-----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, FVCkX27Rt13cQeoWrWLNfgCtunMWhA/p4InTzVwxyVgTo9yzW5bLI27hsF7C1ujm MNnJW7kL+qP5syjb+0WftA== 0000950150-98-001848.txt : 19981126 0000950150-98-001848.hdr.sgml : 19981126 ACCESSION NUMBER: 0000950150-98-001848 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981125 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEGO FINANCIAL CORP CENTRAL INDEX KEY: 0000736035 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE DEALERS (FOR THEIR OWN ACCOUNT) [6532] IRS NUMBER: 135629885 STATE OF INCORPORATION: NY FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08645 FILM NUMBER: 98758880 BUSINESS ADDRESS: STREET 1: 4310 PARADISE RD CITY: LAS VEGAS STATE: NV ZIP: 89109 BUSINESS PHONE: 7027373700 MAIL ADDRESS: STREET 1: 4310 PARADISE RD CITY: LAS VEGAS STATE: NV ZIP: 89109 FORMER COMPANY: FORMER CONFORMED NAME: MEGO CORP DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ . COMMISSION FILE NUMBER 1-8645 MEGO FINANCIAL CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEW YORK 13-5629885 (STATE OR OTHER JURISDICTION OF INCORPORATION OR (IRS EMPLOYER IDENTIFICATION NO.) ORGANIZATION) 4310 PARADISE ROAD, LAS VEGAS, NV 89109 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 702-737-3700 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $.01 PAR VALUE (TITLE OF CLASS) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of November 9, 1998, 21,009,506 shares of the registrant's common stock were outstanding. The aggregate market value of common stock held by non-affiliates of the registrant as of November 9, 1998 was approximately $12,025,681 based on a closing price of $1.13 for the common stock as reported on the NASDAQ National Market on such date. For purposes of the foregoing computation, all executive officers, directors and 5 percent beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such executive officers, directors or 5 percent beneficial owners are, in fact, affiliates of the registrant. DOCUMENTS INCORPORATED BY REFERENCE None - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 MEGO FINANCIAL CORP. ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 12 Item 3. Legal Proceedings........................................... 12 Item 4. Submission of Matters to a Vote of Security Holders......... 14 PART II Item 5. Market for the Registrant's Common Equity and Related Security Holder Matters..................................... 15 Item 6. Selected Consolidated Financial Data........................ 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 18 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 37 Item 8. Financial Statements and Supplementary Data................. 37 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................................................. 37 PART III Item 10. Directors and Executive Officers of the Company............. 38 Item 11. Executive Compensation...................................... 41 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 45 Item 13. Certain Relationships and Related Transactions.............. 46 PART IV Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.................................................... 49 Signatures.................................................. 60
i 3 PART I ITEM 1. BUSINESS General Mego Financial Corp. (Mego Financial) is a premier developer of timeshare properties and a provider of consumer financing to purchase timeshare intervals and land parcels through its wholly-owned subsidiary, Preferred Equities Corporation (PEC) established in 1970. PEC is engaged primarily in originating, selling, servicing and financing consumer receivables generated through timeshare and land sales. PEC markets and finances timeshare interests and land in select resort areas. By providing financing to virtually all of its customers, PEC also originates consumer receivables that it sells and services. Unless the context requires otherwise, the "Company" refers to Mego Financial and its consolidated subsidiaries. In 1992, Mego Financial organized a subsidiary, Mego Mortgage Corporation (MMC), which has been a specialized consumer finance company that originates, purchases, sells, securitizes and services consumer loans consisting primarily of conventional uninsured home improvement and debt consolidation loans. After an initial public offering (the IPO) of MMC common stock in November 1996, Mego Financial held 81.3% of the outstanding stock of MMC. On September 2, 1997, Mego Financial distributed all of its remaining 10,000,000 shares of MMC's common stock to Mego Financial's shareholders in a tax-free spin-off (the Spin-off). See Notes 3 and 19 of Notes to Consolidated Financial Statements, "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) -- Discontinued Operations of MMC" and "Item 13. Certain Relationships and Related Transactions." Since the Spin-off, PEC has represented substantially all of Mego Financial's operations. The Company was incorporated under the laws of the state of New York in 1954 under the name Mego Corp. and, in 1992, changed its name to Mego Financial Corp. In January 1988, the Company sold a controlling interest in the Company consisting of approximately 43% of the then outstanding common stock after the sale, to affiliates of the Assignors (as hereinafter defined). See "Item 13. Certain Relationships and Related Transactions" and Note 2 of Notes to Consolidated Financial Statements. In February 1988, the Company acquired PEC, pursuant to an assignment by the Assignors (Comay Corp., GRI, RRE Corp., and H&H Financial Inc.) of their contract right to purchase PEC. The Company's executive offices are located at 4310 Paradise Road, Las Vegas, Nevada, and its telephone number is (702) 737-3700. Recent Events On March 27, 1998, the Company announced that it had entered into a definitive merger agreement (the Merger Agreement) under which it was to be acquired by Sycamore Partners, LLC (Sycamore). Sycamore was to be financed by Blackacre Capital Group, L.P., a real estate investment fund. Under the terms of the Merger Agreement, the Company's shareholders were to receive a minimum of $5.71 per share up to an estimated maximum of $5.75 per share. After further communication and negotiation, on September 9, 1998, the Company announced that, as a result of breaches by Sycamore, it had terminated the Merger Agreement. Subsequently, on October 12, 1998, the Company received the $300,000 Liquidated Damages Payment called for in the Merger Agreement. On October 6, 1998, the Company announced that it has retained Friedman, Billings, Ramsey & Co., Inc. to review strategic alternatives available to the Company, including potential offers, mergers and financing transactions. PREFERRED EQUITIES CORPORATION General PEC acquires, develops and converts rental and condominium apartment buildings and hotels for sale as timeshare interests and engages in the retail sale of land. PEC's strategy is to acquire properties in desirable destination resort areas that offer a range of recreational activities and amenities. As part of its strategic plan, PEC has shifted its emphasis from sales of land to sales of timeshare interests due both to its diminishing 1 4 inventory of land available for sale in Nevada and its increasing inventory of timeshare interests from the opening of new timeshare resorts. PEC markets and sells timeshare interests in its resorts in Las Vegas and Reno, Nevada; Honolulu, Hawaii; Brigantine, New Jersey; Steamboat Springs, Colorado; Indian Shores and Orlando, Florida; and sells land in Nevada and Colorado. PEC owns additional properties in Steamboat Springs, Colorado and Las Vegas, Nevada which are in the permitting process for construction for sale as timeshare interests and is considering the purchase of additional properties for use in its timeshare operations. Also, PEC owns property in Biloxi, Mississippi which it is considering for the possible construction of a future timeshare resort. In recent years, several major lodging, hospitality and entertainment companies, including The Walt Disney Company, Hilton Hotels Corporation, Marriott Ownership Resorts, Inc. and Hyatt Corporation, among others, have commenced developing and marketing timeshare interests in various resort properties. The Company believes that the entry into the timeshare industry of certain of these large and well- known lodging, hospitality and entertainment companies has contributed to the growth and acceptance of the industry. To enhance its competitive position, in April 1995, PEC entered into a strategic alliance with Ramada Franchise Systems, Inc. (Ramada) and its parent, Hospitality Franchise Systems, Inc., now Cendant Corporation (Cendant), pursuant to which PEC was granted a ten-year (including a renewal option) exclusive license to operate both its existing and future timeshare properties under the name "Ramada Vacation Suites." The American Resort Development Association (ARDA) estimates that approximately 1.8 million families in the United States own timeshare interests in resorts worldwide and that sales of timeshare interests in the United States aggregated approximately $2.18 billion in 1997. Additionally, it is estimated by ARDA that sales volume is increasing at a compounded annual rate of almost 9% due to the entry of brand-name hospitality firms, such as Ramada, and well-financed publicly held companies with lower costs of capital and strong growth among seasoned timeshare companies. Timeshare Properties and Sales PEC acquires, develops and converts rental and condominium apartment buildings and hotels for sale as timeshare interests. PEC's strategy is to acquire properties in desirable destination resort areas that offer a range of recreational activities and amenities. The timeshare interests offered by PEC in its resorts other than in Hawaii generally consist of undivided fee interests in the land and facilities comprising the property or an undivided fee interest in a particular unit, pursuant to which the owner acquires the perpetual right to weekly occupancy of a residence unit each year. In its resort in Hawaii, PEC offers "right-to-use" interests, pursuant to which the owner has occupancy rights for one week each year until December 31, 2009, the last full year of the underlying land lease for the resort property. During fiscal 1998, 1997 and 1996, PEC sold 7,293, 7,860 and 6,982 timeshare interests, respectively, at prices ranging from $4,250 to $30,890. The Company believes that PEC's alliance with Ramada has enabled it to capitalize on the Ramada reputation, name recognition and customer profile, which closely matches PEC's customer profile. The arrangement required PEC to pay an initial access fee of $1 million and monthly recurring fees equal to 1% of PEC's Gross Sales (as defined in the agreement) through January 1996 and 1.5% of PEC's Gross Sales each month commencing after January 1996. The initial term of the arrangement is 5 years and PEC has the option to renew the arrangement for an additional term of 5 years if it has met certain conditions, including the addition of at least 20,000 timeshare interests during the initial term, which condition was satisfied, and the payment of minimum annual fees. In addition to the grant of the license, the arrangement provides for the establishment of joint marketing programs. The Company believes it has benefited from the use of the Ramada name, but is unable to quantify the amount of such benefit. In May 1997, PEC began offering a new sales program whereby a customer pays a fixed fee on an installment basis to use a timeshare interest during an initial one-year period with an option to purchase the timeshare interest. If the customer exercises the option to purchase the interest, the fixed fee is applied toward the down payment of the timeshare interest purchased. PEC currently operates timeshare resorts in Las Vegas and Reno, Nevada; Honolulu, Hawaii; Brigantine, New Jersey; Steamboat Springs, Colorado; Orlando and Indian Shores, Florida; and owns additional properties in Las Vegas, Nevada and Steamboat Springs, Colorado which are in the permitting process for 2 5 construction. PEC is considering the purchase of additional properties for use in its timeshare operations and has recently acquired property in Biloxi, Mississippi for possible construction of a timeshare resort. PEC's Ramada Vacation Suites at Las Vegas includes 34 buildings with a total of 471 studio units and 1 and 2 bedroom units which have been converted for sale as 24,021 timeshare interests, of which 4,471 remained available for sale as of August 31, 1998. The resort is in close proximity to "the Strip" in Las Vegas and features swimming pools and other amenities. Nevada timesharing attracts the upper end of the tourism market and Las Vegas is the most dynamic region of the state for timeshare industry growth according to ARDA statistics. PEC is in the process of converting additional adjacent properties it owns to timesharing units. PEC has completed the expansion of the common areas to include an expanded lobby, convenience store and expanded sales facilities. At August 31, 1998, a total of 3 buildings containing 18 apartment units were under conversion to 918 timeshare interests. The Ramada Vacation Suites at Reno consists of a 95-unit hotel that has been converted for sale as 4,845 timeshare interests, of which 944 remained available for sale as of August 31, 1998. The resort features an indoor swimming pool, exercise facilities, sauna, jacuzzi and sun deck. PEC's Ramada Vacation Suites at Honolulu is an 80-unit hotel consisting of 3 buildings that have been converted for sale as 4,160 timeshare interests, of which 456 remained available for sale as of August 31, 1998. The resort is within walking distance of a public beach and features a swimming pool and jacuzzi. PEC holds the buildings, equipment and furnishings under a land lease expiring in March 2010, under which PEC makes annual rental payments of approximately $192,000. The Ramada Vacation Suites on Brigantine Beach consists of a 91-unit hotel and a 17-unit three story building that have been either converted or constructed for sale as 5,508 timeshare interests, of which 701 remained available for sale as of August 31, 1998. The resort is situated on beach front property in close proximity to Atlantic City, New Jersey and features an enclosed swimming pool, cocktail lounge, bar and restaurant. The Ramada Vacation Suites at Steamboat Springs consists of 60 one- and two-bedroom units, which have been converted for sale as 3,060 timeshare interests, of which 1,043 remained available for sale as of August 31, 1998. PEC acquired this condominium resort in 1994 and completed the conversion in 1995. PEC has constructed a 5,500-square foot amenities building at this facility which features a lobby, front desk, spa and sauna. The Ramada Vacation Suites at Indian Shores consists of a 2-building complex, which has been converted into a total of 32 one- and two-bedroom units to be sold as 1,632 timeshare interests, of which 587 timeshare interests remained available for sale at August 31, 1998. The resort is located on the intercoastal waterway and is in close proximity to St. Petersburg, Florida. The Ramada Vacation Suites at Orlando consists of a 7-building complex, five of which have been converted into 72 units for sale as 3,672 timeshare interests. At August 31, 1998, 2,463 timeshare interests in the five buildings remained available for sale. At August 31, 1998, 2 buildings containing 30 units were under conversion to 1,530 timeshare interests. Florida is one of the country's most significant timeshare markets, representing 23.6% of the total number of resorts in the United States, and, according to ARDA, has experienced unprecedented growth. The Ramada Vacation Suites -- Hilltop is a 2-tower building complex complete with indoor swimming pool, restaurant, cocktail lounge and meeting room facilities. Upon completion of conversion, the complex will consist of 56 one- and two-bedroom units to be sold as 2,856 timeshare interests. In March 1998, 14 units became available for sale as 714 timeshare interests of which 608 timeshare interests remained available for sale at August 31, 1998. At August 31, 1998, 1 building containing 42 units was under conversion to 2,142 timeshare interests. The resort is located in Steamboat Springs, Colorado, in close proximity to the area's ski slopes and attractions. 3 6 The following table sets forth certain information regarding the timeshare interests at the Company's resort properties:
STEAMBOAT INDIAN LAS VEGAS RENO WAIKIKI BRIGANTINE SPRINGS SHORES ORLANDO HILLTOP TOTAL --------- ------- ------- ---------- --------- ------- ------- ------- ------ Maximum number of timeshare interests....................... 24,021 4,845 4,160 5,508 3,060 1,632 3,672 714 47,612 Net number of timeshare interests sold through August 31, 1998.... 19,550 3,901 3,704 4,807(1) 2,017 1,045 1,209 106 36,339 Number of timeshare interests available for sale at August 31, 1998............................ 4,471 944 456 701 1,043 587 2,463 608 11,273 Percent sold through August 31, 1998............................ 81% 81% 89% 87% 66% 64% 33% 15% 76% Number of timeshare interests sold during the year ended August 31, 1998............................ 3,004 230 542 87 690 1,098 1,519 123 7,293 Number of timeshare interests reacquired during the year ended August 31, 1998 through: Contract cancellations.......... 376 124 87 42 57 51 44 -- 781 Exchanges (2)................... 2,103 277 395 54 473 362 338 17 4,019 Acquired for unpaid maintenance fees.......................... 99 44 72 34 7 -- -- -- 256 ------- ------- ------ ------- ------- ------- ------- ------- ------ Total number of timeshare interests reacquired during the year............................ 2,578 445 554 130 547 413 382 17 5,056 ------- ------- ------ ------- ------- ------- ------- ------- ------ Net number of timeshare interests sold (reacquired) during the year ended August 31, 1998...... 426 (215) (12) (43) 153 685 1,137 106 2,237 Additional timeshare interests under development (3)........... 918 -- -- -- -- -- 1,530 2,142 4,590 Sales prices of timeshare interests available at August 31, 1998 range From............................ $ 8,550 $ 6,650 $4,250 $ 5,550 $ 7,450 $ 8,550 $ 8,550 $ 7,390 N/A To.............................. $21,690 $10,690 $6,450 $13,350 $25,690 $16,060 $10,690 $30,890 N/A
- --------------- (1) 4,823 timeshare interests were sold by the prior developer. (2) These exchanges are primarily related to customers exchanging and/or upgrading their current property to generally higher quality and higher priced units. (3) PEC owns additional units under conversion or to be converted to timeshare interests, and are not included above. In Las Vegas, Nevada, the addition of 18 units will be converted into 918 timeshare interests. In Steamboat Springs, Colorado at Hilltop, the addition of 42 units will be converted into 2,142 timeshare interests. In Orlando, Florida, the addition of 30 units will be converted into 1,530 timeshare interests. For the fiscal years ended August 31, 1998, 1997 and 1996, PEC's consolidated revenue from sales of timeshare interests was $37.7 million, $32.3 million and $27.8 million, respectively, representing approximately 55.0% 47.9% and 45.8% of total revenues, respectively. RCI Exchange Network The attractiveness of timeshare interest ownership in resorts is enhanced significantly by the availability of exchange networks allowing owners to exchange their occupancy right in the resort in which they own an interest for an occupancy right in another participating network resort. Several companies, including Resorts Condominiums International (RCI), which became a wholly-owned subsidiary of Cendant in 1997, provide broad-based timeshare interest exchange networks and PEC has qualified its resort properties for participation in the RCI network. RCI has a total of more than 3,200 participating resort facilities located worldwide. Approximately 49.8% of the participating facilities are located in the United States and Canada. PEC and the Owners' Association (as defined later) of each of PEC's timeshare resorts have entered into an agreement with RCI pursuant to which purchasers of timeshare interests in PEC's resorts may apply for membership in the RCI exchange network. Under the terms of these agreements, RCI agrees to make its exchange program available to PEC's customers who apply for membership. RCI and the Owners' Association agree to promote RCI's program and to honor qualified exchanges by members from other participating resorts. The initial five-year terms of the 4 7 agreements are automatically renewable for additional five-year terms, unless either party gives the other party at least 180 days written notice prior to the expiration of the then current term. Either party may terminate the agreement upon a breach of the agreement by the other party. Membership in RCI entitles PEC's customers, based on availability, trading potential (which is based on their timeshare interval), and the payment of a variable exchange fee to RCI, to exchange their occupancy right in the resort in which they own an interest, for an occupancy right at the same or a different time in another participating resort of similar trading potential. The cost of the subscription fee for RCI, which is at the option and expense of the timeshare interest owner, is approximately $63 for the first year and $74 for each annual renewal. Owners' Associations and Property Management PEC's resort properties require ongoing management services. Independent not-for-profit corporations known as Owners' Associations have been established to administer each of PEC's resorts other than the resort in Honolulu. PEC's resort in Honolulu is administered by the White Sands Resort Club, a division of PEC (together with the Owners' Associations, collectively the Associations). Owners of timeshare interests in each of these resorts are responsible for the payment of annual assessment fees to the respective Association, which are intended to fund all of the operating expenses at the resort facilities and accumulate reserves for replacement of furnishings, fixtures and equipment, and building maintenance. Annual assessment fees for 1998 ranged from $249 to $445. PEC has in the past financed budget deficits of the Associations, but is not obligated to do so in the future, except in its Florida resorts. The Public Offering Statements for the Indian Shores and Orlando resorts contain a provision whereby PEC guarantees that the annual assessment fees will not exceed a specified amount, in which case PEC agrees to pay any monetary deficiencies. These guarantees are effective through the Associations' calendar year of December 31, 1999 and may be extended by PEC annually thereafter. In fiscal 1998, PEC financed a budget deficit of $65,000 for the Owners' Association at Indian Shores. During fiscal 1998 and 1997, the Associations had an aggregate excess of $1.2 million and $1.6 million, respectively, of fees received compared to expenses paid. The deficit and/or excess position of the Associations vary primarily due to the timing of major improvement expenditures. Any budget deficits financed by PEC are expected to be recovered in the future by increased assessments to the Associations. If the owner of a timeshare interest defaults in the payments of the annual assessment fee, the Association may impose a lien on the related timeshare interest. PEC has agreed to pay to the Associations the annual assessment fees of timeshare interest owners who are delinquent with respect to such fees, but have paid PEC in full for their timeshare interest. In exchange for the payment by PEC of such fees, the Associations assign their liens for non-payment on the respective timeshare interests to PEC. In the event the timeshare interest holder does not satisfy the lien after having an opportunity to do so, PEC typically acquires a quitclaim deed or forecloses on and acquires the timeshare interest for the amount of the lien and any related foreclosure costs. PEC has entered into management arrangements with the Associations pursuant to which PEC receives annual management and administrative fees in exchange for providing or arranging for various property management services such as bookkeeping, staffing, budgeting, maintenance and housekeeping services. During fiscal 1998, 1997 and 1996, PEC received $2.4 million, $2.2 million and $2.1 million, respectively, of such fees from the Associations. The management arrangements are typically for initial terms ranging from three to five years and automatically renew for successive additional one-year terms unless canceled by the Association. No management arrangement has been canceled to date. The Company believes that proper management is important for maintaining customer satisfaction and protecting PEC's investment in its inventory of unsold timeshare interests. PEC's intent and goal is to manage these properties until all timeshare interests are sold and the receivables generated from such sales have been paid. However, due to cancellations, exchanges and upgrades, none of the resorts are likely to realize a 100% sellout for an extended period of time. The Company believes that continued management of these properties preserves the integrity of the property and the portfolio performance on an ongoing basis beyond the end of the sales period. 5 8 Land Sales PEC is engaged in the retail sale of land in Nevada and Colorado for residential, commercial, industrial and recreational use. PEC acquires lots and large tracts of unimproved land and then subdivides the tracts into lots and parcels for retail sale. Residential lots range in size from one-quarter acre to one and one-half acres, while commercial and industrial lots vary in size. PEC's residential lots generally range in price from $16,000 to $47,000 while commercial and industrial lots generally range in price from $19,000 to $79,000. Improvements such as roads and utilities and, in some instances, amenities are typically part of the development program in Nevada. During fiscal 1998, 1997 and 1996, PEC sold 2,091, 1,459 and 1,610 residential lots, and 12, 50 and 38 commercial and industrial lots, respectively. PEC has a continuing program to plat various properties that it owns. Purchasers of lots and parcels frequently exchange their property after the initial purchase for other property interests offered by PEC. Additionally, PEC is required from time to time to cancel the purchase of lots and parcels as a result of payment defaults or customer cancellations following inspections of the property pursuant to contractual provisions. To date, a substantial portion of PEC's sales of retail lots and land parcels have been in its Calvada subdivisions, containing approximately 30,000 lots in the Pahrump Valley, in Nye County, Nevada, located approximately 60 miles west of Las Vegas. The lots are designated as single family residential, multiple family residential, mobile home, hotel/motel, industrial or commercial. PEC owns a utility company that provides water and sewer service to portions of the subdivisions and two golf courses that are available to property owners and the public. The community of Pahrump has a population of approximately 28,000 and contains an urgent care medical facility, shopping, churches, fast food restaurants, hotel/casino facilities and several schools. The following table illustrates certain statistics regarding the Pahrump valley subdivisions: Number of acres acquired since 1969......................... 18,777 Number of lots platted...................................... 29,849 Net number of lots sold through August 31, 1998............. 29,596 Percent of lots sold through August 31, 1998................ 99% Number of platted lots available for sale at August 31, 1998...................................................... 253 Number of acres available for platting...................... 198 Number of lots to be platted................................ 568 FOR THE YEAR ENDED AUGUST 31, 1998: Number of lots sold......................................... 1,424 Number of lots canceled..................................... (488) Number of lots exchanged.................................... (692) ------ Number of lots sold, net of cancellations and exchanges..... 244 ======
Central Nevada Utilities Company (CNUC), a wholly-owned subsidiary of PEC, operates a sewer and water utility for portions of PEC's Nevada subdivisions and certain other properties located within that subsidiary's certificated service area (which is subject to the regulation of the Public Utilities Commission of Nevada). As of August 31, 1998, CNUC had 1,759 customers. In recent years, connections have grown at an average annual rate of 17% and 14% for residential water and sewer, respectively. PEC also sells larger unimproved tracts of land in Colorado. PEC owns unimproved land in Huerfano County, Colorado, which is being sold for recreational use in parcels of at least 35 acres, at prices ranging from $15,995 to $22,995 depending on location and size. These parcels are sold without any planned improvements and without water rights, which rights have been reserved by PEC, except for an owner's right to drill a domestic well. Substantially all of the parcels have been sold, with approximately 81 parcels remaining in inventory. In February 1998, PEC acquired a substantial tract of land in Park County, Colorado near the town of Hartsel. This property is being sold as 2,137 separate parcels with an average price and size of $23,581 and five acres, respectively. This includes 333 parcels which are awaiting approval of a water augmentation plan by the 6 9 State of Colorado water court, less 172 parcels which will eventually be sold as pairs. As of August 31, 1998, 1,524 parcels remained unsold (excluding those awaiting water court approval). PEC previously acquired improved and unimproved land in Park County, Colorado, known as South Park Ranch, which is being sold for recreational use as 1,872 separate parcels typically ranging in size from 5 to 9 acres or larger and at a price of $16,995. As of August 31, 1998, 1,746 parcels had been sold with 126 parcels remaining in inventory. These parcels are sold without any planned improvements, except for a recreational facility which includes a basketball court, baseball field and picnic facilities. The following table illustrates certain statistics regarding the parcels and lots in Huerfano and Park Counties, Colorado: Number of acres acquired since 1969......................... 60,782 Number of parcels and lots platted.......................... 4,831 Net number of parcels and lots sold through August 31, 1998...................................................... 3,100 Percent of parcels and lots sold through August 31, 1998.... 64% Number of platted parcels and lots available for sale at August 31, 1998........................................... 1,731 FOR THE YEAR ENDED AUGUST 31, 1998: Number of parcels and lots sold............................. 679 Number of parcels and lots canceled......................... (199) Number of parcels and lots exchanged........................ (182) ------ Number of parcels and lots sold, net of cancellations and exchanges................................................. 298 ======
For the fiscal years ended August 31, 1998, 1997 and 1996, respectively, PEC's net revenue from land sales was approximately $13.8 million, $16.6 million and $18 million, representing approximately 20.1%, 24.7% and 29.6% of total revenues. Trust Arrangements Title to certain of PEC's resort properties and land parcels in Huerfano County, Colorado is held in trust by trustees to meet regulatory requirements which were applicable at the time of the commencement of sales. In connection with sales of timeshare interests pursuant to "right-to-use" or installment sales contracts, title to certain of PEC's resort properties in the states of Nevada and Hawaii are held in trust by trustees to meet requirements of certain state regulatory authorities. Prior to 1988, PEC sold timeshare interests in certain of its resorts in the state of Nevada pursuant to "right-to-use" contracts and continues in other resorts to sell under installment sales contracts under which the purchaser does not receive a deed until the purchase price is paid in full. In addition, PEC offers "right-to-use" interests in its resort in Hawaii, since it is on leased property. In connection with the registration of the sale of such "right to use" timeshare interests, the Department of Real Estate of the state of Nevada and the Department of Commerce and Consumer Affairs of the state of Hawaii require that title to the related resorts be placed in trust. Customer Financing PEC provides financing to virtually all the purchasers of its timeshare interests, retail lots and land parcels who make a down payment equal to at least 10% of the purchase price. The financing is generally evidenced by non-recourse installment sale contracts as well as notes secured by deeds of trust. Currently, the term of the financing generally ranges from two to twelve years, with principal and interest payable in equal monthly payments. Interest rates are fixed and generally range from 12.5% to 15.5% per year based on prevailing market rates and the amount of the down payment made relative to the sales price. PEC has a sales program whereby a 5% interest rate is charged on those sales where the aggregate down payment is at least 50% of the purchase price and the balance is payable in 36 or fewer monthly payments. PEC believes its financing is attractive to purchasers who find it convenient to handle all facets of the purchase through a single source. At August 31, 1998, PEC serviced a customer receivables portfolio of 16,704 notes receivable relating to sales of timeshare interests and land, which receivables had an aggregate outstanding principal balance of $117.2 million, a weighted-average maturity of approximately 6.7 years and a weighted-average interest rate of 11.9%. 7 10 PEC has 6 financing arrangements with 5 institutional lenders for the financing of customer receivables, which provide for borrowings of up to an aggregate of $137.5 million. These lines of credit bear interest at variable rates tied to the prime rate and 90 day London Interbank Offering Rate (LIBOR) and are secured by timeshare and land receivables and inventory. At August 31, 1998, an aggregate of $77.4 million was outstanding under such lines of credit and $60.1 million was available for borrowing. PEC periodically sells its timeshare and land receivables to various third party purchasers and uses a portion of the sales proceeds to reduce the outstanding balances of its lines of credit, thereby increasing the borrowing availability under such lines by the amount of prepayment. The sales have generally resulted in yields to the purchaser less than the weighted-average yield on the receivables, with PEC entitled to retain the difference, the estimated value of which is carried as interest only receivables. The sales agreements generally provide for PEC to continue servicing the sold receivables, and require that PEC repurchase or replace accounts that have become more than 90 days contractually delinquent, or as to which certain warranties and representations are determined to be incorrect. In addition, the sales agreements generally require the maintenance of cash reserve accounts for losses and contain minimum net worth requirements and other covenants, the non-compliance with which would allow the purchaser to replace PEC as the servicer. The sales agreements for timeshare receivables contain certain covenants that generally require PEC to use its best efforts to remain the manager of the related resorts and to cause the Associations to maintain appropriate insurance and pay the real estate taxes. Performance by PEC of such covenants generally is guaranteed by the Company. The principal balances of receivables sold by PEC were $9.4 million, $30.1 million and $16 million during fiscal 1998, 1997 and 1996, respectively. At August 31, 1998, PEC was contingently liable to replace or repurchase receivables sold with recourse in the aggregate amount of $66.8 million, if and as such receivables become delinquent. Delinquencies greater than 60 days have increased in fiscal 1998 from fiscal 1997 primarily due to a change in emphasis in the Collection Department. The Preferred Client Services (PCS) group was instituted to work with the portfolio and develop better relationships with customers, thus reducing otherwise potential cancellations. There is a much greater focus on working with the purchasers and their individual problems rather than merely demanding repayment of debt. These procedures primarily contributed to a decrease in cancellations to $15.3 million during fiscal 1998 from $20.3 million in fiscal 1997, a 24.8% decrease. PEC charges off or fully reserves all receivables that are more than 90 days delinquent. The following table sets forth information with respect to receivables owned and sold that were 60 or more days delinquent, excluding accounts that have been fully reserved or charged-off, as of the dates indicated (thousands of dollars):
AUGUST 31, ---------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- 60-day delinquent.............. $ 11,836 $ 5,233 $ 6,685 $ 5,407 $ 5,330 Total receivables.............. $136,509 $137,688 $132,438 $123,752 $112,688 60-day delinquency percentage................... 8.67% 3.80% 5.05% 4.37% 4.73%
The 60-day delinquent amounts include any account that is contractually 60 days delinquent, including those accounts whereby customers are still making payments but have not cured their delinquency status. PEC provides an allowance for cancellations at the time it recognizes revenues from sales of timeshare interests, which PEC believes, based on its experience and its analysis of economic conditions, is adequate to absorb losses on receivables that become uncollectible. Upon the sale of the receivables, the allowance related to those receivables is reduced and the reserve for notes receivable sold with recourse is appropriately increased. Marketing PEC markets timeshare interests and land through on-site and off-site sales offices. PEC's sales staff receives commissions based on net sales volume. PEC maintains fully-staffed on-site sales offices at its timeshare properties in Las Vegas and Reno, Nevada; Steamboat Springs, Colorado; Indian Shores and Orlando, Florida; and, Brigantine, New Jersey; as well as the Las Vegas headquarters, and at its land projects in Nevada and Colorado. In Hawaii, brokers for PEC maintain a smaller on-site sales office staffed with one to 8 11 two sales associates. PEC also maintains off-site sales offices in West Covina, California, Dallas, Texas and Denver, Colorado and plans to open an office in Houston, Texas. PEC's marketing efforts are targeted primarily at tourists meeting its customer profile. Currently, approximately 37.1% of sales are made through the Las Vegas sales office. One of the principal sales techniques utilized by PEC in Las Vegas is to offer pre-screened potential customers a gift such as show tickets in exchange for attending PEC's sales presentations. In addition, to show tickets, other inducements such as local tour packages, dinners, and short-term room accommodations are also offered. The marketing techniques utilized at PEC's sales offices at locations other than Las Vegas include (i) exhibition booths located at shows, fairs and other attractions, that generate inquiries from prospective customers, whom PEC then contacts by telephone, (ii) referrals from existing customers, (iii) limited direct mail programs, and (iv) brokers specializing in lead generation. Various premiums and inducements are offered to prospective customers to obtain their attendance at sales presentations, including the offer of short-term accommodations at certain of PEC's timeshare resorts. As part of its marketing strategy, PEC maintains an internal exchange program. This program enables owners of PEC's timeshare interests to exchange their occupancy right in the resort in which they own an interest for an occupancy right at the same or a different time in another of PEC's timeshare resorts. In addition, PEC has a sales program pursuant to which purchasers of its timeshare interests, retail lots and land may exchange their equity interests in one property for an interest in another of PEC's properties. For example, a purchaser of a timeshare interest in one of PEC's timeshare resorts may exchange his equity interest for an interest in a different unit within the same resort, for an interest in one of PEC's other resorts or for a retail lot or land parcel. The agreement of sale for a timeshare interest or land may be rescinded within various statutory rescission periods. For land sales made at a location other than the property, the customer may generally cancel the contract within a specified period, usually five months from the date of purchase, provided that the contract is not in default, and provided the customer has completed a developer-guided inspection and tour of the subject property first, and then requests the cancellation. At August 31, 1998, $730,000 of recognized sales remained subject to such cancellation. If a customer defaults after all rescission and cancellation periods have expired, all payments are generally retained by PEC, and the customer forfeits all rights to the property. SEASONALITY Sales of timeshare interests and land are somewhat seasonal. For the fiscal years ended August 31, 1998, 1997 and 1996, quarterly sales as a percentage of annual sales, for each of the fiscal quarters averaged:
QUARTER ENDED % OF ANNUAL SALES ------------- ----------------- November 30................................................. 23.7 February 28................................................. 24.0 May 31...................................................... 26.6 August 31................................................... 25.7 ----- 100.0% =====
The majority of the Company's customers are tourists. The Company's major marketing area, Las Vegas, Nevada, reaches peaks of tourist activity at periods different from the Company's other major marketing areas, such as Reno, Nevada and Denver, Park and Huerfano Counties, Colorado, which are more active in summer than in winter. The Company's other major marketing areas, Honolulu, Hawaii, and Orlando, Florida, are not subject to seasonality. The Company is not dependent upon a limited number or segment of customers whose loss would have a material adverse effect on the Company. COMPETITION The timeshare and real estate industries are highly competitive. Competitors in the timeshare and real estate business include hotels, other timeshare properties and real estate properties. Certain of the Company's competitors are substantially larger and have more capital and other resources than the Company. 9 12 PEC's timeshare plans compete directly with many other timeshare plans, some of which are in facilities located in Las Vegas, Reno, Lake Tahoe, Honolulu, Atlantic City, Orlando, Tampa, and Steamboat Springs. In recent years, several major lodging, hospitality and entertainment companies have begun to develop and market timeshare properties. According to ARDA data, in 1997, approximately 31.5% of timeshare resorts were located in the Mountain/Pacific region of the United States, 23.6% in Florida, 12% in the Northeast region, 16.5% in the Southeast region and 16.4% in the Central region of the United States. In addition, PEC competes with condominium projects and with traditional hotel accommodations in these areas. Certain of these competing projects and accommodations are larger and more luxurious than PEC's facilities. There are currently available approximately 108,000 hotel and motel rooms in Las Vegas, Nevada; 37,000 in Honolulu, Hawaii; 22,000 in Washoe County, Nevada, which includes Reno and Lake Tahoe; 98,000 in the Orlando, Florida metropolitan area; 24,000 in the Indian Shores, Florida area; 23,000 in Atlantic City, New Jersey and 3,000 in Steamboat Springs, Colorado. GOVERNMENT REGULATION The Company's timeshare and real estate operations are subject to extensive regulation, potential suspension and licensing requirements by federal and state authorities. The following is a summary of the regulations applicable to the Company. Environmental Regulation Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or chemical releases at such property, and may be held liable to a governmental entity or to third parties for property damage, personal injury and investigation and cleanup costs incurred by such parties in connection with the contamination. Such laws typically impose cleanup responsibility and liability without regard to whether the owner knew of or caused the presence of the contaminants, and the liability under such laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The costs of investigation, remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to properly remediate such property, may adversely affect the owner's ability to sell or rent such property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances also may be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not the facility is owned or operated by such person. In addition, the owner or former owners of a site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site. Timeshare Regulation Nevada Revised Statutes Chapter 119A requires the Company to give each customer a Public Offering Statement that discloses all aspects of the timeshare program, including the terms and conditions of sale, the common facilities, the costs to operate and maintain common facilities, the Company's history and all services and facilities available to the purchasers. Section 514E of the Hawaii Revised Statutes provides for similar information to be provided to all prospective purchasers through the use of the Hawaii Disclosure Statement, just as Chapter 721 of the Florida Statutes similarly provides through the use of a Public Offering Statement. Section 11000, et seq., of the California Business and Professions Code also provides for similar information to be provided to all prospective purchasers through the use of an Out-of-state Timeshare Permit issued by the California Department of Real Estate. Section 45 of the New Jersey Statutes Annotated provides for similar information to be provided to all prospective purchasers through the use of a Public Offering Statement. The Texas Register at 22 Texas Administrative Code, Section 543 provides for similar information to be provided to all prospective purchasers through the use of the Texas Timeshare Disclosure Statement, and similarly, the Mississippi Real Estate Commission requires that the situs state Public Offering Statement provides prospective purchasers with the same information. Title 12, Article 61 of the Colorado Revised Statutes provides for similar information to be provided to all prospective purchasers in their contracts of sales or by 10 13 separate written documents. Nevada and Colorado require a five-day rescission period for all timeshare purchasers. The rescission period required by Hawaii and New Jersey is seven days. The rescission period required by Florida is ten days. The rescission period in California, Mississippi and Texas for out-of-state sales is five days. The Nevada, California, New Jersey, Hawaii, Colorado, Texas, Florida, Mississippi and Texas timeshare statutes have stringent restrictions on sales and advertising practices and require the Company to utilize licensed sales personnel. Lending Regulation PEC is subject to various federal lending regulations related to marketing, financing and selling consumer receivables. These federal regulations include: Fair Housing Act, Americans With Disabilities Act, Interstate Land Sales Full Disclosure Act, Truth-In-Lending Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Federal Trade Commission Telemarketing Rule, Federal Communications Commission Telephone Census Protection Act, Federal Trade Commission Act (Unfair or Deceptive Act or Practices) and Fair Debt Collections Practices Act. The Company believes that it has made all required filings with state, city and county authorities and is in material compliance with all federal, state and local regulations governing timeshare interests. The Company believes that such regulations have not had a material adverse effect on any phase of the Company's operations, including the overall cost of acquiring property. Compliance with or changes in official interpretations of regulations might, however, impose additional compliance costs on the Company that cannot be predicted. Real Estate Regulation The real estate industry is subject to extensive regulation. The Company is subject to compliance with various federal, state and local environmental, zoning and other statutes and regulations regarding the acquisition, subdivision, development and sale of real estate and various aspects of its financing operations. The Interstate Land Sales Full Disclosure Act establishes strict guidelines with respect to the subdivision and sale of land in interstate commerce. The U.S. Department of Housing and Urban Development (HUD) has enforcement powers with respect to this statute. In some instances (e.g., land sales in Huerfano County, Colorado), the Company has been exempt from HUD registration requirements because of the size or number of the subdivided parcels and the limited nature or type of its offerings. The Company registers its timeshare properties with various state agencies. The Company must disclose financial information concerning the property, evidence of title, a description of the intended manner of offering, proposed advertising materials, and must bear the costs of such registration, which include legal and filing fees. The Company believes that it is in compliance, in all material respects, with all applicable federal, state and local regulations. The Company believes that such regulations have not had a material adverse effect on any phase of its operations. Compliance with future changes in regulations might, however, impose additional compliance costs on the Company that cannot be predicted. The city and county governments in areas where the Company operates have enacted licensing and other ordinances that affect timeshare projects. Advertising Regulation In addition to requirements imposed by the various state timeshare acts, PEC's marketing and advertising procedures are subject to the Federal Trade Commission Act (Unfair and Deceptive Practices), Federal Trade Commission Telemarketing Rules, Federal Communication Commission Telephone Consumer Protection Act, Fair Housing Act, Equal Credit Opportunity Act and various state consumer protection laws regulating telephone solicitations, the sale of travel, and sweepstakes, both in states in which PEC timeshare resorts are located or registered and in states in which it advertises. 11 14 EMPLOYEES As of August 31, 1998, PEC had 1,292 employees, of whom 1,191 were full-time employees and 101 were part-time employees. Full-time employees were comprised of the following: 655 sales and marketing officers and personnel, 174 general and administrative officers, managers and support staff, 349 hotel personnel, and 13 utility company personnel. None of PEC's employees are represented by a collective bargaining unit. The Company believes that its relations with its employees are satisfactory. ITEM 2. PROPERTIES At August 31, 1998, the Company had 253 residential, commercial and industrial lots, 1,731 recreational land parcels, 1,248 recreational vehicle intervals, and 11,273 timeshare interests in its inventory. In addition, the Company maintains the following properties: The Company's principal executive offices are located at 4310 Paradise Road, Las Vegas, Nevada 89109, where it occupies approximately 31,000 square feet of office space in a building it owns. Title to the property is held by the Company. The Company owns a second office building located in Las Vegas, Nevada. This building has approximately 67,500 square feet of office space, of which the Company occupies approximately 49,800 square feet. The remaining approximately 17,700 square feet is leased to tenants on a short-term basis. The Company leases an executive office at 1125 N. E. 125th Street in North Miami, Florida, comprising approximately 3,200 square feet, at a rental of $2,400 per month. The lease has been extended to December 1998. The Company leases various other facilities on a short-term or month-to-month basis for off-site sales offices in various cities throughout the United States. ITEM 3. LEGAL PROCEEDINGS Following the Company's November 10, 1995 announcement disclosing certain accounting adjustments, an action was filed on November 13, 1995, in the United States District Court, District of Nevada (Court) by Christopher Dunleavy, as a purported class action against the Company, certain of the Company's officers and directors and the Company's independent auditors. The complaint alleged, among other things, that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder in connection with the preparation and issuance of certain of the Company's financial reports issued in 1994 and 1995, including certain financial statements reported on by the Company's independent auditors. The complaint also alleged that one of the director defendants violated the federal securities laws by engaging in "insider trading." The named plaintiff sought to represent a class consisting of purchasers of Mego Financial's common stock between January 14, 1994 and November 9, 1995, and sought damages in an unspecified amount, costs, attorney's fees and such other relief as the court may deem just and proper. On November 16, 1995, a second action was filed in the Court by Alan Peyser as a purported class action against the Company and certain of its officers and directors, which was served on the Company on December 20, 1995. The complaint alleged, among other things, that the defendants violated the federal securities laws by making statements and issuing certain financial reports in 1994 and 1995 that overstated the Company's earnings and business prospects. The named plaintiff sought to represent a class consisting of purchasers of Mego Financial's common stock between November 28, 1994 and November 9, 1995. The complaint sought damages in an unspecified amount, cost, attorney's fees and such other relief as the Court may deem just and proper. On or about June 10, 1996, the Dunleavy and Peyser Actions were consolidated under the caption "In re Mego Financial Corp. Securities Litigation," Master File No. CV-9-95-01082-LD (RLJ), pursuant to a stipulation by the parties. On December 26, 1996, a third action was filed in the Court by Michael Nadler as a purported class action. The Nadler complaint asserts claims substantially similar to those in the Dunleavy and Peyser Actions. 12 15 On April 23, 1998, counsel for the plaintiffs in the Dunleavy and Peyser actions, and counsel for the defendants filed in the Court a Stipulation and Agreement of Settlement (the Settlement Agreement) in accordance with a prior Memorandum of Understanding dated May 12, 1997. The Settlement Agreement, which was subject to a number of conditions, including approval by the Court, calls for certification, for settlement purposes only, of a class consisting of all purchasers of Mego Financial stock (excluding the defendants and their respective directors, executive officers, partners and affiliates and their respective immediate families, heirs, successors and assigns) during the period from January 14, 1994 through November 9, 1995, inclusive, for creation of a settlement fund of $1.725 million to be distributed to the class, for the dismissal of all claims asserted in the actions with prejudice and for certain releases to defendants. The portion of the settlement amount which has been contributed by the Company, net of directors and officers insurance proceeds, with contribution by another defendant, has not had a material adverse effect on the Company. On October 19, 1998, the Court issued a Final Judgment and Order of Dismissal with Prejudice, approving the Settlement Agreement, which will not become final until the Effective Date, which is the date following either the expiration of any appeal period without appeal, the date following the affirmation of the Final Judgment on appeal, and on which such Final Judgment is no longer subject to further judicial review. On November 13, 1998, Michael Nadler, who had filed objections to the settlement, filed a Notice of Appeal from the Final Judgment and Order of Dismissal with Prejudice and certain other orders of the Court. In the event, for any reason, the Final Judgment is vacated, the Company believes that it has substantial defenses to all of the complaints that have been filed against it described above. However, the Company presently cannot predict the outcome of this matter. On February 23, 1998, an action was filed in the United States District Court for the Northern District of Georgia, Civil Action No.1:98CV0593-CAM, by Robert J. Feeney, plaintiff, as a purported class action against MMC and Jeffrey S. Moore, the former President and Chief Executive Officer of MMC. The complaint alleges, among other things, that the defendants violated the federal securities laws in connection with the preparation and issuance of certain of MMC's financial statements. The named plaintiff seeks to represent a class consisting of purchasers of the common stock of MMC between April 11, 1997 and December 18, 1997, and seeks such other relief as the Court may deem just and proper. An amended complaint was filed in such matter on or about June 29, 1998, which amended complaint, among other things, adds Mego Financial as a defendant, adds John Cole, Trent Hildebrand, Burt W. Price and Frank J. Murphy as Plaintiffs and alleges an expansion of the purported class to certain purchasers of MMC's common stock from April 11, 1997 through May 20, 1998. However, the Company was not the parent company of MMC at the time when the majority of the matters which are cited in the above-described action occurred. Motions to dismiss the complaint have been filed by the defendants. The Company does not believe that any judgment obtained will have a material adverse effect on the Company's or PEC's business or financial condition. On August 27, 1998, an action was filed in the United States District Court, County of Clark, State of Nevada, No. A392585, by Robert and Jocelyne Henry, husband and wife individually and on behalf of all others similarly situated. The plaintiffs have filed a complaint for class action relief claiming the Company is guilty of: breach of contract; unjust enrichment; customer fraud; and bait and switch tactics as a result of a solicitation of betterment fees pursuant to a letter sent to certain lot owners on January 26, 1995 (Letter). The Letter was sent to approximately 1,400 lot owners stating that their lots would be buildable by April 1, 1995 as a result of sewer and water lines being run near their respective lots. The Letter offered to accept a betterment fee payment in the amount of $2,380 per lot prior to an anticipated increase. The Plaintiffs paid the fee and claimed they did not have a buildable lot as sewer and water lines that were run did not reach their property. The Company does not believe a determination in favor of the Plaintiffs will result in a material judgment against the Company. Only approximately 350 customers accepted the offer presented in the Letter and a number of those customers own lots that are buildable. The Company is reviewing the various claims with counsel. In the general course of business the Company, at various times, has been named in other 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. 13 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year ended August 31, 1998. However, on September 16, 1998, the Company held its annual meeting of shareholders at which the 6 incumbent Directors were re-elected, and the approval of the Company's Amended and Restated Stock Option Plan was approved by the Company's Shareholders. 14 17 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS MARKET INFORMATION The Company's common stock is traded in the over-the-counter market and since April 1, 1994, prices have been quoted on the Nasdaq National Market under the symbol MEGO. Prior to April 1, 1994, the common stock was quoted on the Nasdaq Small Cap Market under the symbol MEGO and, prior to May 1, 1994, was traded on the Boston Stock Exchange under the symbol MGO. The following table sets forth the high and low sales prices of the common stock as reported on the Nasdaq National Market for the periods presented:
HIGH LOW ---- --- FISCAL YEAR 1997: First Quarter............................................... 10 5 5/8 Second Quarter.............................................. 9 1/4 7 1/4 Third Quarter............................................... 8 1/8 5 1/2 Fourth Quarter.............................................. 9 1/4 6 3/8 FISCAL YEAR 1998: First Quarter(1)............................................ 8 3/16 2 3/4 Second Quarter.............................................. 5 1/4 3 1/4 Third Quarter............................................... 5 5/8 3 13/16 Fourth Quarter.............................................. 3 13/16 1 15/16 FISCAL YEAR 1999: First Quarter (through November 9, 1998).................... 2 1/4 11/16
- --------------- (1) On September 2, 1997, the Company distributed all of its 10 million shares of MMC's common stock to the Company's shareholders in the Spin-off. The Company believes the decline in the closing price of the common stock on September 3, 1997 to $3 1/8 per share from the closing price on September 2, 1997 of $8 per share is directly attributable to the Spin-off. As of November 9, 1998, there were 1,919 holders of record of the 21,009,506 outstanding shares of common stock. The closing sales price for the common stock on November 9, 1998 was $1.13. See "Item 1. Business -- General," "Item 7. MD&A -- Discontinued Operations of MMC" and Note 3 of Notes to Consolidated Financial Statements. The Company did not pay any cash dividends on its common stock during the fiscal years ended August 31, 1998 and 1997. The Company intends to retain future earnings for the operation and expansion of its business and does not currently anticipate paying cash dividends on its common stock. Any future determination as to the payment of such cash dividends would depend on a number of factors including future earnings, results of operations, capital requirements, the Company's financial condition and any restrictions under credit agreements 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. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected financial data set forth below have been derived from the consolidated financial statements of the Company and its subsidiaries. The consolidated financial statements as of August 31, 1998 and 1997 and for each of the three years in the period ended August 31, 1998 have been audited by Deloitte & Touche LLP, independent auditors, and are included elsewhere herein. The consolidated financial statements as of August 31, 1996, 1995 and 1994 and for the years ended August 31, 1995 and 1994 have been audited by Deloitte & Touche LLP, independent auditors, and are not included herein. 15 18 Certain reclassifications have been made to conform prior years with the current year presentation. As a result of the Spin-off, all fiscal years presented reflect the financial results of MMC as a discontinued operation as of September 1, 1993. See "Item 1. Business -- General," "Item 7. MD&A -- Discontinued Operations of MMC" and Note 3 of Notes to Consolidated Financial Statements for additional information regarding the Spin-off. The selected financial information set forth below should be read in conjunction with the consolidated financial statements, the related notes thereto and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein (thousands of dollars, except per share amounts): CONSOLIDATED SELECTED FINANCIAL DATA(1)(2)
FOR THE YEARS ENDED AUGUST 31, ------------------------------------------------------------------- 1998 1997 1996 1995 1994(3) ----------- ----------- ----------- ----------- ----------- STATEMENTS OF OPERATIONS' DATA: REVENUES OF CONTINUING OPERATIONS: Timeshare interest sales, net............. $ 37,713 $ 32,253 $ 27,778 $ 20,682 $ 19,521 Land sales, net........................... 13,812 16,626 17,968 20,812 13,534 Gain on sale of notes receivable.......... 656 2,013 1,116 1,586 875 Interest income........................... 7,161 7,168 6,594 7,238 8,089 Financial income.......................... 3,304 2,922 1,253 508 30 Other(4).................................. 5,944 6,514 5,943 6,687 5,969 ----------- ----------- ----------- ----------- ----------- Total revenues of continuing operations..................... 68,590 67,496 60,652 57,513 48,018 ----------- ----------- ----------- ----------- ----------- COSTS AND EXPENSES OF CONTINUING OPERATIONS: Cost of sales(5).......................... 11,789 10,477 8,099 7,749 6,992 Marketing and sales....................... 34,167 34,078 30,351 23,690 18,949 Depreciation.............................. 2,245 1,964 1,526 1,131 1,072 Interest expense.......................... 7,850 8,458 7,314 6,306 4,707 General and administrative................ 17,736 17,175 15,849 12,909 11,274 Payments to assignors..................... -- -- -- 7,252 8,526 ----------- ----------- ----------- ----------- ----------- Total costs and expenses of continuing operations.......... 73,787 72,152 63,139 59,037 51,520 ----------- ----------- ----------- ----------- ----------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES..................... (5,197) (4,656) (2,487) (1,524) (3,502) Income taxes (benefit).................... (1,968) (12,662) (1,068) 1,016 761 ----------- ----------- ----------- ----------- ----------- INCOME (LOSS) FROM CONTINUING OPERATIONS.............................. (3,229) 8,006 (1,419) (2,540) (4,263) Income (loss) from discontinued operations, net of income taxes and minority interest(6).................... -- 11,334 6,270 3,434 (1,511) Gain on prior discontinued operations, net of income taxes of $450(7).............. -- -- -- 873 -- ----------- ----------- ----------- ----------- ----------- NET INCOME (LOSS)......................... (3,229) 19,340 4,851 1,767 (5,774) Cumulative preferred stock dividends(8)... -- -- 240 360 360 ----------- ----------- ----------- ----------- ----------- NET INCOME (LOSS) APPLICABLE TO COMMON STOCK................................... $ (3,229) $ 19,340 $ 4,611 $ 1,407 $ (6,134) =========== =========== =========== =========== =========== PER SHARE DATA(9): BASIC: Income (loss) from continuing operations.............................. $ (0.15) $ 0.43 $ (0.08) $ (0.14) $ (0.24) Income (loss) from discontinued operations.............................. -- 0.61 0.34 0.19 (0.08) Gain on prior discontinued operations..... -- -- -- 0.05 -- Cumulative preferred stock dividends...... -- -- (0.01) (0.02) (0.02) ----------- ----------- ----------- ----------- ----------- Net income (loss) applicable to common stock................................... $ (0.15) $ 1.04 $ 0.25 $ 0.08 $ (0.34) =========== =========== =========== =========== =========== Weighted-average number of common shares.................................. 21,009,506 18,657,224 18,117,122 18,087,121 17,802,012 =========== =========== =========== =========== ===========
16 19
FOR THE YEARS ENDED AUGUST 31, ------------------------------------------------------------------- 1998 1997 1996 1995 1994(3) ----------- ----------- ----------- ----------- ----------- DILUTED (10): Income (loss) from continuing operations.............................. $ (0.15) $ 0.41 $ (0.08) $ (0.14) $ (0.24) Income from discontinued operations....... -- 0.58 0.33 0.19 (0.08) Gain on prior discontinued operations..... -- -- -- 0.05 -- Cumulative preferred stock dividend....... -- -- (0.01) (0.02) (0.02) ----------- ----------- ----------- ----------- ----------- Net income applicable to common stock..... $ (0.15) $ 0.99 $ 0.24 $ 0.08 $ (0.34) =========== =========== =========== =========== =========== Weighted-average number of common shares and common share equivalents outstanding............................. 21,009,506 19,528,470 19,114,888 18,646,616 17,802,012 =========== =========== =========== =========== =========== BALANCE SHEET DATA: Total assets.............................. $ 142,076 $ 178,303 $ 145,505 $ 107,910 $ 87,319 Net assets of discontinued operations..... -- 53,276 30,514 19,234 4,139 Total liabilities excluding subordinated debt.................................... 117,049 100,745 109,963 76,328 67,796 Subordinated debt(11)..................... 4,348 4,321 9,691 9,352 -- Redeemable preferred stock................ -- -- -- 3,000 3,000 Total stockholders' equity................ 20,679 73,237 25,851 19,230 16,523
