the part of the Tenant to be performed, the Security Deposit or any then remaining balance thereof, shall be returned to Tenant, without interest, within thirty (30) days after the expiration of the Term. Tenant further covenants that it will not assign or encumber the money deposited herein as a Security Deposit and that neither Landlord nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance. ARTICLE 24. BROKERAGE COMMISSION Landlord and Tenant represent and warrant to each other that neither has dealt with any broker, finder or agent except for the Broker(s) identified in Article 1. Landlord and Tenant represent and warrant to each other that (except with respect to the Broker identified in Article 1 and with whom Landlord has entered into a separate brokerage agreement) no broker, agent, commission salesperson, or other person has represented Tenant or Landlord in the negotiations for and procurement of this Lease and of the Premises and that no commissions, fees, or compensation of any kind are due and payable in connection herewith to each other any broker, agent commission salesperson, or other person. Tenant and Landlord agree to indemnify and hold harmless from any and all claims, suits, or judgments (including, without limitation, reasonable attorneys' fees and court costs incurred in connection with any such claims, suits, or judgments, or in connection with the enforcement of this indemnity) for any fees, commissions, or compensation of any kind which arise out of or are in any way connected with any claimed agency relationship not referenced in Article 1. ARTICLE 25. FORCE MAJEURE Landlord shall be excused for the period of any delay in the performance of any obligation hereunder when prevented from so doing by a cause or causes beyond its control, including all labor disputes, civil commotion, war, war-like operations, invasion, rebellion, hostilities, military or usurped power, sabotage, governmental regulations or controls, fire or other casualty, inability to obtain any material, services or financing, or through acts of God. Tenant shall similarly be excused for delay in the performance of any obligation hereunder; provided: (a) nothing contained in this Section or elsewhere in this Lease shall be deemed to excuse or permit any delay in the payment of the Rent, or any delay in the cure of any default which may be cured by the payment of money unless Tenant is prevented by any of the foregoing events from operating its business in the ordinary course or is denied access to the Premises; (b) no reliance by Tenant upon this Section shall limit or restrict in any way Landlord's right of self-help as provided in this Lease; and 18 (c) Tenant shall not be entitled to rely upon this Section unless it shall first have given Landlord notice of the existence of any force majeure preventing the performance of an obligation of Tenant within five days after the commencement of the force majeure. ARTICLE 26. PARKING (a) Landlord hereby grants to Tenant the right to use the Parking Spaces as identified in Article 1 and shown on Exhibit A. Landlord, at its sole election, may designate the types and locations of said Parking Spaces and Landlord shall have the right, at Landlord's sole election, to change said types and locations from time to time; provided, however, such designation shall be uniformly applied and shall not unfairly favor any tenant in the Building. (b) Tenant shall not pay a Parking Fee during the initial Term of this Lease. However, during any extensions, Landlord shall be entitled to charge a Parking Fee to Tenant if other buildings in the area of the Building are charging parking fees for comparable space. If Landlord charges such a Fee during any extension, Tenant shall pay Landlord a Parking Fee, as Additional Rent, payable monthly in advance with the Monthly Rent. Thereafter, and throughout the extension Term, the parking rate for each type of parking space provided to Tenant hereunder shall be the prevailing parking rate, as Landlord may designate from time to time, at Landlord's sole election, for each such type of parking space. In addition to the right reserved hereunder by Landlord to designate the parking rate from time to time, Landlord shall have the right to change the parking rate at any time to include therein any amounts levied, assessed, imposed or required to be paid to any governmental authority on account of the parking of motor vehicles, including all sums required to be paid pursuant to transportation controls imposed by the Environmental Protection Agency under the Clean Air Act of 1970, as amended, or otherwise required to be paid by any governmental authority with respect to the parking, use, or transportation of motor vehicles, or the reduction or control of motor vehicle traffic, or motor vehicle pollution. (c) If requested by Landlord, Tenant shall notify Landlord of the license plate number, year, make and model of the automobiles entitled to use the Parking Spaces and if requested by Landlord, such automobiles shall be identified by automobile window stickers provided by landlord, and only such designated automobiles shall be permitted to use the Parking Spaces. if Landlord institutes such an identification procedure, Landlord may provide additional parking spaces for use by customers and invitees of Tenant on a daily basis at prevailing parking rates, if any, are being charged as set forth in (b) above. At Landlord's sole election, Landlord may make validation stickers available to Tenant for any such additional parking spaces, provided, however, if Landlord makes validation stickers available to any other tenant in the Building, Landlord shall make such validation stickers available to Tenant. (d) The Parking Spaces and additional parking spaces provided for herein are provided solely for the accommodation of Tenant, its customers and invitees, and Landlord assumes no responsibility or liability of any kind whatsoever from whatever cause with respect to the automobile parking areas, including adjoining streets, sidewalks, driveways, property and passageways, or the use thereof by Tenant or tenant's employees, customers, agents, contractors or invitees. ARTICLE 27. HAZARDOUS MATERIALS A. Definition of Hazardous Materials. The term "Hazardous Materials" for purposes hereof shall mean any chemical, substance, materials or waste or component thereof which is now or hereafter listed, defined or regulated as a hazardous or toxic chemical, substance, materials or waste or component thereof by any federal, state or local governing or regulatory body having jurisdiction, or which would trigger any employee or community "right-to-know" requirements adopted by any such body, or for which any such body has adopted any requirements for the preparation or distribution of a materials safety data sheet ("MSDS"). 19 B. No Hazardous Materials. Tenant shall not transport, use, store, maintain, generate, manufacture, handle, dispose, release or discharge any Hazardous Materials. However, the foregoing provisions shall not prohibit the transportation to and from, and use, storage, maintenance and handling within the Premises of Hazardous Materials customarily used in the business or activity expressly permitted to be undertaken in the Premises under Article 6, provided: (a) such Hazardous Materials shall be used and maintained only in such quantities as are reasonably necessary for such permitted use of the Premises and the ordinary course of Tenant's business therein, strictly in accordance with applicable Law, highest prevailing standards, and the manufacturers' instructions therefor, (b) such Hazardous Materials shall not be disposed of, released or discharged in the Building, and shall be transported to and from the Premises in compliance with all applicable Laws, and as Landlord shall reasonably require, (c) if any applicable Law or Landlord's trash removal contractor requires that any such Hazardous Materials be disposed of separately from ordinary trash, Tenant shall make arrangements at Tenant's expense for such disposal directly with a qualified and licensed disposal company at a lawful disposal site (subject to scheduling and approval by Landlord), and (d) any remaining such Hazardous Materials shall be completely, properly and lawfully removed from the Building upon expiration or earlier termination of this Lease. C. Notices to Landlord. Tenant shall promptly notify Landlord of: (i) any enforcement, cleanup or other regulatory action taken or threatened by any governmental or regulatory authority with respect to the presence of any Hazardous Materials on the Premises or the migration thereof from or to other property, (ii) any demands or claims made or threatened by any party relating to any loss or injury resulting from any Hazardous Materials on the Premises, (iii) any release, discharge or nonroutine, improper or unlawful disposal or transportation of any Hazardous Materials on or from the Premises or in violation of this Article, and (iv) any matters where Tenant is required by Law to give a notice to any governmental or regulatory authority respecting any Hazardous Materials on the Premises. Landlord shall have the right (but no obligation) to join and participate, as a party, in any legal proceedings or actions affecting the Premises initiated in connection with any environmental, health or safety law. At such times as Landlord may reasonably request, Tenant shall provide Landlord with a written list, certified to be true and complete, identifying any Hazardous Materials then used, stored, or maintained upon the Premises, the use and approximate quantity of each such materials, a copy of any MSDS issued by the manufacturer therefor, and such other information as Landlord may reasonably require or as may be required by Law. Landlord shall also provide written notice to Tenant of any presence, release, or discharge of any Hazardous Materials affecting the Premises. D. Indemnification of Landlord. If any Hazardous Materials are released, discharged or disposed of by Tenant or any other occupant of the Premises, or their employees, agents, invitees or contractors, on or about the Building in violation of the foregoing provisions, Tenant shall immediately, properly and in compliance with applicable Laws clean up, remediate and remove the Hazardous Materials from the Building and any other affected property and clean or replace any affected personal property (whether or not owned by landlord), at Tenant's expense (without limiting Landlord's other remedies therefore). Tenant shall further be required to indemnify and hold Landlord, Landlord's directors, officers, employees and agents harmless from and against any and all claims, demands, liabilities, losses, damages, penalties and judgments directly or indirectly arising out of or attributable to a violation of the provisions of this Article by Tenant, Tenant's occupants, employees, contractors or agents. Any clean up, remediation and removal work shall be subject to Landlord's prior written approval (except in emergencies), and shall include, without limitation, any testing, investigation, and the preparation and implementation of any remedial action plan required by any governmental body having jurisdiction or reasonably required by landlord. If Landlord or any Lender or governmental body arranges for any tests or studies showing that this Article has been violated, Tenant shall pay for the costs of such tests. The provisions of this Article shall survive the expiration or earlier termination of this Lease. Landlord shall be responsible, but only to the extent required by applicable federal or state Laws, to clean up or cause the clean up of any release or discharge of Hazardous Materials in the Premises. Should the Premises and/or the Building not be accessible due to any enforcement, cleanup or other regulatory action pertaining to any release or discharge of Hazardous Materials not caused by Tenant, or any of its employees, agents, invitees or contractors, then Rent shall abate for each day the Premises and/or the Building is not accessible. 20 ARTICLE 28. ADDITIONAL RIGHTS RESERVED BY LANDLORD In addition to any other rights provided for herein, Landlord reserves the following rights exercisable without liability to Tenant for damage or injury to property, person or business and without effecting an eviction, constructive or actual, or disturbance of Tenant's use or possession or giving rise to any claim: (a) To name the Building and to change the name or street address of the Building; (b) To install and maintain all signs on the exterior and interior of the Building; (c) To designate all sources furnishing sign painting and lettering; (d) During the last ninety (90) days of the Term, if Tenant has vacated the Premises, to decorate, remodel, repair, alter or otherwise prepare the Premises for reoccupancy, without affecting Tenant's obligation to pay Rent for the Premises; (e) To have pass keys to the Premises and all doors therein, excluding Tenant's vaults and safes; (f) On reasonable prior notice to Tenant, to exhibit the Premises to any prospective purchaser, Lender, mortgagee, or assignee of any mortgage on the Building or Land and to others having an interest therein at any time during the Term, and to prospective tenants during the last six months of the Term; (g) To take any and all reasonable measures, including entering the Premises for the purpose of making inspections, repairs, alterations, additions and improvements to the Premises or to the Building (including for the purpose of checking, calibrating, adjusting and balancing controls and other parts of the Building Systems), as may be necessary or desirable for the operation, improvement, safety, protection or preservation of the Premises or the Building, or in order to comply with all Laws, orders and requirements of governmental or other authority, or as may otherwise be permitted or required by this Lease; provided, however, that Landlord shall use its best efforts (except in an emergency) to minimize interference with Tenant's business in the Premises; (h) To relocate various facilities within the Building and on the land of which the Building is a part if Landlord shall determine such relocation to be in the best interest of the development of the Building and Property, provided that such relocation shall not materially restrict access to or enjoyment of the Premises; and (i) To install vending machines of all kinds in the Premises and the Building and to receive all of the revenue derived therefrom, provided, however, that no vending machines shall be installed by Landlord in the Premises unless Tenant so requests. ARTICLE 29. DEFINED TERMS A. "Building" shall refer to the Building named in Article 1 of which the leased Premises are a part (including all modifications, additions and alterations made to the Building during the term of this Lease), the real property on which the same is located, all plazas, common areas and any other areas located on said real property and designated by Landlord for use by all tenants in the Building. A plan showing the Building is attached hereto as Exhibit A and made a part hereof and the Premises is defined in Article 2 and shown on said Exhibit A by cross-hatched lines. B. "Common Areas" shall mean and include all areas, facilities, equipment, directories and signs of the Building (exclusive of the Premises and areas leased to other Tenants) made available and designated by Landlord for the 21 common and joint use and benefit of Landlord, Tenant and other tenants and occupants of the Building including, but not limited to, lobbies, public washrooms, hallways, sidewalks, parking areas, landscaped areas and service entrances. Common Areas may further include such areas in adjoining properties under reciprocal easement agreements, operating agreements or other such agreements now or hereafter in effect and which are available to Landlord, Tenant and Tenant's employees and invitees. Landlord reserves the right in its sole discretion and from time to time, to construct, maintain, operate, repair, close, limit, take out of service, alter, change, and modify all or any part of the Common Areas. C. "Default Rate" shall mean fourteen percent (14%) per annum, or the highest rate permitted by applicable law, whichever shall be less. D. "Hazardous Materials" shall have the meaning set forth in Article 27. E. "Landlord" and "Tenant" shall be applicable to one or more parties as the case may be, and the singular shall include the plural, and the neuter shall include the masculine and feminine; and if there be more than one, the obligations thereof shall be joint and several. Fro purposes of any provisions indemnifying or limiting the liability of Landlord, the term "Landlord" shall include Landlord's present and future partners, beneficiaries, trustees, officers, directors, employees, shareholders, principals, agents, affiliates, successors and assigns. F. "Law" or "Laws" shall mean all federal, state, county and local governmental and municipal laws, statutes, ordinances, rules, regulations, codes, decrees, orders and other such requirements, applicable equitable remedies and decisions by courts in cases where such decisions are binding precedents in the state in which the Building is located, and decisions of federal courts applying the Laws of such state. G. "Lease" shall mean this lease executed between Tenant and Landlord, including any extensions, amendments or modifications and any Exhibits attached hereto. H. "Lease Year" shall mean each calendar year or portion thereof during the Term, and any initial or final partial calendar years shall be "Partial Lease Years". I. "Lender" shall mean the holder of a Mortgage at the time in question, and where such Mortgage is a ground lease, such term shall refer to the ground lessee. J. "Mortgage" shall mean all mortgages, deeds of trust, ground leases and other such encumbrances now or hereafter placed upon the Building or any part thereof with the written consent of Landlord and all renewals, modifications, consolidations, replacements or extensions thereof, and all indebtedness now or hereafter secured thereby and all interest thereon. K. "Operating Expenses" shall mean all reasonable operating expenses of any kind or nature which are necessary, ordinary or customarily incurred in connection with the operation, maintenance or repair of the Building as reasonably determined by Landlord. Operating Expenses shall include, but not be limited to: 1.1 all real property taxes and assessments levied against the Building by any governmental or quasi-governmental authority. The foregoing shall include all federal, state, county, or local governmental, special district, improvement district, municipal or other political subdivision taxes, fees, levies, assessments, charges or other impositions of every kind and nature, whether general, special, ordinary or extraordinary, respecting the Building, including without limitation, real estate taxes, general and special assessments, interest on any special assessments paid in installments, transit taxes, water and sewer rents, taxes based upon the receipt of rent, personal property taxes imposed upon the fixtures, machinery, equipment, apparatus, appurtenances, furniture and other personal property used in connection with the Building which Landlord shall pay during any calendar year, any portion of which occurs during the Term (without regard to any different fiscal year used by such government or municipal authority except as 31 22 provided below). Provided, however, any taxes which shall be levied on the rentals of the Building shall be determined as if the Building were Landlord's only property, and provided further that in no event shall the term "taxes or assessment," as used herein, include any net federal or state income taxes levied or assessed on Landlord, unless such taxes are a specific substitute for real property taxes. Such term shall, however, include gross taxes on rentals, if any. Expenses incurred by Landlord for tax consultants and in contesting the amount or validity of any such taxes or assessments shall be included in such computations. All of the preceding clause K (1.1) is collectively referred to as the "Tax" or "Taxes". 1.2 all "assessments", including so-called special assessments, levy, charge, or tax imposed by any authority having the direct power to tax, including any city, county, state or federal government, or any school, agricultural, lighting, water, drainage, or other improvement or special district thereof, against the Premises of the Building or any legal or equitable interest of Landlord therein. For the purposes of this lease, any special assessments shall be deemed payable in such number of installments as is permitted by law, whether or not actually so paid. If as of the Commencement Date the Building has not been fully assessed as a completed project, for the purpose of computing the Operating Expenses for any adjustment required herein or under Article 4, the Tax shall be adjusted by Landlord, as of the date on which the adjustment is to be made, to reflect full completion of the Building including all standard Tenant finish work if the method of taxation of real estate prevailing to the time of execution hereof shall be, or has been altered, so as to cause the whole or any part of the taxes now, hereafter or theretofore levied, assessed or imposed on real estate to be levied, assessed or imposed on Landlord, wholly or partially, as a capital levy or otherwise, or on or measured by the rents received therefrom, then such new or altered taxes attributable to the Building shall be included within the term real estate taxes, except that the same shall not include any enhancement of said tax attributable to other income of Landlord. 1.3 reasonable costs of supplies, including, but not limited to, the cost of relamping all Building standard lighting as the same may be required from time to time; 1.4 reasonable costs incurred in connection with obtaining and providing energy for the Building, including, but not limited to, costs of propane, butane, natural gas, steam, electricity, solar energy and fuel oils, coal or any other energy sources; 1.5 reasonable costs of water and sanitary and storm drainage services; 1.6 reasonable costs of janitorial and security services; 1.7 reasonable costs of general maintenance and repairs, including costs under HVAC and other mechanical maintenance contracts and maintenance, repairs and replacement of equipment and tools used in connection with operating the Building; 1.8 reasonable costs of maintenance and replacement of landscaping; 1.9 insurance premiums, including fire and all-risk coverage, together with loss of rent endorsements, the part of any claim required to be paid under the deductible portion of any insurance polices carried by Landlord in connection with the Building (where Landlord is unable to obtain insurance without such deductible from a major insurance carrier at reasonable rates), public liability insurance and any other insurance carried by Landlord on the Building, or any component parts thereof (all such insurance shall be in such amounts as may be required by any holder of a Mortgage or as Landlord may reasonably determine); 1.10 labor costs, including wages and other payments, costs to Landlord of worker's compensation and disability insurance, payroll taxes and welfare fringe benefits. 1.11 reasonable and ordinary professional building management fees required for management of the Building; 23 1.12 reasonable legal, accounting, inspection, and other consultation fees (including, without limitation, fees charged by consultants retained by Landlord for services that are designed to produce a reduction in Operating Expenses or to reasonably improve the operation, maintenance or state of repair of the Building) incurred in the ordinary course of operating the Building or in connection with making the computations required hereunder or in any audit of operations of the Building; but shall not include any of the foregoing fees incurred by Landlord in any tenant litigation matter; 1.13 the costs of improvements or structural repairs or replacements made in or to the Building in order to conform to changes, subsequent to the date of this Lease, in any applicable laws, ordinances, rules, regulations or orders of any governmental or quasi-governmental authority having jurisdiction over the Building (herein "Required Improvements") or the costs incurred by Landlord to install a new or replacement item for the purpose of reducing Operating Expenses (herein "Cost savings Improvements"), and a reasonable reserve for all other improvements and structural repairs and replacements reasonably necessary to permit Landlord to maintain the Building in its current class. The expenditures for Required Improvements and Cost Savings Improvements shall be amortized over the useful life of such improvement or structural repair or replacement (as determined by Landlord). All costs so amortized shall bear interest on the amortized balance at the rate of twelve percent(12%) per annum or such higher rate as may have been paid by Landlord on funds borrowed for the purpose of constructing improvements. However, such Cost Savings Improvements will not be passed through to the Tenant if same do not reduce Operating Expenses. In making any computations contemplated hereby, Landlord shall also be permitted to make such adjustments and modifications to the provisions of this paragraph and Article 4 as shall be reasonable and necessary to achieve the intention of the parties hereto. L. "Rent" shall have the meaning specified therefor in Article 3. M. "Tax" or "Taxes" shall have the meaning set forth in Article 29(K)(1.1). All other capitalized terms shall have the definition set forth in the Lease. ARTICLE 30. MISCELLANEOUS PROVISIONS A. RULES AND REGULATIONS. Tenant shall comply with all of the rules and regulations promulgated by Landlord from time to time for the Building. A copy of the current rule and regulations is attached hereto as Exhibit D. B. EXECUTION OF LEASE. If more than one person or entity executes this Lease as Tenant, each such person or entity shall be jointly and severally liable for observing and performing each of the terms, covenants, conditions and provisions to be observed or performed by Tenant. C. NOTICES. All notices under this Lease shall be in writing and will be deemed sufficiently given for all purposes if, to Tenant, by delivery to Tenant at the Premises during the hours the Building is open for business or by certified mail, return receipt requested or by overnight delivery service (with one acknowledged receipt), to Tenant at the address set forth below, and if to Landlord, by certified mail, return receipt requested or by overnight delivery service (with one acknowledged receipt), at the addresses set forth below. 24 Landlord: at address shown in Article 1. with an additional copy to Building Manager at address shown in Article 1. Tenant: at address shown in Article 1. with copy to: Jon Joseph, c/o Mego Financial Corp., 4310 Paradise Rd., Las Vegas, NV 89109. If any alleged default on the part of the Landlord hereunder occurs, Tenant shall give written notice to Landlord in the manner herein set forth and shall afford Landlord a reasonable opportunity to cure any such default. In addition, Tenant shall send notice of such default by certified or registered mail, postage prepaid, to the holder of any Mortgage whose address Tenant has been notified in writing, and shall afford such Mortgage holder a reasonable opportunity to cure any alleged default on Landlord's behalf. D. TRANSFERS. The term "Landlord" appearing herein shall mean only the owner of the Building from time to time and, upon a sale or transfer of its interest in the Building, the then Landlord and transferring party shall have no further obligations or liabilities for matters accruing after the date of transfer of that interest and Tenant, upon such sale or transfer, shall look solely to the successor owner and transferee of the Building for performance of Landlord's obligations hereunder. E. SHORING. If any excavation or construction is made adjacent to, upon or within the Building, or any part thereof, Tenant shall subject to the receipt of a written request stating the proposed date (s) and time(s) of such excavation or construction, afford to any and all persons causing or authorized to cause such excavation or construction license to enter upon the Premises for the purpose of doing such work as such persons shall deem necessary to preserve the Building or any portion thereof from injury or damage and to support the same by proper foundations, braces and supports, so long as it does not interfere with Tenant's reasonable business use of the Premises. F. RELATIONSHIP OF THE PARTIES. Nothing contained in this Lease shall be construed by the parties hereto, or by any third party, as constituting the parties as principal and agent, partners or joint ventures, nor shall anything herein render either party (other than a guarantor) liable for the debts and obligations of any other party, it being understood and agreed that the only relationship between Landlord and tenant is that of Landlord and Tenant. G. ENTIRE AGREEMENT: MERGER. This Lease and all exhibits hereto embodies the entire agreement and understanding between the parties respecting the Lease and the Premises and supersedes all prior negotiations; agreements and understanding between the parties, all of which are merged herein. No provision of this Lease may be modified, waived or discharged except by an instrument in writing signed by the party against which enforcement of such modification, waiver or discharge is sought. H. NO REPRESENTATION BY LANDLORD. Neither Landlord nor any agent of Landlord has made any representations, warranties, or promises with respect to the Premises or the Building except as expressly set forth herein. 25 I. LIMITATION OF LIABILITY. Notwithstanding any provision in this Lease to the contrary, under no circumstances shall Landlord's liability or that of its directors, officer, employees and agents for failure to perform any obligations arising out of or in connection with the Lease or for any breach of the terms or conditions of this Lease (whether written or implied) exceed the greater of $50,000 or Landlord's equity interest in the Building. Any judgments rendered against Landlord shall be satisfied solely out of proceeds of sale of Landlord's interest in the Building. No personal judgment shall lie against Landlord upon extinguishment of its rights in the Building and any judgments so rendered shall not give rise to any right of execution or levy against Landlord's assets. The provisions hereof shall inure to Landlord's successors and assigns including any Lender. The foregoing provisions are not intended to relieve Landlord from the performance of any of Landlord's obligations under this Lease, but only to limit the personal liability of Landlord in case of recovery of a judgment against Landlord; nor shall the foregoing be deemed to limit Tenant's rights to obtain injunctive relief or specific performance or other remedy which may be accorded Tenant by law or under this Lease. If Tenant claims or asserts that Landlord has violated or failed to perform a covenant under the Lease, Tenant's sole remedy shall be an action for specific performance, declaratory judgment or injunction and in no event shall Tenant be entitled to any money damages in any action or by way of set off, defense or counterclaim and Tenant hereby specifically waives the right to any money damages or other remedies. J. MEMORANDUM OF LEASE. At the request of either party, the other will execute a memorandum of lease in recordable form setting forth such provisions of this Lease as Landlord deems desirable and as may be required by law in order to permit the recording of the form in the appropriate public office. The party recording the memorandum of Lease shall pay for the cost of recordation. K. NO WAIVERS: AMENDMENTS. Failure of Landlord to insist upon strict compliance by Tenant of any condition or provision of this Lease shall not be deemed a waiver by Landlord of that condition. No waiver shall be effective against Landlord unless in writing and signed by Landlord. Similarly, this Lease cannot be amended except by a writing signed by Landlord and Tenant. L. SUCCESSORS AND ASSIGNS. The conditions, covenants and agreements contained herein shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns. M. GOVERNING LAW. This Lease shall be governed by the law of the State where the Building is located. N. EXHIBITS. All exhibits attached to this Lease are a part hereof and are incorporated herein by reference and all provisions of such exhibits shall constitute agreements, promises and covenants of this Lease. O. CAPTIONS. The captions and headings used in this Lease are for convenience only and in no way define or limit the scope, interpretation or content of this Lease. P. COUNTERPARTS. This Lease may be executed in one (1) or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 26 IN WITNESS WHEREOF, and intending to be legally bound hereby, the parties have duly executed this Lease with the Exhibits attached hereto as of the day and year first written above. LANDLORD: MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY By: CORNERSTONE REAL ESTATE ADVISERS, INC. Its Authorized Agent By: /s/ William F. Runge - ------------------------------ ----------------------------- Witness Witness William F. Runge Vice President Date:_____________________________ TENANT: MEGO MORTGAGE CORPORATION By: /s/ James L. Belter - ------------------------------ ------------------------------ Witness Name Printed: James L. Belter Title: Executive Vice President Date:_____________________________ SECRETARY'S CERTIFICATE I, Robert V. Bellacosa, Assistant Secretary of MEGO MORTGAGE CORPORATION, Tenant, hereby certify that the officer executing the foregoing Lease on behalf of Tenant is duly authorized to act on behalf of and bind the Tenant. (Corporate Seal) /s/ ------------------------------ Assistant Secretary Date:______________________________ 27 EXHIBIT B Landlord's Work See Special Stipulations Nos. 2 and 3. 28 EXHIBIT C Tenant's Work None. 29 EXHIBIT D Building's Rule and Regulations 1. The sidewalks, entrances, passages, courts, elevators, vestibules, stairways, corridors or halls of the Building shall not be obstructed or encumbered or used for any purpose other than ingress and egress to and from the premises demised to any tenant or occupant. 2. No awnings or other projection shall be attached to the outside walls or windows of the Building without the prior consent of Landlord. No curtains, blinds, shades, or screens shall be attached to or hung in, or used in connection with, any window or door of the premises demised to any tenant or occupant, without the prior consent of Landlord. Such awnings, projections, curtains, blinds, shades, screens or other fixtures must be of a quality, type, design and color, and attached in a manner, approved by Landlord. 3. No sign, advertisement, object, notice or other lettering shall be exhibited, inscribed, painted or affixed on any part of the outside or inside of the premises demised to any tenant or occupant of the Building without the prior consent of Landlord. Interior signs on doors and directory tables, if any, shall be of a size, color and style approved by Landlord. 4. The sashes, sash doors, skylights, windows, and doors that reflect or admit light and air into the halls, passageways or other public places in the Building shall not be covered or obstructed, nor shall any bottles, parcels, or other articles be placed on any window sills. 5. No show cases or other articles shall be put in front of or affixed to any part of the exterior of the Building, nor placed in the halls, corridors, vestibules or other public parts of the Building. 6. The water and wash closets and other plumbing fixtures shall not be used for any purposes other than those for which they were constructed, and no sweepings, rubbish, rags, or other substances shall be thrown therein. No tenant shall bring or keep, or permit to be brought or kept, any inflammable, combustible, explosive or hazardous fluid, materials, chemical or substance in or about the premises demised to such tenant. 7. Other than for Landlord's work, no tenant or occupant shall mark, paint, drill into, or in any way deface any part of the Building or the premises demised to such tenant or occupant. No boring, cutting or stringing of wires shall be permitted, except with the prior consent of Landlord, and as Landlord may direct. No tenant or occupant shall install any resilient tile or similar floor covering in the premises demised to such tenant or occupant except in a manner approved by Landlord. 8. No bicycles, vehicles or animals of any kind shall be brought into or kept in or about the premises demised to any tenant. No cooking (except with microwave oven) shall be done or permitted in the Building by any tenant without the approval of the Landlord. No tenant shall cause or permit any unusual or objectionable odors to emanate from the premises demised to such tenant. 9. No space in the Building shall be used for manufacturing, for the storage of merchandise, or for the sale of merchandise, goods, or property of any kind at auction, without the prior consent of Landlord. 10. No tenant shall make, or permit to be made, any unseemly or disturbing noises or disturb or interfere with other tenants or occupants of the Building or neighboring buildings or premises whether by the use of any musical instrument, radio, television set or other audio device, unmusical noise, whistling, singing, or in any other way. Nothing shall be thrown out of any doors or window. 30 11. No additional locks or bolts of any kind shall be placed upon any of the doors or windows, no shall any changes be made in locks or the mechanism thereof. Each tenant must, upon the termination of its tenancy, restore to Landlord all keys of stores, offices and toilet rooms, either furnished to, or otherwise procured by, such tenant. 12. All removals from the Building, or the carrying in or out of the Building or the premises demised to any tenant, of any safes, freight, furniture or bulky matter of any description must take place at such time and in such manner as Landlord or its agents may determine, from time to time. Landlord reserves the right to inspect all freight to be brought into the Building and to exclude from the Building all freight which violates any of the Rules and Regulations or the provisions of such tenant's lease. 13. No tenant shall use or occupy, or permit any portion of the premises demised to such tenant to be used or occupied, as an office for a public stenographer or typist, or to a barber or manicure shop, or as an employment bureau. No tenant or occupant shall engage or pay any employees in the Building, except those actually working for such tenant or occupant in the Building, nor advertise for day laborers giving an address at the Building. Tenant may advertise for employees (such as secretaries, receptionists, executives or other office employees). 14. No tenant or occupant shall purchase spring water, ice, food, beverage, lighting maintenance, cleaning towels or other like service, from any company or person not approved by Landlord. No vending machines of any description shall be installed, maintained or operated upon the premises demised to any tenant without the prior consent of Landlord, which shall not be unreasonably withheld. 15. Landlord shall have the right to prohibit any advertising by any tenant or occupant which, in Landlord's opinion, tends to impair the reputation of the Building or its desirability as a building for offices, and upon notice from Landlord, such tenant or occupant shall refrain from or discontinue such advertising. 16. Landlord reserves the right to exclude from the Building, between the hours of 6:00 P.M. and 8:00 A.M. on business days and at all hours on Saturdays, Sundays and holidays, all persons who do not present a pass to the Building signed by Landlord. Landlord will furnish passes to persons for whom any tenant requests such passes. Each tenant shall be responsible for all persons for whom it requests such passes and shall be liable to Landlord for all acts of such persons. 17. Each tenant, before closing and leaving the premises demised to such tenant at any time, shall see that all entrance doors are locked and all windows closed. Corridor doors, when not in use, shall be kept closed. 18. Landlord shall, at its expense, provide artificial light in the premises for Landlord's agents, contractors, and employees while performing janitorial or other cleaning services and making repairs or alterations in said premises. 19. No premises shall be used, or permitted to be used for lodging or sleeping, or for any immoral or illegal purposes. 20. The requirements of tenants will be attended to only upon written notice to Landlord or application at the office of Landlord. Building employees shall not be required to perform, and shall not be requested by any tenant or occupant to perform, and work outside of their regular duties, unless under specific instructions from the office of Landlord. 21. Canvassing, soliciting and peddling in the Building are prohibited and each tenant and occupant shall cooperate in seeking their prevention. 31 22. There shall not be used in the Building, either by any tenant or occupant or by their agents or contractors, in the delivery or receipt of merchandise, freight, or other matter, any hand trucks or other means of conveyance except those equipped with rubber tires, rubber side guards and such other safeguards as Landlord may require. 23. If the premises demised to any tenant become infested with vermin, such tenant, at its sole cost and expense, shall cause its premises to be exterminated, from time to time, to the satisfaction of Landlord, and shall employ such exterminators therefor as shall be approved by Landlord. 24. No premises shall be used, or permitted to be used, at any time, without the prior approval of Landlord, as a store for the sale or display of goods, wares or merchandise of any kind, or as a restaurant, shop, booth, bootlack or other stand, or for the conduct of any business or occupation which predominantly involves direct patronage of the general public in the premises demised to such tenant, or for manufacturing or for other similar purposes. 25. No tenant shall clean any window in the building from the outside. 26. No tenant shall move, or permit to be moved, into or out of the Building or the premises demised to such tenant, any heavy or bulky matter, without the specific approval of Landlord. If any such matter requires special handling, only a qualified person shall be employed to perform such special handling. No tenant shall place, or permit to be placed, on any part of the floor or floors of the premises demised to such tenant, a load exceeding the floor load per square foot which such floor was designed to carry and which is allowed by law. Landlord reserves the right to prescribe the weight and position of safes and other heavy matter, which must be placed so as to distribute the weight. 27. Landlord shall provide and maintain an alphabetical directory board in the first floor (main lobby) of the Building and no other directory shall be permitted without the prior consent of Landlord. Each tenant shall be allowed one line on such board unless otherwise agreed to in writing. 28. With respect to work being performed by a tenant in its premises with the approval of Landlord, the tenant shall refer all contractors, contractor's representatives and installation technicians to Landlord for it supervision, approval and control prior to the performance of any work or services. This provision shall apply to all work performed in the Building including installation of telephones, telegraph equipment, electrical devices and attachments, and installations of every nature affecting floors, walls, woodwork, trim, ceilings, equipment and any other physical portion of the Building. 29. Landlord shall not be responsible for lost or stolen personal property, equipment, money, or jewelry from the premises of tenants or public rooms whether or not such loss occurs when the Building or the premises are locked against entry. 30. Landlord shall not permit entrance to the premises of tenants by use of pass keys controlled by Landlord, to any person at any time without written permission from such tenants, except employees, contractors, or service personnel directly supervised by Landlord and employees of the United States Postal Service, and special delivery companies such as Federal Express. 31. Each tenant and all of tenant's employees and invitees shall observe and comply with the driving and parking signs and markers on the Land surrounding the Building, and Landlord shall not be responsible for any damage to any vehicle towed because of noncompliance with parking regulations. 32. Without Landlord's prior approval, no tenant shall install any radio or television antenna, loudspeaker, music system or other device on the roof or exterior walls of the Building or on common walls with adjacent tenants. 33. Each tenant shall store all trash and garbage within its premises or in such other areas specifically designated by Landlord. No materials shall be placed in the trash boxes or receptacles in the Building unless such materials may be disposed of in the ordinary and customary manner of removing and disposing of trash and garbage and 32 will not result in a violation of any law or ordinance governing such disposal. All garbage and refuse shall be only through entryways and elevators provided for such purposed and at such times as Landlord shall designate. 34. No tenant shall employ any persons other than the janitor or Landlord for the purpose of cleaning its premises without the prior consent of Landlord. No tenant shall cause any unnecessary labor by reason of its carelessness or indifference in the preservation of good order and cleanliness. Janitor service shall include ordinary dusting and cleaning by the janitor assigned to such work and shall not include beating of carpets or rugs or moving of furniture or other special services. Janitor service shall be furnished Mondays through Fridays, legal holidays excepted; janitor service shall not be furnished to areas which are occupied after 9:30 P.M. Window cleaning shall be done only by Landlord, and only between 6:00 A.M. and 5:00 P.M. 33 EXHIBIT E COMMENCEMENT DATE CONFIRMATION DECLARATION BY LANDLORD AND TENANT AS TO DATE OF DELIVERY AND ACCEPTANCE OF POSSESSION OF PREMISES Attached to and made a part of the Lease dated the ___________day of ___________________, 1996, entered into and by MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY as LANDLORD, and MEGO MORTGAGE CORPORATION as TENANT. LANDLORD AND TENANT do hereby declare that possession of the Premises was accepted by TENANT on the ______day of ___________________1996. The Premises required to be constructed and finished by and accepted by TENANT, the Lease is now in full force and effect, and as of the date hereof, LANDLORD has fulfilled all of its obligations under the Lease. The Lease Commencement Date is hereby established as ____________________, 1996. The Term of this Lease shall terminate on _______________________. 2002. LANDLORD: MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY By: CORNERSTONE REAL ESTATE ADVISER, INC. Its authorized agent By:__________________________________________ Name Printed: Title: Vice President Date: TENANT: MEGO MORTGAGE CORPORATION By:_________________________________________ Name Printed: Title: Date: 34 EXHIBIT "F" SPECIAL STIPULATIONS 1.) Pursuant to Article 1, Paragraph L., and Article 3 of the Lease, the following Monthly Rent Schedule shall apply during the Term of the Lease: Months 01 through 06: $51,333.33 per month Months 07 through 12: $73,711.46 per month Months 13 through 24: $75,204.83 per month Months 25 through 36 $76,708.93 per month Months 37 through 48 $78,232.17 per month Months 49 through 60 $79,794.47 per month Months 61 through 72 $81,395.83 per month
The above Monthly Rent schedule incorporates an annual escalation of two (2%) percent added to the initial Monthly Rent rate of $19.25 per rentable square foot per year. The above Monthly Rent schedule also incorporates a reduction during the first six (6) months of the Term whereby Tenant is receiving an abatement of Monthly Rent for a portion of the Premises equaling 13,950 rentable square feet. 2.) Pursuant to Exhibit "B" of this Lease, Landlord shall provide a Tenant Improvement Allowance for the renovation/construction of the Premises in an amount equal to $14.00 per rentable square foot (or a total of $643,300.00). Any cost for the renovation/construction of the Premises that exceeds $643,300.00 and not included as an additional Landlord cost herein or in Paragraph 2 of these Special Stipulations, shall be at the expense of the Tenant. Additionally, Landlord shall pay for the cost of the architectural/construction drawings in accordance with the agreement sent to Troy & Associates in the total amount of $0.63 per rentable square foot (or a total of $28,948.50) plus reasonable reimbursable expenses. Landlord shall also pay a management fee to Landlord's fee manager for the cost of the construction management of the renovation/construction work. 3.) In addition to the items in Paragraph 1 above, Landlord shall renovate the elevator lobbies and restrooms located on the fifth (5th) and sixth (6th) floors of the Building in a manner similar to the third (3rd) floor of the Building. Subject to Landlord's approval, color selections for the materials used to renovate the elevator lobbies herein may be chosen by Tenant. Landlord shall also pay for the cost to remove the existing raised computer flooring located on the fifth (5th) and sixth (6th) floors of the Premises as well as the components existing beneath the raised flooring that do not have a reusable value to Tenant's renovation work. Such work described herein shall be completed in conjunction with the renovation/construction of the Premises and performed by the same contractor who is performing the renovation/construction work of the Premises. 4.) RIGHT OF FIRST REFUSAL. Provided Tenant is not then in default of this Lease and is then occupying the Premises, Tenant shall have the right of first refusal on the following suite(s), located on the fourth (4th) floor of the Building. Such right of first refusal shall be granted to Tenant provided Tenant provides Landlord written notice no less than one hundred eighty (180) days prior to the applicable expiration date for such suite(s) that Tenant wishes to hold the right of first refusal on for any of the specific suites listed below and further identified on the attached Exhibit "SS-1". The expiration date of the current leases and the dates by which Tenant must notify 35 Landlord of its desire to obtain the right of first refusal are outlined below: Suite A Lease Expires: 6/30/96 Notice Date: Upon Lease Execution Suite B Lease Expires: 12/31/97 Notice Date: 6/30/97 Suite C Lease Expires: 11/30/98 Notice Date: 5/31/98 Suite D* Lease Expires: 5/31/97 Notice Date: 11/30/96 Suite E Lease Expires: vacant Notice Date: Upon Lease Execution Suite F Lease Expires: 3/31/97 Notice Date: 9/30/96 Suite G Lease Expires: 10/14/97 Notice Date: 4/14/97 Suite H Lease Expires: 10/31/98 Notice Date: 4/31/98 Suite I* Lease Expires: 3/31/98 Notice Date: 9/30/97
*Suite I and Suite D have extension rights. Tenant's ability to be offered a right of first refusal on these suites shall be subject to the existing tenant extending the term of the lease. In the event Tenant notifies Landlord within the 180 day notice period above, then Tenant shall have the fire right to lease the identified suites prior to Landlord's leasing to another third party. In the event Landlord has a bona fide third party interested in leasing any of the identified suites above, and Tenant has properly notified Landlord of its intent, Landlord shall provide Tenant with written notice and Tenant shall have five (5) business days to confirm with Landlord its desire to lease the identified suite(s). Landlord and Tenant shall then have fifteen (15) days to negotiate in good faith the terms and conditions of the lease of such space and diligently pursue the consummation of a lease amendment evidencing such agreed upon terms and conditions. In the event Landlord and Tenant are unable to agree upon the terms and conditions of such space within the fifteen (I 5) day period, Landlord shall be free to lease such space to any third party and no further right of first refusal shall exist to Tenant pertaining to such suite. 5.) OPTION TO EXTEND. Provided Tenant is not then in default, nor has ever been in material default of this Lease, and is then occupying the Premises, Tenant shall have the option to extend this Lease for an additional sixty (60) months at the then market rate for office space in the Building. Such option to extend shall be exercisable by Tenant providing no less than nine (9) months written notice to Landlord of its desire to extend this Lease. Landlord and Tenant shall agree to execute a lease amendment evidencing the terms and conditions of such extension no later than six (6) months prior to the Expiration Date of this Lease. If such Lease extension is not executed by Tenant and Landlord by the date that is six (6) months prior to the Expiration Date, this option to extend shall be null and void. 36 EXHIBIT G LEASE GUARANTY The undersigned Guarantor, in consideration of Ten Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and of the leasing by MASSACHUSETTS MUTUAL LEFE INSURANCE COMTANY, a Massachusetts corporation, as Landlord, to MEGO MORTGAGE CORPORATION, a Delaware corporation, as Tenant, of certain premises located at 1000 Parkwood, Suites 500 and 600, Atlanta, Georgia, pursuant to and as defined in a lease entitled Office Lease between them dated on or about this date (herein as amended or modified called the "Lease"), does hereby unconditionally guarantee the payment of all rent and other charges and the performance by Tenant of all of its obligations under the Lease. And the Guarantor further covenants and agrees with Landlord, as follows: (a) That if an Event of Default, as defined in said Lease, shall have occurred and be continuing, the Guarantor will, on demand, well and truly pay to Landlord any and all payments that have or will become due to Landlord under the Lease, and will perform or cause to be performed all of the covenants in the Lease to be performed by Tenant and, in addition, will pay all damages that may arise in consequence of such event of default and all costs and attorneys' fees that may be incurred by Landlord in enforcing Tenant's covenants and agreements set forth in the Lease or in enforcing the covenants and agreements of the Guarantor herein. (b) That, at Landlord's option, the Guarantor may be brought into any action or proceeding commenced by Landlord against Tenant in connection with and based upon the Lease or any provision thereof, or Landlord may proceed separately against Guarantor, and recovery may be had against Guarantor in any such action or proceeding or in any independent action or proceeding against Guarantor, without any requirement that Landlord, its successors or assigns, first assert, prosecute or exhaust any remedy or claim against Tenant, its successors and/or assigns. (c) That in the event of any bankruptcy, reorganization, winding-up or similar proceedings with respect to Tenant, no discharge, modification or limitation of Tenant's liability under the Lease which may now or hereafter he imposed by any federal, state or other law or regulation applicable to such proceedings shall discharge, limit or modify the obligation of Guarantor hereunder, which obligation is co-extensive with Tenant's liability as set forth in the Lease without regard to any such discharge, limitation or modification. (d) That this Guaranty shall remain in full force and effect as to any renewal, extension, modification or amendment of the Lease and shall guarantee performance and payment under the Lease by any assignee of the interest of the Tenant under the Lease. (e) That Landlord's interest under this Guaranty may be assigned by it by way of security or otherwise without the consent of the undersigned. (f) Guarantor shall be entitled to receive notices of events of default under the Lease and notices or demands given by Landlord to Tenant. (g) Landlord may, from time to time, without notice to or consent of the undersigned, (i) retain or obtain the primary or secondary liability of any party or parties, in addition to the undersigned, with respect to any of the obligations guaranteed hereby, (ii) extend or renew for any period (whether or not longer than the original period) or alter any of the obligations guaranteed hereby, (iii) release or compromise any liability of the Tenant or any liability of any other party or parties primarily or secondarily liable on any of the obligations guaranteed hereby, and (iv) release, compromise or subordinate its title or security interest, if any, in all or any property now or hereafter securing any of the obligations guaranteed hereby. (h) The undersigned waives: (i) notice of the existence or creation of all or any of the obligations guaranteed hereby, (ii) notice of any alteration, amendment, increase, extension or exchange of any of the obligations guaranteed hereby or of any events of a nature set out in the preceding or succeeding 37 paragraphs, (iii) notice of any amendment or modification of the Lease, (iv) all diligence in collection or protection of or realization upon the obligations guaranteed hereby or any thereof, any obligation hereunder, or any security therefor, and (v) the right to require Landlord to proceed against Tenant on any of the obligations guaranteed hereby. Landlord agrees that it will use reasonably diligent efforts to proceed against Tenant prior to taking action under this Guaranty. (i) No delay or failure on the part of Landlord in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise by Landlord of any right or remedy shall preclude other or future exercise thereof or the exercise of any other right or remedy. No action of Landlord permitted hereunder shall impair or affect this Guaranty. 0) Guarantor waives any right of subrogation or contribution which such Guarantor may have or hereafter obtain as against the Tenant. Without limiting the foregoing, in the event of a default for the nonpayment of a monetary obligation that has occurred and is continuing, Guarantor subordinates any monetary claim which it may have or obtain against the Tenant and any debt which such Guarantor holds or hereafter obtains from Tenant to the indebtedness due Landlord under the Lease and this Guaranty. (k) This Guaranty has been made and delivered in the State of Georgia and shall be construed and governed under Georgia law. (l) Wherever possible, each provision of this Guaranty shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Guaranty shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition of invalidity, without invalidating the remainder of such provision or the remaining provisions of this Guaranty. (m) Masculine pronouns include the feminine and neuter. This Guaranty binds and inures to the benefit of Landlord, Guarantor and their heirs, successors and assigns. (n) This Guaranty shall expire on April 9, 1999 if the following conditions precedent have been met. If all of the following conditions precedent have not been met as of April 9, 1999, then this Guaranty shall remain in full force and effect throughout the term of the Lease and shall not expire until the earlier of April 9, 2002 or the earlier termination of the Lease unless such earlier termination is the result of a default by Tenant whereby this Guaranty shall not expire until April 9, 2002: (i) On or before the end of the 1998 fiscal year, the audited financial statements of Tenant, Mego Mortgage Corporation, for the fiscal year ended 1998 shall demonstrate that Tenant has a net worth of at least Twenty Million Dollars ($20,000,000.00), as certified by an independent certified public accountant reasonably acceptable to Landlord. Tenant's fiscal year ends on August 31. (ii) As of the end of each of the 1996, 1997 and 1998 fiscal years of the Tenant, Tenant shall have a minimum net income after taxes of Two Million Five Hundred Thousand Dollars ($2,500,000.00), as demonstrated by audited financial statements certified by an independent certified public accountant reasonably acceptable to Landlord. (iii) Tenant shall not then be in default under the Lease and shall not have defaulted under the Lease more than three (3) times during the first three (3) years of the Lease Term without curing same in accordance with the terms of the Lease. If the foregoing conditions precedent have been met as of April 9, 1999, Landlord will provide Guarantor notice that this Guaranty has expired as of April 9, 1999. 38 IN WITNESS WHEREOF, the Guarantor has signed and sealed this Guaranty the 10th day of April, 1996. GUARANTOR: MEGO FINANCIAL CORP. Attest: By: Title: Tide: Print Name: Print Name: [CORPORATE SEAL] EX-10.23 9 SERVICES AND CONSULTING AGREEMENT 1 EXHIBIT 10.23 SERVICES AND CONSULTING AGREEMENT THIS AGREEMENT ("Agreement") dated as of September 1, 1996, is entered into by and between MEGO MORTGAGE CORPORATION ("MMC"), a Delaware corporation, and PREFERRED EQUITIES CORPORATION ("PEC"), a Nevada Corporation. BACKGROUND OF AGREEMENT a. MMC and PEC are affiliated companies by virtue of having a common parent, Mego Financial Corp., which owns, as of the date of this Agreement, all of the issued and outstanding stock of MMC and PEC. b. MMC has utilized the services of PEC and certain of PEC's officers, executives and staff to aid MMC in its business operations including, without limitation, management, legal and planning services, for which the estimated cost thereof to PEC has been charged and allocated to MMC on the accounting books of the parties. c. MMC and PEC have decided to enter into this Agreement for the purpose of (i) documenting and detailing PEC's support services to MMC and (ii) providing a schedule (the "Schedule"), attached hereto and made a part hereof, of the services to be provided by PEC to MMC and the corresponding cost of same, as shown on the Schedule. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements hereinafter contained, the parties hereto do hereby agree as follows: ARTICLE 1. APPOINTMENT; TERM 1.1 On the terms and subject to the conditions set forth in this Agreement, MMC hereby appoints PEC as a Management Consultant and Service Provider to MMC to provide the services shown, and for the remuneration shown, on the Schedule attached hereto and made a part hereof; and PEC accepts such appointment. Nothing contained herein shall be deemed a delegation by MMC, or an acceptance by PEC, of any responsibility for or authority from MMC for the management of its business and affairs, which responsibility and authority shall at all times be and remain vested in the Board of Directors, shareholders and management of MMC. 1.2 The term of this agreement shall commence as of the date of this Agreement and shall continue for an initial one-year period. Thereafter, it shall continue unless and until canceled by either party on a whole or partial basis (as defined in Article 6.2 hereof) by notice given no later than ninety (90) days prior to the prospective whole or partial termination. ARTICLE 2. PROPRIETARY INFORMATION AND SECRECY 2.1 Each party shall (i) keep secret and confidential all know-how, plans, data and other industrial property ("Proprietary Information") owned and specified as secret and confidential by the other party and (ii) use its best effort to prevent its employees, agents, 1 2 representatives and shareholders from divulging to others any such Proprietary Information and utilizing any such Proprietary Information except in connection with the business or operations of the other party. The provisions of this Article 2 shall survive for a period of one (1) year following the entire termination of this Agreement for whatever reason. Excluded from such requirement to keep Proprietary Information secret and confidential are the following: a. Information which, at the time of disclosure, is in the public domain; b. Information which, after disclosure to the other party, enters the public domain, except where such entry is the result of a breach of this Agreement; c. Information which, prior to disclosure hereunder, was already in the other party's possession; d. Information which, subsequent to disclosure hereunder, is obtained by a party from a third person who is lawfully in possession of such Proprietary Information and not subject to a contractual or fiduciary relationship with respect to such Proprietary Information and who does not require such party to refrain from disclosing such information; and e. Information which is required to be disclosed by either party or any of their affiliates in a filing with the Securities and Exchange Commission or any other governmental agency or in any other disclosure document required by such authorities or information required to be disclosed in a legal proceeding. ARTICLE 3. SCOPE OF DUTIES OF PEC 3.1 PEC shall, at the reasonable request of MMC from time to time during the term hereof, advise and consult with MMC and its management and provide various services with respect to MMC's operations, financial activities and business affairs, as shown on the attached Schedule, subject to PEC's reasonable convenience and other business activities. Without limitation, the initial services to be provided by PEC shall include management consulting, treasury, accounting, legal, management information, administrative, communications and advertising. 3.2 Such services shall be performed only during regular business hours on weekdays except at the option of PEC, and shall be performed by such employees or agents of PEC as PEC, in its sole discretion, deems appropriate. ARTICLE 4. NO RESTRICTIONS It is understood that this Agreement shall not restrict PEC or any affiliate of PEC from engaging in any business activities, including those which may be deemed to be competitive with MMC, and that this Agreement shall not obligate PEC to bring to MMC any business opportunities that may come to PEC in its business activities. 2 3 ARTICLE 5. COMPENSATION; EXPENSES As full compensation for PEC's services hereunder, MMC hereby agrees to pay to PEC $967,000.00 per annum, payable at $80,583.33 a month, due and payable on the first business day of each month. PEC's performance of any and all services is subject to MMC's timely monthly payments. ARTICLE 6. SCHEDULE REVISION; WHOLE OR PARTIAL TERMINATION 6.1 Not later than sixty (60) days prior to the September 1, 1997, and annually thereafter for the term of this Agreement, PEC shall provide MMC with a revised Schedule detailing the services and cost thereof, PEC is to provide MMC during the next year. Within ten (10) days of the receipt of any such Schedule, MMC may advise PEC of any service listed on the Schedule it does not wish PEC to perform and/or request PEC to perform additional services. Any additional services PEC agrees to perform shall be added to the Schedule to be performed for a fee mutually agreeable to PEC and MMC. 6.2 Notwithstanding the provisions of Section 1.2 hereof, at any time during the term of the Agreement, either party may terminate this Agreement in whole or in part by giving the other party written notice of such termination not later than ninety (90) days prior to the proposed termination date. Any partial termination(s) must specifically detail the line item description of the services on the Schedule that are subject to termination. All payments due prior to any said whole or partial termination shall be prorated to the date of cancellation on a per diem basis, and thereafter neither party shall have a duty to perform or accept such services subject only to MMC's duty to pay for all services rendered to the date of whole or partial termination. ARTICLE 7. LIMITATIONS ON LIABILITY OF PEC; INDEMNIFICATION OF PEC 7.1 Notwithstanding anything to the contrary contained in this Agreement, PEC shall not be liable to MMC for any loss or damage of any nature suffered by MMC occasioned by or arising from any act or omission, or alleged act or omission, of PEC or any officer, employee or agent of PEC in the performance or the nonperformance of this Agreement or any part hereof, or the consequences of any action or course of action taken by MMC pursuant to this Agreement, unless directly caused by PEC's gross negligence or willful misconduct or an act of bad faith in breach of this Agreement. In no event shall PEC be responsible for MMC's loss of profits and/or other consequential loss or damage howsoever caused and whether or not occasioned or caused by the act, default or negligence of PEC. 7.2 MMC shall indemnify, defend and hold harmless PEC and each of its officers and employees performing services hereunder from and against any and all demands, claims, actions or causes of actions, judgments, assessments, losses, liabilities, damages or penalties and reasonable attorney's fees and related disbursements (collectively "Losses") arising out of or due to the performance by PEC or any such officers and employees of any of PEC's duties or obligations hereunder unless such Losses are directly caused by PEC's gross negligence or willful misconduct or an act of bad faith in breach of this Agreement. 3 4 ARTICLE 8. INDEMNIFICATION OF MMC PEC agrees to indemnify, defend and hold harmless MMC for any loss, damage, reasonable expense, claims, and/or causes of action that may be asserted against MMC as a result of any gross negligence or willful misconduct on the part of PEC, its agents or employees in the performance of the services required by this Agreement. ARTICLE 9. MISCELLANEOUS 9.1 Notwithstanding anything to the contrary contained in this Agreement, PEC shall be deemed to be an independent contractor for all purposes hereof and shall not be deemed to be, and shall not, for the purposes of this Agreement, hold itself out as, an agent or partner of, or joint venturer with MMC; and, except as specifically provided herein, PEC shall take no action, without the prior consent of MMC, by which any third party might infer that PEC is such an agent, partner or joint venturer. 9.2 All notices, requests and demands to or upon the respective parties shall be deemed to have been given or made when personally delivered or when deposited in the mail, first class mail, registered or certified, return receipt requested and postage prepaid as follows: 9.2.1 If to PEC, to: Preferred Equities Corporation 4310 Paradise Road Las Vegas, Nevada 89109 Attention: Frederick H. Conte, Executive Vice President and Chief Operating Officer 9.2.2 If to MMC, to: Mego Mortgage Corporation 1000 Parkwood Circle, Suite 500 Atlanta, Georgia 30339 Attention: James L. Belter, Executive Vice President, Treasurer and Chief Financial Officer or to such other address as either such party shall notify the other. 9.3 No failure to exercise and no delay in exercising, on the part of either party hereto, any right, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof of the exercise of any other right, power or privilege. No modification or waiver of any provision of this Agreement, nor consent to any departure from the provisions hereof, shall be effective unless the same shall be in writing from the party so modifying, waiving or consenting and then such waiver or consent shall be given only in the specific instance and for the purpose for which it is given. No notice to either party shall entitle such party to any other of further notice in other or similar circumstances unless expressly provided for herein. No course of 4 5 dealing between any of the parties shall operate as a waiver of any of their respective rights under this Agreement. 9.4 The captions of the various sections of this Agreement have been inserted only for the purpose of convenience, and shall not be deemed in any matter to modify, define, enlarge or restrict any of the provisions of this Agreement. 9.5 This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. Notwithstanding the foregoing, neither party shall assign or transfer any rights or obligations hereunder, except that PEC may assign or transfer this Agreement and its rights and obligations hereunder to a successor corporation in the event of a merger, consolidation or transfer or sale of all or substantially all of the assets of PEC. Any purported assignment, other than as provided above, shall be null and void. 9.6 This Agreement contains the entire agreement between the parties hereto with respect to the subject matter hereof, supersedes all prior written agreements and negotiations and oral understanding, if any, and may not be amended, supplemented or discharged except by performance or by an instrument in writing signed by both of the parties hereto. 9.7 This Agreement shall be construed in accordance with and governed by the laws of the State of Georgia. 9.8 Nothing contained in this Agreement, express or implied, shall confer upon any other person not a party to this Agreement any rights or remedies under or by virtue of this Agreement. 9.9 This Agreement shall be executed on one or more copies, but such counterparts shall together constitute but one and the same Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their respective duly authorized officer or officers thereunto duly authorized as of the day and year first set forth above. PREFERRED EQUITIES CORPORATION, MEGO MORTGAGE CORPORATION, a Nevada corporation a Delaware corporation By: /s/ Frederick H. Conte By: /s/ James L. Belter ------------------------------ ------------------------------ Frederick H. Conte, James L. Belter, Executive Vice President Executive Vice President 5 EX-10.26 10 MASTER REPURCHASE AGREEMENT 1 Exhibit 10.26 Public Securities Association 40 Broad Street, New York, NY 10004-2373 Telephone (212) 809-7000 MASTER REPURCHASE AGREEMENT Dated as of: September 4, 1996 Between: Mego Mortgage Corporation and Greenwich Capital Markets, Inc. 1. Applicability From time to time the parties hereto may enter into transactions in which one party ("Seller") agrees to transfer to the other ("Buyer") securities or financial instruments ("Securities") against the transfer of funds by Buyer, with a simultaneous agreement by Buyer to transfer to Seller such Securities at a date certain or on demand, against the transfer of funds by Seller. Each such transaction shall be referred to herein as a "Transaction" and shall be governed by this Agreement, including any supplemental terms or conditions contained in Annex I hereto, unless otherwise agreed in writing. 2. Definitions (a) "Act of Insolvency", with respect to any party, (i) the commencement by such party as debtor of any case or proceeding under any bankruptcy, insolvency, reorganization, liquidation, dissolution or similar law, or such party seeking the appointment of a receiver, trustee, custodian or similar official for such party or any substantial part of its property, or (ii) the commencement of any such case or proceeding against such party, or another seeking such an appointment, or the filing against a party of an application for a protective decree under the provisions of the Securities Investor Protection Act of 1970, which (A) is consented to or not timely contested by such party, (B) results in the entry of an order for relief, such an appointment, the issuance of such a protective decree or the entry of an order having a similar effect, or (C) is not dismissed within 15 days, (iii) the making by a party of a general assignment for the benefit of creditors, or (iv) the admission in writing by a party of such party's inability to pay such party's debts as they become due; (b) "Additional Purchased Securities", Securities provided by Seller to Buyer pursuant to Paragraph 4(a) hereof; 2 (c) "Buyer's Margin Amount", with respect to any Transaction as of any date, the amount obtained by application of a percentage (which may be equal to the percentage that is agreed to as the Seller's Margin Amount under subparagraph (q) of this Paragraph), agreed to by Buyer and Seller prior to entering into the Transaction, to the Repurchase Price for such Transaction as of such date; (d) "Confirmation", the meaning specified in Paragraph 3(b) hereof; (e) "Income", with respect to any Security at any time, any principal thereof then payable and all interest, dividends or other distributions thereon; (f) "Margin Deficit", the meaning specified in Paragraph 4(a) hereof; (g) "Margin Excess", the meaning specified in Paragraph 4(b) hereof; (h) "Market Value", with respect to any Securities as of any date, the price for such Securities on such date obtained from a generally recognized source agreed to by the parties or the most recent closing bid quotation from such a source, plus accrued income to the extent not included therein (other than any income credited or transferred to, or applied to the obligations of, Seller pursuant to Paragraph 5 hereof) as of such date (unless contrary to market practice for such Securities); (i) "Price Differential", with respect to any Transaction hereunder as of any date, the aggregate amount obtained by daily application of the Pricing Rate for such Transaction to the Purchase Price for such Transaction on a 360 day per year basis for the actual number of days during the period commencing on (and including) the Purchase Date for such Transaction and ending on (but excluding) the date of determination (reduced by any amount of such Price Differential previously paid by Seller to Buyer with respect to such Transaction); (j) "Pricing Rate", the per annum percentage rate for determination of the Price Differential; (k) "Prime Rate", the prime rate of U.S. money center commercial banks as published in The Wall Street Journal; (l) "Purchase Date", the date on which Purchased Securities are transferred by Seller to Buyer; (m) "Purchase Price", (i) on the Purchase Date, the price at which Purchased Securities are transferred by Seller to Buyer, and (ii) thereafter, such price increased by the amount of any cash transferred by Buyer to Seller pursuant to Paragraph 4(b) hereof and decreased by the amount of any cash 3 transferred by Seller to Buyer pursuant to Paragraph 4(a) hereof or applied to reduce Seller's obligations under clause (ii) of Paragraph 5 hereof; (n) "Purchased Securities", the Securities transferred by Seller to Buyer in a Transaction hereunder, and any Securities substituted therefor in accordance with Paragraph 9 hereof. The term "Purchased Securities" with respect to any Transaction at any time also shall include Additional Purchased Securities delivered pursuant to Paragraph 4(a) and shall exclude Securities returned pursuant to Paragraph 4(b); (o) "Repurchase Date", the date on which Seller is to repurchase the Purchased Securities from Buyer, including any date determined by application of the provisions of Paragraphs 3(c) or 11 hereof; (p) "Repurchase Price", the price at which Purchased Securities are to be transferred from Buyer to Seller upon termination of a Transaction, which will be determined in each case (including Transactions terminable upon demand) as the sum of the Purchase price and the Price Differential as of the date of such determination, increased by any amount determined by the application of the provisions of Paragraph 11 hereof; (q) "Seller's Margin Amount", with respect to any Transaction as of any date, the amount obtained by application of a percentage (which may be equal to the percentage that is agreed to as the Buyer's Margin Amount under subparagraph (c) of this Paragraph), agreed to by Buyer and Seller prior to entering into the Transaction, to the Repurchase Price for such Transaction as of such date. 3. Initiation; Confirmation; Termination (a) An agreement to enter into a Transaction may be made orally or in writing at the initiation or either Buyer or Seller. On the Purchase Date for the Transaction, the Purchased Securities shall be transferred to Buyer or its agent against the transfer of the Purchase Price to an account of Seller. (b) Upon agreeing to enter into a Transaction hereunder, Buyer or Seller (or both), as shall be agreed, shall promptly deliver to the other party a written confirmation of each Transaction (a "Confirmation"). The Confirmation shall describe the Purchased Securities (including the CUSIP number, if any), identify Buyer and Seller and set forth (i) the Purchase Date, (ii) the Purchase Price, (iii) the Repurchase Date, unless the Transaction is to be terminable on demand, (iv) the Pricing Rate or Repurchase Price applicable to the Transaction, and (v) any additional terms or conditions of the Transaction not inconsistent 4 with this Agreement. The Confirmation, together with this Agreement, shall constitute conclusive evidence of the terms agreed between Buyer and Seller with respect to the Transaction to which the Confirmation relates, unless with respect to the Confirmation specific objection is made promptly after receipt thereof. In the event of any conflict between the terms of such Confirmation and this Agreement, this Agreement shall prevail. (c) In the case of Transactions terminable upon demand, such demand shall be made by Buyer or Seller, no later than such time as is customary in accordance with market practice, by telephone or otherwise on or prior to the business day on which such termination will be effective. On the date specified in such demand, or on the date fixed for termination in the case of Transactions having a fixed term, termination of the Transaction will be effected by transfer to Seller or its agent of the Purchased Securities and any income in respect thereof received by Buyer (and not previously credited or transferred to, or applied to the obligations of, Seller pursuant to Paragraph 5 hereof) against the transfer of the Repurchase Price to an account of Buyer. 4. Margin Maintenance (a) If at any time the aggregate Market Value of all Purchased Securities subject to all Transactions in which a particular party hereto is acting as Buyer is less than the aggregate Buyer's Margin Amount for all such Transactions (a "Margin Deficit"), then Buyer may by notice to Seller require Seller in such Transactions, at Seller's option, to transfer to Buyer cash or additional Securities reasonably acceptable to Buyer ("Additional Purchased Securities"), so that the cash and aggregate Market Value of the Purchased Securities, including any such Additional Purchased Securities, will thereupon equal or exceed such aggregate Buyer's Margin Amount (decreased by the amount of any Margin Deficit as of such date arising from any Transactions in which such Buyer is acting as Seller). (b) If at any time the aggregate Market Value of all Purchased Securities subject to all Transactions in which a particular party hereto is acting as Seller exceeds the aggregate Seller's Margin Amount for all such Transactions at such time (a (Margin Excess"), then Seller may by notice to Buyer require Buyer in such Transactions at such time (a "Margin Excess"), then Seller may by notice to Buyer require Buyer in such Transactions, at Buyer's option, to transfer cash or Purchased Securities to Seller, so that the aggregate Market Value of the Purchased Securities, after deduction of any such cash or any Purchased Securities so transferred, will thereupon not exceed such aggregate Seller's Margin Amount (increased by the amount of any Margin Excess as of such date arising from any Transactions in which such Seller is acting as Buyer), 5 (c) Any cash transferred pursuant to this Paragraph shall be attributed to such Transactions as shall be agreed upon by Buyer and Seller. (d) Seller and Buyer may agree, with respect to any or all Transactions hereunder, that the respective rights of Buyer or Seller (or both) under subparagraphs (a) and (b) of this Paragraph may be exercised only where a Margin Deficit or Margin Excess exceeds a specified dollar amount or a specified percentage of the Repurchase Prices for such Transactions (which amount or percentage shall be agreed to by Buyer and Seller prior to entering into any such Transactions). (e) Seller and Buyer may agree, with respect to any or all Transactions hereunder, that the respective rights of Buyer and Seller under subparagraphs (a) and (b) of this Paragraph to require the elimination of a Margin Deficit or a Margin Excess, as the case may be, may be exercised whenever such a Margin Deficit or Margin Excess exists with respect to any single Transaction hereunder (calculated without regard to any other Transaction outstanding under this Agreement). 