- --------------- (1) On September 2, 1997, the Company distributed all of its 10 million shares of MMC's common stock to the Company's shareholders in a tax-free Spin-off. The operations of MMC have been reclassified as discontinued operations and prior years' Consolidated Financial Statements of the Company included herein reflect the reclassification accordingly. See "Item 1. Business -- General," "Item 7. MD&A -- Discontinued Operations of MMC" and Note 3 of Notes to Consolidated Financial Statements. (2) The statements of operations' data, per share data and balance sheet data herein for the five fiscal years are not necessarily indicative of the results to be expected in the future. Certain reclassifications have been made to conform prior years with the current presentation. (3) The Company has restated certain of its previously issued financial statements including for the year ended August 31, 1994, upon which its independent auditors had rendered unqualified opinions. The financial data presented herein gives effect to those restatements. (4) Other revenues include incidental operations, management fees from owners' associations, and amortization of negative goodwill. (5) Direct cost of sales includes costs of sales of timeshare interests, land and incidental operations. (6) Income from discontinued operations, net of taxes and minority interest, includes the net income from MMC, after tax, reduced by the related minority interests and certain general and administrative expense related to the discontinued operations. (7) A gain on discontinued operations of $873,000 after deducting $450,000 of tax was recognized in fiscal 1995. (8) See Note 15 of Notes to Consolidated Financial Statements. (9) No cash dividends per common share were declared during the fiscal years included herein. (10) The incremental shares from assumed conversions are not included in computing the diluted per share amounts for the years ended August 31, 1998 and 1994 because the Company incurred a net loss and the effect would be anti-dilutive. (11) In payment of the exercise price of $4,250,000 of warrants exercised for 1,000,000 shares of the Company's common stock by the Assignors, the subordinated debt due to the Assignors was reduced by that amount in August 1997. See Note 14 of Notes to Consolidated Financial Statements and "Item 13. Certain Relationships and Related Transactions." 17 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS The following Management's Discussion and Analysis of Financial Condition and Results of Operations and the foregoing Business sections contain certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made by and information currently available to management. Such forward-looking statements include, without limitation, the Company's expectation and estimates as to the Company's business operations, including the introduction of new timeshare and land sales programs and future financial performance, including growth in revenues and net income and cash flows. Such forward-looking statements also include, without limitation, the Company's expectations and beliefs as to the projected costs and anticipated timetable to address Year 2000 compliance issues, the adequacy of its plans to address such issues and the impact on the Company's operations in the event that certain or all of its plans or the plans of its lenders and other third parties in respect of such compliance issues prove to be inadequate. In addition, included herein the words "anticipates," "believes," "estimates," "expects," "plans," "intends" and similar expressions, as they relate to the Company or its management, are intended to identify forward-looking statements. Such statements reflect the current views of the Company's management with respect to future events and are subject to certain risks, uncertainties and assumptions. In addition, the Company specifically advises readers that the factors listed under the caption "Liquidity and Capital Resources" could cause actual results to differ materially from those expressed in any forward-looking statement. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements, including the notes thereto, contained elsewhere herein. GENERAL The business of the Company after the acquisition of PEC (see "Item 1. Business" and "Item 13. Certain Relationships and Related Transactions"), and following the Spin-off, is primarily the marketing, financing, and sale of timeshare interests, retail lots and land parcels, and servicing the related notes receivable. Discontinued Operations of Mego Mortgage Corporation The Company formed MMC in June 1992 as a wholly-owned subsidiary and operated MMC as such until November 1996. MMC is a specialized consumer finance company that originates, purchases, sells, securitizes and services consumer loans consisting primarily of conventional uninsured home improvement and debt consolidation loans which are generally secured by liens on residential property. In November 1996, MMC consummated the IPO and as a result, the Company's ownership of MMC was reduced to approximately 81.3% of the outstanding common stock. On September 2, 1997, the Company distributed all of its 10 million shares of MMC's common stock to the Company's shareholders in the Spin-off. To fund MMC's past operations and growth and in conjunction with a Tax Allocation and Indemnity Agreement dated November 19, 1996 (Tax Agreement), MMC incurred debt and other obligations due to the Company and its subsidiary, PEC. The amount of debt due to the Company was $10.1 million at August 31, 1997, of which $3.4 million was paid by MMC in October 1997 together with $500,000 advanced by the Company to PEC on behalf of MMC in September 1997. In April 1998, an agreement was made to adjust the balance due on the receivable by a reduction of the income tax portion in the amount of $5.3 million previously deemed owed by MMC to the Company under the Tax Agreement, since that amount was no longer payable under that agreement. As of the date of the April 1998 agreement, MMC owed the Company an estimated total of $6.2 million, of which $5.3 million was the estimated amount due to the Company under the Tax Agreement prior to the Spin-off. An agreement was subsequently made to settle the remaining $870,000 balance due the Company by MMC. In consideration of this settlement, MMC paid the entire amount of $1.6 million, which was separately owed to PEC, in June 1998. Following this transaction, MMC 18 21 had no outstanding indebtedness to the Company. MMC also had agreements with PEC for providing management services and loan servicing. The accompanying Consolidated Statements of Operations reflect the operating results of MMC as discontinued operations in accordance with APB Opinion No. 30. For additional information see Note 3 of Notes to Consolidated Financial Statements. The Consolidated Statement of Operations for the fiscal year ended August 31, 1998, and the Consolidated Pro Forma Statements of Operations for the fiscal years ended August 31, 1997 and 1996, reflect the continuing operations of the Company. Consolidated Pro Forma Statements of Operations of continuing operations are also presented below for each of the quarters of fiscal 1997. The Consolidated Pro Forma Statements of Operations are unaudited and are based on the historical statements of the periods presented and provide an understanding of the results of the Company on a stand-alone basis excluding the operations of MMC and the prior discontinued operations. The Consolidated Pro Forma Statements of Operations give effect to the Spin-off as if it had occurred prior to September 1, 1995 and are presented for comparative purposes only (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, ------------------------------ PRO FORMA ------------------- 1998 1997 1996 ------- -------- ------- REVENUES: Timeshare interest and land sales, net............... $51,525 $ 48,879 $45,746 Gain on sale of receivables.......................... 656 2,013 1,116 Interest income...................................... 7,161 7,168 6,594 Financial income and other........................... 9,248 9,436 7,196 ------- -------- ------- Total revenues............................. 68,590 67,496 60,652 ------- -------- ------- EXPENSES: Direct costs of timeshare interest and land sales.... 9,145 7,493 5,842 Operating expenses................................... 56,792 56,201 49,983 Interest expense..................................... 7,850 8,458 7,314 ------- -------- ------- Total expenses............................. 73,787 72,152 63,139 ------- -------- ------- Loss before income taxes............................. (5,197) (4,656) (2,487) Income taxes (benefit)............................... (1,968) (12,662) (1,068) ------- -------- ------- Income (loss) from continuing operations............. (3,229) 8,006 (1,419) Cumulative preferred stock dividends................. -- -- 240 ------- -------- ------- Net income (loss) applicable to common stock......... $(3,229) $ 8,006 $(1,659) ======= ======== =======
19 22
FOR THE THREE MONTHS ENDED ----------------------------------------------------- AUGUST 31, MAY 31, FEBRUARY 28, NOVEMBER 30, PRO FORMA 1997 1997 1997 1996 --------- ---------- ------- ------------ ------------ REVENUES: Timeshare interest and land sales, net................................. $12,774 $13,202 $11,956 $10,947 Gain on sale of receivables........... 620 503 441 449 Interest income....................... 1,828 1,941 1,762 1,637 Financial income and other............ 2,219 2,609 2,493 2,115 ------- ------- ------- ------- Total revenues.............. 17,441 18,255 16,652 15,148 ------- ------- ------- ------- EXPENSES: Direct costs of timeshare interest and land sales.......................... 2,501 1,746 1,612 1,634 Operating expenses.................... 14,967 14,326 14,014 12,894 Interest expense...................... 2,107 2,084 2,116 2,151 ------- ------- ------- ------- Total expenses.............. 19,575 18,156 17,742 16,679 ------- ------- ------- ------- Income (loss) before income taxes..... (2,134) 99 (1,090) (1,531) Income taxes (benefit)................ (7,653) (2,084) (2,458) (467) ------- ------- ------- ------- Net income (loss)..................... $ 5,519 $ 2,183 $ 1,368 $(1,064) ======= ======= ======= =======
The unaudited consolidated pro forma financial information is presented for informational purposes only and should be read in conjunction with the Company's historical Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" set forth herein. The pro forma financial statements should not be considered indicative of the operating results which the Company will achieve in the future if it were operated on an independent, stand-alone basis because, among other things, these statements are based on historical rather than prospective information and upon certain assumptions which are subject to change. The unaudited Consolidated Pro Forma Statements of Operations of the Company reflect, in management's opinion, all adjustments necessary to fairly state the pro forma results of operations for the periods presented and to make the unaudited pro forma statements not misleading. PEC PEC recognizes revenue primarily from sales of timeshare interests and land sales in resort areas, gain on sale of receivables and interest income. PEC periodically sells its consumer receivables while generally retaining the servicing rights. Revenue from sales of timeshare interests and land is recognized after the requisite rescission period has expired and at such time as the purchaser has paid at least 10% of the sales price for sales of timeshare interests and 20% of the sales price for land sales. Land sales typically meet these requirements within six to ten months of closing, and sales of timeshare interests typically meet these requirements at the time of sale. The sales price, less a provision for cancellation, is recorded as revenue and the allocated cost related to such net revenue of the timeshare interest or land parcel is recorded as expense in the year that revenue is recognized. When revenue related to land sales is recognized, the portion of the sales price attributable to uncompleted required improvements, if any, is deferred. Notes receivable with payment delinquencies of 90 days or more have been considered in determining the allowance for cancellations. Cancellations occur when the note receivable is determined to be uncollectible and the related collateral, if any, has been recovered. Cancellation of a note receivable in the quarter the revenue is recognized is deemed to not represent a sale and is accounted for as a reversal of the revenue with an adjustment to cost of sales. Cancellation of a note receivable subsequent to the quarter the revenue was recognized is charged to the allowance for cancellations. Gain on sale of notes receivable includes the present value of the differential between contractual interest rates charged to borrowers on notes receivable sold by PEC and the interest rates to be received by the purchasers of such notes receivable, after considering the effects of estimated prepayments and a normal 20 23 servicing fee. PEC retains certain participations in cash flows from the sold notes receivable and generally retains the associated servicing rights. PEC generally sells its notes receivable at par value. The present values of expected net cash flows from the sale of notes receivable are recorded at the time of sale as interest only receivables. Interest only receivables are amortized as a charge to income, as payments are received on the retained interest differential over the estimated life of the underlying notes receivable. Interest only receivables are recorded at the lower of unamortized cost or estimated fair value. The expected cash flows used to determine the interest only receivables asset have been reduced for potential losses under recourse provisions of the sales agreements. Reserve for notes receivable sold with recourse represents PEC's estimate of the fair value of its future credit losses to be incurred over the lives of the notes receivable in connection with the recourse provisions of the sales agreements and is shown separately as a liability in the Company's Consolidated Balance Sheets. In discounting cash flows related to notes receivable sales, PEC defers servicing income at an annual rate of 1% and discounts cash flows on its sales at the rate it believes a purchaser would require as a rate of return. Earned servicing income is included under the caption of financial income. The cash flows were discounted to present value using a discount rate of 15% in each of fiscal years 1998, 1997 and 1996. PEC has developed its assumptions based on experience with its own portfolio, available market data and consultation with its financial advisors. 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. Provision for cancellations relating to notes receivable is recorded as expense in amounts sufficient to maintain the allowance at a level considered adequate to provide for anticipated losses resulting from customers' failure to fulfill their obligations under the terms of their notes receivable. PEC records provision for cancellations at the time revenue is recognized, based on historical experience and current economic factors. The related allowance for cancellations represents PEC's estimate of the amount of the future credit losses to be incurred over the lives of the notes receivable. The allowance for cancellations is reduced by actual cancellations experienced, including cancellations related to previously sold notes receivable which were reacquired pursuant to the recourse obligations discussed herein. Such allowance is also reduced to establish the separate liability for reserve for notes receivable sold with recourse. PEC's judgment in determining the adequacy of this allowance is based upon a periodic review of its portfolio of notes receivable. These reviews take into consideration changes in the nature and level of the portfolio, current economic conditions which may affect the purchasers' ability to pay, changes in collateral values, estimated value of inventory that may be reacquired and overall portfolio quality. Changes in the allowance as a result of such reviews are included in the provision for cancellations. Recourse to PEC on sales of notes receivable is governed by the agreements between the purchasers and PEC. The reserve for notes receivable sold with recourse represents PEC's estimate of the fair value of future credit losses to be incurred over the lives of the notes receivable. A liability for reserve for notes receivable sold with recourse is established at the time of each sale based upon PEC's estimate of the fair value of the future recourse obligation under each agreement of sale. Fees for servicing notes receivable originated or acquired by PEC and sold with servicing rights retained are generally based on a stipulated percentage of the outstanding principal balance of such notes receivable and are recognized when earned. Interest received on notes receivable sold, less amounts paid to investors, is reported as financial income. Interest only receivables are amortized systematically to reduce notes receivable 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 notes receivable are recorded to expense as incurred. Interest income represents the interest received on loans held in PEC's portfolio, the accretion of the discount on the interest only receivables and interest on cash funds. Total costs and expenses consist primarily of marketing and sales expenses, general and administrative expenses, direct costs of sales of timeshare interests and land, depreciation and amortization and interest 21 24 expense. Marketing and sales costs directly attributable to unrecognized sales are accounted for as deferred selling costs until such time as the sale is recognized. The Company incurs a portion of operating expenses of the timeshare Associations based on ownership of unsold timeshare interests at each of the respective timeshare properties. These costs are referred to as "association assessments" and are included in the Consolidated Statements of Operations under the caption of general and administrative expenses. Management fees received from the associations are included under the caption of other revenues. These fees are not deemed to be the result of a separate revenue generating line of business since the management activities to which they relate are part of the support of the timeshare business and the fees are actually a reduction of the expense the Company incurs to fulfill obligations regarding timeshares. The following table sets forth certain data regarding notes receivable additions and servicing through sales of timeshare interests and land:
FOR THE YEARS ENDED AUGUST 31, ------------------------------ 1998 1997 ------------- ------------- Principal balance of notes receivable additions......... $ 57,789,000 $ 55,469,000 ============ ============ Number of notes receivable additions, net of upgrades and downgrades........................................ 5,076 5,540 ============ ============ Notes receivable serviced at end of period.............. $117,150,000 $118,487,000 ============ ============
Land sales as of August 31, 1998 exclude $13.3 million of sales not yet recognized under generally accepted accounting principles (GAAP) since the requisite payment amounts have not yet been received. If ultimately recognized, revenues from these sales would be reduced by a related provision for cancellations of $1.9 million, estimated deferred selling costs of $3.7 million and cost of sales of $2.0 million. REAL ESTATE RISK Real estate development involves significant risks, including risks that suitable properties will not be available at reasonable prices, that acquisition, development and construction financing may not be available on favorable terms or at all, that infrastructure and construction costs may exceed original estimates, that construction may not be completed on schedule, and that upon completion of construction and improvements, properties may not be sold on favorable terms or at all. In addition, PEC's timeshare activities, as well as its ownership, improvement, subdivision and sale of land, are subject to comprehensive federal, state and local laws regulating environmental and health matters, protection of endangered species, water supplies, zoning, land development, land use, building design and construction and other matters. Such laws and difficulties in obtaining, or the failure to obtain, the requisite licenses, permits, allocations, authorizations and other entitlements pursuant to such laws can adversely impact the development and completion of PEC's projects. The enactment of "slow-growth" or "no-growth" initiatives in any area where PEC sells land or timeshare interests could also delay or preclude entirely the development of such properties. RESTATEMENT AND SEC INVESTIGATION As previously reported in the Company's Form 10-K for the year ended August 31, 1997, Form 10-Q for the three months ended May 31, 1998, and in prior reports, following the Company's restatement of certain of its previously issued financial statements, including for the year ended August 31, 1994, upon which its auditors had rendered unqualified opinions, the Securities and Exchange Commission (SEC) commenced a formal investigation to determine, among other things, whether the Company, and/or its officers and directors, violated applicable federal securities laws in connection with the preparation and filing of the Company's previously issued financial statements or certain of its common stock. In a letter from the SEC dated June 1, 1998, the Company was advised that the staff inquiry had been terminated and that no enforcement action had been recommended to the SEC. In addition, the letter referred to Securities Act Release 5310 which provides that such letter should not be construed to mean that any party has been exonerated or that no action may ultimately result from the staff's investigation. 22 25 CERTAIN PAYMENTS AND AMORTIZATION OF NEGATIVE GOODWILL In connection with the assignment to the Company in 1988 by affiliates of certain officers and directors of the Company (Assignors) of the right to acquire PEC, the Company became obligated to make quarterly payments to the Assignors equal to 63% of the cash balances of PEC, during the 7-year period ended January 31, 1995, that could be used to pay a dividend without violating PEC's loan agreements. Accrual of amounts owed under such assignment agreement to the Assignors ended on January 31, 1995, when their right to the accrual expired, at which time PEC owed the Assignors $13.3 million. On March 2, 1995, $10 million of such amount was converted to subordinated debt. See Notes 14 and 19 of Notes to the Consolidated Financial Statements for further discussion. At the time of the acquisition of PEC, the underlying book value of the net assets acquired exceeded the purchase price paid by the Company by $42.3 million, resulting in the creation of negative goodwill (Revaluation Adjustment). Of this amount, $20 million was not amortized but was instead reduced as additional payments were accrued to the Assignors. Amounts accrued to the Assignors in excess of $20 million were expensed as such accruals were made. The amortization of the remaining $22.3 million of the Revaluation Adjustment was directly affected by the level of collections of the receivables of PEC included in the acquired assets. As proceeds of these receivables were collected, through installment payments or sale, a portion of the Revaluation Adjustment included as a contra account in notes receivable was recorded to income as amortization of negative goodwill, which amortization was completed at February 28, 1995. The Company also amortized over a five-year period ended in 1998 negative goodwill related to the excess of the underlying book value over the purchase price paid in 1993 for the acquisition of the minority interest of Vacation Spa Resorts, Inc. (VSR), formerly an 80%-owned subsidiary. The Consolidated Financial Statements of the Company accordingly reflect amortization of a portion of the Revaluation Adjustment (Revaluation Amortization), amortization of the negative goodwill associated with the acquisition of the VSR minority interest and accrual of payments to the Assignors. RESULTS OF OPERATIONS YEAR ENDED AUGUST 31, 1998 COMPARED TO YEAR ENDED AUGUST 31, 1997 PEC Total revenues for PEC increased 1.6% or $1.1 million to $68.5 million during fiscal 1998 from $67.4 million during fiscal 1997 primarily due to a net increase of $2.6 million in timeshare and land sales to $51.5 million in fiscal 1998 from $48.9 million in fiscal 1997 (net timeshare sales increased by $5.4 million and net land sales decreased by $2.8 million), an increase in financial income to $3.3 million in fiscal 1998 from $2.9 million in fiscal 1997, partially offset by an aggregate decrease of $1.9 million in gain on sale of notes receivable, incidental operations and other income. Gross sales of timeshare interests increased to $41.4 million in fiscal 1998 from $39.9 million in fiscal 1997, an increase of 4.0%. Net sales of timeshare interests increased to $37.7 million from $32.3 million, an increase of 16.9%. The provision for cancellations represented 9.0% and 19.1% of gross sales of timeshare interests for the years ended August 31, 1998 and 1997, respectively. The decrease in the provision for cancellations was primarily due to lower cancellation experience during the current fiscal year. The number of cancellations during fiscal 1998 was 781 compared to 1,496 during fiscal 1997 which reduction was due, in part, to a change in the collection procedures as previously discussed herein. The number of exchanges, generally for timeshares, which are primarily made for upgrades, during fiscal 1998 was 4,019 compared to 3,749 during fiscal 1997. Gross sales of land decreased to $14.9 million in fiscal 1998 from $19.2 million in fiscal 1997, a decrease of 22.6%. Net sales of land decreased to $13.8 million in fiscal 1998 from $16.6 million in fiscal 1997, a decrease of 16.9%. The provision for cancellations decreased to 7.3% for the year ended August 31, 1998 from 13.6% of gross sales of land for the year ended August 31, 1997, primarily due to a decrease in cancellation experience during fiscal 1998. The 1998 decrease in gross land sales was the result of PEC's emphasis shift, as part of its strategic plan, from sales of land, to sales of timeshare interests due both to its diminishing inventory of land available for sale and its increasing inventory of timeshare interests from the opening of new timeshare 23 26 resorts. The shift from land sales to timeshare sales is due primarily to the reduction of PEC's current land inventory in Nevada which has not been fully replenished with additional land due generally to the unavailability of suitable land at acceptable prices. However, the acquisition of the Hartsel property in Colorado should enhance land sales for several years, including fiscal 1999. Gain on sale of receivables decreased to $.7 million for fiscal 1998 from $2 million for fiscal 1997, as more loans were kept in PEC's own portfolio. PEC periodically sells receivables to reduce the outstanding balances under its lines of credit. Interest income was $7.0 million in fiscal 1998, relatively unchanged from the $7.1 million in fiscal 1997. Financial income increased to $3.3 million in fiscal 1998 from $2.9 million in fiscal 1997, an increase of 13.1%. The increase is a result of the increased number of loans serviced by PEC during fiscal 1998, generating increased servicing fees. Included in the above is $2.0 million and $1.8 million for fiscal years 1998 and 1997, respectively, for servicing of MMC's receivables. This will not occur in the future since the loan servicing agreement with MMC was terminated by agreement during 1998. As a result of the foregoing, total PEC revenues increased to $68.5 million during fiscal 1998 from $67.4 million during fiscal 1997. Total costs and expenses increased to $71.7 million for fiscal 1998 from $69.2 million for fiscal 1997, an increase of 3.7%. The increase resulted primarily from an increase in general and administrative expenses to $16.3 million from $15.6 million, an increase of 4.7%, an increase in direct costs of timeshare interest sales to $7.4 million from $5.9 million, an increase of 24.5%, and an increase in depreciation to $2.2 million from $2.0 million, an increase of 14.3%. The increase in general and administrative expenses is primarily due to general increases in payroll and commissions paid to the collections and verifications department functions. The increase in direct costs of timeshare sales is directly attributable to higher net timeshare sales in 1998 and to the higher costs to develop new timeshare inventory. Depreciation expense increased to $2.2 million in fiscal 1998 from $2 million in fiscal 1997, an increase of 14.3%. The increase is a result of the additions made to property and equipment during fiscal 1998, and a full year of depreciation from fiscal 1997 additions, to support continued growth. Property and equipment, net of accumulated depreciation, was $24.0 million at August 31, 1998 compared to $24.2 million at August 31, 1997. As a percentage of gross sales of timeshare interests and land, marketing and sales expenses relating thereto increased to 60.6% in fiscal 1998 from 57.7% in fiscal 1997, and cost of sales increased to 16.2% in fiscal 1998 from 12.7% in fiscal 1997. Sales prices of timeshare interests are typically lower than those of land, while selling costs per sale, other than commissions, are approximately the same in amount for timeshare interests and land; accordingly, PEC generally realizes lower profit margins from sales of timeshare interests than from sales of land. Interest expense was $7.2 million in fiscal 1998 and $7.1 million in fiscal 1997. The increase is a result of an increase in the average outstanding balance of notes and contracts payable during fiscal 1998 compared to fiscal 1997. A loss before income taxes of $3.2 million was recorded in fiscal 1998 compared to a loss before income taxes of $1.8 million in fiscal 1997. The increase in loss is primarily due to the decrease in gain on sale of notes receivable, the increase in general and administrative expenses, and an increase in product cost, together with a decrease in land sales, the effect of which was partially offset by an increase in timeshare sales. No income tax provision or benefit was recorded for either fiscal 1998 or 1997. As part of an arrangement between PEC and the Company, regarding payment of taxes (the Tax Sharing Arrangement), PEC does not recognize a tax benefit for periods in which it records a loss. As a result of the foregoing, PEC reported a net loss of $3.2 million for fiscal 1998 compared to a net loss of $1.8 million for fiscal 1997. 24 27 COMPANY (consolidated) Income from continuing operations decreased $11.2 million to a loss of $3.2 million in fiscal 1998 from income of $8 million in fiscal 1997, due principally to the recording of a $2.0 million tax benefit in fiscal 1998 compared to the much larger $12.7 million income tax benefit in fiscal 1997. Income from discontinued operations, net of taxes and minority interest, was $11.3 million in fiscal 1997 due to the inclusion of MMC. Income from discontinued operations represents net income from MMC of $14.8 million reduced by minority interest of $2.4 million and $1.1 million in general and administrative expenses related to the discontinued operations. See "Item 1. Business -- General," "Item 7. MD&A -- Discontinued Operations of MMC" and Note 3 of Notes to Consolidated Financial Statements. Total costs and expenses during fiscal 1998 were $73.8 million, an increase of 2.3% over $72.2 million in fiscal 1997. Direct costs of timeshare interest sales increased $1.5 million, to $7.4 million in fiscal 1998 from $5.9 million in fiscal 1997. The increase is primarily due to increased sales and the higher costs to develop new timeshare inventory. Additionally, Mego Financial (parent only) continues to incur interest on subordinated debt. The decrease in interest expense is primarily attributable to the lower average balance of subordinated debt in fiscal 1998 as the balance was significantly reduced immediately prior to August 31, 1997. Total general and administrative expenses for Mego Financial (parent only) were primarily comprised of professional services, external financial reporting expenses, and regulatory and other public company corporate expenses. Also, see prior discussion for PEC. The income tax benefit for fiscal 1998 was $2.0 million compared to the much larger income tax benefit of $12.7 million for fiscal 1997. The benefit for both fiscal 1998 and 1997 was primarily due to the application of net operating loss (NOL) carryforwards and changes in certain income tax liability reserves. The income tax liability reserves are a result of facts and circumstances determined in an extensive review and analysis of the Company's federal income tax liability completed in fiscal 1997. See Notes 4 and 16 of Notes to Consolidated Financial Statements. Net loss applicable to common stock amounted to $3.2 million during fiscal 1998 compared to income of $19.3 million during fiscal 1997, primarily due to the foregoing. YEAR ENDED AUGUST 31, 1997 COMPARED TO YEAR ENDED AUGUST 31, 1996 PEC Total revenues for PEC increased 11.1% or $6.7 million to $67.4 million during fiscal 1997 from $60.7 million during fiscal 1996 primarily due to an increase in timeshare sales to $32.3 million in fiscal 1997 from $27.8 million in fiscal 1996 and an increase in gain on sale of notes receivable and interest income from $7.7 million to $9.1 million. Timeshare interests and land sales, net, increased to $48.9 million in fiscal 1997 from $45.7 million in fiscal 1996, an increase of 6.8%. Gross sales of timeshare interests increased to $39.9 million in fiscal 1997 from $33.2 million in fiscal 1996, an increase of 20.1%. Net sales of timeshare interests increased to $32.3 million from $27.8 million, an increase of 16.1%. The provision for cancellations represented 19.1% and 16.3% of gross sales of timeshare interests for the years ended August 31, 1997 and 1996, respectively. The increase in the provision for cancellations was primarily due to higher cancellation experience during fiscal 1997. During the first quarter of fiscal 1997, the Ramada Vacation Suites at Indian Shores, Florida was completed and 360 timeshare interests in that resort were sold through August 31, 1997. The number of cancellations during fiscal 1997 was 1,496 compared to 1,216 during fiscal 1996. The number of exchanges during fiscal 1997 was 3,749 compared to 3,305 during fiscal 1996. Gross sales of land decreased to $19.2 million in fiscal 1997 from $22.3 million in fiscal 1996, a decrease of 13.9%. Net sales of land decreased to $16.6 million in fiscal 1997 from $18 million in fiscal 1996, a decrease of 7.5%. The provision for cancellations decreased to 13.6% for the year ended August 31, 1997 from 19.6% of gross sales of land for the year ended August 31, 1996, primarily due to a decrease in cancellation experience from the prior years. The 1997 decrease in gross land sales was the result of PEC's emphasis shift, as part of its 25 28 strategic plan, from sales of land, to sales of timeshare interests due both to its diminishing inventory of land available for sale and its increasing inventory of timeshare interests from the opening of new timeshare resorts. Gain on sale of receivables increased to $2 million for fiscal 1997 from $1.1 million for fiscal 1996. This increase resulted from sales of timeshare receivables and land receivables increasing to $30.1 million in fiscal 1997 from $16 million in fiscal 1996. Interest income increased to $7.1 million in fiscal 1997 from $6.6 million for fiscal 1996, primarily due to the increased average outstanding portfolio of timeshare notes receivable. Financial income increased to $2.9 million in fiscal 1997 from $1.3 million in fiscal 1996, an increase of 133.2%. The increase is a result of the increased number of loans serviced by PEC, generating increased servicing fees. As a result of the foregoing, total PEC revenues increased to $67.4 million during fiscal 1997 from $60.7 million during fiscal 1996. Total costs and expenses increased to $69.2 million for fiscal 1997 from $59.3 million for fiscal 1996, an increase of 16.6%. The increase resulted primarily from an increase in marketing and sales expense to $34.1 million from $30.4 million, an increase of 12.3%; an increase in general and administrative expenses to $15.6 million from $13.7 million, an increase of 13.4%, and an increase in direct costs of timeshare interest sales to $5.9 million from $4 million, an increase of 48.1%. PEC's marketing and sales expenses increased primarily as a result of increased sales and costs relating to the establishment of new marketing programs during fiscal 1997 and strategies designed to increase sales of timeshare interests, market research costs, additional staffing, increased advertising costs and additional sales offices. The increase in general and administrative expenses is primarily due to increases in payroll related to hiring of additional administrative personnel and Association costs related to a higher level of unsold timeshare inventory. In June 1997, sales commenced at PEC's Orlando, Florida timeshare property and 1,122 new upscale, luxury timeshare interests in Las Vegas became available for sale in September 1997. The increase in direct costs of timeshare sales is directly attributable to the higher costs to develop new timeshare inventory. As a percentage of gross sales of timeshare interests and land, marketing and sales expenses relating thereto increased to 57.7% in fiscal 1997 from 54.7% in fiscal 1996, and cost of sales increased to 12.7% in fiscal 1997 from 10.5% in fiscal 1996. Depreciation expense increased to $2.0 million in fiscal 1997 from $1.5 million in fiscal 1996, an increase of 28.7%. The increase is a result of the additions made to property and equipment during fiscal 1997 to support continued growth. Property and equipment, net of accumulated depreciation, increased to $24.2 million at August 31, 1997 from $19.4 million at August 31, 1996, an increase of 24.9%. Interest expense increased to $7.1 million in fiscal 1997 from $5.6 million in fiscal 1996, an increase of 25.7%. The increase is a result of an increase in the average outstanding balance of notes and contracts payable during fiscal 1997 compared to fiscal 1996. A loss before income taxes of $1.8 million was recorded in fiscal 1997 compared to income before income taxes of $1.3 million in fiscal 1996. The decrease is largely due to the increase in marketing and sales expense and in general and administrative expense, together with a decrease in land sales, the effect of which was partially offset by an increase in timeshare sales. No income tax provision or benefit was recorded for fiscal 1997 compared to $455,000 in income tax provision for fiscal 1996. As part of an arrangement between PEC and the Company, regarding payment of taxes (the Tax Sharing Arrangement), PEC does not recognize a tax benefit for periods in which it records a loss. As a result of the foregoing, PEC reported a net loss of $1.8 million during fiscal 1997 compared to net income of $882,000 during fiscal 1996. 26 29 COMPANY (consolidated) Income from continuing operations increased $9.4 million to income of $8.0 million in fiscal 1997 from a loss of $1.4 million in fiscal 1996, due principally to the recording in fiscal 1997 of a $12.7 million income tax benefit. This increase was partially offset by a decrease of $2.6 million in PEC net income, due to increased expenses related to expansion of selling operations. See prior discussion for PEC. Income from discontinued operations, net of taxes and minority interest, increased 80.8% to $11.3 million during fiscal 1997 from $6.3 million during fiscal 1996 due to the growth and profitability of MMC. Income from discontinued operations represents net income from MMC of $14.8 million reduced by minority interest of $2.4 million and $1.1 million in general and administrative expenses related to the discontinued operations. See "Item 1. Business -- General," "Item 7. MD&A -- Discontinued Operations of MMC" and Note 3 of Notes to Consolidated Financial Statements. Total costs and expenses during fiscal 1997 were $72.2 million, an increase of 14.3% over $63.1 million in fiscal 1996. Marketing and sales expenses and general and administrative expenses increased 10.9% for fiscal 1997 compared to fiscal 1996 due primarily to the expansion of timeshare marketing efforts by PEC. Additionally, Mego Financial (parent only) continues to incur interest on subordinated debt. Total general and administrative expenses for Mego Financial (parent only) were primarily comprised of professional services, external financial reporting expenses, and regulatory and other public company corporate expenses. The income tax benefit for fiscal 1997 was $12.7 million compared to an income tax benefit of $1.1 million for fiscal 1996. The increase in the benefit was primarily due to the application of net operating loss (NOL) carryforwards and changes in certain income tax liability reserves. The changes in certain income tax liability reserves were a result of facts and circumstances determined in an extensive review and analysis of the Company's federal income tax liability completed in fiscal 1997. See Notes 4 and 16 of Notes to Consolidated Financial Statements. Net income applicable to common stock increased to $19.3 million during fiscal 1997 from $4.6 million during fiscal 1996, primarily due to the foregoing. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents for the Company was $1.8 million at August 31, 1998 compared to $10.4 million at August 31, 1997. The decrease was primarily due to the funding of the Company's sales operations with a lesser amount of receivable sales. The Company's principal cash requirements relate to PEC's acquisition of timeshare properties and land and the payment of marketing and sales expenses in connection with timeshare and land sales and Mego Financial's payment of interest on subordinated debt. PEC requires continued access to sources of debt financing and sales in the secondary market for receivables. PEC PEC's cash requirements arise from the acquisition of timeshare properties and land, payments of operating expenses, payments of taxes and dividends to Mego Financial, payments of principal and interest on debt obligations, and payments of marketing and sales expenses in connection with sales of timeshare interests and land. Marketing and sales expenses payable by PEC in connection with sales of timeshare interests and land typically exceed the down payments received at the time of sale, as a result of which PEC generates a cash shortfall. This cash shortfall and PEC's other cash requirements are funded primarily through sales of receivables, PEC's lines of credit in the aggregate amount of $137.5 million and cash flows from operations. At August 31, 1998, no commitments existed for material capital expenditures. 27 30 At August 31, 1998, PEC had arrangements with 5 institutional lenders under 6 agreements for the financing of receivables in connection with sales of timeshare interests and land and the acquisition of timeshare properties and land, which provide for 6 lines of credit of up to an aggregate of $137.5 million. Such lines of credit are secured by timeshare and land receivables and mortgages. At August 31, 1998, an aggregate of $77.4 million was outstanding under such lines of credit, and $60.1 million was available for borrowing. At August 31, 1997, $62.1 million had been borrowed under these lines. Under the terms of these lines of credit, PEC may borrow 70% to 90% of the balances of the pledged timeshare and land receivables. Summarized lines of credit information and accompanying notes relating to these six lines of credit outstanding at August 31, 1998, consist of the following (thousands of dollars):
BORROWING MAXIMUM AMOUNT AT BORROWING REVOLVING AUGUST 31, 1998 AMOUNT EXPIRATION DATE(F) MATURITY DATE INTEREST RATE - --------------- --------- ------------------ ------------- ------------- $46,066 $75,000 (a) May 15, 2000 Various Prime + 2.0 - 2.25% 3,418 15,000 (b) December 15, 1998 Various Prime + 2.0% 10,561 15,000 (c) February 28, 1999 Various LIBOR + 4.0 - 4.25% 6,315 15,000 (c) May 1, 1999 Various LIBOR + 4.0 - 4.25% 4,360 10,000 (d) August 1, 2000 August 1, 2003 Prime + 2.0 - 2.25% 6,676 7,500 (e) December 15, 1998 Various Prime + 2.0 - 3.00%
- --------------- (a) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $20 million with such amount increasing each fiscal quarter after August 31, 1997 by an amount equal to 50% of PEC's consolidated net income for each quarter up to a maximum requirement of $25 million. At August 31, 1998, $31.1 million was outstanding related to financings at prime +2%, of which $23 million of loans secured by land receivables mature May 15, 2010 and $8.1 million of loans secured by timeshare receivables mature May 15, 2007. The outstanding borrowing amount includes $.6 million in acquisition and development (A&D) financing maturing May 20, 1999, $5.1 million maturing July 1, 2003 for the financing of corporate office buildings, both of which loans are amortizing loans, and a real estate loan with an outstanding balance of $1.2 million maturing March 20, 1999, all bearing interest at prime +2.25%. The remaining A&D loans, receivables loans and a resort lobby loan outstanding of $8.1 million are at prime +2% and mature between November 30, 1998 and February 28, 2001. (b) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $25 million during the life of the loan. These credit lines include available financing for A&D and receivables. At August 31, 1998, $1.3 million was outstanding under the A&D loan maturing September 1, 1999, and $2.1 million maturing June 1, 2002, was outstanding under the receivables loan. Management has obtained a verbal commitment from the lender that this revolving line of credit will be extended for a period of 18 months on substantially the same terms. (c) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $17 million during the life of the loan. These credit lines include available financings for A&D and receivables. At August 31, 1998, $5.4 million was outstanding under the A&D loans which have maturity dates of December 31, 2000 and June 30, 2001, and bear interest at 90 day LIBOR +4.25%. The available receivable financings, of which $5.2 million was outstanding at August 31, 1998, is at 90 day LIBOR +4% and has maturity dates of June 5, 2005 and August 5, 2005. (d) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $25 million. This credit line is for the purpose of financing receivables and costs of remodeling. (e) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $15 million. This credit line is for the purpose of financing receivables of which $2.7 million was outstanding at August 31, 1998 in respect to receivable debt, and a real estate loan of $4.0 million with a maturity date of August 31, 1999. The maturity date for the receivables is May 31, 2002. Management has obtained a verbal commitment from the lender that this revolving line of credit will be extended for a period of 18 months on substantially the same terms. 28 31 (f) Revolving expiration dates represent the expiration of the revolving features of the lines of credit, at which time the credit lines become loans with fixed maturities. A schedule of the cash shortfall arising from recognized and unrecognized sales for the periods indicated is set forth below (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, -------------------------------- 1998 1997 1996 -------- -------- -------- Marketing and sales expenses attributable to recognized and unrecognized sales................ $ 34,733 $ 34,388 $ 29,863 Less: Down payments................................ (12,934) (13,966) (13,231) -------- -------- -------- Cash Shortfall..................................... $ 21,799 $ 20,422 $ 16,632 ======== ======== ========
During the fiscal years ended August 31, 1998 and 1997, PEC sold notes receivable of $9.4 million and $30.1 million from which $8.0 million and $25.3 million of the sales proceeds were used to pay down debt during the fiscal years ended August 31, 1998 and 1997, respectively. The receivables, which have interest rates depending on the transaction ranging from 13.0% - 14.3% and 12.3% - 14.3% in fiscal 1998 and fiscal 1997, respectively, were sold to yield returns of 9.75% in fiscal 1998 and 9% - 9.8% in fiscal 1997 to the purchasers, with any excess interest received from the obligors being payable to PEC. PEC sells notes receivable subject to recourse provisions as contained in each agreement. PEC is obligated under these agreements to replace or repurchase accounts that become over 90 days delinquent or are otherwise subject to replacement or repurchase in either cash or receivables generally at the option of the purchaser. At August 31, 1998, PEC was contingently liable to replace or repurchase notes receivable sold with recourse totaling $66.8 million. The repurchase provisions provide for substitution of receivables as recourse for $66.1 million of sold notes receivable and cash payments for repurchase relating to $651,000 of sold notes receivable. As of October 31, 1998, one purchaser had exercised its option to require any future repurchases to be replaced by cash payments. This recourse as of August 31, 1998 related to $19.2 million of receivables. At August 31, 1998 and 1997, the undiscounted amounts of the recourse obligations on such sold notes receivable were $7.8 million and $9.7 million, respectively. PEC periodically reviews the adequacy of this liability. 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, changes in collateral values, estimated value of inventory that may be reacquired and overall portfolio quality. Recourse to PEC on sales of notes receivable is governed by the agreements between the purchasers and PEC. The reserve for notes receivable sold with recourse represents PEC's estimate of its probable future credit losses to be incurred over the lives of the notes receivable. Proceeds from the sale of notes receivable sold with recourse were $9.4 million and $30.1 million for the years ended August 31, 1998 and 1997, respectively. A liability for reserve for notes receivable sold with recourse is established at the time of each sale based upon PEC's analysis of the fair value of all probable losses resulting from PEC's recourse obligation under each agreement of sale. During fiscal years 1998 and 1997, PEC used cash of $20.1 million and provided cash of $7.2 million in operating activities, respectively. This decrease was primarily due to reduced notes receivable sales and an increase in the purchase and development of land and timeshare units. During fiscal years 1998 and 1997, PEC provided cash of $3.2 million and used cash of $1.9 million in investing activities, respectively, which increased as a result of a decline in purchases for property and equipment and increased repayments from the parent in fiscal 1998. During fiscal years 1998 and 1997, PEC provided cash of $15.7 million and used cash of $5.6 million from financing activities, respectively, as a result of increased borrowings and decreased paydowns applied to such borrowings. COMPANY (consolidated) At January 31, 1995, when accrual of payments to assignors ceased, $13.3 million was payable to the Assignors. On March 2, 1995, the Assignors agreed to defer payment of $10 million (Subordinated Debt) of the amounts due to them pursuant to an amendment to the Assignment and Assumption Agreement providing 29 32 for the subordination of such amounts to payment of debt for money borrowed by the Company or obligations of the Company's subsidiaries guaranteed by the Company. Warrants (Warrants) to purchase 1 million shares of common stock, at an exercise price of $4.25 per share (the closing market price per share on March 2, 1995), were granted to the Assignors in consideration of the payment deferral and subordination. These Warrants were exercised in August 1997 in a non-cash transaction, whereby the Subordinated Debt was reduced by $4.25 million. Interest on the Subordinated Debt was to be paid semiannually at the rate of 10% per year starting September 1, 1995, and the Subordinated Debt was to be repaid in 7 equal semiannual payments commencing March 1, 1997. On June 14, 1995, the Company paid an aggregate of $809,000 to the Assignors, including interest in the amount of $59,000. In January 1997, the outstanding balance of payable to Assignors of $2.6 million (including interest of $45,000) was paid in full. Effective March 1, 1997, the Assignors received the first of what was originally 7 equal semiannual payments of $1,429,000 plus interest related to the repayment of the Subordinated Debt. However, in connection with the reduction of the Subordinated Debt in August 1997, payments aggregating $4.25 million were deemed paid and the semiannual payments are scheduled to resume in March 1999, with a partial payment made in September 1998. The Subordinated Debt is collateralized by a pledge of PEC's outstanding stock. Interest of $1.2 million on Subordinated Debt was paid during fiscal 1998. See "Item 13. Certain Relationships and Related Transactions" and Note 14 of Notes to Consolidated Financial Statements. During fiscal years 1998 and 1997, the Company used cash of $20.8 million and provided cash of $32.5 million in operating activities, respectively. The decrease was due primarily to decreased proceeds from sale of notes receivable. During fiscal 1997, the Company used cash of $19.8 million in discontinued operations. During fiscal years 1998 and 1997, the Company used cash of $4.2 million and $7 million in investing activities, respectively, which decreased as a result of a decline in purchases of property and equipment. During fiscal years 1998 and 1997, the Company provided cash of $16.4 million and $1.9 million in financing activities, respectively, as a result of increased borrowings and decreased paydowns applied to such borrowings. Capital expenditures during fiscal years 1998 and 1997 were $15.6 million and $8.9 million, respectively, for the acquisition of timeshare and land inventory and $2.3 million and $6.8 million, respectively, for the purchase of property and equipment. The Company made additional capital expenditures in 1998 for renovation of future timeshare inventory, refurbishment of present timeshare inventory and the acquisition of replacement equipment. No commitments existed at August 31, 1998 for material capital expenditures. The Company believes that its capital requirements will be met from cash balances, internally generated cash, existing lines of credit, sales of receivables, and the modification, replacement or addition to its lines of credit and new financings. The components of the Company's debt, including lines of credit consist of the following (thousands of dollars):
AUGUST 31, ------------------ 1998 1997 ------- ------- Notes collateralized by receivables......................... $42,793 $31,489 Mortgages collateralized by real estate properties.......... 37,393 32,311 Installment contracts and other notes payable............... 1,800 1,769 ------- ------- Total............................................. $81,986 $65,569 ======= =======
FINANCIAL CONDITION AUGUST 31, 1998 COMPARED TO AUGUST 31, 1997 Cash and cash equivalents decreased 82.5% to $1.8 million at August 31, 1998 from $10.4 million at August 31, 1997, primarily as a result of funding of the Company's sales operations with a lesser amount of receivable sales. 30 33 Notes receivable, net, increased 39.4% to $47.8 million at August 31, 1998 from $34.3 million at August 31, 1997 primarily as a result of decreased receivable sales of $9.4 million to one financial institution during fiscal 1998 compared to $30.1 million to two different financial institutions during fiscal 1997. The Company provides allowance for cancellations in amounts which, in the Company's judgment, will be adequate to absorb losses on notes receivable that may become uncollectible. The Company's judgment in determining the adequacy of this allowance is based on its continual review of its portfolio which utilizes historical experience and current economic factors. These reviews take into consideration changes in the nature and level of the portfolio, historical rates, collateral values, and current and future economic conditions which may affect the obligors' ability to pay, collateral values and overall portfolio quality. Changes in the aggregate of the allowance for cancellations, excluding discounts, and the reserve for notes receivable sold with recourse for the fiscal years ended August 31, 1998 and 1997, consisted of the following (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, ------------------- 1998 1997 ------- -------- Balance at beginning of year................................ $19,527 $ 19,924 Provision for cancellations............................... 4,827 10,219 Amounts charged to allowance for cancellations and reserve for notes receivable sold with recourse................ (5,866) (10,616) ------- -------- Balance at end of year...................................... $18,488 $ 19,527 ======= ========
The allowance for cancellations and the reserve for notes receivable sold with recourse consisted of the following at these dates (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, -------------------- 1998 1997 -------- -------- Allowance for cancellations, excluding discounts............ $11,868 $10,824 Reserve for notes receivable sold with recourse............. 6,620 8,703 ------- ------- Total............................................. $18,488 $19,527 ======= =======
Timeshare and land sales, net, increased to $51.5 million at August 31, 1998 from $48.9 million at August 31, 1997. Timeshare and land sales, net, are set forth in the following table (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, -------------------- 1998 1997 $ CHANGE % CHANGE -------- -------- -------- -------- Timeshare sales, net....................... $37,713 $32,253 $ 5,460 16.9% Land sales, net............................ 13,812 16,626 (2,814) (16.9)% ------- ------- ------- Total timeshare and land sales, net............................ $51,525 $48,879 $ 2,646 5.4% ======= ======= =======
The implementation of SFAS No. 125 requires the reclassification of excess servicing rights as interest only receivables which are carried at fair market value. Interest only receivables increased 2.2% to $3.4 million at August 31, 1998 from $3.3 million at August 31, 1997. See Note 4 of Notes to Consolidated Financial Statements. Land and improvements inventory and timeshare interests held for sale increased 17.3% to $43.8 million at August 31, 1998 from $37.3 million at August 31, 1997 primarily as a result of the acquisition of the Hartsel Ranch property and the development of timeshare property. Property and equipment, net, decreased 1.1% to $24.0 million at August 31, 1998 from $24.2 million at August 31, 1997. 31 34 Net assets of discontinued operations were $53.3 million at August 31, 1997. The $53.3 million represented the net assets of MMC at August 31, 1997 of $53.1 million and the Company's receivable of $10.1 million from MMC less the minority interest of $9.9 million at August 31, 1997. Notes and contracts payable increased 25.0% to $82.0 million at August 31, 1998 from $65.6 million at August 31, 1997 due to decreased paydowns of debt with proceeds from receivable sales during fiscal 1997. Accounts payable and accrued liabilities increased to $19.1 million at August 31, 1998 from $17.2 million at August 31, 1997, primarily as a result of increases in accrued payroll, interest and other unpaid operational costs. Reserve for notes receivable sold with recourse decreased 24.0% to $6.6 million at August 31, 1998 from $8.7 million at August 31, 1997 due to the decreased amount of receivable sales in fiscal 1998. Recourse to the Company on sales of notes receivable is governed by the agreements between the purchasers and the Company. Accrued income taxes decreased 28.3% to $4.5 million at August 31, 1998 from $6.2 million at August 31, 1997 primarily due to application of NOL carryforwards and changes in certain income tax liability reserves. The changes in fiscal 1997 income tax liability reserves are a result of facts and circumstances determined in an extensive review and analysis of the Company's federal income tax liability completed in fiscal 1997. See Note 16 of Notes to Consolidated Financial Statements. Stockholders' equity decreased to $20.7 million at August 31, 1998 from $73.2 million at August 31, 1997 as a result of the distribution of MMC common stock totaling $49.3 million in connection with the Spin-off, including the adjustment of the receivable from MMC, and a net loss applicable to common stock of $3.2 million during fiscal 1998. AUGUST 31, 1997 COMPARED TO AUGUST 31, 1996 Cash and cash equivalents increased 278.4% to $10.4 million at August 31, 1997 from $2.7 million at August 31, 1996, primarily as a result of the receipt of proceeds in connection with the exercise of common stock options and warrants in August 1997. Notes receivable, net, decreased 15.6% to $34.3 million at August 31, 1997 from $40.6 million at August 31, 1996 primarily as a result of increased receivable sales of $30.1 million during fiscal 1997 compared to $16 million during fiscal 1996. Receivable sales of $19.7 million and $10.4 million were recorded to two different financial institutions during fiscal 1997. The Company provides allowance for cancellations in amounts which, in the Company's judgment, will be adequate to absorb losses on notes receivable that may become uncollectible. The Company's judgment in determining the adequacy of this allowance is based on its continual review of its portfolio which utilizes historical experience and current economic factors. These reviews take into consideration changes in the nature and level of the portfolio, historical rates, collateral values, and current and future economic conditions which may affect the obligors' ability to pay, collateral values and overall portfolio quality. Changes in the aggregate of the allowance for cancellations, excluding discounts, and the reserve for notes receivable sold with recourse for the fiscal years ended August 31, 1997 and 1996, consisted of the following (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, -------------------- 1997 1996 -------- -------- Balance at beginning of year................................ $19,924 $18,821 Provision for cancellations............................... 10,219 9,778 Amounts charged to allowance for cancellations and reserve for notes receivable sold with recourse................ (10,616) (8,675) ------- ------- Balance at end of year...................................... $19,527 $19,924 ======= =======
32 35 The allowance for cancellations and the reserve for notes receivable sold with recourse consisted of the following at these dates (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, -------------------- 1997 1996 -------- -------- Allowance for cancellations, excluding discounts............ $10,824 $11,512 Reserve for notes receivable sold with recourse............. 8,703 8,412 ------- ------- Total............................................. $19,527 $19,924 ======= =======
Timeshare and land sales, net, increased to $48.9 million at August 31, 1997 from $45.7 million at August 31, 1996 which increased net notes receivable. Timeshare and land sales, net, are set forth in the following table (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, -------------------- 1997 1996 $ CHANGE % CHANGE -------- -------- -------- -------- Timeshare sales, net....................... $32,253 $27,778 $ 4,475 16.1% Land sales, net............................ 16,626 17,968 (1,342) (7.5)% ------- ------- ------- Total timeshare and land sales, net............................ $48,879 $45,746 $ 3,133 6.8% ======= ======= =======
The implementation of SFAS No. 125 requires the reclassification of excess servicing rights as interest only receivables which are carried at fair market value. Interest only receivables increased 53.5% to $3.3 million at August 31, 1997 from $2.1 million at August 31, 1996. See Note 4 of Notes to Consolidated Financial Statements. Timeshare interests held for sale and land and improvements inventory increased 4% to $37.3 million at August 31, 1997 from $35.9 million at August 31, 1996 primarily as a result of the opening of the Indian Shores and Orlando timeshare resorts during fiscal 1997. Property and equipment, net, increased 24.9% to $24.2 million at August 31, 1997 from $19.4 million at August 31, 1996 due to increased capital expenditures related to expansion of CNUC and the expansion of various other Company facilities. Net assets of discontinued operations increased 74.6% to $53.3 million at August 31, 1997 from $30.5 million at August 31, 1996 primarily due to the growth and earnings of MMC. The $53.3 million represents the net assets of MMC at August 31, 1997 of $53.1 million and the Company's receivable of $10.1 million from MMC less the minority interest of $9.9 million at August 31, 1997. Notes and contracts payable decreased 6.7% to $65.6 million at August 31, 1997 from $70.3 million at August 31, 1996 due to increased paydowns of debt with proceeds from receivable sales during fiscal 1997. Accounts payable and accrued liabilities increased to $17.2 million at August 31, 1997 from $15.6 million at August 31, 1996, primarily as a result of increases in accrued payroll, interest and other unpaid operational costs. Reserve for notes receivable sold with recourse increased 3.5% to $8.7 million at August 31, 1997 from $8.4 million at August 31, 1996 due to increased receivable sales. Recourse to the Company on sales of notes receivable is governed by the agreements between the purchasers and the Company. Accrued income taxes decreased 38.1% to $6.2 million at August 31, 1997 from $10.1 million at August 31, 1996 primarily due to application of NOL carryforwards and changes in certain income tax liability reserves. The changes in certain income tax liability reserves are a result of facts and circumstances determined in an extensive review and analysis of the Company's federal income tax liability completed in fiscal 1997. See Note 19 of Notes to Consolidated Financial Statements. Stockholders' equity increased 183.3% to $73.2 million at August 31, 1997 from $25.9 million at August 31, 1996 as a result of net income applicable to common stock of $19.3 million during fiscal 1997, the 33 36 gain on sale of MMC stock of $13.1 million in November 1996, warrants valued at $3 million, issued in connection with a loan purchase commitment and the proceeds from the exercise of common stock warrants and options of $11.9 million. 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. Inflationary increases are difficult to pass on to customers since increases in sales prices often result in lower sales closing rates and higher cancellations. The Company's notes receivable 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 cancellation rates may be affected by changes in the national economy. SEASONALITY Sales of timeshare interests and land are somewhat seasonal. For the fiscal years ended August 31, 1998, 1997 and 1996, quarterly sales as a percentage of annual sales, for each of the fiscal quarters averaged:
QUARTER ENDED % OF ANNUAL SALES ------------- ----------------- November 30................................................. 23.7% February 28................................................. 24.0 May 31...................................................... 26.6 August 31................................................... 25.7 ----- 100.0% =====
The majority of the Company's customers are tourists. The Company's major marketing area, Las Vegas, Nevada, reaches peaks of tourist activity at periods different from the Company's other major marketing areas, such as Reno, Nevada, and Denver, Park and Huerfano Counties, Colorado, which are more active in summer than in winter. The Company's other major marketing areas, Honolulu, Hawaii, and Orlando, Florida, are not subject to seasonality. The Company is not dependent upon a limited number of customers whose loss would have a material adverse effect on the Company. RECENT ACCOUNTING PRONOUNCEMENTS The FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," (SFAS 123), which establishes financial accounting and reporting standards for stock-based employee compensation plans and for 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. The Company elected to continue to apply the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," as permitted by SFAS 123, and, accordingly, provides pro forma disclosure in Note 17 of Notes to Consolidated Financial Statements. Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," (SFAS 125) was issued by the 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 or loss and (b) assessment for asset impairment or increased obligation based on their fair values. SFAS 125 requires that the Company's excess servicing rights be measured at fair market value and be 34 37 reclassified as interest only receivables and accounted for in accordance with SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115). As required by SFAS 125, the Company adopted the new requirements effective January 1, 1997. Implementation of SFAS 125 did not have any material impact on the financial statements of the Company, as the book value of the Company's interest only receivables approximated fair value. SFAS No. 128, "Earnings per Share," (SFAS 128) was issued by the FASB in March 1997, effective for financial statements issued after December 15, 1997. SFAS 128 provides simplified standards for the computation and presentation of earnings per share (EPS), making EPS comparable to international standards. SFAS 128 requires dual presentation of "Basic" and "Diluted" EPS, by entities with complex capital structures, replacing "Primary" and "Fully-diluted" EPS under APB Opinion No. 15. See Note 4 of Notes to Consolidated Financial Statements for further discussion and SFAS 128 pro forma calculations. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130), and SFAS No. 131, "Disclosures and Segments of an Enterprise and Related Information" (SFAS 131). SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. SFAS 131 establishes standards of reporting by publicly-held business enterprises and disclosure of information about operating segments in annual financial statements and, to a lesser extent, in interim financial reports issued to shareholders. SFAS Nos. 130 and 131 are effective for fiscal years beginning after December 15, 1997. As both SFAS Nos. 130 and 131 deal with financial statement disclosure, the Company does not anticipate the adoption of these new standards will have a material impact on its financial position, results of operations or cash flows. The Company has not yet determined what its reporting segments will be under SFAS 131. YEAR 2000 COMPLIANCE The ability of computers, software and other equipment utilizing microprocessors to recognize and properly process data fields containing a 2-digit year is commonly referred to as the Year 2000 (Y2K) compliance issue. As the year 2000 approaches, such systems may be unable to accurately process certain data-based information. The Company expects that it will be compliant by August 31, 1999, the end of the Company's fiscal year, and has been assured by all of its significant third-party vendors, lenders and other parties such as title companies, that they will be Y2K compliant by no later than December 31, 1999. State of Readiness. The Company has identified the following applications that required, or require, modification to be Y2K compliant.