5. Income Payments Where a particular Transaction's term extends over an income payment date on the Securities subject to that Transaction, Buyer shall, as the parties may agree with respect to such Transaction (or, in the absence of any agreement, as Buyer shall reasonably determine in its discretion), on the date such income is payable either (i) transfer to or credit to the account of Seller an amount equal to such income payment or payments with respect to any Purchased Securities subject to such Transaction or (ii) apply the income payment or payments to reduce the amount to be transferred to Buyer by Seller upon termination of the Transaction. Buyer shall not be obligated to take any action pursuant to the preceding sentence to the extent that such action would result in the creation of a Margin Deficit, unless prior thereto or simultaneously therewith Seller transfers to Buyer cash or Additional Purchased Securities sufficient to eliminate such Margin Deficit. 6. Security Interest Although the parties intend that all Transactions hereunder be sales and purchases and not loans, in the event any such Transactions are deemed to be loans, Seller shall be deemed to have pledged to Buyer as security for the performance by Seller of its obligations under each such Transaction, and shall be deemed to have granted to Buyer a security interest in, all of the Purchased Securities with respect to all Transactions hereunder and all proceeds thereof. 6 7. Payment and Transfer Unless otherwise mutually agreed, all transfers of funds hereunder shall be in immediately available funds. All securities transferred by one party hereto to the other party (i) shall be in suitable form for transfer or shall be accompanied by duly executed instruments of transfer or assignment in blank and such other documentation as the party receiving possession may reasonably request (ii) shall be transferred on the book-entry system of a Federal Reserve Bank, or (iii) shall be transferred by any other method mutually acceptable to Seller and Buyer. As used herein with respect to Securities, "transfer" is intended to have the same meaning as when used in Section 8-313 of the New York Uniform Commercial Code or, where applicable, in any federal regulation governing transfers of the Securities. 8. Segregation of Purchased Securities To the extent required by applicable law, all Purchased Securities in the possession of Seller shall be segregated from other securities in its possession and shall be identified as subject to this Agreement. Segregation may be accomplished by appropriate identification on the books and records of the holder, including a financial intermediary or a clearing corporation. Title to all Purchased Securities shall pass to Buyer and, unless otherwise agreed by Buyer and Seller, nothing in this Agreement shall preclude Buyer from engaging in repurchase transactions with the Purchased Securities or otherwise pledging or hypothecating the Purchased Securities, but no such transaction shall relieve Buyer of its obligations to transfer Purchased Securities to Seller pursuant to Paragraphs 3, 4 or 11 hereof, or of Buyer's obligation to credit or pay income to, or apply income to the obligation of, Seller pursuant to Paragraph 5 hereof. Required Disclosure for Transactions in Which the Seller Retains Custody of the Purchased Securities Seller is not permitted to substitute other securities for those subject to this Agreement and therefore must keep Buyer's securities segregated at all times, unless in this Agreement Buyer grants Seller the right to substitute other securities. If Buyer grants the right to substitute, this means that Buyer's securities will likely be commingled with Seller's own securities during the trading day. Buyer is advised that, during any trading day that Buyer's securities are commingled with Seller's securities, they [will]* [may]** be subject to liens granted by Seller to [its clearing bank]* [third parties]** and may be used by Seller for deliveries on other securities transactions. Whenever the securities are commingled, Seller's ability 7 to resegregate substitute securities for Buyer will be subject to Seller's ability to satisfy [the clearing]* [any]** lien or to obtain substitute securities. 9. Substitution (a) Seller may, subject to an agreement with and acceptance by Buyer, substitute other Securities for any Purchased Securities. Such substitution shall be made by transfer to Buyer of such other securities and transfer to Seller of such Purchased Securities. After substitution, the substituted Securities shall be deemed to be Purchased Securities. (b) In Transactions in which the Seller retains custody of Purchased Securities, the parties expressly agree that Buyer shall be deemed, for purposes of subparagraph (a) of this Paragraph, to have agreed to and accepted in this Agreement substitution by Seller of other Securities for Purchased Securities; provided, however, that such other Securities shall have a Market Value at least equal to the Market Value of the Purchased Securities for which they are substituted. 10. Representations Each of Buyer and Seller represents and warrants to the other that (i) it is duly authorized to execute and deliver this Agreement, to enter into the Transactions contemplated hereunder and to perform its obligations hereunder and has taken all necessary action to authorize such execution, delivery and performance, (ii) it will engage in such Transactions as principal (or, if agreed in writing in advance of any Transaction by the other party hereto, as agent for a disclosed principal), (iii) the person signing this Agreement on its behalf is duly authorized to do so on its behalf (or on behalf of any such disclosed principal), (iv) it has obtained all authorization of any governmental body required in connection with this Agreement and the Transactions hereunder and such authorizations are in full force and effect and (v) the execution, delivery and performance of this Agreement and the Transactions hereunder will not violate any law, ordinance, charter, by-law or rule applicable to it or any agreement by which it is bound or by which any of its assets are affected. On the Purchase Date for any Transaction Buyer and Seller shall each be deemed to repeat all the foregoing representations made by it. - -------------------------------- * Language to be used under 17 C.F.R. ss.403.4(e) if Seller is a government securities broker or dealer other than a financial institution. ** Language to be used under 17 C.F.R. ss.403.5(d) if Seller is a financial institution. 8 11. Events of Default In the event that (i) Seller fails to repurchase or Buyer fails to transfer Purchased Securities upon the applicable Repurchase Date, (ii) Seller or Buyer fails, after one business day's notice, to comply with Paragraph 4 hereof, (iii) Buyer fails to comply with Paragraph 5 hereof, (iv) an Act of Insolvency occurs with respect to Seller or Buyer, (v) any representation made by Seller or Buyer shall have been incorrect or untrue in any material respect when made or repeated or deemed to have been made or repeated, or (vi) Seller or Buyer shall admit to the other its inability to, or its intention not to, perform any of its obligations hereunder (each an "Event of Default"): (a) At the option of the nondefaulting party, exercised by written notice to the defaulting party (which option shall be deemed to have been exercised, even if no notice is given, immediately upon the occurrence of an Act of Insolvency), the Repurchase Date for each Transaction hereunder shall be deemed immediately to occur. (b) In all Transactions in which the defaulting party is acting as Seller, if the nondefaulting party exercises or is deemed to have exercised the option referred to in subparagraph (a) of this Paragraph, (i) the defaulting party's obligations hereunder to repurchase all Purchased Securities in such Transactions shall thereupon become immediately due and payable, (ii) to the extent permitted by applicable law, the Repurchase Price with respect to each such Transaction shall be increased by the aggregate amount obtained by daily application of (x) the greater of the Pricing Rate for such Transaction or the Prime Rate to (y) the Repurchase Price for such Transaction as of the Repurchase Date as determined pursuant to subparagraph (a) of this Paragraph (decreased as of any day by (A) any amounts retained by the nondefaulting party with respect to such Repurchase Price pursuant to subparagraph (d)(i) of this Paragraph, (B) any proceeds from the sale of Purchased Securities pursuant to subparagraph (d)(i) of this Paragraph, and (C) any amounts credited to the account of the defaulting party pursuant to subparagraph (e) of this Paragraph) on a 360 day per year basis for the actual number of days during the period from and including the date of the Event of Default giving rise to such option to but excluding the date of payment of the Repurchase Price as so increased, (iii) all Income paid after such exercise or deemed exercise shall be retained by the nondefaulting party and applied to the aggregate unpaid Repurchase Prices owed by the defaulting party, and (iv) the defaulting party shall immediately deliver to the nondefaulting party any Purchased Securities subject to such Transactions then in the defaulting party's possession. (c) In all Transactions in which the defaulting party is acting as Buyer, upon tender by the nondefaulting party of payment of the aggregate Repurchase Prices for all such Transactions, the 9 defaulting party's right, title and interest in all Purchased Securities subject to such Transactions shall be deemed transferred to the nondefaulting party, and the defaulting party shall deliver all such Purchased Securities to the nondefaulting party. (d) After one business day's notice to the defaulting party (which notice need not be given if an Act of Insolvency shall have occurred, and which may be the notice given under subparagraph (a) of this Paragraph or the notice referred to in clause (ii) of the first sentence of this Paragraph), the nondefaulting party may: (i) as to Transactions in which the defaulting party is acting as Seller, (A) immediately sell, in a recognized market at such price or prices as the nondefaulting party may reasonably deem satisfactory, any or all Purchased Securities subject to such Transactions and apply the proceeds thereof to the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder or (B) in its sole discretion elect, in lieu of selling all or a portion of such Purchased Securities, to give the defaulting party credit for such Purchased Securities in an amount equal to the price therefor on such date, obtained from a generally recognized source or the most recent closing bid quotation from such a source, against the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder; and (ii) as to Transactions in which the defaulting party is acting as Buyer, (A) purchase securities ("Replacement Securities") of the same class and amount as any Purchased Securities that are not delivered by the defaulting party to the nondefaulting party as required hereunder or (B) in its sole discretion elect, in lieu of purchasing Replacement Securities, to be deemed to have purchased Replacement Securities at the price therefor on such date, obtained from a generally recognized source or the most recent closing bid quotation from such a source. (e) As to Transactions in which the defaulting party is acting as Buyer, the defaulting party shall be liable to the nondefaulting party (i) with respect to Purchased Securities (other than the Additional Purchased Securities), for any excess of the price paid (or deemed paid) by the nondefaulting party for Replacement Securities therefor over the Repurchase Price for such Purchased Securities and (ii) with respect to Additional Purchased Securities, for the price paid (or deemed paid) by the nondefaulting party for the Replacement 10 Securities therefor. In addition, the defaulting party shall be liable to the nondefaulting party for interest on such remaining liability with respect to each such purchase (or deemed purchase) of Replacement Securities from the date of such purchase (or deemed purchase) until paid in full by Buyer. Such interest shall be at a rate equal to the greater of the Pricing Rate for such Transaction of the Prime Rate. (f) For purposes of this Paragraph 11, the Repurchase Price for each Transaction hereunder in respect of which the defaulting party is acting as Buyer shall not increase above the amount of such Repurchase Price for such Transaction determined as of the date of the exercise or deemed exercise by the nondefaulting party of its option under subparagraph (a) of this Paragraph. (g) The defaulting party shall be liable to the nondefaulting party for the amount of all reasonable legal or other expenses incurred by the nondefaulting party in connection with or as a consequence of an Event of Default, together with interest thereon at a rate equal to the greater of the Pricing Rate for the relevant Transaction or the Prime Rate. (h) The nondefaulting party shall have, in addition to its rights hereunder, any rights otherwise available to it under any other agreement or applicable law. 12. Single Agreement Buyer and Seller acknowledge that, and have entered hereunto and will enter into each Transaction hereunder in consideration of and in reliance upon the fact that, all Transactions hereunder constitute a single business and contractual relationship and have been made in consideration of each other. Accordingly, each of Buyer and Seller agrees (i) to perform all of its obligations in respect of each Transaction hereunder, and that a default in the performance of any such obligations shall constitute a default by it in respect of all Transactions hereunder, (ii) that each of them shall be entitled to set off claims and apply property held by them in respect of any Transaction against obligations owing to them in respect of any other Transactions hereunder and (iii) that payments, deliveries and other transfers made by either of them in respect of any Transaction shall be deemed to have been made in consideration of payments, deliveries and other transfers in respect of any other Transactions hereunder, and the obligations to make any such payments, deliveries and other transfers may be applied against each other and netted. 11 13. Notices and Other Communications Unless another address is specified in writing by the respective party to whom any notice or other communication is to be given hereunder, all such notices or communications shall be in writing or confirmed in writing and delivered at the respective addresses set forth in Annex II attached hereto. 14. Entire Agreement; Severability This Agreement shall supersede any existing agreements between the parties containing general terms and conditions for repurchase transactions. Each provision and agreement herein shall be treated as separate and independent from any other provision of agreement herein and shall be enforceable notwithstanding the unenforceability of any such other provision or agreement. 15. Nonassignability; Termination The rights and obligations of the parties under this Agreement and under any Transaction shall not be assigned by either party without the prior written consent of the other party. Subject to the foregoing, this Agreement and any Transactions shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns. This Agreement may be canceled by either party upon giving written notice to the other, except that this Agreement shall, notwithstanding such notice, remain applicable to any Transactions then outstanding. 16. Governing Law This Agreement shall be governed by the laws of the State of New York without giving effect to the conflict of law principles thereof. 17. No Waivers, Etc. No express or implied waiver of any Event of Default by either party shall constitute a waiver of any other Event of Default and no exercise of any remedy hereunder by any party shall constitute a waiver of its right to exercise any other remedy hereunder. No modification or waiver of any provision of this Agreement and no consent by any party to a departure herefrom shall be effective unless and until such shall be in writing and duly executed by both of the parties hereto. Without limitation on any of the foregoing, the failure to give a notice pursuant to subparagraphs 4(a) or 4(b) hereof will not constitute a waiver of any right to do so at a later date. 12 18. Use of Employee Plan Assets (a) If assets of any employee benefit plan subject to any provision of the Employee Retirement Income Security Act of 1974 ("ERISA") are intended to be used by either party hereto (the "Plan Party") in a Transaction, the Plan Party shall so notify the other party prior to the Transaction. The Plan Party shall represent in writing to the other party that the Transaction does not constitute a prohibited transaction under ERISA or is otherwise exempt therefrom, and the other party may proceed in reliance thereon but shall not be required so to proceed. (b) Subject to the last sentence of subparagraph (a) of this Paragraph, any such Transaction shall proceed only if Seller furnishes or has furnished to Buyer its most recent available audited statement of its financial condition and its most recent subsequent unaudited statement of its financial condition. (c) By entering into a Transaction pursuant to this Paragraph, Seller shall be deemed (i) to represent to Buyer that since the date of Seller's latest such financial statements, there has been no material adverse change in Seller's financial condition which Seller has not disclosed to Buyer, and (ii) to agree to provide Buyer with future audited and unaudited statements of its financial condition as they are issued, so long as it is a Seller in any outstanding Transaction involving a Plan Party. 19. Intent (a) The parties recognize that each Transaction is a "repurchase agreement" as that term is defined in Section 101 of Title 11 of the United States Code, as amended (except insofar as the type of Securities subject to such Transaction or the term of such Transaction would render such definition inapplicable), and a "securities contract" as that term is defined in Section 741 of Title 11 of the United States Code, as amended. (b) It is understood that either party's right to liquidate Securities delivered to it in connection with Transactions hereunder or to exercise any other remedies pursuant to Paragraph 11 hereof, is a contractual right to liquidate such Transaction as described in Sections 555 and 559 of Title 11 of the United States Code, as amended. 20. Disclosure Relating to Certain Federal Protections The parties acknowledge that: (a) in the case of Transactions in which one of the parties is a broker or dealer registered with the Securities and Exchange Commission ("SEC") under Section 15 of the Securities Exchange Act of 1934 ("1934 Act"), the Securities Investor Protection 13 Corporation has taken the position that the provisions of the Securities Investor Protection Act of 1970 ("SIPA") do not protect the other party with respect to any Transaction hereunder; (b) In the case of Transactions in which one of the parties is a government securities broker or a government securities dealer registered with the SEC under Section 15C of the 1934 Act, SIPA will not provide protection to the other party with respect to any Transaction hereunder; and (c) in the case of Transactions in which one of the parties is a financial institution, funds held by the financial institution pursuant to a Transaction hereunder are not a deposit and therefore are not insured by the Federal Deposit Insurance Corporation, the Federal Savings and Loan Insurance Corporation or the National Credit Union Share Insurance Fund, as applicable. Mego Mortgage Corporation Greenwich Capital Markets, Inc. By: /s/ James L. Belter By: /s/ -------------------------- Title: Executive V.P. Title: Co- President Date: September 5, 1996 Date: September 4, 1996 14 ANNEX I Supplemental Terms and Conditions 1. Paragraph 12 of the Agreement shall be deleted in its entirety and the following paragraph shall be inserted in lieu thereof: 12. Single Agreement Each party hereby agrees to fulfill all of its obligations to the other party with respect to any transaction or agreement between them, and agrees that a default in the performance of any such obligations ("Obligations") shall constitute an Event of Default hereunder, and each party shall have a right of setoff against the other party for amounts owing hereunder and any other amounts or obligations owing in respect of any other agreement or transaction whatsoever, and that payments and deliveries made by either party hereunder shall be considered to have been made in consideration of payments and deliveries made by the other party with respect to any other agreement or transaction between them, and the Obligations to make any such payments and deliveries may be applied against each other and netted. As security for the performance by each party of all its Obligations, each party hereby grants to the other a security interest in all securities and other property (and all proceeds thereof) transferred by such party to the other pursuant to this Agreement or any other transaction or agreement. With respect to defaulted Obligations which did not arise under this Agreement, such security interest may be enforced in accordance with the provisions of applicable law or Paragraph 11(d)(i) hereof (applying such Paragraph as if such defaulted Obligations were owed hereunder in respect of a Transaction in which the defaulting party is acting as Seller). 2. Pursuant to Paragraph 18 of the Agreement, if assets of an employee benefit plan subject to any provision of the Employee Retirement Income Security Act of 1974 ("ERISA") are intended to be used by either party hereto (the "Plan Party") in a Transaction, the Plan Party shall so notify the other party prior to the Transaction and the other party may, at its complete discretion, upon such notification decide not to enter into the Transaction. In addition, with respect to each such Transaction, the Plan Party is deemed to represent to the other party that such Transaction does not constitute a prohibited transaction under ERISA or is otherwise exempt therefrom. 15 ANNEX II Names and Addresses for Communications Between Parties Greenwich Capital Markets, Inc. 600 Steamboat Road Greenwich, Connecticut 06830 Phone: (203) 625-7909 Fax: (203) 629-2514 Attn: Peter Sanchez Mego Mortgage Corporation 1000 Parkwood Circle - 5th Floor Atlanta, GA 30339 Phone: 800-550-6346 Fax: 800-694-6346 Attn: Jeffrey S. Moore, President EX-10.27 11 LETTER AGREEMENT - GREENWICH 1 EX-10.27 GREENWICH CAPITAL MARKETS, INC. 600 STEAMBOAT ROAD GREENWICH, CONNECTICUT 06830 October 1, 1996 Mego Mortgage Corporation 1000 Parkwood Circle 5th floor Atlanta, Georgia 30339 Attention: Mr. James L. Belter Chief Financial Officer and Treasurer Gentlemen: This letter will confirm the engagement of Greenwich Capital Markets, Inc. ("Greenwich") by Mego Mortgage Corporation ("Company") on an exclusive basis to render advisory services, investment banking services and financial/structuring services generally related to Transactions (as defined below) to the Company, and to act as the Company's exclusive agent, in connection with the financing and/or subsequent sale of one- to four-family residential home improvement loans ("HIP Loans") and other subsequent types of loans originated under loan programs approved in advance by Greenwich. In addition, under an Amended and Restated Master Loan Purchase and Servicing Agreement among Greenwich, the Company and Mego Financial Corp., as guarantor, dated as of the date hereof (the "Master Agreement"), the Company will be obligated to sell and Greenwich will be obligated to purchase HIP Loans and certain other mortgage loans as and to the extent provided in such agreement. It is currently contemplated that the HIP Loans will consist of (i) loans insured by the Federal Housing Administration ("FHA") pursuant to Title I of the National Housing Act ("Title I Loans") and (ii) conventional HIP Loans. Such conventional HIP Loans may provide for all or a portion of the Loan proceeds to be used for debt consolidation purposes as specified in the program underwriting guidelines pursuant to which such conventional HIP Loans were originated. Such program underwriting guidelines must be approved in writing by Greenwich prior to the purchase of such 2 Loans by Greenwich. (It is understood that Title I Loans, which may or may not be secured by mortgages or deeds of trust, are relatively illiquid as whole loans since, among other reasons, FHA requires that its book-entry insurance reserves be transferred under certain circumstances and subject to certain restrictions when Title I Loans are transferred or assigned.) It is further contemplated that the focus of Greenwich's services will be on general investment banking advice primarily related to alternative means by which the Company may (i) obtain third-party financing of the HIP Loan portfolio pursuant to a warehousing, repurchase, commercial paper or similar arrangement, but not including the issuance of corporate equity or debt in a private or public offering (any such transaction, a "Financing Transaction"), and/or (ii) sell or otherwise dispose of HIP Loans or interests therein (or secured thereby) in transactions pursuant to which the Company would either sell HIP Loans as whole mortgage loans or cause to be issued participation certificates or securities evidencing ownership of, or secured by, HIP Loans pooled as Real Estate Mortgage Investment Conduits under federal tax law (in the case of real estate or manufactured housing loans) or otherwise (any such transaction, a "Disposition Transaction", and Disposition Transactions and Financing Transactions collectively, "Transactions"). 1. Services to be Rendered. Greenwich shall perform such of the following advisory services, investment banking services and financial/structuring services as the Company may reasonably request: a. Review of the HIP Loan Business. Greenwich shall familiarize itself to the extent appropriate and feasible with the characteristics of the HIP Loans. In the course of its review, Greenwich shall rely, without independent investigation, upon (i) information supplied by the Company, (ii) information supplied by third parties employed by the Company, and (iii) information otherwise publicly available. Greenwich shall not be obligated to conduct any independent investigation relative to the above noted information. In addition, Greenwich may from time to time examine all or a statistical sample of the HIP Loans to determine generally the characteristics thereof. All information provided by the Company and third parties employed by the Company to Greenwich shall be complete and accurate to the best of the Company's knowledge. b. Valuation of HIP Loans. Greenwich shall from time to time perform quantitative analyses of the HIP Loans using a magnetic data tape provided by the Company to: 2 3 i. stratify the relevant characteristics of the HIP Loans (i.e. weighted average coupon, weighted average remaining term, etc.), ii. determine a range of values given Greenwich's assumptions regarding, but not limited to, prepayment rates, types of loans, collateral characteristics, expected and historical performance, representations and warranties, geographic dispersion, capital and secondary loan market conditions, Transaction structure, etc., and iii. present such valuations to the Company (each, a "Valuation"). c. Marketing Initiatives for the HIP Loans. Greenwich shall from time to time develop and implement marketing strategies specifically oriented to the characteristics of particular HIP Loans, and in that connection Greenwich shall: i. advise the Company on the structure of proposed Disposition Transactions, which will attempt to minimize the cost of funds and maximize proceeds; ii. compare and analyze a variety of securitization structures with different credit enhancement facilities, if appropriate; iii. perform cost/benefit analyses for the Company regarding collateral criteria selection, credit enhancement levels and marketing implications tailored to the Company's goals for securitization and future portfolio growth; and iv. access Greenwich's investor/customer base in an attempt to facilitate prompt and efficient placements of HIP Loans in the form of whole loans, participation certificates or securities. d. Education and Analysis. Greenwich shall from time to time provide to the Company securities market education, information systems development and review, collateral parameter selection criteria and regulatory and balance sheet analyses. 3 4 e. Potential Counterparties. Greenwich shall advise and assist the Company in identifying specific potential counterparties for Transactions, including (without limitation) institutional investors, lending institutions, trustees and custodians, credit enhancers and rating agencies ("Counterparties") and shall, on behalf of the Company, contact such potential Counterparties as the Company may designate. f. Presentations. Greenwich shall advise and assist the management of the Company in making presentations to the Board of Directors of the Company concerning securitization and structured finance as it relates to the HIP Loans. g. Preparation of Information Summary. With the assistance of the Company, Greenwich shall from time to time prepare a summary of the HIP Loans ("Summary") for distribution to potential Counterparties. The Company shall review and approve the Summary prior to its distribution. The Company will be solely responsible for the completeness and accuracy of the Summary. h. Negotiations. Greenwich shall advise and assist the Company in developing negotiating strategies for possible Transactions, and shall negotiate on behalf of the Company with potential Counterparties, and other persons or entities designated by the Company, in connection with Transactions. i. Bids and Proposals. At the Company's request, Greenwich shall solicit, receive and evaluate bids and proposals (whether in whole loan, participation certificate or structured form) for third-party purchases or financings of the HIP Loans, or interests therein or secured thereby, and advise the Company as to such bids and proposals. j. Closings. Greenwich shall assist in coordinating each such applicable Counterparty's due diligence and assist in the closing of each Transaction. k. Other Services. Greenwich shall render such other services incidental to the Company's HIP Loan business as from time to time may be agreed upon by Greenwich and the Company. 2. Exclusive Engagement. The Engagement created hereby is an exclusive right to render advisory services, investment banking services and financial/structuring services with respect to the Company's HIP Loan business in accordance with the terms hereof. The Company agrees not to employ, appoint or engage any other advisor, broker, investment banker, person or entity for such purposes during the term of this agreement nor shall the Company effect, or attempt to affect a Transaction itself during 4 5 the term of this agreement. The right granted to Greenwich hereunder is a power coupled with an interest and is irrevocable over the term of the engagement created hereby. The Company shall refer to Greenwich all inquiries with respect to a potential Transaction. It is understood and agreed that except as specifically provided herein and in any agreement entered into between Greenwich and the Company that implements the terms hereof, no revolving credit agreement, financing facility or any other type of financial commitment is, or is to be deemed to be, created hereby or created or implied by this agreement or by any actions or course of conduct of Greenwich. The Company further agrees that, during the twelve months following the full term of this exclusive engagement, as extended pursuant to Section 3 and without regard to any early termination pursuant to Section 7(b), the Company will not (1) directly or indirectly seek to consummate a Transaction with any offeree, subscriber, person or entity whose name is provided to the Company or any other Mego Entity (as defined below) pursuant to this letter agreement, (ii) use such names except in connection with this agreement or (iii) disclose such names to any other advisor, broker or other person, unless prior thereto the Company has obtained the written consent of Greenwich and shall have paid to Greenwich any fee(s) required pursuant to Section 4(a) or (b) unless otherwise agreed in writing by Greenwich. 3. Term. This agreement shall terminate on the earlier of (i) September 30, 2001 and (ii) the completion of $2 billion in aggregate Sold Principal Balances of Disposition Transactions, excluding all Sold Principal Balances relating to HIP Loans purchased by Greenwich before the date hereof, unless extended in writing by mutual agreement. 4. Fees. a. Disposition Fee. Upon consummation of any Disposition Transaction involving whole Title I Loans exclusively, participations in Title I Loans exclusively, or securities evidencing interests in or secured by Title I Loans exclusively, which securities are rated in one of the two highest rating categories of a rating agency ("Specified Securities", which term shall not include securities entitled to nominal or disproportionately low principal or interest distributions regardless of any rating), the Company shall pay to Greenwich for its services hereunder a cash fee for such Disposition Transaction equal to a percentage of the Sold Principal Balance (as defined below) of such Title I Loans or Specified Securities, as the case may be. Such percentage shall be: (i) one percent (1.00%) of the Sold Principal Balances, for the first $50 million of such Sold Principal Balances in the aggregate that are settled in Disposition Transactions; (ii) three-quarters of one percent 5 6 (0.75%) of the Sold Principal Balances for the next $100 million of such Sold Principal Balances in the aggregate that are settled in Disposition Transactions; and (iii) one-half of one percent (0.50%) of the Sold Principal Balances that are settled in Disposition Transactions thereafter. Such cash fee shall be paid on the date of closing of the Disposition Transaction and shall be payable whether or not Greenwich is acting as principal. In the event of a Disposition Transaction involving either HIP Loans other than Title I Loans or securities other than Specified Securities, the fee payable to Greenwich pursuant to this Section 4(a) shall be (x) one percent (1.00%) of the Sold Principal Balances, for the first $100 million of such Sold Principal Balances in the aggregate that are settled in Disposition Transactions; (y) three-quarters of one percent (0.75%) of the Sold Principal Balances for the next $150 million of such Sold Principal Balances in the aggregate that are settled in Disposition Transactions; and (z) one-half of one percent (0.50%) of the Sold Principal Balances that are settled in Disposition Transactions thereafter. Solely for purposes of calculating the fees payable to Greenwich pursuant to clauses (i), (ii) and (iii) of the third preceding sentence, the Sold Principal Balances described in such clauses shall include the Sold Principal Balances of all HIP Loans purchased on or after April 29, 1996 and subsequently settled in Disposition Transactions. The "Sold Principal Balance" of any whole HIP Loans, participations in HIP Loans or securities evidencing interests in or secured by HIP Loans (including Specified Securities), which HIP Loans, participations or securities in each case are sold by the Company, shall be the aggregate unpaid principal amount of such HIP Loans, participations or securities calculated as of the cut-off date applicable to settlement of the related Disposition Transaction. It is understood and acknowledged that from time to time the Company may originate HIP Loans that are not intended for inclusion in a Disposition Transaction and that will be traded away ("Trade Away Loans") by the Company and not sold to Greenwich. The parties agree that up to 5% of the Company's loan production in any month may be "traded away" from Greenwich, subject to the payment to Greenwich upon any such sale of a fee equal to one-quarter of one percent of the aggregate unpaid principal amount of such Trade Away Loans calculated as of the cut-off date(s) applicable to such sales. It is further understood and acknowledged that from time to time the Company may expand its product line to include other types of consumer loan products, which may not be included in Disposition Transactions. The parties agree that Greenwich will have the exclusive right to assist the Company to accomplish the sale or disposition of such new loan products to third party 6 7 purchasers and/or financiers on a flow delivery basis for a fee to be agreed upon in advance of any such sale. b. Financing Fees. Upon consummation of any Financing Transaction, the Company shall pay to Greenwich a cash fee of one-half of one percent (0.50%) of the gross amount committed to the Company by the Counterparty/source of funds in the Financing Transaction. If applicable, the Company shall also pay a cash fee calculated at such percentage of the amount of any subsequent increase in such committed amount. c. Mego Entity Fees. In the event any affiliate of the Company or any entity more than 10% owned, or controlled or created, by either (each a "Mego Entity"), shall, while this agreement shall be in effect, consummate a Disposition Transaction, the Company shall pay, or cause such Mego Entity to pay, the same Disposition Fee to Greenwich as the Company would have paid had the Disposition Transaction been made by the Company. Such Disposition Transaction shall be considered as having been made by the Company for the purpose of calculating the applicable percentage under paragraph 4(a) of this agreement. d. Contingent Nature of Fees. Any fees due under Subsection (a), (b) or (c) of this Section 4 shall be contingent upon the consummation of the related Transaction. e. Early Termination Fees. The Company shall pay to Greenwich any applicable fees required under Section 7. 5. Expenses. In addition to any fees that may be payable to Greenwich hereunder, the Company hereby agrees, from time to time upon request, to reimburse Greenwich for all reasonable fees and disbursements of Greenwich, including without limitation, legal fees in a structured transaction in which Greenwich has previously purchased the HIP Loans as principal, and all of Greenwich's reasonable legal, travel and other out-of-pocket expenses arising out of or relating to Greenwich's engagement hereunder, provided, however, that, unless otherwise agreed in writing, the Company shall not be responsible for, and Greenwich shall not be obliged to incur such expenses in an amount in excess of $10,000 in any month and $50,000 for any year. Greenwich shall notify the Company when its expenses for any applicable period approach such ceilings. It is understood that, unless otherwise agreed, the Company shall be required in a Transaction to pay all costs and expenses including all Counterparty fees and expenses of (i) issuance of securities evidencing or secured by HIP Loans, (ii) transfer of HIP Loans to a trustee or purchaser and (iii) Financing Transaction expenses. 7 8 6. Indemnification and Contribution. In the event that Greenwich becomes involved in any capacity in any action, proceeding or investigation in connection with any matter related to or arising out of this agreement, the Company will from time to time reimburse Greenwich for its legal and other expenses (including the cost of any investigation and preparation) incurred in connection therewith as and when such expenses are incurred. The Company hereby indemnifies Greenwich for any losses, claims, damages or liabilities to which Greenwich may become subject as a result of any violation of the Securities Act of 1933 or the securities laws of any state in connection with a Transaction. The Company hereby also indemnifies Greenwich against any losses (other than losses arising from Greenwich acting as principal for its own account), claims, damages or liabilities to which Greenwich may become subject in connection with any matter related to or arising out of this agreement, provided, however, there shall be excluded from such indemnification any such loss, claim, damage or liability which results from the gross negligence or willful misconduct of Greenwich in performing the services which it is to render pursuant to this agreement. The reimbursement and indemnification obligations of the Company under this Section 6 shall be in addition to any liability which the Company may otherwise have, shall extend upon the same terms and conditions to any affiliates of Greenwich, the employees, agents and controlling persons (if any) of Greenwich and shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of the Company, Greenwich, and any affiliate of Greenwich and any such person. Unless otherwise agreed by Greenwich, the bid or proposal and purchase contract with each potential purchaser/Counterparty will contain the potential purchaser's representation that it has not relied on Greenwich, has conducted its own diligence and will hold harmless and indemnify Greenwich from and against any liability (including attorney's fees) in connection with any threatened, pending or completed action, proceeding or suit arising out of a Transaction or proposed Transaction. 