COMPLIANT AT IF "NO" ANTICIPATED APPLICATION AUGUST 31, 1998 DATE OF COMPLIANCE ----------- --------------- ------------------- Reservation System............................. Yes Property Management............................ Yes Loan Receivables............................... No By December 31, 1998 Sales.......................................... No By March 31, 1999 General Ledger and Accounts Payable............ No (1) Telephone -- Main Office....................... Yes Telephone -- Resorts........................... No By August 31, 1999
- --------------- (1) The Company is in the process of engaging Mann & Associates, a regional professional consultant and vendor for the Great Plains System (System). Mann & Associates will be engaged to assist in the System setup, tailoring and training. The System is planned to be fully operational, including testing, by June 30, 1999. The Company has verbal, and upon signing the agreement will have formal, representations and warranties from Great Plains that the System, once installed, will be fully Y2K compliant. 35 38 Additionally, the Company has obtained verbal assurances from the following financial institutions and companies with which it does business that they will be Y2K compliant by the date shown:
INSTITUTION COMPLIANT AT AUGUST 31, 1998 IF "NO" COMPLIANT BY DATE ----------- ---------------------------- --------------------------- Bank of America....................... No December 31, 1999 Textron............................... No December 31, 1999 Finova................................ No December 31, 1999 Heller Financial...................... No December 31, 1999 First Chicago NBD..................... No December 31, 1999 Litchfield Financial.................. No December 31, 1999 United Title Company.................. No December 31, 1999 RCI................................... No December 31, 1999
Disclosure of Costs. The Company believes that its approximate total cost to become Y2K compliant by not later than August 31, 1999 will be approximately $350,000. Of this amount, as of August 31, 1998, the Company had expended $60,000, including internal labor costs of approximately $50,000. The Company believes it has adequate financial resources to pay for the balance of the Y2K compliance costs. Disclosure of Risk. The Company services consumer receivables arising out of its sale of timeshare and land products to its customers on the Company's internally-developed system. The most significant risk to the Company in not being Y2K compliant by December 31, 1999 would be that the existing data base could not adequately track payments due under its receivable portfolio. Many of these receivables have been pledged to lenders to which the Company provides servicing. In the event of the Company's failure to adequately track its receivables, it could become in default under certain loan arrangements with its lenders. The failure of a lender(s) to be Y2K compliant could affect such lender's (s') loan documentation/records, which could adversely impact the Company's ability to borrow under its lines of credit. The reservation system operated by PEC could also be affected by a failure, which could make assignments of its timeshare intervals for timeshare owners problematical. PEC's wholly-owned utility subsidiary, CNUC, could also have problems with customer billings if not compliant. Certain operational aspects of PEC could be affected by not being Y2K compliant, including elevator service at its resorts, telephone service and other essential utility services. Any of the above discussed items, if not Y2K compliant, could have a material adverse effect on the Company and PEC. The Company expects to be fully compliant by August 31, 1999. Contingency Plans. As the Company believes it will be fully compliant by August 31, 1999, it does not have a contingency plan. However, in the event that the Company is not fully compliant by the end of 1999, the failure to have a contingency plan could have a material adverse effect on the Company. 36 39 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The table below provides information about the Company's financial instruments that are sensitive to changes in interest rates. Such information includes fair values of the market risk sensitive instruments and contract terms sufficient to determine future cash flows from those instruments, categorized by expected maturity dates:
AUGUST 31, EXPECTED MATURITY DATE --------------------------------------------------------------------------------------- 1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE ------ ------ ------- ------ ------- ---------- ------- ---------- ASSETS: Interest only receivables(a) Fixed rate..................... $ -- $ 15 $ 22 $ 86 $ 264 $ 2,980 $ 3,367 $ 3,367 Average interest rate........ --% 12.27% 12.28% 13.03% 13.40% 13.00% LIABILITIES: Notes and contracts payable(b) Fixed rate..................... $ 81 $ 195 $ 935 $ 454 $ 326 $ -- $ 1,991 $ 1,991 Average interest rates....... 10.21% 10.46% 9.00% 10.40% 9.20% --% Variable rate.................. $7,886 $5,207 $14,166 $4,742 $11,142 $36,852 $79,995 $79,995 Average interest rates....... 11.06% 10.67% 10.16% 10.50% 10.60% 10.40% Subordinated debt(c) Fixed rate..................... $2,967 $1,381 $ -- $ -- $ -- $ -- $ 4,348 $ 4,348 Average interest rates....... 10.00% 10.00% --% --% --% --%
- --------------- (a) 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 financial advisors and portfolio experience. (b) Notes payable generally are adjustable rate, indexed to the prime rate, or to the 90 day London Interbank Offering Rate (LIBOR); therefore, carrying value approximates fair value. (c) Carrying value is approximately the same as fair value. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following Consolidated Financial Statements of the Company and its subsidiaries are included herewith:
PAGE ---- Independent Auditors' Report................................ F-2 Consolidated Balance Sheets at August 31, 1998 and 1997..... F-3 Consolidated Statements of Operations -- Years Ended August 31, 1998, 1997 and 1996................................... F-4 - F-5 Consolidated Statements of Stockholders' Equity -- Years Ended August 31, 1998, 1997 and 1996...................... F-6 Consolidated Statements of Cash Flows -- Years Ended August 31, 1998, 1997 and 1996................................... F-7 - F-8 Notes to Consolidated Financial Statements -- Years Ended August 31, 1998, 1997 and 1996............................ F-9 - F-36
All other schedules are omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 37 40 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES The following table sets forth certain information with respect to the directors and executive officers of the Company.
NAME AGE POSITION ---- --- -------- Robert Nederlander................ 65 Chairman of the Board, Chief Executive Officer and Director Jerome J. Cohen................... 70 President and Director Don A. Mayerson................... 71 Executive Vice President, General Counsel and Secretary Herbert B. Hirsch................. 62 Senior Vice President, Chief Financial Officer, Treasurer and Director Eugene I. Schuster................ 61 Vice President and Director Wilbur L. Ross, Jr................ 60 Director John E. McConnaughy, Jr........... 69 Director Frederick H. Conte................ 46 President and Chief Operating Officer of PEC Jon A. Joseph..................... 51 Vice President and Associate General Counsel Charles G. Baltuskonis............ 48 Vice President and Chief Accounting Officer Richard L. Rodriguez.............. 41 Vice President
Robert Nederlander has been the Chairman of the Board and Chief Executive Officer of the Company since January 1988, when affiliates of the Assignors, including Mr. Cohen, acquired approximately 43% of the outstanding common stock of the Company (Share Acquisition). See "Item 13. Certain Relationships and Related Transactions." Mr. Nederlander is the Chairman of the Executive Committee and a member of the Audit Committee. Since July 1995, Mr. Nederlander served on the Board of Directors of Cendant Corporation, formerly Hospitality Franchise Systems, Inc. (HFS). In April 1995, prior to Mr. Nederlander becoming a Board member of HFS, the Company entered into an agreement with Ramada, a subsidiary of Cendant Corporation, pursuant to which the Company is licensed to use the Ramada name in its timeshare operations. 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 the world's largest chains of legitimate theaters. Mr. Nederlander 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 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 the Company; and Chairman of the Board of Allis-Chalmers Corp. from May 1989 to 1993, and from 1993 to 1996 as Vice Chairman. Mr. Nederlander remains a director of Allis-Chalmers Corp. Mr. Nederlander was a director of MMC from September 1996 until June 1998. In October 1996, Mr. Nederlander became a director of News Communications Inc., a publisher of community oriented free circulation newspapers. Mr. Nederlander does not currently serve on a full time basis in his capacities with the Company. Jerome J. Cohen has been the President and a Director of the Company since the Share Acquisition. Mr. Cohen serves as a member of the Executive Committee and is Chairman of the Board and Chief Executive Officer of PEC. Mr. Cohen served as Chairman of the Board of MMC from April 1995 to June 1998, as Chief Executive Officer from June 1992 to September 1997 and as President from June 1992 to until March 1995. From April 1992 to June 1997, Mr. Cohen was a director of Atlantic Gulf Communities Inc., 38 41 formerly known as General Development Corporation, a publicly held company engaged in land development, land sales and utility operations in Florida and Tennessee. Don A. Mayerson has been the Secretary of the Company since the Share Acquisition and the Executive Vice President and General Counsel of the Company since April 1988. Mr. Mayerson served as a director of MMC from June 1992 until June 1998 and served as Vice President, General Counsel and Secretary of MMC from 1992 to September 1996. Mr. Mayerson has advised the Company that he plans to retire on December 31, 1998. Herbert B. Hirsch has been the Senior Vice President, Chief Financial Officer, Treasurer and a Director of the Company since the Share Acquisition. Mr. Hirsch serves as a member of the Executive Committee. Mr. Hirsch served as a director of MMC from June 1992 to June 1998, and served as Vice President, Chief Financial Officer and Treasurer of MMC from 1992 to September 1996. Eugene I. Schuster has been a Vice President and a Director of the Company since the Share Acquisition. Mr. Schuster is a member of the Stock Option Committee. Mr. Schuster has also been Chief Executive Officer and Chairman of the Board of Directors of Venture Funding, Ltd., a business development corporation, since its inception in May 1983. Since February 1986, Mr. Schuster has been the President and Chief Executive Officer and a director of Quest BioTechnology, Inc., a publicly held biotechnology research and development firm. Since September 1985, Mr. Schuster has been a director of Wavemat, Inc., a publicly held company engaged in the manufacture and sale of microwave equipment for advanced materials processing. Since January 1988, Mr. Schuster has been the Chairman and from May 1988 through February 1995 was Chief Executive Officer, of Cellex Biosciences, Inc., a publicly held manufacturer of automated cell culture systems. Mr. Schuster is Chairman and Chief Executive Officer of Art Renaissance, Inc., a privately held company which operates several chains of retail art galleries. Mr. Schuster does not currently serve on a full time basis in his capacities with the Company. Wilbur L. Ross, Jr. has been a Director of the Company since 1984. Mr. Ross serves as a member of the Audit, Stock Option and Executive Incentive Compensation Committees. Mr. Ross has been a Senior Managing Director of Rothschild Inc., an investment banking firm, since August 1976. Mr. Ross serves as a director of Syms Corporation and is Chief Executive Officer and a director of News Communications, Inc. and is a director of KTI, Inc. John E. McConnaughy, Jr. has been a Director of the Company since 1984. Mr. McConnaughy serves as Chairman of the Audit Committee and a member of the Stock Option and Executive Incentive Compensation Committees. Mr. McConnaughy was Chairman and Chief Executive Officer of Peabody International Corp. from 1969 to 1986. He was Chairman and Chief Executive Officer of GEO International Corp. (GEO), a nondestructive testing, screen printing and oil field services company, from 1981 to 1992. GEO was spun off in 1981 and became publicly held. Mr. McConnaughy has been a director of Oxigene, Inc., Texstar Corporation, MAI Corporation, Akzona Corp., First Bank Corp. (New Haven), Beringer Co., Inc. the Pullman Co., Moore McCormack Resources and Peabody International Corp. He is currently on the Board of Directors of Transact International, Inc., DeVlieg Bullard, Inc., Levcor International, Inc., Riddell Sports, Inc., Wave Systems, Inc and Adrien Arpel, Inc. Mr. McConnaughy is on the Board of Trustees and Executive Committee of the Strang Cancer Prevention Center and is Chairman of the Board of the Harlem School of the Arts. Frederick H. Conte has been with PEC since 1978, and has been its President and Chief Operating Officer since June 1998. Prior to this, Mr. Conte held various positions at PEC, including that of Executive Vice President and Chief Operating Officer, since February 1988. Jon A. Joseph has been a Vice President and Associate General Counsel of the Company since July 1995. Mr. Joseph was Executive Vice President of Valley Bank of Nevada from 1984 to 1991. In 1992, Valley Bank of Nevada was acquired by Bank of America. Mr. Joseph remained with the legal department of Bank of America until June 1, 1995, when he joined the Company. Charles G. Baltuskonis has been a Vice President and Chief Accounting Officer of the Company since April 1997. He is a certified public accountant and served as Senior Vice President and Controller of Chase 39 42 Federal Bank from May 1995 to March 1997. Prior to that date, he was Chief Financial Officer of F&C Bancshares and First Coastal Bank, a Senior Vice President -- Finance of Bank of New England, and was a Senior Manager with the public accounting firm of Ernst & Young. Richard L. Rodriguez has been with PEC since 1984, and has been its Treasurer since January 1994. He became a Vice President of Mego Financial in November 1998 and a Vice President of PEC in August 1991. Prior to this Mr. Rodriguez held various positions at PEC including General Manager of Customer Services in 1985 and Manager of Financial Operations in April 1988. PEC is currently undergoing a management transition. Jerome J. Cohen is re-assuming the position of President of PEC which he held between 1988 and June 1998. Gregg A. McMurtrie, formerly a Vice President of PEC, has been promoted to Executive Vice President and Chief Operating Officer. Frederick H. Conte, currently President of PEC, will be leaving PEC after a transition period, having accepted another senior position in the timeshare industry. Mr. Conte's departure is on excellent terms with the Company, and he is contractually obligated not to solicit employees of PEC. Gregg A. McMurtrie was named Executive Vice President and Chief Operating Officer of PEC in November 1998. Mr. McMurtrie joined the staff of PEC in August 1982. From August 1982 to July 1987, Mr. McMurtrie served in various capacities in the credit, internal auditing, marketing, customer relations, sales and executive departments. He was General Manager, Colorado Land Sales, from September 1987 to February 1989. Since September 1989, Mr. McMurtrie has served as Director of Sales Administration. He was promoted to Vice President of PEC in August 1991. Since February 1992, he has also served as President, Secretary and Treasurer of Preferred Equities Insurance Agency, Inc. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's Directors and executive officers, and persons who own more than ten percent of the Company's outstanding common stock, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock. Such persons are required by SEC regulation to furnish the Company with copies of all such reports they file. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, all Section 16(a) filing requirements applicable to its officers, Directors and greater than ten percent beneficial owners have been satisfied, except that a Form 4 filed by Wilbur L. Ross, Jr. with respect to the sale of an aggregate of 152,500 shares of Common Stock was not timely filed. ADDITIONAL INFORMATION CONCERNING OFFICERS AND DIRECTORS 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 shareholders 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 received an annual fee of $40,000 in fiscal 1998 and will receive an annual fee of $30,000 for fiscal 1999. Directors are also reimbursed for their expenses incurred in attending meetings of the Board of Directors and its committees. Effective as of September 23, 1998, the Company entered into indemnification agreements with each of its directors and Don A. Mayerson, its Executive Vice President, General Counsel and Secretary, which superseded indemnification agreements entered into by the Company and such persons in April 1998. The new indemnification agreements provide certain protections now afforded by the Company's Articles of Incorporation and By-laws so that they cannot be changed without the consent of such directors and officer. In addition, such agreements clarify the procedures for obtaining indemnification from the Company and require the Company to maintain directors and officers insurance. 40 43 ITEM 11. 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 four other most highly compensated executive officers whose annual salary and bonus during the fiscal years presented exceeded $100,000 (Named Executive Officers).
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION ---------------------------- -------------------------------------------- NUMBER OF FISCAL OTHER ANNUAL OPTIONS ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(A) COMPENSATION GRANTED(B) COMPENSATION(C) --------------------------- ------ -------- -------- ------------- ---------- --------------- Robert Nederlander................... 1996 $150,000 $ 2,885 $3,789 -- $2,293 Chairman of the Board and Chief 1997 150,000 2,885 4,378 -- 2,010 Executive Officer, MFC 1998 200,000 -- 6,373 12,500 1,039 Chairman of the Board, PEC Jerome J. Cohen,..................... 1996 $300,000 $216,666 $6,279 -- $2,250 President, MFC 1997 300,002 368,800 7,259 -- 2,329 Chief Executive Officer, PEC 1998 300,002 -- 8,383 12,500 2,644 Don A. Mayerson...................... 1996 $200,000 $ 86,680 $5,305 -- $2,250 Executive Vice President, General 1997 200,000 147,520 6,132 -- 2,381 Counsel and Secretary, MFC 1998 200,000 -- 7,077 5,000 2,375 Senior Vice President, PEC Herbert B. Hirsch.................... 1996 $200,000 $ 86,680 $1,512 -- $2,250 Senior Vice President, Chief 1997 200,000 147,520 1,743 -- 2,319 Financial Officer & Treasurer, MFC 1998 200,000 -- 2,005 5,000 2,341 Senior Vice President and Chief Financial Officer , PEC Frederick H. Conte................... 1998 $175,010 $ -- $ -- 30,000 $2,399 President and Chief Operating Officer, PEC (effective June 1998)
- --------------- (a) In January 1997, pursuant to contractual arrangements, incentive compensation attributable to the year ended August 31, 1996 was paid to Messrs. Cohen, Mayerson and Hirsch and is included in the above table as 1996 compensation. Incentive compensation attributable to the year ended August 31, 1997 paid to Messrs. Cohen, Mayerson and Hirsch is included in the above table as 1997 compensation. (b) The Company adopted the Stock Option Plan on November 17, 1993, and options were granted to certain executive officers on December 22, 1993 and subsequently to other employees, subject to shareholder approval of the Stock Option Plan. The Stock Option Plan was approved by the shareholders on February 9, 1994 and later amended and restated. See Stock Option Plan. One-fifth of each grant to the Named Executive Officers became exercisable on December 22, 1994 and an additional one-fifth became exercisable on December 22, 1995 and December 22, 1996. In August 1997, in connection with the approval by the Company's Board of Directors of the distribution to the holders of record of the Company's common stock as of August 27, 1997 of all 10 million shares of MMC's common stock held by the Company in the Spin-off, the Stock Option Committee accelerated the vesting of all such options, excluding those options granted subsequent to February 26, 1997. See "Aggregated Fiscal Year-End Option Table" and "Stock Option Plan." There were 65,000 of options held by Named Executive Officers at August 31, 1998. There were no options exercised by the executive officers during fiscal 1998. On September 23, 1998, the exercise price of these options was revised from $3.125 per share to $1.00 per share. There were also an additional 37,500 of options granted on September 23, 1998 to the Named Executive Officers at an exercise price of $1.00 per share. (c) Represents the Company's discretionary matching contributions of 25% of the employee's contribution to the Company's 401(k) Plan on behalf of the employee. 41 44 OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth certain information concerning grants of stock options made during the fiscal year ended August 31, 1998 to the Named Executive Officers:
INDIVIDUAL GRANTS POTENTIAL REALIZABLE -------------------------------------------------------- VALUE AT ASSUMED NUMBER OF PERCENT OF ANNUAL RATES OF SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION ------------------------- NAME GRANTED(#) FISCAL YEAR ($/SH)(1) DATE 5%($) 10%($) ---- ------------ ------------- --------- ---------- ---------- ----------- Robert Nederlander... 12,500 3.6% $3.438 09/02/02 $ 7,000 $ 20,000 Jerome J. Cohen...... 12,500 3.6% $3.125 09/02/07 $25,000 $ 62,000 Don A. Mayerson...... 5,000 1.4% $3.125 09/02/07 $10,000 $ 25,000 Herbert B. Hirsch.... 5,000 1.4% $3.125 09/02/07 $10,000 $ 25,000 Frederick H. Conte... 30,000 8.6% $3.125 09/02/07 $59,000 $149,000
- --------------- (1) On September 23, 1998, the exercise price of these options was revised to $1.00 per share which represented fair value at the date of repricing. AGGREGATED FISCAL YEAR-END OPTION VALUE TABLE The following table sets forth certain information concerning unexercised stock options held by the Named Executive Officers as of August 31, 1998. No stock options were exercised by the Named Executive Officers during the fiscal year ended August 31, 1998. See "Stock Option Plan" below in this section.
VALUE OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS HELD AT OPTIONS HELD AT AUGUST 31, 1998 AUGUST 31, 1998(1) ---------------------------- ---------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- Robert Nederlander......................... -- 12,500 $ -- $ -- Jerome J. Cohen............................ -- 12,500 $ -- $ -- Don A. Mayerson............................ -- 5,000 $ -- $ -- Herbert B. Hirsch.......................... -- 5,000 $ -- $ -- Frederick H. Conte......................... -- 30,000 $ -- $ --
- --------------- (1) The closing sales price of the Company's Common Stock as reported on the Nasdaq National Market on August 31, 1998 was $1.938. The exercise price as of August 31, 1998 was $3.125 per share, therefore, the value of the unexercised options at August 31, 1998 was zero. On September 23, 1998, the exercise price of these options was revised to $1.00 per share which represented fair value at the date of repricing. EMPLOYMENT AGREEMENTS The Company has entered into an employment agreement with Jerome J. Cohen which expires on January 31, 2002. The agreement provides for an annual base salary of $300,000 plus 2.5% of Incentive Income as defined in the Company's Incentive Plan (See "Executive Incentive Compensation Plan"). Mr. Cohen's employment agreement does not provide for an early termination bonus or other additional compensation based on performance. The Company has entered into an employment agreement with Jon A. Joseph which expires on August 31, 2000 and provides for an annual base salary of $175,000 and a minimum annual bonus of $25,000. PEC has entered into a compensation agreement with Frederick H. Conte which provides for an annual base salary of $240,000. In addition, Mr. Conte is to receive an incentive bonus each full fiscal year during Mr. Conte' s employment at PEC commencing with fiscal 1999 and shall receive an incentive bonus in an amount equal to .75% of Incentive Income as defined in the Company's Incentive Plan. If Mr. Conte's employment is terminated by PEC, Mr. Conte shall receive his base salary to the date of termination and a 42 45 severance payment of $200,000 payable as installments over the following nine months after termination. As discussed above, Mr. Conte has informed the Company that he is terminating his employment with the Company after a short transition period. STOCK OPTION PLAN Under the Company's Stock Option Plan, as originally adopted, 525,000 shares of common stock were reserved for issuance upon exercise of options. In 1997, the Company's Board of Directors approved an amendment to the Stock Option Plan to increase by 500,000 shares the number of shares of common stock reserved for issuance pursuant to the Company's Stock Option Plan, subject to approval by the Company's shareholders. The amendment was approved by the shareholders at the Annual Meeting held September 9, 1997, resulting in an aggregate of 1,025,000 shares of common stock reserved for issuance pursuant to the Stock Option Plan of which 461,000 had been issued due to the exercise of options through August 31, 1997. During fiscal 1998, the Company's Board of Directors unanimously approved, subject to approval by the Company's shareholders, the amendment and restatement of the Stock Option Plan. The amendments to the Stock Option Plan (the Plan Amendments) approved by the Company's Board of Directors consist of changes to permit the grant of options to non-employee directors of the Company and changes to conform the Stock Option Plan to changes to the federal securities laws. On September 16, 1998, the shareholders approved the amendment and restatement of the Stock Option Plan. The Stock Option Plan is designed to serve as an incentive for retaining qualified and competent employees and directors. The Stock Option Committee of the Company's Board of Directors, administers and interprets the Stock Option Plan and is authorized, in its discretion, to grant options thereunder to all eligible employees of the Company, including officers of the Company. The Stock Option Plan provides for the granting of both "incentive stock options" (as defined in Section 422A of the Internal Revenue Code) and nonstatutory stock options. Options can be granted under the Stock Option Plan on such terms and at such prices as determined by the Board, or a committee thereof, except that the per share exercise price of options may not be less than 80% of the fair market value of the common stock on the date of grant, and, in the case of an incentive stock option, the per share exercise price may not be less than 100% of such fair market value. In the case of incentive stock options granted to a 10% shareholder, the per share exercise price may not be less than 110% of the fair market value of the common stock on the date of grant and shall expire five years from the date of grant. The aggregate fair market value of the shares covered by incentive stock options granted under the Stock Option Plan that become exercisable by a grantee for the first time in any calendar year is subject to a $100,000 limit. Options granted under the Stock Option Plan are exercisable after the period or periods specified in the option agreement. Options granted under the Stock Option Plan are not exercisable after the expiration of ten years from the date of grant (except in the case of options granted to 10% shareholders) and are not transferable other than by will or by the laws of descent and distribution. In August 1997, in connection with the Spin-off of MMC, the Stock Option Committee accelerated the vesting of all options granted, excluding those granted subsequent to February 26, 1997. As of August 31, 1997, an aggregate of 455,000 of such options were exercised. In September 1997, subsequent to the Spin-off, an additional 348,500 incentive stock options were granted under the Stock Option Plan to employees at fair market value, which was authorized by the Stock Option Committee, of which 15,000 were subject to future shareholder approval of the Plan Amendments in accordance with applicable law, which shareholders' approval was obtained on September 16, 1998, when the Amended and Restated Stock Option Plan was approved by shareholders. On September 23, 1998, an additional 111,000 incentive stock options were granted under the Stock Option Plan. In addition, the exercise price of all options issued September 2, 1997 was revised from $3.125 per share to $1.00 per share. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Board of Directors has not designated a Compensation Committee, but has delegated the responsibility and authority for setting and overseeing the administration of policy which governs the 43 46 compensation of all of the Company's employees (with the exception of Messrs. Nederlander, Cohen, Mayerson, Hirsch and Schuster) to its President, Jerome J. Cohen. The compensation paid to Messrs. Nederlander, Cohen, Mayerson, Hirsch and Schuster is determined by the Board of Directors. The directors who are also executive officers of the Company do not participate in deliberations of the Board of Directors of the Company concerning their own compensation. EXECUTIVE INCENTIVE COMPENSATION PLAN On June 22, 1994, the Board of Directors of the Company approved and adopted an Executive Incentive Compensation Plan (Incentive Plan) for executives and other key employees of the Company and its subsidiaries who contribute to the success of the Company. Under the terms of the Incentive Plan, awards of incentive compensation are determined by the Incentive Compensation Committee of the Board of Directors of the Company, which committee shall be composed of not less than two members. The Incentive Plan provides that the Board of Directors may amend, suspend or terminate the Incentive Plan at any time. Incentive Compensation for any fiscal year is defined as an amount equal to 7.5% of incentive income (Incentive Income) for such year. Incentive Income for any fiscal year is defined as the amount reported as income before taxes in the consolidated financial statements of the Company for such year. The maximum amount of all awards of Incentive Compensation for any fiscal year shall not exceed (a) 7.5% of Incentive Income for such year, reduced by (b) the amount of Incentive Income which must be paid by the Company to employees pursuant to any contractual obligation of the Company, increased by (c) any unawarded Incentive Compensation carried forward from a prior fiscal year. On June 22, 1994, the Board of Directors also approved an employment agreement with Mr. Jerome J. Cohen, President of the Company, and agreements with Messrs. Don A. Mayerson and Herbert B. Hirsch, executive officers of the Company, pursuant to which Messrs. Cohen, Mayerson and Hirsch are entitled to receive 2.5%, 1% and 1% respectively, of Incentive Income of the Company, as defined in the Incentive Plan, for the five-year period commencing with fiscal 1995 (extended to a seven-year period for Mr. Cohen), which amounts would directly reduce the amounts available for awards under the Incentive Plan. On September 2, 1997, the Board of Directors increased the annual salaries of Messrs. Nederlander and Schuster to $200,000 and $75,000, respectively. At that meeting, the Board also authorized agreements with Messrs. Mayerson and Hirsch pursuant to which the Company would pay them, as a separation payment, $250,000 and $150,000, respectively, at such time as they no longer are employed by the Company. SPLIT-DOLLAR INSURANCE PLAN On April 5, 1995, the Board of Directors of the Company established a split-dollar life insurance plan (Split-Dollar Plan) pursuant to which the Company pays the premiums for certain "second to die" life insurance policies on the lives of Robert Nederlander, Jerome J. Cohen, Don A. Mayerson and Herbert B. Hirsch, executive officers of the Company (Messrs. Nederlander, Cohen and Hirsch are also directors of the Company), and their respective spouses, for a period not to exceed five years, at an annual aggregate premium outlay of $400,000. Each policy is in the name of a trust established for family beneficiaries selected by each executive. On August 3, 1995, the Company approved a life insurance policy for Mr. Schuster at an annual cost of $100,000 for a period of five years. Pursuant to the plan, and with respect to each policy, after ten years, or earlier upon the deaths of the respective insured parties, or certain other events, the Company will receive the amount of premiums paid on the policy. 44 47 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of November 9, 1998, information with respect to the beneficial ownership of the Company's common stock by (i) each person known by the Company to be the beneficial owner of more than 5% of the outstanding shares of common stock, (ii) each director of the Company, (iii) each of the Named Executive Officers (as defined in "Item 11. Executive Compensation"), and (iv) all directors and executive officers of the Company as a group. Unless otherwise noted, the Company believes that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them.
PERCENTAGE OF NAME AND ADDRESS OF AMOUNT AND NATURE OF OUTSTANDING COMMON BENEFICIAL OWNER OR IDENTITY OF GROUP BENEFICIAL OWNERSHIP(1) STOCK OWNED ------------------------------------- ----------------------- ------------------ Robert Nederlander(2)......................... 2,039,352 9.7% Eugene I. Schuster and Growth Realty Inc. (GRI)(3).................................... 1,835,634 8.7% Jerome J. Cohen(4)............................ 1,104,464 5.3% Herbert B. Hirsch(5).......................... 1,623,464 7.7% Don A. Mayerson(6)............................ 829,555 3.9% John E. McConnaughy, Jr.(7)................... 594,077 2.8% Wilbur L. Ross, Jr.(8)........................ 1,000 * Frederick H. Conte(9)......................... 29,214 0.1% Friedman Billings Ramsey Group, Inc. and affiliates(10).............................. 2,326,550 11.1% All Officers and Directors as a Group (10 persons)(11)................................ 8,070,260 38.4%
- --------------- * 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 November 9, 1998 upon the exercise of options or 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 applicable date have been exercised. (2) 810 Seventh Avenue, 21st Floor, New York, New York 10019. Includes 250,000 shares held by an affiliate of Mr. Nederlander and 2,500 shares issuable under an option granted pursuant to the Company's Stock Option Plan. Does not include 100,000 shares of common stock owned by the Robert E. Nederlander Foundation, an entity organized and operated exclusively for charitable purposes (the Foundation), of which Mr. Nederlander is President. Mr. Nederlander disclaims beneficial ownership of the shares owned by the Foundation. (3) 321 Fisher Building, Detroit, Michigan 48202. Consists of (i) 1,599,634 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, (ii) 235,000 shares held of record by Growth Realty Holdings L.L.C., a limited liability corporation owned by Mr. Schuster, GRI and Mr. Schuster's three children, and (iii) 1,000 shares issuable under an option granted pursuant to the Company's Stock Option Plan. (4) 1125 N. E. 125th Street, Suite 206, North Miami, Florida 33161. Includes 2,500 shares issuable under an option granted pursuant to the Company's Stock Option Plan. Excludes 93,503 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. Also excludes 30,000 shares of common stock owned by the Rita and Jerome J. Cohen Foundation, Inc., an entity organized and operated exclusively for charitable purposes (the Cohen Foundation), of which Mr. Cohen is President. Mr. Cohen disclaims beneficial ownership of the shares owned by the Cohen Foundation. 45 48 (5) 230 East Flamingo Road, Las Vegas, Nevada 89109. Includes 1,000 shares issuable under an option granted pursuant to the Company's Stock Option Plan. (6) 1125 N. E. 125th Street, Suite 206, North Miami, Florida 33161. Includes 1,000 shares issuable under an option granted pursuant to the Company's Stock Option Plan. (7) 1011 High Ridge Road, Stamford, Connecticut 06905. Includes 1,000 shares issuable under an option granted pursuant to the Company's Stock Option Plan. Excludes 3,000 shares owned by a member of Mr. McConnaughy's family, as to which Mr. McConnaughy does not have any investment or voting power, and as to which he disclaims beneficial ownership. (8) 1251 Avenue of the Americas, 51st Floor, New York, New York 10020. Consists of 1,000 shares issuable under an option granted pursuant to the Company's Stock Option Plan. Excludes 15,000 shares owned by a member of Mr. Ross' family and 250,000 shares owned by Rothschild, Inc., of which Mr. Ross is a Managing Director, over which Mr. Ross does not have any investment or voting power, and as to which he disclaims beneficial ownership. (9) 4310 Paradise Road, Las Vegas, NV 89109. Includes 6,000 shares issuable under an option granted pursuant to the Company's Stock Option Plan. (10) 1001 19th Street North, Arlington, VA. 22209. Based upon a Schedule 13G dated July 13, 1998 filed jointly by Friedman Billings Ramsey Group, Inc., Friedman Billings Ramsey Group, Inc. Voting Trust, Eric F. Billings, Emanuel J. Friedman and W. Russell Ramsey with the SEC. Consists of 2,266,550 shares owned by Friedman Billings Ramsey Group, Inc. and 60,000 shares owned personally by Emanuel J. Friedman. The Company has been advised that Emanuel J. Friedman, Eric F. Billings and W. Russell Ramsey are each control persons with respect to Friedman Billings Ramsey Group, Inc. and are the sole voting trustees of the Friedman Billings Ramsey Group, Inc. Voting Trust, which has sole discretion to vote approximately 89.1% of the voting power of Friedman Billings Ramsey Group, Inc. (11) See Notes (2) - (9). Also includes 11,000 and 2,500 shares, respectively, issuable under options granted to Mr. Joseph and Mr. Rodriguez pursuant to the Company's Stock Option Plan. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Purchase of Preferred Equities Corporation. Pursuant to a Stock Purchase and Redemption Agreement dated October 6, 1987 and amended October 25, 1987, Comay Corp., an affiliate of Messrs. Cohen and Mayerson (Comay), GRI, an affiliate of Mr. Schuster, RRE Corp., an affiliate of Mr. Nederlander (together with its assignee, RER Corp., another affiliate of Mr. Nederlander, RER), and H&H Financial Inc., an affiliate of Mr. Hirsch (H&H), obtained the rights (PEC Purchase Rights) to acquire PEC, a privately-held Nevada corporation engaged in retail land sales, resort time-sharing and other real estate related activities. (Comay, GRI, RER and H&H are collectively referred to as the Assignors). Certain Arrangements Between the Company and Affiliates of Certain Officers and Directors. Pursuant to the Assignment and Assumption Agreement, dated February 1, 1988 as subsequently amended, the Assignors assigned (Assignment) their PEC Purchase Rights to the Company. As part of the consideration for the Assignment to the Company, the Assignors were entitled to receive from the Company, on a quarterly basis until January 31, 1995, amounts equal in the aggregate to 63% of the "Unrestricted Cash Balances" of PEC. The Assignment and Assumption Agreement defines Unrestricted Cash Balances of PEC as the cash on hand and on deposit of PEC and its subsidiary as of the end of a fiscal quarter that could be used to make a dividend or other payment to the Company without violating the most restrictive loan agreement to which PEC is a party or by which PEC is bound. On January 31, 1995, at which point the accrual of payments ceased, the Company owed the Assignors an aggregate of $13.3 million pursuant to the Assignment and Assumption Agreement. Pursuant to an amendment (the Amendment) to the Assignment and Assumption Agreement, dated March 2, 1995, the Assignors agreed to defer payment of the $10 million of Subordinated Debt and to subordinate the payment of such amount to them to the Company's repayment of certain borrowings and the repayment of certain obligations of subsidiaries of the Company, the repayment of which obligations were guaranteed by the 46 49 Company. In consideration of the payment deferral and subordination described above, Warrants for 1 million shares of common stock at an exercise price of $4.25 per share (the closing market price per share on March 2, 1995) were granted to the Assignors. The Warrants were exercised in August 1997 in a non-cash transaction whereby the Subordinated Debt was reduced by $4.25 million. The Amendment calls for interest to be paid semiannually on the Subordinated Debt at the rate of 10% per annum starting September 1, 1995, and seven equal semiannual payments of $1.4 million plus interest, which commenced March 1, 1997. However, in connection with the reduction of the Subordinated Debt, payments accumulating $4.25 million have been deemed paid and the semiannual payments will resume in March 1999, with a partial payment in September 1998, pursuant to the Third Amendment to the Assignment and Assumption Agreement. The Subordinated Debt is collateralized by a pledge of PEC's outstanding stock. In addition to the Subordinated Debt, at May 31, 1995, $3.3 million was payable to the Assignors, which amount bore interest at the rate of 10% per year, payable semiannually pursuant to the provisions of the Assignment and Assumption Agreement (Unsubordinated Amount). During fiscal 1998, the Company paid an aggregate of $640,000 to the Assignors on the subordinated debt, all of which represented interest. The Unsubordinated Amount was paid in full in January 1997. In April 1995, PEC entered into an arrangement with Ramada, a subsidiary of Cendant Corporation, of which Mr. Nederlander became a director in July 1995. See "Business -- Preferred Equities Corporation -- Timeshare Properties and Sales." Transactions with MMC. The Company formed MMC in June 1992 as a wholly-owned subsidiary and operated MMC as such until November 1996. MMC is a specialized consumer finance company that originates, purchases, sells, securitizes and services consumer loans consisting primarily of conventional uninsured home improvement and debt consolidation loans which are generally secured by liens on residential property. In November 1996, MMC consummated the IPO and as a result, the Company's ownership of MMC was reduced to approximately 81.3% of the outstanding common stock. On September 2, 1997, Mego Financial distributed all of its 10 million shares of MMC's common stock to Mego Financial's shareholders in the Spin-off. To fund MMC's past operations and growth and in conjunction with filing consolidated income tax returns, MMC incurred debt to the Company and its subsidiary, PEC. The amount of intercompany debt was $10.1 million at August 31, 1997 of which $3.4 million was paid in October 1997 together with $500,000 advanced by the Company to MMC in September 1997. Subsequently, separate agreements were made in April and June 1998 to adjust by reductions the remaining $6.2 million indebtedness, since the major portion was no longer payable under the Tax Sharing and Indemnity Agreement between the Company and MMC, in consideration of which MMC paid $1.6 million, which was separately owed to PEC. Following this transaction, MMC had no outstanding indebtedness to the Company. See Note 4 to Notes to Consolidated Financial Statements. Management Services Provided by PEC to MMC. MMC and PEC were parties to a management services arrangement (the Management Arrangement) pursuant to which certain executive, accounting, legal, management information, data processing, human resources, advertising and promotional personnel of PEC provided services to MMC on an as needed basis. For the years ended August 31, 1998, 1997 and 1996, approximately $616,000, $967,000, and $671,000, respectively, of the salaries and expenses of certain employees of PEC were attributable to and paid by MMC in connection with services rendered by such employees to MMC. In addition, during the year ended August 31, 1996, MMC paid PEC for developing certain computer programming costs of $56,000. This agreement was terminated by agreement during fiscal 1998. Servicing Agreement between PEC and MMC. Prior to September 1, 1996, MMC had an arrangement with PEC pursuant to which it paid annual servicing fees at an annual rate of 50 basis points on the principal balance of loans serviced. For the years ended August 31, 1998, 1997 and 1996, MMC paid servicing fees to PEC of approximately $2,008,000, $1,766,000 and $709,000, respectively. MMC entered into a servicing agreement with PEC (the Servicing Agreement), providing for the payment of servicing fees at an annual rate of 50 basis points on the principal balance of loans serviced per year. The Servicing Agreement was modified 47 50 effective September 1, 1997, to provide for the payment of servicing fees at an annual rate of 40 basis points on the principal balance of loans serviced per year, reducing to 35 basis points per year. For the years ended August 31, 1998, 1997 and 1996, MMC incurred interest expense in the amount of $29,000, $16,000 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 equaled 10.46% in 1998, 10.48% in 1997 and 10.68% in 1996. By agreement prior to August 31, 1998, PEC no longer services loans for MMC. 48 51 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a)Certain documents filed as part of Form 10-K. See Item 8 above for a list of financial statements included as part of this Annual Report on Form 10-K. (b)Reports on Form 8-K. The Company did not file any current report on Form 8-K during the quarter ended August 31, 1998. (c) Exhibits.
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1(1) Disclosure Statement dated October 3, 1983, together with Schedules A through G and Debtors' Plan, filed as Exhibit (2) to Mego International (a predecessor of the Company) Form 10-K for the year ended February 28, 1983, and incorporated herein by reference. 2.2(8) Articles of Merger of Vacation Spa Resorts, Inc. with and into Preferred Equities Corporation dated March 10, 1993, Agreement and Plan of Merger dated as of July 24, 1992, among Preferred Equities Corporation and Vacation Spa Resorts, Inc., Amendment to Agreement and Plan of Merger dated July 14, 1992, and Amendment to Agreement and Plan of Merger dated December 7, 1992. 3.1(a)(1) Certificate of Incorporation of the Company, as amended, filed as Exhibit 3.1 to the Company's Form 10-K for the fiscal year ended August 31, 1987 and incorporated herein by reference. 3.1(b)(5) Certificate of Amendment of the Certificate of Incorporation of the Company, dated June 19, 1992. 3.1(c)(8) Certificate of Amendment of the Certificate of Incorporation of the Company, dated August 26, 1993. 3.2(1) By-laws of the Company, as amended. 3.3(10) Mego Mortgage Corporation Amended and Restated Certificate of Incorporation of Mego Mortgage Corporation. 3.4(10) Mego Mortgage Corporation By-laws of Mego Mortgage Corporation, as amended. 4.1(10) Mego Mortgage Corporation Specimen Common Stock Certificate. 10.4(a)(1) Stock Purchase Agreement dated October 25, 1987 by and among the Company, and Robert Nederlander, Jerome J. Cohen, Don A. Mayerson, Herbert Hirsch and Growth Realty Inc. (GRI) (collectively, the Purchasers) filed as Exhibit A to a Schedule 13D dated October 25, 1987, filed by Jerome J. Cohen, et al., and incorporated herein by reference. 10.4(b)(1) Letter dated January 7, 1988 from the Purchasers of the Company, updating representations made by the Company, in the Stock Purchase Agreement (Exhibit 10.5(a)) filed as Exhibit 10.2 to a Current Report on Form 8-K of the Company, dated January 7, 1988, and incorporated herein by reference. 10.5(a)(1) Assignment Agreement dated October 25, 1987 by and among Comay Corp. (Comay), GRI, RER Corp. (RER) (as successor in interest to RRE Corp.) and H&H Financial, Inc. (H&H) (collectively the Assignors) and the Company, with respect to shares of Common Stock of Preferred Equities Corporation (PEC), filed as Exhibit B to a Schedule 13D dated October 25, 1987 filed by Jerome J. Cohen, et al., and incorporated herein by reference.
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.5(b)(1) Assignment and Assumption Agreement dated February 1, 1988 by and among the Assignors and the Company filed as Exhibit 10.2 to a Current Report of Form 8-K of the Company, dated February 1, 1988 and incorporated herein by reference. 10.5(c)(1) Amendment to Exhibit 10.6(b) dated as of July 29, 1988 filed as Exhibit 10.3 to a Current Report on Form 8-K of the Company, dated August 1, 1988 and incorporated herein by reference. 10.6(a)(1) Stock Purchase and Redemption Agreement dated as of October 6, 1987 by and among PEC, Comay, GRI, RRE Corp., H&H, Linda Sterling and the 1971 Rosen Family Stock Trust filed as Exhibit C to a Schedule 13D dated October 25, 1987 filed by Jerome J. Cohen, et al., and incorporated herein by reference. 10.6(b)(1) Amendment dated as of October 25, 1987 of Exhibit 10.7(a) filed as Exhibit 10.3(b) to a Current Report on Form 8-K of the Company dated February 1, 1988, and incorporated herein by reference. 10.7(1) Loan and Security Agreement dated February 1, 1988 by and between the Company and Greyhound Real Estate Finance Company filed as Exhibit 10.7 to a Current Report on Form 8-K of the Company dated February 1, 1988 and incorporated herein by reference. 10.8(1) Pledge and Security Agreement dated February 1, 1988 by and among the Company and Comay, GRI, REF, H&H and PEC regarding the pledge of PEC stock pursuant to the Assignment Agreement and the Assignment and Assumption Agreement (Exhibits 10.6(a) and (b)) filed as Exhibit 10.8 to the Form 8 Amendment dated April 18, 1988 to a Current Report on Form 8-K of the Company dated February 1, 1988 and incorporated herein by reference. 10.9(1) Purchase Agreement dated June 30, 1988 by and among Preferred Equities Corporation (PEC), Southern Colorado Properties, Inc., Colorado Land and Grazing Company and The Oxford Finance Companies, Inc. filed as Exhibit 10.1 to a Quarterly Report of the Company on Form 10-Q for the quarter ended May 31, 1988 and incorporated herein by reference. 10.10(2) Amendment to Exhibit 10.5(b), dated July 29, 1988. 10.11(3) Amended and Restated Loan and Security Agreement between Greyhound Real Estate Finance Company and Vacation Spa Resorts, Inc., dated May 10, 1989 and Amended and Restated Promissory Note and Guarantee and Subordination Agreement. 10.12(3) Amendment No. 2 to Loan and Security Agreement between Greyhound Real Estate Finance Company and Vacation Spa Resorts, Inc., dated April 16, 1990 and Amendment No. 2 to Promissory Note and Guarantee and Subordination Agreement. 10.13(3) Purchase Agreement dated 24th day of September, 1990 by and among Brigantine Inn, Ltd., Brigantine Preferred Properties, Inc. and Preferred Equities Corporation. 10.14(3) Purchase Agreement dated 24th day of September, 1990 by and among Brigantine Villas, L.P., Brigantine Preferred Properties, Inc., and Preferred Equities Corporation. 10.15(4) Amendment No. 3 to Loan and Security Agreement between Greyhound Real Estate Finance Company and Preferred Equities Corporation, dated May 31, 1991 and Amendment No. 2 to Promissory Note. 10.16(4) Amendment No. 3 to Loan and Security Agreement between Greyhound Real Estate Finance Company and Vacation Spa Resorts, Inc., dated May 31, 1991 and Amendment No. 2 to Promissory Note. 10.17(4) Loan and Security Agreement between Dorfinco Corporation and Preferred Equities Corporation, dated July 31, 1991 and related Promissory Note dated August 9, 1991.
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.18(4) Forbearance and Assumption Agreement, Guarantee and Second Amendment to Loan and Security Agreement between Chemical Bank of New Jersey, Brigantine Villas, L.P. and Brigantine Preferred Properties, Inc., dated June 12, 1991, Amended and Restated Promissory Note dated June 18, 1991, and Second Amendment to Mortgage dated June 18, 1991. 10.19(5) Stock Purchase Agreement dated August 13, 1992 between the Company and PEC. 10.20(5) Amendment No. 4 to Amended and Restated Loan and Security Agreement between Greyhound Real Estate Finance Company and Preferred Equities Corporation, dated January 13, 1992, and Amendment No. 3 to Amended and Restated Promissory Note. 10.21(5) Agreement to Wholesale Financing and related Promissory Note between ITT Commercial Finance Corp. and Calvada Homes, Inc., dated January 17, 1992. 10.22(5) Purchase and Sale Agreement between Golden West Homes and Calvada Homes, Inc., dated February 26, 1992. 10.23(5) Standard Form of Agreement between Owner and Contractor between Calvada Homes, Inc. and Emfad Enterprises, Inc., dated March 23, 1992. 10.24(5) Loan Modification and Extension Agreement between Valley Bank of Nevada and Preferred Equities Corporation dated January 30, 1992. 10.25(5) Amendment No. 2 to Amended and Restated Loan Agreement between Valley Bank of Nevada and Vacation Spa Resorts, Inc., dated February 20, 1992, and related Promissory Note dated February 20, 1992. 10.26(6) Purchase and Servicing Agreement dated as of October 15, 1992 among Vacation Spa Resorts, Inc. and Preferred Equities Corporation as Sellers, Preferred Equities Corporation as Servicer, and NBD Bank, N.A. as Purchaser. 10.27(6) Guaranty Agreement as of October 15, 1992 made by Vacation Spa Resorts, Inc., Preferred Equities Corporation, and the Company in favor of NBD Bank, N.A. 10.28(6) Letter from Greyhound Financial Corporation dated December 4, 1992 extending the borrowing term of the Amended and Restated Loan and Security Agreement dated May 10, 1992, between Greyhound Real Estate Finance Company and Preferred Equities Corporation and Loan and Security Agreement dated March 30, 1989, between Greyhound Real Estate Finance Company and Vacation Spa Resorts, Inc., to December 31, 1992. 10.29(7) Asset Sale Agreement dated December 22, 1992, by and between Brigantine Preferred Properties, Inc. as Seller, and The Oxford Finance Companies as Buyer. 10.30(7) Amendment No. 5 to Amended and Restated Loan and Security Agreement between Greyhound Real Estate Finance Company and Preferred Equities Corporation, dated February 23, 1993, Amendment No. 4 to Loan and Security Agreement between Greyhound Real Estate Finance Company and Vacation Spa Resorts, Inc., dated February 23, 1993. 10.31(7) First Amendment to Stock Purchase Agreement dated March 10, 1993, by and between the Company and Preferred Equities Corporation. 10.32.(7) Amendment No. 6 to Amended and Restated Loan and Security Agreement between Greyhound Real Estate Finance Company and Preferred Equities Corporation, dated June 28, 1993, and three (3) related Promissory Notes, relating to the Grand Flamingo Winnick, Grand Flamingo Fountains, and Preferred Equities Corporation corporate offices.
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.33(7) Second Amendment to Loan and Security Agreement dated June 30, 1993, between Dorfinco Corp. and Preferred Equities Corporation, and First Amendment to Promissory Note. 10.34(7) Agreement for Sale of Notes Receivable arising from Timeshares sales dated August 3, 1993, by and between Brigantine Properties, Inc. as Seller, and The Oxford Finance Companies as Buyer. 10.35(7) Purchase and Sale Agreement dated August 30, 1993, between Preferred Equities Corporation as Developer, and Marine Midland Bank, N.A., and Wellington Financial Corp. 10.36(7) Purchase Agreement dated August 31, 1993, between Mego Financial Corp. as Seller, and Legg Mason Special Investment Trust as Buyer, for the purchase of 300,000 shares of the Company's Preferred Stock. 10.37(8) Amended and Restated Loan Agreement between Bank of America Nevada and Preferred Equities Corporation, dated September 10, 1993. 10.38(8) Agreement for Line of Credit and Commercial Promissory Note between Mego Mortgage Corporation and First National Bank of Boston, dated January 4, 1994. 10.39(8) Amendment No. 7 to Amended and Restated Loan and Security Agreement between Greyhound Real Estate Finance Company and Preferred Equities Corporation, dated January 24, 1994. 10.40(8) Agreement between Mego Mortgage Corporation and Hamilton Consulting, Inc., dated January 31, 1994. 10.41(8) Loan Purchase and Sale Agreement dated March 22, 1994, between Mego Mortgage Corporation as Buyer, and Southwest Beneficial Finance, Inc. as Seller. 10.42(8) Amendment No. 8 to Amended and Restated Loan and Security Agreement between Greyhound Real Estate Finance Company and Preferred Equities Corporation, dated April 15, 1994. 10.43(8) Purchase and Servicing Agreement dated as of June 1, 1994, between Preferred Equities Corporation as Seller and Servicer, and NBD Bank, N.A. as Purchaser. 10.44(8) Purchase and Servicing Agreement dated as of July 6, 1994, between Preferred Equities Corporation as Seller, and First National Bank of Boston as Purchaser. 10.45(8) Amendment No. 9 to Amended and Restated Loan and Security Agreement between Greyhound Real Estate Finance Company and Preferred Equities Corporation, dated August 31, 1994, and Amendment No. 4 to Amended and Restated Promissory Note dated August 31, 1994, Amendment No. 6 to Loan and Security Agreement between Greyhound Real Estate Finance Company and Preferred Equities Corporation dated August 31, 1994, and Amendment No. 4 to Promissory Note dated August 31, 1994, between Preferred Equities Corporation as successor-in-interest to Vacation Spa Resorts, Inc., and Greyhound Financial Corporation. 10.46(8) Master Loan Purchase and Servicing Agreement dated as of August 26, 1994, between Mego Mortgage Corporation as Seller, and First National Bank of Boston, as Purchaser. 10.47(9) Third Amendment to Loan and Security Agreement and Assumption Agreement dated August 23, 1994, by and between Preferred Equities Corporation, Colorado Land and Grazing Corp. and Dorfinco Corporation. 10.48(9) General Loan and Security Agreement dated October 5, 1994, between Steamboat Suites, Inc. and Textron Financial Corporation. 10.49(9) Purchase and Servicing Agreement, Second Closing, dated November 29, 1994, between Preferred Equities Corporation and NBD Bank, N.A.
52 55
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.50(9) Form of Agreement with respect to the Company's "Split-Dollar" Life Insurance Plan, including Form of Assignment of Limited Interest in Life Insurance as Collateral Security. 10.51(9) Construction Loan Agreement dated January 20, 1995, by and between Preferred Equities Corporation and NBD Bank. 10.52(9) Amendment No. 10 to Amended and Restated Loan and Security Agreement dated January 26, 1995, by and between Greyhound Financial Corporation and Preferred Equities Corporation. 10.53(9) Loan Agreement re: Calvada Golf Course dated January 31, 1995, by and among The First National Bank of Boston and Preferred Equities Corporation. 10.54(9) Second Amendment to Assignment and Assumption Agreement dated March 2, 1995, by and between RER Corp., Comay Corp., Growth Realty, Inc. and H&H Financial, Inc. and Mego Financial Corp. 10.55(9) First Amendment to General Loan and Security Agreement dated February 27, 1995, between Steamboat Suites, Inc. and Textron Financial Corporation. 10.56(9) Master Loan Purchase and Servicing Agreement dated April 1, 1995, by and between Greenwich Capital Financial Products, Inc. and Mego Mortgage Corporation. 10.57(9) Licensing Agreement dated April 18, 1995, by and among Hospitality Franchise Systems, Inc., Ramada Franchise Systems, Inc. and Preferred Equities Corporation. 10.58(9) Purchase and Servicing Agreement, Third Closing, dated May 24, 1995, between NBD Bank, N.A. and Preferred Equities Corporation. 10.59(9) Participation and Servicing Agreement dated May 25, 1995, by and between Atlantic Bank, N.A. and Mego Mortgage Corporation. 10.60(9) Purchase and Servicing Agreement, dated as of August 31, 1995, between Preferred Equities Corporation, Colorado Land and Grazing Corp. and First National Bank of Boston. 10.61(9) Warehousing Credit and Security Agreement, dated as of August 11, 1995, between Mego Mortgage Corporation and First National Bank of Boston. 10.62(10) Mego Mortgage Corporation Stock Option Plan. 10.63(10) Form of Tax Allocation and Indemnity Agreement entered into between Mego Mortgage Corporation and the Company. 10.64(10) Loan Program Sub-Servicing Agreement between Mego Mortgage Corporation and Preferred Equities Corporation dated as of September 1, 1996. 10.65(10) 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. 10.66(10) Loan Purchase Agreement between Financial Asset Securities Corp., as Purchaser, and the Mego Mortgage Corporation, as Seller, dated as of March 21, 1996. 10.67(11) Indemnification Agreement among MBIA Insurance Corporation, as Insurer, Mego Mortgage Corporation, as Seller and Greenwich Capital Markets, Inc. as Underwriter, dated as of March 29, 1996. 10.68(10) Pooling and Servicing Agreement, dated as of March 21, 1996, among Mego Mortgage Corporation, 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.