7. Termination of Agreement. a. Right to Terminate. Subject to the provisions of this Section 7, Greenwich's engagement hereunder may be terminated by either the Company or Greenwich at any time, with cause, upon written notice to such effect to the other party. b. Early Termination Fee. Greenwich shall be entitled to an early termination fee ("Early Termination Fee") if this agreement is terminated by the Company without cause prior to the expiration of this agreement. The Early Termination Fee shall be equal to the fees that Greenwich would have earned 8 9 pursuant to Section 4(a) and (b) with respect to any Transactions described therein during the remainder of the scheduled term of this Engagement Letter. The Early Termination Fee shall be contingent upon and earned and payable at the consummation of such a Transaction. Notwithstanding the foregoing, no Early Termination Fee shall be payable by the Company if it sells HIP Loans to third parties upon the failure of Greenwich to purchase HIP Loans under the Master Agreement at any time that the aggregate principal balance of HIP Loans then owned by Greenwich under the Master Agreement (such HIP Loans, the "Portfolio Loans") equals or exceeds the Portfolio Limit (as defined in Section 2(a)(ii) of the Master Agreement) to the extent (i) such Portfolio Loans met all of the criteria for purchase and complied with all of the representations and warranties under the Master Agreement at the time of such sale to Greenwich and (ii) Greenwich is unable or unwilling to execute Disposition Transactions with respect to such Portfolio Loans to create additional capacity under the Portfolio Limit and such inability or unwillingness is not the result of any act or omission of the Company or any material breach by the Company of this agreement or the Master Agreement; provided, however, that (x) the Company shall become obligated to pay the Early Termination Fee at such time as the Company makes any additional sales of HIP Loans to third parties after receipt of notice that Greenwich has raised the Portfolio Limit, effected Disposition Transactions creating additional capacity under the Portfolio Limit or otherwise waived compliance with the Portfolio Limit and (y) for purposes of clause (ii) of this sentence, Greenwich shall not be deemed unable to execute Disposition Transactions with respect to any Portfolio Loans that Greenwich has been unable to sell on a whole-loan basis to a third party as a result of the Company's unwillingness to convey to Greenwich or such third party any rights retained by the Company in such Portfolio Loans. c. Binding Agreement. The Company shall not have the right to terminate this agreement with respect to any Transaction for which a binding agreement has been signed. 8. Documentation. The Company acknowledges that, as a condition precedent to any closing contemplated hereby, the Company shall be obligated to cause to be prepared at its expense and executed for each proposed Transaction a prospectus or private placement memorandum, a pooling agreement, any certificates or securities to be issued, a placement and/or purchase agreement and all related and applicable documents, instruments, certificates and opinions of counsel required by the applicable Counterparties. The Company acknowledges that Greenwich shall require a placement, purchase or underwriting agreement providing customary representations, warranties, indemnities and closing conditions for the benefit of the 9 10 underwriter or purchaser to the extent that Greenwich underwrites any security relating to, or purchases, HIP Loans. 9. Transactions with Affiliates and Greenwich. No provision of this agreement shall restrict or be deemed to restrict the Company from entering into agreements and arrangements, including Transactions, with Mego Entities, nor, except as provided in Section 4(a) with respect to Trade Away Loans, shall any such Transactions give rise to fees payable to Greenwich hereunder unless otherwise agreed in writing by the Company. No provision of this agreement shall prevent a Mego Entity and Greenwich (and its or their affiliates) from entering into agreements pursuant to which Greenwich purchases HIP Loans or interests therein (or secured thereby) as principal, nor shall Greenwich, in the event of such purchase, be or be deemed to be acting as other than a principal for its own account, and shall not be deemed to be acting as an investment banker, an advisor or a consultant to any Mego Entity. 10. Limitations on Use of Advice. Any advice or analysis, written or oral, rendered or provided by Greenwich to the Company pursuant to this agreement will be solely for the information and assistance of the Company in connection with the consideration of its strategic alternatives and shall not be used, circulated, quoted, disclosed publicly or otherwise referred to for any purpose, or disclosed to any person who is not an officer, director or employee of the Company, except in each case in accordance with and subject to the prior written consent of Greenwich. For purposes of this agreement and for all other purposes, information furnished to Counterparties in Transactions or prospective Transactions either by Greenwich pursuant to this letter agreement or by the Company shall be deemed to be information prepared, approved and furnished by the Company. 11. Greenwich Securities Positions. In the normal course of Greenwich's trading activities, Greenwich may from time to time have long or short positions in, and buy or sell securities, or options on securities, which are the subject of the advice contemplated by this agreement. In connection with transactions which Greenwich effects on behalf of the Company, Greenwich may, in order to position itself to effect such transactions and to minimize its risks, take long or short positions in, and buy or sell, securities or financial instruments which are the subject of such transactions or which are similar to such securities or financial instruments. By entering into this agreement, the Company consents to such activities by Greenwich. 12. General Provisions. 10 11 a. Cooperation. The Company shall (and shall use its best efforts to cause third parties employed by it to) cooperate fully with Greenwich in connection with its engagement hereunder and with each potential Counterparty to a Transaction. b. Company's Discretion. It is understood that the Company shall have absolute discretion in determining whether to accept or reject any proposed bid, proposal or Transaction. c. Restrictions on Retention. Greenwich shall not retain any broker, finder or other party with respect to a Transaction for which compensation will be payable by the Company unless approved by the Company. d. Survival of Provisions. The provisions of Sections 6, 7 and this Section 12(d) shall survive termination of this agreement. In addition, Sections 2 and 4 shall survive with respect to termination without cause. Termination of this agreement shall not relieve either party of obligations accrued and owing as of the date of termination. e. Governing Law. THIS AGREEMENT SHALL BE INTERPRETED AND CONSTRUED UNDER THE LAWS OF THE STATE OF NEW YORK. 13. Effect of Agreement. This Engagement Letter shall be effective as of the date hereof in all respects and shall supersede the Engagement Letter dated October 19, 1993 (as amended by Amendment No. 1 thereto dated April 29, 1996) (as so amended, the "Original Engagement Letter") between Greenwich and the Company, except that the Company shall be responsible to Greenwich for all obligations incurred to the date hereof, but not performed or satisfied, pursuant to the Original Engagement Letter. 11 12 Please confirm that the foregoing is in accordance with your understandings and agreements with Greenwich by signing and returning to the undersigned the duplicate of this letter enclosed herewith. Very truly yours, GREENWICH CAPITAL MARKETS, INC. By: /s/ ---------------------------- Name: Title: Address for Notice: Telecopy No.: ACCEPTED AND AGREED AS OF THE DATE FIRST ABOVE WRITTEN; MEGO MORTGAGE CORPORATION By: /s/ ------------------------ Name: Title: Address for Notices: Telecopy No.: EX-10.28 12 MASTER LOAN REPURCHASE AGREEMENT 1 EX-10.28 AMENDED AND RESTATED MASTER LOAN PURCHASE AND SERVICING AGREEMENT GREENWICH CAPITAL MARKETS, INC. Initial Purchaser MEGO MORTGAGE CORPORATION Seller and Servicer MEGO FINANCIAL CORP. Guarantor Dated as of October 1, 1996 FHA Loans and Conventional Loans 2 TABLE OF CONTENTS
Page SECTION 1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 2. Agreement to Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 3. Loan Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 4. Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 5. Examination of Loan Files . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 6. Conveyance from Seller to Initial Purchaser . . . . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 7. Representations, Warranties and Covenants; Remedies for Breach . . . . . . . . . . . . . . . . . 16 SECTION 8. Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 9. Closing Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 SECTION 10. Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 11. Seller's Servicing Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 12. Removal of Loans from Inclusion Under this Agreement Upon a Whole Loan Transfer or a Pass-Through Transfer on One or More Reconstitution Dates. . . . . . . . . . . . . . 27 SECTION 13. The Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 14. Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 15. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 SECTION 16. Successor to the Seller. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 SECTION 17. Transfer of FHA Insurance Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 18. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 19. Mandatory Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 20. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
-i- 3 Page ---- SECTION 21. Severability Clause. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 22. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 23. Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 24. Intention of the Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 25. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 26. Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 SECTION 27. Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 SECTION 28. General Interpretive Principles . . . . . . . . . . . . . . . . . . . . . . . . . . 36 SECTION 29. Reproduction of Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 SECTION 30. Further Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 31. Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 32. Guaranty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
EXHIBITS EXHIBIT 1A SELLER'S OFFICER'S CERTIFICATE EXHIBIT 1B GUARANTOR'S OFFICER'S CERTIFICATE EXHIBIT 2 SECURITY RELEASE CERTIFICATION EXHIBIT 3 ASSIGNMENT AND CONVEYANCE EXHIBIT 4 CONTENTS OF EACH LOAN FILE EXHIBIT 5 [COLLECTION ACCOUNT] [SPREAD ACCOUNT] LETTER AGREEMENT EXHIBIT 6 SERVICING ADDENDUM EXHIBIT 7 PRICING LETTER EXHIBIT 8 REO ACCOUNT LETTER AGREEMENT EXHIBIT 9A SELLER'S OFFICER'S CERTIFICATE OF CHIEF FINANCIAL OFFICER EXHIBIT 9B GUARANTOR'S OFFICER'S CERTIFICATE OF GENERAL COUNSEL EXHIBIT 10 CUSTODIAL AGREEMENT EXHIBIT 11 WARRANT AGREEMENT SCHEDULE I LOAN SCHEDULE
-ii- 4 AMENDED AND RESTATED MASTER LOAN PURCHASE AND SERVICING AGREEMENT This is an AMENDED AND RESTATED MASTER LOAN PURCHASE AND SERVICING AGREEMENT (the "Agreement"), dated as of October 1, 1996, by and among Greenwich Capital Markets, Inc., having an office at 600 Steamboat Road, Greenwich, Connecticut 06830 (the "Initial Purchaser", and the Initial Purchaser or the Person, if any, to which the Initial Purchaser has assigned its rights and obligations as permitted hereunder as Purchaser with respect to a Loan, and each of their respective successors and permitted assigns, the "Purchaser"), Mego Mortgage Corporation, having an office at 1000 Parkwood Circle, 5th floor, Atlanta, Georgia 30339 (the "Seller") and Mego Financial Corp., having an office at 1125 Northeast 125th Street, Suite 206, North Miami, Florida 33161 (the "Guarantor"). W I T N E S S E T H : WHEREAS, the Seller desires to sell from time to time to the Initial Purchaser, and the Initial Purchaser desires to purchase from time to time from the Seller, Loans (exclusive of the Excess Yield) as described herein on a servicing-retained basis, which shall be delivered in groups of whole loans on various dates as provided herein (each a "Closing Date"); WHEREAS, each Loan is either secured by a mortgage, deed of trust or other security instrument creating a lien on, or was otherwise originated to finance improvements to, a residential dwelling located in the jurisdiction indicated on the Loan Schedule for the related Loan Package (or was originated under any other program which has been approved in advance by the Purchaser), which is to be annexed hereto on each Closing Date as Schedule I with a designation for the appropriate Loan Package Number; WHEREAS, the Initial Purchaser and the Seller wish to prescribe the manner of the conveyance, servicing and control of the Loans and the Excess Yield; WHEREAS, the Seller has agreed to establish and maintain the Spread Account, and to transfer funds to the Spread Account from time to time from the Excess Yield pursuant to Subsection 11.16 (Exhibit 6); WHEREAS, the Seller and Greenwich Capital Financial Products, Inc. ("GCFP") entered into a Master Loan Purchase and Servicing Agreement dated as of April 1, 1995 (the "Original Agreement"), as amended by an Amendment dated February 1, 1996 and an Amendment No. 2 ("Amendment No. 2") dated as of July 1, 1996; WHEREAS, the Initial Purchaser, with the consent of the Seller, has agreed to replace GCFP as a party to this Agreement and to assume the obligations of GCFP under the Original Agreement, as amended; WHEREAS, the Initial Purchaser and the Seller desire to amend and restate the Original Agreement to reflect the terms of Amendment No. 2 and certain additional terms set forth in a letter between the Seller and the Purchaser dated September 17, 1996; and 5 -2- WHEREAS, as an additional inducement to the Initial Purchaser to so amend and restate the Original Agreement, the Guarantor is willing to grant certain warrants to the Initial Purchaser and has agreed, subject to certain conditions, to guarantee the performance of the Seller's obligations hereunder; NOW, THEREFORE, in consideration of the premises and mutual agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Initial Purchaser and the Seller agree as follows: SECTION 1. Definitions. For purposes of this Agreement the following capitalized terms shall have the respective meanings set forth below. Agreement: This Amended and Restated Master Loan Purchase and Servicing Agreement including all exhibits, schedules, amendments and supplements hereto. Assignment and Conveyance: An assignment and conveyance of the Loans purchased on a Closing Date in the form annexed hereto as Exhibit 3. Assignment of Mortgage: With respect to each Mortgage Loan, an individual assignment of a Mortgage, notice of transfer or equivalent instrument in recordable form, sufficient under the laws of the jurisdiction wherein the related Improved Property is located to give record notice of the sale of the Mortgage to the Purchaser. Bankruptcy Act: The Bankruptcy Reform Act of 1978, as amended (Title 11 of the United States Code). BIF: The Bank Insurance Fund of the FDIC, or any successor thereto. Business Day: Any day other than a Saturday or Sunday, or a day on which banking and savings and loan institutions in the State of Georgia are authorized or obligated by law or executive order to be closed. Closing Date: The date or dates on which the Purchaser from time to time shall purchase from the Seller, and the Seller from time to time shall sell to the Purchaser, the Loans listed on the related Loan Schedule with respect to the related Loan Package. Closing Documents: With respect to any Closing Date, the documents required pursuant to Section 9. Code: The Internal Revenue Code of 1986, or any successor statute thereto. Collection Account: The separate account or accounts, each of which shall be an Eligible Account, created and maintained pursuant to this Agreement, which shall be entitled "Mego Mortgage Corporation, as servicer, in trust for Greenwich Capital Markets, Inc. as Purchaser under that certain Amended and Restated Master Loan Purchase and Servicing 6 -3- Agreement, dated as of October 1, 1996, among Greenwich Capital Markets, Inc., Mego Mortgage Corporation and Mego Financial Corp. for FHA and Conventional Home Improvement Loans", initially established at The First National Bank of Boston, or any other bank which has been approved in advance by the Purchaser and the Seller. Condemnation Proceeds: With respect to a Mortgage Loan, all awards, compensation and settlements in respect of a taking of all or part of an Improved Property by exercise of the power of condemnation or the right of eminent domain. Conventional Loan: A home improvement or other type of loan not subject to an FHA Insurance Contract. All such conventional loans shall be originated in compliance with underwriting guidelines which have been approved in advance in writing by the Purchaser. Custodial Agreement: The agreement, in the form annexed hereto as Exhibit 10, governing the retention of the originals of each Note, Mortgage, Assignment of Mortgage and each other Loan Document. Custodian: The custodian under the Custodial Agreement, or its successor in interest or permitted assign, or any successor to the Custodian under the Custodial Agreement, as therein provided. Cut-off Date: With respect to a Closing Date, the close of business on the date selected by the Seller, which shall appear on the Pricing Letter and Loan Schedule and which shall be no later than 6 days prior to, and no earlier than 30 days prior to, such Closing Date. Deleted Loan: A Loan replaced or to be replaced by a Qualified Substitute Loan. Delinquent Loan: As to any date of determination, a Loan that is more than 60 days contractually delinquent in payment of scheduled principal or interest as of such date and that has not been subject to a Purchaser Disposition. Determination Date: With respect to each Distribution Date, the last Business Day of the preceding calendar month. Distribution Date: The twentieth (20th) day of each month, commencing for any Loan Package on the twentieth (20th) day of the month next following the month in which the related Cut-off Date occurs, or if such twentieth (20th) day is not a Business Day, the first Business Day immediately following such twentieth (20th) day. Due Date: The day of the month on which the Monthly Payment is due on a Loan, exclusive of any days of grace. Due Period: With respect to each Distribution Date, the calendar month preceding the month of the Distribution Date. 7 -4- Eligible Account: Either (i) an account or accounts maintained with a federal or state chartered depository institution or trust company the short-term unsecured debt obligations of which (or, in the case of a depository institution or trust company that is the principal subsidiary of a holding company, the short-term unsecured debt obligations of such holding company) are rated A-2 or higher by S&P or Prime-1 by Moody's (or a comparable rating if another rating agency is specified by the Initial Purchaser by written notice to the Seller) at the time any amounts are held on deposit therein, (ii) an account or accounts the deposits in which are fully insured by the FDIC or (iii) a trust account or accounts maintained with a federal or state chartered depository institution or trust company acting in its fiduciary capacity. Eligible Accounts may bear interest. Event of Default: Any one of the events enumerated in Subsection 14.01. Excess Yield: When used with respect to distributions on a Distribution Date, with respect to a Loan, an amount equal to the product of the related Excess Yield Rate and the stated principal balance of the Loan, calculated on the same principal balance and for the same period as interest and pass-through interest on the related Loan at the Loan Interest Rate was calculated. Excess Yield Holder: Mego Mortgage Corporation and its successors and assigns. Excess Yield Rate: With respect to each Loan, a per annum rate of interest equal to: (a) the related Loan Interest Rate minus (b) the sum of (i) the Pass-Through Rate and (ii) the Servicing Fee Rate. FDIC: The Federal Deposit Insurance Corporation, or any successor thereto. FHA: The Federal Housing Administration, an agency within the United States Department of Housing and Urban Development, or any successor thereto and including the Federal Housing Commissioner and the Secretary of Housing and Urban Development where appropriate under the FHA Regulations. FHA Approved Mortgagee: A financial institution which holds a valid Title I contract of insurance and continues to be approved by FHA under 24 CFR part 202 to originate, purchase, service, and/or sell loans insured by FHA. FHA Insurance Contract: The contractual obligation of FHA respecting the insurance of the FHA Loans pursuant to Title I of the National Housing Act, as amended. FHA Insurance Proceeds: With respect to each FHA Loan, the proceeds of the FHA Insurance Contract. FHA Insurance Reserves: The insurance coverage reserve account established for the Seller by the FHA with respect to the FHA Loans in the Seller's portfolio. 8 -5- FHA Loan: A home improvement loan subject to an FHA Insurance Contract. FHA Regulations: Regulations promulgated by HUD under the National Housing Act, codified in 24 Code of Federal Regulations, and other HUD issuances relating to FHA loans, including the related handbooks, circulars, notices and mortgagee letters. Final Closing Date: The Closing Date with respect to the purchase and sale of the final Loan Package purchased hereunder, which date shall be the earlier of (i) September 30, 2001 and (ii) the Closing Date on which the aggregate unpaid principal balance of Loans purchased by the Purchaser pursuant to this Agreement from and including the date hereof through and including such Closing Date first equals at least $2 billion ($2,000,000,000). Final Recovery Determination: With respect to any defaulted Loan or any REO Property (other than a Loan or REO Property purchased by the Seller pursuant to this Agreement), a determination made by the Seller that all Insurance Proceeds, Liquidation Proceeds and other payments or recoveries which the Seller, in its reasonable good faith judgment, expects to be finally recoverable in respect thereof have been so recovered. The Seller shall maintain records, prepared by a servicing officer of the Seller, of each Final Recovery Determination. HUD: The United States Department of Housing and Urban Development or any successor thereto. Impound Payments: Any payments in respect of FHA insurance premiums required to be made by an Obligor pursuant to a rider to the related Note. Improved Property: The Obligor's real property improvements which are financed by a Loan which, in the case of a Mortgage Loan, secures repayment of a related Note, consisting of a fee simple interest in a single parcel of real property improved by a Residential Dwelling. Initial Closing Date: The Closing Date on which the Initial Purchaser purchases and the Seller sells the first Loan Package hereunder. Initial Purchaser: Greenwich Capital Markets, Inc. or any successor. Insurance Proceeds: With respect to each Loan, the proceeds of any insurance policies insuring the Loan or the related Improved Property, including, in the case of each FHA Loan, the FHA Insurance Proceeds. Liquidation Event: With respect to any Loan or REO Property, either of the following events: (i) a Final Recovery Determination is made as to such Loan or REO Property; or (ii) such Loan or REO Property is removed from this Agreement by reason of its being 9 -6- repurchased, sold or replaced pursuant to or as contemplated by any provision of this Agreement. Liquidation Proceeds: Amounts, other than Insurance Proceeds and Condemnation Proceeds, received in connection with the liquidation of a defaulted Loan through trustee's sale, foreclosure sale or otherwise, other than amounts received following the acquisition of REO Property. Loan: Each FHA Loan and each Conventional Loan sold, assigned and transferred to the Purchaser pursuant to this Agreement and the related Pricing Letter, and identified on the Loan Schedule annexed to the respective Pricing Letter on such Closing Date, which Loan includes without limitation the Loan File, the Monthly Payments, Principal Prepayments, Liquidation Proceeds, Condemnation Proceeds, Insurance Proceeds, any REO Disposition proceeds, and all other rights, benefits, proceeds and obligations arising from or in connection with such Loan. Loan Documents: The following documents pertaining to any Loan: (a) the original Note bearing all intervening endorsements to the Seller and endorsed "Pay to the order of _____________, without recourse" and signed in the name of the Seller by an officer. To the extent that there is no space on the face of the Notes for endorsements, the endorsement may be contained on an allonge, if state law so allows. If the Loan was acquired by the Seller in a merger, the endorsement must be by "[Seller], successor by merger to [name of predecessor]". If the Loan was acquired or originated by the Seller while doing business under another name, the endorsement must be by "[Seller], formerly known as [previous name]"; (b) with respect to each Mortgage Loan, the original Assignment of Mortgage for each Loan, in form and substance acceptable for recording executed by the Seller with the assignee's name and identifying number in blank. If the Loan was acquired by the Seller in a Merger, the Assignment of Mortgage must be made by "[Seller], successor by merger to [name of predecessor]". If the Loan was acquired or originated by the Seller while doing business under another name, the Assignment of Mortgage must be by "[Seller], formerly known as [previous name]"; (c) with respect to each Mortgage Loan, the original Mortgage with evidence of recording thereon. If in connection with any Loan, the Seller cannot deliver or cause to be delivered the original Mortgage with evidence of recording thereon prior to the related Closing Date because of a delay caused by the public recording office where such Mortgage has been delivered for recordation or because such Mortgage has been lost or because such public recording office retains the original recorded Mortgage, the Seller shall deliver or cause to be delivered to the Initial Purchaser, a photocopy of such Mortgage, together with (i) in the case of a delay caused by the public recording office, an Officer's Certificate of the Seller stating that such Mortgage has been delivered to the appropriate public recording office for recordation and that the original recorded 10 -7- Mortgage or a copy of such Mortgage certified by such public recording office to be a true and complete copy of the original recorded Mortgage will be promptly delivered to the Initial Purchaser upon receipt thereof by the Seller; or (ii) in the case of a Mortgage where a public recording office retains the original recorded Mortgage or in the case where a Mortgage is lost after recordation in a public recording office, a copy of such Mortgage with the recording information thereon certified by such public recording office to be a true and complete copy of the original recorded Mortgage; (d) the originals of all assumption, modification, consolidation or extension agreements, with evidence of recording thereon, if any; (e) with respect to each Mortgage Loan, the originals of all intervening Assignments of Mortgage with evidence of recording thereon, or if any such intervening Assignment of Mortgage has not been returned from the applicable recording office or has been lost or if such public recording office retains the original recorded Assignments of Mortgage, the Seller shall deliver or cause to be delivered to the Initial Purchaser, a photocopy of such intervening Assignment of Mortgage, together with (i) in the case of a delay caused by the public recording office, an Officer's Certificate of the Seller stating that such intervening Assignment of Mortgage has been delivered to the appropriate public recording office for recordation and that such original recorded intervening Assignment of Mortgage or a copy of such intervening Assignment of Mortgage certified by the appropriate public recording office to be a true and complete copy of the original recorded intervening Assignment of Mortgage will be promptly delivered to the Initial Purchaser upon receipt thereof by the Seller; or (ii) in the case of an intervening Assignment of Mortgage where a public recording office retains the original recorded intervening Assignment of Mortgage or in the case where an intervening Assignment of Mortgage is lost after recordation in a public recording office, a copy of such intervening Assignment of Mortgage with recording information thereon certified by such public recording office to be a true and complete copy of the original recorded intervening Assignment of Mortgage; and (f) any other documents to be retained by the Custodian as may be specified in the Custodial Agreement. Loan File: The items pertaining to a particular Loan referred to in Exhibit 4 annexed hereto, and any additional documents required to be added to the Loan File pursuant to this Agreement. Loan Interest Rate: With respect to each Loan, the annual rate at which interest accrues on such Loan in accordance with the provisions of the related Note, which rate shall be the rate set forth in the related Loan Schedule. Loan Package: The Loans listed on a Loan Schedule delivered to the Purchaser at least five (5) Business Days prior to the related Closing Date and attached as Schedule I to the related Pricing Letter on the related Closing Date. 11 -8- Loan Package Number: The number, if any, assigned to a Loan Package as set forth in the related Pricing Letter (for example, "1995-4"). Loan Schedule: With respect to each Loan Package, the schedule of Loans to be annexed as Schedule I (or a supplement thereto) to the related Pricing Letter on each Closing Date for the Loan Package delivered on such Closing Date in both hard copy and magnetic form, such schedule setting forth the following information with respect to each Loan in the Loan Package: (1) the Seller's Loan identifying number; (2) the Obligor's first and last name; (3) the street address of the Improved Property including the state and zip code; (4) the original months to maturity; (5) the original date of the Mortgage; (6) the Loan Interest Rate; (7) the date on which the first Monthly Payment was due on the Loan; (8) the stated maturity date; (9) the amount of the Monthly Payment; (10) the last Due Date on which a Monthly Payment was actually applied to the unpaid principal balance; (11) the original principal amount of the Loan; (12) the actual unpaid principal balance of the Loan as of the Cut-off Date; (13) the Servicing Fee Rate; (14) a code indicating whether Impound Payments are applicable to the Loan; and (15) the name of any dealer, correspondent or contractor associated with such Loan and the identification number which the Seller has assigned to such dealer, correspondent or contractor. With respect to the Loan Package in the aggregate, the Loan Schedule shall set forth the following information, as of the related Cut-off Date: (1) the number of Loans; (2) the aggregate actual unpaid principal balance of the Loans; (3) the weighted average Loan Interest Rate of the Loans; and (4) the weighted average maturity of the Loans. Schedule I hereto shall be supplemented as of each Closing Date to reflect the addition of the Loan Schedule with respect to the related Loan Package. Monthly Advance: With respect to any Loan, the aggregate of the advances made by the Seller on any Distribution Date pursuant to Subsection 11.15. Monthly Payment: With respect to any Loan, the scheduled combined payment of principal and interest payable by an Obligor under the related Note on each Due Date. Moody's: Moody's Investors Service, Inc. or its successor in interest. Mortgage: With respect to each Mortgage Loan, the mortgage, deed of trust or other instrument creating a lien on the Improved Property securing the Note. Mortgage Loan: A Loan secured by a Mortgage. Nonrecoverable Advance: Any Monthly Advance or Servicing Advance previously made or proposed to be made in respect of a Loan or REO Property that, in the good faith business judgment of the Seller, will not, or, in the case of a proposed Monthly Advance or Servicing Advance, would not be, ultimately recoverable from related late payments, Insurance Proceeds or Liquidation Proceeds on such Loan or REO Property as provided herein. Note: The original executed note or other evidence of the Loan indebtedness of an Obligor. 12 -9- Noteholder: The holder of the Note and, if applicable, the related Mortgage. Obligor: The obligor on a Note. Officer's Certificate: A certificate signed by either the President, a Vice President, the Secretary or one of the Assistant Treasurers or Assistant Secretaries of the Person on behalf of whom such certificate is being delivered. Opinion of Counsel: A written opinion of counsel, who may be salaried counsel for the Person on behalf of whom the opinion is being given, reasonably acceptable to each Person to whom such opinion is addressed. Pass-Through Rate: With respect to any Loan (or any related REO Property), as of any date of determination, the per annum rate of interest to be received by the Purchaser in connection with the related Loan Package, as set forth in the related Pricing Letter. Pass-Through Transfer: The sale or transfer of some or all of the Loans by the Purchaser to a trust to be formed as part of a publicly issued or privately placed mortgage-backed securities transaction. Permitted Investments: One or more of the following: (i) obligations of, or guaranteed as to principal and interest by, the United States or any agency or instrumentality thereof, when such obligations are backed by the full faith and credit of the United States; (ii) repurchase agreements on obligations specified in clause (i) maturing not more than one month from the date of acquisition thereof; (iii) federal funds, certificates of deposit, demand deposits, time deposits and bankers' acceptances (which shall each have an original maturity of not more than ninety (90) days and, in the case of bankers' acceptances, shall in no event have an original maturity of more than 365 days or a remaining maturity of more than thirty (30) days denominated in United States dollars of any U.S. depository institution or trust company incorporated under the laws of the United States or any state thereof or of any domestic branch of a foreign depository institution or trust company; (iv) commercial paper (having original maturities of not more than 270 days) of any corporation incorporated under the laws of the United States or any state thereof rated investment grade or better by S&P or Moody's; and (v) a money market fund or a qualified investment fund. 13 -10- Person: An individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. Pricing Letter: With respect to a Loan Package, a letter agreement between the Initial Purchaser and the Seller in the form of Exhibit 7. Principal Prepayment: Any payment or other recovery of principal on a Loan which is received in advance of its scheduled Due Date which is not accompanied by an amount of interest representing scheduled interest due on any date or dates in any month or months subsequent to the month of prepayment. Purchase Price: The price paid on the related Closing Date by the Purchaser to the Seller pursuant to the related Pricing Letter in exchange for the Loans purchased on such Closing Date as calculated as provided in Section 4. Purchase Price Percentage: With respect to the Loans purchased on any Closing Date, the percentage of par specified in the related Pricing Letter for the type of Loans in the related Loan Package (which percentage shall be a function of the rate required to produce a par transaction upon securitization). The Purchase Price Percentage for the Initial Closing Date shall be 103% for FHA Loans and 100% for Conventional Loans. Purchaser Disposition: With respect to any Loan purchased hereunder, the resale by the Purchaser or the transfer into a trust by the Purchaser for the purpose of a Pass-Through Transfer or Whole Loan Transfer. Qualified Substitute Loan: A loan substituted for a Deleted Loan pursuant to the terms of this Agreement which must, on the date of such substitution, (i) have an outstanding principal balance, not in excess of the Stated Principal Balance of the Deleted Loan as of the date on which the substitution occurs, (ii) have a Loan Interest Rate not less than (and not more than one percentage point in excess of) the Loan Interest Rate of the Deleted Loan, (iii) have a Pass-Through Rate identical to the Pass-Through Rate of the Deleted Loan, (iv) have a remaining term to maturity not greater than (and not more than one year less than) that of the Deleted Loan and (v) conform to each representation and warranty set forth in Subsection 7.02 of this Agreement. In the event that one or more loans are substituted for one or more Deleted Loans, the amounts described in clause (i) hereof shall be determined on the basis of aggregate principal balances, the Loan Interest Rates described in clause (ii) hereof shall be determined on the basis of weighted average Loan Interest Rates, the Pass-Through Rates described in clause (iii) hereof shall be satisfied as to each such loan, the terms described in clause (iv) shall be determined on the basis of weighted average remaining terms to maturity, and, except to the extent otherwise provided in this sentence, the representations and warranties described in clause (v) hereof must be satisfied as to each Qualified Substitute Loan or in the aggregate, as the case may be. 14 -11- Realized Loss: With respect to each Loan as to which a Final Recovery Determination has been made, an amount (not less than zero) as of the date of the Final Recovery Determination equal to: (i) the Stated Principal Balance of the Loan as of the date of the Final Recovery Determination; plus (ii) interest on such Stated Principal Balance at the related Pass-Through Rate from the Due Date as to which interest was last paid by the Obligor or advanced by the Seller up to the date on which the Final Recovery Determination was made; minus (iii) the amount of all Insurance Proceeds (including related FHA Insurance Proceeds), Condemnation Proceeds and Liquidation Proceeds, if any, received during the month in which the Final Recovery Determination was made, net of all amounts payable or reimbursable therefrom with respect to such Loan for unpaid Servicing Fees and unreimbursed advances made pursuant to Subsections 11.15 or 11.03(b) of the Servicing Addendum, or unreimbursed Servicing Advances. With respect to each REO Property sold or otherwise disposed of, an amount (not less than zero) as of the date on which such REO Property was acquired pursuant to Subsection 11.08 equal to: (i) the Stated Principal Balance of the related Loan as of the date on which such REO Property was acquired by the Seller on behalf of the Purchaser; plus (ii) interest on such Stated Principal Balance at the Pass-Through Rate for the related Loan from the Due Date as to which interest was last paid by the Obligor or advanced by the Seller up to the date on which such REO Property was sold or otherwise disposed of; minus (iii) any amounts previously distributed to the Purchaser in respect of such REO Property pursuant to Subsection 11.08; minus (iv) any proceeds derived from the disposition of such REO Property, net of all amounts payable or reimbursable therefrom with respect to such REO Property or the related Loan for unpaid Servicing Fees and unreimbursed advances made pursuant to Subsection 11.15 or 11.03(b) of the Servicing Addendum, or unreimbursed Servicing Advances. Reconstitution Agreement: The agreement or agreements entered into by the Seller and the Purchaser and/or certain third parties on the Reconstitution Date or Dates with respect to any or all of the Loans serviced hereunder, in connection with a Whole Loan Transfer or a Pass-Through Transfer as provided in Section 12 hereof. Reconstitution Date: With respect to any Loan serviced under this Agreement, the date on which such Loan is removed from this Agreement and reconstituted as part of a Whole Loan Transfer or Pass-Through Transfer pursuant to Section 12 hereof. 15 -12- Record Date: With respect to each Distribution Date, the last Business Day of the month immediately preceding the month in which such Distribution Date occurs. REO Account: The separate trust account or accounts created and maintained pursuant to this Agreement which shall be entitled "Mego Mortgage Corporation in trust for Greenwich Capital Markets, Inc. as Purchaser under that certain Amended and Restated Master Loan Purchase and Servicing Agreement, dated as of October 1, 1996, among Greenwich Capital Markets, Inc., Mego Mortgage Corporation and Mego Financial Corp. for FHA and Conventional Home Improvement Loans". REO Disposition: The final sale by the Seller of any REO Property. REO Property: An Improved Property acquired as a result of the liquidation of a Mortgage Loan. Repurchase Price: With respect to any Loan, a price equal to (i) the Stated Principal Balance of such Loan plus (ii) interest on such Stated Principal Balance at the Pass-Through Rate from and including the last Due Date through which interest has been paid by or on behalf of the Obligor (including, but not limited to, a Monthly Advance made by the Seller) to the first day of the month following the date of repurchase, less amounts received in respect of such repurchased Loan which are being held in the Collection Account for distribution to the Purchaser in connection with such Loan. Residential Dwelling: Any one of the following: (i) a detached one-family dwelling, (ii) a detached two- to four-family dwelling, (iii) a one-family dwelling unit in a condominium project, or (iv) a detached one-family dwelling in a planned unit development, none of which is a co-operative or a mobile or manufactured home which is not real property under applicable state law. SAIF: The Savings Association Insurance Fund, or any successor thereto. Seller Public Offering: The initial public offering of debt and equity securities of the Seller, proposed to be commenced in or about November 1996. Seriously Delinquent Loan: As to any date of determination, a Loan that is more than 150 days contractually delinquent in payment of scheduled principal or interest as of such date and that has not been subject to a Purchaser Disposition. Servicing Addendum: The terms and conditions attached hereto as Exhibit 6 which will govern the servicing of the Loans by the Seller. Servicing Advances: All customary, reasonable and necessary "out-of-pocket" costs and expenses incurred by the Seller in the performance of its servicing obligations, including, but not limited to, the cost of (i) preservation, restoration and repair of an Improved 16 -13- Property, (ii) any enforcement or judicial proceedings with respect to a Loan, including foreclosure actions and (iii) the management and liquidation of REO Property. Servicing Fee: With respect to any Loan, the fee payable to the Seller as servicer for each calendar month, in arrears, which is equal to one-twelfth of the product of the Servicing Fee Rate and the unpaid principal balance of the related Loan calculated on the same balance and for the same period as the related interest at the Loan Interest Rate is calculated. The right of the Seller to receive the Servicing Fee is limited to, and payable solely from, the interest portion of related Monthly Payments collected by the Seller and otherwise as provided in Subsection 11.03. Servicing Fee Rate: One and one-quarter percent (1.25%) per annum. Servicing File: With respect to each Loan, the file retained by the Seller consisting of originals of all documents in the Loan File which are not delivered to the Purchaser or Custodian and copies of the Loan Documents. S&P: Standard & Poor's Ratings Group or its successor in interest. Spread Account: The account or accounts maintained pursuant to Subsection 11.16, each of which shall be an Eligible Account. Spread Account Depository: The First National Bank of Boston or any successor Spread Account Depository under this Agreement which has been approved in advance by the Purchaser and the Seller. Stated Principal Balance: As to each Loan as of any date of determination, (i) the unpaid principal balance of the Loan as of the related Cut-off Date after giving effect to payments of principal received on or before such Cut-off Date including any principal prepayments received on or before the Cut-off Date minus (ii) all amounts previously distributed to the Purchaser with respect to the related Loan representing payments or recoveries of principal. Whole Loan Transfer: Any sale or transfer of some or all of the Loans by the Purchaser to a third party in whole loan or participation format, which sale or transfer is not a Pass-Through Transfer. Any actual transfer of whole Loans that are FHA Loans shall be made only to an FHA Approved Mortgagee. SECTION 2. Agreement to Purchase; Required Securitizations. (a) Subject to the terms and conditions set forth in this Agreement, the Seller shall agree to sell, and the Purchaser shall agree to purchase, from time to time (and as frequently as weekly, at the Seller's request) on or before the Final Closing Date, Loans (exclusive of the related Excess Yield) having an aggregate principal balance on the related Cut-off Date in an amount as set forth in the related Pricing Letter, or in such other amount as agreed to by the Purchaser and the Seller as evidenced by the actual aggregate principal balance of the Loans accepted by the 17 -14- Purchaser on the related Closing Date (any such agreement to be evidenced by a Pricing Letter); provided, however, that (i) the aggregate principal balance of Loans to be sold by the Seller on any given Closing Date shall be at least $5 million ($5,000,000), (ii) at any time, the aggregate principal balance of Loans sold to the Purchaser (excluding all Loans resold or transferred by the Purchaser pursuant to a Purchaser Disposition prior to such time) shall not exceed $100 million ($100,000,000) (such limit (as amended from time to time, the "Portfolio Limit") to be reassessed on a quarterly basis), (iii) the aggregate principal balance of Loans that the Purchaser is committed to purchase from the Seller pursuant to this Agreement shall be $2 billion ($2,000,000,000) and (iv) the percentage of Conventional Loans owned by the Purchaser at any one time and acquired pursuant to this Agreement shall not exceed 65% of the total amount of Loans owned by the Purchaser at such time and acquired pursuant to this Agreement. (b) As more fully described in Section 12, the Seller acknowledges that it shall cooperate fully with the Purchaser and any prospective purchaser with respect to all customary procedures reasonably appropriate in completing a Purchaser Disposition. The Seller acknowledges that it is the Purchaser's intention to complete such Purchaser Dispositions once every three months commencing no later than December 31, 1996. The Seller shall use its best efforts to assist the Purchaser in selling to third parties pursuant to one or more Whole Loan Transfers any and all Loans purchased by the Purchaser that, for any reason whatsoever (including without limitation the delinquency status of such Loans, low Loan Interest Rates associated with such Loans, or the ineligibility of such Loans to be assets of a "real estate mortgage investment conduit"), are not resold or transferred by the Purchaser pursuant to a Pass-Through Transfer. (c) The Seller acknowledges that the Initial Purchaser may enter into a purchase and sale agreement with GCFP (the "Affiliate Purchase Agreement") pursuant to which GCFP will agree to purchase Loans from the Initial Purchaser to the same extent the Initial Purchaser is obligated to purchase Loans from the Seller hereunder. The Seller agrees that during the term of the Affiliate Purchase Agreement, to the extent GCFP agrees to purchase a Loan Package directly from the Seller, the Seller shall deal directly with GCFP and shall look only to GCFP for performance of such purchase obligations. The Initial Purchaser acknowledges that the Seller shall be obligated to deal with GCFP on the sale of any Loan Package only to the extent GCFP's obligations with respect to such Loan Package are identical to the Initial Purchaser's corresponding obligations hereunder. In addition, the Initial Purchaser acknowledges that notwithstanding any obligations assumed by GCFP with respect to a particular Loan Package, the Initial Purchaser shall remain obligated with respect to future purchases of Loans hereunder. (d) The Initial Purchaser hereby assumes all of the obligations of GCFP under the Original Agreement, as amended, as though it were a party signatory thereto. SECTION 3. Loan Schedules. The Seller shall deliver the Loan Schedule for a Loan Package to be purchased on a particular Closing Date to the Purchaser at least five (5) Business Days prior to the related Closing Date. 18 -15- SECTION 4. Purchase Price; Fee to Purchaser. (a) On each Closing Date, the Purchaser shall pay to the Seller the amount (the "Purchase Price") stated in the related Pricing Letter, which amount shall be equal to the aggregate of the percentage set forth in such Pricing Letter for each Loan to be purchased multiplied by the Cut-off Date principal balance of each such Loan, plus accrued interest on each such principal balance at the Pass-Through Rate from (and including) the day following the date through which interest has, as of the Cut-off Date, been paid by the Obligor to (but not including) the related Closing Date for such Loan. In no instance shall the Purchaser pay more than thirty days of accrued interest on any one Loan. The Purchaser shall own and be entitled to receive with respect to each Loan purchased, (1) all scheduled principal received after the related Cut-off Date, (2) all other recoveries of principal collected after the related Cut-off Date, and (3) all payments received after the Cut-off Date of interest on the Loans at the Pass-Through Rate. The Purchaser shall pay to the Seller a Profit Sharing Payment (as defined in the related Pricing Letter). The "Cut-off Date Balance" of a Loan will reflect the application of all payments of principal received on or before the Cut-off Date. (b) Concurrently with the Initial Purchaser's execution of this Agreement, (i) the Seller shall pay the Initial Purchaser a one-time cash fee of $150,000 and (ii) the Guarantor shall grant the Initial Purchaser warrants to purchase one million (1,000,000) shares of voting common stock of the Guarantor, as set forth in the form of Warrant Agreement attached hereto as Exhibit 11. SECTION 5. Examination of Loan Files. The Initial Purchaser has the right to underwrite the Loans and review the Loan Files prior to the related Closing Date. If the Initial Purchaser makes such examination prior to the related Closing Date and identifies any Loans that do not conform to the representations and warranties in Subsection 7.02, such Loans may, at the Initial Purchaser's option, be rejected for purchase by the Initial Purchaser. If not purchased by the Initial Purchaser, such Loans shall be deleted from the related Loan Schedule. The Initial Purchaser may, at its option and without notice to the Seller, purchase all or part of any Loan Package without conducting any partial or complete examination. The fact that the Initial Purchaser has conducted or has determined not to conduct any partial or complete examination of the Loan Files shall not affect the Initial Purchaser's (or any of its successors' or assigns') rights to demand repurchase or other relief or remedy provided for in this Agreement. 19 -16- SECTION 6. Conveyance from Seller to Initial Purchaser. Subsection 6.01. Conveyance of Loans; Possession of Servicing Files. The Seller, simultaneously with the payment of the Purchase Price, shall execute and deliver to the Initial Purchaser an Assignment and Conveyance with respect to the related Loan Package in the form attached hereto as Exhibit 3. The Servicing File retained by the Seller with respect to each Loan pursuant to this Agreement shall be appropriately identified in the Seller's computer system to reflect clearly the sale of such related Loan to the Purchaser. The Seller shall release from its custody the contents of any Servicing File retained by it only in accordance with this Agreement, except when such release is required in connection with a repurchase of any such Loan pursuant to Subsection 7.03. Subsection 6.02. Books and Records. Record title to each Note and, with respect to each Mortgage Loan, the related Mortgage, as of the related Closing Date shall be in the name of the Seller pending recordation of the Assignments of Mortgage, and thereafter in the name of one or more designees of the Purchaser, as the Purchaser shall designate. Notwithstanding the foregoing, beneficial ownership of each Note and, with respect to each Mortgage Loan, the related Mortgage, in each case exclusive of the Excess Yield, shall be vested solely in the Purchaser. All rights arising out of the Loans including, but not limited to, all funds received by the Seller after the related Cut-off Date on or in connection with a Loan as provided in Section 4 shall be vested in the Purchaser (exclusive of the Excess Yield); provided, however, that all such funds received on or in connection with a Loan as provided in Section 4 shall be received and held by the Seller in trust for the benefit of the Purchaser as the owner of the Loans pursuant to the terms of this Agreement. It is the express intention of the parties hereto that the transactions contemplated by this Agreement be, and be construed as, a sale of the Loans, exclusive of the Excess Yield by the Seller and not a pledge of the Loans by the Seller to the Purchaser to secure a debt or other obligation of the Seller. However, in the event that the Loans are held to be property of the Seller, or if for any reason this Agreement is held or deemed to create a security interest in the Loans then it is intended that (a) this Agreement shall also be deemed to be a security agreement within the meaning of the Uniform Commercial Code of any applicable jurisdiction; (b) to the extent allowed under FHA Title I rules and regulations, in order to secure the obligations of the Seller to the Purchaser hereunder with respect to the FHA Loans, the Seller hereby shall be deemed to have granted to the Purchaser a security interest in all of the Seller's right (including the power to convey title thereto), title and interest, whether now owned or hereafter acquired, in and to (A) the FHA Loans; (B) the FHA Insurance Reserves, all of the Seller's other contractual rights against the FHA in relation to the Loans, and all documents in the possession or under the control of the Seller with respect thereto; (C) all amounts payable pursuant to the FHA Insurance Contract in accordance with the terms thereof; and (D) any and all general intangibles consisting of, arising from or relating to any of the foregoing, and all proceeds of the conversion, voluntary or involuntary, of the foregoing into cash, instruments, 20 -17- securities or other property, including, without limitation, all amounts from time to time held or invested in the Spread Account, any REO Account or the Collection Accounts, whether in the form of cash, instruments, securities or other property; (c) the possession by the Purchaser of the related Notes or such other items of property as constitute instruments, money, negotiable documents or chattel paper shall be deemed to be "possession by the secured party", or possession by a purchaser or a person designated by such secured party, for purposes of perfecting the security interest pursuant to the Uniform Commercial Code of any applicable jurisdiction (including, without limitation, Section 9-305, 8-313 or 8-321 thereof); (d) notifications to persons holding such property, and acknowledgments, receipts or confirmations from persons holding such property, shall be deemed notifications to, or acknowledgments, receipts or confirmations from, financial intermediaries, bailees or agents (as applicable) of the Purchaser for the purpose of perfecting such security interest under applicable law; and (e) for purposes of the Agreement and the Pricing Letter, "Loan Documents" shall include UCC-1 financing statements in form acceptable for filing in the applicable jurisdictions in which are located the principal place of business and the executive offices of the Seller and executed by the Seller in favor of the Purchaser. Subsection 6.03. Delivery of Loan Documents. The Seller shall from time to time in connection with each Closing Date, on or prior to such Closing Date, deliver and release to the Custodian those Loan Documents as required by this Agreement or the Custodial Agreement with respect to each Loan to be purchased and sold on the related Closing Date and set forth on the related Loan Schedule. The Custodian shall certify its receipt of all such Loan Documents required to be delivered pursuant to the Custodial Agreement for the related Closing Date, as evidenced by the Trust Receipt and Initial Certification or Trust Receipt and Final Certification, as the case may be, of the Custodian in the forms annexed to the Custodial Agreement. The fees and expenses of the Custodian shall be paid by the Seller pursuant to the terms of the Custodial Agreement. The Seller shall forward to the Custodian original documents evidencing an assumption, modification, consolidation or extension of any Loan entered into in accordance with this Agreement within two (2) weeks of their execution, provided, however, that the Seller shall provide the Custodian with a certified true copy of any such document submitted for recordation within two (2) weeks of its execution, and shall provide the original of any document submitted for recordation or a copy of such document certified by the appropriate public recording office to be a true and complete copy of the original within ninety (90) days of its submission for recordation. 21 -18- Subsection 6.04. Excess Yield. Notwithstanding any other provisions of this Agreement, (i) the sale and delivery of the Loans to the Initial Purchaser is exclusive of the Excess Yield Holder's right, title and interest in, to, and under the Excess Yield and (ii) subject to Subsection 11.16 of the Servicing Addendum, the right of the Excess Yield Holder to the Excess Yield with respect to each Loan shall be absolute and unconditional, and shall survive any Event of Default by the Seller, any termination of the Seller as servicer hereunder and any other event. It is understood and intended, and is expressly covenanted by the Purchaser and the Seller as the Excess Yield Holder, each to the other, that neither the Excess Yield Holder nor the Purchaser shall have any right in any manner whatsoever by virtue of the provisions of this Agreement (i) to affect, disturb or prejudice the rights of the other, (ii) to seek to obtain priority over or preference to the other with respect to their respective interests in the Loans, except as provided in Subsection 11.16 of the Servicing Addendum, or (iii) to enforce any right under this Agreement, except in the manner herein provided and as the respective interests of the Purchaser and the Excess Yield Holder are provided for pursuant to this Agreement. The Excess Yield Holder and the Purchaser each agree to execute and deliver from time to time such other instruments and documents as may be reasonably requested by the other to further effectuate the provisions of this Subsection 6.04. SECTION 7. Representations, Warranties and Covenants; Remedies for Breach. Subsection 7.01. Representations and Warranties Respecting the Seller. The Seller represents, warrants and covenants to the Purchaser as of the Initial Closing Date and each subsequent Closing Date or as of such date specifically provided herein or in the applicable Assignment and Conveyance: (i) The Seller is duly organized, validly existing and in good standing under the laws of Delaware and is and will remain in compliance with the laws of each state in which any Improved Property is located to the extent necessary to ensure the enforceability of each Loan and the servicing of the Loan in accordance with the terms of this Agreement; (ii) The Seller has the full power and authority to hold each Loan, to sell each Loan, and to execute, deliver and perform, and to enter into and consummate, all transactions contemplated by this Agreement. The Seller has duly authorized the execution, delivery and performance of this Agreement, has duly executed and delivered this Agreement, and this Agreement, assuming due authorization, execution and delivery by the Purchaser and the Guarantor, constitutes a legal, valid and binding obligation of the Seller enforceable against it in accordance with its terms except as the enforceability thereof may be limited by bankruptcy, insolvency or reorganization; 22 -19- (iii) The execution and delivery of this Agreement by the Seller and the performance of and compliance with the terms of this Agreement will not violate the Seller's certificate of incorporation or by-laws or constitute a default under or result in a breach or acceleration of, any material contract, agreement or other instrument to which the Seller is a party or which may be applicable to the Seller or its assets; (iv) The Seller is not in violation of, and the execution and delivery of this Agreement by the Seller and its performance and compliance with the terms of this Agreement will not constitute a violation with respect to, any order or decree of any court or any order or regulation of any federal, state, municipal or governmental agency having jurisdiction over the Seller or its assets, which violation might have consequences that would materially and adversely affect the condition (financial or otherwise) or the operation of the Seller or its assets or might have consequences that would materially and adversely affect the performance of its obligations and duties hereunder; (v) The Seller is an FHA Approved Mortgagee in good standing to service mortgages and has not been suspended as a mortgagee or servicer by the FHA; (vi) The Seller does not believe, nor does it have any reason or cause to believe, that it cannot perform each and every covenant contained in this Agreement; (vii) The Note, the Mortgage, the Assignment of Mortgage and any other documents required to be delivered with respect to each Loan pursuant to the Custodial Agreement, have been delivered to the Custodian all in compliance with the specific requirements of the Custodial Agreement. With respect to each Loan, the Seller is in possession of a complete Loan File in compliance with Exhibit 4, except for such documents as have been delivered to the Custodian; (viii) Immediately prior to the payment of the Purchase Price for each Loan, the Seller was the owner of record of the indebtedness evidenced by each Note and, with respect to each Mortgage Loan, the related Mortgage, and upon the payment of the Purchase Price by the Purchaser, in the event that the Seller retains record title, the Seller shall retain such record title to each Mortgage Note, the related Loan Files with respect thereto and, with respect to each Mortgage Loan, the related Mortgage, in trust for the Purchaser as the owner thereof and only for the purpose of servicing and supervising the servicing of each Loan; (ix) There are no actions or proceedings against, or investigations of, the Seller before any court, administrative or other tribunal (A) that might prohibit its entering into this Agreement, (B) seeking to prevent the sale of the Loans or the consummation of the transactions contemplated by this Agreement, or (C) that might prohibit or materially and adversely affect the performance by the Seller of its obligations under, or the validity or enforceability of, this Agreement; (x) No consent, approval, authorization or order of any court or governmental agency or body is required for the execution, delivery and performance by the Seller of, or 23 -20- compliance by the Seller with, this Agreement or the consummation of the transactions contemplated by this Agreement, except for such consents, approvals, authorizations or orders, if any, that have been obtained prior to the Closing Date; (xi) The consummation of the transactions contemplated by this Agreement are in the ordinary course of business of the Seller, and the transfer, assignment and conveyance of the Notes and the Mortgages by the Seller pursuant to this Agreement are not subject to the bulk transfer or any similar statutory provisions; (xii) Neither this Agreement nor any written statement, report or other document prepared and furnished or to be prepared and furnished by the Seller pursuant to this Agreement or in connection with the transactions contemplated hereby contains any untrue statement of material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading; and (xiii) With respect to each FHA Loan, the Seller has complied and shall comply with the applicable provisions of the National Housing Act, as amended and supplemented, all rules and regulations issued thereunder, and all administrative publications published pursuant thereto including all FHA requirements for FHA Title I loans. Subsection 7.02. Representations and Warranties Regarding Individual Loans. The Seller hereby represents and warrants to the Purchaser that, as to each Loan, as of the related Closing Date for such Loan: (i) The information set forth in each of the related Loan Schedule and Assignment and Conveyance is complete, true and correct; (ii) With respect to each FHA Loan, the amount and the original term to maturity of such FHA Loan comply with the FHA Regulations at the time of origination unless the requirements with respect to such FHA Loan are specifically waived by HUD with respect to such FHA Loan; (iii) Each Loan was originated and underwritten by the Seller in accordance with the underwriting criteria established by the Seller and, in the case of each FHA Loan, the FHA and HUD; (iv) Each Loan (a)(i) is an FHA Title I property improvement loan (as defined in 24 CFR Section 201.2(aa)) underwritten by the Seller or an entity which at the time of origination, was a lender approved by the FHA for participation in the programs under Title I of the National Housing Act, in accordance with the FHA requirements for the Title I loan program as set forth in 24 CFR Parts 201 and 202, and is the subject of FHA Insurance, (ii) was originated and underwritten in accordance with applicable FHA requirements, and (iii) was made to provide financing for eligible home improvements for a Residential Dwelling or (b)(i) is a 24 -21- conventional home improvement loan underwritten by the Seller or an entity acceptable to the Initial Purchaser and (ii) was made to provide financing for home improvements for a Residential Dwelling or (c) is a Loan originated pursuant to underwriting guidelines approved in advance in writing by the Initial Purchaser; (v) The Loan is in compliance with all requirements set forth in the Pricing Letter, and the characteristics of the related Loan Package as set forth in the related Pricing Letter are true and correct; (vi) As of the Cut-off Date, the Loan is not more than one payment delinquent nor has it been more than one payment delinquent, measured as of month-end, more than twice during (a) the last twelve months in the event the Loan was acquired but not originated by the Seller, or (b) since origination, in the event the Loan was originated by the Seller; the Seller has not advanced funds, or induced, solicited or knowingly received any advance of funds from a party other than the owner of the related Improved Property, directly or indirectly, for the payment of any amount required by the Note or Mortgage; (vii) The terms of the Note and, with respect to each Mortgage Loan, the Mortgage have not been impaired, waived, altered or modified in any respect, except by written instruments, recorded in the applicable public recording office if necessary to maintain the lien priority of the Mortgage, and which have been delivered to the Custodian and the terms of which are reflected in the related Loan Schedule. No instrument of waiver, alteration or modification has been executed, and no Obligor has been released, in whole or in part, except in connection with an assumption agreement, which assumption agreement has been delivered to the Purchaser and the terms of which are reflected in the related Loan Schedule; (viii) The Note and, if applicable, the Mortgage are not subject to any right of rescission, set-off, counterclaim or defense, including the defense of usury, nor will the operation of any of the terms of the Note and the Mortgage, or the exercise of any right thereunder, render the Note or the Mortgage unenforceable, in whole or in part, or subject to any right of rescission, set-off, counterclaim or defense, including the defense of usury and no such right of rescission, set-off, counterclaim or defense has been asserted with respect thereto; (ix) If upon origination of the Loan, the Improved Property was in an area identified on a Flood Hazard Map or Flood Insurance Rate Map issued by the Federal Emergency Management Agency as having special flood hazards (and such flood insurance has been made available) a flood insurance policy meeting the requirements of the current guidelines of the Federal Insurance Administration is in effect, which policy, in the case of each FHA Loan, conforms to the requirements of FHA. The Loan obligates the Obligor thereunder to maintain all such insurance at the Obligor's cost and expense, and on the Obligor's failure to do so, authorizes the holder of the Mortgage to maintain such insurance at Obligor's cost and expense and to seek reimbursement therefor from the Obligor; (x) Any and all requirements of any federal, state or local law including, without limitation, usury, truth in lending, real estate settlement procedures, consumer credit 25 -22- protection, equal credit opportunity or disclosure laws, applicable to the origination and servicing of the Loan, have been complied with; (xi) In the case of a Mortgage Loan, the Mortgage has not been satisfied, cancelled, subordinated or rescinded, in whole or in part, and the Improved Property has not been released from the lien of the Mortgage, in whole or in part, nor has any instrument been executed that would effect any such satisfaction, cancellation, subordination, rescission or release; (xii) In the case of a Mortgage Loan, the Mortgage was recorded or submitted for recordation in the appropriate public recording office so as to perfect the lien of the Mortgage under the law of the jurisdiction in which the Improved Property is located and is a valid, existing and enforceable lien on the Improved Property and the Seller has full right to sell and assign the same to the Purchaser; (xiii) The Note and, if applicable, the related Mortgage are genuine and each is the legal, valid and binding obligation of the maker thereof, enforceable in accordance with its terms; (xiv) The proceeds of the Loan have been fully disbursed to or for the account of the Obligor and there is no obligation for the mortgagee to advance additional funds thereunder and there are no escrows of such funds. All costs, fees and expenses incurred in making or closing the Loan and the recording of the Mortgage have been paid, and the Obligor is not entitled to any refund of any amounts paid or due to the Obligor pursuant to the Note or Mortgage; (xv) All parties to the Note and the Mortgage had legal capacity to enter into the Loan and to execute and deliver the Note and the Mortgage to the extent necessary to maintain the enforceability of the Note and, in the case of each FHA Loan, the existence of the FHA Insurance Contract without offset, defense, surcharge or other impairment; the Note and the Mortgage have been duly and properly executed and delivered by all parties thereto. The Obligor is a natural person; (xvi) The Seller is the sole legal, beneficial and equitable owner of the Note and, if applicable, the Mortgage and has full right to transfer and sell the Loan to the Purchaser free and clear of any encumbrance, equity, lien, pledge, charge, claim or security interest; (xvii) All parties which have had any interest in the Loan, whether as mortgagee, assignee, pledgee or otherwise, are (or, during the period in which they held and disposed of such interest, were) in compliance with any and all applicable "doing business" and licensing requirements of the laws of the state wherein the Improved Property is located to the extent necessary to preserve the enforceability of the Note and, in the case of each FHA Loan, the existence of the FHA Insurance Contract, without offset, defense, surcharge or other impairment; 26 -23- (xviii) There is no default, breach, violation or event of acceleration existing under the Note or, if applicable, the Mortgage, and no event which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration, and the Seller has not waived any default, breach, violation or event of acceleration; (xix) Principal payments on the Loan commenced no more than sixty days after the proceeds of the Loan were disbursed; the Loan bears interest at the Loan Interest Rate and the Note is payable in Monthly Payments which are sufficient to fully amortize the original principal balance over the original term thereof and to pay interest at the related Loan Interest Rate (except for Loans identified in the Loan Schedule, annexed to each respective Pricing Letter, as having a balloon payment which the Purchaser has agreed to purchase); (xx) The origination, collection and servicing practices used by the Seller with respect to each Note and Mortgage have been in all respects legal, proper, prudent and customary in the mortgage origination and servicing industry and, in the case of each FHA Loan, have satisfied all FHA requirements. The Loan has been serviced by the Seller and any predecessor servicer in accordance with the terms of the Note; (xxi) To the best of the Seller's knowledge, the Improved Property is free of damage and waste and there is no proceeding pending for the total or partial condemnation thereof; (xxii) The Note and, if applicable, the Mortgage contain customary and enforceable provisions such as to render the rights and remedies of the holder thereof adequate for the realization against the Improved Property of the benefits of the security provided thereby, including, (a) in the case of a Mortgage designated as a deed of trust, by trustee's sale, and (b) otherwise by statutory or judicial foreclosure. There is no homestead or other exemption available to the Obligor which would interfere with the right to sell the Improved Property at a trustee's sale or the right to foreclose the Mortgage. The Obligor has not notified the Seller, and the Seller has no knowledge, of any relief requested or allowed to the Obligor under the Soldiers and Sailors Civil Relief Act of 1940; (xxiii) With respect to each FHA Loan, the Note and, if applicable, the Mortgage are on forms acceptable to FHA; (xxiv) The Note is not and has not been secured by any collateral except the lien of the applicable corresponding Mortgage on the Improved Property and the security interest of any applicable security agreement; (xxv) With respect to any Mortgage Loan, in the event the Mortgage constitutes a deed of trust, a trustee, duly qualified under applicable law to serve as such, has been properly designated and currently so serves and is named in the Mortgage, and no fees or expenses are or will become payable by the Purchaser to the trustee under the deed of trust, except in connection with a trustee's sale after default by the Obligor; 27 -24- (xxvi) The Seller has not received notice that the Obligor has filed for protection under applicable bankruptcy laws or that the Improved Property has been subject to foreclosure proceedings, in connection with the enforcement of a prior lien; (xxvii) No Loan contains provisions pursuant to which Monthly Payments are (a) paid or partially paid with funds deposited in any separate account established by the Seller, the Obligor, or anyone on behalf of the Obligor, (b) paid by any source other than the Obligor or (c) contains any other similar provisions which may constitute a "buydown" provision. The Loan is not a graduated payment loan and the Loan does not have a shared appreciation or other contingent interest feature; (xxviii) No instrument of release or waiver has been executed in connection with the Loan, and no Obligor has been released, in whole or in part, except in connection with an assumption agreement which has been approved by the Purchaser (and, in the case of FHA Loans, by the FHA to the extent required by the applicable FHA Insurance Contract) and which has been delivered to the Purchaser, and except such Loan which contains in the related Loan File evidence of a release or waiver; and any assumption agreement which discharged the original borrower from all of the debt obligations in connection with the related Loan provides for the assumption of all such debt obligations by the party assuming the obligations under the Loan; (xxix) Each Assignment of Mortgage is in recordable form and is acceptable for recording under the laws of the jurisdiction in which the Improved Property is located; (xxx) Each FHA Loan was originated and has been serviced in a manner such that it will be eligible for the maximum amount of insurance made available by the FHA pursuant to Title I of the National Housing Act (subject to the aggregate limitation on the amount of FHA insurance available for the Seller), without any right of offset, counterclaim or any other defense by the FHA. The Seller has reported the origination of the FHA Loan to the FHA and has obtained or shall obtain a case number for the FHA Loan from the FHA; (xxxi) The Obligor has executed statements to the effect that the Obligor has received all disclosure materials required by applicable law with respect to the making of fixed rate mortgage loans and rescission materials with respect to the making of such fixed rate mortgage loans, and such statements are and will remain in the Loan File; (xxxii) The Seller has no knowledge of any circumstances or condition with respect to the Mortgage, the Improved Property, the Obligor or the Obligor's credit standing that can reasonably be expected to cause the Loan to become delinquent, or adversely affect the value of the Loan; (xxxiii) The Improved Property is lawfully occupied under applicable law; all inspections, licenses and certificates required to be made or issued with respect to all occupied portions of the Improved Property and, with respect to the use and occupancy of the same, including but not limited to certificates of occupancy, have been made or obtained from the 28 -25- appropriate authorities to the extent necessary to maintain the enforceability of the Note and, in the case of each FHA Loan, the existence of the FHA Insurance Contract without offset, defense, surcharge or other impairment; (xxxiv) No error, omission, misrepresentation, negligence, fraud or similar occurrence with respect to a Loan has taken place on the part of any person, including without limitation the Obligor, any appraiser, any builder or developer, or any other party involved in the origination of the Loan or in the application of any insurance in relation to such Loan that would render the Note unenforceable or, in the case of each FHA Loan, impair the existence of the FHA Insurance Contract or render it subject to any offset, defense, surcharge or other impairment; (xxxv) Any principal advances made to the Obligor prior to the Cut-off Date have been consolidated with the outstanding principal amount secured by the Mortgage, and the secured principal amount, as consolidated, bears a single interest rate and single repayment term; (xxxvi) With respect to each Loan originated by a dealer or contractor, the Seller is in possession of the completion certificate for the related improvement to the extent required by FHA, in the case of FHA Loans, or as otherwise required under the Seller's underwriting guidelines, in the case of Conventional Loans; (xxxvii) Seller has or will cause an amount of FHA Insurance Reserves with respect to FHA Loans equal to 10% of the outstanding principal balance of the FHA Loans as of the related Cut-off Date to be transferred or approved for transfer on or prior to the related Closing Date to the Purchaser's account maintained by the FHA; and (xxxviii) No FHA insurance premiums with respect to an FHA Loan are due and unpaid, and all such premiums for subsequent periods shall be timely paid. Subsection 7.03. Remedies for Breach of Representations and Warranties. It is understood and agreed that the representations and warranties set forth in Subsections 7.01 and 7.02 shall survive the sale of the Loans to the Initial Purchaser and shall inure to the benefit of the Purchaser, notwithstanding any restrictive or qualified endorsement on any Note or Assignment of Mortgage or the examination or lack of examination of any Loan File. Upon discovery by either the Seller or the Purchaser of a breach of any of the foregoing representations and warranties which materially and adversely affects the value of the Loans or the interest of the Purchaser therein (or which materially and adversely affects the interests of the Purchaser in the related Loan in the case of a representation and warranty relating to a particular Loan), the party discovering such breach shall give prompt written notice to the other. Within sixty (60) days (ten (10) days in the case of a breach of the representation in Subsection 7.01(a)(vii) arising from any nondelivery of any Transfer of Note Report (as defined in the Custodial Agreement)) of the earlier of either discovery by or notice to the Seller of any breach of a representation or warranty which materially and adversely affects the value 29 -26- of a Loan or the interest of the Purchaser therein, the Seller shall promptly use all reasonable efforts to cure