53 56
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.69(11) Insurance Agreement among MBIA Insurance Corporation, as Insurer, Norwest Bank Minnesota, N.A., as Master Servicer, Mego Mortgage Corporation, 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. 10.70(11) Credit Agreement dated as of June 28, 1996 between Mego Mortgage Corporation and First National Bank of Boston as Agent. 10.71(10) Loan Purchase Agreement dated as of August 1, 1996 between Financial Asset Securities Corp., as Purchaser, and Mego Mortgage Corporation, as Seller. 10.72(10) Pooling and Servicing Agreement dated as of August 1, 1996 between Financial Asset Securities Corp., as Purchaser, and Mego Mortgage Corporation, as Seller. 10.73(11) Amendment No. 1 to Warehousing Credit and Security Agreement dated as of August 9, 1996 between Mego Mortgage Corporation and First National Bank of Boston. 10.74(10) Office Lease by and between MassMutual and Mego Mortgage Corporation dated April 1996. 10.75(11) Amendment to Master Loan Purchase and Servicing Agreement between Greenwich Capital Financial Products, Inc., and Mego Mortgage Corporation dated February 1, 1996. 10.76(11) Amendment No. 2 to Master Loan Purchase and Servicing Agreement between Greenwich Capital Financial Products, Inc., and Mego Mortgage Corporation dated July 1, 1996. 10.77(10) Services and Consulting Agreement between Mego Mortgage Corporation and Preferred Equities Corporation dated as of September 1, 1996. 10.78(11) Employment Agreement between Mego Mortgage Corporation and Jeffrey S. Moore dated January 1, 1994. 10.79(11) Form of Indenture entered into between Mego Mortgage Corporation and the Indenture Trustee. 10.80(10) Master Repurchase Agreement dated as of September 4, 1996 between Mego Mortgage Corporation and Greenwich Capital Markets, Inc. 10.81(10) Letter agreement dated October 1, 1996 between Mego Mortgage Corporation and Greenwich Capital Markets, Inc. 10.82(10) Amended and Restated Master Loan Purchase and Servicing Agreement dated as of October 1, 1996 among Mego Mortgage Corporation, Mego Financial Corp. and Greenwich Capital Markets, Inc. 10.83(10) Form of Agreement entered into between Mego Mortgage Corporation and Mego Financial Corp. 10.84(10) Commitment letter between Mego Mortgage Corporation and Greenwich Capital Markets, Inc. dated September 17, 1996. 10.85(12) Amendment No. 11 to Amended and Restated Loan and Security Agreement dated September 22, 1995, by and between Finova Capital Corporation and Preferred Equities Corporation and related Promissory Note relating to Aloha Bay Phase II. 10.86(12) Amendment No. 12 to Amended and Restated Loan and Security Agreement dated September 29, 1995, by and between Finova Capital Corporation and Preferred Equities Corporation and Amended and Restated Promissory Note relating to Corporate Office Building.
54 57
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.87(12) Fourth Amendment to Loan and Security Agreement and Assumption Agreement dated September 30, 1995, by and between Preferred Equities Corporation, Colorado Land and Grazing Corp., Mego Financial Corp. and Dorfinco Corporation. 10.88(12) Request for Receivables Purchase dated November 16, 1995, by and between Preferred Equities Corporation as Seller and NBD Bank as Purchaser. 10.89(12) Second Amendment to General Loan and Security Agreement dated November 30, 1995, by and between Steamboat Suites, Inc. and Textron Financial Corporation and Restated and Amended Receivables Promissory Note. 10.90(12) Amendment No. 13 to Amended and Restated Loan and Security Agreement dated December 13, 1995, by and between Finova Capital Corporation and Preferred Equities Corporation and three (3) related Promissory Notes, relating to the Grand Flamingo Towers Lobby, Ida and Winnick Building Additions. 10.91(12) Purchase and Sale Agreement dated December 29, 1995, by and between Overlook Lodge Limited Liability Company as Seller and Preferred Equities Corporation as Purchaser. 10.92(12) Second Amendment to Purchase and Sale Agreement dated February 8, 1996, as previously amended by an Amendment to Purchase and Sale Agreement dated May 10, 1994, between Preferred Equities Corporation, Marine Midland Bank, and Wellington Financial Corp. 10.93(12) Acquisition and Construction Loan Agreement dated March 29, 1996, by and between Heller Financial, Inc. and Preferred Equities Corporation and three (3) related Promissory Notes; Acquisition Promissory Note, Revolving Renovation Promissory Note, and Receivables Promissory Note. 10.94(12) Construction Loan Agreement dated April 30, 1996, by and between Preferred Equities Corporation and NBD Bank and related Promissory Note. 10.95(12) Amendment No. 14 to Amended and Restated Loan and Security Agreement dated June 5, 1996, by and between Finova Capital Corporation and Preferred Equities Corporation and Second Amended and Restated Promissory Note, relating to Headquarters and FCFC Property. 10.96(12) Amendment No. 15 to Amended and Restated Loan and Security Agreement dated August 16, 1996, by and between Finova Capital Corporation and Preferred Equities Corporation; Amendment No. 7 to Loan and Security Agreement; Amendment No. 5 to Amended and Restated Promissory Note; Amendment No. 5 to Promissory Note; Amendment No. 1 to Promissory Note [Towers Lobby]. 10.97(12) Request for Receivables Purchase dated July 30, 1996, by and between Preferred Equities Corporation as Seller and NBD Bank as Purchaser. 10.98(12) Preferred Stock redemption agreement by and between Mego Financial Corp. and Legg Mason Special Investment Trust, Inc. 10.99(12) Amendment to Common Stock Purchase Warrant issued by Mego Financial Corp. to Legg Mason Special Investment Trust, Inc. 10.100(14) Third Amendment to General Loan and Security Agreement dated November 29, 1996 between Steamboat Suites, Inc. as Debtor and Textron Financial Corporation as Lender and the related Restated and Amended Receivables Promissory Note dated November 30, 1996 effective October 6, 1994.
55 58
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.101(14) Fifth Amendment to Loan and Security Agreement dated November 29, 1996 by and among Preferred Equities Corporation and Colorado Land and Grazing Corp. as Borrower; Mego Financial Corp. as Guarantor; and Dorfinco Corporation as Lender and the related Fourth Amendment to Promissory Note dated November 29, 1996. 10.102(14) Acquisition and Renovation Loan Agreement dated August 6, 1996 between Heller Financial, Inc. as Lender and Preferred Equities Corporation as Borrower; and Interval Receivables Loan and Security Agreement dated August 6, 1996 by and among Heller Financial, Inc. as Lender and Preferred Equities Corporation as Borrower and Mego Financial Corp. as Guarantor, and the three related Promissory Notes. 10.103(15) Subdivision Improvement Agreement dated March 7, 1995 between Preferred Equities Corporation and the Board of County Commissioners of the County of Nye, State of Nevada. 10.104(15) Subdivision Improvement Agreement dated February 20, 1996 between Preferred Equities Corporation and the Board of County Commissioners of the County of Nye, State of Nevada. 10.105(15) Subdivision Improvement Agreement dated February 20, 1996 between Preferred Equities Corporation and the Board of County Commissioners of the County of Nye, State of Nevada. 10.106(15) Subdivision Improvement Agreement dated December 17, 1996 between Preferred Equities Corporation and the Board of County Commissioners of the County of Nye, State of Nevada. 10.107(15) Subdivision Improvement Agreement dated December 17, 1996 between Preferred Equities Corporation and the Board of County Commissioners of the County of Nye, State of Nevada. 10.108(15) Subdivision Improvement Agreement dated December 17, 1996 between Preferred Equities Corporation and the Board of County Commissioners of the County of Nye, State of Nevada. 10.109(15) Subdivision Improvement Agreement dated December 17, 1996 between Preferred Equities Corporation and the Board of County Commissioners of the County of Nye, State of Nevada. 10.110(15) Subdivision Improvement Agreement dated December 17, 1996 between Preferred Equities Corporation and the Board of County Commissioners of the County of Nye, State of Nevada. 10.111(15) Commitment letter between Preferred Equities Corporation and FINOVA Capital Corporation dated March 3, 1997. 10.112(15) Employment Agreement between Mego Financial Corp. and Irving J. Steinberg dated August 1, 1996. 10.113(16) Employment Agreement between Jerome J. Cohen and Mego Financial Corp. dated September 1, 1996. 10.114(16) Purchase and Servicing Agreement between Preferred Equities Corporation as Seller and BankBoston, N.A. as Purchaser dated May 30, 1997. 10.115(16) Second Amended and Restated and Consolidated Loan and Security Agreement between Preferred Equities Corporation as Borrower and FINOVA Capital Corporation as lender, dated May 15, 1997. 10.116(16) Form of Owners Association Agreement between Resort Condominiums International, Inc. and Homeowners Associations with schedule listing the associations.
56 59
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.117(16) Loan Purchase Agreement dated as of November 1, 1996 between Financial Asset Securities Corp. and Mego Mortgage Corporation. 10.118(16) Pooling and Servicing Agreement dated as of November 1, 1996 among Financial Asset Securities Corp., Mego Mortgage Corporation, Norwest Bank Minnesota, N.A. and First Trust of New York, National Association. 10.119(16) Home Loan Purchase Agreement dated as of March 1, 1997 between Financial Asset Securities Corp. and Mego Mortgage Corporation. 10.120(16) Sale and Servicing Agreement dated as of March 1, 1997 among Mego Mortgage Home Loan Owner Trust 1997-1, Financial Asset Securities Corp., Mego Mortgage Corporation, Norwest Bank Minnesota, N.A. and First Trust of New York, National Association. 10.121(16) Trust Agreement dated as of March 1, 1997 among Financial Asset Securities Corp., Mego Mortgage Corporation, Wilmington Trust Company and First Trust of New York, National Association. 10.122(16) Home Loan Purchase Agreement dated as of May 1, 1997 between Financial Asset Securities Corp. and Mego Mortgage Corporation. 10.123(16) Sale and Servicing Agreement dated as of May 1, 1997 among Mego Mortgage Home Loan Owner Trust 1997-2, Financial Asset Securities Corp., Mego Mortgage Corporation, Norwest Bank Minnesota N.A. and First Trust of New York, National Association. 10.124(16) Trust Agreement dated as of May 1, 1997 among Financial Asset Securities Corp., Mego Mortgage Corporation, Wilmington Trust Company and First Trust of New York, National Association. 10.125(16) Home Loan Purchase Agreement dated as of June 14, 1997 between Financial Asset Securities Corp. and Mego Mortgage Corporation. 10.126(16) Sale and Servicing Agreement dated as of June 14, 1997 among Mego Mortgage Home Loan Owner Trust 1997-3, Financial Asset Securities Corp., Mego Mortgage Corporation, Norwest Bank Minnesota N.A. and First Trust of New York, National Association. 10.127(13) Agreement between Mego Financial Corp. and Mego Mortgage Corporation dated August 29, 1997. 10.128(17) Sub-Servicing Agreement dated September 1, 1996, as amended September 2, 1997, between Mego Financial Corp., Mego Mortgage Corporation and Preferred Equities Corporation. 10.129(17) Third Amendment to Assignment and Assumption Agreement by and between RER Corp., Comay Corp., Growth Realty, Inc. and H&H Financial, Inc. and Mego Financial Corp. dated August 20, 1997. 10.130(17) Loan and Security Agreement between Litchfield Financial Corporation and Preferred Equities Corporation dated July 30, 1997. 10.131(17) Employment Agreement between Stuart Harelik and Mego Financial Corp. dated October 9, 1996. 10.132(17) Employment Agreement between Jon A. Joseph and Mego Financial Corp. dated August 31, 1997. 10.133(17) Agreement between the Company and Herbert B. Hirsch dated September 2, 1997 relating to a severance payment.
57 60
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.134(17) Agreement between the Company and Don A. Mayerson dated September 2, 1997 relating to a severance payment. 10.135(17) Amendment to Services and Consulting Agreement between Mego Mortgage Corporation and Preferred Equities Corporation dated January 20, 1998. 10.136(17) Amendment to Loan Program Sub-Servicing Agreement between Mego Mortgage Corporation and Preferred Equities Corporation dated January 20, 1998. 10.137(17) Agreement between Mego Mortgage Corporation and Preferred Equities Corporation, dated February 9, 1998, regarding assignment of rights related to the Loan Program Sub- Servicing Agreement to Greenwich Capital Markets, Inc. 10.138(17) Mortgage Loan Facility Agreement between FINOVA Capital Corporation and Preferred Equities Corporation dated February 18, 1998. 10.139(18) Termination of Services and Consulting Agreement between Mego Mortgage Corporation and Preferred Equities Corporation, dated April 22, 1998. 10.140(18) Settlement letter from Mego Financial Corp. to Mego Mortgage Corporation dated June 26, 1998. 10.141(18) Settlement letter from Preferred Equities Corporation to Mego Mortgage Corporation dated June 26, 1998. 10.142 Amended and Restated Real Estate Purchase and Sales Agreement by and among Preferred Equities as borrower and Mercantile Equities Corporation and Hartsel Springs Ranch of Colorado, Inc., as Noteholder dated as of November 25, 1997. 10.143 Letter Amendment to General Loan and Security Agreement dated December 1, 1997, between Steamboat Suites, Inc. and Textron Financial Corporation. 10.144 Mortgage Loan Facility Agreement between FINOVA Capital Corporation and Preferred Equities Corporation dated March 20, 1998. 10.145 Loan and Security Agreement dated August 12, 1998 between Preferred Equities Corporation as Borrower and Dorfinco Corporation as Lender and the related Promissory Note. 10.146 Post-72 Lots Purchase Money Promissory Note by and among Preferred Equities and Mercantile Equities Corporation and Hartsel Springs Ranch of Colorado, Inc. dated as of February 20, 1998. 10.147 Purchase Money Promissory Note by and among Preferred Equities as borrower and Mercantile Equities Corporation and Hartsel Springs Ranch of Colorado, Inc., as Noteholder dated as of February 20, 1998. 10.148 Compensation Agreement between Frederick H. Conte and Preferred Equities Corporation dated September 1, 1998. 10.149 Form of Indemnification Agreement, each dated as of September 23, 1998 between the Company and each of Robert Nederlander, Jerome J. Cohen, Eugene I. Schuster, Herbert B. Hirsch, John E. McConnaughy, Jr., Wilbur L. Ross, Jr. and Don A. Mayerson. 21.1(19) List of subsidiaries. 27.1 Financial Data Schedule (for SEC use only).
- --------------- (1) Filed as part of the Company's Form 10-K for fiscal year ended August 31, 1988 and incorporated herein by reference. (2) Filed as part of the Company's Form 10-K for fiscal year ended August 31, 1989 and incorporated herein by reference. 58 61 (3) Filed as part of the Company's Form 10-K for fiscal year ended August 31, 1990 and incorporated herein by reference. (4) Filed as part of the Company's Form 10-K for fiscal year ended August 31, 1991 and incorporated herein by reference. (5) Filed as part of the Company's Registration Statement on Form S-4 originally filed August 31, 1992 and incorporated herein by reference. (6) Filed as part of the Company's Form 10-K for fiscal year ended August 31, 1992 and incorporated herein by reference. (7) Filed as part of the Company's Form 10-K for fiscal year ended August 31, 1993 and incorporated herein by reference. (8) Filed as part of the Company's Form 10-K for fiscal year ended August 31, 1994 and incorporated herein by reference. (9) Filed as part of the Company's Form 10-K for fiscal year ended August 31, 1995 and incorporated herein by reference. (10) Filed as part of the Registration Statement on Form S-1 filed by Mego Mortgage Corporation, as amended (File No. 333-12443), and incorporated herein by reference. (11) Filed as part of the Registration Statement on Form S-1 filed by Mego Mortgage Corporation, as amended (File No. 333-13421), and incorporated herein by reference. (12) Filed as part of the Company's Form 10-K for fiscal year ended August 31, 1996 and incorporated herein by reference. (13) Filed as part of Mego Mortgage Corporation's Form 10-K for fiscal year ended August 31, 1996 and incorporated herein by reference. (14) Filed as part of the Company's Form 10-Q for the quarter ended November 30, 1996 and incorporated herein by reference. (15) Filed as part of the Company's Form 10-Q for the quarter ended February 28, 1997 and incorporated herein by reference. (16) Filed as part of the Company's Form 10-Q for the quarter ended May 31, 1997 and incorporated herein by reference. (17) Filed as part of the Company's Form 10-Q for the quarter ended February 28, 1998 and incorporated herein by reference. (18) Filed as part of the Company's Form 10-Q for the quarter ended May 31, 1998 and incorporated herein by reference. (19) Filed as part of the Company's Form 10-K for the fiscal year ended August 31, 1997 and incorporated herein by reference. (d) Financial Statement schedules required by Regulation S-X. No financial statement schedules are included because of the absence of the conditions under which they are required or because the information is included in the financial statements or the notes thereto. 59 62 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. MEGO FINANCIAL CORP. Date: November 23, 1998 By: /s/ JEROME J. COHEN -------------------------------------- Jerome J. Cohen, President and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the date(s) indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ ROBERT NEDERLANDER Chairman of the November 23, 1998 - -------------------------------------------------------- Board, Chief Robert Nederlander Executive Officer and Director /s/ JEROME J. COHEN President and November 23, 1998 - -------------------------------------------------------- Director Jerome J. Cohen /s/ HERBERT B. HIRSCH Senior Vice November 23, 1998 - -------------------------------------------------------- President, Chief Herbert B. Hirsch Financial Officer, Treasurer and Director /s/ EUGENE I. SCHUSTER Vice President and November 23, 1998 - -------------------------------------------------------- Director Eugene I. Schuster /s/ CHARLES G. BALTUSKONIS Vice President and November 23, 1998 - -------------------------------------------------------- Chief Accounting Charles G. Baltuskonis Officer /s/ WILBUR L. ROSS, JR. Director November 23, 1998 - -------------------------------------------------------- Wilbur L. Ross, Jr. /s/ JOHN E. MCCONNAUGHY, JR. Director November 23, 1998 - -------------------------------------------------------- John E. McConnaughy, Jr.
60 63 MEGO FINANCIAL CORP. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE NO. ---------- Independent Auditors' Report................................ F-2 Consolidated Financial Statements: Consolidated Balance Sheets at August 31, 1998 and 1997... F-3 Consolidated Statements of Operations -- Years Ended August 31, 1998, 1997 and 1996......................... F-4 Consolidated Statements of Stockholders' Equity -- Years Ended August 31, 1998, 1997 and 1996................... F-5 Consolidated Statements of Cash Flows -- Years Ended August 31, 1998, 1997 and 1996......................... F-6 - F-7 Notes to Consolidated Financial Statements.................. F-8 - F-35
F-1 64 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Mego Financial Corp. and Subsidiaries Las Vegas, Nevada We have audited the accompanying consolidated balance sheets of Mego Financial Corp. and its subsidiaries (the Company) as of August 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended August 31, 1998. 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 consolidated financial statements present fairly, in all material respects, the financial position of Mego Financial Corp. and its subsidiaries at August 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 1998 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP San Diego, California November 9, 1998 F-2 65 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) ASSETS
AUGUST 31, -------------------- 1998 1997 -------- -------- Cash and cash equivalents................................... $ 1,813 $ 10,376 Restricted cash............................................. 1,694 2,049 Notes receivable, net of allowance for cancellations and discounts of $12,403 and $11,341 at August 31, 1998 and 1997, respectively........................................ 47,789 34,274 Interest only receivables, at fair value.................... 3,367 3,296 Timeshare interests held for sale........................... 35,798 35,088 Land and improvements inventory............................. 7,965 2,206 Other investments........................................... 4,395 2,149 Property and equipment, net of accumulated depreciation of $14,119 and $15,292 at August 31, 1998 and 1997, respectively.............................................. 23,950 24,220 Deferred selling costs...................................... 3,719 3,153 Prepaid debt expenses....................................... 1,431 1,286 Other assets................................................ 10,155 6,930 Net assets of discontinued operations....................... -- 53,276 -------- -------- TOTAL ASSETS...................................... $142,076 $178,303 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Notes and contracts payable............................... $ 81,986 $ 65,569 Accounts payable and accrued liabilities.................. 19,098 17,202 Reserve for notes receivable sold with recourse........... 6,620 8,703 Deposits.................................................. 4,877 2,983 Negative goodwill......................................... -- 53 Accrued income taxes...................................... 4,468 6,235 -------- -------- Total liabilities before subordinated debt........ 117,049 100,745 -------- -------- Subordinated debt........................................... 4,348 4,321 Redeemable preferred stock, Series A, 12% cumulative preferred stock, $.01 par value, $10 redemption value, 0 shares issued and outstanding at August 31, 1998 and 1997...................................................... -- -- Stockholders' equity: Preferred stock, $.01 par value (authorized--5,000,000 shares)................................................ -- -- Common stock, $.01 par value (authorized--50,000,000 shares); issued and outstanding--21,009,506 at August 31, 1998 and 1997...................................... 210 210 Additional paid-in capital................................ 12,789 34,524 Retained earnings......................................... 7,680 38,503 -------- -------- Total stockholders' equity........................ 20,679 73,237 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $142,076 $178,303 ======== ========
See notes to consolidated financial statements. F-3 66 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED AUGUST 31, --------------------------------------- 1998 1997 1996 ----------- ----------- ----------- REVENUES OF CONTINUING OPERATIONS Timeshare interest sales, net............................. $ 37,713 $ 32,253 $ 27,778 Land sales, net........................................... 13,812 16,626 17,968 Gain on sale of notes receivable.......................... 656 2,013 1,116 Interest income........................................... 7,161 7,168 6,594 Financial income.......................................... 3,304 2,922 1,253 Incidental operations..................................... 2,831 3,050 2,995 Other..................................................... 3,113 3,464 2,948 ----------- ----------- ----------- Total revenues of continuing operations........... 68,590 67,496 60,652 ----------- ----------- ----------- COSTS AND EXPENSES OF CONTINUING OPERATIONS Direct cost of: Timeshare interest sales............................... 7,375 5,922 3,998 Land sales............................................. 1,770 1,571 1,844 Incidental operations.................................. 2,644 2,984 2,257 Marketing and sales....................................... 34,167 34,078 30,351 Depreciation.............................................. 2,245 1,964 1,526 Interest expense.......................................... 7,850 8,458 7,314 General and administrative................................ 17,736 17,175 15,849 ----------- ----------- ----------- Total costs and expenses of continuing operations...................................... 73,787 72,152 63,139 ----------- ----------- ----------- LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES......... (5,197) (4,656) (2,487) INCOME TAXES (BENEFIT)...................................... (1,968) (12,662) (1,068) ----------- ----------- ----------- INCOME (LOSS) FROM CONTINUING OPERATIONS.................... (3,229) 8,006 (1,419) INCOME FROM DISCONTINUED OPERATIONS NET OF INCOME TAXES OF $9,062 AND $4,235 FOR 1997 AND 1996, RESPECTIVELY, AND MINORITY INTEREST OF $2,358 FOR 1997...................... -- 11,334 6,270 ----------- ----------- ----------- NET INCOME (LOSS)........................................... (3,229) 19,340 4,851 CUMULATIVE PREFERRED STOCK DIVIDENDS........................ -- -- 240 ----------- ----------- ----------- NET INCOME (LOSS) APPLICABLE TO COMMON STOCK................ $ (3,229) $ 19,340 $ 4,611 =========== =========== =========== EARNINGS (LOSS) PER COMMON SHARE Basic: Income (loss) from continuing operations............... $ (0.15) $ 0.43 $ (0.08) Income from discontinued operations.................... -- 0.61 0.34 Cumulative preferred stock dividends................... -- -- (0.01) ----------- ----------- ----------- Net income (loss) applicable to common stock........... $ (0.15) $ 1.04 $ 0.25 =========== =========== =========== Weighted-average number of common shares and common share equivalents outstanding................................... 21,009,506 18,657,224 18,117,122 =========== =========== =========== Diluted: Income (loss) from continuing operations............... $ (0.15) $ 0.41 $ (0.08) Income from discontinued operations.................... -- 0.58 0.33 Cumulative preferred stock dividends................... -- -- (0.01) ----------- ----------- ----------- Net income (loss) applicable to common stock........... $ (0.15) $ 0.99 $ 0.24 =========== =========== =========== Weighted-average number of common shares and common share equivalents outstanding................................... 21,009,506 19,528,470 19,114,888 =========== =========== ===========
See notes to consolidated financial statements. F-4 67 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
COMMON STOCK $.01 PAR VALUE ADDITIONAL ------------------- PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL ---------- ------ ---------- -------- -------- Balance at September 1, 1995............. 18,087,556 $180 $ 4,498 $ 14,552 $ 19,230 Issuance of common stock in connection with the exercise of stock options..... 2,218 1 9 -- 10 Issuance of common stock in connection with redemption of preferred stock..... 343,347 3 1,997 -- 2,000 Dividends on preferred stock............. -- -- -- (240) (240) Net income............................... -- -- -- 4,851 4,851 ---------- ---- -------- -------- -------- Balance at August 31, 1996............... 18,433,121 184 6,504 19,163 25,851 Gain on sale of stock of subsidiary...... -- -- 13,085 -- 13,085 Issuance of warrants in connection with commitment received.................... -- -- 3,000 -- 3,000 Issuance of common stock in connection with the exercise of common stock warrants............................... 2,300,000 23 11,712 -- 11,735 Issuance of common stock in connection with exercise of stock options......... 276,385 3 223 -- 226 Net income............................... -- -- -- 19,340 19,340 ---------- ---- -------- -------- -------- Balance at August 31, 1997............... 21,009,506 210 34,524 38,503 73,237 Distribution of MMC common stock in connection with spin-off and adjustments of receivable from MMC..... -- -- (21,735) (27,594) (49,329) Net loss................................. -- -- -- (3,229) (3,229) ---------- ---- -------- -------- -------- Balance at August 31, 1998............... 21,009,506 $210 $ 12,789 $ 7,680 $ 20,679 ========== ==== ======== ======== ========
See notes to consolidated financial statements. F-5 68 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
FOR THE YEARS ENDED AUGUST 31, ------------------------------ 1998 1997 1996 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)......................................... $ (3,229) $ 19,340 $ 4,851 -------- -------- -------- Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Amortization of negative goodwill...................... (53) (29) (49) Charges to allowance for cancellations................. (5,984) (10,470) (6,918) Provision for cancellations............................ 4,827 10,219 9,778 Gain on sale of notes receivable....................... (656) (2,013) (1,116) Provision for uncollectible owners' association advances............................................. (403) 275 12 Cost of sales.......................................... 9,145 7,493 5,842 Depreciation........................................... 2,245 1,964 1,526 Gain on sale of stock subsidiary....................... -- 13,085 -- Additions to interest only receivables................. (523) (1,543) (781) Amortization of interest only receivables.............. 452 394 716 Repayments on notes receivable, net.................... 36,669 34,243 26,596 Additions to notes receivable.......................... (57,789) (55,469) (51,535) Proceeds from sale of notes receivable................. 9,418 30,117 16,003 Purchase of land and timeshare interests............... (15,614) (8,911) (20,883) Additions to other receivables......................... (4,193) -- -- Decreases to other receivables......................... 8,140 -- -- Changes in operating assets and liabilities: Decrease in restricted cash.......................... 355 134 1,752 Increase in other assets............................. (5,050) (1,328) (957) Decrease (increase) in deferred selling costs........ (566) (252) 431 Increase in accounts payable and accrued liabilities....................................... 1,896 1,606 3,837 Increase (decrease) in deposits...................... 1,894 12 (648) Decrease in payable to assignors..................... -- (2,579) -- Increase (decrease) in accrued income taxes.......... (1,767) (3,836) 2,232 -------- -------- -------- Total adjustments................................. (17,557) 13,112 (14,162) -------- -------- -------- Net cash provided by (used in) operating activities...................................... (20,786) 32,452 (9,311) -------- -------- -------- NET CASH USED IN DISCONTINUED OPERATIONS.................... -- (19,762) (11,280) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment........................ (2,334) (6,811) (8,690) Proceeds from sale of property and equipment.............. 359 24 19 Additions to other investments............................ (2,246) (769) (1,381) Decreases in other investments............................ -- 592 940 -------- -------- -------- Net cash used in investing activities............. (4,221) (6,964) (9,112) -------- -------- --------
F-6 69 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
FOR THE YEARS ENDED AUGUST 31, ------------------------------ 1998 1997 1996 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings.................................. 51,311 38,568 54,551 Reduction of debt......................................... (34,894) (43,251) (27,801) Preferred stock dividends................................. -- -- (240) Redemption of preferred stock............................. -- -- (1,000) Increase in additional paid-in capital due to exercise of warrants............................................... -- 7,472 -- Increase in additional paid-in capital due to exercise of stock options.......................................... -- 223 9 Increase in common stock due to exercise of stock options................................................ -- 3 1 Increase in common stock due to exercise of warrants...... -- 13 -- Payments on subordinated debt............................. (640) (2,429) (1,000) Increase in subordinated debt............................. 667 1,309 1,339 -------- -------- -------- Net cash provided by financing activities......... 16,444 1,908 25,859 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (8,563) 7,634 (3,844) CASH AND CASH EQUIVALENTS -- BEGINNING OF YEAR.............. 10,376 2,742 6,586 -------- -------- -------- CASH AND CASH EQUIVALENTS -- END OF YEAR.................... $ 1,813 $ 10,376 $ 2,742 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest, net of amounts capitalized................... $ 7,595 $ 8,193 $ 9,136 ======== ======== ======== Income taxes........................................... $ -- $ -- $ 25 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES In connection with the securitization of loans and creation of mortgage related securities, the Company retained interest only securities and residual interest securities (included in net assets of discontinued operations)............................................ $ -- $ -- $ 20,096 ======== ======== ======== Redemption of preferred stock through issuance of common stock.................................................. $ -- $ -- $ 2,000 ======== ======== ======== In connection with the acquisition of certain timeshare interest held for sale................................. $ -- $ -- $ 245 ======== ======== ======== Issuance of warrants for 1,000,000 shares of common stock in connection with commitment received................. $ -- $ 3,000 $ -- ======== ======== ======== Reduction of subordinated debt to assignors in connection with the exercise of 1,000,000 common stock warrants... $ -- $ 4,250 $ -- ======== ======== ========
See notes to consolidated financial statements. F-7 70 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996 1. NATURE OF OPERATIONS Mego Financial Corp. (Mego Financial) is a premier developer of timeshare properties and a provider of consumer financing to purchase timeshare intervals and land parcels through its wholly-owned subsidiary, Preferred Equities Corporation (PEC), established in 1970. PEC is engaged primarily in originating, selling, servicing and financing consumer receivables generated through timeshare and land sales. Mego Financial and its subsidiaries are herein individually or collectively referred to as the Company as the context requires. PEC markets and finances timeshare interests and land in select resort areas. By providing financing to virtually all of its customers, PEC also originates consumer receivables that it sells and generally services. Mego Financial was incorporated under the laws of the state of New York in 1954 under the name Mego Corp. and, in 1992, changed its name to Mego Financial Corp. In February 1988, Mego Financial acquired PEC, pursuant to an assignment by the Assignors, as defined below, of their contract right to purchase PEC. See Note 2 for further discussion. To facilitate its sales of timeshare interests, the Company has entered into several trust agreements. The trustees administer the collection of the related notes receivable. The Company has assigned title to certain of its resort properties in Nevada and its interest in certain related notes receivable to the trustees. In 1992, Mego Financial organized a subsidiary, Mego Mortgage Corporation (MMC), which has been a specialized consumer finance company that originates, purchases, sells, securitizes and services consumer loans consisting primarily of conventional uninsured home improvement and debt consolidation loans. After an initial public offering (the IPO) of MMC common stock in November 1996, Mego Financial held 81.3% of the outstanding stock of MMC. On September 2, 1997, Mego Financial distributed all of its remaining 10,000,000 shares of MMC's common stock to Mego Financial's shareholders in a tax-free spin-off (the Spin-off). See Notes 3 and 19. Since the Spin-off, PEC has represented substantially all of Mego Financial's operations. 2. ACQUISITION OF PREFERRED EQUITIES CORPORATION The acquisition of PEC on February 1, 1988, was effected pursuant to an Assignment Agreement, dated October 25, 1987, between Mego Financial and several corporations (Assignors) and a related Assignment and Assumption Agreement (Assignment and Assumption Agreement), dated February 1, 1988, and amended on July 29, 1988, between Mego Financial and the Assignors (collectively, such agreements constitute the Assignment). The acquisition of PEC was accomplished by PEC's issuing 2 shares of its common stock to Mego Financial for a purchase price of approximately $50,000. Immediately prior to that time, the previously outstanding shares held by others were surrendered and redeemed by PEC at a cost to PEC of approximately $10,463,000 plus fees and expenses, leaving Mego Financial with all of the outstanding shares of PEC. The right to purchase shares from PEC was obtained by Mego Financial pursuant to the Assignment, which assigned to Mego Financial the right to purchase shares from PEC pursuant to the Stock Purchase and Redemption Agreement, dated October 6, 1987, between PEC and the Assignors, as amended on October 25, 1987. Consideration for the Assignment consisted of promissory notes (Purchase Notes) from Mego Financial to the Assignors in the aggregate amount of $2,000,000 and additional payments to the Assignors as described below. The Purchase Notes were paid in full prior to August 31, 1988. After the payment of the Purchase Notes, the Assignors were entitled to receive from Mego Financial on a quarterly basis, as determined as of the end of each quarter, additional payments equal in the aggregate to 63% of PEC's consolidated unrestricted cash balances, for a period ended on January 31, 1995. The additional payments were collateralized by a pledge of PEC stock to the Assignors. F-8 71 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996 On March 2, 1995, Mego Financial entered into the Second Amendment to Assignment and Assumption Agreement (Amendment) whereby the Assignors agreed to defer payment of $10,000,000 of the amount payable to Assignors and to subordinate such amount constituting (Subordinated Debt), in right of payment to debt for money borrowed by Mego Financial or obligations of subsidiaries guaranteed by Mego Financial. Warrants (Warrants) for 1,000,000 shares of Mego Financial common stock, at an exercise price of $4.25 per share (the closing market price per share on March 2, 1995) were granted to the Assignors in consideration of the payment deferral and subordination. The Warrants were exercised in August 1997, in a non-cash transaction, whereby the Subordinated Debt was reduced by $4,250,000. The Amendment calls for interest to be paid semiannually at the rate of 10% per annum starting September 1, 1995, and 7 equal semi-annual payments of $1,429,000 plus interest, which commenced March 1, 1997. However, in connection with the reduction of the Subordinated Debt, payments aggregating $4,250,000 have been deemed paid and the semiannual payments will resume in March 1999 with a partial payment in September 1998, pursuant to the Third Amendment to the Assignment and Assumption Agreement. The Subordinated Debt is collateralized by a pledge of PEC's outstanding stock. See Notes 14 and 19 for further discussion. 3. DISCONTINUED OPERATIONS On September 2, 1997, Mego Financial distributed all of its 81.3% interest in MMC comprised of 10,000,000 shares of MMC's common stock to Mego Financial's shareholders in the Spin-off. MMC's financial results have been accounted for as discontinued operations and, accordingly, the Company reclassified its Consolidated Financial Statements for all periods presented prior to that date. In April 1998, an agreement was made to adjust the balance due on a $10,100,000 receivable at August 31, 1997 by a reduction of the income tax portion in the amount of $5,283,000 previously deemed owed by MMC to the Company under a Tax Allocation and Indemnity Agreement dated November 19, 1996 (Tax Agreement) since that amount was no longer payable under that agreement. As of the date of the April 1998 agreement, MMC owed the Company an estimated total of $6,153,000, of which $5,283,000 was the estimated amount due to the Company under the Tax Agreement prior to the Spin-off. An agreement was subsequently made to settle the remaining $870,000 balance due the Company by MMC. In consideration of this settlement, MMC paid the entire amount of $1,574,000, which was separately owed to PEC, in June 1998. Following this transaction, MMC had no outstanding indebtedness to the Company. The net effect of the Spin-off resulted in the Company recording a distribution in the amount of $49,329,000 for financial statement purposes in fiscal 1998. F-9 72 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996 The summarized components of the net assets of discontinued operations at August 31, 1997 were as follows (thousands of dollars): Cash and cash equivalents, including restricted cash........ $ 12,994 Loans held for sale, net.................................... 9,523 Mortgage related securities................................. 106,299 Mortgage servicing rights................................... 9,507 Other receivables........................................... 7,945 Property and equipment, net................................. 2,153 Other....................................................... 5,779 -------- Total assets...................................... 154,200 -------- Notes and contracts payable................................. 35,572 Accounts payable and accrued liabilities.................... 7,759 Other liabilities and obligations........................... 57,762 -------- Total liabilities................................. 101,093 -------- Due to Mego Financial....................................... 10,100 Undistributed minority interest in discontinued operations................................................ (9,931) -------- Net assets of discontinued operations....................... $ 53,276 ========
Operating results of the discontinued operations were as follows (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, -------------------- 1997 1996 -------- -------- REVENUES Gain on sale of loans and mortgage related securities....... $48,641 $19,236 Interest income, net........................................ 3,133 988 Financial income and other.................................. 3,036 3,348 ------- ------- Total revenues.................................... 54,810 23,572 ------- ------- EXPENSES Operating expenses.......................................... 25,511 12,845 Net provision for credit losses............................. 6,300 55 Interest expense............................................ 245 167 ------- ------- Total expenses.................................... 32,056 13,067 ------- ------- Income before income taxes.................................. 22,754 10,505 Income taxes................................................ 9,062 4,235 Minority interest in discontinued operations................ 2,358 -- ------- ------- Net income from discontinued operations..................... $11,334 $ 6,270 ======= =======
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation and Basis of Presentation -- The accompanying consolidated financial statements include the accounts of Mego Financial and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. See Note 1 for further discussion. The accompanying Consolidated Statements of Operations reflect the operating results of MMC as discontinued operations for fiscal 1997 and 1996 in accordance with Accounting Principles Board (APB) Opinion No. 30. Prior period operating results have been restated to reflect continuous operations. The footnote information presented F-10 73 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996 herein applies only to the continuing operations of Mego Financial unless otherwise stated. See Note 3 for further discussion. Parent Company Only Basis -- At August 31, 1998 and 1997, Mego Financial, on a "parent company only" basis, reflected total assets of $29,495,000 and $98,157,000, respectively, which were comprised principally of its equity investment in subsidiaries of $27,294,000 and $79,723,000, respectively, and liabilities of $4,468,000 and $10,669,000, respectively, excluding subordinated debt. The decrease reflected above is primarily due to the distribution of MMC common stock totaling $49.3 million in connection with the Spin-off including the adjustment of a receivable from MMC. At August 31, 1998, liabilities were comprised principally of accrued income taxes of $4,468,000, excluding subordinated debt. At August 31, 1997, liabilities were comprised principally of accrued income taxes of $6,235,000 and payable to PEC of $3,072,000, excluding subordinated debt. At August 31, 1998 and 1997, subordinated debt of $4,348,000 and $4,321,000, respectively, was outstanding. See Notes 2 and 19 for further discussion. Cash Equivalents -- Cash equivalents consist primarily of certificates of deposit, repurchase agreements and commercial paper with original maturities of 90 days or less. Restricted Cash -- Restricted cash represents cash on deposit which relates to utility subsidiary customer deposits and betterment fees; cash on deposit in accordance with notes receivable sale agreements; and untransmitted funds received from collection of notes receivable which have not as yet been disbursed to the purchasers of such notes receivable in accordance with the related sale agreements. Notes Receivable -- The basis is the outstanding principal balance of the notes reduced by the allowance for cancellations and discounts. Substantially all of the notes receivable generated by PEC are carried at the lower of cost or market on an aggregate basis by type of receivable. Allowance for Cancellations -- Provision for cancellations relating to notes receivable is recorded as expense in amounts sufficient to maintain the allowance at a level considered adequate to provide for anticipated losses resulting from customers' failure to fulfill their obligations under the terms of their notes receivable. The Company records provision for cancellations at the time revenue is recognized, based upon periodic analysis of the portfolio, collateral values, historical credit loss experience, borrowers' ability to repay and current economic factors. The allowance for cancellations represents the Company's estimate of the future credit losses to be incurred over the lives of the notes receivable. The allowance for cancellations is reduced by actual cancellations experienced, including cancellations related to previously sold notes receivable which were reacquired pursuant to the recourse obligations discussed herein. Such allowance is also reduced to establish the separate liability for the reserve for notes receivable sold with recourse. Recourse to the Company on sales of notes receivable is governed by the agreements between the purchasers and the Company. The Company's judgment in determining the adequacy of this allowance is based upon a periodic review of its portfolio of notes receivable. These reviews take into consideration changes in the nature and level of the portfolio, current economic conditions which may affect the purchasers' ability to pay, the estimated value of inventory that may be reacquired and overall portfolio quality. Changes in the allowance as a result of such reviews are reflected in the provision for cancellations. Interest Only Receivables -- Interest only receivables were formerly excess servicing rights which were renamed in accordance with Statement of Financial Accounting Standards (SFAS) No. 125 (as hereinafter defined) and are carried at fair market value. Timeshare Interests Held for Sale -- Costs incurred in connection with preparing timeshare interests for sale are capitalized and include all costs of acquisition, renovation and furnishings. Timeshare interests held for sale are valued at the lower of cost or net realizable value. F-11 74 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996 Land and Improvements Inventory -- Land and improvements inventory include carrying costs capitalized during the development period and costs of improvements incurred to date and are stated at cost, not in excess of market value. Property and Equipment -- Property and equipment is stated at cost and is depreciated over its estimated useful life (generally 3 - 40 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. Utility Accounting Policies -- The Company, through a wholly-owned subsidiary, provides water and sewer services to customers in the Pahrump valley of Nevada. This subsidiary is subject to regulation by the Public Utilities Commission of Nevada and the Company's accounting policies conform to generally accepted accounting principles as applied in the case of regulated public utilities in accordance with the accounting requirements of the regulatory authority having jurisdiction. Contributions in aid of construction (CIAC) received by the Company from its customers are included as a separate liability and amortized over the period of 9 - 25 years, which represents the estimated remaining useful life of the corresponding improvements. Amortization of CIAC reduces depreciation expense. CIAC is included in accounts payable and accrued liabilities in the amounts of $8,264,000 and $6,409,000 at August 31, 1998 and 1997, respectively. The Company excludes from the CIAC liability a sum equal to the income taxes related to the receipt of CIAC funds. Reserve for Notes Receivable Sold with Recourse -- Recourse to the Company on sales of notes receivable is governed by the agreements between the purchasers and the Company. The reserve for notes receivable sold with recourse represents the Company's estimate of the fair value of future credit losses to be incurred over the lives of the notes receivable. Proceeds from the sale of notes receivable sold with recourse were $9,418,000, $30,117,000 and $16,003,000 for the years ended August 31, 1998, 1997 and 1996, respectively. A liability for reserve for notes receivable sold with recourse is established at the time of each sale based upon the Company's estimate of the future fair value of the recourse obligation under each agreement of sale. Income Taxes -- The Company utilizes the provisions of SFAS No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires the Company to adhere to an asset/liability approach for financial accounting and reporting for income taxes. Income tax expense is provided for the tax effects of transactions reported in the financial statements and consists of taxes currently due plus deferred taxes related primarily to differences between the bases of the balance sheet for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when they are recovered or settled. Deferred taxes also are recognized for operating losses that are available to offset future taxable income and tax credits that are available to offset future income taxes. See Note 16. Revenue and Profit Recognition -- Timeshare Interests and Land Sales -- Sales of timeshare interests and land are recognized and included in revenues after certain "down payment" and other "continuing investment" criteria are met. Land sale revenues are recognized using the deposit method in accordance with the provisions of SFAS No. 66, "Accounting for Sales of Real Estate." The agreement for sale generally provides for a down payment and a note secured by a deed of trust or mortgage payable to the Company in monthly installments, including interest, over a period of up to ten years. Revenue is recognized after the requisite rescission period has expired and at such time as the purchaser has paid at least 10% of the sales price for sales of timeshare interests and 20% of the sales price for land sales. Land sales usually meet these requirements within eight to ten months from closing, and sales of timeshare interests usually meet these requirements at the time of sale. The sales price, less a provision for cancellation, is recorded as revenue and the allocated cost related to such net revenue of the timeshare interest or land is recorded as expense in the F-12 75 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996 year that revenue is recognized. When revenue related to land sales is recognized, the portion of the sales price attributable to uncompleted required improvements, if any, is deferred. All payments received prior to the recognition of the sale as revenue are accounted for as deposits. Selling costs directly attributable to unrecognized sales are accounted for as deferred selling costs until the sale is recognized. For land sales made at a location other than at the property, the purchaser may cancel the contract within a specified inspection period, usually five months from the date of purchase, provided that the purchaser is not in default under the terms of the contract. At August 31, 1998, $730,000 of recognized sales remain subject to such cancellation. If a purchaser defaults under the terms of the contract, after all rescission and inspection periods have expired, all payments are generally retained by the Company. If the underlying note receivable is at a "below market" interest rate, a discount is applied to the note receivable balance and amortized over its term so that the effective yield is 10%. Notes receivable with payment delinquencies of 90 days or more have been considered in determining the allowance for cancellations. Cancellations occur when the note receivable is determined to be uncollectible and the related collateral, if any, has been recovered. Cancellation of a sale in the quarter the revenue is recognized is deemed to not represent a sale and is accounted for as a reversal of the revenue with an adjustment to cost of sales. Cancellation of a note receivable subsequent to the quarter the revenue was recognized is charged to the allowance for cancellations. Revenue Recognition -- Gain on Sale of Notes Receivable -- Gain on sale of notes receivable includes the present value of the differential between contractual interest rates charged to borrowers on notes receivable sold by the Company and the interest rates to be received by the purchasers of such notes receivable, after considering the effects of estimated prepayments and a normal servicing fee. The Company retains certain participations in cash flows from the sold notes receivable and generally retains the associated servicing rights. The Company generally sells its notes receivable at par value. The present values of expected net cash flows from the sale of notes receivable are recorded at the time of sale as interest only receivables. Interest only receivables are amortized as a charge to income, as payments are received on the retained interest differential over the estimated life of the underlying notes receivable. Interest only receivables are recorded at the lower of unamortized cost or estimated fair value. Reserve for notes receivable sold with recourse represents the Company's estimate of losses to be incurred in connection with the recourse provisions of the sales agreements and is shown separately as a liability in the Company's Consolidated Balance Sheets. In discounting cash flows related to notes receivable sales, the Company defers servicing income at an annual rate of 1% and discounts cash flows on its sales at the rate it believes a purchaser would require as a rate of return. Earned servicing income is included under the caption of financial income. The cash flows were discounted to present value using a discount rate which averaged 15% in each of fiscal years 1998, 1997 and 1996. The Company has developed its assumptions based on experience with its own portfolio, available market data and consultation with its financial advisors. 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. Interest Income -- Interest income is recorded as earned. Interest income represents the interest earned on notes receivable and short term investments. F-13 76 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996 Financial Income -- Fees for servicing notes receivable 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 notes receivable and are recognized when earned. Interest received on notes receivable sold, less amounts paid to investors, is reported as financial income. Capitalized interest only receivables are amortized systematically to reduce 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 notes receivable are recorded as expense when incurred. Timeshare Owners' Associations -- The Company incurs a portion of operating expenses of the timeshare owners' associations based on ownership of the unsold timeshare interests at each of the respective timeshare properties. These costs are referred to as Association Assessments and are included in the Consolidated Statements of Operations in general and administrative expense. Management fees and costs received from the associations are included in other revenues. See Note 19. Income (Loss) Per Common Share -- Basic income (loss) per common share is based on the net income (loss) applicable to common stock for each period divided by the weighted-average number of common shares outstanding during the period. Diluted income per common share is computed by dividing net income applicable to common stock by the weighted-average number of common shares plus common share equivalents. Income (loss) from continuing operations per share, income (loss) from discontinued operations per share and gain on prior discontinued operations per share, are also disclosed due to the Spin-off of MMC. See Note 3. In loss periods, anti-dilutive common share equivalents are excluded. Recently Issued Accounting Standards -- The Financial Accounting Standards Board (the FASB) issued Statement No. 123, "Accounting for Stock-Based Compensation," (SFAS 123), which established 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. 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 elected to continue to apply the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees," as permitted by SFAS 123, and accordingly provides pro forma disclosure in Note 17. SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 125) was issued by the FASB in June 1996. SFAS 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. This statement also provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. It requires that liabilities and derivatives incurred or obtained by transferors as part of a transfer of financial assets be initially measured at fair value. SFAS 125 also requires that servicing assets be measured by allocating the carrying amount between the assets sold and retained interests based on their relative fair values at the date of transfer. Additionally, this statement requires that the servicing assets and liabilities be subsequently measured by (a) amortization in proportion to and over the period of estimated net servicing income or loss and (b) assessment for asset impairment or increased obligation based on their fair values. SFAS 125 requires the Company's excess servicing rights be measured at fair market value and reclassified as interest only receivables and accounted for in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115). As required by SFAS 125, the Company adopted the new requirements effective January 1, 1997. Implementation of SFAS 125 did not have any material impact on the financial statements of the Company, as the book value of the Company's interest only receivables approximated fair value. SFAS No. 128, "Earnings per Share," (SFAS 128) was issued by the FASB in March 1997, effective for financial statements issued after December 15, 1997. SFAS 128 provides simplified standards for the F-14 77 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996 computation and presentation of earnings per share (EPS), making EPS comparable to international standards. SFAS 128 requires dual presentation of "Basic" and "Diluted" EPS, by entities with complex capital structures, replacing "Primary" and "Fully-diluted" EPS under APB Opinion No. 15. Basic EPS excludes dilution from common stock equivalents and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from common stock equivalents, similar to fully diluted EPS, but uses only the average stock price during the period as part of the computation. An entity that reports discontinued operations is required to present Basic and Diluted EPS for each of the income related line items. Data utilized in calculating pro forma earnings per share under SFAS 128 are as follows (thousands of dollars, except share amounts):
FOR THE YEARS ENDED AUGUST 31, --------------------------------------- 1998 1997 1996 ----------- ----------- ----------- BASIC: Income (loss) from continuing operations...... $ (3,229) $ 8,006 $ (1,419) Income from discontinued operations........... -- 11,334 6,270 Preferred stock dividends..................... -- -- (240) ----------- ----------- ----------- Net income (loss)............................. $ (3,229) $ 19,340 $ 4,611 =========== =========== =========== Weighted-average number of common shares outstanding................................ 21,009,506 18,657,224 18,117,122 =========== =========== =========== DILUTED: Income (loss) from continuing operations...... $ (3,229) $ 8,006 $ (1,419) Income from discontinued operations........... -- 11,334 6,270 Preferred stock dividends..................... -- -- (240) ----------- ----------- ----------- Net income (loss)............................. $ (3,229) $ 19,340 $ 4,611 =========== =========== =========== Weighted-average number of common shares and common share equivalents outstanding....... 21,009,506 19,528,470 19,114,888 =========== =========== ===========
The following table reconciles income (loss) from continuing operations, basic and diluted shares and EPS for the following periods (thousands of dollars, except per share amounts):
FOR THE YEARS ENDED AUGUST 31, -------------------------------------------------------------------------------------------- 1998 1997 1996 ----------------------------- ---------------------------- ----------------------------- PER- PER- PER- INCOME SHARE INCOME SHARE INCOME SHARE (LOSS) SHARES AMOUNT (LOSS) SHARES AMOUNT (LOSS) SHARES AMOUNT ------- ---------- ------ ------ ---------- ------ ------- ---------- ------ Income (loss) from continuing operations....................... $(3,229) $8,006 $(1,419) BASIC EPS Income (loss) from continuing operations....................... (3,229) 21,009,506 $(0.15) 8,006 18,657,224 $0.43 (1,419) 18,117,122 $(0.08) ------- ---------- ====== ------ ---------- ===== ------- ---------- ====== Effect of dilutive securities: Warrants......................... -- -- -- 620,133 -- 735,870 Stock options.................... -- -- -- 251,113 -- 261,896 ------- ---------- ------ ---------- ------- ---------- DILUTED EPS Income (loss) from continuing operations and assumed conversions...................... $(3,229) 21,009,506 $(0.15) $8,006 19,528,470 $0.41 $(1,419) 19,114,888 $(0.08) ======= ========== ====== ====== ========== ===== ======= ========== ======
F-15 78 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996 The following table reconciles income from discontinued operations, net of tax and minority interest, basic and diluted shares, and EPS for the following periods (thousands of dollars, except per share amounts):
FOR THE YEARS ENDED AUGUST 31, ------------------------------------------------------------ 1997 1996 ----------------------------- ---------------------------- PER- PER- SHARE SHARE INCOME SHARES AMOUNT INCOME SHARES AMOUNT ------- ---------- ------ ------ ---------- ------ Income from discontinued operations(1)........................ $13,692 $6,270 Less: Minority interest in discontinued operations........................... 2,358 -- ------- ------ BASIC EPS Income from discontinued operations.... 11,334 18,657,224 $0.61 6,270 18,117,122 $0.34 ------- ---------- ===== ------ ---------- ===== Effect of dilutive securities: Warrants............................. -- 620,133 -- 735,870 Stock options........................ -- 251,113 -- 261,896 ------- ---------- ------ ---------- DILUTED EPS Income from discontinued operations and assumed conversions.................. $11,334 19,528,470 $0.58 $6,270 19,114,888 $0.33 ======= ========== ===== ====== ========== =====
- --------------- (1) Net of income taxes of $9,062 and $4,235 for 1997 and 1996, respectively. The following table reconciles the net income (loss) applicable to common shareholders, basic and diluted shares and EPS for the following periods (thousands of dollars, except per share amounts):
FOR THE YEARS ENDED AUGUST 31, -------------------------------------------------------------------------------------------- 1998 1997 1996 ----------------------------- ----------------------------- ---------------------------- PER- PER- PER- INCOME SHARE INCOME SHARE INCOME SHARE (LOSS) SHARES AMOUNT (LOSS) SHARES AMOUNT (LOSS) SHARES AMOUNT ------- ---------- ------ ------- ---------- ------ ------ ---------- ------ Net income (loss)................ $(3,229) $19,340 $4,851 Less: Preferred stock dividends...................... -- -- 240 ------- ------- ------ BASIC EPS Income (loss) applicable to common stockholders............ (3,229) 21,009,506 $(0.15) 19,340 18,657,224 $1.04 4,611 18,117,122 $0.25 ------- ---------- ====== ------- ---------- ===== ------ ---------- ===== Effect of dilutive securities: Warrants....................... -- -- -- 620,133 -- 735,870 Stock options.................. -- -- -- 251,113 -- 261,896 ------- ---------- ------- ---------- ----- ---------- DILUTED EPS Income (loss) applicable to common stockholders and assumed conversions.................... $(3,229) 21,009,506 $(0.15) $19,340 19,528,470 $0.99 $4,611 19,114,888 $0.24 ======= ========== ====== ======= ========== ===== ====== ========== =====
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130), and SFAS No. 131, "Disclosures and Segments of an Enterprise and Related Information" (SFAS 131). SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. SFAS 131 establishes standards of reporting by publicly-held business enterprises and disclosure of information about operating segments in annual financial statements and, to a lesser extent, in interim financial reports issued to shareholders. SFAS Nos. 130 and 131 are effective for fiscal years beginning after December 15, 1997. As both SFAS Nos. 130 and 131 deal with financial statement disclosure, the Company does not anticipate the adoption of these new standards will have a F-16 79 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996 material impact on its financial position, results of operations or cash flows. The Company has not yet determined what its reporting segments will be under SFAS 131. 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 (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 5. 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 Balance Sheets. 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. Estimated fair values, carrying values and various methods and assumptions used in valuing the Company's financial instruments at August 31, 1998 and 1997 are set forth below (thousands of dollars):
AUGUST 31, 1998 AUGUST 31, 1997 ---------------------- ---------------------- CARRYING ESTIMATED CARRYING ESTIMATED VALUE FAIR VALUE VALUE FAIR VALUE -------- ---------- -------- ---------- FINANCIAL ASSETS: Cash and cash equivalents(a)............... $1,813 $ 1,813 $10,376 $10,376 Notes receivable, net(b)................... 47,789 48,152 34,274 34,753 Interest only receivables(c)............... 3,367 3,367 3,296 3,296 FINANCIAL LIABILITIES: Notes and contracts payable(d)............. 81,986 81,986 65,569 65,569 Subordinated debt(a)....................... 4,348 4,348 4,321 4,321
- --------------- (a) Carrying value is approximately the same as fair value. (b) The fair value was estimated by using outstanding commitments from investors adjusted for non-qualified receivables and the collateral securing such receivables. (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 financial advisors and portfolio experience. (d) Notes payable generally are adjustable rate, indexed to the prime rate, or to the 90 day London Interbank Offering Rate (LIBOR); therefore, carrying value approximates fair value. The fair value estimates were based upon pertinent market data and relevant information on the financial instruments at that time. Because no market exists for a certain portion of the financial instruments, fair value estimates may be based upon judgments regarding future expected loss experience, current economic F-17 80 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996 conditions, risk characteristics of various financial instruments and other factors. Changes in assumptions could significantly affect the estimates and do not reflect any premium or discount that could result from the bulk sale of the entire portion of the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. 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 an effect on fair value estimates and have not been considered in any of the estimates. 6. CONCENTRATIONS OF RISK Availability of Funding Sources -- The Company funds substantially all of the notes receivable, timeshare inventory and land inventory with borrowings through its financing facilities and internally generated funds. These borrowings are in turn repaid with the proceeds received by the Company from such notes receivable through loan sales and payments. 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 notes receivable, could have a material adverse effect on the Company's operations. Geographic Concentrations -- The Company services notes receivable in all 50 states, the District of Columbia and Canada. At August 31, 1998, 28% of the dollar value of notes receivable serviced had been originated in California. No other state accounted for more than 10% of the servicing portfolio of the Company's receivables. 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. The Company's timeshare and land inventories are concentrated in Nevada, New Jersey, Colorado, and Florida. The risk inherent in such concentrations is in the continued popularity of these resort destinations, which affects the marketability of the Company's products. Credit Risk -- The Company is exposed to on-balance sheet credit risk related to its notes receivable. The Company is exposed to off-balance sheet credit risk related to notes receivable sold under recourse provisions. The outstanding balance of notes receivable sold with recourse provisions totaled $71,890,000 and $77,061,000 at August 31, 1998 and 1997, respectively. 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 notes receivable originated by the Company and the interest rates payable under its financing facilities to fund the Company's notes receivable and inventory held for sale and the yield required by investors on notes receivable sales. The spread can be adversely affected after a note is originated or purchased and while it is held by increases in the interest rate demanded by investors. In addition, because the notes receivable originated 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 notes receivable are originated until the closing of the sale. Additionally, the fair value of interest only receivables 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. F-18 81 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996 7. NOTES RECEIVABLE Notes receivable consist of the following (thousands of dollars):
AUGUST 31, -------------------- 1998 1997 -------- -------- Related to timeshare sales.................................. $ 32,353 $ 21,947 Related to land sales....................................... 27,839 23,668 -------- -------- Total............................................. 60,192 45,615 -------- -------- Less: Allowance for cancellations........................... (11,868) (10,824) Discounts................................................. (535) (517) -------- -------- (12,403) (11,341) -------- -------- Total............................................. $ 47,789 $ 34,274 ======== ========
The Company provides financing to the purchasers of its timeshare interests and land. This financing is generally evidenced by notes secured by deeds of trust or mortgages as well as non-recourse installment sales contracts. These notes receivable are generally payable over a period of up to 12 years, bear interest at rates ranging from 12.5% to 15.5% and require equal monthly installments of principal and interest. The Company has entered into financing arrangements with certain purchasers of timeshare interests and land whereby a 5% interest rate is charged if the aggregate down payment is at least 50% of the purchase price and the balance is payable in 36 or fewer monthly payments. Notes receivable of $7,258,000 and $7,023,000 at August 31, 1998 and 1997, respectively, made under this arrangement are included in the table above. A discount is established to provide for an effective interest rate (currently 10%) on notes receivable bearing no stated interest rate at the time of sale, and is applied to the principal balance and amortized over the terms of the notes receivable. The effective interest rate is based upon the economic interest rate environment and similar industry data. The Company is obligated under certain agreements for the sale of notes receivable and certain loan agreements to maintain various minimum net worth requirements. The most restrictive of these agreements requires PEC to maintain a minimum net worth of $25,000,000. PEC's net worth at August 31, 1998 was $27,294,000. At August 31, 1998 and 1997, receivables aggregating $49,645,740 and $41,063,000, respectively, were pledged to lenders to collateralize certain of the Company's indebtedness. Receivables which qualify for the lenders' criteria may be pledged as collateral whether or not such receivables have been recognized for accounting purposes. See Note 13 for further discussion. F-19 82 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996 Allowance for Cancellations -- The Company provides an allowance for cancellations, in an amount which in the Company's judgment will be adequate to absorb losses on notes receivable that may become uncollectible. The Company's judgment in determining the adequacy of this allowance is based on its continual review of its portfolio which utilizes historical experience and current economic factors. These reviews take into consideration changes in the nature and level of the portfolio, historical rates, collateral values, current and future economic conditions which may affect the obligors' ability to pay and overall portfolio quality. Changes in both the allowance for cancellations and the reserve for notes receivable sold with recourse consist of the following (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, ------------------------------ 1998 1997 1996 ------- -------- ------- Balance at beginning of year......................... $19,527 $ 19,924 $18,821 Provision for cancellations.......................... 4,827 10,219 9,778 Amounts charged to allowance for cancellations and reserve for notes receivable sold with recourse.... (5,866) (10,616) (8,675) ------- -------- ------- Balance at end of year............................... $18,488 $ 19,527 $19,924 ======= ======== ======= Allowance for cancellations.......................... $11,868 $ 10,824 $11,512 Reserve for notes receivable sold with recourse...... 6,620 8,703 8,412 ------- -------- ------- Total...................................... $18,488 $ 19,527 $19,924 ======= ======== =======
Number of Notes Receivable Accounts Serviced -- The number of notes receivable accounts serviced at August 31, 1998 and 1997, was 16,704 and 18,038, respectively. At August 31, 1998 and 1997, the amount of notes receivable with payment delinquencies of 90 days or more was $9,654,000 and $4,026,000, respectively, on serviced accounts other than accounts serviced for MMC. Notes Receivable Serviced and Originated -- At August 31, 1998 and 1997, notes receivable serviced were $117,150,000 and $118,487,000, respectively, other than accounts serviced for MMC. Notes receivable originated were $57,789,000 and $55,469,000 for the years ended August 31, 1998 and 1997, respectively. 8. INTEREST ONLY RECEIVABLES With the implementation of SFAS 125 on January 1, 1997, the Company's future and existing excess servicing rights were renamed interest only receivables. Activity in interest only receivables is as follows (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, -------------------------------- 1998 1997 1996 -------- -------- -------- Balance at beginning of year............................. $3,296 $2,147 $2,082 Plus: Additions.......................................... 523 1,543 781 Less: Amortization....................................... (452) (394) (716) ------ ------ ------ Balance at end of year................................... $3,367 $3,296 $2,147 ====== ====== ======
As of August 31, 1998 and 1997, interest only receivables consisted of excess cash flows on sold loans totaling $71,890,000 and $77,061,000, respectively, yielding weighted-average interest rates of 12.5% and 12.3%, respectively, net of normal servicing fees and had weighted-average pass-through yields to the investor of 9.2%, for both years. These loans were sold under recourse provisions as described in Note 4. F-20 83 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996 The principal balance of notes receivable as shown below, represents a series of sales, providing a range of yields to purchasers at fixed rates for the periods indicated as follows (thousands of dollars):
1998 1997 ----------------------------- ---------------------------------- PRINCIPAL BALANCE OF PRINCIPAL BALANCE OF NOTES RECEIVABLE SOLD YIELD NOTES RECEIVABLE SOLD YIELD --------------------- ----- --------------------- ---------- 9,418..$...... 9.75% $19,741 9% - 9.13% 10,376(a) 9% - 9.75%
- --------------- (a) These series of sales were to the same purchaser, while the other series of sales were to different purchasers. 9. INVENTORIES Timeshare interests held for sale consist of the following (thousands of dollars):
AUGUST 31, ------------------ 1998 1997 ------- ------- Timeshare interests (including capitalized interest of $710 and $473 in 1998 and 1997, respectively).................. $22,845 $17,624 Timeshare interests under construction (including capitalized interest of $888 and $1,043 in 1998 and 1997, respectively)............................................. 12,953 17,464 ------- ------- Total............................................. $35,798 $35,088 ======= =======
At August 31, 1998 and 1997, 11,273 and 9,124 timeshare interests, respectively, were available for sale. Timeshare units amounting to 90 and 176 at August 31, 1998 and 1997, respectively, were under construction and awaiting completion of remodeling, renovation, furnishing, conversion and registration, representing 4,590 and 8,976 timeshare interests, respectively. 10. OTHER INVESTMENTS Other investments in the following locations, at lower of cost or market, consist of the following (thousands of dollars):
AUGUST 31, ---------------- 1998 1997 ------ ------ Water rights: Huerfano County, Colorado................................. $ 533 $ 532 Nye County, Nevada........................................ 413 413 Land: Nye County, Nevada........................................ 721 602 Clark County, Nevada...................................... 84 51 Timeshare project: Biloxi, Mississippi....................................... 2,257 -- Other....................................................... 387 551 ------ ------ Total............................................. $4,395 $2,149 ====== ======
F-21 84 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996 11. PROPERTY AND EQUIPMENT Property and equipment and related accumulated depreciation, consist of the following (thousands of dollars):
AUGUST 31, ------------------ 1998 1997 ------- ------- Water and sewer systems..................................... $17,450 $16,209 Furniture and equipment..................................... 5,330 7,065 Buildings................................................... 9,745 10,643 Vehicles.................................................... 2,812 2,531 Recreational facilities and equipment....................... 1,050 1,323 Land........................................................ 1,342 1,342 Leasehold improvements...................................... 340 399 ------- ------- 38,069 39,512 Less: Accumulated depreciation.............................. (14,119) (15,292) ------- ------- Total............................................. $23,950 $24,220 ======= =======
12. OTHER ASSETS Other assets consist of the following (thousands of dollars):
AUGUST 31, ----------------- 1998 1997 ------- ------ Other receivables........................................... $ 6,744 $3,574 Miscellaneous assets........................................ 627 843 Deposits and impounds....................................... 379 511 Licenses.................................................... 667 967 Other receivables collateralized by trust deeds and second mortgages................................................. 53 86 Prepaid expenses and other.................................. 1,685 949 ------- ------ Total............................................. $10,155 $6,930 ======= ======
F-22 85 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996 13. NOTES AND CONTRACTS PAYABLE The Company's debt including lines of credit consists of the following (thousands of dollars):
AUGUST 31, ------------------ 1998 1997 ------- ------- Notes collateralized by receivables (a).................. $42,793 $31,489 Mortgages collateralized by real estate properties(b)(1)....................................... 37,393 32,311 Installment contracts and other notes payable............ 1,800 1,769 ------- ------- Total.......................................... $81,986 $65,569 ======= =======
- --------------- (1) Includes $2,790,000 of separate mortgage borrowings not under the lines of credit. The details of the notes payable are summarized as follows (thousands of dollars):
AUGUST 31, ------------------ 1998 1997 ------- ------- (a) NOTES COLLATERALIZED BY RECEIVABLES Borrowings bearing interest at prime plus: 2% in 1998 and 1997 including "lines of credit" (see below)............ $42,793 $31,489 ======= ======= (b) MORTGAGES COLLATERALIZED BY REAL ESTATE PROPERTIES Mortgages collateralized by the respective underlying assets with various repayment terms and fixed interest rates of 8% in 1997 and variable rates of prime plus: 2% to 3% and 90 day LIBOR plus 4.25% in 1998 and 1997.................... $37,393 $32,311 ======= =======
The prime rate of interest was 8.50% and the 90 day LIBOR was 5.63% at August 31, 1998. Maturities -- Scheduled maturities of the Company's notes and contracts payable are as follows (thousands of dollars):
YEARS ENDING AUGUST 31, ----------------------- 1999....................................................... $ 7,967 2000....................................................... 5,402 2001....................................................... 15,101 2002....................................................... 5,196 2003....................................................... 11,468 Thereafter................................................. 36,852 ------- $81,986 =======
F-23 86 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996 Lines of Credit -- PEC is the borrower under 6 agreements for lines of credit with 5 lenders not to exceed $137,500,000 which are collateralized by security interests in timeshare and land receivables and are guaranteed by the Company. At August 31, 1998 and 1997, an aggregate of $77,396,000 and $62,089,000 had been borrowed under these lines, respectively. Under the terms of such lines of credit, PEC may borrow 70% to 90% of the balances of the pledged timeshare and land receivables. Summarized line of credit information relating to these six lines of credit outstanding at August 31, 1998, consist of the following (thousands of dollars):
BORROWING MAXIMUM AMOUNT AT BORROWING REVOLVING AUGUST 31, 1998 AMOUNT EXPIRATION DATE(F) MATURITY DATE INTEREST RATE - --------------- --------- ------------------ ------------- ------------- 46,0$66..... $75,000 (a) May 15, 2000 Various Prime + 2.0 -2.25% 3,418...... 15,000 (b) December 15, 1998 Various Prime + 2.0% 10,561..... 15,000 (c) February 28, 1999 Various LIBOR + 4.0 - 4.25% 6,315...... 15,000 (c) May 1, 1999 Various LIBOR + 4.0 - 4.25% 4,360...... 10,000 (d) August 1, 2000 August 1, 2003 Prime + 2.0 -2.25% 6,676...... 7,500 (e) December 15, 1998 Various Prime + 2.0 -3.00%
- --------------- (a) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $20,000,000 with such amount increasing each fiscal quarter after August 31, 1997 by an amount equal to 50% of PEC's consolidated net income for each quarter up to a maximum requirement of $25,000,000. At August 31, 1998, $31,076,000 was outstanding related to financings at prime +2%, of which $23,020,000 of loans secured by land receivables mature May 15, 2010 and $8,057,000 of loans secured by timeshare receivables mature May 15, 2007. The outstanding borrowing amount includes $570,000 in acquisition and development (A&D) financing maturing May 20, 1999 and $5,083,000 maturing July 1, 2003 for the financing of corporate office buildings; both of which loans are amortizing loans, and a real estate loan with an outstanding balance of $1,174,000 maturing March 20, 1999, all bearing interest at prime +2.25%. The remaining A&D loans, receivables loans and a resort lobby loan outstanding of $8,163,000 are at prime +2% and mature between November 30, 1998 and February 28, 2001. (b) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $25,000,000 during the life of the loan. These credit lines include available financings for A&D and receivables. At August 31, 1998, $1,351,000 was outstanding under the A&D loan maturing September 1, 1999 and $2,067,000, maturing June 1, 2002, was outstanding under the receivables loan. Management has obtained a verbal commitment from the lender that this revolving line of credit will be extended for a period of 18 months on substantially the same terms. (c) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $17,000,000 during the life of the loan. These credit lines include available financings for A&D and receivables. At August 31, 1998, $5,413,000 was outstanding under the A&D loans which have maturity dates of December 31, 2000 and June 30, 2001 and bear interest at 90 day LIBOR +4.25%. The available receivable financings of which $5,148,000 was outstanding at August 31, 1998, is at 90 day LIBOR +4% and has maturity dates of June 5, 2005 and August 5, 2005. (d) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $25,000,000. This credit line is for the purpose of financing receivables and costs of remodeling. (e) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $15,000,000. This credit line is for the purpose of financing receivables of which $2,676,000 was outstanding at August 31, 1998 in respect to receivable debt and a real estate loan of $4,000,000 with a maturity date of August 31, 1999. The maturity date for the receivables is May 31, 2002. Management has obtained a verbal F-24 87 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996 commitment from the lender that this revolving line of credit will be extended for a period of 18 months on substantially the same terms. (f) Revolving expiration dates represent the expiration of the revolving features of the lines of credit, at which time the credit lines become loans with fixed maturities. 14. SUBORDINATED DEBT On March 2, 1995, Mego Financial entered into the Amendment whereby the Assignors agreed to defer payment of $10,000,000 of the amount payable to Assignors and to subordinate such amount, constituting Subordinated Debt, in right of payment to debt for money borrowed by Mego Financial or obligations of subsidiaries guaranteed by Mego Financial. Warrants for 1,000,000 shares of Mego Financial common stock, at an exercise price of $4.25 per share (the closing market price per share on March 2, 1995) were granted to the Assignors in consideration of the payment deferral and subordination. The Warrants were exercised in August 1997 in a non-cash transaction whereby the Subordinated Debt was reduced by $4,250,000. The Amendment calls for interest to be paid semi-annually at the rate of 10% per annum starting September 1, 1995, and 7 equal semi-annual payments of $1,429,000 plus interest, which commenced March 1, 1997. However, in connection with the reduction of the Subordinated Debt, payments aggregating $4,250,000 were deemed paid and the semiannual payments will resume in March 1999 with a partial payment in September 1998, pursuant to the Third Amendment to the Assignment and Assumption Agreement. The Subordinated Debt is collateralized by a pledge of PEC's outstanding stock. See Note 2 for further discussion. The following table represents Subordinated Debt activity (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, ------------------- 1998 1997 ------- -------- Balance at beginning of year................................ $4,321 $ 9,691 Accreted interest........................................... 667 1,309 Less: Interest payments..................................... (640) (1,000) Principal paydowns.................................... -- (1,429) Reduction due to exercise of warrants................. -- (4,250) ------ ------- Balance at end of year...................................... $4,348 $ 4,321 ====== =======
15. REDEEMABLE PREFERRED STOCK Mego Financial had designated 300,000 shares of its 5,000,000 authorized preferred shares as Series A, 12% Cumulative Preferred Stock, par value, $.01 per share. The remaining 4,700,000 authorized preferred shares have not been designated. As of August 31, 1993, Mego Financial sold 300,000 shares of its Series A, 12% Cumulative Preferred Stock (Preferred Stock), at a price of $10 per share. The Preferred Stock was stated at its par value of $.01 per share, and redemption value of $10 per share. Mego Financial was obligated to redeem 100,000 shares of Preferred Stock on August 31, 1995, at $10 per share. In August 1995, Mego Financial gave notice of redemption of 100,000 shares. On September 1, 1995, after receipt of the certificates, Mego Financial redeemed 100,000 shares of its Preferred Stock. On August 31, 1996, the holder of Mego Financial's 200,000 shares of outstanding 12% cumulative Preferred Stock with a redemption price of $2,000,000 redeemed their shares for 343,347 shares of Mego Financial's common stock. The number of common shares exchanged was based upon the 10 day average closing stock price of $5.825 for Mego Financial's common stock immediately prior to August 31, 1996. In conjunction with the exchange, the expiration date of the warrants outstanding to purchase 300,000 shares of Mego Financial's common stock at a price of $1.20, issued in conjunction with the Preferred Stock, and due to expire on August 31, 1996, was F-25 88 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996 extended to August 31, 1997. In February 1997, the warrants were exercised and 300,000 shares of Mego Financial common stock were issued. 16. INCOME TAXES Mego Financial files a consolidated federal income tax return with its subsidiaries for its tax year which ends the last day of February. The operations of MMC will no longer be included subsequent to the Spin-off which occurred on September 2, 1997. The benefit for fiscal 1998 and from continuing operations recorded for fiscal 1997 is primarily a result of the use of net operating loss (NOL) carryforwards which were previously fully reserved and currently are used to offset income on a consolidated basis. In addition, due to changes in facts and circumstances determined in fiscal 1997, certain income tax liability reserves recorded in prior periods were reversed. Deferred income taxes shown in Balance Sheets as Accrued 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 for income tax purposes, and (c) operating loss and tax credit carryforwards. The tax effects of significant items comprising the Company's net deferred income tax, shown on Balance Sheets as Accrued Income Taxes, as of August 31, 1998 and 1997 are as follows (thousands of dollars):
AUGUST 31, ------------------ 1998 1997 ------- ------- Deferred tax liabilities: ------- ------- Timing of revenue recognition............................. $20,651 $13,279 ------- ------- 20,651 13,279 ------- ------- Deferred tax assets: Difference between book and tax carrying value of assets................................................. 14,007 4,821 Other..................................................... 2,176 2,223 ------- ------- 16,183 7,044 ------- ------- Net deferred income tax........................... $ 4,468 $ 6,235 ======= =======
The provision for income taxes as reported is different from the tax provision computed by applying the statutory federal rate of 34%. The differences are as follows (thousands of dollars):
1998 1997 1996 ------- -------- ------- Loss from continuing operations before income taxes.............................................. $ 5,197 $ 4,656 $ 2,487 ======= ======== ======= Tax at the statutory federal rate.................... $(1,767) $ (1,583) $ (846) Increase (decrease) in income taxes resulting from: Contributions in aid of construction............... -- -- 81 Preferred stock dividends.......................... -- -- (82) Application of NOL carryforwards and changes in certain income tax liability reserves........... (201) (11,079) -- Other.............................................. -- -- (221) ------- -------- ------- Total...................................... $(1,968) $(12,662) $(1,068) ======= ======== =======
The income tax provision applied to discontinued operations exceeds the statutory federal rate primarily due to state income taxes. F-26 89 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996 17. STOCKHOLDERS' EQUITY Mego Financial has a stock option plan (Stock Option Plan), adopted November 1993, amended September 9, 1997, and amended and restated as of September 16, 1998 by approval of shareholders, for officers, key employees and directors which provides for non-qualified and qualified incentive options. The Stock Option Committee of the Board of Directors determines the option price (not to be less than fair market value for qualified incentive options) at the date of grant. The options generally expire ten years from the date of grant and are exercisable over the period stated in each option at the cumulative rate of 20% per year commencing December 22, 1994, for three years and the remaining 40% after December 22, 1997. In August 1997, in connection with the Spin-off of MMC, the Stock Option Committee vested all options previously granted, excluding those granted subsequent to February 26, 1997. On September 23, 1998, an additional 111,000 incentive and non-incentive stock options were granted under the Stock Option Plan. In addition, the exercise prices of 304,500 of options issued on September 2, 1997 were revised from $3.125 per share to $1.00 per share. The following table sets forth shares reserved and options exercised, granted and forfeited for the following periods:
NUMBER OF PRICE PER RESERVE SHARES OPTIONS SHARE -------------- --------- --------------- At August 31, 1995......................... 523,000 465,000 $ 2.50/2.75 Exercised.................................. (4,000) (4,000) $ 2.50 Forfeited.................................. -- (6,000) $ 2.50 Granted.................................... -- 25,000 $ 5.875 -------- -------- At August 31, 1996......................... 519,000 480,000 $ 2.50/8.75 Exercised.................................. (455,000) (455,000) $ 2.50/8.75 Forfeited.................................. -- (50,000) $ 6.75/8.00 Granted.................................... 500,000 70,000 $ 5.625/6.75 -------- -------- At August 31, 1997......................... 564,000 45,000 $ 5.625 Exercised.................................. -- -- -- Forfeited.................................. -- (49,000) $3.125/5.625 Granted.................................... -- 348,500(1) $3.125/3.438 -------- -------- ------------ At August 31, 1998......................... 564,000 344,500 $3.125/5.625 ======== ======== ============
- --------------- (1) Exercise price reduced to $1.00 per share at September 23, 1998 which represented fair value at the date of repricing. SFAS 123 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 non employees. 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. The Company elected to continue to apply the provisions of APB Opinion No. 25 as permitted by SFAS 123 and, accordingly, provides pro forma disclosure below. Stock options granted under Mego Financial's Stock Option Plan are qualified and unqualified stock options that: (1) are generally granted at prices which are equal to the fair value of the stock on the date of grant; (2) generally subject to a grantee's continued employment with the Company, vest at various periods over a four-year period; and (3) expire ten years subsequent to the award. F-27 90 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996 A summary of the status of Mego Financial's stock options granted under the Stock Option Plan as of August 31, 1998, 1997 and 1996 and the changes during the year is presented below:
AUGUST 31, 1998 AUGUST 31, 1997 AUGUST 31, 1996 -------------------- -------------------- -------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------- --------- ------- --------- ------- --------- Outstanding at beginning of year....................... 45,000 $5.625 480,000 $3.746 465,000 $3.605 Granted...................... 348,500 3.136(1) 70,000 6.027 25,000 5.875 Exercised.................... -- -- 455,000 3.512 4,000 2.500 Forfeited.................... 49,000 3.380 50,000 7.375 6,000 2.500 ------- ------- ------- Outstanding at end of year... 344,500 3.427 45,000 5.625 480,000 3.746 ======= ======= ======= Options exercisable at end of year....................... -- -- -- -- 165,000 3.133 ======= ======= =======
- --------------- (1) Exercise price reduced to $1.00 per share at September 23, 1998 which represented fair value at the date of repricing. The fair value of each option granted during fiscal 1998, 1997 and 1996 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: (1) dividend yield of zero; (2) expected volatility of 65.0% for 1998 and 59.3% for 1997 and 1996; (3) risk-free interest rate of 6% for 1998, 1997 and 1996 and; (4) expected life of 7 years. The weighted-average fair value of options granted during 1998, 1997 and 1996 were $2.13, $3.93 and $3.83, respectively. As of August 31, 1998, there were 344,500 options outstanding which have exercise prices ranging from $3.125 to $5.625 per common share and a weighted-average remaining contractual life of 8.78 years. Had compensation cost for Mego Financial's fiscal 1998, 1997 and 1996 grants for stock options been determined consistent with SFAS 123, the Company's pro forma net income and pro forma net income per common share for fiscal 1998, 1997 and 1996 would approximate the pro forma amounts below (thousand of dollars, except per share amounts):
AUGUST 31, 1998 AUGUST 31, 1997 AUGUST 31, 1996 ------------------------ ------------------------ ------------------------ AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA ----------- --------- ----------- --------- ----------- --------- Net income (loss) applicable to common stock............... $(3,229) $(3,333) $19,340 $19,042 $4,611 $4,431 Net income (loss) per common share: Basic................. (0.15) (0.16) 1.04 1.02 0.25 0.24 Diluted............... (0.15) (0.16) 0.99 0.98 0.24 0.23
In addition to the 1,000,000 warrants exercised as described in Note 14, an additional 1,300,000 warrants were exercised in August 1997 for $7,485,000. As of August 31, 1998, there were no warrants outstanding. F-28 91 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996 18. TIMESHARE INTEREST SALES AND LAND SALES Timeshare interest sales, net -- A summary of the components of timeshare interest sales is as follows (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, -------------------------------- 1998 1997 1996 -------- -------- -------- Timeshare interest sales.............................. $41,449 $39,850 $33,178 Less: Provision for cancellations..................... (3,736) (7,597) (5,400) ------- ------- ------- Total....................................... $37,713 $32,253 $27,778 ======= ======= =======
Land sales, net -- A summary of the components of land sales is as follows (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, -------------------------------- 1998 1997 1996 -------- -------- -------- Land sales............................................ $14,903 $19,248 $22,346 Less: Provision for cancellations..................... (1,091) (2,622) (4,378) ------- ------- ------- Total....................................... $13,812 $16,626 $17,968 ======= ======= =======
The following table reflects the maturities of receivables from land sales for each of the five years after August 31, 1998 (thousands of dollars):
1999 2000 2001 2002 2003 ---- ------ ---- ------ ------ Land receivables maturities...................... $490 $1,131 $543 $1,209 $1,453
The range of interest rates are from 0.0% to 15.0% and the weighted-average interest rate at August 31, 1998 was 11.8%. The delinquency information related to land loans at August 31, 1998 is as follows (thousands of dollars):
PRINCIPAL BALANCE % OF LOANS SERVICED ----------------- ------------------- 30 - 59 days................................ $2,097 1.8% 60 - 90 days................................ $1,362 1.2% Over 90 days................................ $3,476 3.0%
The estimated total costs and expenditures for improvements on these loans for the next five years are deemed immaterial for disclosure purposes at August 31, 1998. No material obligations for future improvements on land existed at August 31, 1997. 19. RELATED PARTY TRANSACTIONS Timeshare Owners' Associations -- Owners' Associations have been incorporated for the Grand Flamingo, Reno Spa, Brigantine, Steamboat Springs, Aloha Bay and Orlando timesharing resorts. The respective Owners' Associations are independent not-for-profit corporations. PEC acts as the managing agent for these Owners' Associations and the White Sands Waikiki Resort Club, which is a division of PEC, (Associations) and has received management fees for its services of $2,388,000, $2,198,000 and $2,081,000 in 1998, 1997 and 1996, respectively. Such fees were recorded under the caption of other revenue. The expenses of PEC for management of each timeshare resort are incurred to preserve the integrity of the property and the portfolio performance on an on-going basis beyond the end of the sales period. PEC does not manage resorts of other developers and would not collect management fees or incur expenses were it not part of the total timeshare sale package and support of the portfolio. The owners of timeshare interests in each Association are responsible for payment to the Associations of assessments, which are intended to fund all of the operating F-29 92 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996 expenses at each of the resort facilities. The Company's share of the Association Assessments, net of room income, was $1,677,000, $1,589,000 and $983,000 for 1998, 1997 and 1996, respectively, and have been recorded under the caption general and administrative expense. The Company has in the past financed budget deficits of the Associations as is reflected in the receivable from such Associations, but is not obligated to do so in the future, except in its Florida resorts. The Public Offering Statements for the Indian Shores and Orlando resorts contain a provision whereby PEC guarantees that the annual assessment fees will not exceed a specified amount, in which case PEC agrees to pay any monetary deficiencies. These guarantees are effective through the Associations' calendar year of December 31, 1999 and may be extended by PEC annually thereafter. In fiscal 1998, PEC financed a budget deficit of $65,000 for the Owners' Association at Indian Shores.. Since January 1988, the Company has agreed to pay to the Associations the assessments of timeshare interest owners who are delinquent with respect to their assessments, but have paid the Company in full for their timeshare interests. In exchange for these payments, the Associations assign their liens for non-payment of assessments on the respective timeshare interests to the Company. In the event the timeshare interest holder does not satisfy the lien after having an opportunity to do so, the Company acquires the timeshare interest for the amount of the lien and any foreclosure costs. At August 31, 1998 and 1997, $477,000 and $500,000, respectively, was due from Owners' Associations and is included under the caption accounts payable and accrued liabilities. Payments to Assignors -- Certain transactions have been entered into with the Assignors, who are affiliates of certain officers and directors of the Company, and these transactions are more fully described in Notes 2 and 14. During the years ended August 31, 1998, 1997 and 1996, approximately $0, $2,796,000 and $1,196,000, including interest of $0, 218,000 and $196,000, respectively, were paid to the Assignors. Subordinated Debt -- On March 2, 1995, the Company entered into the Amendment whereby the Assignors agreed to defer payment of $10,000,000 of the amount payable to Assignors and to subordinate such amount, constituting Subordinated Debt, in right of payment to debt for money borrowed by Mego Financial or obligations of subsidiaries guaranteed by Mego Financial. During the years ended August 31, 1998, 1997 and 1996, approximately $640,000, $2,429,000 and $1,000,000, including interest of $640,000, $1,000,000 and $1,000,000, respectively, were paid on the Subordinated Debt. In connection with the exercise of warrants for 1,000,000 shares of common stock in August 1997, a non-cash payment of $4,250,000 was recorded, whereby the Subordinated Debt was reduced by such amount. See Note 14 for further discussion. Transactions with MMC -- In November 1996, MMC consummated the IPO and as a result, the Company's ownership of MMC was reduced to approximately 81.3% of the outstanding common stock. On September 2, 1997, Mego Financial distributed all of its 10,000,000 shares of MMC's common stock to Mego Financial's shareholders in the Spin-off. To fund MMC's past operations and growth and in conjunction with the Tax Agreement, MMC incurred debt to the Company and its subsidiary PEC. The amount of intercompany debt was $10,100,000 at August 31, 1997, of which approximately $3,400,000 was paid by MMC in October 1997 together with $500,000 advanced by the Company to PEC on behalf of MMC in September 1997. In April 1998, an agreement was made to adjust the balance due on the receivable by reductions of the income tax portion in the amount of $5,283,000 previously deemed owed by MMC to the Company under the Tax Agreement since that amount was no longer payable under that agreement. As of the date of the April 1998 agreement, MMC owed the Company an estimated total of $6,153,000, of which $5,283,000 was the estimated amount due to the Company under the Tax Agreement prior to the Spin-off. An agreement was subsequently made to settle the remaining $870,000 balance due the Company by MMC. In consideration of this settlement, MMC paid the entire amount of $1,574,000, which was separately owed to PEC, in June 1998. Following this transaction, MMC had no outstanding indebtedness to the Company. F-30 93 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996 Management Services Provided by PEC. MMC and PEC were parties to a management services arrangement pursuant to which certain executive, accounting, legal, management information, data processing, human resources, advertising and promotional personnel of PEC provided services to MMC on an as needed basis. For the years ended August 31, 1998, 1997 and 1996, approximately $616,000, $967,000 and $671,000, respectively, of the salaries and expenses of certain employees of PEC were attributable to and paid by MMC in connection with services rendered by such employees to MMC. In addition, during the year ended August 31, 1996, MMC paid PEC for developing certain computer programming costs of $56,000. This agreement was terminated by agreement prior to August 31, 1998. Servicing Agreement between PEC and MMC. Prior to September 1, 1996, MMC had an arrangement with PEC pursuant to which it paid annual servicing fees at an annual rate of 50 basis points on the principal balance of loans serviced. For the years ended August 31, 1998, 1997 and 1996, MMC paid servicing fees to PEC of approximately $2,008,000, $1,766,000 and $709,000, respectively. MMC entered into a servicing agreement with PEC (the Servicing Agreement), which provided for the payment of servicing fees at an annual rate of 50 basis points on the principal balance of loans serviced per year. The Servicing Agreement was modified effective September 1, 1997, to provide for the payment of servicing fees at an annual rate of 40 basis points on the principal balance of loans serviced per year, reducing to 35 basis points per year on January 1, 1998. For the years ended August 31, 1998, 1997 and 1996, MMC incurred interest expense in the amount of $29,000, $16,000 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 equaled 10.46% in 1998, 10.48% in 1997 and 10.68% in 1996. By agreement prior to August 31, 1998, PEC no longer services loans for MMC. 20. COMMITMENTS AND CONTINGENCIES Future Improvements -- Central Nevada Utilities Company (CNUC), a subsidiary, has issued performance bonds of $2,943,000 outstanding at August 31, 1998, to ensure the completion of water, sewer and other improvements in portions of the Calvada development areas. The cost of the improvements will be offset by the future receipt of betterment fees and connection fees. Leases -- The Company leases certain real estate for sales offices. The Company also leases its Hawaii real estate for timeshare usage. Rental expense for fiscal 1998, 1997 and 1996 was $2,035,000, $2,339,000 and $2,567,000, respectively. Future minimum rental payments under operating leases are set forth below (thousands of dollars):
FOR THE YEARS ENDING AUGUST 31, ------------------------------- 1999...................................................... $1,796 2000...................................................... 1,334 2001...................................................... 981 2002...................................................... 447 2003...................................................... 196 Thereafter................................................ 1,276 ------ Total........................................... $6,030 ======
Litigation -- Following the Company's November 10, 1995 announcement disclosing certain accounting adjustments, an action was filed on November 13, 1995, in the United States District Court, District of Nevada (Court) by Christopher Dunleavy, as a purported class action against the Company, certain of the Company's officers and directors and the Company's independent auditors. The complaint alleged, among other things, that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder in connection with the preparation and issuance of certain of the Company's financial reports issued in 1994 and 1995, including certain financial statements reported on by the Company's F-31 94 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996 independent auditors. The complaint also alleged that one of the director defendants violated the federal securities laws by engaging in "insider trading." The named plaintiff sought to represent a class consisting of purchasers of Mego Financial's common stock between January 14, 1994 and November 9, 1995, and sought damages in an unspecified amount, costs, attorney's fees and such other relief as the court may deem just and proper. On November 16, 1995, a second action was filed in the Court by Alan Peyser as a purported class action against the Company and certain of its officers and directors, which was served on the Company on December 20, 1995. The complaint alleged, among other things, that the defendants violated the federal securities laws by making statements and issuing certain financial reports in 1994 and 1995 that overstated the Company's earnings and business prospects. The named plaintiff sought to represent a class consisting of purchasers of Mego Financial's common stock between November 28, 1994 and November 9, 1995. The complaint sought damages in an unspecified amount, costs, attorney's fees and such other relief as the Court may deem just and proper. On or about June 10, 1996, the Dunleavy and Peyser Actions were consolidated under the caption "In re Mego Financial Corp. Securities Litigation," Master File No. CV-9-95-01082-LD (RLJ), pursuant to a stipulation by the parties. On December 26, 1996 a third action was filed in the court by Michael Nadler as a purported class action. The Nadler complaint asserts claims substantially similar to those in the Dunleavy and Peyser Actions. On April 23, 1998, counsel for the plaintiffs in the Dunleavy and Peyser actions, and counsel for the defendants filed in the Court a Stipulation and Agreement of Settlement (the Settlement Agreement) in accordance with a prior Memorandum of Understanding dated May 12, 1997. The Settlement Agreement, which was subject to a number of conditions, including approval by the Court, calls for certification, for settlement purposes only, of a class consisting of all purchasers of Mego Financial stock (excluding the defendants and their respective directors, executive officers, partners and affiliates and their respective immediate families, heirs, successors and assigns) during the period from January 14, 1994 through November 9, 1995, inclusive, for creation of a settlement fund of $1.725 million to be distributed to the class, for the dismissal of all claims asserted in the actions with prejudice and for certain releases to defendants. The portion of the settlement amount which has been contributed by the Company, net of anticipated directors and officers insurance proceeds, with contribution by another defendant, has not had a material adverse effect on the Company. On October 19, 1998, the Court issued a Final Judgment and Order of Dismissal with Prejudice, approving the Settlement Agreement, which will not become final until the Effective Date, which is the date following either the expiration of any appeal period without appeal, the date following the affirmation of the Final Judgment on appeal and on which such Final Judgment is no longer subject to further judicial review. On November 13, 1998, Michael Nadler, who had filed objections to the settlement, filed a Notice of Appeal from the Final Judgment and Order of Dismissal with Prejudice and certain other orders of the Court. In the event, for any reason, the Final Judgment is vacated, the Company believes that it has substantial defenses to all of the complaints that have been filed against it described above. However, the Company presently cannot predict the outcome of this matter On February 23, 1998, an action was filed in the United States District Court for the Northern District of Georgia, Civil Action No.1:98CV0593-CAM, by Robert J. Feeney, plaintiff, as a purported class action against MMC and Jeffrey S. Moore, the former President and Chief Executive Officer of MMC. The complaint alleges, among other things, that the defendants violated the federal securities laws in connection with the preparation and issuance of certain of MMC's financial statements. The named plaintiff seeks to represent a class consisting of purchasers of the common stock of MMC between April 11, 1997 and December 18, 1997, and seeks such other relief as the Court may deem just and proper. An amended complaint was filed in such matter on or about June 29, 1998, which amended complaint, among other things, F-32 95 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996 adds Mego Financial as a defendant, adds John Cole, Trent Hildebrand, Burt W. Price and Frank J. Murphy as Plaintiffs and alleges an expansion of the purported class to certain purchasers of MMC's common stock from April 11, 1997 through May 20, 1998. However, the Company was not the parent company of MMC at the time when the majority of the matters which are cited in the above-described action occurred. Motions to dismiss the Complaints have been filed by the defendants. The Company does not believe that any judgment obtained will have a material adverse effect on the Company's or PEC's business or financial condition. On August 27, 1998, an action was filed in the United States District Court, County of Clark, State of Nevada, No. A392585, by Robert and Jocelyne Henry, husband and wife individually and on behalf of all others similarly situated. The plaintiffs have filed a complaint for class action relief claiming the Company is guilty of: breach of contract; unjust enrichment; customer fraud; and bait and switch tactics as a result of a solicitation of betterment fees pursuant to a letter sent to certain lot owners on January 26, 1995 (Letter). The Letter was sent to approximately 1,400 lot owners stating that their lots would be buildable by April 1, 1995 as a result of sewer and water lines being run near their respective lots. The Letter offered to accept a betterment fee payment in the amount of $2,380 per lot prior to an anticipated increase. The Plaintiffs paid the fee and claimed they did not have a buildable lot as sewer and water lines that were run did not reach their property. The Company does not believe a determination in favor of the Plaintiffs will result in a material judgment against the Company. Only approximately 350 customers accepted the offer presented in the Letter and a number of those customers own lots that are buildable. The Company is reviewing the various claims with counsel. In the general course of business the Company, at various times, has been named in other 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. Contingencies -- At August 31, 1998, irrevocable letters of credit in the amount of $310,000 were issued and outstanding to secure certain obligations of the Company. These letters are collateralized by notes receivable in the amount of $1,036,000. License Agreement -- In April 1995, PEC entered into a strategic alliance pursuant to which PEC was granted a ten-year (including a renewal option) exclusive license to operate both its existing and future timeshare properties under the name "Ramada Vacation Suites." PEC has renamed its timeshare resorts. The arrangement provides for the payment by PEC of an initial access fee of $1,000,000, which has been paid, and monthly recurring fees equal to 1% of PEC's Gross Sales (as defined) each month through January 1996 and 1.5% of PEC's Gross Sales each month commencing in February 1996. The initial term of the arrangement is five years and PEC has the option to renew the arrangement for an additional term of five years. F-33 96 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996 21. QUARTERLY FINANCIAL DATA (UNAUDITED) The following tables reflect consolidated quarterly financial data for the Company for the fiscal years ended August 31, 1998 and 1997 (thousands of dollars, except per share amounts):
FOR THE THREE MONTHS ENDED ------------------------------------------------------- AUGUST 31, MAY 31, FEBRUARY 28, NOVEMBER 30, 1998 1998 1998 1997 ----------- ----------- ------------ ------------ REVENUES: Net timeshare interest and land sales.... $ 14,539 $ 13,109 $ 12,016 $ 11,861 Gain on sale of receivables.............. 656 -- -- -- Interest income.......................... 1,913 1,931 1,693 1,624 Financial income and other............... 1,956 2,471 2,219 2,602 ----------- ----------- ----------- ----------- Total revenues................. 19,064 17,511 15,928 16,087 ----------- ----------- ----------- ----------- EXPENSES: Direct costs of timeshare interest and land sales............................. 2,705 2,176 2,018 2,246 Operating expenses....................... 14,852 15,019 13,431 13,490 Interest expense......................... 2,215 2,157 1,762 1,716 ----------- ----------- ----------- ----------- Total expenses................. 19,772 19,352 17,211 17,452 ----------- ----------- ----------- ----------- Income (loss) from continuing operations before income taxes.................... (708) (1,841) (1,283) (1,365) Income taxes (benefit)................... (240) (1,728) -- -- ----------- ----------- ----------- ----------- Income (loss) from continuing operations............................. (468) (113) (1,283) (1,365) Income from discontinued operations, net of taxes and minority interest......... -- -- -- -- ----------- ----------- ----------- ----------- Net income applicable to common stock.... $ (468) $ (113) $ (1,283) $ (1,365) =========== =========== =========== =========== EARNINGS (LOSS) PER COMMON SHARE: Basic: Income (loss) from continuing operations.......................... $ (0.02) $ (0.01) $ (0.06) $ (0.06) Income from discontinued operations.... -- -- -- -- ----------- ----------- ----------- ----------- Net income applicable to common stock............................... $ (0.02) $ (0.01) $ (0.06) $ (0.06) =========== =========== =========== =========== Weighted-average number of common shares.............................. 21,009,506 21,009,506 21,009,506 21,009,506 =========== =========== =========== =========== Diluted: Income (loss) from continuing operations.......................... $ (0.02) $ (0.01) $ (0.06) $ (0.06) Income from discontinued operations.... -- -- -- -- ----------- ----------- ----------- ----------- Net income applicable to common stock............................... $ (0.02) $ (0.01) $ (0.06) $ (0.06) =========== =========== =========== =========== Weighted-average number of common shares and common share equivalents outstanding......................... 21,009,506 21,009,506 21,009,506 21,009,506 =========== =========== =========== ===========
F-34 97 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
FOR THE THREE MONTHS ENDED ------------------------------------------------------- AUGUST 31, MAY 31, FEBRUARY 28, NOVEMBER 30, 1997 1997 1997 1996 ----------- ----------- ------------ ------------ REVENUES: Net timeshare interest and land sales.... $ 12,774 $ 13,202 $ 11,956 $ 10,947 Gain on sale of receivables.............. 620 503 441 449 Interest income.......................... 1,828 1,941 1,762 1,637 Financial income and other............... 2,219 2,609 2,493 2,115 ----------- ----------- ----------- ----------- Total revenues................. 17,441 18,255 16,652 15,148 ----------- ----------- ----------- ----------- EXPENSES: Direct costs of timeshare interest and land sales............................. 2,501 1,746 1,612 1,634 Operating expenses....................... 14,967 14,326 14,014 12,894 Interest expense......................... 2,107 2,084 2,116 2,151 ----------- ----------- ----------- ----------- Total expenses................. 19,575 18,156 17,742 16,679 ----------- ----------- ----------- ----------- Income (loss) from continuing operations before income taxes.................... (2,134) 99 (1,090) (1,531) Income taxes (benefit)................... (7,653) (2,084) (2,458) (467) ----------- ----------- ----------- ----------- Income (loss) from continuing operations............................. 5,519 2,183 1,368 (1,064) Income from discontinued operations, net of taxes and minority interest......... 3,747 2,944 2,413 2,230 ----------- ----------- ----------- ----------- Net income applicable to common stock.... $ 9,266 $ 5,127 $ 3,781 $ 1,166 =========== =========== =========== =========== EARNINGS (LOSS) PER COMMON SHARE: Basic: Income (loss) from continuing operations.......................... $ 0.29 $ 0.11 $ 0.07 $ (0.06) Income from discontinued operations.... 0.20 0.16 0.13 0.12 ----------- ----------- ----------- ----------- Net income applicable to common stock............................... $ 0.49 $ 0.27 $ 0.20 $ 0.06 =========== =========== =========== =========== Weighted-average number of common shares.............................. 18,878,748 18,733,121 18,579,788 18,433,121 =========== =========== =========== =========== Diluted: Income (loss) from continuing operations.......................... $ 0.28 $ 0.11 $ 0.07 $ (0.06) Income from discontinued operations.... 0.19 0.16 0.12 0.12 ----------- ----------- ----------- ----------- Net income applicable to common stock............................... $ 0.47 $ 0.27 $ 0.19 $ 0.06 =========== =========== =========== =========== Weighted-average number of common shares and common share equivalents outstanding......................... 19,619,687 19,299,365 19,662,582 18,433,121 =========== =========== =========== ===========