such breach in all material respects and, if such breach cannot be cured, the Seller shall, at the Purchaser's option, repurchase such Loan at the Repurchase Price using its own funds and shall not use funds in the Spread Account for such repurchases. The Seller shall, at the request of the Purchaser and assuming that Seller has a Qualified Substitute Loan, rather than repurchase the Loan as provided above, remove such Loan and substitute in its place a Qualified Substitute Loan or Loans; provided that such substitution shall be effected not later than 120 days after the related Closing Date. If the Seller has no Qualified Substitute Loan, it shall repurchase the deficient Loan. Any repurchase of a Loan pursuant to the foregoing provisions of this Subsection 7.03 shall occur on a date designated by the Purchaser and shall be accomplished by deposit in the Collection Account of the amount of the Repurchase Price for distribution to the Purchaser on the next scheduled Distribution Date. At the time of repurchase of any deficient Loan, the Purchaser and the Seller shall arrange for the reassignment and transfer of the repurchased Loan and, if applicable, the related FHA Insurance Reserve to the Seller and the delivery to the Seller of any documents held by the Custodian relating to the repurchased Loan. In the event the Repurchase Price is deposited in the Collection Account, the Seller shall, simultaneously with such deposit, give written notice to the Purchaser that such deposit has taken place. Upon such repurchase the related Loan Schedule shall be amended to reflect the withdrawal of the repurchased Loan from this Agreement. As to any Deleted Loan for which the Seller substitutes a Qualified Substitute Loan or Loans, the Seller shall effect such substitution by delivering to the Purchaser for such Qualified Substitute Loan or Loans the Note, the Mortgage, the Assignment of Mortgage and such other documents and agreements as are required by this Agreement, with the Note endorsed as required therein. The Seller shall deposit in the Collection Account an amount equal to the Monthly Payment less (a) the Servicing Fee and (b) any Impound Payments (if applicable) received on such Qualified Substitute Loan or Loans in the month following the date of such substitution, together with any interest shortfall suffered by the Purchaser arising from the substitution of Loans having differing Due Dates. Monthly Payments received with respect to Qualified Substitute Loans in the month of substitution will be retained by the Seller. For the month of substitution, distributions to the Purchaser will include the Monthly Payment received on such Deleted Loan in the preceding month, and the Seller shall thereafter be entitled to retain all amounts subsequently received by the Seller in respect of such Deleted Loan. The Seller shall give written notice to the Purchaser that such substitution has taken place and shall amend the Loan Schedule to reflect the removal of such Deleted Loan from the terms of this Agreement and the substitution of the Qualified Substitute Loan. Upon such substitution, such Qualified Substitute Loan or Loans shall be subject to the terms of this Agreement in all respects, and the Seller shall be deemed to have made with respect to such Qualified Substitute Loan or Loans, as of the date of substitution, the covenants, representations and warranties set forth in Subsections 7.01 and 7.02. For any month in which the Seller substitutes one or more Qualified Substitute Loans for one or more Deleted Loans, the Seller will determine the amount (if any) by which 30 -27- the aggregate principal balance of all such Qualified Substitute Loans as of the date of substitution is less than the aggregate Stated Principal Balance of all such Deleted Loans (after application of principal payments received in the month of substitution). The amount of such shortfall shall be distributed by the Seller in the month following the month of substitution pursuant to the Servicing Addendum. Accordingly, in the month of such substitution, the Seller will deposit from its own funds into the Collection Account an amount equal to such amount. In addition to such cure, repurchase and substitution obligation, the Seller shall indemnify the Purchaser and hold it harmless against any losses, damages, penalties, fines, forfeitures, reasonable and necessary legal fees and related costs, judgments, and other costs and expenses resulting from any claim, demand, defense or assertion based on or grounded upon, or resulting from, a breach of the Seller's representations and warranties contained in this Section 7. It is understood and agreed that the obligations of the Seller set forth in this Subsection 7.03 to cure or repurchase a defective Loan or to substitute a Qualified Substitute Loan and to indemnify the Purchaser as provided in this Subsection 7.03 constitute the sole remedies of the Purchaser respecting a breach of the foregoing representations and warranties. Any cause of action against the Seller relating to or arising out of the breach of any representations and warranties made in Subsections 7.01 or 7.02 shall accrue as to any Loan upon (i) discovery of such breach by the Purchaser or notice thereof by the Seller to the Purchaser, (ii) failure by the Seller to cure such breach or repurchase such Loan as specified above, and (iii) demand upon the Seller by the Purchaser for compliance with the relevant provisions of this Agreement. Subsection 7.04 Representations and Warranties Respecting the Purchaser. The Purchaser represents, warrants and covenants to the Seller as of the Initial Closing Date and each subsequent Closing Date or as of such date specifically provided herein or in the applicable Assignment and Conveyance: (i) the Purchaser is an FHA-Approved Mortgagee; (ii) no consent, approval, authorization, license or order of any court or governmental agency or body is required for the execution, delivery and performance by the Purchaser of, or compliance by the Purchaser with, this Agreement or the consummation of the transactions contemplated by this Agreement, except for such consents, approvals, authorizations, licenses or orders, if any, that have been obtained prior to the Closing Date; and (iii) the Purchaser has the full power and authority to execute, deliver and perform, and to enter into and consummate, all transactions contemplated by this Agreement. The Purchaser has duly authorized the execution, delivery and performance of this Agreement, has duly executed and delivered this Agreement, and this Agreement, assuming due authorization, execution and delivery by the Seller, constitutes a legal, valid and binding obligation of the Purchaser, enforceable against it in accordance with its terms except as the enforceability thereof may be limited by bankruptcy, insolvency or reorganization. 31 -28- Subsection 7.05. Representations and Warranties Respecting the Guarantor. The Guarantor represents, warrants and covenants to the Purchaser as of the Initial Closing Date and each subsequent Closing Date or as of such date specifically provided herein or in the applicable Assignment and Conveyance: (i) The Guarantor is duly organized, validly existing and in good standing under the laws of New York; (ii) The Guarantor has the full power and authority to execute, deliver and perform, and to enter into and consummate, all transactions contemplated by this Agreement. The Guarantor has duly authorized the execution, delivery and performance of this Agreement, has duly executed and delivered this Agreement, and this Agreement, assuming due authorization, execution and delivery by the Purchaser and the Seller, constitutes a legal, valid and binding obligation of the Guarantor enforceable against it in accordance with its terms except as the enforceability thereof may be limited by bankruptcy, insolvency or reorganization; (iii) The execution and delivery of this Agreement by the Guarantor and the performance of and compliance with the terms of this Agreement will not violate the Guarantor's certificate of incorporation or by-laws or constitute a default under or result in a breach or acceleration of, any material contract, agreement or other instrument to which the Guarantor is a party or which may be applicable to the Guarantor or its assets; (iv) The Guarantor is not in violation of, and the execution and delivery of this Agreement by the Guarantor and its performance and compliance with the terms of this Agreement will not constitute a violation with respect to, any order or decree of any court or any order or regulation of any federal, state, municipal or governmental agency having jurisdiction over the Guarantor or its assets, which violation might have consequences that would materially and adversely affect the condition (financial or otherwise) or the operation of the Guarantor or its assets or might have consequences that would materially and adversely affect the performance of its obligations and duties hereunder; (v) The Guarantor does not believe, nor does it have any reason or cause to believe, that it cannot perform each and every covenant contained in this Agreement; (vi) There are no actions or proceedings against, or investigations of, the Guarantor before any court, administrative or other tribunal (A) that might prohibit its entering into this Agreement, (B) seeking to prevent the consummation of the transactions 32 -29- contemplated by this Agreement, or (C) that might prohibit or materially and adversely affect the performance by the Guarantor of its obligations under, or the validity or enforceability of, this Agreement; and (vii) No consent, approval, authorization or order of any court or governmental agency or body is required for the execution, delivery and performance by the Guarantor of, or compliance by the Guarantor with, this Agreement or the consummation of the transactions contemplated by this Agreement, except for such consents, approvals, authorizations or orders, if any, that have been obtained prior to the Closing Date. SECTION 8. Closing. The closing for each Loan Package shall take place on the related Closing Date. At the Purchaser's option, the closing shall be either: by telephone, confirmed by letter or wire as the parties shall agree, or conducted in person, at such place as the parties shall agree. The closing for the Loans to be purchased on each Closing Date shall be subject to each of the following conditions: (a) all of the representations and warranties of the Seller under this Agreement shall be true and correct as of the related Closing Date and no event shall have occurred which, with notice or the passage of time, would constitute a default under this Agreement; (B) the Initial Purchaser shall have received, or the Initial Purchaser's attorneys shall have received in escrow, all Closing Documents as specified in Section 9, in such forms as are agreed upon and acceptable to the Purchaser, duly executed by all signatories other than the Purchaser as required pursuant to the terms hereof; (c) the Seller shall have delivered and released to the Custodian all documents required pursuant to this Agreement; and (d) all other terms and conditions of this Agreement shall have been complied with. Subject to the foregoing conditions, the Initial Purchaser shall pay to the Seller on the related Closing Date the Purchase Price (which shall include accrued interest, as set forth in Section 4) by wire transfer of immediately available funds to the account designated by the Seller. SECTION 9. Closing Documents. (a) On or before the Initial Closing Date, the Seller shall submit to the Initial Purchaser fully executed originals of the following documents: 1. this Agreement, in four (4) counterparts; 2. the Custodial Agreement, in six (6) counterparts in the form attached as Exhibit 10 hereto; 3. Collection Account and Spread Account Letter Agreements in the form attached as Exhibit 5 hereto; 33 -30- 4. Officer's Certificates, in the form of Exhibit 1A and Exhibit 1B hereto, including all attachments thereto; and 5. a Seller's Officer's Certificate of Chief Financial Officer and a Guarantor's Officer's Certificate of General Counsel, in the form of Exhibit 9A and Exhibit 9B, respectively, hereto. (b) The Closing Documents for the Loans to be purchased on each Closing Date shall consist of fully executed originals of the following documents: 1. the related Pricing Letter; 2. the related Loan Schedule; 3. Officer's Certificates, in the form of Exhibit 1A and Exhibit 1B hereto, including all attachments thereto; 4. a Security Release Certification, in the form of Exhibit 2 hereto executed by any Person, as requested by the Initial Purchaser, if any of the Loans has at any time been subject to any security interest, pledge or hypothecation for the benefit of such Person; 5. a certificate or other evidence of merger or change of name, signed or stamped by the applicable regulatory authority, if any of the Loans were acquired by the Seller by merger or acquired or originated by the Seller while conducting business under a name other than its present name, if applicable; 6. an Assignment and Conveyance in the form of Exhibit 3 hereto; 7. a Custodian's Trust Receipt and Initial Certification or Trust Receipt and Final Certification, as required under the Custodial Agreement in the form annexed thereto; and 8. A Certificate of Good Standing of the Seller dated within 5 days of the Closing Date. SECTION 10. Costs. The Purchaser shall pay any commissions due its salesmen and the legal fees and expenses of its attorneys. All other costs and expenses incurred in connection with the transfer and delivery of the Loans, including without limitation, the fees of the Custodian, governmental recording fees for recording Assignments of Mortgage and the Seller's attorneys' fees, shall be paid by the Seller. 34 -31- SECTION 11. Seller's Servicing Obligations. The Seller, as independent contract servicer, shall service and administer the Loans in accordance with the terms and provisions set forth in the Servicing Addendum attached as Exhibit 6, which Servicing Addendum is incorporated herein by reference. SECTION 12. Removal of Loans from Inclusion Under this Agreement Upon a Whole Loan Transfer or a Pass-Through Transfer on One or More Reconstitution Dates. The Seller acknowledges and the Purchaser agrees that with respect to some or all of the Loans, the Purchaser shall effect either: (1) one or more Whole Loan Transfers; and/or (2) one or more Pass-Through Transfers. With respect to each Whole Loan Transfer or Pass-Through Transfer, as the case may be, entered into by the Purchaser, the Seller agrees: (1) to cooperate fully with the Purchaser and any prospective purchaser with respect to all reasonable requests and due diligence procedures including participating in meetings with rating agencies, bond insurers and such other parties as the Purchaser shall designate and participating in meetings with prospective purchasers of the Loans or interests therein and providing information reasonably requested by such purchasers; (2) to execute all Reconstitution Agreements provided that each of the Seller and the Purchaser is given an opportunity to review and reasonably negotiate in good faith the content of such documents not specifically referenced or provided for herein; (3) with respect to any Whole Loan Transfer or Pass-Through Transfer, the Seller shall make the representations and warranties regarding the Seller and, if such Whole Loan Transfer or Pass- Through Transfer occurs within eighteen (18) months of the Closing Date or such later period as specified in the related Pricing Letter, the Loans, as of the date of the Whole Loan Transfer or Pass-Through Transfer, modified to the extent necessary to accurately reflect the pool statistics of the Loans as of the date of such Whole Loan Transfer or Pass-Through Transfer and any events or circumstances existing subsequent to the related Closing Date; (4) to deliver to the Purchaser for inclusion in any prospectus or other offering material such publicly available information regarding the Seller, its financial condition and its mortgage loan delinquency, foreclosure and loss experience and any additional information requested by the Purchaser, and to deliver to the Purchaser any similar non public, unaudited financial 35 -32- information (which the Purchaser may, at its option and at the Seller's cost, have audited by certified public accountants) and such other information as is reasonably requested by the Purchaser and which the Seller is capable of providing without unreasonable effort or expense, and to indemnify the Purchaser and its affiliates for material misstatements contained in or omissions from such information; (5) to deliver to the Purchaser and to any Person designated by the Purchaser, at the Seller's expense, such statements and audit letters of reputable, certified public accountants pertaining to information provided by the Seller pursuant to paragraph 4 above as shall be reasonably requested by the Purchaser; (6) to deliver to the Purchaser, and to any Person designated by the Purchaser, such legal documents and Opinions of Counsel as are customarily delivered by originators or servicers, as the case may be, and reasonably determined by the Purchaser to be necessary in connection with Whole Loan Transfers or Pass-Through Transfers, as the case may be, such Opinions of Counsel for a Pass- Through Transfer to be in a form reasonably acceptable to the Purchaser, it being understood that the cost of any opinions of outside special counsel that may be required for a Whole Loan Transfer or Pass-Through Transfer, as the case may be, shall be the responsibility of the Seller; and (7) to cooperate fully with the Purchaser and any prospective purchaser with respect to the preparation (including, but not limited to, the endorsement, delivery, assignment, and execution) of the Loan Documents and other related documents, and with respect to requirements reasonably requested by the rating agencies and credit enhancers. SECTION 13. The Seller. Subsection 13.01. Additional Indemnification by the Seller. In addition to the indemnification provided in Subsection 7.03, and subject to Subsection 13.03, the Seller shall indemnify the Purchaser and hold the Purchaser harmless against any and all claims, losses, damages, penalties, fines, forfeitures, reasonable and necessary legal fees and related costs, judgments and any other costs, fees and expenses that the Purchaser may sustain in any way related to the failure of the Seller to perform its obligations under this Agreement including but not limited to its obligation to service and administer the Loans in strict compliance with the terms of this Agreement or any Reconstitution Agreement entered into pursuant to Section 12. 36 -33- Subsection 13.02. Merger or Consolidation of the Seller. The Seller shall keep in full force and effect its existence, rights and franchises as a corporation under the laws of the state of its incorporation except as permitted herein, and shall obtain and preserve its qualification to do business as a foreign corporation in each jurisdiction in which such qualification is or shall be necessary to protect the validity and enforceability of this Agreement or any of the Loans, and to enable the Seller to perform its duties under this Agreement. Any Person into which the Seller may be merged or consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Seller shall be a party, or any Person succeeding to the business of the Seller, shall be the successor of the Seller hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding; provided, however, that the successor or surviving Person shall be an institution whose deposits are insured by FDIC or a company whose business is the origination and servicing of loans, shall be an FHA Approved Mortgagee and shall satisfy any requirements of Section 16 with respect to the qualifications of a successor to the Seller. Subsection 13.03. Limitation on Liability of the Seller and Others. Neither the Seller nor any of the officers, employees or agents of the Seller shall be under any liability to the Purchaser for any action taken or for refraining from the taking of any action in good faith in connection with the servicing of the Loans pursuant to this Agreement, or for errors in judgment; provided, however, that this provision shall not protect the Seller or any such person against any breach of warranties or representations made herein, or failure to perform its obligations in strict compliance with any standard of care set forth in this Agreement, or any liability which would otherwise be imposed by reason of any breach of the terms and conditions of this Agreement. The Seller and any officer, employee or agent of the Seller may rely in good faith on any document of any kind prima facie properly executed and submitted by any Person respecting any matters arising hereunder. The Seller shall not be under any obligation to appear in, prosecute or defend any legal action which is not incidental to its obligation to sell, or duty to service, the Loans in accordance with this Agreement and which in its opinion may result in its incurring any expenses or liability; provided, however, that the Seller may, with the consent of the Purchaser, undertake any such action which it may deem necessary or desirable in respect to this Agreement and the rights and duties of the parties hereto. In such event, the legal expenses and costs of such action and any liability resulting therefrom shall be expenses, costs and liabilities for which the Purchaser shall be liable and the Seller shall be entitled to reimbursement therefor from the Purchaser upon written demand except when such expenses, costs and liabilities are subject to the Seller's indemnification under Subsections 7.03 or 13.01. 37 -34- Subsection 13.04. Seller Not to Resign. The Seller shall not assign this Agreement or resign from the obligations and duties hereby imposed on it except by mutual consent of the Seller and the Purchaser or upon the determination that its servicing duties hereunder are no longer permissible under applicable law and such incapacity cannot be cured by the Seller in which event the Seller may resign as servicer. Any such determination permitting the resignation of the Seller as servicer shall be evidenced by an Opinion of Counsel to such effect delivered to the Purchaser which Opinion of Counsel shall be in form and substance acceptable to the Purchaser and shall be provided at the cost of the Seller. No such resignation shall become effective until a successor shall have assumed the Seller's responsibilities and obligations hereunder in the manner provided in Section 16. Subsection 13.05. No Transfer of Servicing. The Seller acknowledges that the Purchaser has acted in reliance upon the Seller's independent status, the adequacy of its servicing facilities, plant, personnel, records and procedures, its integrity, reputation and financial standing and the continuance thereof. Without in any way limiting the generality of this Section, the Seller shall not either assign this Agreement or the servicing hereunder or delegate its rights or duties hereunder or any portion thereof, or sell or otherwise dispose of all or substantially all of its property or assets, without the prior written approval of the Purchaser, which consent shall not be unreasonably withheld. SECTION 14. Default. Subsection 14.01. Events of Default. In case one or more of the following Events of Default by the Seller shall occur and be continuing, that is to say: (i) any failure by the Seller to remit to the Purchaser any payment required to be made under the terms of this Agreement which continues unremedied for a period of three (3) Business Days after the date upon which written notice of such failure, requiring the same to be remedied, shall have been given to the Seller by the Purchaser; or (ii) failure on the part of the Seller duly to observe or perform in any material respect any other of the covenants or agreements on the part of the Seller set forth in this Agreement which continues unremedied for a period of thirty (30) days (except that such number of days shall be fifteen (15) in the case of a failure to pay any premium for any insurance policy required to be maintained under this Agreement) after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the Seller by the Purchaser; or (iii) a decree or order of a court or agency or supervisory authority having jurisdiction for the appointment of a conservator or receiver or liquidator in any 38 -35- insolvency, bankruptcy, readjustment of debt, marshalling of assets and liabilities or similar proceedings, or for the winding-up or liquidation of its affairs, shall have been entered against the Seller and such decree or order shall have remained in force undischarged or unstayed for a period of sixty (60) days; or (iv) the Seller shall consent to the appointment of a conservator or receiver or liquidator in any insolvency, bankruptcy, readjustment of debt, marshalling of assets and liabilities or similar proceedings of or relating to the Seller or of or relating to all or substantially all of its property; or (v) the Seller shall admit in writing its inability to pay its debts generally as they become due, file a petition to take advantage of any applicable insolvency or reorganization statute, make an assignment for the benefit of its creditors, or voluntarily suspend payment of its obligations; or (vi) failure by the Seller to be in compliance with the "doing business" or licensing laws of any jurisdiction where an Improved Property is located; or (vii) the Seller ceases to meet the qualifications of, or ceases to be, an FHA Approved Mortgagee; or (viii) the Seller attempts to assign its right to its servicing compensation hereunder or the Seller attempts, without the consent of the Purchaser, to sell or otherwise dispose of all or substantially all of its property or assets or to assign this Agreement or the servicing responsibilities hereunder or to delegate its duties hereunder or any portion thereof; then, and in each and every such case, so long as an Event of Default shall not have been remedied, the Purchaser, by notice in writing to the Seller may, in addition to whatever rights the Purchaser may have at law or equity to damages, including injunctive relief and specific performance, terminate all the rights and obligations of the Seller as servicer and any obligation of Initial Purchaser to purchase additional Loans under this Agreement. On or after the receipt by the Seller of such written notice, all authority and power of the Seller to service the Loans under this Agreement shall on the date set forth in such notice pass to and be vested in the successor appointed pursuant to Section 16. Upon written request from the Purchaser in connection with any such termination, the Seller shall prepare, execute and deliver, any and all documents and other instruments, place in the Purchaser's possession all Loan Files, and do or accomplish all other acts or things necessary or appropriate to effect the purposes of such notice of termination, whether to complete the transfer and endorsement or assignment of the Loans and related documents, or otherwise, at the Seller's sole expense. The Seller agrees to cooperate with the Purchaser and such successor in effecting the termination of the Seller's responsibilities and rights hereunder as servicer, including, without limitation, the transfer to such successor for administration by it of all cash amounts which shall at the time be credited by the Seller to the Collection Account or REO Account or thereafter received with respect to the Loans. 39 -36- Subsection 14.02. Waiver of Defaults. The Purchaser may waive any default by the Seller in the performance of its obligations hereunder and its consequences. Upon any such waiver of a past default, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been remedied for every purpose of this Agreement. No such waiver shall extend to any subsequent or other default or impair any right consequent thereon except to the extent expressly so waived. SECTION 15. Termination. The respective obligations and responsibilities of the Seller, as servicer, shall terminate upon the earlier of: (i) the distribution to the Purchaser of the final payment or liquidation with respect to the last Loan (or advances of same by the Seller); or (ii) the disposition of all property acquired upon foreclosure or deed in lieu of foreclosure with respect to the last Loan and the remittance of all funds due hereunder unless terminated with respect to all or a portion of the Loans on an earlier date at the option of the Purchaser pursuant to this Section 15 or pursuant to Section 14; or (iii) by mutual written agreement of the Seller and the Purchaser. SECTION 16. Successor to the Seller. Prior to termination of the Seller's responsibilities and duties under this Agreement pursuant to Section 14, the Purchaser shall (i) succeed to and assume all of the Seller's responsibilities, rights, duties and obligations under this Agreement but not any rights in or to the Excess Yield, or (ii) appoint a successor which shall succeed to all rights and assume all of the responsibilities, duties and liabilities of the Seller as servicer under this Agreement but not any rights in or to the Excess Yield. Any successor to the Seller hereunder shall be an FHA Approved Mortgagee. In connection with such appointment and assumption, the Purchaser may make such arrangements for the compensation of such successor out of payments on Loans as it and such successor shall agree. In the event that the Seller's duties, responsibilities and liabilities as servicer under this Agreement should be terminated pursuant to the aforementioned Section, the Seller shall discharge such duties and responsibilities during the period from the date it acquires knowledge of such termination until the effective date thereof with the same degree of diligence and prudence which it is obligated to exercise under this Agreement, and shall take no action whatsoever that might impair or prejudice the rights or financial condition of the Purchaser or such successor. The termination of the Seller as servicer pursuant to the aforementioned section shall not become effective until a successor shall be appointed pursuant to this Section 16 and shall in no event relieve the Seller of the representations and warranties made pursuant to Subsections 7.01 and 7.02 and the remedies available to the Purchaser under Subsection 7.03. It is understood and agreed that the provisions of such Subsections 7.01, 7.02 and 7.03 shall be applicable to the Seller notwithstanding any resignation or termination of the Seller, or the termination of this Agreement. Any successor appointed as provided herein shall execute, acknowledge and deliver to the Seller and to the Purchaser an instrument accepting such appointment, whereupon such successor shall become fully vested with all the rights, powers, duties, responsibilities, obligations and liabilities of the Seller, with like effect as if originally named as a party to this 40 -37- Agreement provided, however, that such successor shall not assume, and Seller shall indemnify such successor for, any and all liabilities arising out of the Seller's acts as servicer. Any termination of the Seller as servicer pursuant to Section 15 shall not affect any claims that the Purchaser may have against the Seller arising prior to any such termination or resignation or remedies with respect to such claims. The Seller shall timely deliver to the successor the funds in the Collection Account, the Spread Account and the REO Account and the Loan Files and related documents and statements held by it hereunder and the Seller shall account for all funds. The Seller shall execute and deliver such instruments and do such other things all as may reasonably be required to more fully and definitely vest and confirm in the successor all such rights, powers, duties, responsibilities, obligations and liabilities of the Seller as servicer. The successor shall make arrangements as it may deem appropriate to reimburse the Seller for amounts the Seller actually expended as servicer pursuant to this Agreement which the successor is entitled to retain hereunder and which would otherwise have been recovered by the Seller pursuant to this Agreement but for the appointment of the successor servicer. SECTION 17. Transfer of FHA Insurance Reserves. With respect to each Loan Package that includes any FHA Loans, no later than 15 days following the later of (i) the receipt by the Seller from FHA of the FHA case number for each FHA Loan and (ii) the applicable Closing Date the Seller shall execute documents necessary to transfer the related FHA Insurance Reserves allocable to such Loan Package to the Purchaser, or such other entity as the Purchaser may designate by notice in writing to the Seller provided that such entity is an FHA Approved Mortgagee. The originals of such executed documents shall be sent to the Purchaser or the Purchaser's designee in the manner indicated by the Purchaser. SECTION 18. Financial Statements. The Seller understands that the Purchaser may make available to a prospective purchaser of the Loans from the Purchaser the Seller's annual financial statements. The Seller, if it has not already done so, agrees to furnish promptly to the Purchaser copies of the statements specified above. The Seller also shall make available to the Purchaser information on its servicing performance with respect to loans serviced for others, including delinquency ratios. The Seller also agrees to allow access to knowledgeable financial, accounting, origination and servicing officers of the Seller for the purpose of answering questions asked by any prospective purchaser regarding recent developments affecting the Seller, its loan origination or servicing practices or the financial statements of the Seller. The Purchaser agrees to maintain full confidentiality with regard to non-public information of the Seller released under this section. 41 -38- SECTION 19. Mandatory Purchase. The purchase of each Loan (exclusive of the related Excess Yield) on or before the related Closing Date, subject to the terms and conditions of the Pricing Letter, is mandatory. SECTION 20. Notices. All demands, notices and communications hereunder shall be in writing and shall be deemed to have been duly given if mailed, by registered or certified mail, return receipt requested, or, if by other means, when received by the other party at the address as follows: (i) if to the Seller: Mego Mortgage Corporation 1000 Parkwood Circle 5th floor Atlanta, Georgia 30339 Attention: Jeffrey S. Moore President With copy to: Jerome J. Cohen Mego Mortgage Corporation 4310 Paradise Road Las Vegas, Nevada 89109 (ii) if to the Guarantor: Mego Financial Corp. 1125 Northeast 125th Street Suite 206 North Miami, Florida 33161 Attention: Jerome J. Cohen Don A. Mayerson With copy to: Mego Financial Corp. 4310 Paradise Road Las Vegas, Nevada 89109 Attn: Jerome J. Cohen (iii) if to the Purchaser: Greenwich Capital Markets, Inc. 600 Steamboat Road Greenwich, Connecticut 06830 42 -39- Attn: General Counsel or such other address as may hereafter be furnished to the other party by like notice. Any such demand, notice or communication hereunder shall be deemed to have been received on the date delivered to or received at the premises of the addressee (as evidenced, in the case of registered or certified mail, by the date noted on the return receipt). SECTION 21. Severability Clause. Any part, provision, representation or warranty of this Agreement which is prohibited or which is held to be void or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Any part, provision, representation or warranty of this Agreement which is prohibited or unenforceable or is held to be void or unenforceable in any jurisdiction shall be ineffective, as to such jurisdiction, to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction as to any Loan shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, the parties hereto waive any provision of law which prohibits or renders void or unenforceable any provision hereof. If the invalidity of any part, provision, representation or warranty of this Agreement shall deprive any party of the economic benefit intended to be conferred by this Agreement, the parties shall negotiate, in good faith, to develop a structure the economic effect of which is nearly as possible the same as the economic effect of this Agreement without regard to such invalidity. SECTION 22. Counterparts. This Agreement may be executed simultaneously in any number of counterparts. Each counterpart shall be deemed to be an original, and all such counterparts shall constitute one and the same instrument. SECTION 23. Governing Law. The Agreement shall be construed in accordance with the laws of the State of New York without regard to any conflicts of law provisions and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with the laws of the State of New York, except to the extent preempted by federal law. SECTION 24. Intention of the Parties. It is the intention of the parties that the Initial Purchaser is purchasing, and the Seller is selling, the Loans (exclusive of Excess Yield) and not a debt instrument of the Seller or another security. Accordingly, the parties hereto each intend to treat the transaction for federal income tax purposes as a sale by the Seller, and a purchase by the Purchaser, of the Loans. The Initial Purchaser shall have the right to review the Loans and the related Loan Files to determine the characteristics of the Loans which shall affect the federal income tax consequences of owning the Loans and the Seller shall cooperate with all reasonable requests made by the Initial Purchaser in the course of such review. 43 -40- SECTION 25. Successors and Assigns. This Agreement shall bind and inure to the benefit of and be enforceable by the Seller and the Purchaser and the respective successors and permitted assigns of the Seller and the Purchaser. This Agreement shall not be assigned, pledged or hypothecated by the Seller to a third party without the prior written consent of the Purchaser, and shall not be assigned by the Initial Purchaser or any subsequent Purchaser other than to an affiliate thereof without the prior written consent of the Seller. SECTION 26. Waivers. No term or provision of this Agreement may be waived or modified unless such waiver or modification is in writing and signed by the party against whom such waiver or modification is sought to be enforced. SECTION 27. Exhibits. The exhibits to this Agreement are hereby incorporated and made a part hereof and are an integral part of this Agreement. SECTION 28. General Interpretive Principles. For purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Agreement have the meanings assigned to them in this Agreement and include the plural as well as the singular, and the use of any gender herein shall be deemed to include the other gender; (b) accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles; (c) references herein to "Articles," "Sections," "Subsections," "Paragraphs," and other subdivisions without reference to a document are to designated Articles, Sections, Subsections, Paragraphs and other subdivisions of this Agreement; (d) reference to a Subsection without further reference to a Section is a reference to such Subsection as contained in the same Section in which the reference appears, and this rule shall also apply to Paragraphs and other subdivisions; (e) the words "herein," "hereof," "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular provision; and (f) the term "include" or "including" shall mean without limitation by reason of enumeration. SECTION 29. Reproduction of Documents. This Agreement and all documents relating thereto, including, without limitation, (a) consents, waivers and modifications which may hereafter be executed, (b) documents received by any party at the closing, and (c) financial statements, certificates and other information previously or hereafter furnished, may be reproduced by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process. The parties agree that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding, whether or not the 44 -41- original is in existence and whether or not such reproduction was made by a party in the regular course of business, and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. SECTION 30. Further Agreements. The Seller and the Purchaser each agree to execute and deliver to the other such reasonable and appropriate additional documents, instruments or agreements as may be necessary or appropriate to effectuate the purposes of this Agreement. SECTION 31. Entire Agreement. This Agreement, together with each Pricing Letter, constitutes the entire agreement of the parties and supersedes all prior agreements, oral and written, between the parties with respect to the subject matter hereof, and the provisions of both this Agreement and each Pricing Letter shall survive the closing of the transactions contemplated herein. In the event that there exist inconsistencies between this Agreement and any Pricing Letter, this Agreement shall control. SECTION 32. Guaranty. The Guarantor hereby guarantees, in favor of the Initial Purchaser and its successors and permitted assigns, the full and satisfactory performance of all commitments, obligations, covenants and agreements (in each case financial or otherwise) of the Seller hereunder. The foregoing guaranty shall remain in effect until such time, if any, as the Seller Public Offering shall have been completed. 