F-35 EX-10.142 2 AMEND. & RESTD. REAL ESTATE & SALE AGREEMENT 1 EXHIBIT 10.142 AMENDED AND RESTATED REAL ESTATE PURCHASE AND SALE AGREEMENT THIS AMENDED AND RESTATED REAL ESTATE PURCHASE AND SALE AGREEMENT ("Restated Agreement") is made and entered into as of this 25th day of November, 1997, by and between MERCANTILE EQUITIES CORPORATION, a Nevada corporation ("Mercantile"), with its principal address being Hartsel Springs Ranch, 2870 Juniper Drive, Golden, CO 80401 and HARTSEL SPRINGS RANCH OF COLORADO, INC., a Colorado corporation ("HSRC"), having the same principal address as Mercantile (Mercantile and HSRC are hereinafter collectively referred to as "Seller"), and PREFERRED EQUITIES CORPORATION, a Nevada corporation, with its principal address being 4310 Paradise Road, Las Vegas, Nevada ("Purchaser"). In consideration of the mutual covenants and promises herein set forth, the parties agree as follows: RECITAL OF FACT Seller and Purchaser entered into a REAL ESTATE PURCHASE AND SALE AGREEMENT ("Agreement") as of October 17, 1997, whereby the Purchaser would acquire certain Lots in Hartsel Springs Ranch from Seller. Seller and Purchaser have mutually determined that the Lot count shown in the Agreement is, through the fault of neither party, different than the Lot count that Seller now desires to convey to Purchaser and Purchaser desires to acquire from Seller. Accordingly, Seller and Purchaser are entering into this Restated Agreement in order to clarify the Lot count, the consideration to be paid for the Lots and to make certain other amendments to the Agreement as noted below. The parties intend to attach all Exhibits as referenced in this Restated Agreement, to the Restated Agreement on or before the end of the Inspection Period, November 24, 1997, and to determine a final Lot count on or before said date and the consideration to be paid for the Lots. So long as the Purchaser has not terminated the Agreement on or before 5:00 P.M. P.S.T. on November 24, 1997, Purchaser and Seller shall execute this Restated Agreement on November 25, 1997, and record a memorandum of this Restated Agreement against the Lots on said date. Now, therefore, in consideration of the foregoing and other good and valuable consideration, the parties hereto hereby agree as follows: 1. DEFINITIONS. All capitalized terms used within this Restated Agreement and any Escrow Instructions, unless otherwise defined, shall have the respective meanings ascribed in the Appendix of Defined Terms attached hereto and made a part hereof. 2. PURCHASE AND SALE. Seller agrees to sell to Purchaser and Purchaser agrees to purchase from Seller, certain of the platted lots in Hartsel Springs Ranch including 1,360 Lots in South Ranch as shown on Exhibit "A-1"("South Ranch Lots"), 54 partial Lots in South Ranch as 1 2 shown on Exhibit "A-2" ("South Ranch Partial Lots"), 165 Lots in South Ranch as shown on Exhibit "A-3" ("South Ranch Add-On Lots"), 314 Lots in South Ranch platted after June 1st of 1972 as shown on Exhibit "A-4" (the "Post-72 Lots"),439 Lots in North Ranch as shown on Exhibit "A-5" ("North Ranch Lots") and 8 partial Lots in North Ranch shown on Exhibit "A-6" ("North Ranch Partial Lots). (The South Ranch Lots, South Ranch Partial Lots, South Ranch Add-On Lots, North Ranch Lots, North Ranch Partial Lots and Post-72 Lots are hereinafter collectively referred to as "the Lots"). Excluded from the purchase by Purchaser are the following described parcels of real property in Hartsel Springs Ranch and Seller's proposed use of said parcels: the lodge and timeshare development more particularly described on Exhibit "B-1" attached hereto and made a part hereof; bison preserve area more particularly described on Exhibit "B-2" attached hereto and made a part hereof; equestrian center area and reservoir more particularly described on Exhibit "B-3" attached hereto and made a part hereof; bison preserve and RV resort lots more particularly described on Exhibit "B-4" attached hereto and made a part hereof; reservoir "A & B," RV resort and commercial area more particularly described on Exhibit "B-5" attached hereto and made a part hereof; Hartsel Spring and lots more particularly described on Exhibit "B-6" attached hereto and made a part hereof; and highway signs and monument locations more particularly described on Exhibit "B-7" attached hereto and made a part hereof. The real property shown on Exhibits "B-1" through "B-7" inclusive and all other real property owned by Seller in Hartsel Springs Ranch is hereinafter referred to as the "Seller's Retained Property." At Closing, Seller is to convey to Purchaser all of its right, title and interest in and to all of the Lots shown on Exhibits "A-1" through "A-6" inclusive, together with all of the following property rights: (a) All improvements located on the Lots, including buildings, roads, structures and other facilities, if any, (the "Improvements"); (b) All licenses, leases, permits, franchise agreements, authorizations and approvals, if any, pertaining to ownership and/or operation of the Lots which are separable and transferable from Seller's Retained Property, including but not limited to the Contracts, Licenses, Leases, Plans and Studies that are acceptable to Purchaser; and (c) All easements, privileges, rights-of-way, riparian and other water rights (subject to Seller's right to fully develop and use the springs and water in Seller's Retained Property as shown on Exhibit "B-6;" however, said use will not impair availability of water to the Lots for domestic purposes) and appurtenances pertaining to or accruing to the benefit of the Lots that are owned by Seller. The Lots, Improvements and all of the other property and rights described in this Section 2. are hereinafter collectively called the "Property." 3. PURCHASE PRICE. The Purchase Price to be paid by the Purchaser to the Seller at Closing for the Property is to be determined on or before November 24, 1997, as follows: (a) $2,700 for each South Ranch Lot; 2 3 (b) Subject to receipt of the Water Opinion prior to Closing, $2,700 for each two of the South Ranch Partial Lots which Purchaser can combine to form a saleable Lot; (c) Subject to receipt of the Water Opinion prior to Closing, $2,700 for each two of the South Ranch Add-On Lots; (d) $2,700 for each Post-72 Lot assuming the Plan of Augmentation is approved on or before two (2) years and six (6) months after Closing, or at Purchaser's election, $2,041 for each Post-72 Lot if the Plan of Augmentation is not approved on or before two (2) years and six (6) months after Closing; (e) $3,250 for each North Ranch Lot; and (f) Subject to receipt of the Water Opinion prior to Closing, $3,250 for each two of the North Ranch Partial Lots which Purchaser can combine to form a saleable Lot. The Seller shall have the right to sell the Lots prior to the end of the Inspection Period; however, at Closing, Seller is to deliver not less than 439 North Ranch Lots. A final determination of the total number of South Ranch Lots, South Ranch Partial Lots, South Ranch Add-On Lots, Post-72 Lots and North Ranch Partial Lots shall be made on or before the end of the Inspection Period and inserted in the appropriate blank space on page 1 of this Restated Agreement on or before execution of this Restated Agreement on November 25, 1997. At Closing, in consideration of $1.00, Seller is to deliver to Purchaser the Option, a form of which is attached hereto and made a part hereof as Exhibit "E," for the Option Lots. 4. TERMS OF PAYMENT. The Purchase Price is to be paid in currency of the United States of America and shall be paid at Closing to Seller as follows: (a) $250,000.00 in Earnest Money has been deposited by the Purchaser with the Escrow Agent and will go "hard" upon execution of this Restated Agreement; (b) Purchaser will deliver cash, inclusive of the Earnest Money, to Seller at Closing for the South Ranch Lots, South Ranch Partial Lots and South Ranch Add-On Lots (the South Ranch Lots, South Ranch Partial Lots and South Ranch Add-On Lots will be delivered free and clear at Closing, subject only to the Title Exceptions); and (c) The balance of the Purchase Price will be paid by Purchaser delivering to Seller the Purchase Money Note, a form of which is attached hereto and made a part hereof as Exhibit "F-1," for the North Ranch Lots and North Ranch Partial Lots secured by the Purchase Money Mortgage, a form of which is attached hereto and made a part hereof as Exhibit "F-2," recorded against the North Ranch Lots and North Ranch Partial Lots and by Purchaser's delivery to Seller of the Post-72 Lots Purchase Money Note, a form of which is attached hereto and made a part hereof as Exhibit "G-1," secured by the Post-72 Lots Purchase Money Mortgage,a form of which is 3 4 attached hereto and made a part hereof as Exhibit "G-2," recorded against the Post-72 Lots. 5. CLOSING DATE. The Closing will be conducted through the Escrow established by the Escrow Agent, in accordance with customary escrow closings for Park County, Colorado. The Earnest Money Deposit shall be opened by the Escrow Agent depositing the Earnest Money in an interest-bearing account with a federally insured Colorado commercial bank. Purchaser and Seller shall mutually agree upon the Closing Date which shall occur on or before the Outside Closing Date. The Outside Closing Date shall occur on or before sixty (60) days following execution of this Restated Agreement, unless extended as a result of Purchaser not yet obtaining the Governmental Approvals and as otherwise provided herein. In the event Purchaser does not terminate the Agreement on or before the end of the Inspection Period and Closing does not occur on or before the Outside Closing Date through no fault of Buyer or Seller, the Earnest Money Deposit shall be returned to Buyer and neither Buyer or Seller shall have any further rights or obligations under this Restated Agreement; however, the Outside Closing Date will be extended ten (10) business days after Purchaser's receipt of the Governmental Approvals in the event all other conditions, except for Purchaser obtaining the Governmental Approvals, have been met on or before the Outside Closing Date. In the event Purchaser does not terminate the Agreement during the Inspection Period and all other conditions, except for the Purchaser obtaining the Governmental Approvals,have been met on or before the Outside Closing Date and Purchaser is unable to obtain the Governmental Approvals on or before July 1, 1998, this Restated Agreement shall terminate and the Escrow Agent shall deliver the Earnest Money Deposit to Seller in consideration of the Property being unavailable for sale during this period of time. 6. TITLE. Seller, at Seller's expense, has delivered to Purchaser the Title Commitment for the Title Policy. The Title Commitment shall be endorsed and updated at Seller's expense within ten (10) days before Closing. The Title Policy will be delivered to Purchaser at Seller's expense at Closing. The Title Commitment and any endorsement or update thereof shall show Seller to be vested with good, marketable and insurable fee simple title to the Lots, free and clear of all Defects, except only the following Title Exceptions: (a) Ad valorem real estate taxes for the year of Closing, provided same are not then due and payable, and subsequent years; (b) All applicable zoning ordinances and regulations, none of which shall prohibit or otherwise interfere with all uses presently being made of the Property and/or Purchaser's Intended Use of the Property; (c) Those Title Exceptions acceptable to Purchaser as described on Exhibit "C" attached hereto; 4 5 (d) The Coverage CC&R, which is attached hereto and made a part hereof as Exhibit "H," recorded as a senior-most lien against the Lots and Seller's Retained Property; (e) The Restriction on Sale of Seller's Retained Property, which is attached hereto and made a part hereof as Exhibit "I," recorded as a lien, junior only to the Coverage CC&R, against Seller's Retained Property; (f) The Purchase Money Mortgage, recorded against the North Ranch Lots and North Ranch Partial Lots, and Post-72 Lots Purchase Money Mortgage, recorded against the Post-72 Lots; (g) The Option, recorded against the Option Lots, junior only to the Coverage CC&R and Restriction On The Sale Of Seller's Retained Property; and (h) Restrictions or matters appearing on the plat or otherwise common to the subdivision of which the Property might be a part, none of which shall prohibit or otherwise interfere with all uses presently being made of the Property and/or Purchaser's Intended Use of the Property. Title shall be deemed good, marketable and insurable only if the Title Commitment allows for issuance of an Owner's ALTA Form B Marketability Policy effective as of Closing Date at minimum promulgated risk rate premiums, without any guarantees and without any exceptions, standard or otherwise, other than the Title Exceptions. Purchaser shall have until the expiration of the Title Review Period within which to examine the Title Commitment as well as any Survey. If Purchaser finds any Title Exception to be a Defect, Purchaser shall, no later than the expiration of the Title Review Period, notify Seller in writing specifying any such Defects (which Defects shall also include any UCC-1 Financing Statements filed against any personal property of Seller and/or the Contracts with the Colorado Secretary of State); provided, that if Purchaser fails to give Seller written notice of Defects before the expiration of the Title Review Period, then any such Defect shown on the Title Commitment and/or Survey, if any, shall, be described on Exhibit "C" as acceptable Title Exceptions and be deemed to be waived as a Defect(s) to Closing. Purchaser may raise as additional Defects any matters first shown by any subsequent endorsement to the Title Commitment and/or recertifications of the Survey, if any, by providing Seller written notice of Defects within five (5) days of Purchaser's knowledge of any such Defect or such Defect shall be deemed to be waived as a Defect(s) to Closing. If Purchaser has given Seller timely written notice of Defects and the Defects cause title to the Property to be other than as represented in this Restated Agreement, Seller shall use its best efforts to cause such Defects to be cured by the Closing Date including but not limited to the removal by payment, bonding, or otherwise of any lien against the Property capable of removal by the payment of money or bonding. At Purchaser's option, the Closing Date may be extended for a reasonable period for purposes of eliminating any Defects. In the event that Seller does not eliminate the Defects as of the Closing Date, Purchaser shall have the option of either: (i) so long as it will not cost more than $250,000.00 to eliminate the Defects, Closing and accepting the title "as is," and deducting from the Purchase Price the amount of any lien or encumbrance which can be satisfied by a liquidated amount, or (ii) cancelling this Restated 5 6 Agreement, in which event the Escrow Agent shall return the Earnest Money Deposit to Purchaser, whereupon both parties shall be released from all further obligations under this Restated Agreement, except only (i) for those obligations which are intended to survive Closing and/or any earlier termination of this Restated Agreement, and (ii) Seller shall remain liable to Purchaser in the event any such Defects were caused by Seller's willful act or willful failure to act. Seller shall execute appropriate documents as required for "gap coverage" by the title insurer. 7. DELIVERIES. Seller has delivered to Purchaser true, correct and complete copies of items (a) through (f) inclusive: (a) All contracts, franchise agreements, pre-paid reservation deposits or other reservation agreements, marketing agreements, Leases, tenancies, arrangements, Licenses, concessions, easements, service arrangements, employment contracts or agreements, brokerage agreements, and any and all other contracts or agreements, either recorded or unrecorded, written or oral, affecting the Property or any portion thereof, or the use thereof (the "Contracts"). A true, correct and complete list of the Contracts is to be attached hereto as Exhibit "D," and all new Contracts hereafter entered into by Seller as, and solely to the extent, permitted hereby, shall be added to Exhibit "D"; (b) All permits, licenses, authorizations or approvals (other than those which are no longer in effect) issued by any governmental body or agency having jurisdiction over Hartsel Springs Ranch, related to the ownership, sale of lots and/or operation of Hartsel Springs Ranch, including but not limited to federal, state and local lot sale registrations (the "Licenses"); (c) Copies of the bill or bills issued for the years 1995, 1996 and 1997 when available, for real estate and personal property taxes and any subsequently issued notices pertaining to real estate or personal property taxes or assessments applicable to the Property; (d) An existing Survey, if any, and all plat plans, engineering and architectural plans and as-built plans, specifications and drawings relating to the Property (the "Plans") and all engineering and environmental studies or audits relating to the Property ("Studies"), which are within the control or possession of Seller; (e) Seller's Litigation Schedule; and (f) The Cease and Desist Order. Notwithstanding the foregoing, Seller has not provided (i) copies of materials previously provided to Purchaser as shown on Exhibit "D-1" and (ii) copies of any mortgage loan documents or agreements between Seller and its lenders, as all existing liens that secure any such 6 7 mortgage loan documents or agreements are to be released or reconveyed as a lien against the Lots, at or prior to Closing. Seller has delivered to Purchaser drafts of the Purchase Money Note, Purchase Money Mortgage, Post-72 Lots Purchase Money Note and Post-72 Lots Purchase Money Mortgage. Purchaser has delivered to Seller drafts of the Coverage CC&Rs and Restriction On The Sale Of Seller's Retained Property. On or before November 19, 1997, Seller is to deliver to Purchaser a draft of the Option for the Option Lots. 8. INSPECTION PERIOD. Purchaser shall have the right to inspect the Property pursuant to 8.(a) and 8.(b), in order to determine whether the Property is satisfactory. (a) Purchaser shall have until 5:00 P.M. P.S.T. on November 24, 1997(the period between the date of the Agreement and 5:00 P.M. P.S.T. on November 24, 1997, shall be referred to in this Restated Agreement from time to time as the "Inspection Period," which Inspection Period will be extended on a day-to-day basis for each day beyond the periods referred to in Section 7. above that Seller fails to deliver to Purchaser any material items required to be delivered to Purchaser pursuant thereto) to examine the Purchase Money Note, Purchase Money Mortgage, Post-72 Purchase Money Note, Post-72 Purchase Money Mortgage, Option, Title Commitment, the Contracts, the Leases, the Licenses, the Plans, the Studies, The Cease and Desist Order, Seller's Litigation Schedule and the Survey, if any, to decide whether they are satisfactory to Purchaser and to make such physical, zoning, land use, environmental, water rights and other examinations, inspections and investigations of the Property or the use or operation thereof which Purchaser, in Purchaser's sole discretion, may determine to make. In the event Purchaser is not satisfied with the Property, determined in Purchaser's sole and absolute discretion for any or no reason, Purchaser may cancel this transaction by giving written notice to the Escrow Agent on or before the end of the Inspection Period, in which event the Earnest Money Deposit shall be immediately returned to Purchaser. (b) Purchaser shall have until the expiration of the Inspection Period to make a physical inspection of the Property by architects, engineers, environmental specialists, and/or any other agent of Purchaser's choice, for the purpose of determining the condition and suitability of the Property. In the event that, based upon such inspection or otherwise, Purchaser is not satisfied with the condition of the Property, determined in Purchaser's sole discretion for any or no reason, Purchaser may cancel this transaction by giving written notice to the Escrow Agent on or before the end of the Inspection Period, in which 7 8 event the Earnest Money Deposit shall be immediately returned to Purchaser. In the event the Agreement is not terminated on or before the end of the Inspection Period pursuant to 8(a) or 8(b), the Earnest Money Deposit shall continue to be held by the Escrow Agent and be credited at Closing toward the Purchase Price or in the event Governmental Approvals are not obtained on or before July 1, 1998, the Earnest Money Deposit will be delivered to Seller, or as otherwise called for pursuant to this Restated Agreement. 9. CONDITIONS PRECEDENT. The obligation of Purchaser to proceed to Closing shall be subject to any conditions precedent to Closing in the Escrow Instructions and the following conditions precedent to Closing being fully met and completed on or before the Closing Date: (a) The Property is now zoned R-1 under the Park County, Colorado land use statutes, rules and regulations and the Property will remain so zoned and classified at Closing so as to permit sale of the Property and each and every use now being made on the Property and the Intended Use. There shall be no special or limiting conditions or agreements under any zoning resolution that prohibit or frustrate the use of the Property as it is presently being used or for the Purchaser's Intended Use and the Property shall comply with all applicable zoning, environmental and land use requirements, laws and regulations. (b) As of the Closing, there shall be no Contracts, arrangements or any other agreements of any nature whatsoever, whether oral or written, other than the Contracts that are acceptable to Purchaser, affecting the Property, that cannot be cancelled by Purchaser upon not more than thirty (30) days notice and without payment of premium or charge therefor. (c) As of the Closing, all of Seller's employees employed at the Property shall be re-assigned or terminated, and no such employees shall have any claim whatsoever against Purchaser and/or the Property for back wages, withholding taxes or any other matter. (d) In the event Purchaser determines to locate Purchaser's Sales Office upon Seller's Retained Property, or to lease Seller's existing sales office, Purchaser and Seller agreeing, prior to the end of the Inspection Period, upon a location for Purchaser's Sales Office and the terms and conditions for the development and use of the Purchaser's Sales Office or agreeing on or before the end of the Inspection Period, to the terms and conditions for leasing Seller's existing sales office. In the event the property site on which the Purchaser's Sales Office is to be located is conveyed to Purchaser in fee simple, the representations of Seller in 10.(a) through (1) inclusive shall be made in association with any such purchase and shall survive the Closing. 8 9 (e) Purchaser shall be allowed to use the name "Hartsel Springs Ranch" and derivatives thereof and other tradenames, trademarks and copyrights subject to the mutually agreeable License, a form of which is attached hereto and made a part hereof as Exhibit "J," to be granted from Seller to Purchaser at Closing. (f) Bluegreen Corporation's ("BXG") marketing agreement and right of first refusal thereunder having expired with any litigation by and between Seller and BXG in no manner affecting Purchaser's acquisition or sale of the Lots. (g) Recordation of the Restriction On The Sale Of Seller's Retained Property on Seller's Retained Property, junior only to the Coverage CC&R. (h) Recordation of the Coverage CC&R as a senior-most lien on the Lots and Seller's Retained Property. (i) Receipt of all Governmental Approvals. (j) Approval, in the reasonable opinion of Purchaser, of Seller's Litigation Schedule, updated as of the Closing Date, in the event there are material changes to Seller's Litigation Schedule delivered during the Inspection Period. (k) Receipt of the Water Opinion. (l) Recordation of the Option against the Option Lots, junior only to the Coverage CC&R and Restriction On The Sale Of Seller's Retained Property. (m) All of Seller's representations shall be true and correct on the Closing Date and Seller shall not be in breach of any warranty or covenant as of the Closing Date. In the event any of the foregoing conditions precedent are not fulfilled as of the Outside Closing Date (or earlier date if specified otherwise), then Purchaser shall have the option of either: (i) waiving the condition and closing "as is," without reduction in the Purchase Price (except as provided for in this Restated Agreement) or claim against Seller therefor, or (ii) cancelling this Restated Agreement by written notice to Seller given by not later than the Outside Closing Date, in which event the Escrow Agent shall return the Earnest Money Deposit to Purchaser, whereupon both parties shall be released from all further obligations under this Restated Agreement, except those obligations which are specifically stated to survive termination or Closing of this transaction. In addition to the elections available to Purchaser pursuant to (i) and (ii) immediately above, Seller shall be liable to Purchaser for damages in the event any condition precedent is not met or fulfilled by the Outside Closing Date as a result of Seller's willful act or willful failure to act. 9 10 9-A. CONDITIONS SUBSEQUENT - Purchaser is acquiring the Post-72 Lots in consideration of delivery to the Seller of the Post-72 Lots Purchase Money Note in the amount of $847,800.00 (or $2,700.00 for each Post-72 Lot) to be secured by the Post-72 Lots Purchase Money Mortgage to be recorded against the Post-72 Lots. In the event the Plan of Augmentation is approved by final nonappealable order of the Water Court on or before two (2) years and six (6) months from the Closing Date, the principal of the Post-72 Lots Purchase Money Note shall be reduced by the total of Purchaser's costs and expenses (including but not limited to engineering fees, legal fees and court costs (but excluding all internal costs and expenses of Purchaser for its staff personnel or otherwise) expended in obtaining approval of the Plan of Augmentation. Until such time as the Plan of Augmentation is approved, the Post-72 Lots Purchase Money Note and Post-72 Lots Purchase Money Mortgage shall be recourse only to the Post-72 Lots. In the event the Plan of Augmentation is approved or in the event the Plan of Augmentation is not approved but Purchaser elects to purchase the Post-72 Lots at the price of $2,041 for each Post-72 Lot, the Post-72 Lots Purchase Money Note and Post-72 Lots Purchase Money Mortgage shall be recourse to the Purchaser and the Post-72 Lots. In the event the Plan of Augmentation is not approved by final nonappealable order of the Water Court, or final nonappealable order of any court to which the decision of the Water Court may be appealed, on or before two (2) years and six (6) months from the Closing Date, Purchaser may (i) elect to purchase the Post-72 Lots and the principal of the Post-72 Purchase Money Note shall be reduced to $640,874.00 (or $2,041 for each Post-72 Lot) and Seller will not be obligated to provide water and storage facilities or (ii) re-convey the Post-72 Lots to Seller, subject only to the Title Exceptions, in consideration for the cancellation of the Post-72 Lots Purchase Money Note and re-conveyance of the Post-72 Lots Purchase Money Mortgage. In the event Purchaser elects to re-convey the Post-72 Lots to Seller, the Post-72 Lots will not be subject to the Restriction On The Sale Of Seller's Retained Property. 10. SELLER'S REPRESENTATIONS. As a specific inducement for Purchaser to enter into this Restated Agreement, Seller represents, warrants and covenants to Purchaser and agrees with Purchaser as follows: (a) Seller has not entered into any pre-paid or other reservation agreements, Leases, tenancies, occupancy agreements, contracts, arrangements, Licenses, concessions, easements, marketing agreements or other agreements, including, without limitation, marketing agreements with any third party regarding the sale of Hartsel Springs Ranch property, service arrangements and employment agreements, either recorded or unrecorded, written or oral, affecting the Property, or any portion thereof or the use thereof, other than the Contracts. Each of the Contracts: (i) is in good standing and not in default or would be in default subject to the giving of notice or passage of time or both; (ii) fully assignable to Purchaser without any change in the terms and provisions thereof; and (iii) except as expressly provided to the contrary on Exhibit "D," may be cancelled by Purchaser upon not more than thirty (30) days notice without payment of premium or penalty therefor. No 10 11 tenant occupying space under a Lease or any other agreement (i) has prepaid any rent or any other sums; (ii) is holding over contrary to the wishes of Seller; (iii) is entitled to the construction of any tenant improvements or common area improvements; (iv) has any right to set off against any amount of rent due or to become due; and (v) has no understanding with Seller regarding occupancy or any other usage of the Property except as expressly shown on Exhibit "D." Seller shall not modify any of the Contracts nor shall Seller cancel or permit the cancellation of any of the Contracts, and Seller shall not enter into any new Contract or other agreement affecting the Property. (b) Seller has no notice or knowledge of: (i) any pending improvement liens to be made by any governmental authority with respect to the Property; (ii) any violations of building codes and/or zoning ordinances or other governmental regulations with respect to the Property; (iii) any pending or threatened lawsuits , other than shown on the Seller's Litigation Schedule; or (iv) any pending or threatened condemnation proceedings, other than shown on Seller's Litigation Schedule. (c) To the best of Seller's knowledge, no fact or condition exists which would result in the termination or impairment of access to the Property or the ability to obtain septic system approvals, water (other than for the Post-72 Lots), electric, gas, telephone or other utilities or services to the Property. (d) To the best of Seller's knowledge, no additional Park County Zoning Approval will be required or necessary to carry out the Intended Use. (e) During the period between the date of this Restated Agreement and Closing, Seller shall continue to operate and manage the Property in a prudent, businesslike and responsible manner consistent with its operation and management prior to the date of this Restated Agreement and keep same clear of accumulations of trash and debris. Seller shall have the right to the end of the Inspection Period to sell the Lots. From the date of execution of this Restated Agreement until the Closing Date, Seller may not sell or otherwise convey, lien or encumber any of the Lots. Seller shall continue to maintain all of the present services to the Property and make all repairs and replacements to the Property in the ordinary course of business. In addition, Seller shall make all payments due prior to Closing in connection with the Property, and payments on any other obligations affecting the Property. (f) Seller is vested with good, marketable and insurable fee simple title to the Lots subject only to the Title Exceptions. 11 12 (g) Prior to Closing, Seller shall comply with all laws, rules, regulations, and ordinances of all governmental authorities having jurisdiction over the Property. Seller shall be responsible for and shall promptly pay all amounts owed for labor, materials supplied, services rendered and/or any other bills or amounts related to Seller and Seller's ownership and/or operation of the Property prior to Closing. (h) Subject only to Seller's right to sell the Lots to the end of the Inspection Period and Bluegreen's right of first refusal, which shall expire on or before the end of the Inspection Period, prior to Closing, no portion of the Property or any interest therein, beneficial or otherwise, shall be alienated, encumbered, conveyed or otherwise transferred. In addition, Seller shall not negotiate any potential sale of the Property with any third party during the term hereof. Further, prior to Closing, no interest in the Seller, beneficial or otherwise, shall be alienated, encumbered, conveyed or otherwise transferred if such event could, within the opinion of Purchaser, negatively affect Seller's ability to fulfill the transaction contemplated by this Restated Agreement. (i) Mercantile is a corporation duly formed and validly existing under the laws of the State of Nevada. HSRC is a corporation duly formed and validly existing under the laws of the State of Colorado. The execution, delivery and performance of this Restated Agreement by Seller have been duly authorized and no consent of any other person or entity to such execution, delivery and performance is required to render this document a valid and binding instrument enforceable against Seller in accordance with its terms. Neither the execution of this Restated Agreement or the consummation of the transactions contemplated hereby will: (i) result in a breach of, or default under, any agreement to which Seller is a party or by which the Property is bound; or (ii) violate any restrictions to which Seller is subject. (j) To the best of Seller's knowledge, there has not been and there is not now: (i) any Hazardous Substance present on the Property; (ii) any present or past generation, recycling, reuse, sale, storage, handling, transport and/or disposal of any Hazardous Substance on the Property; or (iii) any failure to comply with any applicable local, state or federal environmental laws, regulations, ordinances or administrative or judicial orders relating to the generation, recycling, reuse, sale, storage, handling, transport and/or disposal of any Hazardous Substance. Seller has not received any notice from any governmental authority regarding the presence of any Hazardous Substance, any present or past generation, recycling, reuse, sale, storage, handling, transport and/or disposal of any Hazardous Substance or any failure to comply with any applicable local, state or federal environmental 12 13 laws, regulations, ordinances or administrative or judicial orders relating to the generation, recycling, reuse, sale, storage, handling, transport and/or disposal of any Hazardous Substance. As used herein, the term "Hazardous Substance" means any substance or material defined or designated as a hazardous or toxic waste material or substance, or other similar term by any federal, state or local environmental statute, regulation or ordinance presently or hereinafter in effect, as such statute, regulation or ordinance may be amended from time to time. (k) Except as is disclosed on Exhibit "D," there are no Leases, occupancy agreements, marketing agreements, sales agreements, or any other type or form of agreement, either written or oral, which affect the Property and Seller has exclusive possession of the Property. (l) Seller has no unfulfilled obligation of any nature whatsoever owed to any of Seller's employees including but not limited to the payment of employees wages and associated payroll taxes that could result in a claim against the Purchaser or the Property. (m) Each South Ranch Lot, South Ranch Partial Lot, South Ranch Add-On Lot, North Ranch Partial Lot and North Ranch Lot that makes up a part of the Property (i) has, a reserved right for a water well (ii) is served by fully installed Park County roads of record or easements for road extensions (not less than ninety percent (90%) of the lots that make up the Property are served by fully installed Park County roads of record) (iii) will be delivered unencumbered except for the Title Exceptions and (iv) has access (subject to the expenditures as necessary to make utilities available to the Lots) to other Park County services including but not limited to electric, telephone, police services, fire services and schools. The foregoing representation also applies to the Post-72 Lots with the exception of 10.(m) (i). (n) While the Restriction on Sale of Seller's Retained Property is in effect, Seller will not sell any of the Seller's Retained Property except as allowed by this Restated Agreement and the Restriction On The Sale Of Seller's Retained Property. (o) Seller agrees to record the Restriction On The Sale Of Seller's Retained Property against all of Seller's Retained Property junior only to the Coverage CC&R. In the event of a breach of the Restriction On The Sale Of Seller's Retained Property by Seller or any Affiliate of or successor in interest to Seller, Seller will consent to the filing of the Injunction. The Injunction will prevent Seller from selling any lot, 13 14 now existing or to be platted in Hartsel Springs Ranch owned by Seller, or any Affiliate of or successor in interest to Seller, for a period of ten (10) years from the date of filing. The Seller and Purchaser hereby agree that the determination of damages in the event of Seller's breach of the Restriction On The Sale Of Seller's Retained Property would be difficult to ascertain and hereby agree that the filing of the Injunction is an appropriate remedy for Seller's breach of the Restriction On The Sale Of Seller's Retained Property. (p) Seller shall make available at its cost, sufficient water rights and storage facilities as may be required or necessary, as determined pursuant to 12.(v) of this Restated Agreement, to obtain approval of the Plan of Augmentation. (q) Seller shall assist Purchaser with the preparation and submission of all Governmental Approvals including executing all applications and other documents as may be necessary in the reasonable opinion of Purchaser. Any out-of-pocket costs incurred by Seller in assisting Purchaser shall be borne by Purchaser. The following representations, warranties and covenants of Seller shall be deemed renewed at and shall survive the Closing: 10.(a); (b); (c); (g); (i); (j); (k); (l); (m); (n); (o); (p) and (q) provided, however, if Seller becomes aware of any event or changed circumstance that causes or makes a representation, warranty or covenant of Seller given herein with respect to the Property untrue as of Closing, Seller shall, immediately upon learning of same, notify Purchaser of such event or changed circumstance in writing, and unless Seller is willing and able to remediate the event or changed circumstance or condition prior to Closing, Purchaser shall have the right by written notice to Seller and Escrow Agent to either (i) terminate this Restated Agreement, in which event the Earnest Money Deposit shall be returned to Purchaser and neither party shall have any further obligation hereunder, or (ii) proceed to Closing, in which event the affected representation, warranty or covenant shall be deemed modified as of the Closing Date to conform to the event or changed circumstance or condition. Notwithstanding the election available to Purchaser pursuant to (i) and (ii) above, in the event any representation, warranty and/or covenant of Seller made in this Restated Agreement becomes untrue as of or prior to Closing, Seller shall be liable to Purchaser for damages in the event Seller (i) knowingly or negligently made an inaccurate or untruthful representation or warranty or covenanted to perform an act which Seller did not intend to perform or knew it was incapable of performing or (ii) by commission or omission caused or allowed a representation or warranty true when made to become untrue. 11. REPRESENTATIONS OF PURCHASER. As a specific inducement for Seller to enter into this Restated Agreement, Purchaser represents, warrants and covenants to Seller and agrees with Seller as follows: (a) that the execution, delivery and performance of this Restated Agreement by Purchaser is the legal, valid and binding agreement of the Purchaser; (b) Purchaser is 14 15 an experienced developer of real property and has been and is currently engaged in the sale of residential real estate lots in Park County, Colorado as part of its ordinary business activities; (c) through the delivery of the Purchase Money Note, Post-72 Lots Purchase Money Note and/or through arms length lending transactions, has the financial ability and wherewithal, subject to Purchaser's right to cancel during the Inspection Period, to proceed to Closing and to pay the balance of the Purchase Price by the delivery of cash or cash equivalent using currency of the United States of America and delivery of the Purchase Money Note and Post-72 Lots Purchase Money Note; (d) Purchaser shall diligently proceed to obtain the Governmental Approvals on or before the Outside Closing Date, as some may be extended pursuant to the terms and conditions of this Restated Agreement; and (e) subject to Seller making available to Purchaser sufficient water and storage facilities at Seller's cost as required pursuant to this Restated Agreement, Purchaser shall diligently proceed to obtain approval of the Plan of Augmentation. 12. COVENANTS OF SELLER. In addition to the other covenants and agreements of Seller contained in this Restated Agreement, Seller hereby covenants and agrees with Purchaser to: (i) record against Seller's Retained Property, junior only to the Coverage CC&R and be bound by the terms and conditions of, the Restriction On The Sale Of Seller's Retained Property (ii) to record the Coverage CC&R as a senior-most lien against the Lots and Seller's Retained Property (iii) to assist Purchaser in obtaining the Governmental Approvals including but not limited to executing any and all applications or other registration materials whatsoever as reasonably requested by the Purchaser (iv) to allow for the filing of the Injunction in the event Seller violates the Restriction On The Sale Of Seller's Retained Property(v) at Seller's cost, to make water and storage facilities available, as required in the opinion of counsel hired by Purchaser to obtain approval of the Plan of Augmentation (Seller shall have the right to approve said counsel in Seller's reasonable opinion) and (vi) Seller shall record the Option junior only to the Coverage CC&R and Restriction On The Sale Of Seller's Retained Property, against the Option Lots. All recordations are to be completed at or prior to Closing. Seller's covenants shall survive Closing. 12-A. COVENANTS OF PURCHASER. In addition to the other covenants and agreements of Purchaser contained in this Restated Agreement, Purchaser hereby covenants and agrees with Seller to: (i) diligently pursue all Governmental Approvals (ii) to assist Seller, at Seller's expense in a Section 1031 tax deferred exchange and (iii) subject to Seller providing, at Seller's cost, water and storage facilities as determined pursuant to 12.(v), Purchaser shall pay the costs and expenses of having the Plan of Augmentation approved. Purchaser's covenants shall survive Closing. 13. DEFAULT PROVISIONS. In the event of the failure or refusal of the Purchaser to proceed with Closing on or before the Outside Closing Date as same may be extended pursuant to the terms hereof, without fault on Seller's part and without failure of title or any conditions precedent to Purchaser's obligations hereunder, Seller shall receive the Earnest Money Deposit as agreed upon liquidated damages for said breach as Seller's sole and exclusive remedy for default of 15 16 Purchaser, whereupon the parties shall be relieved of all further obligations hereunder, except those obligations which are specifically stated herein to survive the termination or Closing of this transaction. In the event of a default by Seller under this Restated Agreement, Purchaser at its option shall have the right to: (i) receive the return of the Earnest Money Deposit whereupon the parties shall be released from all further obligations under this Restated Agreement, except those obligations which are specifically stated herein to survive the termination or Closing of this transaction, unless the default was caused by the willful act, willful omission, misrepresentation or breach of covenant by Seller in which event Seller shall continue to be liable for damages caused thereby, anything to the contrary notwithstanding, or, alternatively, (ii) seek specific performance of the Seller's obligations hereunder and/or any other equitable remedies, without thereby waiving damages. Notwithstanding the foregoing, in the event of a default by either party of any obligation which specifically survives Closing, then the non-defaulting party shall be entitled to seek any legal redress permitted by law or equity. The provisions hereof shall survive Closing. 14. PRORATIONS. Real estate and personal property taxes, rents (whether or not actually collected), interest, costs and revenues and all other proratable items shall be prorated as of the Closing Date. Seller shall be responsible for the payment of all utility bills and shall receive credit for any prepaid utility deposits as of the Closing Date. Seller shall pay all sales and/or use tax due on revenues received and purchases made prior to the Closing Date and shall comply with all statutory provisions necessary for Purchaser to avoid transferee liability for same. In the event the taxes for the year of Closing are unknown, the tax proration will be based upon the taxes for the prior year, and at the request of either party, the taxes for the year of Closing shall be reprorated and adjusted when the tax bill for such year is received and the actual amount of taxes is known. The provisions of this paragraph shall survive the Closing. 15. IMPROVEMENT LIENS. Certified, confirmed or ratified liens for governmental improvements as of the Closing Date, if any, shall be paid in full by Seller, and pending liens for governmental improvements as of the Closing Date shall be assumed by the Purchaser, provided that where the governmental improvement has been substantially completed as of the Closing Date, such pending lien shall be considered certified. 16. CLOSING COSTS. The parties shall bear the following Closing costs: (a) The Purchaser shall be responsible for payment of the following: (i) the cost of examining the Title Commitment and Survey, if any, (ii) any and all costs and expenses of architectural, engineering and other inspection and feasibility studies and reports incidental to Purchaser's inspections, and (iii) clerk's recordation fees for recording the warranty deed. 16 17 (b) The Seller shall be responsible for payment of the following: (i) any costs associated with issuance of the Title Commitment and delivery of a Survey if available, (ii) the premium for the Title Policy, (iii) any transfer taxes in connection with the delivery of the deed and documentary stamp tax and surtax, (iv) recording costs on documents necessary to clear title and (v) the cost of recording the Option, Coverage CC&R and Restriction On The Sale Of Seller's Retained Property. (c) Each party shall pay its own legal fees except as provided in Section 25(d) below. (d) The parties shall equally share the cost of Escrow. 17. CLOSING. The Closing shall be held at the offices of the Escrow Agent. At Closing, Seller shall execute and/or deliver to Purchaser through Escrow the following Closing documents: (a) a good and sufficient warranty deed to convey the Property to Purchaser subject only to the Title Exceptions; (b) an appropriate mechanic's lien affidavit, sufficient in form and content for any title insurance company to delete the standard exceptions for mechanic's liens, and, to the extent of work performed in the ninety (90) days prior to Closing, appropriate releases and indemnities to allow Purchaser to obtain title insurance coverage over any unfiled liens; (c) an affidavit of exclusive possession; (d) a certified copy of the Restriction On The Sale Of Seller's Retained Property recorded junior only to the Cover CC&R against all of Seller's Retained Property; (e) a certified copy of the Coverage CC&R recorded as a senior-most lien against the Property and Seller's Retained Property; (f) assignments of or license agreements for any of the trademarks, tradenames, copyrights, contract rights, guarantees and warranties, intangible rights and other property and rights included in this transaction that Purchaser elects to take by assignment or license; (g) appropriate evidence of Seller's formation, existence and authority to sell and convey the Property; 17 18 (h) an appropriate "gap" affidavit and/or indemnity as required by the title insurer; (i) the Title Policy; (j) a certificate reaffirming all representations, warranties and covenants of Seller; (k) the License; (l) Evidence, satisfactory to Purchaser, that Seller has sufficient water resources and storage facilities, either existing or to be made available by Seller, at its cost, to allow for approval of the Plan of Augmentation; (m) a certified copy of the Option recorded against the Option Lots junior only to the Coverage CC&R and Restriction On The Sale Of Seller's Retained Property; and (n) such other items as may be required by Escrow Agent to consummate the Closing. At Closing, Purchaser shall deliver through Escrow to the Seller: (a) The Earnest Money Deposit; (b) The Purchase Money Note and Purchase Money Mortgage; (c) The Post-72 Lots Purchase Money Note and Post-72 Lots Purchase Money Mortgage; (d) The balance of the Purchase Price in currency of the United States of America in cash or cash equivalent; and (e) Such other documents as may be required by Escrow Agent to consummate the Closing. At Closing, Seller and Purchaser shall each execute counterpart Closing statements and such other documents as are reasonably necessary to consummate this transaction. 18. BROKERS; CONSULTANTS. Purchaser and Seller each represent that they know of no Broker who may have any claim for a commission in connection with this transaction. 18 19 19. ASSIGNABILITY. Purchaser shall be entitled to assign its rights hereunder to any Affiliate of Purchaser, provided that upon any such assignment, Purchaser shall not be released from its obligations hereunder. 20. INSPECTIONS. Purchaser, and Purchaser's agents and contractors, shall have the right during the term of this Restated Agreement to enter upon the Property at reasonable times for purposes of inspection and making tests and studies thereon. Throughout the term of this Restated Agreement, Seller, its agents and employees shall at all times cooperate with Purchaser, its agents and contractors in connection with their performance of the inspections provided herein. Purchaser agrees to indemnify, defend and hold harmless Seller from and against all liabilities, damages, claims, costs, fees and expenses whatsoever (including reasonable attorneys fees and court costs at trial and all appellate levels) arising out of or resulting from any damage to the Property caused by Purchaser, or Purchaser's agents, contractors or employees, in connection with such inspection or investigation. 21. ESCROW AGENT. The Escrow Agent shall not be liable for any actions taken in good faith, but only for its gross or willful negligence. Purchaser and Seller hereby agree to indemnify and hold the Escrow Agent harmless from and against any loss, liability, claim or damage whatsoever (including reasonable attorney's fees and court costs at trial and all appellate levels) the Escrow Agent may incur or be exposed to in its capacity as escrow agent hereunder except for that caused by Escrow Agent's gross negligence and/or willful misconduct. If there be any dispute as to disposition of any proceeds held by the Escrow Agent pursuant to the terms of this Restated Agreement, the Escrow Agent is hereby authorized to interplead said amount or the entire proceeds with any Colorado court of competent jurisdiction and thereby be released from all obligations hereunder. So long as the Earnest Money Deposit is deposited with a federally insured Colorado commercial bank, the Escrow Agent shall not be liable for any failure of the depository. 22. NOTICES. Any notices required or permitted to be given under this Restated Agreement shall be in writing and shall be deemed to have been given if delivered by hand, sent by recognized overnight courier (such as Federal Express), sent by facsimile transmission or mailed by certified or registered mail, return receipt requested, in a postage prepaid envelope, and addressed as follows: If to the Purchaser at: Preferred Equities Corporation 4310 Paradise Road Las Vegas, Nevada 89109 Attn: Frederick H. Conte, Executive Vice President Fax No. (702) 369-4398
19 20 With a copy to: Preferred Equities Corporation 4310 Paradise Road Las Vegas, Nevada 89109 Attn: Jon A. Joseph, Esq. Fax No. (702) 369-4398 If to the Seller at: Richard Grumet, President Hartsel Springs Ranch P.O. Box 5 Hartsel, Colorado 80449 Fax No. (719) 836-0321 With a copy to: Gregory M. Lattimer 6960 S. Newland Ct. Littleton, Colorado 80123 Fax No. (303) 215-1204 If to the Escrow Agent at: Security Title Guaranty Co. 60615 U.S. Highway 285 P.O. Box 331 Bailey, Colorado 80421 Attn: Ginger Dyer Fax No. (303) 838-5537
Notices personally delivered or sent by overnight courier shall be deemed given on the date of delivery, notices transmitted by facsimile shall be deemed given on the date sent provided that the transmitting machine confirms transmission in writing (or otherwise, upon actual receipt by the other party) and notices mailed in accordance with the foregoing shall be deemed given three (3) days after deposit in the U.S. mails. Signatures on documents transmitted via facsimile shall be binding as if an original signature. A copy of all notices shall be provided to the Escrow Agent; however, failure to provide such copy(ies) shall not modify the effect of any such notice on the primary recipient. 23. RISK OF LOSS. Seller shall continue to bear the risk of loss to and including the Closing Date. The Property shall be conveyed to Purchaser in the same condition as on the date of this Restated Agreement, force majeure excepted, free of all Leases, tenancies or occupancies other than those described on Exhibit "D" that are acceptable to Purchaser, and Seller shall not remove anything from the Property between now and Closing. In the event that the Property or any material portion thereof is taken by eminent domain prior to Closing, Purchaser shall have the option of either: (i) cancelling this Restated Agreement and receiving a refund of the Earnest Money Deposit whereupon both parties shall be relieved of all further obligations under this Restated Agreement, except those obligations which are specifically stated herein to survive the termination or Closing of this transaction, or (ii) Purchaser may proceed with Closing in which case Purchaser shall be entitled to all condemnation awards and settlements. In the event the Property is 20 21 damaged or destroyed as a result of force majuere or otherwise prior to Closing, Seller shall have the option to repair and restore the Property to the same condition as before the damage and the Closing Date shall be deferred for up to sixty (60) days to permit such repair and restoration. If Seller elects not to repair and restore or if Seller is unable to repair and restore within such sixty (60) day period, then Purchaser shall have the option of either: (i) cancelling this Restated Agreement and receiving a refund of the Earnest Money Deposit, whereupon both parties shall be released from all further obligations under this Restated Agreement, except those obligations which are specifically stated herein to survive the termination or Closing of this transaction, or (ii) allowing Seller additional time to repair and restore or (iii) proceeding with Closing, in which case Purchaser shall be entitled to all insurance proceeds, if any and to a credit equal to the insurance deductibles, if any. 24. SELLER'S INDEMNITY. Seller shall indemnify and hold Purchaser harmless from any and all liability, including costs and attorneys' fees (at trial and all appellate levels) for: (a) Any contracts for services to the Property existing now or at any time prior to Closing; (b) Any personal property taxes remaining unpaid for calendar years prior to the year of Closing; (c) Any claims made against Purchaser by Seller's employee(s) employed at the Property; (d) Any claims made against Purchaser or the Property by persons or governmental agencies who claim monies due for wages or other payments for employee(s) benefits and any and all payroll taxes, including but not limited to, federal, state, local and other tax withholdings and federal and state unemployment taxes; (e) Any claims made against Purchaser, or any attempt whatsoever to prevent the issuance of, or otherwise interfere with, the filing of the Injunction in the event the Restriction On The Sale Of Seller's Retained Property is breached; (f) Any claims made against Purchaser or the Lots as a result of the termination of Seller's marketing agreement with Bluegreen Corporation; and (g) Any misrepresentations made by Seller and/or breach of warranty or covenant by Seller as to matters which survive Closing. 24A. PURCHASER'S INDEMNITY - Purchaser shall indemnify and hold Seller harmless from any and all liability, including costs and attorneys' fees (at trial and all appellate levels) for (i) any action taken by Seller against Purchaser in the event monumentation, signage and other identification to be installed on the Property by Purchaser does not reasonably conform with 21 22 design, scale and/or quality of the Master Plan Monumentation program at Hartsel Springs Ranch (ii) any damage or impairment to the name "Hartsel Springs Ranch" as a result of Purchaser's use of said name or joinder of Seller in litigation or governmental proceeding as a result of Purchaser's use of said name and (iii) for damages to the Seller in the event Purchaser influenced or otherwise caused Bluegreen Corporation to breach its marketing agreement with Seller; Purchaser categorically denies having taken any action which in any manner may have resulted in Bluegreen Corporation's breach of said marketing agreement. The provisions of this Section shall survive the Closing. 25. MISCELLANEOUS. (a) This Restated Agreement shall be construed and governed in accordance with the laws of the State of Colorado. All of the parties to this Restated Agreement have been represented by competent counsel and have participated fully in the negotiation and preparation hereof; and, accordingly, this Restated Agreement shall not be more strictly construed against any one of the parties hereto. (b) All signs and monumentation erected by Purchaser on South Ranch shall be subject to the reasonable review and approval of Seller. (c) In the event any term or provision of this Restated Agreement be determined by appropriate judicial authority to be illegal or otherwise invalid, such provision shall be given its nearest legal meaning or be construed as deleted as such authority determines, and the remainder of this Restated Agreement shall be construed to be in full force and effect. (d) In the event of any litigation between the parties under this Restated Agreement, the prevailing party shall be entitled to reasonable attorney's fees and court costs at all trial and appellate levels. The provisions of this subparagraph shall survive the Closing coextensively with other surviving provisions of this Restated Agreement. (e) If any date upon which, or by which, action required under this Restated Agreement is a Saturday, Sunday or legal holiday recognized by the Federal government and/or the State of Colorado, then the date for such action shall be extended to the first day that is after such date and is not a Saturday, Sunday or legal holiday recognized by the Federal government and/or the State of Colorado. (f) In construing this Restated Agreement, the singular shall be held to include the plural, the plural shall include the singular, the use of any gender shall include every other and all genders, and captions and paragraph headings shall be disregarded. 22 23 (g) Neither Purchaser nor Seller is aware of any fact, event or condition which could or would prevent or adversely affect their respective abilities to meet and comply with their respective representations, covenants and conditions pursuant to and under this Restated Agreement. This Restated Agreement is entered into subject to a covenant of good faith and fair dealing on behalf of both Purchaser and Seller. Remedies available to either party under this Restated Agreement shall be available to either party under this Restated Agreement if circumstances so warrant and allow. (h) All of the Exhibits and any Escrow Instructions attached to this Restated Agreement are incorporated in, and made a part of, this Restated Agreement. (i) Time is of the essence for each and every provision of this Restated Agreement. 26. ACCEPTANCE DATE. This Restated Agreement shall be of no force and effect and shall be deemed to be null and void unless executed by the Purchaser and the Seller on or before October 10, 1997, the Acceptance Date. 27. ENTIRE AGREEMENT. This Restated Agreement, the Escrow Instructions, if any, and the Exhibits attached hereto constitute the entire agreement between the parties and there are no other agreements, representations or warranties other than as set forth herein. This Restated Agreement may not be changed, altered or modified except by an instrument in writing signed by the party against whom enforcement of such change would be sought. This Restated Agreement shall be binding upon the parties hereto and their respective successors and assigns and shall supersede and completely replace the Agreement. 23 24 EXECUTED as of the date first above written in several counterparts, each of which shall be deemed an original, but all constituting only one agreement. Witnessed by: SELLER: MERCANTILE EQUITIES CORPORATION /s/ GREGORY M. LATTIMER By: /s/ RICHARD S. GRUMET - ------------------------ ----------------------- /s/ V. M. DYER Name: Richard S. Grumet - ------------------------ Title: President Witnessed by: SELLER: HARTSEL SPRINGS RANCH OF COLORADO /s/ GREGORY M. LATTIMER By: /s/ RICHARD S. GRUMET - ------------------------ ---------------------- /s/ V. M. DYER Name: Richard S. Grumet - ------------------------ Title: President PURCHASER: PREFERRED EQUITIES CORPORATION, a Nevada corporation Witnessed by: /s/ JON A. JOSEPH By: /s/ FREDERICK H. CONTE - ------------------------- ------------------------ /s/ C. SCOTT MAYNARD Name: Frederick H. Conte - ------------------------- Title: Executive Vice President
24 25 APPENDIX OF DEFINED TERMS ACCEPTANCE DATE - defined in Section 26. AFFILIATE - shall mean a person, partnership, corporation or any other organization of any nature or type whatsoever, that controls, is controlled by or under control with Purchaser or Seller. As used herein, "control" means the ability, standing alone, to direct the affairs of another person or entity without their respective consent. AGREEMENT - defined in the Recital of Fact. BROKER(S) - means the broker(s), if any, defined in Section 18. CEASE AND DESIST ORDER - means the Cease and Desist Order issued against Bankers Life and Casualty Company et al on March 12, 1979. CLOSING - means conveyance of the Property from Seller to Purchaser via warranty deed and termination of Escrow. CLOSING DATE - The date on which the Lots are conveyed to the Purchaser. CONTRACTS - defined in Section 7. A schedule of Contracts is attached as Exhibit "D." Contracts include but are not limited to Leases, Licenses, Plans, Studies and the Survey, if any. COVERAGE CC&R - mean the covenants, conditions and restrictions to be recorded as a senior-most lien against the Lots and Seller's Retained Property. The Coverage CC&R will help maintain the open space character of Hartsel Springs Ranch by providing that all improvements to real property located in Hartsel Springs Ranch be limited to forty percent (40%) coverage of any lot now platted or platted at any time in the future, including but not limited to paving and landscaping. DEFECTS - means Title Exceptions as shown on the Title Commitment that are unacceptable to Purchaser. EARNEST MONEY - means a portion of the Purchase Price and any interest earned thereon delivered to the Escrow Agent for deposit in a federally insured Colorado financial institution. EARNEST MONEY DEPOSIT - means the Earnest Money deposited by the Escrow Agent in a federally insured Colorado financial institution. ESCROW - means the escrow established with the Escrow Agent to facilitate the conveyance of the Property from Seller to Purchaser pursuant to the terms of this Restated Agreement. ESCROW AGENT - means Security Title Guaranty Co., Attn: Ginger Dyer. 25 26 ESCROW INSTRUCTIONS - means any writing by and between Purchaser, Seller and Escrow Agent entered into to help facilitate the Closing. All Escrow Instructions shall be attached to and become a part of this Restated Agreement. In the event of any conflict between the terms of this Restated Agreement and Escrow Instructions, the terms and conditions of the Escrow Instructions shall control. GOVERNMENTAL APPROVALS - means approval by Department of Housing and Urban Development ("HUD") and State of Colorado governmental authorities of registration of the South Ranch Lots, South Ranch Partial Lots, South Ranch Add-On Lots, North Ranch Partial Lots and North Ranch Lots for sale by Purchaser. HARTSEL SPRINGS RANCH - means the Property, Seller's Retained Property and all other property owned by Seller or its affiliates or assignees in the property commonly known as Hartsel Springs Ranch. HAZARDOUS SUBSTANCE - defined in Section 10(j). INJUNCTION - defined in Section 10.(o). INSPECTION PERIOD - defined in Section 8. INTENDED USE - means Purchaser's sale of the Lots by conveyance of fee simple real property lot sales to customers of Purchaser. LEASES - means all writings and/or oral agreements that in any manner whatsoever create an occupancy interest in the Property. LICENSE - means the license for Purchaser to use the name "Hartsel Springs Ranch," a form of which is attached hereto as Exhibit "J." LICENSES - defined in Section 7.(c). Includes all HUD and other governmental filings. LOTS - defined in Section 2. NORTH RANCH LOTS - means the Lots shown on Exhibit "A-5." NORTH RANCH PARTIAL LOTS - means the Lots shown on Exhibit "A-6." OPTION - means Purchaser's option to acquire the Lots shown on Exhibits "B-3," "B-5" and "B-6" to this Restated Agreement in the event Seller does not require some or all of said lots for reservoir purposes at a price of $2,700 for any said lot in South Ranch and $3,250 for any said lot in North Ranch. OPTION LOTS - means the Lots shown on Exhibits "B-3," "B-5" and "B-6." OUTSIDE CLOSING DATE - defined in Section 5. 26 27 PLAN OF AUGMENTATION - means a plan of water augmentation for the Post-72 Lots to be filed with the Colorado Water Court which, upon nonappealable approval by the Water Court, or nonappealable order of any court to which the decision of the Water Court may be appealed, which is to occur on or before two (2) years and six (6) months from the Closing Date, will allow for a well permit for domestic use to be issued for each Post-72 Lot. Seller is to provide, at its cost, sufficient water resources and storage facilities (as determined pursuant to Section 12(v) of this Restated Agreement) so that the Plan of Augmentation will be approved. Purchaser will pay all costs and expenses in association with the approval of the Plan of Augmentation including but not limited to legal and court costs but excluding all internal expenses of Purchaser for its staff personnel or otherwise, with said amounts to be credited against the principal balance of the Post-72 Purchase Money Note. PLANS - defined in Section 7.(d). POST - 72 LOTS - means the Lots shown on Exhibit "A-4." POST - 72 LOTS PURCHASE MONEY MORTGAGE - means the mortgage or deed of trust to be recorded against the Post-72 Lots to secure payment of the Post-72 Lots Purchase Money Note. Post-72 Lots will be released from the lien of the Post-72 Lots Purchase Money Mortgage upon the payment (including normal amortization) of release prices of $3,250.00 for each Post-72 Lot, if Purchaser pays $2,700.00 for each Post-72 Lot or upon the payment (including normal amortization) of release prices of $2,591.00 for each Post-72 Lot, if Purchaser pays $2,041.00 for each Post-72 Lot. POST - 72 LOTS PURCHASE MONEY NOTE - means a promissory note delivered to Seller from Purchaser at Closing in the face amount of $847,800.00 (2,700 times the number of Post-72 Lots). Prior to the Plan of Augmentation being approved, the Post-72 Lots Purchase Money Note will be recourse as to the principal balance thereof but not interest owed thereon only to the Post-72 Lots and provide for the payment of interest only payable quarterly calculated at the Prime Rate plus 2% on $640,874.00 ($2,041 times the number of Post-72 Lots). The face amount of the Post-72 Lots Purchase Money Note and the amount of principal interest will be imputed on shall be adjusted pursuant to the ultimate paragraph of Section 9-A. of this Restated Agreement and as described below. If the Plan of Augmentation is approved on or before the two (2) years and six (6) months from the Closing Date, the Post-72 Lots Purchase Money Note shall become recourse as to principal as well as interest to the Purchaser and be adjusted by subtracting from the principal face amount of the Post-72 Lots Purchase Money Note Purchaser's out-of-pocket costs spent in having the Plan of Augmentation approved, with interest on the resultant principal amount to be charged at 2% over the Prime Rate payable quarterly with quarterly amortization payments, with all principal not otherwise paid due and payable five (5) years from the date of the first payment after said adjustment. Release prices of $3,000.00 for the release of each Post-72 Lot will be credited against the next regularly scheduled quarterly principal payment(s). 27 28 If the Plan of Augmentation is not approved on or before two (2) years and six (6) months from the Closing Date, Purchaser shall have within thirty (30) days of disapproval or failure to approve within said two (2) year and six (6) month period, the election of (i) reducing the principal balance of the Post-72 Lots Purchase Money Note to $640,874.00 ($2,041.00 times the number of the Post-72 Lots), payable on a recourse basis, with interest charged at 2% over the Prime Rate and quarterly amortization payments, with all principal not otherwise paid due and payable five (5) years from the date of said election. Release payments of $3,000.00 for each Post-72 Lot shall be credited against the next regularly scheduled quarterly principal payment(s) or (ii) re-conveying, subject only to the Title Exceptions, the Post-72 Lots to Seller in consideration of cancellation of the Post-72 Lots Purchase Money Note. In the event the Post-72 Lots are re-conveyed, the Post-72 Lots shall not be subject to the Restriction On The Sale Of Seller's Retained Property. PRIME RATE - The rate of interest paid by the most credit worthy borrowers to large commercial banks as published in The Wall Street Journal. The interest rate on the Purchase Money Note and Post-72 Lots Purchase Money Note shall be at 2% over the Prime Rate adjusted as of the first business day of each month. PROPERTY - defined in Section 2. PURCHASE MONEY NOTE - means the recourse promissory note to be delivered by Purchaser to Seller at Closing in an amount determined by multiplying 439 North Ranch Lots times $3,250 and adding thereto the consideration to be paid for the North Ranch Partial Lots with interest on said amount to be paid at 2% over the Prime Rate payable quarterly with quarterly amortization payments, having a term of five (5) years from the Closing Date. Release prices shall be credited against the next regularly scheduled principal payment(s). PURCHASE MONEY MORTGAGE - means the mortgage or deed of trust recorded against the North Ranch Lots to secure Purchaser's performance of the Purchase Money Note. Lots in North Ranch subject to the Purchase Money Mortgage shall be released from the lien of the Purchase Money Mortgage at the direction of Purchaser for the payment of $5,000 a Lot, until such time as the Purchase Money Note is repaid in full. Releases will also be given for each $5,000.00 increment of regularly scheduled principal reduction. Purchase Money Note principal shall be paid quarterly (with release prices credited to the next regularly scheduled principal payment(s)), with all principal not otherwise paid being due and payable five (5) years from the Closing Date. 28 29 PURCHASE PRICE - defined in Section 3. PURCHASER - defined in the preamble to this Restated Agreement. PURCHASER'S SALES OFFICE - means at Purchaser's election, Purchaser's sales office located at a site mutually agreeable to Purchaser and Seller or by lease of Seller's existing sales office or as otherwise determined by Purchaser. RESTATED AGREEMENT - defined in the preamble of this Restated Agreement. RESTRICTION ON THE SALE OF SELLER'S RETAINED PROPERTY - means the restrictive covenant to be recorded on or before the Closing Date, junior only to the Coverage CC&R, against Seller's Retained Property. The covenant shall run with the land and restrict Seller, its Affiliates and its successors and assigns for a period of the earlier of ten (10) years from the Closing Date or for one (1) year from whenever all of the Lots have been sold, from selling residential lots in Hartsel Springs Ranch, now platted or platted in the future, unless said lots are (i) improved with a single family dwelling to be sold at a price not less than $99,000.00, (ii) sold pursuant to a Park County approved, platted and recorded subdivision restricting said lots solely for RV use and having a maximum size of 5,000 square feet, (iii) used, to a maximum of ten (10) lots, for trade out services (iv) used for "Buffalo Package" sales so long as no said lot shall be sold for less than $40,001.00 (v) used for the "homestead package," so long as no said lot is sold for less than $75,000.00 and (vi) used to develop Seller's Retained Property with a guest lodge/timeshare development, reservoirs and bison preserve. RIGHT OF FIRST REFUSAL - means Seller's covenant, pursuant to 12(vi) of this Restated Agreement whereby Seller grants to Purchaser a right of first refusal to match any bona fide offer for any or all of Seller's Retained Property upon the same terms and conditions offered to Seller for any or all of said Seller's Retained Property. Seller shall deliver to Purchaser copies of all offers to acquire any or all of Seller's Retained Property to Purchaser and Purchaser shall have thirty (30) days after receipt of a copy of any said offer(s) to advise Seller in writing that it has determined to match said offer(s). A form of which is attached hereto and made a part hereof as Exhibit "K". SELLER - defined in the preamble to this Restated Agreement, including Seller's Affiliates, successors and assigns. SELLER'S LITIGATION SCHEDULE - A schedule of litigation showing all existing and pending or threatened litigation involving Seller, the Property, Seller's Retained Property and Hartsel Springs Ranch. SELLER'S RETAINED PROPERTY - means the real property shown on Exhibit "B-1" through "B-7" inclusive and all other real property located in Hartsel Springs Ranch, other than the Lots, owned by Seller, its Affiliates, successors and assigns. SOUTH RANCH LOTS - means the Lots shown on Exhibit "A-1." 29 30 SOUTH RANCH ADD-ON LOTS - means the Lots shown on Exhibit "A-3." SOUTH RANCH PARTIAL LOTS - means the Lots shown on Exhibit A-2." STUDIES - defined in Section 7.(d). SURVEY - means any existing survey of the Property and any survey of the Property to be ordered by and paid for by the Purchaser. TITLE COMMITMENT - means the commitment for the Title Policy. TITLE EXCEPTION - means exceptions to Purchaser's fee simple ownership as shown on the Title Commitment and/or the Survey. Title Exceptions not objected to by Purchaser will appear on Exhibit "C" and on the Title Policy. TITLE POLICY - means the ALTA Form B Marketability owner's title insurance policy issued by a company acceptable to Purchaser in the amount of the Purchase Price insuring Purchaser's fee simple ownership to the Lots subject only to the Title Exceptions, to be delivered from Seller to Purchaser at Closing. TITLE REVIEW PERIOD - means October 24, 1997. WATER OPINION - means a legal opinion in form and substance acceptable to Purchaser from a Colorado attorney acceptable to Purchaser, delivered from Seller to Purchaser at or prior to Closing opining to the fact that the South Ranch Add-On Lots, South Ranch Partial Lots and North Ranch Partial Lots have a reserved right to drill a well. ZONING APPROVAL - means that existing zoning of the Property as represented by Seller in Section 9.(a) of this Restated Agreement, which allows for Purchaser's Intended Use of the property. 30 31 EXHIBITS Exhibit "A-1" - South Ranch Lots Exhibit "A-2" - South Ranch Partial Lots Exhibit "A-3" - South Ranch Add-On Lots Exhibit "A-4" - Post-72 Lots Exhibit "A-5" - North Ranch Lots Exhibit "A-6" - North Ranch Partial Lots Exhibit "B-1" - Lodge and Timeshare Development Exhibit "B-2" - Bison Preserve Area Exhibit "B-3" - Equestrian Center Area and Reservoir Exhibit "B-4" - Bison Preserve Area and RV Lots Exhibit "B-5" - Reservoir "A and B," RV Resort and Commercial Area Exhibit "B-6" - Hartsel Spring and Lots Exhibit "B-7" - Highway Signs and Monument Locations Exhibit "C" - Title Exceptions Exhibit "D" - Contracts Exhibit "D-1" - Contracts Previously Provided by Seller Exhibit "E" - Option Exhibit "F-1" - Purchase Money Note Exhibit "F-2" - Purchase Money Mortgage Exhibit "G-1" - Post-72 Lots Purchase Money Note Exhibit "G-2" - Post-72 Lots Purchase Money Mortgage Exhibit "H" - Coverage CC&R Exhibit "I" - Restriction On The Sale Of Seller's Retained Property Exhibit "J" - License Exhibit "K" - Right of First Refusal
1 EX-10.143 3 AMENDMENT TO GENERAL LOAN & SECURITY AGREEMENT 1 EXHIBIT 10.143 [TEXTRON LETTERHEAD] December 10, 1997 Steamboat Suites, Inc. 4310 Paradise Road Las Vegas, Nevada 89109 Re: Amendment to General Loan and Security Agreement Gentlemen: Reference is made to that certain Inventory Loan in the original principal amount of Five Million Dollars ($5,000,000.00) (the "Inventory Loan") from Textron Financial Corporation (the "Lender") to Steamboat Suites, Inc. (the "Borrower"), pursuant to that certain General Loan and Security Agreement dated October 5, 1994, as amended on February 27, 1995, November 30,1995 and November 29, 1996 (the "Loan Agreement"). Reference is further made to letter amendment dated September 23,1996 wherein a one time Inventory Advance was extended to Borrower. Each capitalized term used herein, but not otherwise defined herein, shall have the meaning ascribed to such term in the Loan Agreement. Each of the documents executed and delivered in connection with the Loan is collectively referred to herein as the "Loan Documents". The Borrower has requested the Lender, and Lender has agreed, to amend the Inventory Loan under the Loan Agreement as hereinafter provided in this letter agreement. Accordingly, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is hereby agreed as follows: 1. Section 2.1(b) of the Loan Agreement, which presently provides Borrower may not re-borrow previously paid Inventory Advances and Section 1.1, Inventory Termination Date in which no Inventory Advance was to be made after certain events including May 1, 1996 are hereby amended to provide that a second "one-time" 2 Inventory Advance in the principal amount of $1,000,000.00 may be made by Lender to Borrower in accordance with the other terms and conditions of the Loan Agreement, such Advance to occur not later than December 31, 1997. Upon the issuance of such Advance, the principal balance outstanding under the Inventory Loan shall be $1,850,513.82. The Inventory Promissory Note, the Inventory Deed of Trust and other documents shall continue to secure the Inventory Loan. In addition, the undersigned hereby confirm and represent that the Collateral pledged for the Loan has a Fair Market Value sufficient to continue to secure and repay the Loan. 2. The "Inventory Maturity Date" as defined in the Loan Agreement shall be amended to be September 1, 1999. All other terms of the Loan Agreement, Inventory Deed of Trust and Inventory Promissory Note shall remain in full force and effect. 3. Each of the other Loan Documents is hereby amended so that (i) all references in such Loan Document to the "Agreement" shall mean the Loan Agreement, as amended to date and (ii) all references in such Loan document, to that Loan Document or to any of the other Loan Documents shall mean the Loan Document or such other Loan Documents as amended to date. 4. Borrower shall pay to Lender the reasonable fees, expenses and disbursements of Lender preparing or reviewing this letter agreement or otherwise representing Lender in connection with any matters relating to the Loan Agreement or this letter agreement. 5. Borrower and the undersigned Guarantors hereby ratify and affirm in all respects each and every representation, warranty, covenant, condition, term and agreement set forth in the Loan Agreement, except as the Loan Agreement has been expressly amended by this letter agreement. Borrower hereby confirms that the Loan Agreement and each of the other Loan Documents are in full force and effect as of the date hereof. Each of the Guarantors hereby confirm that each respective Guaranty Agreement and Subordination Agreement is in full force and effect as of the date hereof. 6. The effective date of this letter agreement is December 10, 1997. 7. This letter agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original without the production of any other counterpart and all of which taken together shall constitute but one and the same instrument. This letter agreement shall also be effective upon exchange and receipt of facsimile signatures on such counterparts. Kindly acknowledge your agreement with and acceptance of the terms and conditions of this letter agreement by signing in the appropriate space below. 2 3 Very truly yours, TEXTRON FINANCIAL CORPORATION By: __________________________________ Its: __________________________________ EACH OF THE UNDERSIGNED HEREBY AGREES WITH AND ACCEPTS THE TERMS AND CONDITIONS OF THE LETTER AGREEMENT DATED AS OF DECEMBER 10, 1997 Witness: STEAMBOAT SUITES, INC. _________________________________ By: __________________________________ Its: _________________________________ GUARANTORS: PREFERRED EQUITIES CORPORATION _________________________________ By: __________________________________ Its: _________________________________ MEGO FINANCIAL CORP. _________________________________ By: __________________________________ Its: _________________________________ 3 EX-10.144 4 PROMISSORY NOTE 1 EXHIBIT 10.144 PROMISSORY NOTE [Biloxi Property] U.S. $1,173,750.00 March 20, 1998 Phoenix, Arizona FOR VALUE RECEIVED, the undersigned PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Maker"), promises to pay to FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender"), or order, at such place as the holder of this Note ("Holder") may from time to time designate in writing, in lawful money of the United States of America, the principal sum of up to ONE MILLION ONE HUNDRED AND SEVENTY-THREE THOUSAND SEVEN HUNDRED AND FIFTY AND NO/100 DOLLARS (U.S. $1,173,750.00), or so much thereof as has been disbursed and not repaid, together with interest on the unpaid principal balance from time to time outstanding from the date hereof until paid, as more fully provided for below. This Note is executed pursuant to the terms of that certain Second Amended and Restated and Consolidated Loan and Security Agreement dated effective as of May 15, 1997 between Maker and Lender, as amended and supplemented by that certain Letter Agreement of even date herewith by and between Maker and Lender (the "Letter Agreement") (such Amended and Restated and Consolidated Loan and Security Agreement, as amended and supplemented by the Letter Agreement and as otherwise amended to date, and as may be further amended, is herein the "Loan Agreement"). All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement, the applicable provisions of which are incorporated herein by reference. Interest due under this Note shall (a) accrue daily on the basis of the actual number of days in the computation period, and (b) be calculated on the basis of a year consisting of 360 days. Interest shall accrue initially at an annual interest rate ("Initial Interest Rate") equal to Prime (as hereinafter defined) in effect on the date of the initial advance of the loan evidenced by this Note ("Initial Prime") plus two and one-quarter percent (2.250%) per annum, subject to adjustment on each Interest Rate Change Date (as hereinafter defined), but in no event to exceed the maximum contract rate permitted under the Applicable Usury Law (as hereinafter defined). The interest rate shall change on each Interest Rate Change Date by adding to or subtracting from the Initial Interest Rate, as the case may be, the change, if any, between Initial Prime and Prime in effect on the applicable Interest Rate Change Date. As used in this Note, the following capitalized terms shall have the meaning set forth opposite them below: "Prime" shall mean the rate of interest publicly announced, from time to time, by Citibank, N.A., New York, New York ("Citibank"), as the corporate base 2 rate of interest charged by Citibank to its most creditworthy commercial borrowers notwithstanding the fact that some borrowers of Citibank may borrow from Citibank at rates of less than such announced Prime rate; and "Interest Rate Change Date" means (a) the first business day of Citibank during the calendar month following the date of the initial advance of the loan evidenced by this Note and (b) the first business day of Citibank during each successive month thereafter. Interest shall be payable monthly in arrears commencing on April 1, 1998 and on the first day of each month thereafter. Notwithstanding anything herein to the contrary, if not sooner paid, the entire principal balance of this Note, together with accrued and unpaid interest thereon and all other sums due and owing hereunder, shall be due and payable in full on the first anniversary of the date hereof (the "Maturity Date"); provided, that so long as: (i) there does not exist on the original Maturity Date an Event of Default, or an event, act or failure to act which with notice, passage of time or both would constitute an Event of Default, (ii) Lender has received from Maker, not less than thirty (30) days prior to the original Maturity Date, written notice of Maker's desire to extend the original Maturity Date, and (iii) Maker has paid to Lender in immediately available funds, on or prior to the original Maturity Date, a renewal fee in the amount of two and one-half percent (2.50%) of the outstanding and unpaid principal balance of this Note as of the original Maturity Date, then the Maturity Date in all events shall be the second anniversary of the date hereof. Payments of principal and/or interest shall, at the option of Holder, earn interest after they are due at a rate ("Overdue Rate") equal to (a) two percent (2%) per annum above the rate otherwise payable hereunder or (b) the maximum contract rate permitted under the Applicable Usury Law, whichever of (a) or (b) is lesser. Furthermore, in the event of the occurrence of an Event of Default (as the term "Event of Default" is defined in the Loan Agreement) the unpaid principal balance of this Note shall, at the option of Holder, accrue interest at the Overdue Rate. All payments made under this Note shall be applied first against amounts due hereunder or under the Loan Agreement, other than principal and interest; second, against interest then due under this Note; and third, against the principal of this Note. In the event any installment of principal and/or interest required to be made in connection with the indebtedness evidenced hereby is not paid when due and, except in the case of the final installment, for which no grace period is allowed, such default continues for five (5) days after notice thereof to Maker or an Event of Default occurs, Holder may, at its option, without notice or demand, declare immediately due and payable the entire unpaid principal balance hereof, all accrued and unpaid interest thereon, and all other charges owing in connection with the loan evidenced hereby. 2 3 The contracted for rate of interest of the loan contemplated hereby, without limitation, shall consist of the following: (i) the interest rate, calculated and applied to the principal balance of this Note in accordance with the provisions of this Note; (ii) the Overdue Rate, calculated and applied to the amounts due under this Note in accordance with the provisions hereof; (iii) the Biloxi Advance Loan Fee (defined in the Letter Agreement), all Mortgage Loan Fees, Project Incentive Fees and other Fees as provided in the Loan Agreement; and (iv) all Additional Sums (as hereinafter defined), if any. Maker agrees to pay an effective contracted for rate of interest which is the sum of the above referenced elements. All fees, charges, goods, things in action or any other sums or things of value (other than amounts described in the immediately previous paragraph), paid or payable by Maker (collectively, the "Additional Sums"), whether pursuant to this Note, the Loan Agreement, the other Documents or any other documents or instruments in any way pertaining to this lending transaction, or otherwise with respect to this lending transaction, that under any applicable law may be deemed to be interest with respect to this lending transaction, for the purpose of any applicable law that may limit the maximum amount of interest to be charged with respect to this lending transaction, shall be payable by Maker as, and shall be deemed to be, additional interest, and for such purposes only, the agreed upon and "contracted for rate of interest" of this lending transaction shall be deemed to be increased by the rate of interest resulting from the Additional Sums. Prepayment from time to time of the principal amount of this Note is permitted without penalty; provided, that in the event a prepayment of this Note occurs as a result of an acceleration by Lender of this Note pursuant to Lender's right to declare an acceleration thereof under the terms of the Loan Agreement, then Maker shall pay to Lender a prepayment premium equal to five percent (5.0%) of the principal being prepaid. In the event that Holder institutes legal proceedings to enforce this Note and Holder is the prevailing party in such proceeding, Maker agrees to pay Holder, in addition to any indebtedness due and unpaid, all costs and expenses of such proceedings, including, without limitation, attorneys' fees. Holder shall not by any act or omission or commission be deemed to waive any of its rights or remedies hereunder unless such waiver be in writing and signed by an authorized officer of Holder and then only to the extent specifically set forth therein; a waiver on one occasion shall not be construed as continuing or as a bar to or waiver of such right or remedy on any other occasion. All remedies conferred upon Holder by this Note or any other instrument or agreement connected herewith or related hereto shall be cumulative and none is exclusive and such remedies may be exercised concurrently or consecutively at Holder's option. Every person or entity at any time liable for the payment of the indebtedness evidenced hereby waives: presentment for payment, protest and demand; notice of protest, 3 4 demand, dishonor and nonpayment of this Note; and trial by jury in any litigation arising out of, relating to or connected with this Note or any instrument given as security herefor. Every such person or entity further consents that Holder may renew or extend the time of payment of any part or the whole of the indebtedness at any time and from time to time at the request of any other person or entity liable therefor. Any such renewals or extensions may be made without notice to any person or entity liable for the payment of the indebtedness evidenced hereby. This Note is given and accepted as evidence of indebtedness only and not in payment or satisfaction of any indebtedness or obligation. Time is of the essence with respect to all of Maker's obligations and agreements under this Note. This Note and all of the provisions, conditions, promises and covenants hereof shall be binding in accordance with the terms hereof upon Maker, its successors and assigns, provided nothing herein shall be deemed consent to any assignment restricted or prohibited by the terms of the Loan Agreement. If more than one (1) person or other entity has executed this Note as Maker, the obligations of such persons and entities shall be joint and several. This Note has been executed and delivered in Phoenix, Arizona, and the obligations of Maker hereunder shall be performed in Phoenix, Arizona. THIS NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ARIZONA AND, TO THE EXTENT THEY PREEMPT THE LAWS OF SUCH STATE, THE LAWS OF THE UNITED STATES. Maker (a) hereby irrevocably submits itself to the process, jurisdiction and venue of the courts of the State of Arizona, Maricopa County, and to the process, jurisdiction and venue of the United States District Court for Arizona, for the purposes of suit, action or other proceedings arising out of or relating to this Note or the subject matter hereof brought by Holder and (b) without limiting the generality of the foregoing, hereby waives and agrees not to assert by way of motion, defense or otherwise in any such suit, action or proceeding any claim that Maker is not personally subject to the jurisdiction of the above-named courts, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. It is the intent of the parties to comply with the usury law ("Applicable Usury Law") applicable pursuant to the terms of the preceding paragraph or such other usury law which is applicable if the law chosen by the parties is not. Accordingly, it is agreed that notwithstanding any provisions to the contrary in this Note, or in any of the documents securing payment hereof or otherwise relating hereto, in no event shall this Note or such documents require the payment or permit the collection of interest in excess of the maximum contract rate permitted by the Applicable Usury Law. In the event (a) any such excess of interest otherwise would be contracted for, charged or received from Maker or otherwise in 4 5 connection with the loan evidenced hereby, or (b) the maturity of the indebtedness evidenced by this Note is accelerated in whole or in part, or (c) all or part of the principal or interest of this Note shall be prepaid, so that under any of such circumstance the amount of interest contracted for, shared or received in connection with the loan evidenced hereby, would exceed the maximum contract rate permitted by the Applicable Usury Law, then in any such event (1) the provisions of this paragraph shall govern and control, (2) neither Maker nor any other person or entity now or hereafter liable for the payment hereof will be obligated to pay the amount of such interest to the extent that it is in excess of the maximum contract rate permitted by the Applicable Usury Law, (3) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal amount hereof or refunded to Maker, at Holder's option, and (4) the effective rate of interest will be automatically reduced to the maximum amount of interest permitted by the Applicable Usury Law. It is further agreed, without limiting the generality of the foregoing, that to the extent permitted by the Applicable Usury Law: (x) all calculations of interest which are made for the purpose of determining whether such rate would exceed the maximum contract rate permitted by the Applicable Usury Law shall be made by amortizing, prorating, allocating and spreading during the period of the full stated term of the loan evidenced hereby, all interest at any time contracted for, charged or received from Maker or otherwise in connection with such loan; and (y) in the event that the effective rate of interest on the loan should at any time exceed the maximum contract rate allowed under the Applicable Usury Law, such excess interest that would otherwise have been collected had there been no ceiling imposed by the Applicable Usury Law shall be paid to Holder from time to time, if and when the effective interest rate on the loan otherwise falls below the maximum amount permitted by the Applicable Usury Law, to the extent that interest paid to the date of calculation does not exceed the maximum contract rate permitted by the Applicable Usury Law, until the entire amount of interest which would have otherwise been collected had there been no ceiling imposed by the Applicable Usury Law has been paid in full. Maker further agrees that should the maximum contract rate permitted by the Applicable Usury Law be increased at any time hereafter because of a change in the law, then to the extent not prohibited by the Applicable Usury Law, such increases shall apply to all indebtedness evidenced hereby regardless of when incurred; but, again to the extent not prohibited by the Applicable Usury Law, should the maximum contract rate permitted by the Applicable Usury Law be decreased because of a change in the law, such decreases shall not apply to the indebtedness evidenced hereby regardless of when incurred. In the event of any conflict or inconsistency between the provisions of this Note and the provisions of the Loan Agreement, the provisions of the Loan Agreement shall control. This Note is secured by a Deed of Trust, Assignment of Rents and Proceeds and Security Agreement of even date herewith executed by Maker, as Trustor, for the benefit of Lender, as Beneficiary, and encumbering real and personal property situated in Harrison 5 6 County, Mississippi, as more particularly described therein, by the Loan Agreement and by certain other Mortgages now existing or hereafter arising. "MAKER" PREFERRED EQUITIES CORPORATION, a Nevada corporation By: --------------------------------------- Name: Charles G. Baltuskonis Its: Vice President and Chief Accounting Officer Federal Taxpayer Identification Number: 88-0106662 Address: 4310 Paradise Road Las Vegas, Nevada 89109 Attention: President 6 7 This instrument was prepared by Indexing Instructions: and after recording return to: Randall S. Dalton, Esq. Gammage & Burnham Two North Central Avenue, 18th Floor Phoenix, Arizona 85004 Phone: 602/256-0566 DEED OF TRUST, ASSIGNMENT OF RENTS AND PROCEEDS AND SECURITY AGREEMENT [BILOXI PROPERTY] THIS DEED OF TRUST, ASSIGNMENT OF RENTS AND PROCEEDS AND SECURITY AGREEMENT (this "Deed of Trust") is made as of the 20th day of March, 1998, by and among PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Trustor"), whose mailing address is 4310 Paradise Road, Las Vegas, Nevada 89109-6597, and Jim B. Tohill, 633 N. State Street, Jackson, Mississippi 39202 ("Trustee"), for the benefit of FINOVA CAPITAL CORPORATION, a Delaware corporation ("Beneficiary"), having an office and mailing address at 7272 East Indian School Road, Suite 410, Scottsdale, Arizona 85251 (Attn: Vice President - Law). W I T N E S S E T H: Beneficiary has loaned to Trustor the principal sum of up to One Million One Hundred Seventy-Three Thousand Seven Hundred and Fifty and No/100 United States Dollars (U.S. $1,173,750.00) (the "Loan"), under the circumstances set forth in the Loan Agreement, as defined below, which Loan is evidenced by a Promissory Note of even date herewith (as from time to time modified, extended, amended, renewed, replaced or restated, the "Note"). ARTICLE I GRANTING CLAUSES NOW, THEREFORE, in consideration for the making of the Loan, for the purpose of securing (a) the timely repayment of the Loan, as evidenced by the Note, with interest thereon, (b) the timely repayment of that certain Second Amended and Restated Promissory Note dated May 15, 1997 (the "Receivables Note") in the principal amount of Seventy-Five Million United States Dollars (U.S. $75,000,000.00), (c) the timely repayment of that certain Second Amended and Restated Promissory Note [Headquarters and FCFC 1 8 Property] dated as of June 5, 1996 (the "Office Note") in the original principal amount of Six Million Seven Hundred Seventy-Three Thousand Seven Hundred Seventy-Eight and 74/100 United States Dollars (U.S. $6,773,778.74), as amended, (d) the timely repayment of that certain Promissory Note (the "Towers Note") dated as of December 13, 1995, as amended pursuant to that Amendment No. 1 to Promissory Note [Towers Lobby] dated as of August 16, 1996, in the original principal amount of One Million Two Hundred Eighty-Six Thousand One Hundred Twenty-Six and No/100 United States Dollars (U.S. $1,286,126.00), as amended, (e) the timely repayment of that certain Promissory Note (the "Ida Building Addition Note") dated as of December 13, 1995 in the original principal amount of One Million Five Hundred Thousand United States Dollars (U.S. $1,500,000), as amended, (f) the timely repayment of that certain Promissory Note (the "Aloha Bay Note") dated as of September 22, 1995 in the original principal amount of Three Million Six Hundred Thousand United States Dollars (U.S. $3,600,000), as amended, (g) the timely repayment of that certain Promissory Note (the "Ida Building One Note") dated as of January 26, 1995 in the original principal amount of Two Million Nine Hundred Ninety-Nine Thousand Seven Hundred and No/100 United States Dollars (U.S. $2,999,700.00), as amended, (h) the timely repayment of that certain Promissory Note (the "Ida Building Two Note") dated as of April 27, 1995 in the original principal amount of One Million Seven Hundred Fifty-Five Thousand and No/100 United States Dollars (U.S. $1,755,000.00), as amended, (i) the timely repayment of that certain Promissory Note (the "Winnick Building Addition Note") dated as of December 13, 1995 in the original principal amount of Two Million One Hundred Thousand United States Dollars (U.S. $2,100,000.00), as amended, (j) the timely repayment of that certain Promissory Note (the "Second Winnick Building Addition Note") dated as of May 15, 1997 in the original principal amount of One Million Eight Hundred Eighteen Thousand and No/100 Dollars (U.S. $1,818,000.00), as amended, (k) the timely repayment of the Note, (l) the timely repayment of any and all indebtedness evidenced by any Project Note as may be executed by Trustor for the benefit of Beneficiary after the date hereof and as contemplated by the Loan Agreement hereinafter described, (m) the timely payment of the Hartsel Springs Ranch Incentive Fee ("Incentive Fee") in the amount of Thirty-One Thousand Forty and No/100 United States Dollars (U.S. $31,040.00), the obligation for payment of which is set forth in the Loan Agreement hereafter described, (n) the full, timely and faithful performance of and compliance with ("Performance") all the covenants and conditions made by Trustor herein, in the Note, in the Receivables Note, in the Office Note, in the Towers Note, in the Ida Building Addition Note, in the Aloha Bay Note, in the Ida Building One Note, in the Ida Building Two Note, in the Winnick Building Addition Note, in the Second Winnick Building Addition Note, in any Project Note, in the Second Amended and Restated and Consolidated Loan and Security Agreement between Trustor and Beneficiary dated effective as of May 15, 1997, as amended and supplemented by that certain Letter Agreement [Biloxi Property] by and between Trustor and Beneficiary of even date herewith (as so amended and supplemented, as further amended and supplemented to date and as may be subsequently amended, restated, supplemented or extended, the "Loan Agreement"), in the Documents (as defined in the Loan Agreement), and in each and every other document executed in connection therewith, other than the Environmental Certificate 2 9 with Representations, Covenants and Warranties of even date herewith executed in connection with the Premises (the "Environmental Certificate") and in any and all modifications, extensions, renewals, replacements or restatements of any of the foregoing (this Deed of Trust, the Note, the Receivables Note, the Office Note, the Towers Note, the Ida Building Addition Note, the Aloha Bay Note, the Ida Building One Note, the Ida Building Two Note, the Winnick Building Addition Note, the Second Winnick Building Addition Note, any Project Note, the Loan Agreement, the Documents and the other documents (exclusive of the Environmental Certificate), as from time to time modified, extended, renewed, replaced or restated, are collectively referred to as the "Loan Documents"), and also (o) the payment of any and all other indebtedness, direct or contingent (other than arising out of the Environmental Certificate), that may now or hereafter become owing to Beneficiary from Trustor or any successor-in-ownership of the Trust Property (all of the foregoing secured obligations collectively "Obligations" or individually "Obligation", some of which Obligations consist of a line of credit to be used primarily for business or commercial purposes entitled to the lien protection afforded by Sections 89-1-49 and 89-5-21 of the Mississippi Code of 1972, as amended), Trustor hereby irrevocably grants, conveys, bargains, sells, assigns, warrants and confirms unto Trustee, its successors and assigns, in trust, with power of sale and right of entry and possession, all of Trustor's right, title and interest in and to the real estate located in the Second Judicial District of Harrison County, Mississippi, and more fully described in Exhibit A attached hereto and by this reference incorporated herein ("Premises") (the Premises and other rights, titles and interests hereby granted, conveyed, bargained, sold and assigned to Trustee and/or Beneficiary as provided below are collectively referred to as the "Trust Property"). For purposes of the laws of the State of Mississippi governing limitations on actions, the latest date that any of the Notes is finally due and payable is May 31, 2010. TOGETHER WITH all of Trustor's right, title and interest in and to all buildings and other improvements now or hereafter erected on the Trust Property, all building materials at any time intended to be incorporated into the improvements now or hereafter erected on the Trust Property and all fixtures, equipment, machinery, appliances, furniture, furnishings and other articles of personal property of Trustor of every kind and nature whatsoever now or hereafter located on the Trust Property, and used, intended for use or usable in connection with the operation of the Trust Property, including, without limitation, all heating, lighting, laundry, incinerating and power equipment, engines, pipes, pumps, tanks, motors, conduits, switchboards, plumbing, cleaning, fire prevention, fire extinguishing, refrigerating, ventilating and communications apparatus, air cooling and air conditioning apparatus, elevators, escalators, shades, awnings, screens, storm doors and windows, wall beds, stoves, ranges, refrigerators, freezers, food and beverage preparation and serving equipment, cabinets, partitions, ducts, compressors, canopies, furnishings, garbage and rubbish disposals, counters, bathtubs, sinks, basins, carpets, floor and wall coverings, drapes, swimming pool equipment, inventory, merchandise and proceeds therefrom and all substitutions and replacements therefor; it being understood and agreed that all such property is part and parcel of the Trust Property and appropriated to the use thereof, and whether 3 10 affixed or annexed to the Trust Property or not, shall for the purpose of this Deed of Trust be deemed conclusively to be a portion of the security for the Performance of the Obligations; TOGETHER WITH all of the right, title and interest of Trustor, now or hereafter acquired in and to all and singular the tenements, hereditaments, rights of way, easements, riparian rights, water and water rights and water rights applications appurtenant or pertaining to the Premises or necessary for the operation of the Premises for its intended purpose, as well as all rights in ditches for the irrigation of the Trust Property and shares of stock evidencing such rights, and such other rights, liberties and privileges now or hereafter belonging or appertaining thereto; TOGETHER WITH, subject to the assignment thereof to Beneficiary pursuant to Article III hereof or otherwise, all income, rents, royalties, revenues, issues, profits, fees, accounts, accounts receivable and other proceeds of the Trust Property, including, without limitation, all of the right, title and interest of Trustor, now or hereafter acquired, as lessor or seller, as the case may be, in and to all leases, subleases, assignments, co-occupancy or co-tenancy agreements, sales contracts, installment sales agreements and purchase money notes pertaining to the Trust Property, or any part thereof, and all security documents related to any of the foregoing; TOGETHER WITH all right, title and interest of Trustor, now or hereafter acquired, in and to any and all strips and gores of land adjacent to and used in connection with the Premises and all right, title and interest of Trustor, now owned or hereafter acquired, in, to and under the ways, streets, sidewalks and alleys now or hereafter adjoining the Premises; TOGETHER WITH, subject to any assignment thereof to Beneficiary, all of Trustor's rights as "declarant", "developer", "owner" and/or otherwise under the governing documents or restrictive covenants affecting the Trust Property, if any, including, without limitation, owners' association charters or articles or certificates of incorporation, bylaws and rules and regulations related thereto, if any, whether now or hereafter existing (collectively, the "Project Documents"); TOGETHER WITH, insofar as permitted by applicable law and subject to any assignment thereof to Beneficiary, any licenses, contracts, management contracts or agreements pursuant to which any third party is rendering services to Trustor, franchise agreements, insurance policies pertaining to the ownership, operation or maintenance of the Trust Property (but only to the extent they so pertain), to the extent assignable, permits, authorizations or certificates, now or hereafter required or used in connection with the ownership, operation or maintenance of the Trust Property; TOGETHER WITH, subject to any assignment thereof to Beneficiary, all intangibles, choses in action, names, logos, trademarks, trade names and copyrights now or 4 11 hereafter used in connection with the Trust Property (except with respect to the name "Ramada Vacation Suites"); TOGETHER WITH all replacements, substitutions or renewals of or additions to, all products of, and all books, records and files of Trustor pertaining in whole or in part to any of the foregoing; AND TOGETHER WITH, subject to the assignment thereof to Beneficiary, to the extent hereinafter provided, all proceeds and payments of the conversion, voluntary or involuntary, of any of the foregoing, into cash or otherwise, including, without limitation, all accounts, all condemnation awards in respect to any taking by eminent domain or otherwise payable to the extent hereinafter provided, and all proceeds of any insurance required to be maintained by Trustor pursuant to this Deed of Trust, whether payable to Trustor or otherwise. TO HAVE AND TO HOLD the Trust Property with all and singular the rights, easements and appurtenances thereunto appertaining unto Trustee, its successors and assigns forever, in trust for the benefit and security of the Beneficiary, for the purposes and uses herein set forth. PROVIDED ALWAYS that upon Performance of all of the Obligations, this Deed of Trust shall be subject to termination and reconveyance and shall be released in the manner provided by law, but at the expense of Trustor; otherwise to be and remain in full force and effect. ARTICLE II REPRESENTATIONS, WARRANTIES AND COVENANTS TO BETTER SECURE THE OBLIGATIONS, TRUSTOR, JOINTLY AND SEVERALLY IF MORE THAN ONE, REPRESENTS, WARRANTS, COVENANTS AND AGREES WITH TRUSTEE AND BENEFICIARY AS FOLLOWS: 2.1 Trustor; Good Standing; Authority to Convey; Performance of the Obligations. (a) Trustor is a corporation duly organized and validly existing and in good standing under the laws of the State of Nevada and is qualified to do business and in good standing in each jurisdiction where the location or nature of the properties used or its business, as the same is being or is proposed to be conducted, makes such qualification necessary (except where failure to do so would not (i) adversely affect Beneficiary's ability to realize upon this Deed of Trust or the other security for the Performance of the Obligations or (ii) materially adversely affect the business or financial condition of Trustor or the ability of Trustor to complete Performance of the 5 12 Obligations), with powers and authority adequate for executing, delivering and Performing under the Loan Documents, for undertaking and Performing the Obligations, and for carrying on its business and owning its property. Trustor shall, until Trustor has completed Performance of all of the Obligations, maintain such powers, authority and qualifications. (b) Trustor has good right and power to convey the Trust Property and to execute and deliver this Deed of Trust. All action necessary and required by Trustor's governance documents and by all applicable laws for the obtaining of the Loan and for the execution and delivery of this Deed of Trust and all other Loan Documents executed and delivered in connection with the Loan has been duly and effectively taken; and this Deed of Trust is and will be, and all other Loan Documents are and will be legal, valid, binding and enforceable against Trustor in accordance with their respective terms (subject, however, to bankruptcy, insolvency, reorganization, arrangement, moratorium, or other similar laws relating to or affecting the rights of creditors generally and general principles of equity), and do not violate the usury laws of the State where the Premises are located. The execution, delivery and Performance of the Obligations of this Deed of Trust and the other Loan Documents do not and will not violate, constitute a default under, or (other than the lien in favor of Beneficiary) result in the creation or imposition of any lien, charge or encumbrance upon any of the properties or assets of Trustor pursuant to the terms of, any provision of: any law, regulation, judgment, decree, order, franchise or permit applicable to Trustor; Trustor's governance documents; or any contract or other agreement or instrument to which Trustor is a party or by which Trustor or Trustor's assets are bound. Except for such consents as have been disclosed in writing to Beneficiary and have been obtained and are in full force and effect, no consent of any government or agency thereof, or of any other person, firm or entity not a party hereto is or will be required as a condition to the valid execution, delivery, performance or enforceability of the Loan Documents. (c) Trustor shall Perform when due all the Obligations. 2.2 Title. (a) Trustor is lawfully seized of a good and marketable title in fee simple in the Premises and of a good and marketable title in fee simple as to the buildings and other improvements erected thereon and has good and legal title to the rest of the Trust Property. The Trust Property is free from liens, claims, restrictions or encumbrances, except for such liens, claims, restrictions or encumbrances as are listed in Exhibit B attached hereto and by this reference incorporated herein ("Permitted Encumbrances"). 6 13 (b) Trustor does hereby warrant and shall forever defend the Trust Property against the claims of all persons whatsoever. 2.3 Insurance. (a) Throughout the term of the Deed of Trust, Trustor shall provide, maintain and deliver or cause to be provided, maintained and delivered, at no cost or expense to Beneficiary, such insurance as is from time to time required in writing by the Beneficiary, written by such insurers, in such amounts and forms and with such limits, deductibles and retentions as are satisfactory to Beneficiary. (b) Reserved. (c) A complete certified copy of each policy signed by an authorized insurance company representative, shall be delivered to the Beneficiary from time to time, as requested by Beneficiary. (d) If any policy required by Beneficiary is not received by Beneficiary as required by Beneficiary, Beneficiary reserves the right to procure such insurance and pay the premium therefor; and such sum shall, without notice or demand, become immediately due and payable with interest from the date of its advance until received by Beneficiary from Trustor at the Overdue Rate (as the term "Overdue Rate" is defined in the Note) and secured hereby. In any event, failure to deliver any required insurance policy within the requirements prescribed in this Deed of Trust will constitute an Event of Default and require immediate cure by the Trustor. (e) Trustor shall furnish to Beneficiary, from time to time upon request, within fifteen (15) days following any such request, a certificate signed by the Trustor and the appropriate insurance carrier representative containing a detailed list of the insurance policies then outstanding and in force on the Trust Property. (f) Trustor shall promptly notify Beneficiary of any damage to or destruction of the Trust Property costing more than Twenty Five Thousand Dollars ($25,000) to repair or restore, whether or not the same is covered by insurance, and if so covered, shall promptly make proof of loss relating thereto. Beneficiary may make proof of loss to the Trust Property if not made promptly by Trustor. Trustor hereby authorizes Beneficiary, at Beneficiary's option, to be named as the loss-payee on any insurance policy and to adjust or compromise in the name of Trustor any loss covered by any insurance policy on the Trust Property; provided, however, that Beneficiary's right to adjust or compromise any loss shall be available to Beneficiary only if the Project Documents give Trustor the right to adjust or compromise such loss. As between Trustor and Beneficiary, Trustor hereby authorizes Beneficiary, at 7 14 Beneficiary's option, to collect and receipt the proceeds from any such policy and use such proceeds as set forth in Section 2.3(g) below. To the extent, but only to the extent, that the Project Documents provide that insurance proceeds would be payable to Trustor, such proceeds shall be paid directly to Beneficiary instead of to Trustor or Trustor and Beneficiary jointly. (g) To the extent, but only to the extent, that the Project Documents provide that insurance proceeds would be payable to Trustor, the proceeds of all insurance shall, at the option of Beneficiary, be applied by Beneficiary in reduction of the indebtedness secured hereby in such order as Beneficiary shall determine whether the same be then matured or unmatured (unless otherwise elected by Beneficiary, no such application shall be deemed to be an advance payment of any subsequently accruing fixed sum), used to fulfill any of the Obligations, or paid over, subject to such terms and conditions as Beneficiary may in its sole but reasonable discretion then impose, wholly or in part to Trustor by Beneficiary for the repair and restoration of the Trust Property or for any other purpose or object satisfactory to Beneficiary. If insurance proceeds are paid over to Trustor for the purpose of repair and restoration of the Trust Property, Beneficiary, without limitation of its right to impose other terms and conditions, may require receipt and approval by itself and its architect of plans and specifications for the work to be done; disbursement of proceeds not more frequently than monthly for work done against invoices, lien waivers, title insurance policy endorsements and architect's certifications; title policy endorsements, retention of holdbacks until completion of construction and expiration of mechanic's lien periods; and receipt of assurance adequate to Beneficiary in its sole judgment that the proceeds remaining after disbursement will be sufficient to complete such repair and replacement. Trustor hereby assigns to Beneficiary for the uses and purposes aforesaid all insurance required by this Deed of Trust and the proceeds thereof. Beneficiary shall not be responsible for the insolvency of any insurer or any insurance underwriter. Furthermore, other than to the extent resulting from the gross negligence or willful misconduct of Beneficiary, Beneficiary shall not be responsible for such insurance or for the collection of any insurance moneys. Application of insurance proceeds by Beneficiary, regardless of the manner or order, shall not waive Performance of the Obligations, cure or waive any default by Trustor in the Performance of the Obligations, or invalidate or affect any act done hereunder because of any such default. Beneficiary shall not be obligated to see to the proper application of insurance proceeds paid over to Trustor. 2.4 Condemnation of Title or Use; Eminent Domain; Special Provisions. (a) All awards heretofore or hereafter made by any public or quasi-public authority to the present and all subsequent owners of the Trust Property by virtue of an exercise of the right of eminent domain by such authority, including, 8 15 without limitation, any award for a taking (whether direct or indirect) of title, possession or right of access to a public way, or for any change of grade or streets affecting the Trust Property (collectively, "Condemnation Awards"), are hereby assigned to Beneficiary. Beneficiary, at its option, is hereby authorized, directed and empowered to collect and receive the proceeds of any such awards from the authorities making the same and to give proper receipts and acquittances therefor. Such proceeds shall be received, held, applied and used as set forth in Section 2.3(g) hereof with respect to insurance proceeds. If prior to the receipt by Beneficiary of such award or payment the Trust Property shall have been sold on foreclosure of this Deed of Trust, Beneficiary shall have the right to receive such award or payment to the extent of any deficiency found to be due upon such sale, with interest thereon, at the rate provided in the Note, notwithstanding any rule of law or provision, if any, herein or in any of the other Loan Documents forbidding deficiency judgments or personal liability, and whether or not a deficiency judgment on this Deed of Trust shall have been sought or denied. Upon request by Beneficiary, Trustor shall make, execute and deliver any and all assignments and other instruments sufficient for the purpose of effectuating the assignment of all such awards to Beneficiary. Beneficiary shall have the right to intervene and participate in any proceeding for and in connection with any taking referred to in this Section 2.4(a); provided, however, that if such intervention shall not be permissible or permitted by the court, Trustor shall, at its expense, consult with Beneficiary, its attorneys and experts and make all reasonable efforts to cooperate with them in any defense of such proceedings. Trustor shall not, without Beneficiary's prior written consent, enter into any agreement for the taking of the Trust Property or any part thereof with any person or persons authorized to acquire the same by condemnation or eminent domain. (b) Anything to the contrary herein notwithstanding, for so long as any part of the Trust Property is subject to the Project Documents, any and all insurance proceeds arising from damage or destruction to the Trust Property and any and all Condemnation Awards received by Beneficiary shall be delivered and paid out by Beneficiary to the Insurance Trustee, if any, under the Project Documents, to be distributed and used in accordance with the provisions of the Project Documents. 2.5 Restrictions on Transfer, Merger and Consolidation; No Additional Liens. (a) To the extent not prohibited by applicable law and except as may be expressly permitted herein or in the Loan Agreement, Trustor shall not, without the prior written consent of Beneficiary: (i) sell, convey, lease, sublease, assign, mortgage, pledge, encumber or otherwise transfer the Trust Property or any part thereof other than the sale of Units (as defined in the Loan Agreement) in the ordinary course of business or (ii) assign or hypothecate any rent, issues, profits or proceeds from the Trust Property (other than Purchaser Notes and Purchaser 9 16 Mortgages, as each of those terms is defined in the Loan Agreement). Any such act shall be expressly subject to this Deed of Trust and the prior lien created hereby, and written consent of Beneficiary to any one such act shall not be construed to be a waiver of this provision with respect to any subsequent act. (b) Without limiting the generality of the foregoing, neither Trustor nor any other person have or shall have, without the prior written consent of Beneficiary, any right, power or authority to create, incur, permit, or suffer to be placed or imposed upon the Trust Property any lien, security interest or other charge or encumbrance whatsoever, except this Deed of Trust, the Permitted Encumbrances and such other liens and security interests, if any, as may be expressly permitted herein. If any such prohibited lien shall arise, Trustor shall promptly discharge such lien; provided, however, that Trustor shall have the right to contest in good faith, with due diligence and appropriate proceedings, at no cost or expense to Beneficiary, the validity, applicability, or amount of any such lien, provided further, however, that Trustor, prior to commencing such contest, shall have furnished to Beneficiary a bond or other security in such form, substance and amount as is reasonably satisfactory to Beneficiary. 2.6 Taxes, Assessments. (a) TRUSTOR SHALL PAY OR CAUSE TO BE PAID WHEN DUE, AND INDEMNIFY AND HOLD HARMLESS Trustee, Beneficiary, their successors, assigns and shareholders and the directors, officers, employees, agents and servants of the foregoing from all taxes (including, without limitation, revenue and documentary stamp taxes, intangible taxes, ad valorem real estate and personal property taxes), assessments, water, sewer and other utility rates, rents and charges, license and registration fees and excises, together with any penalties, fines or interest thereon, in each case whether general or special, ordinary or extraordinary, foreseen or unforeseen, of every character in respect of the Trust Property or any of the Loan Documents, which at any time prior to Performance of the Obligations may be imposed on or become a lien upon (i) Trustee or Beneficiary, (ii) the Trust Property or any part thereof or any rent or other income or proceeds therefrom, (iii) the occupancy, operation, use, possession or disposition thereof (including, without limitation, any disposition in exercise of the rights of Beneficiary arising from an Event of Default (as hereinafter defined)), or (iv) any activity conducted on or in connection with the Trust Property or part thereof (all such taxes, assessments, rents, rates, charges, fees, excises and any such penalties, fines or interest thereon, collectively "Impositions" ). The Obligation to pay Impositions shall not apply to any Imposition measured by the net income payable by Beneficiary in consequence of the receipt of payments of principal and/or interest called for in the Note or commitment fees, if any, paid in connection with the Loan. The Obligation to pay Impositions shall include the Obligation to pay any increase to Beneficiary in federal income taxes 10 17 owing to such jurisdictions as a result of inclusion in income of Beneficiary of any amount required by this Section 2.6(a) to be paid to or for Beneficiary. (b) If claim is made against Beneficiary for any Imposition, Beneficiary will use reasonable efforts to promptly notify Trustor thereof (but failure to do so shall not prejudice Beneficiary's rights hereunder). (c) If the burden of any Imposition cannot lawfully be shifted from Beneficiary to Trustor, then all sums hereby secured, without any deduction, shall, at the option of the Beneficiary, become due and payable upon demand, notwithstanding anything contained herein or any law heretofore or hereafter enacted. (d) Trustor has filed or caused to be filed all tax returns which are required to be filed by it and (except to the extent being contested in good faith and for the payment of which adequate security has been provided) has paid or caused to be paid all taxes shown to be due or payable on such returns and all Impositions which are due and payable. (e) Trustor shall furnish to Beneficiary receipts or other evidence satisfactory to Beneficiary showing payment of all ad valorem real estate and personal property taxes and assessments within 30 days of the final due date of such taxes and assessments. If such receipts or other evidence of payment is not provided, Beneficiary may take such action as Beneficiary deems necessary, at Trustor's expense, to obtain such evidence of payment. (f) Trustor shall have the right to contest in good faith, with due diligence and appropriate proceedings, at no cost or expense to Beneficiary, the validity, applicability or amount of such Impositions; provided, however, that Trustor, prior to commencing such contest, shall have furnished to Beneficiary a bond or other security in such form, substance and amount as is reasonably satisfactory to Beneficiary. 2.7 Impounds. (a) Upon the occurrence of an Event of Default and at all times thereafter, Trustor shall upon written request of Beneficiary make monthly deposits with Beneficiary of the following: (i) an installment of the taxes and special assessments levied or to be levied against the Trust Property and (ii) an installment of the premium or premiums that will become due and payable to renew the insurance on the Trust Property. Such installments are to be equal to the estimated taxes and assessments and premium or premiums for such insurance next due (as reasonably estimated by Beneficiary giving due consideration to the previous year's tax and premiums), less all installments already paid therefor, and divided by the number of 11 18 months that are to elapse before one (1) month prior to the date when such taxes and assessments or premium or premiums shall become delinquent. If the Trust Property is a part of a larger tract for purposes of real estate taxation, Trustor shall have or cause to have the property taxes assessed separately; or, if a separate assessment is not possible, Trustor, upon request of Beneficiary, will make the monthly deposits for an installment of taxes and special assessments calculated for the larger tract. If amounts paid to Beneficiary under the provisions of this Section 2.7(a) are insufficient to discharge the Obligation for such taxes and assessments or insurance premiums as the same become due, Trustor shall pay to Beneficiary upon demand such additional sums as may be required to fully pay and discharge this Obligation. (b) Nothing in this Section 2.7 shall release Trustor of its Obligation to pay taxes, assessments and insurance premiums as the same become due and payable to the extent that provision is not made for such payment pursuant to the terms of this Section 2.7. To the extent not prohibited by law, deposits made under this Section 2.7 shall not be deemed to be held in trust and may be commingled with Beneficiary's general funds; and Beneficiary shall have no liability to Trustor for any interest on such deposits. (c) If, by reason of any Event of Default, Beneficiary declares all indebtedness secured hereby to be due and payable, Beneficiary, to the extent not prohibited by applicable law, may, at its option and without notice, then apply any funds in the impounds account against such indebtedness in such order as Beneficiary may in its discretion determine. Application of such funds to the indebtedness secured hereby shall not cure or waive any default by Trustor in the Performance of the Obligations or invalidate any act done hereunder because of any such default. The enforceability of the Obligations herein relating to taxes, assessments and insurance premiums shall not be affected except insofar as those Obligations have been met by compliance with this Section 2.7. (d) Beneficiary may from time to time, at its option, waive, and after any such waiver reinstate, any or all provisions hereof requiring such deposits, by notice to Trustor. While any such waiver is in effect, Trustor shall pay Impositions and insurance premiums as herein elsewhere provided. 2.8 Compliance with Insurance Terms, Laws, etc. Trustor has complied, and will comply or cause compliance with and will not suffer or permit any violation of: (a) all terms of any insurance policy covering or applicable to the Trust Property or any part thereof, all requirements of the issuer of any such policy, and all orders, rules, regulations and other requirements of the National Fire Protection Association (or any other body exercising similar functions) applicable to or affecting the Trust Property or any use or condition of the Trust Property; and (b) all laws, ordinances, regulations, covenants, conditions and restrictions affecting Trustor or the Trust Property; provided, however, that 12 19 Trustor shall have the right to contest in good faith, with due diligence and appropriate proceedings, at no cost or expense to Beneficiary, the validity or applicability of such law, ordinance, regulation, covenant, condition or restriction, provided further, however, that Trustor, prior to commencing such contest, shall have furnished to Beneficiary a bond or other security in such form, substance and amount as is reasonably satisfactory to Beneficiary. 2.9 Alterations, Maintenance, Inspection, Repair. (a) Trustor (i) will not, without the prior written consent of Beneficiary, make any material alteration to the Trust Property or remove, demolish, or alter the design or structural character of any building now or hereafter erected upon the Trust Property, unless otherwise permitted herein or required by law; (ii) will not, without the prior written consent of Beneficiary, remove or permit the removal from the Premises of any fixtures, equipment, machinery, appliances, fixtures, furniture, furnishings or other items of personal property which constitute part of the Trust Property, except in the ordinary course of business or unless otherwise permitted herein; (iii) will promptly repair or cause to be repaired any portions of the Trust Property that may be damaged or destroyed (regardless of the sufficiency of insurance and condemnation proceeds) and will not commit or suffer waste upon the Trust Property, but will at all times make or cause to be made such repairs, maintenance and renewals and replacements, or otherwise, as may be necessary to maintain the Trust Property and condition thereof in good order and repair; (iv) will keep or cause the Trust Property to be kept free of rubbish and other unsightly conditions; (v) will keep or cause all buildings and other improvements on the Trust Property to be kept free of dry rot, fungus, termites and all other harmful or destructive pests; (vi) will keep or cause all ornamental plants, trees and shrubs on the Trust Property to be kept neatly pruned and in good condition; and (vii) will complete, subject to clauses (i) and (iii) above, promptly, in a good and workmanlike manner and in substantial conformity with plans and specifications approved in writing by Beneficiary any improvements now or hereafter commenced. (b) Nothing contained in this Deed of Trust and/or any of the other Loan Documents shall constitute any consent or request by Trustee or Beneficiary, express or implied, for the performance of any labor or service or the furnishing of any materials or other property in respect of the Trust Property, or be construed to give Trustor any right, power or authority to contract for or permit the performance of any labor or services or the furnishing of any materials or other property in such fashion as would permit the making of any claim against Trustee or Beneficiary in respect thereof or any claim that any lien based on the performance of such labor or services or the furnishing of any such materials or other property is prior to this Deed of Trust. During the performance of any such labor or services or the furnishing of any such materials or other property with respect to the Trust Property or the 13 20 Premises, Trustor shall post in conspicuous locations notices reasonably sufficient to advise the suppliers of such services or materials of the non-responsibility of Beneficiary with respect to the same. 2.10 Use; Zoning. (a) Trustor shall use the Trust Property (if developed from its present state of unused land) for the purpose of selling Units. (b) The use of the Trust Property for the sale of Units does not and will not violate any private covenant or restriction affecting the Trust Property. The Trust Property is zoned for residential use and the Trust Property is not a part of a larger tract of land owned or leased by Trustor or any of its affiliates, or otherwise considered as part of one zoning lot, or, if it is, any authorization or variance required for the subdivision of such larger tract which a sale of the Trust Property would entail has been obtained from all the appropriate governmental authorities, so that the Trust Property constitutes one zoning lot (including street access and parking and utility facilities, if relevant) capable of being conveyed as such. The necessary rights-of-way for all roads necessary for the full utilization of the Trust Property for its intended purposes have been acquired, and/or have been dedicated to public use and accepted by the appropriate governmental authority. (c) Trustor shall not, without Beneficiary's prior written consent, seek, join in or consent to any change in any private covenant, zoning law or other public or private restriction, which change would limit the use of the Trust Property or any part thereof or reduce its fair market value. 2.11 Establishment and Maintenance of the Deed of Trust; Further Assurances. (a) Trustor shall establish and maintain this Deed of Trust, subject only to the Permitted Encumbrances and such other liens and security interests, if any, as may be expressly permitted herein, as a Deed of Trust and lien and security interest on the Trust Property and any other property intended to be encumbered and on all renewals and replacements of all such property. Trustor shall perform all acts and execute all instruments necessary or required by Beneficiary in order to permit the immediate registration and/or recordation of this Deed of Trust at the appropriate office for the foregoing purposes in the county where the Premises are located. Trustor shall furnish to Beneficiary from time to time such proof as Beneficiary may reasonably request with respect to Trustor's compliance with the foregoing. 14 21 (b) Trustor shall pay all expenses incurred by Trustee and/or Beneficiary in connection with the preparation, completion, registration and/or recordation of this Deed of Trust or any other Document. (c) If this Deed of Trust or any provision hereof shall be deemed invalidated in whole or in part by any present or future law or any decision of any court having jurisdiction, Trustor shall execute and deliver such other and further instruments and do such things as in the sole opinion of Beneficiary will carry out the true intent and spirit of this Deed of Trust. From time to time, Trustor shall execute and deliver such further documents and assurances as in the sole opinion of Beneficiary may be required to more effectively subject the Trust Property and any other property intended to be transferred or encumbered to or for the benefit of Trustee or Beneficiary as security for the Performance of the Obligations. (d) Trustor, at its sole cost and expense, will appear in and prosecute or defend any action or proceeding that may affect the priority of this Deed of Trust or the security of Beneficiary hereunder, and will pay all costs and expenses (including the cost of searching title and attorneys' fees) incurred in such action or proceeding. Beneficiary may, at its option, appear in and defend any action or proceeding purporting to affect the priority of this Deed of Trust or the security hereof or the rights or powers of Trustee and/or Beneficiary. All amounts paid, suffered or incurred by Beneficiary in exercising the authority herein granted, including, without limitation, court costs, attorneys' fees and other expenses, with interest at the Note Rate (or at the Overdue Rate in the event such advance is necessary as a result of the occurrence of an Event of Default or an event which with notice, passage of time or both, would constitute an Event of Default (an "Incipient Default") ) from the date of advance until paid, shall, without notice or demand, immediately be due and payable by Trustor to Beneficiary and be secured by this Deed of Trust. The Note Rate means the rate of interest at which the unpaid principal balance of the Note accrues in the absence of an Event of Default. 2.12 Right of Beneficiary to Act. If there be commenced any action or proceedings affecting the Trust Property or the title thereto, or if Trustee or Beneficiary be made a party to any action or proceeding because of its status hereunder, or if Trustor defaults in the Performance of any of its Obligations, then Beneficiary, or Trustee upon written instruction from Beneficiary (the legality thereof to be determined solely by Beneficiary), without obligation to do so, may procure such abstracts or other evidence of title as it deems necessary; may appear in any such action as Beneficiary deems advisable; perform such Obligations and for such purposes may enter upon the Trust Property; and shall become subrogated to the lien and rights of all persons to whom payments have been made in performing the Obligations. For any of such purposes, including court costs, attorneys' fees and expenses, Beneficiary may advance such sums of money as it deems necessary. Such sums advanced, with interest from the date of advance at the Note Rate (or the Overdue Rate 15 22 in the event such advance is necessary as a result of the occurrence of an Event of Default or Incipient Default) until paid, shall, without notice or demand, immediately be due from Trustor to Beneficiary and be secured by this Deed of Trust. Beneficiary shall be the sole judge of the legality, validity and priority of any claim, lien, encumbrance, tax, assessment and premium it discharges pursuant hereto and of the amount necessary to be paid in satisfaction thereof. Any action taken by Beneficiary or Trustee pursuant to this Section 2.12 shall not waive Performance of any Obligation, cure or waive any default by Trustor in the Performance of the Obligations, or invalidate or affect any act done hereunder because of such a default. The foregoing notwithstanding, Beneficiary agrees to use reasonable efforts to give Trustor five (5) days prior written notice as to the taking of any action pursuant to this Section 2.12 unless (i) the delay incurred in taking such action, pending the giving of such notice, would further jeopardize the Trust Property or the lien of this Deed of Trust or (ii) Beneficiary takes such action as a result of the occurrence of an Event of Default. 