45 IN WITNESS WHEREOF, the Initial Purchaser, the Seller and the Guarantor have caused their names to be signed hereto by their respective officers thereunto duly authorized as of the date first above written. GREENWICH CAPITAL MARKETS, INC. (Initial Purchaser) By: /s/ --------------------------------------------- Name: ------------------------------------------- Title: ------------------------------------------ MEGO MORTGAGE CORPORATION (Seller) By: /s/ --------------------------------------------- Name: ------------------------------------------- Title: ------------------------------------------ MEGO FINANCIAL CORP. (Guarantor) By: /s/ --------------------------------------------- Name: ------------------------------------------- Title: ------------------------------------------ 46 EXHIBIT 1A SELLER'S OFFICER'S CERTIFICATE I, Jeffrey S. Moore, hereby certify that I am the duly elected President of Mego Mortgage Corporation, a Delaware corporation (the "Seller"), and further certify, on behalf of the Seller as follows: 1. Attached hereto as Attachment I are a true and correct copy of the Certificate of Incorporation and by-laws of the Seller as are in full force and effect on the date hereof. No event has occurred since [Month] ___, 199_ which has affected the good standing of the Seller under the laws of the State of Delaware. 2. No proceedings looking toward merger, liquidation, dissolution or bankruptcy of the Seller are pending or contemplated. 3. Each person who, as an officer or attorney-in-fact of the Seller, signed (a) the Amended and Restated Master Loan Purchase and Servicing Agreement (the "Purchase Agreement"), dated as of October 1, 1996, by and among the Seller, Greenwich Capital Markets, Inc. (the "Purchaser") and Mego Financial Corp.; (b) the Pricing Letter, dated as of [month] ____, 199_, between the Seller and the Purchaser (the "Pricing Letter"); and (c) the Custodial Agreement dated as of April 1, 1995 among Greenwich Capital Markets, Inc. (as assignee of Greenwich Capital Financial Products, Inc.), First Trust National Association and the Seller and (d) any other document delivered prior hereto or on the date hereof in connection with the sale and servicing of the Loans in accordance with the Purchase Agreement and the Pricing Letter was, at the respective times of such signing and delivery, and is as of the date hereof, duly elected or appointed, qualified and acting as such officer or attorney-in-fact, and the signatures of such persons appearing on such documents are their genuine signatures. 4. Attached hereto as Attachment II is a true and correct copy of the resolutions duly adopted by the board of directors of the Seller on [date] (the "Resolutions") with respect to the authorization and approval of the sale and servicing of the Loans; said Resolutions have not been amended, modified, annulled or revoked and are in full force and effect on the date hereof. 5. Attached hereto as Attachment III is a Certificate of Good Standing of the Seller dated [month] _________ 199_. 6. All of the representations and warranties of the Seller contained in Subsections 7.01 and 7.02 of the Purchase Agreement were true and correct in all material respects as of the date of the Purchase Agreement and are true and correct in all material respects as of the date hereof. 7. The Seller has performed all of its duties and has satisfied all the material conditions on its part to be performed or satisfied prior to the related Closing Date pursuant to the Purchase Agreement and the Pricing Letter. 47 -2- All capitalized terms used herein and not otherwise defined shall have the meaning assigned to them in the Purchase Agreement. IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal of the Seller. Dated: ------------------------------------- [Seal] MEGO MORTGAGE CORPORATION By: ------------------------------- Name: ----------------------------- Title: President I, ___________________, Assistant Secretary of ______________ hereby certify that _______________ is the duly elected, qualified and acting President of the Seller and that the signature appearing above is such person's genuine signature. IN WITNESS WHEREOF, I have hereunto signed my name. Dated: ------------------------------------- [Seal] MEGO MORTGAGE CORPORATION By: -------------------------------- Name: ------------------------------ Title: Assistant Secretary 48 EXHIBIT 1B GUARANTOR'S OFFICER'S CERTIFICATE I, [Jerome J. Cohen], hereby certify that I am the duly elected President of Mego Financial Corp., a New York corporation (the "Guarantor"), and further certify, on behalf of the Guarantor as follows: 1. Attached hereto as Attachment I are a true and correct copy of the Certificate of Incorporation and by-laws of the Guarantor as are in full force and effect on the date hereof. No event has occurred since [Month] ___, 199_ which has affected the good standing of the Guarantor under the laws of the State of New York. 2. No proceedings looking toward merger, liquidation, dissolution or bankruptcy of the Guarantor are pending or contemplated. 3. Each person who, as an officer or attorney-in-fact of the Guarantor, signed (a) the Amended and Restated Master Loan Purchase and Servicing Agreement (the "Purchase Agreement"), dated as of October 1, 1996, by and among Mego Mortgage Corporation, Greenwich Capital Markets, Inc. (the "Purchaser") and the Guarantor and (b) any other document delivered prior hereto or on the date hereof in connection with the sale and servicing of the Loans in accordance with the Purchase Agreement was, at the respective times of such signing and delivery, and is as of the date hereof, duly elected or appointed, qualified and acting as such officer or attorney-in-fact, and the signatures of such persons appearing on such documents are their genuine signatures. 4. Attached hereto as Attachment II is a true and correct copy of the resolutions duly adopted by the board of directors of the Guarantor on [date] (the "Resolutions") with respect to the authorization and approval of the Guarantor's entry into the Purchase Agreement; said Resolutions have not been amended, modified, annulled or revoked and are in full force and effect on the date hereof. 5. Attached hereto as Attachment III is a Certificate of Good Standing of the Guarantor dated [month] _________ 199_. 6. All of the representations and warranties of the Guarantor contained in Subsections 7.01 and 7.02 of the Purchase Agreement were true and correct in all material respects as of the date of the Purchase Agreement and are true and correct in all material respects as of the date hereof. 7. The Guarantor has performed all of its duties and has satisfied all the material conditions on its part to be performed or satisfied prior to the related Closing Date pursuant to the Purchase Agreement. 49 -2- All capitalized terms used herein and not otherwise defined shall have the meaning assigned to them in the Purchase Agreement. IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal of the Guarantor. Dated: ------------------------------------- [Seal] MEGO FINANCIAL CORP. By: ------------------------------ Name: ---------------------------- Title: I, ___________________, Assistant Secretary of ______________ hereby certify that _______________ is the duly elected, qualified and acting [title] of the Guarantor and that the signature appearing above is such person's genuine signature. IN WITNESS WHEREOF, I have hereunto signed my name. Dated: ------------------------------------- [Seal] MEGO FINANCIAL CORP. By: -------------------------- Name: Don A. Mayerson Title: Secretary 50 EXHIBIT 2 SECURITY RELEASE CERTIFICATION I. Release of Security Interest ________________________________, hereby relinquishes any and all right, title and interest it may have in and to the Loans described in Exhibit A attached hereto upon purchase thereof by Greenwich Capital Markets, Inc. from the Seller named below pursuant to that certain Amended and Restated Master Loan Purchase and Servicing Agreement, dated as of October 1, 1996, as of the date and time of receipt by __________________________ of $_____________ for such Loans (the "Date and Time of Sale"), and certifies that all notes, mortgages, assignments and other documents in its possession relating to such Loans have been delivered and released to the Seller named below or its designees as of the Date and Time of Sale. Name and Address of Financial Institution - ------------------------------------------- (Name) - ------------------------------------------ (Address) By: --------------------------------------------- 51 -2- II. Certification of Release The Seller named below hereby certifies to Greenwich Capital Markets, Inc. that, as of the Date and Time of Sale of the above mentioned Loans to Greenwich Capital Markets, Inc., the security interests in the Loans released by the above named corporation comprise all security interests relating to or affecting any and all such Loans. The Seller warrants that, as of such time, there are and will be no other security interests affecting any or all of such Loans. MEGO MORTGAGE CORPORATION Seller By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- 52 EXHIBIT 3 ASSIGNMENT AND CONVEYANCE On this ____________ day of _____________, 199__, Mego Mortgage Corporation ("Seller") as the Seller under that certain Amended and Restated Master Loan Purchase and Servicing Agreement, dated as of October 1, 1996 (the "Agreement"), does hereby sell, transfer, assign, set over and convey to Greenwich Capital Markets, Inc. as Purchaser under the Agreement, without recourse, but subject to the terms of the Agreement, all right, title and interest of the Seller in and to the Loans (with the exception of the Excess Yield) listed on the Loan Schedule attached hereto, together with the related Loan Files and all rights and obligations arising under the documents contained therein. Pursuant to Subsection 6.03 of the Agreement, the Seller has delivered to the Purchaser the documents for each Loan to be purchased. The contents of each related Servicing File required to be retained by the Seller to service the Loans pursuant to the Agreement and thus not delivered to the Purchaser or the Custodian are and shall be held in trust by the Seller for the benefit of the Purchaser as the owner thereof. The Seller's possession of any portion of each such Servicing File is for the sole purpose of facilitating servicing of the related Loan pursuant to the Agreement, and such retention and possession by the Seller shall be in a custodial capacity only. The ownership of each Note, Mortgage, and the contents of the Loan File and Servicing File is vested in the Purchaser, except for the Excess Yield, and the ownership of all records and documents with respect to the related Loan prepared by or which come into the possession of the Seller shall immediately vest in the Purchaser and shall be retained and maintained, in trust, by the Seller at the will of the Purchaser in such custodial capacity only. The Seller confirms to the Purchaser that the representations and warranties set forth in Subsections 7.01 and 7.02 of the Agreement are true and correct as of the date hereof and makes the following additional representations and warranties to the Purchaser, which additional representations and warranties are hereby incorporated into Subsection 7.02 of the Agreement: (1) No Loan had a principal balance at origination in excess of $_____________ nor less than $____________ and the average principal balance of the Loans on the Cut-off Date was not less than $_____________; (2) Each Loan has a Loan Interest Rate of at least _________%. The Loans have a weighted average Loan Interest Rate of _______% as of the Cut-off Date; and (3) No Loan had an original term to maturity of more than ___ months[.][;] [Other] 53 -2- Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Agreement. MEGO MORTGAGE CORPORATION By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ 54 EXHIBIT 4 CONTENTS OF EACH LOAN FILE With respect to each Loan, the Loan File shall include all documents reasonably necessary to service the Loan and, in the case of each FHA Loan, necessary to document the Loan in accordance with FHA requirements, which shall be available for inspection by the Purchaser and which shall be retained by the Seller or delivered to the Purchaser. 55 EXHIBIT 5 [COLLECTION ACCOUNT] [SPREAD ACCOUNT] LETTER AGREEMENT ___________________, 199_ To: ---------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- (the "Depository") As Seller under the Amended and Restated Master Loan Purchase and Servicing Agreement, dated as of October 1, 1996, we hereby authorize and request you to establish an account, as a Collection Account, to be designated as "Mego Mortgage Corporation in trust for Greenwich Capital Markets, Inc. as Purchaser under that certain Amended and Restated Master Loan Purchase and Servicing Agreement, dated as of October 1, 1996, among Greenwich Capital Markets, Inc., Mego Mortgage Corporation and Mego Financial Corp. for FHA and Conventional Home Improvement Loans." All deposits in the account shall be subject to withdrawal therefrom by order signed by the Seller. This letter is submitted to you in duplicate. Please execute and return one original to us. MEGO MORTGAGE CORPORATION By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- Date: -------------------------------------- 56 -2- The undersigned, as Depository, hereby certifies that the above-described account has been established under Account Number ____________ at the office of the Depository indicated above, and agrees to honor withdrawals on such account as provided above. The amount deposited at any time in the account will be insured by the Federal Deposit Insurance Corporation through the Bank Insurance Fund ("BIF") or the Savings Association Insurance Fund ("SAIF") subject to applicable insurance maximums. ------------------------------------------ Depository By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ Date: ------------------------------------- 57 EXHIBIT 6 SERVICING ADDENDUM SECTION 11. Servicing Subsection 11.01 Seller to Act as Servicer. The Seller shall administer and master service the Loans in accordance with the Agreement and customary servicing procedures, and shall have full power and authority, to do or cause to be done any and all things in connection with such administration which the Seller may deem necessary or desirable and consistent with the terms of the Agreement, including, in the case of each FHA Loan, taking all actions that an FHA Approved Mortgagee is permitted or required to take by the FHA. Consistent with the terms of this Agreement, the Seller may waive, modify or vary any term of any Loan or consent to the postponement of strict compliance with any such term or in any manner grant indulgence to any Obligor if in the Seller's reasonable and prudent determination such waiver, modification, postponement or indulgence is not materially adverse to the Purchaser or the Excess Yield Holder; provided, however, that the Seller shall not permit any modification with respect to any Loan that would change the Loan Interest Rate, defer or forgive the payment thereof or of any principal or interest payments, reduce the outstanding principal amount (except for actual payments of principal), make additional advances, extend the final maturity date or adversely affect any FHA Insurance Contract with respect to such Loan. Without limiting the generality of the foregoing, the Seller shall continue, and is hereby authorized and empowered, to execute and deliver on behalf of itself, and the Purchaser and the Excess Yield Holder, all instruments of satisfaction or cancellation, or of partial or full release, discharge and all other comparable instruments, with respect to the Loans and, in the case of a Mortgage Loan, with respect to the Improved Property. If reasonably required by the Seller, the Purchaser and the Excess Yield Holder shall furnish the Seller with any powers of attorney and other documents necessary or appropriate to enable the Seller to carry out its servicing and administrative duties under this Agreement. In servicing and administering the Loans, the Seller shall employ procedures including collection procedures and exercise the same care that it customarily employs and exercises in servicing and administering loans for its own account giving due consideration to accepted mortgage servicing practices of prudent lending institutions and the Purchaser's and the Excess Yield Holder's reliance on the Seller. It is understood and agreed that the Seller may delegate certain servicing duties to qualified sub-servicers with the Purchaser's prior written approval; provided, however, that the Seller shall remain responsible to the Purchaser for all servicing activities notwithstanding such delegation. The Seller shall make such inspections of an Improved Property, if any, as are consistent with standard servicing procedures customary to the applicable loan type and, in the case of each FHA Loan, as required by FHA Regulations if the Seller has actual notice of 58 -2- any related condition which materially and adversely affects or may materially and adversely affect such Improved Property. Such inspection shall be conducted in accordance with customary servicing procedures and, in the case of each FHA Loan, FHA servicing requirements for delinquent mortgages. The Seller shall take all actions necessary to assure that a case number is assigned to each FHA Loan by the FHA. Subsection 11.02 Collection of Loan Payments. Continuously from the date hereof until the principal and interest on all Loans are paid in full, the Seller shall proceed diligently to collect all payments due under each Loan when the same shall become due and payable and shall, to the extent such procedures shall be consistent with this Agreement, follow such collection procedures as it follows with respect to loans comparable to the Loans held for its own account. Subsection 11.03 Repurchase of or Realization Upon Defaulted Loans. (a) In the event that two or more Monthly Payments are delinquent on or after the Due Date of succeeding Monthly Payments with respect to a Loan, the Seller may at its option repurchase such Loan by depositing the Repurchase Price therefor into the Collection Account. Such repurchased Loans shall cease to be subject to this Agreement, and the Purchaser shall convey such Loans to the Seller as contemplated by Subsection 7.03. The Seller shall use all reasonable efforts, consistent with the procedures that the Seller would use in servicing loans for its own account and, in the case of each FHA Loan, the requirements of FHA, with respect to any Loan as comes into and continues in default and as to which no satisfactory arrangements can be made for collection of delinquent payments pursuant to Subsection 11.01, either (i) in the case of an FHA Loan, to assign the Loan to the FHA and obtain FHA Insurance Proceeds with respect thereto or (ii) in the case of a Mortgage Loan, with Purchaser's consent, which will not be unreasonably withheld or delayed, to foreclose upon or otherwise comparably convert the ownership of the related Improved Property, and, in the case of a Loan that is not a Mortgage Loan, to collect from the Obligor amounts that are due and unpaid. The Seller shall use all reasonable efforts to realize upon defaulted Loans in such a manner as will maximize the receipt of principal and interest at the Pass-Through Rate by the Purchaser, taking into account, among other things, the timing of foreclosure proceedings, if applicable. In the event that the Seller fails, on a timely basis, to (i) in the case of an FHA Loan, assign the Loan to the FHA and obtain FHA Proceeds with respect thereto or (ii) in the case of a Mortgage Loan, with purchaser's consent, which will not be unreasonably withheld or delayed, to foreclose upon or otherwise comparably convert the ownership of the related Improved Property or (iii) in the case of a Loan that is not a Mortgage Loan, the Seller shall use its best efforts to cause the obligor to bring such Loan current or (iv) deposit all FHA Insurance Proceeds into the Collection Account, the Seller shall, at the Purchaser's request, repurchase such Loan at the Repurchase Price. 59 -3- (b) Notwithstanding the foregoing provisions of this Subsection 11.03, with respect to any Mortgage Loan as to which the Seller has received actual notice of, or has actual knowledge of, the presence of any toxic or hazardous substance on the related Improved Property the Seller shall not either (i) obtain title to such Improved Property as a result of or in lieu of foreclosure or otherwise, or (ii) otherwise acquire possession of, or take any other action, with respect to, such Improved Property if, as a result of any such action, the Purchaser would be considered to hold title to, to be a mortgagee-in-possession of, or to be an owner or operator of such Improved Property within the meaning of the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended from time to time, or any comparable law, unless the Seller has also previously determined, based on his reasonable judgment and a prudent report prepared by a Person who regularly conducts environmental audits using customary industry standards, that: (1) such Improved Property is in compliance with applicable environmental laws or, if not, that it would be in the best economic interest of the Purchaser to take such actions as are necessary to bring the Improved Property into compliance therewith; and (2) there are no circumstances present at such Improved Property relating to the use, management or disposal of any hazardous substances, hazardous materials, hazardous wastes, or petroleum-based materials for which investigation, testing, monitoring, containment, clean-up or remediation could be required under any federal, state or local law or regulation, or that if any such materials are present for which such action could be required, that it would be in the best economic interest of the Purchaser to take such actions with respect to the affected Improved Property. The cost of the environmental audit report contemplated by this Subsection 11.03 shall be advanced by the Seller, subject to the Seller's right to be reimbursed therefor from the Collection Account as provided in Subsection 11.05(v). If the Seller determines, as described above, that it is in the best economic interest of the Purchaser to take such actions as are necessary to bring any such Improved Property into compliance with applicable environmental laws, or to take such action with respect to the containment, clean-up or remediation of hazardous substances, hazardous materials, hazardous wastes, or petroleum-based materials affecting any such Improved Property, then the Seller shall take such action as it deems to be in the best economic interest of the Purchaser. The cost of any such compliance, containment, cleanup or remediation shall be advanced by the Seller, subject to the Seller's right to be reimbursed therefor from the Collection Account as provided in Subsection 11.05(v). (c) Proceeds received in connection with any Final Recovery Determination, as well as any recovery resulting from a partial collection of Insurance Proceeds or Liquidation Proceeds in respect of any Loan, will be applied in the following order of priority: first, to any unpaid Servicing Fees pursuant to Subsection 11.05(ii); second, to accrued and unpaid interest on the Loan at the Pass-Through Rate, pursuant to Subsection 11.09, to the 60 -4- date of the Final Recovery Determination, or to the Due Date prior to the Distribution Date on which such amounts are to be distributed if not in connection with a Final Recovery Determination; third, to any related unreimbursed Servicing Advances and Monthly Advances and other advances pursuant to Subsection 11.05(v); fourth, as a recovery of principal on the Loan; and fifth, to Excess Yield pursuant to Subsection 11.09. Subsection 11.04 Establishment of Collection Accounts; Deposits in Collection Accounts. The Seller shall segregate and hold all funds collected and received pursuant to each Loan separate and apart from any of its own funds and general assets and shall establish and maintain one or more Collection Accounts, in the form of time deposit or demand accounts. The creation of any Collection Account shall be evidenced by a Collection Account Letter Agreement in the form of Exhibit 5. The Seller shall deposit in the Collection Account on a daily basis, and retain therein the following payments and collections received by it subsequent to the Cut-off Date, or received by it prior to the Cut-off Date but allocable to a period subsequent thereto, other than in respect of principal and interest on the Loans received on or before the Cut-off Date: (i) all payments on account of principal on the Loans; (ii) all payments on account of interest on the Loans; (iii) all Impound Payments received on the Loans; (iv) all Liquidation Proceeds; (v) all Insurance Proceeds including amounts required to be deposited pursuant to Subsection 11.07 other than proceeds to be applied to the restoration or repair of the Improved Property or released to the Obligor in accordance with the Seller's normal servicing procedures, the Loan Documents or applicable law; (vi) all Condemnation Proceeds affecting any Improved Property which are not released to the Obligor in accordance with the Seller's normal servicing procedures, the Loan Documents or applicable law; (vii) all Monthly Advances; (viii) the Repurchase Price of any Loan repurchased in accordance with Subsections 7.03 or 11.03, and all amounts required to be deposited by the Seller in connection with shortfalls in principal amount of Qualified Substitute Loans pursuant to Subsection 7.03; (ix) any amounts required to be deposited by the Seller in connection with any REO Property pursuant to Subsection 11.08; 61 -5- (x) any amounts required to be deposited in the Collection Account pursuant to Subsections 11.14 or 11.16; and (xi) any late charges and assumption fees. The foregoing requirements for deposit in the Collection Account shall be exclusive. Such Collection Account shall be an Eligible Account. Any interest or earnings on funds deposited in the Collection Account by the depository institution shall accrue to the benefit of the Seller and the Seller shall be entitled to retain and withdraw such interest from the Collection Account pursuant to Subsection 11 .05(ii). The Seller shall give notice to the Purchaser and the Excess Yield Holder of the location of the Collection Account when established and prior to any change thereof. Subsection 11.05 Permitted Withdrawals From the Collection Account. Subject to the order of priorities set forth in Subsection 11.03(c), the Seller may, from time to time, withdraw from the Collection Account for the following purposes: (i) to reimburse itself for premiums paid under the FHA Insurance Contract, to the extent that the Seller has received Impound Payments with respect thereto; (ii) to pay to itself pursuant to Subsection 11.18 as servicing compensation (a) any interest earned on funds in the Collection Account (all such interest to be withdrawn monthly not later than each Distribution Date); (b) the Servicing Fee from that portion of any payment or recovery as to interest on a particular Loan; and (c) any payments in the nature of late payment charges and assumption fees and other charges, to the extent permitted by Subsection 11.18; (iii) to pay to itself with respect to each Loan that has been repurchased pursuant to Subsection 7.03 or Subsection 11.03 all amounts received thereon and not distributed as of the date on which the related Repurchase Price is determined; (iv) to reimburse itself for Monthly Advances, the Seller's right to reimburse itself pursuant to this subclause (iv) being limited to amounts received on the related Loan which represent late collections including related Liquidation Proceeds, Condemnation Proceeds, Insurance Proceeds and such other amounts as may be collected by the Seller, from the Obligor or otherwise relating to the Mortgage Loan), it being understood that, in the case of such reimbursement, (i) the Seller's right thereto shall be prior to the rights of Purchaser, except that, where the Seller is required to repurchase a Loan, pursuant to Subsection 7.03, the Seller's right to such reimbursement shall be subsequent to the payment to the Purchaser of the Repurchase Price pursuant to Subsection 7.03, and all other amounts required to be paid to the Purchaser with respect to such Loans, and (ii) the Seller shall not be permitted to reimburse itself pursuant to this subclause (iv) from any amounts transferred into the Collection Account from the Spread Account pursuant to Subsection 11.16(c); 62 -6- (v) to reimburse itself for unreimbursed Servicing Advances, the Seller's right to reimburse itself pursuant to this subclause (v) with respect to any Loan being limited to related Liquidation Proceeds, Condemnation Proceeds, Insurance Proceeds and such other amounts as may be collected by the Seller from the Obligor or otherwise relating to the Loan, it being understood that, in the case of such reimbursement, (i) the Seller's right thereto shall be prior to the rights of the Purchaser, except that, where the Seller is required to repurchase a Loan, pursuant to Subsection 7.03, the Seller's right to such reimbursement shall be subsequent to the payment to the Purchaser of the Repurchase Price pursuant to Subsection 7.03 and all other amounts required to be paid to the Purchaser with respect to such Loans, and (ii) the Seller shall not be permitted to reimburse itself pursuant to this subclause (v) from any amounts transferred into the Collection Account from the Spread Account pursuant to Subsection 11.16(c); (vi) to reimburse the Seller for any Monthly Advance or Servicing Advance previously made which the Seller has determined to be a Nonrecoverable Advance; provided that, the Seller shall not be permitted to reimburse itself pursuant to this subclause (vi) from any amounts transferred into the Collection Account from the Spread Account pursuant to Subsection 11.16(c); (vii) to make distributions to the Purchaser of all amounts distributable to the Purchaser pursuant to this Agreement in the manner provided for in Subsection 11.09, such amounts allocated first to interest at the Pass-Through Rate and then to principal; (viii) to pay into the Spread Account certain amounts representing a portion of or all of the Excess Yield, to the extent required pursuant to Subsection 11.16; and (ix) to clear and terminate the Collection Account on the termination of this Agreement. Subsection 11.06 Transfer of Accounts. The Seller may transfer the Collection Account and/or the Spread Account and/or any REO Account to a different depository institution from time to time. Such transfer shall be made only upon obtaining the prior written consent of the Purchaser and the Excess Yield Holder, which consent shall not be unreasonably withheld. In any case, the Collection Account, the Spread Account and any REO Account shall be an Eligible Account. Subsection 11.07 Collection of FHA Insurance Proceeds; Other Remedies. In the event of a default by the Obligor with respect to any FHA Loan, the Seller shall, subject to the Seller's rights under Subsection 11.03, consistent with the provisions of Subsection 11.01 and all requirements of the FHA, and provided that adequate FHA Insurance Reserves exist, use all reasonable efforts to assign the related FHA Loan to the FHA and to collect the related FHA Insurance Proceeds. In the event that the FHA Insurance Reserves are 63 -7- inadequate to permit the FHA to pay the FHA Insurance Proceeds with respect to such FHA Loan, or in the event that the FHA denies the Seller's claim for FHA Insurance Proceeds for reasons other than reasons that would constitute a breach of the Seller's representations and warranties under Subsection 7.01 or Subsection 7.02, the Seller shall proceed to foreclose upon or otherwise comparably convert the ownership of the related Improved Property with respect to any Mortgage Loan that is an FHA Loan, and, with respect to any FHA Loan that is not a Mortgage Loan, to undertake such actions as necessary and appropriate to collect amounts due and owing under the related Note, consistent with the related Loan Documents, FHA Regulations and all other applicable laws and regulations. The Seller shall deposit all FHA Insurance Proceeds into the Collection Account promptly upon receipt thereof. Subsection 11.08 Title, Management and Disposition of REO Property. In the event that title to the Improved Property is acquired in foreclosure or by deed in lieu of foreclosure, the deed or certificate of sale shall be taken in the name of the person designated by the Purchaser, or in the event such person is not authorized or permitted to hold title to real property in the state where the REO Property is located, or would be adversely affected under the "doing business" or tax laws of such state by so holding title, the deed or certificate of sale shall be taken in the name of such Person or Persons as shall be consistent with an Opinion of Counsel obtained by the Seller from an attorney duly licensed to practice law in the state where the REO Property is located. Any Person or Persons holding such title other than the Purchaser shall acknowledge in writing that such title is being held as nominee for the benefit of the Purchaser. The Seller shall either itself or through an agent selected by the Seller, manage, conserve, protect and operate each REO Property (and may with the prior written consent of the Purchaser temporarily rent the same) in the same manner that it manages, conserves, protects and operates other foreclosed property for its own account, and in the same manner that similar property in the same locality as the REO Property is managed. The Seller shall use all reasonable efforts to dispose of the REO Property as soon as possible. With respect to each REO Property, the Seller shall segregate and hold all funds collected and received in connection with the operation of the REO Property separate and apart from its own funds or general assets and shall establish and maintain a separate REO Account for each REO Property in the form of a non-interest bearing demand Eligible Account. The creation of any REO Account shall be evidenced by a letter agreement in the form shown in Exhibit 8. An original of such letter agreement shall be furnished to the Purchaser upon request. The Seller shall deposit or cause to be deposited, on a daily basis in each REO Account all revenues received with respect to the related REO Property and shall withdraw therefrom funds necessary for the proper operation, management and maintenance of the REO Property, including the fees of any managing agent acting on behalf of the Seller. The Seller shall not be entitled to retain interest paid or other earnings, if any, on funds deposited in such 64 -8- REO Account. On or before each Determination Date, the Seller shall withdraw from each REO Account and deposit into the Collection Account the net income from the REO Property on deposit in the REO Account. The Seller shall furnish to the Purchaser on each Distribution Date, an operating statement for each REO Property covering the operation of each REO Property for the previous month. Such operating statement shall be accompanied by such other information as the Purchaser shall reasonably request. Each REO Disposition shall be carried out by the Seller at such price and upon such terms and conditions as the Seller deems to be in the best interest of the Purchaser and the Excess Yield Holder. If as of the date title to any REO Property was acquired by the Seller there were outstanding unreimbursed Servicing Advances with respect to the REO Property, the Seller, upon an REO Disposition of such REO Property, shall be entitled to reimbursement for any related unreimbursed Servicing Advances from proceeds received in connection with such REO Disposition. The proceeds from the REO Disposition, net of any payment to which the Seller is entitled as provided herein, shall be deposited in the REO Account and shall be transferred to the Collection Account on the Determination Date in the month following receipt thereof for distribution on the succeeding Distribution Date in accordance with Subsection 11.09. Subsection 11.09 Distributions. On each Distribution Date, the Seller shall distribute to the Purchaser all amounts credited to the Collection Account during the related Due Period which are attributable to principal and interest (adjusted to the related Pass-Through Rate) collected with respect to each Loan (including Liquidation Proceeds, Condemnation Proceeds and Insurance Proceeds) plus all Monthly Advances, if any, which the Seller is obligated to make pursuant to Subsection 11.15, minus all amounts that the Seller is entitled to withdraw from the Collection Account pursuant to Subsection 11.05(i) through (vi) plus any amount distributable to the Purchaser pursuant to Subsection 11.16(c) of the Agreement. The Seller shall deposit into the Spread Account any amount required to be deposited therein as specified in Subsection 11.16(a). With respect to any remittance received by the Purchaser on or after the second Business Day following the Business Day on which such payment was due, the Seller shall pay to the Purchaser, as applicable, interest on any such late payment at an annual rate equal to the rate of interest as is publicly announced from time to time at its principal office by Chemical Bank, New York, New York, as its prime lending rate, adjusted as of the date of each change, plus three percentage points, but in no event greater than the maximum amount permitted by applicable law. Such interest shall be paid by the Seller to the Purchaser, as applicable, on the date such late payment is made and shall cover the period commencing with the day following such second Business Day and ending with the Business Day on which such payment is made, both inclusive. Such interest shall be remitted along with such late payment. 65 -9- The payment by the Seller of any such interest shall not be deemed an extension of time for payment or a waiver by the Purchaser of any Event of Default by the Seller. Subsection 11.10 Remittance Reports. On the Distribution Date, the Seller shall furnish to the Purchaser and the Excess Yield Holder or their designees a computer tape containing, and a hard copy of, the Remittance Report, in such form as the Purchaser may reasonably request. Subsection 11.11 Statements to the Purchaser and the Excess Yield Holder. Not more than sixty days after the end of each calendar year, the Seller shall furnish to each Person who was the Purchaser at any time during such calendar year, (i) as to the aggregate of remittances for the applicable portion of such year, an annual statement in accordance with the requirements of applicable federal income tax law, and (ii) listing of the principal balances of the Loans outstanding at the end of such calendar year. The Seller shall prepare and file any and all tax returns, information statements or other filings required to be delivered to any governmental taxing authority or to any Purchaser pursuant to any applicable law with respect to the Loans and the transactions contemplated hereby. In addition, the Seller shall provide the Purchaser with such information concerning the Loans as is necessary for the Purchaser to prepare its federal income tax return as any Purchaser may reasonably request from time to time. Subsection 11.12 Real Estate Owned Reports. Together with the statement furnished pursuant to Subsection 11.08, with respect to any REO Property, the Seller shall furnish to the Purchaser a statement covering the Seller's efforts in connection with the sale of such REO Property and any rental of such REO Property incidental to the sale thereof for the previous month, together with the operating statement. Such statement shall be accompanied by such other information as the Purchaser shall reasonably request. Subsection 11.13 Liquidation Reports. Upon the foreclosure sale of any Improved Property or the acquisition thereof by the Purchaser pursuant to a deed-in-lieu of foreclosure, the Seller shall submit to the Purchaser a liquidation report with respect to such Improved Property. 66 -10- Subsection 11.14 Satisfaction of Mortgages and Release of Loan Files. In the event the Seller satisfies or releases a Mortgage without having obtained payment in full of the indebtedness secured by the Mortgage or should it otherwise prejudice any right the Purchaser may have under the mortgage instruments, the Seller, upon written demand, shall remit to the Purchaser the then outstanding principal balance of the related Loan by deposit thereof in the Collection Account. From time to time and as appropriate in connection with the servicing, assignment to the FHA, foreclosure or other enforcement of a Loan, the Purchaser shall, upon request of the Seller and delivery to the Purchaser of a servicing receipt signed by a servicing officer of the Seller (a "Servicing Officer"), release the requested portion of the Loan File held by the Purchaser to the Seller, together with any assignments necessary to enable the Seller to perform its obligations. Such servicing receipt shall obligate the Seller to return the related Loan Documents to the Purchaser when the need therefor by the Seller no longer exists, unless (a) the Loan has been liquidated and the Liquidation Proceeds relating to the Loan have been deposited in the Collection Account, or (b) the Loan File or such document has been delivered to (i) the FHA in connection with an assignment of the Loan to the FHA and collection of FHA Insurance Proceeds, or (ii) an attorney, for purposes of initiating or pursuing legal action or other proceedings to collect amounts due under the Loan (if such Loan is not a Mortgage Loan), or (iii) with respect to a Mortgage Loan, an attorney or a public trustee or other public official as required by law for purposes of initiating or pursuing legal action or proceedings for the foreclosure of the Improved Property either judicially or non-judicially, and the Seller has delivered to the Purchaser a certificate of a Servicing Officer certifying as to the name and address of the Person to which such Loan File or such document was delivered and the purpose or purposes of such delivery. Upon receipt of a certificate of a Servicing Officer stating that such Loan was liquidated, or the FHA Insurance Proceeds received, the servicing receipt shall be returned by the Purchaser to the Seller. Subsection 11.15 Monthly Advances by the Seller. (a) Not later than the close of business on the Business Day preceding each Distribution Date, the Seller shall deposit in the Collection Account an amount equal to all payments not previously advanced by the Seller, whether or not deferred pursuant to Subsection 11.01, of interest not allocable to the period prior to the Cut-off Date, at the Pass-Through Rate, which were due on a Loan and delinquent at the close of business on the related Determination Date. (b) The obligation of the Seller to make such Monthly Advances is mandatory, notwithstanding any other provision of this Agreement, and, with respect to any Loan or REO Property, shall continue until a Final Recovery Determination in connection therewith; provided that, notwithstanding anything herein to the contrary, no Monthly Advance shall be required to be made hereunder by the Seller if such Monthly Advance would, if made, constitute a Nonrecoverable Advance. The determination by the Seller that it has made a 67 -11- Nonrecoverable Advance or that any proposed Monthly Advance or Servicing Advance, if made, would constitute a Nonrecoverable Advance, shall be evidenced by an Officer's Certificate delivered to the Purchaser. Subsection 11.16 Spread Account. (a) The Seller shall, for the benefit of the Purchaser, establish and maintain with the Spread Account Depository one or more accounts (collectively, the "Spread Account"), which shall be entitled "Mego Mortgage Corporation in trust for Greenwich Capital Markets, Inc. as Purchaser under that certain Amended and Restated Master Loan Purchase and Servicing Agreement, dated as of October 1, 1996, among Greenwich Capital Markets, Inc., Mego Mortgage Corporation and Mego Financial Corp. for FHA and Conventional Home Improvement Loans". The Seller shall deposit or cause to be deposited monthly into the Spread Account all interest received on the Loans at the Excess Yield Rate to the extent required to increase the aggregate amount on deposit in the Spread Account to an amount equal to the sum of (i) 25% of the aggregate unpaid principal balance of all Delinquent Loans other than Seriously Delinquent Loans, (ii) in the case of any FHA Loans which are Seriously Delinquent Loans which have had HUD claims filed but have not yet received final rejections of claim from HUD, 25% of the aggregate unpaid principal balance of such FHA Loans, (iii) in the case of FHA Loans which are Seriously Delinquent Loans which either (x) have not had HUD claims filed or (y) have had HUD claims filed and have received final rejections from HUD on such claims, 100% of the aggregate unpaid principal balance of such FHA Loans and (iv) 100% of the aggregate unpaid principal balance of all Conventional Loans that are Seriously Delinquent Loans, such balances to be computed as of the immediately preceding Determination Date. The Seller shall cause the Spread Account Depository to deposit into the Spread Account, from the Collection Account, any Excess Yield required to be deposited therein. To the extent that as of any Determination Date the amount on deposit in the Spread Account exceeds the sum described in the second preceding sentence (computed as of such Determination Date), at the Seller's request the Purchaser shall instruct the Spread Account Depository to release the amount of such excess to the Seller on the related Distribution Date. Similarly, to the extent that the amount required to be deposited into the Spread Account pursuant to the third preceding sentence is greater than the Excess Yield for such month, the Seller shall deposit the amount of such deficiency into the Spread Account. The Seller shall, upon the request of the Purchaser or the Excess Yield Holder, provide evidence that the Spread Account has been established. The Purchaser shall not have any interest in the Spread Account other than as a holder of a security interest therein. Amounts held in the Spread Account from time to time shall continue to be the property of the Excess Yield Holder until withdrawn from the Spread Account pursuant to Subsection 11.16(c). The Seller, or the Excess Yield Holder if different from the Seller, hereby grants to the Purchaser a security interest in the Spread Account and such assets as are deposited and held therein from time to time and any investments thereof, together with any and all income, proceeds and payments with respect thereto. Such grant is made to secure the obligations of the Seller (or the Excess Yield Holder if different from the Seller) under this Subsection 11.16. 68 -12- The Seller (and the Excess Yield Holder, if such is not the Seller) shall cause, at all times that the Loans are outstanding, a valid and perfected lien on or security interest in the Spread Account to be maintained, and a valid and perfected security interest of first priority under the Uniform Commercial Code as in effect from time to time in the State wherein the Spread Account is located to be maintained, in the amounts deposited in the Spread Account and the investments thereof in order to secure the full and timely performance of the obligations of the Excess Yield Holder pursuant to this Subsection 11.16. Amounts properly distributed by the Spread Account Depository to the Excess Yield Holder pursuant to Subsection 11.16(d) shall be deemed released from the provisions of this Agreement and the security interest established by this subsection, and the Excess Yield Holder will in no event be required to refund any such distributed amounts. The Spread Account Depository shall keep records that accurately reflect the funds on deposit in the Spread Account. The amount held in the Spread Account shall be noted on the monthly remittance reports provided to the Purchaser and the Excess Yield Holder pursuant to Subsection 11.10. (b) The Spread Account Depository shall at the written direction of the Seller, so long as the Seller is the Excess Yield Holder, invest the funds in such account in Permitted Investments, each of which shall mature not later than one year following the date of such investment. All such Permitted Investments shall be registered in the name of the Spread Account Depository (in its capacity as such) or its nominee. All income and gain realized from any such investment as well as any interest earned on deposits in the Spread Account shall be deposited or retained in the Spread Account and accumulated therein, pending any withdrawal or release from the Spread Account pursuant to subsection (c) below. The Seller shall deposit in the Spread Account (with respect to investments made hereunder of funds held therein) an amount equal to the amount of any loss incurred in respect of any such investment immediately upon realization of such loss. The Seller shall be permitted, in its discretion, to liquidate any Permitted Investment. The proceeds of such liquidated investment shall be deposited into the Spread Account. The Spread Account Depository shall not be liable for the amount of any loss incurred in respect of any investment, or lack of investment, of funds held in the Spread Account, except for losses attributable to the Spread Account Depository's failure to make payments on such Permitted Investments issued by the Spread Account Depository, in its commercial capacity, in accordance with their terms. (c) On the Business Day prior to each Distribution Date, the Seller shall deposit into the Collection Account for distribution to the Purchaser on such Distribution Date pursuant to Subsection 11.09, an amount equal to the aggregate of all Realized Losses incurred with respect to any Loans and REO Properties as to which Final Recovery Determinations were made during the period ending on the related Determination Date and any Realized Losses with respect to any Loans and REO Properties as to which Final Recovery Determinations were made during prior periods but which were not paid due to insufficient funds in the Spread Account. Amounts distributable to the Purchaser shall be limited to funds represented by the amounts then on deposit in the Spread Account (the "Spread Account Balance") and the Seller shall not be required to supplement such funds with its own funds except to the extent of any loss on a Permitted Investment with respect to the Spread Account. The Spread Account Balance shall be reduced by the amount of any Realized Losses. The Seller 69 -13- may, in satisfaction of its obligation described in this paragraph (c), cause the Spread Account Depository to withdraw from the Spread Account and deposit into the Collection Account the total amount to be deposited therein for such Distribution Date pursuant to the preceding sentences. Notwithstanding the foregoing, in the event that the Seller is unable to assign an FHA Loan to the FHA and to collect FHA Insurance Proceeds (i) due to insufficient FHA Insurance Reserves or (ii) due to the FHA's denial of a claim for reasons not constituting a breach of a representation or warranty under Subsection 7.01 or 7.02, which denial the Seller believes in good faith to be final, the Seller shall either, at its option, repurchase the related FHA Loan under Subsection 11.03 or proceed to enforce its other remedies. In the event that the Seller pursues other remedies but no Final Recovery Determination can be made within 12 months after the date of default under an FHA Loan with respect to (i) above and within 12 months after final denial by the FHA of a claim with respect to (ii) above, the Seller shall cause to be withdrawn from the Spread Account and deposited in the Collection Account, in the manner described in this subsection, an amount equal to the amount that would be deemed a Realized Loss if a Final Recovery Determination could be made, and the Spread Account shall be reduced by such amount. Any amounts subsequently received by the Seller with respect to the related FHA Loan or REO Property shall be deposited by the Seller into the Spread Account. (d) Upon the termination of this Agreement, any and all amounts remaining in the Spread Account shall be distributed to the Excess Yield Holder. Subsection 11.17 [Intentionally Deleted] Subsection 11.18 Servicing Compensation. As compensation for its services hereunder the Seller shall be entitled to withdraw from the Collection Account or to retain from interest payments on the Loans the amounts provided for as the Seller's Servicing Fee. Additional servicing compensation in the form of any assumption fees and late payment charges or other charges shall be retained by the Seller to the extent not required to be deposited in the Collection Account. The Seller shall be required to pay all expenses incurred by it in connection with its servicing activities hereunder and shall not be entitled to reimbursement therefor except as specifically provided for. Subsection 11.19 Statement as to Compliance. The Seller will deliver to the Purchaser not later than 120 days following the end of each fiscal year of the Seller, which as of the Closing Date ends on the last day in August 31, in each calendar year, beginning with the fiscal year ending August 31, 1997, an Officers' Certificate stating, as to each signatory thereof, that (i) a review of the activities of the Seller during the preceding year and of performance under this Agreement has been made under such officers' supervision and (ii) to the best of such officers' knowledge, based on such review, the Seller has fulfilled all of its obligations under this Agreement throughout such year, or, if there has been a default in the fulfillment of any such obligation, specifying each such default known 70 -14- to such officer and the nature and status thereof. Copies of such statement shall be provided by the Purchaser to any Person identified as a prospective purchaser of the Loans. Subsection 11.20 Independent Public Accountants' Servicing Report. Not later than 90 days following the end of each fiscal year of the Seller, beginning with the fiscal year ending August 31, 1997, the Seller at its expense shall cause a firm of independent public accountants (which may also render other services to the Seller) which is a member of the American Institute of Certified Public Accountants to furnish a statement to the Purchaser or its designee to the effect that such firm has examined certain documents and records relating to the servicing of the Loans under this Agreement or of loans under servicing agreements (including the Loans and this Agreement) substantially similar one to another (such statement to have attached thereto a schedule setting forth the servicing agreements covered thereby) and that, on the basis of such examination conducted substantially in compliance with the Audit Guide for Use by Independent Public Accountants in Audits of HUD-approved Non-Supervised Mortgagees, Loan Correspondents and Coinsuring Mortgagees (the "Audit Guide"), such firm confirms that such servicing has been conducted in compliance with such servicing agreements except for such significant exceptions or errors in records that, in the opinion of such firm, the Audit Guide requires it to report. Copies of such statement shall be provided by the Purchaser to any Person identified as a prospective purchaser of the Loans. Subsection 11.21 Access to Certain Documentation. The Seller shall provide to the Office of Thrift Supervision, the FDIC and any other federal or state banking or insurance regulatory authority that may exercise authority over the Purchaser or the Excess Yield Holder access to the documentation regarding the Loans serviced by the Seller required by applicable laws and regulations. Such access shall be afforded without charge, but only upon reasonable request and during normal business hours at the offices of the Seller. In addition, access to the documentation will be provided to the Purchaser, the Excess Yield Holder or any agent thereof identified to the Seller by the Purchaser or the Excess Yield Holder without charge, upon reasonable request during normal business hours at the offices of the Seller. Subsection 11.22 Status of Completion Certificates. Upon the request of the Purchaser from time to time, the Seller shall identify to the Purchaser the Loans as to which the Seller has not received a completion certificate, in the case of any FHA Loan, in the form required by FHA, whether or not the deadline for delivery of such certificate by the Obligor has passed, together with the status of such deadline. 71 EXHIBIT 7 PRICING LETTER [Date], 199_ Greenwich Capital Markets, Inc. 600 Steamboat Road Greenwich, Connecticut 06830 Attn: Ladies and Gentlemen: Pursuant to Section 2 of that certain Amended and Restated Master Loan Purchase and Servicing Agreement, dated as of October 1, 1996 (the "Purchase Agreement"), among Greenwich Capital Markets, Inc. (the "Purchaser"), Mego Mortgage Corporation (the "Seller") and Mego Financial Corp., the Seller agrees to sell, and the Purchaser agrees to purchase on [date] or such other date mutually agreed to by the Seller and the Purchaser not later than 14 days following such date (the "Closing Date"), Loans having an aggregate principal balance not in excess of $_______ and originated by the Seller between [date] and [date] (the "Cut-off Date"). The Loan Package shall have an adjustable Pass-Though Rate equal to 200 basis points per annum in excess of the London Inter Bank Offered Rate ("LIBOR") for U.S. dollar deposits for one month as quoted on Page 3750 on the Telerate Service (or such other page as may replace Page 3750 on that service or such other service as may be nominated for the time being by the British Bankers Association as the information vendor for the purpose of displaying British Bankers Association Interest Settlement Rates). The Pass-Through Rate shall adjust monthly at 30-day intervals following the Closing Date based upon LIBOR as in effect two Business Days prior to such adjustment date. This Pricing Letter supersedes any prior Pricing Letters the Purchaser and the Seller have agreed to. Capitalized terms used but not defined herein shall have the meanings set forth in the Purchase Agreement. The Purchase Price for the Loan Package will be the sum of (A) _____% multiplied by the balance of the FHA Loans, (B) _____% multiplied by the aggregate unpaid principal balance of the Conventional Loans and (C) accrued interest (as specified in Section 4 of the Purchase Agreement). The Purchase Price shall be paid by the Purchaser to the Seller on the Closing Date as directed by the Seller. Pursuant to Subsection 11.16 of the Purchase Agreement, all interest received on the Loans at the Excess Yield Rate shall be deposited monthly in the Spread Account to be maintained at The First National Bank of Boston (or another depository approved by the Purchaser), and retained therein, subject to withdrawal solely for the purpose of remittance to the Purchaser in respect of any Realized Losses. 72 -2- Each Loan purchased hereunder may be resold by the Purchaser or transferred into a trust for the purpose of a Pass-Through Transfer or Whole Loan Transfer (any such resale or transfer, a "Purchaser Disposition") and, upon such a Purchaser Disposition, the Purchaser shall make an additional payment (the "Disposition Payment") to the Seller in an amount determined in this Pricing Letter to the extent that the Purchaser Disposition is effected at a price greater than the price paid by the Purchaser. The Disposition Payment will be equal to any amount by which (a) the net proceeds realized by the Purchaser from a Purchaser Disposition exceed (b) the sum of (i) the Disposition Fee payable to Greenwich Capital Markets, Inc. ("GCM") pursuant to the engagement letter dated October 1, 1996 between GCM and the Seller and (ii) the aggregate Purchase Price paid by the Purchaser to the Seller for the related Loans. Amounts paid by the Purchaser hereunder shall be paid in same day funds through the federal funds wire system. The Purchaser shall use its reasonable best efforts to minimize the amount of Excess Yield required to credit enhance the interest of any investor in the Loans pursuant to any Reconstitution Agreement unless such efforts under the then existing market conditions might reasonably lead to a net resale price less than Par. 73 -3- Attached hereto as Schedule I is the Loan Schedule for the Loan Package. The related Closing Date with respect to such Loan Package shall be [date], 199_, and the Cut-off Date will be [date], 199_. MEGO MORTGAGE CORPORATION, By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- Agreed to and Accepted GREENWICH CAPITAL MARKETS, INC. By: ---------------------------- Name: ----------------------- Title: ------------------------- 74 EXHIBIT 8 REO ACCOUNT LETTER AGREEMENT , 199 --------------------- -- To: ----------------------------- ---------------------------------------- ---------------------------------------- (the "Depository") As Seller under the Amended and Restated Master Loan Purchase and Servicing Agreement, dated as of October 1, 1996, we hereby authorize and request you to establish an account, as an REO Account, to be designated as "Mego Mortgage Corporation in trust for Greenwich Capital Markets, Inc. as Purchaser under that certain Amended and Restated Master Loan Purchase and Servicing Agreement, dated as of October 1, 1996, among Greenwich Capital Markets, Inc., Mego Mortgage Corporation and Mego Financial Corp. for FHA and Conventional Home Improvement Loans." All deposits in the account shall be subject to withdrawal therefrom by order signed by the Seller. This letter is submitted to you in duplicate. Please execute and return one original to us. MEGO MORTGAGE CORPORATION By: -------------------------------------------- Name: ------------------------------------------ Title: ----------------------------------------- Date: ------------------------------------------ 75 -2- The undersigned, as Depository, hereby certifies that the above-described account has been established under Account Number ____________ at the office of the Depository indicated above, and agrees to honor withdrawals on such account as provided above. The amount deposited at any time in the account will be insured by the Federal Deposit Insurance Corporation through the Bank Insurance Fund ("BIF") or the Savings Association Insurance Fund ("SAIF") subject to applicable insurance maximums. ------------------------------------------ Depository By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ Date: ------------------------------------- 76 EXHIBIT 9A SELLER'S OFFICER'S CERTIFICATE OF CHIEF FINANCIAL OFFICER I, _____________, hereby certify that I am the duly elected Vice President and Chief Financial Officer of Mego Mortgage Corporation, a Delaware corporation (the "Seller"), and further certify, on behalf of the Seller, as follows: 1. I am familiar with each of the material agreements to which the Seller is a party or by which it is bound; and 2. Neither the sale nor delivery of the Loans to the Purchaser, nor the consummation of the transactions contemplated by, nor the fulfillment of the obligations of the Seller under the terms of the Amended and Restated Master Loan Purchase and Servicing Agreement (the "Purchase Agreement") dated as of October 1, 1996, among the Seller, Greenwich Capital Markets, Inc. (the "Purchaser") and Mego Financial Corp., and the Custodial Agreement, dated as of April 1, 1995, among Greenwich Capital Financial Products, Inc., First Trust National Association and the Seller, materially conflicts with or will materially conflict with, or results or will result in a material breach of, or constitutes or will constitute a material default under, the certificate of incorporation of the Seller, the terms of any indenture or other agreement or instrument to which the Seller is a party or by which it is bound or to which it is subject, or to any statute or order, rule, regulation, writ, injunction or decree of any court, governmental authority or regulatory body to which the Seller is subject or by which it is bound. All capitalized terms used herein and not otherwise defined shall have the meaning assigned to them in the Purchase Agreement. 77 -2- IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal of the Seller. Dated: [Seal] MEGO MORTGAGE CORPORATION By: ---------------------------------------- Name: Title: Vice President and Chief Financial Officer I, ________________, Assistant Secretary of ___________________________, hereby certify that ______________ is the duly elected, qualified and acting Vice President and Chief Financial Officer of the Seller and that the signature appearing above is such person's genuine signature. IN WITNESS WHEREOF, I have hereunto signed my name. Dated: [Seal] MEGO MORTGAGE CORPORATION By: -------------------------------- Name: Title: Assistant Secretary 78 EXHIBIT 9B GUARANTOR'S OFFICER'S CERTIFICATE OF GENERAL COUNSEL I, _____________, hereby certify that I am the duly elected Executive Vice President and General Counsel of Mego Financial Corp., a New York corporation (the "Guarantor"), and further certify, on behalf of the Guarantor, as follows: 1. I am familiar with each of the material agreements to which the Guarantor is a party or by which it is bound; and 2. The fulfillment of the obligations of the Guarantor under the terms of the Amended and Restated Master Loan Purchase and Servicing Agreement (the "Purchase Agreement") dated as of October 1, 1996, among Mego Mortgage Corporation, Greenwich Capital Markets, Inc. (the "Purchaser") and the Guarantor does not materially conflict with and will not materially conflict with, will not result in a material breach of, or constitute a material default under, the certificate of incorporation of the Guarantor, the terms of any indenture or other agreement or instrument to which the Guarantor is a party or by which it is bound or to which it is subject, or to any statute or order, rule, regulation, writ, injunction or decree of any court, governmental authority or regulatory body to which the Guarantor is subject or by which it is bound. All capitalized terms used herein and not otherwise defined shall have the meaning assigned to them in the Purchase Agreement. 79 -2- IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal of the Guarantor. Dated: [Seal] MEGO FINANCIAL CORP. By: ----------------------------------- Name: Title: Executive Vice President and General Counsel I, ________________, Assistant Secretary of _______________________, hereby certify that _____________ is the duly elected, qualified and acting Vice President and General Counsel of the Guarantor and that the signature appearing above is such person's genuine signature. IN WITNESS WHEREOF, I have hereunto signed my name. Dated: [Seal] MEGO FINANCIAL CORP. By: --------------------------------- Name: Title: Assistant Secretary 80 EXHIBIT 10 CUSTODIAL AGREEMENT 81 SCHEDULE I LOAN SCHEDULE EX-10.29 13 FORM OF AGREEMENT - MEGO FINANCIAL 1 EXHIBIT 10.29 AGREEMENT This Agreement is made as of the _____ day of November, 1996, between MEGO FINANCIAL CORP., a New York corporation ("Mego Financial"), and MEGO MORTGAGE CORPORATION, a Delaware corporation (the "Corporation"). WHEREAS, Mego Financial and the Corporation desire to enter into this Agreement for the purpose of providing for certain matters relating to the relationship between Mego Financial and the Corporation. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the parties hereto hereby agree as follows: 1. Restrictions Relating to Share Issuance and Acquisitions. During the period (the "Eighty Percent Period") that and so long as Mego Financial, presently the sole stockholder of the Corporation, holds shares having at least 80% of the total combined voting power of all classes of stock entitled to vote for directors of the Corporation and constituting at least 80% of the total number of shares of each other class of stock of the Corporation, all as defined in Section 368(c) of the Internal Revenue Code of 1986, as amended (the "Code") (all such stock in the aggregate constituting "Eighty Percent Control" and Mego Financial being hereinafter referred to as the "Eighty Percent Holder"), and although a vote of stockholders is not and shall not be required under applicable law or the Corporation's Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") for the issuance of shares of capital stock or equity securities or any debt or other instrument that is convertible or exchangeable into stock or any other equity security of the Corporation or any subsidiary, including options or any other rights to purchase capital stock pursuant to any employee benefit plan or stock option plan (a "Plan") or otherwise, that are authorized under the Certificate of Incorporation, but unissued, or, to acquire an ownership interest in certain assets, the advance written approval of the Eighty Percent Holder shall be required (unless waived in writing by the Eighty Percent Holder) prior to: (i) the Corporation taking any action, including, without limitation, the issuance of any capital stock or other equity security or any debt or other instrument that is convertible or exchangeable into stock or any other equity security of the Corporation, including options, warrants or any other rights to purchase capital stock, pursuant to any Plan or otherwise, that would reduce the percentage of ownership of the Eighty Percent Holder in the capital stock of the Corporation so that the Eighty Percent Holder thereafter would not own stock constituting Eighty Percent Control (treating options, warrants or any other rights to purchase capital stock as exercised immediately upon issuance for purposes of making this determination) or that otherwise would reduce (or, with the taking of any action contemplated by the instrument in question, could reduce) the Eighty Percent Holder's ownership of the Corporation's stock below "control" of the Corporation within the meaning of Section 368(c) of the Code; (ii) the Corporation acquiring or taking any action to cause any subsidiary to acquire any direct or indirect ownership interest in any asset that does not constitute part of an active trade or business within the meaning of Section 355(b) of the Code; provided, however, that the Corporation or any subsidiary may acquire any asset that is similar in nature to the assets it holds on October 28, 1996, so long as that acquisition would not cause the Corporation or any subsidiary not to be engaged in an active trade or business within the meaning of Section 355(b) of the Code; or 2 (iii) the Corporation taking any action to cause the issuance of any capital stock or equity security, any debt or other instrument that is convertible or exchangeable into stock or any other equity security by or of any subsidiary or any right to purchase the same in the Corporation or any subsidiary, and the Corporation shall not take any such action above without the prior written approval of the Eighty Percent Holder. Any attempt to take any such actions without the prior written approval of the Eighty Percent Holder during the Eighty Percent Period shall be null and void and any purported issuance of any capital stock or equity security or any convertible or exchangeable debt or other instrument or any right to purchase the same in the Corporation or any subsidiary or any acquisition in violation of this provision shall not terminate the Eighty Percent Period. 2. Restrictions Relating to Boards of Directors and Bylaws. During the Eighty Percent Period, the Corporation shall not take any action to (i) change the number of its directors or the number of directors of any subsidiary, (ii) fill any vacancy in its board of directors or in the board of directors of any subsidiary or (iii) alter, amend or repeal, in whole or in part, its Bylaws, or adopt new Bylaws, without the advance written approval of the Eighty Percent Holder (unless such requirement is waived in writing by the Eighty Percent Holder). 3. Prior Approval is not Required for Stockholder Vote. The obligations of the Corporation contained in this Agreement to obtain the advance written approval of the Eighty Percent Holder shall continue in effect during the Eighty Percent Period, notwithstanding that the Corporation is required under applicable law or its Certificate of Incorporation to have a vote of stockholders to take any such actions, except possibly with respect to certain acquisitions, and that the Corporation will have a vote of stockholders to take any such actions, except possibly with respect to certain acquisitions. The consent or lack of consent of the Eighty Percent Holder with respect to any matter is not a vote on such matter by the Eighty Percent Holder. 4. Actions and Obligations of Mego Financial. The Corporation is entering into this Agreement because Mego Financial has agreed to pursue an initial public offering for the Corporation. Mego Financial agrees to exercise its rights in a reasonably prompt manner, subject to its use of diligence reasonably deemed necessary by Mego Financial. 5. Injunctive Relief. The Corporation agrees that any violation of the foregoing covenants will cause irreparable injury to Mego Financial, that the remedies at law for any such violation will be inadequate to Mego Financial, and that Mego Financial shall, in addition to and not in limitation of any other rights and/or remedies available at law or in equity, be entitled to temporary and permanent injunctive relief and specific performance without the necessity of proving actual damage. 6. Severability. Each of the covenants herein is independent and severable. Each covenant shall remain in full force and effect regardless of the enforceability of any other covenant herein. If it shall be determined at any time by a court of competent jurisdiction that any provision of this Agreement or any portion thereof is unenforceable, then such portions as shall be determined to be unreasonably restrictive or unenforceable shall thereupon be deemed amended as to make such restrictions reasonable in the determination of such court and the provisions, as amended, shall be enforceable between the parties to the same extent as if such amendment had been made prior to the date of any alleged breach of such provision. 2 3 7. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. 8. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, understandings, negotiations and discussions, both written and oral, between the parties hereto with respect to the subject matter hereof. This Agreement may not be amended or modified in any way except by a written instrument executed by the parties hereto. 9. Benefits; Binding Effect. This Agreement shall be for the benefit of and binding upon the parties hereto, their respective successors and assigns. IN WITNESS WHEREOF, the undersigned have hereunto set hand and seal as of the date first written above. MEGO FINANCIAL CORP. By: --------------------------------- Name: Title: MEGO MORTGAGE CORPORATION By: --------------------------------- Name: Title: EX-10.30 14 COMMITMENT LETTER - GREENWICH 1 Exhibit 10.30 GREENWICH CAPITAL MARKETS, INC. 600 STEAMBOAT ROAD GREENWICH, CONNECTICUT 06830 September 17, 1996 Mr. Herbert B. Hirsch Chief Financial Officer and Treasurer Mego Mortgage Corporation Las Vegas, Nevada 89109 Re: Interest Only/Residual Financing Facility ----------------------------------------- Dear Herb: Greenwich Capital Markets, Inc. ("GCM") is pleased to submit this commitment to extend an Interest Only/Residual Financing Facility to Mego Mortgage Corporation ("Mego") on the following terms: Term: One year commencing on November 1, 1996 and ending on October 31, 1997. Amount: The aggregate dollar amount of Interest Only Certificates ("IOs"), Class R Certificates ("Residuals") and Performing Inventory Adjustment, as defined below, to be financed under this facility at any one time shall be the lesser of (i) the aggregate of (a) 60% of the GCM Residual Value (as defined below) of each Residual financed, (b) 75% of the GCM IO Value (as defined below) of each IO financed and (c) the Performing Inventory Adjustment and (ii) $11,000,000. If Mego chooses to finance the Mego Mortgage FHA Title I Loan Trust 1996-1 Class S Certificate and the 1996-2 Class S Certificate under the separate PSA Master Repurchase Agreement which has already been executed between GCM and Mego, then such amount in item (ii) above shall be $8,000,000. 2 Mr. Herbert Hirsch September 17, 1996 Page 2 of 4 Fundings: Upon notice from Mego, GCM will advance funds representing the proposed financing of such IOs and/or Residuals to Mego. The amount of such financing will be dependent upon several things including, but not limited to, collateral type, GCM's IO and/or Residual Value (see below), as applicable, Advance Rates (see below) and current market conditions. Collateral: GCM will finance either IOs or Residuals of securitizations underwritten and/or issued by GCM or one of its affiliates. GCM will only finance a Residual if the IO of the related securitization has already been either sold or financed by GCM. If, in accordance with the preceding sentence, GCM finances a Residual on a given securitization and an IO is issued on a subsequent securitization, then, if such subsequent IO is not sold by GCM, such subsequent IO must replace the prior Residual which was already financed or sold. Once such subsequent IO has been financed, then, to the extent the maximum amount of the financing has not been reached, the Residual from the prior deal can once again be financed by GCM. Performing Inventory Adjustment: If Mego so desires, GCM will lend Mego an amount equal to the Performing Inventory Adjustment. Such Performing Inventory Adjustment shall be equal to the sum of (i) in the case of Title I HILs which are not delinquent the aggregate of (a) the current outstanding balance of each such non-delinquent Title I HIL multiplied by (b) the excess of 103% over the percent of par paid to Mego for such same Title I HIL on the related Closing Date and (ii) in the case of Conventional HILs which are not delinquent the aggregate of (c) the current outstanding balance of each such non-delinquent Conventional HIL multiplied by (d) the excess of 100% over the percent of par paid to Mego for such same Conventional HIL on the related Closing Date. Interest Rate: LIBOR +350. All interest is payable monthly in arrears and is due by the 15th day of the following month. Interest will be calculated on the basis of a 360-day year comprised of 12 30-day months. Advance Rate: GCM will advance 75% of the GCM IO Value and 60% of the GCM Residual Value. The "GCM IO Value" and the "GCM Residual Value" will be GCM's internal valuation of the related security (and underlying collateral), in its sole discretion, based initially on a predetermined calculation agreed upon by both parties. 3 Mr. Herbert Hirsch September 17, 1996 Page 3 of 4 Modeling assumptions, such as overcollateralization levels in particular, will affect the respective GCM IO and/or Residual Values significantly. The assumptions to be used in determining the respective GCM IO and/or Residual Values are subject to change based on market conditions and the performance of Mego's collateral (particularly delinquencies and losses) and the financial condition of both Mego Mortgage Corporation and Mego Financial Corp. GCM Fee: As compensation for providing this Interest Only/Residual Financing Facility, GCM will receive an upfront fee of $50,000. Such fee shall be due and payable upon execution of the Interest Only/Residual Financing Facility documents by both Mego and GCM. Covenants: Those affirmative, negative and financial covenants customarily found in facility agreements similar in content to the proposed transaction. Financial covenants to be determined by GCM will include, but not be limited to, the following: (i) Minimum net worth during the term of the Residual Financing Facility; (ii) Maximum debt to equity ratio; (iii) Maximum percentage of servicing portfolio which is 30 days or more delinquent; and (iv) No material change of control, either executive, management or ownership, other than that contemplated by the upcoming equity offering. Events of Default: The Interest Only/Residual Financing Facility will contain customary default provisions which will be appropriate in the context of the proposed Interest Only/Residual Financing Facility. Guaranty: All commitments and obligations, financial or otherwise, of Mego Mortgage Corporation shall be guaranteed by Mego Financial Corp. until such time as the proposed public offering of debt and equity of Mego Mortgage Corporation is completed. 4 Mr. Herbert Hirsch September 17, 1996 Page 4 of 4 This commitment is subject to (a) execution of definitive documentation reasonably satisfactory to GCM, (b) receipt of opinions reasonably acceptable to GCM regarding the due authorization, execution and enforceability of the facility, (c) confirmation that there has not been any material adverse change in the condition (financial or otherwise) of Mego or its parent and (d) approval of GCM's Credit Committee. Very truly yours, /s/ Stephen M. Peet ------------------- Stephen M. Peet Executive Vice President Accepted and Agreed: Mego Mortgage Company By: /s/ Don A. Mayerson -------------------------- Name: Don A. Mayerson Title: Vice President EX-12.1 15 COMPUTATION OF RATIO OF EARNINGS 1 EXHIBIT 12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (IN THOUSANDS OF DOLLARS)
FOR THE YEARS ENDED AUGUST 31, ------------------------------ 1994 1995 1996 ------- ------ ------- Income (loss) before provision for income taxes per income statement.................................................... $(1,511) $5,919 $11,155 Add Portion of rents representative of the interest factor(1)................................................. 28 82 112 Interest on indebtedness(2).................................. 129 655 1,283 ------- ------ ------- Income as adjusted................................... $(1,354) $6,656 $12,550 ======= ====== ======= Fixed charges Interest on indebtedness..................................... $ 129(2) $ 655(2) $ 167(3) Pro forma interest on senior subordinated notes.............. -- -- 5,200 Prepaid commitment fees...................................... 50 129 -- Portion of rents representative of the interest factor(1)................................................. 28 82 112 ------- ------ ------- Fixed charges............................................. $ 207 $ 866 $ 5,479 ------- ------ ------- Ratio of earnings to fixed charges............................. NM 7.69 2.29 ======= ====== ======= (1) Total rents................................................ $ 85 $ 249 $ 338 Multiplied by 1/3......................................... 0.33 0.33 0.33 ------- ------ ------- Portion of rents representative of the interest factor..... $ 28 $ 82 $ 112 ======= ====== ======= (2) Based on total interest expense. (3) Represents interest expense on debt not expected to be repaid (leases).
NM = NOT MEANINGFUL EX-23.2 16 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 3 to Registration Statement No. 333-12443 of Mego Mortgage Corporation on Form S-1 of our report dated October 28, 1996 appearing in the Prospectus, which is part of this Registration Statement, and to the references to us under the headings "Selected Financial Data" and "Experts" in such Prospectus. DELOITTE & TOUCHE LLP Las Vegas, Nevada November 13, 1996 -----END PRIVACY-ENHANCED MESSAGE-----