2.13 Risk of Loss; Indemnity. As between Trustor and Beneficiary, Trustor assumes the entire risk of loss of the Trust Property from any cause whatsoever and further assumes all risks and liability for the Trust Property, and the use and operation thereof, and for injuries or deaths of persons and damage to property, however arising from or incident to such use or operation, whether such injury or death to persons be of agents or employees of Trustor or of third parties and such damage to property be of Trustor or of others. TRUSTOR SHALL SAVE AND HOLD HARMLESS and defend Trustee and Beneficiary, their successors, assignees and shareholders (including corporate shareholders) and the directors, officers, employees, agents and servants of the foregoing, from any and all losses, costs, expenses (including court costs and attorneys' fees), damages, demands, claims, suits, proceedings (whether civil or criminal), orders and judgments, penalties, fines and other sanctions (collectively, "Damages") arising or incurred because of or incident to (a) the Trust Property or the actual or alleged management, control, condition, destruction, disposition, use or operation thereof; (b) any brokerage fees arising from or in connection with the making of the Loan, (c) any incorrectness in the assurance which the Trustor hereby gives: (i) that there are no present violations on the Premises of any enforceable covenants, conditions, or restrictions; (ii) that, except to the extent shown as Permitted Encumbrances, there are no encroachments of buildings, structures, or improvements located on the Premises onto adjoining lands, nor any encroachments onto said land of buildings, structures, or improvements located on adjoining lands; (d)(i) any future violations on the Premises of any covenants, conditions, or restrictions occurring prior to acquisition of title to said estate or interest by the Beneficiary, provided such violations result in loss or impairment of the lien of this Deed of Trust, or result in loss or impairment of the title to said estate or interest if the Beneficiary shall acquire such title in satisfaction of the indebtedness secured by this Deed of Trust; (ii) unmarketability of the title to said estate or interest by reason of any violations on the Premises, occurring prior to acquisition of title to the Premises by the Beneficiary, of any covenants, conditions or restrictions; (e) any interest or claims not shown by the public records which could be ascertained by an inspection of the Premises; (f) easements or claims of easements not shown by public records; and; (g) discrepancies, conflicts and boundary 16 23 lines, shortage in area, encroachments and any facts which a correct survey and inspection of the Premises would disclose, and which are not shown by the public records, unless in any of the foregoing cases, the Damages arise from the gross negligence or willful misconduct of the person or entity seeking indemnification. On written request by a person or other entity covered by the above agreement of indemnity, Trustor shall undertake, at its own cost and expense, on behalf of such indemnitee, using counsel satisfactory to the indemnitee, the defense of any legal action or proceeding to which such indemnitee shall be a party, provided that such action or proceeding shall result from, or grow or arise out of any of the events set forth in this Section 2.13. 2.14 Non-Default Status. Except as disclosed in the exhibit delivered pursuant to paragraph 8.3(a) of the Loan Agreement, Trustor is not in default of any payment on account of indebtedness for borrowed money or in violation of or default under any material term of any agreement, instrument, undertaking, or order, decree or judgment of any court, arbitration or governmental authority to which it is a party or by which it or its assets are bound. Trustor is fully familiar with all of the covenants, terms and conditions of the Loan Documents and is not in default thereunder. No act or event has occurred which after notice and/or lapse of time would constitute such a default or an Event of Default. 2.15 Approvals and Reports. Trustor has obtained or has caused to be obtained all necessary consents, licenses, permits, franchises, approvals and exemption certificates and has made or caused to be made all registrations or declarations with each government or any agencies or departments thereof that are required in connection with the Trust Property and the use thereof as contemplated herein; and the same are in full force and effect. All such filings and reports delivered to any governmental authority have been truthfully completed and duly filed; and true and complete copies of such applications, consents, licenses, permits, franchises, exemption certificates, approvals, filings and reports have been delivered to Beneficiary. Trustor undertakes to continue in full force and effect all of the foregoing and will obtain any new or additional governmental approvals as become necessary for the Performance of the Obligations. 2.16 Litigation. There is no action, litigation or other proceeding pending or threatened before any arbitration tribunal, court, governmental agency or administrative body against Trustor which, if adversely determined, would adversely affect Beneficiary's ability to realize upon this Deed of Trust or the other security for the Performance of the Obligations or would materially adversely affect the business or financial condition of Trustor, or impair the ability of Trustor to complete Performance of the Obligations; or which questions the validity of any of the Loan Documents. 2.17 Full Disclosure. Neither this Deed of Trust nor any other Document, certificate, financial statement or written material furnished to Beneficiary by or on behalf of Trustor in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the 17 24 statements contained herein and therein not misleading. To the extent any of such documents is a contract, such document constitutes the legal, valid and binding obligation of the parties thereto in accordance with its terms (subject, however, to bankruptcy, insolvency, reorganization, arrangement, moratorium, or other similar laws relating to or affecting the rights of creditors generally and general principles of equity), no party thereto is in material default thereunder, and Trustor knows of no reason why any party thereto has a right to terminate the contract prematurely for failure of a stated condition or otherwise. There is no fact known to Trustor which materially adversely affects or in the future may (so far as Trustor can now foresee) materially adversely affect the business or financial condition of Trustor which has not been set forth specifically in detail in the Loan Documents or the certificates, financial statements or other written materials furnished to Beneficiary in connection with the transactions contemplated hereby. 2.18 Reserved. 2.19 Environmental Representations. (a) Representations, Covenants and Warranties. Except as disclosed in the Disclosure Schedule, attached to the Environmental Certificate as Exhibit "B" and incorporated therein by reference (herein the "Disclosure Schedule"), Trustor, to the best of its knowledge after due inquiry and investigation, hereby represents, covenants and warrants to Beneficiary as follows: (i) Trustor certifies that it investigated the present and past uses of the Trust Property, and employed a qualified environmental consultant, acceptable to Trustor, to make due inquiry of all Operations and the potential existence and/or Release of Contaminants at the Trust Property. To the best of Trustor's knowledge, Trustor certifies that such investigation complied with Beneficiary's guidelines for conducting such investigation. (ii) The Trust Property is not listed on any federal, state, or local list identifying properties with a known or suspected Release. Trustor is unaware of any condition that, if known to a Governmental Authority, would require (i) the Trust Property be listed or (ii) Remedial Action. (iii) Operations have never been, and will not be, for the purpose of the manufacture, Remedial Action, generation, Release, or refining of any Contaminant (whether legal or illegal, accidental or intentional). (iv) Trustor obtained, and is and shall continue to be in compliance with, all EHS Permits necessary for the Operations at the Trust Property. 18 25 (v) No Environmental Lien has, is, or will be attached to the Trust Property or any portion thereof. (vi) Trustor is not, has not, and does not anticipate being, subject to any action by a Governmental Authority regarding: (i) the violation of any Environmental Requirement; (ii) any Remedial Action; (iii) any liability arising out of or related to the presence or Release of any Contaminant resulting from or pertaining to the Operations at the Trust Property. (vii) Trustor certifies that to the best of its knowledge and after appropriate inquiry, except as set forth in the Disclosure Schedule, there has been no unauthorized release of any contaminant at, on, from, or beneath the property. The foregoing representations, covenants and warranties are continuing and shall be true and correct from the date hereof through the final payment of all indebtedness owed by Trustor to Beneficiary and the final Performance of all Obligations owed to Beneficiary, with the same force and effect as if made each day throughout such period. All representations, covenants and warranties survive payment and Performance. Beneficiary warrants that it shall act, in its capacity as a lender, in compliance with all federal, state, and local laws regarding environmental lender liability, including, without limitation, 42 U.S.C. Section 9607 under the Comprehensive Environmental Response, Compensation and Liability Act. (b) Covenant to Clean Up and Notify. (i) Trustor, at its own cost, shall perform all Remedial Action: (i) in accordance with all Environmental Requirements; (ii) to the reasonable satisfaction of Beneficiary; and (iii) in accordance with any Governmental Authority orders, directives, and/or terms, whether negotiated or imposed. (ii) Trustor shall give notice to Beneficiary immediately, via certified mail, of any deviation from any of the above representations, covenants and warranties. Such notification is triggered by, but not limited to Trustor's: (i) receipt of notice from any Governmental Authority of any known, alleged or suspected violation of any Environmental Requirement; (ii) receipt, or anticipated receipt, of any notice from a Governmental Authority of the Release of a Contaminant, violation of an EHS Permit, and/or damages for personal or property injury or natural resources, stemming from a violation or Release; and (iii) knowledge of the presence of any Contaminant (other than those described in the Disclosure Schedule) on the Trust Property in a 19 26 condition that may adversely impact the Environment. Notification shall include an explanation of the deviation from the representation and warranty and a description of the communication to or knowledge on the part of the Trustor. Trustor, at Beneficiary's request, shall provide all documents pertaining to any environmental matters (including but not limited to otherwise privileged or confidential materials). (iii) In the event of such deviation, Trustor must: (i) promptly comply with all Environmental Requirements, including but not limited to those requiring Remedial Action and/or notification of a Release, and provide Beneficiary with satisfactory evidence of such compliance; and (ii) provide Beneficiary, within thirty (30) days, financial assurance evidencing, to Beneficiary's reasonable satisfaction, that sufficient funds are available to pay the cost of Remedial Action, compliance with any Environmental Requirement, and discharging any Environmental Liens. (c) Site Assessment. (i) If Beneficiary believes that Contaminants (other than those described in the Disclosure Schedule) affect the Trust Property, Beneficiary, at any time, may contract for the services of persons ("Site Assessors") to perform environmental site assessments ("Site Assessments") to determine whether any environmental condition exists that could result in the diminution of the value of the Trust Property, and/or any liability, cost, or expense to the owner, occupier, or operator of the Trust Property. Site Assessments may be performed at any time, upon reasonable notice and with minimal interference with Trustor's affairs to the extent practicable, as determined by Beneficiary. Site Assessments must be performed pursuant to Beneficiary's guidelines. Trustor shall not impede or interfere with the Site Assessment, and shall cooperate fully with the Site Assessors. The Site Assessors, which term includes their employees, agents, subcontractors, and assigns are hereby authorized to enter upon the Trust Property for such purposes and are further authorized to perform tests on the Trust Property necessary to conduct the Site Assessment. Trustor shall supply Site Assessors historical and operational information regarding the Trust Property to facilitate the Site Assessment. Trustor shall make appropriate personnel, having knowledge of relevant matters, available for meetings with the Site Assessors. On request, Beneficiary shall make the results of such Site Assessments available to Trustor. The cost of performing the Site Assessments, including, without limitation, sampling and monitoring, the preparation of any reports or studies, and the cost of laboratory analysis, shall be paid by Trustor upon demand. 20 27 (ii) Prior to a breach, default or Event of Default under or as defined in any Loan Document, Beneficiary may notify Trustor of its intent to conduct a Site Assessment and allow Trustor to initiate and pay for the Site Assessment directly. Unless otherwise agreed, a Site Assessment performed pursuant to this Section 2.19(c) must be: (i) initiated within seven (7) business days of the date upon which Trustor is contacted by Beneficiary; and (ii) completed with a finalized report delivered to Beneficiary within thirty (30) calendar days of the date upon which Trustor is contacted. The Site Assessors hired by Trustor must be acceptable to Beneficiary. Beneficiary must be consulted by Trustor and approve the scope of any proposed Site Assessment. Site Assessors must provide a draft and final report discussing their findings. Beneficiary shall be given the opportunity to review and comment on all draft reports. Beneficiary shall be provided copies of all draft and final reports. Any and all representations and findings by Site Assessors shall expressly run to the benefit of Beneficiary. (d) Indemnify and Hold Harmless. (i) Trustor shall indemnify, defend and hold harmless Beneficiary, its employees, shareholders, officers, directors, and agents from and against any and all Environmental Costs. (ii) Trustor agrees, upon request by Beneficiary, to contest and to defend against all Environmental Costs. Beneficiary may, without being obligated to, hire counsel, consultants, and others necessary to defend against any Environmental Costs. (iii) Trustor agrees to reimburse Beneficiary upon demand for any expenses incurred in connection with any Environmental Costs. The provisions of this Section 2.19 are in addition to any other obligations and liabilities Trustor may have to Beneficiary at common law, in equity or under documentation executed in connection with the Loan, and shall survive the closing, funding and payment in full of the Loan, as well as any foreclosure of the Loan, or the granting of any deed in lieu of foreclosure and the recordation of any release of the lien of this Deed of Trust or of the Loan Agreement. (e) Beneficiary's Right to Remove Contaminants. (i) Beneficiary shall have the right, but not the obligation, without limiting Beneficiary's other rights and remedies under this Deed of Trust or the Environmental Certificate, to enter onto the Trust Property or to take such other actions as it deems necessary or advisable to effectuate a Remedial Action, or to in any other way resolve or minimize the impact of, or 21 28 otherwise deal with, any Contaminant on or affecting the Trust Property in such a manner that may jeopardize Beneficiary's security interest. Costs and expenses paid or incurred by Beneficiary in the exercise of any such rights shall be secured by this Deed of Trust and the Loan Agreement and shall be payable by Trustor upon demand. (ii) Without limiting Beneficiary's other rights and remedies, Beneficiary will notify Trustor of its intent to undertake a Remedial Action or any other action as discussed above. Prior to Beneficiary's initiation of any such action, unless otherwise agreed to by Trustor and Beneficiary, Trustor shall have thirty (30) days from the date of receiving Beneficiary's notice to complete the required action and provide Beneficiary with satisfactory completion documentation. (f) Reliance and Binding Nature. Trustor acknowledges that Beneficiary has and will rely upon the representations, warranties, and indemnification set forth herein and that the execution and delivery of this Deed of Trust is an essential condition but for which Beneficiary would not close or fund the Loan. The representations, warranties and indemnifications herein shall be binding upon Trustor, its successors, assigns and legal representatives and shall inure to the benefit of Beneficiary, its successors, assigns and legal representatives. (g) Relation to Other Documents. All terms and conditions contained in the Loan Documents, including, without limitation, this Deed of Trust, shall be interpreted to give such terms full force and effect. In the event terms or conditions contained in this Section 2.19 directly conflict with or are contrary to terms and conditions contained in the other Loan Documents, and the matter at issue concerns or is related to the Site Assessment or indemnity and hold harmless provisions of this Section 2.19, this Section 2.19 shall govern and supersede any conflicting requirement. For the purposes of this Section 2.19, the following terms shall have the following meanings: "Contaminant" means any pollutant, hazardous, radioactive, or toxic substance, hazardous waste, medical, radioactive, or special waste, petroleum or petroleum-derived substance or waste, asbestos-containing material, polychlorinated biphenyls (PCBs), or any hazardous or toxic constituent thereof and includes, but is not limited to, any substance defined in or regulated under any Environmental Requirement. "EHS Permits" means all environmental, health and safety permits, licenses, consents, and authorizations required by any Environmental Requirement. 22 29 "Environment" shall have the same meaning as defined under Environmental Laws. If Environmental Laws conflict, the most expansive definition is used. "Environmental Conditions" means the presence or release into the Environment of Contaminants arising out of Operations. "Environmental Costs" means any and all claims, demands, liabilities, damages, losses, expenses, fines, penalties, judgments, awards, settlements and costs (including, without limitation, legal, accounting, consulting, engineering, construction and other costs) arising out of Environmental Conditions. Environmental Costs include, without limitation, all past, current and future expenses, arising out of: (a) any pending, threatened or completed action by a Governmental Authority or any person or entity for property damage, bodily injury or personal injury; (b) any inquiry, investigation, audit, study, assessment, notice of violation, administrative complaint, summons, citation directive or judicial complaint; (c) any development of remedial or response plans; and (d) any conduct or activity in any way associated therewith. "Environmental Laws" means any applicable federal, state or local laws, statutes, codes, ordinances, rules or regulations, court order or decree, administrative order or governmental agency guidelines. "Environmental Lien" means a lien in favor of any Governmental Authority for any: (a) liability under any Environmental Requirement; or (b) damages arising from, or costs incurred by such Governmental Authority in response to a Release of a Contaminant into the Environment. "Environmental Requirement" means all Environmental Laws or EHS Permits relating to the Environment, health or safety, including, without limitation: (a) the use, handling, treatment storage, or Release of any Contaminant; and (b) workplace or worker safety and health, as authorized by any Governmental Authority. "Governmental Authority" means any federal, state or local agency, department, court or other administrative, legislative or regulatory federal, state or local governmental body, or any private individual or entity in place of such entities. "Operations" means the entire scope of activity performed or undertaken at the Trust Property, past and present, with respect to any and all Contaminants. "Release" means the actual, partial, or threatened release, spill, emission, escape, leaking, pumping, injection, deposit, discharge, dispersal, dumping, disposal, leaching, placing, production or migrating into the Environment of any Contaminant. 23 30 "Remedial Action" means actions required to: (a) clean up, remove, treat or otherwise address Contaminants in the Environment; (b) prevent or minimize the Release of Contaminants into the Environment; or (c) determine if a remedial response or corrective action is needed, design an appropriate response, compile necessary data and reports, conduct pre- and post-remedial investigation, monitoring, operation, maintenance and care. Remedial Action shall be undertaken such that the Trust Property is utilized to its maximum economic benefit. 2.20 Compliance with Americans With Disabilities Act of 1990. (a) Trustor hereby represents, covenants and warrants to Beneficiary, its successors and assigns, as follows: (i) Trustor has made and will make all modifications and/or provided and will provide all accommodations which may be required to be made or provided by Trustor pursuant to 42 U.S.C. Section 12101, et seq., and all applicable rules and regulations promulgated thereunder (the "ADA") in order to accommodate the needs and requirements of disabled persons, including, without limitation, disabled employees of Trustor and shall otherwise comply or cause compliance with all provisions of the ADA. (ii) Trustor has received no notice or complaint regarding any noncompliance with the ADA of the Trust Property or of Trustor's employment practices and, to the best of Trustor's knowledge, there has been no threatened litigation alleging any such noncompliance by Trustor or the Trust Property. (b) Trustor shall promptly provide Beneficiary with copies of all notices or claims which may be received by Trustor and involving claims made by any individual, entity or governmental agency as to any alleged noncompliance of the Trust Property or Trustor's employment practices with the requirements of the ADA. (c) Trustor shall observe and comply and shall ensure that all and other occupants of the Trust Property observe and comply in all material respects with all obligations and requirements of the ADA as it applies to the Trust Property, which shall include, without limitation, installing or constructing all improvements or alterations which may be necessary to cause the Trust Property to be accessible to all persons as and to the extent required by the ADA. (d) Without limiting the generality of any other provision of this Deed of Trust, Trustor shall indemnify, defend and hold harmless Beneficiary, its successors and assigns, and the directors, officers, employees, agents and servants of the foregoing, from any and all losses, costs, expenses (including court costs and 24 31 attorneys' fees), damages, demands, claims, suits, proceedings, orders and judgments, penalties, fines and other sanctions arising from any claim that the Trust Property or occupant thereof is not in compliance with the requirements of the ADA or that Trustor has otherwise discriminated against any disabled person in violation of the ADA. ARTICLE III ASSIGNMENT OF RENTS AND SALES PROCEEDS; SECURITY AGREEMENT 3.1 Assignment of Rents. (a) Trustor hereby absolutely assigns and transfers to Beneficiary (this "Assignment"): (i) all the right, title and interest of Trustor in and to all existing and future lease agreements, occupancy agreements and use agreements relating to the Trust Property or any part thereof (whether written or oral and whether for a definite term or month to month) (collectively "Leases"), (ii) all right and power of Trustor to amend, cancel or terminate any Leases and (iii) all Trustor's income, rents, royalties, revenues, issues, accounts, accounts receivable, profits, fees, and other proceeds (including, without limitation, room sales) from the Trust Property (collectively "Rents"). This Assignment shall extend to and cover any and all extensions and renewals of Leases and to all security for the obligations of the lessees or occupants thereunder and any and all guaranties or indemnities of or similar arrangements with respect to any such obligations. This Assignment is given to facilitate Performance of the Obligations. In pursuance of this Assignment, and not in lieu hereof, Trustor shall, to the extent this Assignment does not extend to future Leases and otherwise when requested by Beneficiary, execute and deliver to Beneficiary separate assignments of the Leases, the terms of such assignments being incorporated herein by reference. (b) Trustor hereby authorizes and directs the lessees and tenants of the Trust Property that upon written notice from Beneficiary, all payments required under the Leases, or in any way respecting same, including payments past due, shall be made directly to the Beneficiary as they become due. Trustor hereby relieves such lessees and tenants from any liability to Trustor by reason of such payments being made to Beneficiary. Nevertheless, until Beneficiary notifies in writing Trustor or such lessees and tenants that such payments are to be made to Beneficiary, Trustor shall be entitled to collect all Rents. Beneficiary is hereby authorized to give such notification upon the occurrence of an Event of Default and at any time thereafter while such Event of Default is continuing. 25 32 (c) All Rents collected by Trustor shall be applied in the following manner: FIRST, to the payment of all taxes and lien assessments levied and due and payable against the Trust Property, where provision for paying such is not otherwise made to the satisfaction of Beneficiary; SECOND, to the payment of ground rents (if any) due and payable with respect to the Trust Property; THIRD, to the payment of the Obligations due and owing to Beneficiary; FOURTH, to the payment of current operating costs and expenses (including repairs, maintenance and necessary acquisitions of property and expenditures for capital improvements) arising in connection with the Trust Property; and FIFTH, to Trustor or its designee. All Rents collected by Beneficiary may be applied to the items above listed in any manner that Beneficiary deems advisable and without regard to the aforestated priorities. Receipt by Beneficiary of the Rents shall not constitute a waiver of any right that Beneficiary may enjoy under this Deed of Trust or under applicable law; nor shall the receipt and application thereof cure any default hereunder, or invalidate or affect any act done in connection with such default, including without limitation, any foreclosure proceeding or any foreclosure sale authorized by this Deed of Trust and applicable law. Beneficiary does not assume any obligation of the lessor under any of the Leases, and no liability shall attach to Beneficiary for failure or inability to collect any Rents. Trustor shall (i) timely fulfill or perform each and every term, covenant and provision of each Lease to be fulfilled or performed by the lessor thereunder; (ii) give prompt notice to Beneficiary of each notice under the Leases received by Trustor, together with a complete copy of such notice; and (iii) enforce, short of termination thereof, the Performance of each and every term, covenant and provision of each Lease. Trustor, without first obtaining the prior written consent of Beneficiary, will not: accept Rent payments for more than one month in advance; cancel, modify, renew, accept the surrender of, or consent to the subordination of, any Lease; or in any way release or impair Beneficiary's right to proceed against (A) any security for the payment and performance of the obligations of the lessees under the Leases or of any guarantors or sureties of any such obligations, or (B) any person primarily or secondarily liable for the payment and performance of such obligations. 26 33 (d) This Assignment is not a delegation of Trustor's duties under the Leases and does not operate to make Beneficiary a mortgagee in possession or place upon Beneficiary responsibility for the control, care, management or repair of the Trust Property or for the performance of any of the terms and conditions of any of the assigned Leases nor does this Assignment operate to make Beneficiary responsible or liable for (i) any waste committed on the Trust Property by the tenants or any other person, (ii) any dangerous or defective condition of the Trust Property or (iii) any negligence in the management, upkeep, repair or control of the Trust Property resulting in loss, injury or death to any tenant, invitee, licensee, employee or stranger. Without limiting the generality of any other provision of this Deed of Trust, TRUSTOR SHALL AND DOES HEREBY AGREE TO INDEMNIFY AND TO HOLD BENEFICIARY HARMLESS from and against any and all liability, loss or damage which may or might be incurred by reason of this Assignment unless caused by Beneficiary's gross negligence or willful misconduct. Should Beneficiary incur any liability by reason of this Assignment or in defense of any claim or demand for loss or damage as provided above, the amount thereof and all related costs and expenses, including, without limitation, attorneys' fees, together with interest thereon at the Overdue Rate from the date paid by Beneficiary until repaid by Trustor, shall be secured hereby and Trustor shall reimburse Beneficiary therefor immediately upon demand. (e) Trustor represents and warrants that: (i) Trustor is the owner of the landlord's interest in the Leases, if any, with full power and authority to assign the same together with the Rents; (ii) there are no outstanding assignments or pledges of the Leases or Rents; (iii) Trustor has not accepted the payment of any Rents for more than one (1) month in advance; and (iv) there are no defaults now existing under any of the Leases and there exists no state of facts which, with the giving of notice or lapse of time or both, would constitute a default under any of the Leases. 3.2 Security Agreement. (a) To the extent any of the Trust Property is property covered by the Uniform Commercial Code ("UCC Property"), this Deed of Trust constitutes a security agreement and Trustor hereby grants to Beneficiary, as secured party, a security interest in the Trust Property and the proceeds thereof in favor of Beneficiary for the purpose of securing Performance of the Obligations. This security interest shall be self-operative with respect to the UCC Property, but Trustor shall execute and deliver on demand such security agreements, financing statements and other instruments as Beneficiary may request in order to impose and/or perfect the lien and security interest hereof more specifically upon any of the UCC Property. Should the lien and/or security interest of this Deed of Trust on any UCC Property be subject to a prior security agreement covering such UCC Property, then upon the occurrence of an Event of Default, all the right, title and interest of Trustor in and to any and all 27 34 deposits made in connection with the transaction whereby such prior security agreement was made are hereby assigned to Beneficiary, together with the benefit of any payments now or hereafter made in connection with such transactions. (b) The UCC Property is used primarily for business (other than farm) purposes. (c) Trustor shall replace or cause to be replaced with property of equal or greater value all portions or items of UCC Property which are consumed or worn out in ordinary usage. Trustor may sell or dispose of only that part of the UCC Property that it is obliged to replace and has replaced; and, unless Beneficiary then agrees otherwise in writing, all proceeds from any such sale or disposition in excess of the amount expended for such replacements shall promptly be paid over by Trustor to be applied against the indebtedness secured hereby, whether or not such indebtedness is then due and payable. The foregoing notwithstanding, Trustor may sell or dispose and not replace UCC Property which in the aggregate, after taking into account all other items of UCC Property that have been sold or disposed and not replaced, is not of a material value and is not material to or necessary for the continued operation of the Premises for the purposes for which it is intended; provided, however, that unless Beneficiary then agrees otherwise in writing, all proceeds from such sale or disposition shall be promptly paid over by Trustor to be applied against the indebtedness secured hereby, whether or not such indebtedness is then due and payable. (d) Trustor warrants that its chief executive office and principal place of business is as set forth at the beginning of this Deed of Trust. Trustor further warrants that the UCC Property is located at the Premises. Trustor shall immediately notify Beneficiary in writing of any change in its principal place of business/chief executive office/residence, as the case may be, and of any change in location of the UCC Property not removed or replaced as permitted or required by the terms of this Deed of Trust. (e) All covenants of Trustor contained in this Deed of Trust, whether or not expressly referred to herein, shall apply to the UCC Property to the extent applicable to the UCC Property. The covenants and warranties of Trustor and the rights and remedies of Beneficiary contained in this Section 3.2 are in addition to, and not in limitation of, those contained in the other provisions of the Deed of Trust. (f) This Deed of Trust shall be deemed a financing statement filed as a fixture filing; provided the filing of any other financing statement relating to the UCC Property shall not be construed to diminish any of Beneficiary's rights or priorities hereunder. 28 35 3.3 Servicing Agent. Beneficiary may, at its option, require that so long as Beneficiary is entitled to collect such payments, all payments on the Leases be collected by a servicing agent according to the terms of a servicing agreement in form and substance satisfactory to Beneficiary. Trustor shall promptly pay all costs in connection therewith. 3.4 Power of Attorney. Upon and during the continuance of an Event of Default, Beneficiary shall have the right, but not the obligation: (a) to demand and receive payment and performance and to enforce any and all of Trustor's rights with respect to the Leases and the personal property covered hereby; (b) to exercise any right and to perform any obligation of Trustor under or in connection with the Project Documents, the Leases and any other instrument covered hereby, at Trustor's expense; (c) with respect to rights to payment and performance assigned hereunder, while an Event of Default exists, to make extension agreements, release persons liable thereon or securities for payment or other performance, and settle and compromise disputes in connection with those rights; (d) while an Event of Default exists, to modify, cancel, or accept the surrender of the terms of any Lease; (e) to take any action Beneficiary may deem necessary or desirable to perfect the assignments and the security interest made and granted to Beneficiary hereunder; and (f) to perform all these acts in the name of Trustor or in the name of Beneficiary with the same force and effect as if performed by Beneficiary in the absence of this provision. For all of the foregoing purposes, Trustor irrevocably appoints Beneficiary, until Performance of the Obligations, as its attorney-in-fact. All such actions may be taken without notice to Trustor and without being called to account therefor by Trustor. 3.5 Relationship. Nothing in this instrument shall be construed to obligate Beneficiary to discharge or perform the duties of Trustor under the Project Documents, the Leases or any other instrument or of a landlord to a tenant or to impose any liability as a result of the exercise of the right to collect rents or proceeds under a Lease; nor shall Beneficiary be responsible or liable in any manner with respect to the Trust Property or the use, occupancy or enjoyment of all or any part thereof. Nothing herein shall be construed as establishing a partnership or joint venture between Trustor and Beneficiary. ARTICLE IV DEFAULTS AND REMEDIES 4.1 Events of Default and Remedies. The following events and occurrences shall constitute an event of default ("Event of Default") under this Deed of Trust: (a) other than a default or violation referred to elsewhere in this Section 4.1, an "Event of Default" as defined in the Loan Agreement occurs, or an act or event occurs under the Loan Agreement, whether or not denominated as an "Event of Default", which expressly entitles Beneficiary to accelerate Performance of any of the Obligations and/or exercise its remedies; 29 36 (b) there is a default in the Performance of any of the terms of Section 2.3 or Section 2.5(a) hereof or Trustor knowingly violates or suffers or permits the violation of any of the warranties or conditions of the policies of insurance required under Section 2.3; (c) any party holding a mortgagee's or beneficiary's interest under a mortgage or deed of trust or any other lien or security interest on any part of the Trust Property commences foreclosure or sale thereof; or (d) Trustor vacates or abandons the Trust Property. 4.2 Remedies. At any time after an Event of Default has occurred, to the extent not prohibited by the applicable law: (a) Beneficiary may without further demand, protest or notice of any kind to Trustor, declare all indebtedness secured hereby to be due and payable immediately, and upon such declaration the same shall be immediately due and payable, together with applicable premiums, and collectible by an action at law; and/or (b) Beneficiary may commence proceedings for the complete or partial foreclosure of this Deed of Trust by commencing an action to foreclose this Deed of Trust as a mortgage and/or deed of trust and/or cause Trustee to exercise the power of sale herein granted; and/or (c) Trustee and/or Beneficiary may without regard to the adequacy of any security for the Performance of the Obligations, personally, or by any of its and/or their agents or employees, or by a receiver appointed by a court of competent jurisdiction, enter into and upon all or any part of the Trust Property and may exclude Trustor, its agents and servants therefrom; and having and holding the same, may in its and/or their own name(s) or the name of Trustor, as it/they deems best, control, lease, manage and operate the Trust Property, conduct the business thereof, and exercise all rights and powers of Trustor with respect thereto, including, without limitation, the Leases, either personally or by its agents, employees or receivers; and upon every such entry, Trustee and/or Beneficiary at the expense of Trustor, from time to time, either by purchase, repair or construction, may maintain, restore and insure the Trust Property; and likewise, from time to time, at the expense of Trustor, Trustee and/or Beneficiary may make all necessary or proper repairs, renewals and replacements and such useful alterations, additions, betterments and improvements thereto and thereon as to it may seem advisable; and Trustee and/or Beneficiary shall be entitled to collect and receive all Rents and to apply them in the manner Beneficiary is entitled to apply them pursuant to Section 3.1 hereof; and/or 30 37 (d) Beneficiary shall be entitled, as a matter of right, to the appointment of a receiver of the Trust Property and the court may appoint a receiver, either before or after judgment, without notice and without regard to the solvency or insolvency of Trustor or any Guarantor (as defined in the Loan Agreement) at the time of the application for such receiver and without regard to the then value of the Trust Property or any other security held for Performance of the Obligations; and such receiver shall have full power and authority to collect the Rents and all other powers necessary or incidental for the protection, possession, control, management and operation of the Trust Property, at the expense of the Trust Property and of Trustor, to maintain, restore and insure the Trust Property, and to pay all taxes, assessments and other charges arising in connection therewith; and/or (e) Trustee and/or Beneficiary may take such steps to protect and enforce its rights whether by action, suit or proceeding in equity or at law for the specific performance of any covenant, condition or agreement in this Deed of Trust or any of the other Loan Documents, or in aid of the execution of any power herein expressly or impliedly granted, or for any foreclosure hereunder or for the enforcement of any other appropriate legal or equitable remedy, or otherwise as Beneficiary shall elect; and/or (f) Trustee and/or Beneficiary may take possession of the personal property covered hereby and may enter and remain upon the Trust Property to protect the personal property; and upon written notice from Trustee and/or Beneficiary, Trustor shall assemble the personal property and make it available to Beneficiary at the Trust Property or at any other place designated in the notice, which shall be reasonably convenient to both parties; and/or (g) all of the Trust Property (both realty and personalty) is encumbered as one unit, and all the Trust Property, at Beneficiary's option, may be foreclosed or sold in the same proceeding or in separate proceedings; and all of the Trust Property (both realty and personalty) may, at Beneficiary's option, be sold as such in one unit as a going business; and/or (h) Beneficiary may exercise the "declarant's," "developer's" and "owner's" rights under the Project Documents (it being agreed and understood that such right is reserved to the Trustor other than upon the occurrence of and during the continuance of an Event of Default); and/or (i) Trustee and/or Beneficiary may assert such other rights and remedies as they may have hereunder or under any of the other Loan Documents, at law, in equity or by statute, including those of a secured party and of a mortgagee and/or trust deed beneficiary. 31 38 4.3 Power of Sale. Should Beneficiary elect to foreclose by exercise of the power of sale herein granted, Beneficiary will deposit with Trustee such items as Trustee may require. After such notice(s) of default and sale and other notices have been given as then required by law, and after lapse of such time as may then be required by law after such events, Trustee, without demand on Trustor, shall sell the Trust Property at the time and place of sale fixed by it in such notice of sale, either as a whole or in separate parcels, and in such order as it may determine, at public auction to the highest bidder for cash in lawful money of the United States payable at the time of sale, or to the extent not prohibited by law upon such other terms and conditions as are acceptable to Trustee and Beneficiary. Trustee may postpone sale of all or any portion of the Trust Property by public announcement at such time and place of sale, and from time to time thereafter may postpone such sale by public announcement at the time fixed by the preceding postponement. If Trustee is directed by Beneficiary to foreclose pursuant to a nonjudicial foreclosure sale, Trustee shall sell the Trust Property, or any part thereof, after having first given notice of the time, place and terms of sale as required by Section 89-1-55 of the Mississippi Code of 1972, as amended. If the Trust Property is situated in two or more counties or in two judicial districts of the same county or different counties, Trustee shall have full power to select in which county or judicial district the sale of all of any part of the Trust Property shall be made. Trustee shall have authority to fix the day, hour, terms and place of sale and may conduct any sale personally or through an agent whose appointment need not be recorded. Trustor waives any provision of law which restricts or limits the right of Trustee to offer more than 160 acres at one time, regardless of the manner in which the Trust Property may be described. In the event any portion of the Trust Property is subject to the provisions of the Uniform Commercial Code, Trustee shall have the same authority, rights and obligation with respect to such property as to all other Trust Property, or Beneficiary may proceed directly with respect to the Trust Property subject to the provisions of the Uniform Commercial Code. In the event Beneficiary directs Trustee to sell that portion of the Trust Property which is subject to the Uniform Commercial Code, Trustee may elect to sell such property separately subject to the provisions of the Uniform Commercial Code, or Trustee may sell all Trust Property pursuant to the provisions relating to sales of real property. Trustee may sell real and personal property separately or coordinate sales in any manner deemed advisable by Beneficiary. The recitals in any deed executed pursuant to this power of sale of any matters or facts shall be conclusive proof of the truthfulness thereof. From time to time before Trustee's sale pursuant to this Section 4.3, Beneficiary may rescind any notice of breach or default and of election to cause the Trust Property to be sold by executing and delivering to Trustee a written notice of such rescission, which notice, shall also constitute a cancellation of any prior declaration of default and demand for sale. The exercise by Beneficiary of such right of rescission shall not constitute a waiver of any breach or default then existing or subsequently occurring; impair the right of Beneficiary to execute and deliver to Trustee, as above provided, other declarations of default and demands for sale, and notices of breach or default, and of election to cause the Trust Property to be sold to satisfy the Obligations; or otherwise affect any provision, covenant or condition of the Note and/or of this Deed of Trust 32 39 and/or of any of the other Documents or any of the rights, obligations or remedies of the parties thereunder or hereunder. 4.4 Rights, Powers and Remedies Cumulative; Waiver. (a) Each and every power and remedy in this Deed of Trust specifically given to Beneficiary shall be cumulative and shall be in addition to every other power and remedy specifically given in the Loan Documents or now or hereafter existing at law, in equity, or by statute. Each and every such power and remedy may be exercised from time to time and as often and in such order as may be deemed expedient by Beneficiary; and the exercise or the beginning of the exercise of any power or remedy shall not be construed to be a waiver of the right to exercise at the same time or thereafter any other power or remedy. No delay or omission by Beneficiary in the exercise of any right or power or in the pursuit of any remedy accruing upon the occurrence of any Event of Default shall impair any such right, power or remedy or be construed to be a waiver thereof or of any such Event of Default or to be any acquiescence therein; nor shall the acceptance by Beneficiary of any security or any payment on or performance of any of the other Obligations, though made after default, be deemed a waiver of any right to take advantage of any future Event of Default or of any past Event of Default not completely cured thereby. (b) Whenever by the terms of this Deed of Trust or any other Document Beneficiary is given any option, such option may be exercised when the right accrues or at any time thereafter; provided, however, that in the event such option is exercisable upon the occurrence of an Event of Default, such option may be exercised only during the continuance of such Event of Default. (c) Any failure by Beneficiary to insist upon the strict performance by Trustor of any of the terms and provisions hereof shall not be deemed to be a waiver of any of the terms and provisions hereof, and Beneficiary, notwithstanding any such failure, shall have the right thereafter to insist upon the strict performance by Trustor of any and all of the terms and provisions of this Deed of Trust to be performed by Trustor. Neither Trustor nor any other person now or hereafter obligated for the Performance of the whole or any part of the Obligations shall be relieved of such Obligation (i) by reason of the failure of Trustee or Beneficiary to comply with any request of Trustor or of any other person so obligated to take action to foreclose this Deed of Trust or otherwise enforce any of the provisions of this Deed of Trust or any other Document or any other Obligation, or (ii) by reason of the release, regardless of consideration, of the whole or any part of the security held for the Performance of the Obligations of any person primarily or secondarily liable for the Performance of the Obligations, or (iii) by reason of the failure to join any person in a foreclosure proceeding, or (iv) by reason of any transfer of the Trust Property or any part thereof by Trustor or any subsequent owner of the Trust Property, or (v) by 33 40 reason of any agreements or stipulations between any subsequent owner or owners of the Trust Property, or any part thereof, and Beneficiary with reference to the Trust Property, this Deed of Trust or any of the other Loan Documents, including, without limitation, any agreements or stipulations extending the time of payment or modifying the terms of the Obligations or this Deed of Trust without first having obtained the consent of Trustor or such other person; and in the last event, Trustor and all such other persons shall continue to be liable hereunder and under the other Loan Documents according to such agreements or stipulations unless expressly released and discharged in writing by Beneficiary. Any such action may be taken without the consent of any junior lienholder and without impairing or affecting the lien of this Deed of Trust or the priority of such lien over any subordinate lien; and Beneficiary may resort for the Performance of the Obligations to its several securities therefor in such order and manner as Beneficiary may elect. 4.5 Power of Attorney. Beneficiary is hereby irrevocably appointed the true and lawful attorney-in-fact of Trustor, in its name and stead, to make all necessary conveyances, assignments, transfers and deliveries of the Trust Property sold pursuant to this Article IV; and for that purpose, Beneficiary may execute all necessary instruments of conveyance, assignment and transfer, and may substitute one or more persons with like power, Trustor hereby ratifying and confirming all that its attorney or such substitute or substitutes shall lawfully do by virtue hereof. Nevertheless, if so requested by Beneficiary, Trustor shall ratify and confirm any such sale or sales by executing and delivering to Trustee or to such purchaser or purchasers all such instruments as may be advisable, in the judgment of Beneficiary, for that purpose and are designated in such request. Any such sale or sales made under or by virtue of this Article IV whether made under the power of sale granted in this Deed of Trust or under or by virtue of judicial proceedings or of a judgment or decree of foreclosure and sale, shall operate to divest all the estate, right, title, interest, claim and demand whatsoever, whether at law or in equity, of Trustor in and to the Trust Property and rights so sold, and shall be a perpetual bar both at law and in equity against Trustor and against any and all persons claiming or who may claim the same, or any part thereof from, through or under Trustor. 4.6 Beneficiary's Right to Bid and Purchase. Upon any sale made under or by virtue of this Article IV, including, without limitation, made under the power of sale herein granted or under or by virtue of judicial proceedings or of a judgment or decree of foreclosure and sale, any person, including, without limitation, Beneficiary, its agents or employees may bid for and acquire the Trust Property or any part thereof. If Beneficiary's bid is successful, Beneficiary, in lieu of paying cash for the Trust Property covered thereby, may make settlement for the purchase price by crediting upon the indebtedness secured hereby, in such order as Beneficiary may determine, the net sales price after deducting therefrom the expenses of the sale and the costs of the action and any other sums which Beneficiary is authorized to deduct under this Deed of Trust. 34 41 4.7 Application of Proceeds of Sale. To the extent not prohibited by the applicable law, the purchase money and other proceeds of any sale made under or by virtue of this Article IV, together with any other sums which then may be held by Beneficiary under this Deed of Trust as part of the Trust Property or the proceeds thereof, whether under the provisions of this Deed of Trust or otherwise, shall be applied as follows: FIRST, to the payment of the costs and expenses of such sale, including reasonable compensation to Trustee and Beneficiary, their agents and attorneys, and the expenses of any judicial proceedings wherein the same may be made, and of all advances made hereunder or under any other Loan Documents securing the Performance of the Obligations (together with interest on all such advances at the Overdue Rate from the date of advance until received by Beneficiary or Trustee), as the case may be, and to the payment of all taxes, assessments or liens prior to the lien of this Deed of Trust, except any taxes, assessments, liens or other charges, subject to which the Trust Property shall have been sold; SECOND, to the payment of the whole amount then due, owing and unpaid upon the Note, including premium, if any; THIRD, to the payment of any other Obligations; and FOURTH, to the payment of the surplus, if any, to Trustor, its successors or assigns, or to whosoever may be lawfully entitled to receive the same upon its written request, or as any court of competent jurisdiction may direct. 4.8 Right to Recover Judgment. To the extent permitted by the applicable law, Beneficiary shall be entitled to recover judgment on the Note either before or after or during the pendency of any proceedings for the enforcement of the provisions of this Deed of Trust; and the right of Beneficiary to recover such judgment shall not be affected by any entry or sale hereunder, or by the exercise of any other right, power or remedy for the enforcement of the provisions of this Deed of Trust, or the foreclosure of the lien hereof. In the event of a sale of the Trust Property and of the application of the proceeds of sale, as herein provided, to the payment of the Obligations, Beneficiary shall be entitled to enforce payment of and to receive all amounts then remaining due and unpaid upon the Note, and to enforce payment of all other charges, payments and costs due under this Deed of Trust and the other Loan Documents; and shall be entitled to recover judgment for any portion of the Obligations remaining unpaid, with interest at the Overdue Rate from the date of entry of such judgment to the date that payment is actually received by Beneficiary from Trustor. 4.9 Certain Assurances. Trustor shall not at any time insist upon, or plead, or in any manner whatever claim or take any benefit or advantage of any stay or extension or moratorium law, any homestead law or any exemption from execution or sale of the Trust Property or any part thereof, now or at any time hereafter in force, which may 35 42 affect the covenants and terms of performance of this Deed of Trust or Trustor shall not claim, take or insist upon any benefit or advantage of any law now or hereafter in force providing for the valuation or appraisal of the Trust Property, or any part thereof, prior to any sale or sales thereof which may be made pursuant to any provision herein, or pursuant to the decree, judgment or order of any court of competent jurisdiction; or, after any such sale or sales, claim or exercise any right under any statute heretofore or hereafter enacted to redeem the property so sold or any part thereof. Trustor hereby expressly waives to the extent not prohibited by law all benefit or advantage of any such law or laws, and covenants not to hinder, delay or impede the execution of any power herein granted or delegated to Trustee and/or Beneficiary, but to suffer and permit the execution of every power as though no such law or laws had been made or enacted. Trustor, for itself and all who may claim under it, waives, to the extent that they lawfully may, all right to have the Trust Property marshalled upon any foreclosure hereof. 4.10 Expenses. Trustor shall pay all costs, charges and expenses, including attorneys' fees and court costs, which Trustee and/or Beneficiary may incur in collecting any sum secured hereby or in exercising any of the remedies hereunder; and all such costs and expenses shall be secured by this Deed of Trust and, without notice or demand, be payable by Trustor to Beneficiary, as the case may be, with interest at the Overdue Rate from the date of advance until received by Beneficiary from Trustor. 4.11 Trustor Tenant at Will After Sale. Trustor agrees that after any sale hereunder, Trustor and/or all parties occupying the Trust Property, or any part thereof, shall, at the option of the purchaser(s) at such sale, be mere tenants at the will and sufferance of the purchaser(s) at such sale or sales, and that such purchaser(s) shall be entitled to immediate possession thereof, and that if Trustor or any such tenant or tenants fail to vacate the Trust Property, or any part thereof immediately at such purchaser's request, such purchaser(s) may, and shall have the right to, file or institute an action in forcible entry and detainer or institute or maintain any other action or suit or exercise any other rights or remedies given landlords under any statute or law. Notwithstanding the above, however, at the option of any purchaser at such sale, any tenant leases covering the Trust Property or any part thereof in effect at the time of such sale shall remain in full force and effect and such purchaser(s) shall automatically become the "landlord" thereunder with all rights and obligations accruing to the landlord thereunder. ARTICLE V MISCELLANEOUS 5.1 Beneficiary's Account. All moneys payable hereunder or under the other Loan Documents shall be paid to Beneficiary in Phoenix, Arizona, at its address first above mentioned, unless otherwise designated by Beneficiary by notice. 36 43 5.2 Modification. This Deed of Trust, the Loan Agreement and the Loan Documents exclusively and completely state the rights of Beneficiary and Trustor with respect to the Trust Property. No modification, variation, termination, discharge or abandonment hereof and no waiver of any of the provisions or conditions hereof shall be valid unless in writing and signed by duly authorized representatives of Beneficiary and Trustor or the successors, transferees or assigns of either, subject, however, to the limitations herein on Trustor with respect to assignment, merger and consolidation. This Deed of Trust supersedes any and all prior representations, warranties and/or inducements, written or oral, heretofore made by Beneficiary (other than in the other Loan Documents) concerning this transaction, which are null and void and of no force or effect whatsoever. 5.3 Powers Coupled With an Interest. The powers and agency hereby granted by Trustor are coupled with an interest and are irrevocable until Performance of the Obligations and are granted as cumulative to Beneficiary's other remedies for the enforcement of Performance of the Obligations. 5.4 Counterparts. This Deed of Trust may be executed simultaneously in any number of identical copies, any number of which having been executed by all parties hereto shall constitute an original for all purposes. 5.5 Notice. Any notice required or permitted to be given hereunder shall be given in the manner set forth in the Loan Agreement. Notwithstanding anything herein to the contrary, if any notice given to Trustor by Trustee or Beneficiary is given in the manner permitted or required by a statute of the State where the Premises are located, such notice shall be deemed to have been effectively given regardless of whether notice has been given in the manner required by the Loan Agreement. 5.6 Binding Effect. This Deed of Trust shall inure to the benefit of and be binding upon Beneficiary and Trustor, and, subject to the provisions of Section 2.5, their heirs, legatees, devisees, personal representatives, administrators, executors, successors and assigns. The term "Trustor" shall mean both the original Trustor and any subsequent owner or owners of any of the Trust Property. The term "Beneficiary" shall mean the owner and holder, including pledgees, of the Note, whether or not named as Beneficiary herein. Whenever in this Deed of Trust reference is made to "Trustee", it shall be construed to mean the trustee or trustees for the time being, whether original or successors or successor in the trust; and that all title, estate, rights, powers, trusts and duties hereunder given or appertaining to or devolving upon the trustee if more than one, shall be in each Trustee so that any action hereunder or purporting to be hereunder of any one of the original or any successor trustee shall for all purposes be considered to be as effective as the action of every trustee. 5.7 Severability. If any one or more of the provisions contained in this Deed of Trust shall be held invalid, illegal or unenforceable in any respect, the validity, 37 44 legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby; provided that where the provisions of any invalidating law may be waived, they are hereby waived by Trustor to the fullest extent possible. 5.8 Interpretation. All headings are inserted for convenience only and shall not affect any construction or interpretation of this Deed of Trust. The provisions of this Deed of Trust shall apply to the parties according to the context hereof and without regard to the number or gender of words and expressions used herein. Unless otherwise indicated, all references herein to clauses and other subdivisions refer to the corresponding sections, paragraphs, clauses and other subdivisions of this Deed of Trust; the words "herein", "hereof", "hereto", "hereunder" and words of similar import refer to this Deed of Trust as a whole and not to any particular section, paragraph, clause or other subdivision hereof; and reference to a numbered or lettered subdivision of an Article, section or paragraph shall include relevant matter within the Article, section or paragraph which is applicable to but not within such numbered or lettered subdivision. 5.9 CHOICE OF LAW. THIS DEED OF TRUST HAS BEEN DELIVERED IN PHOENIX, ARIZONA. THE PROVISIONS OF THIS DEED OF TRUST AND ALL RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF ARIZONA AND, TO THE EXTENT THEY PREEMPT SUCH LAWS, THE LAWS OF THE UNITED STATES. HOWEVER, THE INTERNAL LAWS OF THE STATE WHERE THE PREMISES ARE LOCATED SHALL APPLY TO THE APPOINTMENT OF TRUSTEES, TO THE CREATION OF LIENS AND TO ANY FORECLOSURE, FORECLOSURE SALE, APPOINTMENT OF A RECEIVER OR OTHER REMEDY WITH RESPECT TO THAT PORTION OF THE TRUST PROPERTY CONSISTING OF REAL PROPERTY. 5.10 JURISDICTION AND VENUE. TRUSTOR AND TRUSTEE HEREBY AGREE THAT ALL ACTIONS OR PROCEEDINGS INITIATED BY TRUSTOR AND ARISING DIRECTLY OR INDIRECTLY OUT OF THE LOAN DOCUMENTS SHALL BE LITIGATED IN THE SUPERIOR COURT OF ARIZONA, MARICOPA COUNTY DIVISION, OR THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA OR, IF BENEFICIARY INITIATES SUCH ACTION, IN ADDITION TO THE FOREGOING COURTS ANY COURT IN WHICH BENEFICIARY SHALL INITIATE SUCH ACTION, TO THE EXTENT SUCH COURT HAS JURISDICTION. TRUSTOR AND TRUSTEE HEREBY EXPRESSLY SUBMIT AND CONSENT IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED BY TRUSTOR OR BENEFICIARY IN ANY OF SUCH COURTS. TRUSTOR AND TRUSTEE WAIVE ANY CLAIM THAT PHOENIX, ARIZONA OR THE DISTRICT OF ARIZONA IS AN INCONVENIENT FORUM OR AN IMPROPER FORUM BASED ON LACK OF VENUE. THE 38 45 EXCLUSIVE CHOICE OF FORUM FOR TRUSTOR SET FORTH IN THIS SECTION SHALL NOT BE DEEMED TO PRECLUDE THE ENFORCEMENT BY BENEFICIARY OF ANY JUDGMENT OBTAINED IN ANY OTHER FORUM OR THE TAKING, BY BENEFICIARY, OF ANY ACTION TO ENFORCE THE SAME IN ANY OTHER APPROPRIATE JURISDICTION, AND TRUSTOR HEREBY WAIVES THE RIGHT TO COLLATERALLY ATTACK ANY SUCH JUDGMENT OR ACTION. 5.11 WAIVER OF RIGHT TO JURY TRIAL. BENEFICIARY AND TRUSTOR ACKNOWLEDGE AND AGREE THAT ANY CONTROVERSY WHICH MAY ARISE UNDER ANY OF THE LOAN DOCUMENTS OR WITH RESPECT TO THE TRANSACTION CONTEMPLATED THEREBY WOULD BE BASED UPON DIFFICULT AND COMPLEX ISSUES AND, THEREFORE, THE PARTIES AGREE THAT ANY LAWSUIT ARISING OUT OF ANY SUCH CONTROVERSY SHALL BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY. Initials ______ 5.12 Acceptance by Trustee. Trustee accepts this trust when this Deed of Trust, duly executed and acknowledged, is made a public record. 5.13 Protection of Trustee. At any time, or from time to time, without liability therefor and without notice, upon written request of Beneficiary and without affecting the personal liability of any person for payment of the indebtedness secured hereby or the effect of this Deed of Trust upon the remainder of the Trust Property, Trustee and Beneficiary may: reconvey any part of the Trust Property; consent in writing to the making of any map or plat thereof; join in granting any easement thereon; or join in any extension agreement or any agreement subordinating the lien or charge hereof. Trustee shall be protected in acting upon any notice, request, consent, demand, statement, note or other paper or document believed by it to be genuine and to have been signed by the party purporting to sign such document. Trustee shall not be liable for any error of judgment, nor for any act done or step taken or omitted, nor for any mistake of law or fact, nor for anything which it may do or refrain from doing in good faith. Trustee shall have no accountability under this Deed of Trust except for its own individual willful default or gross negligence. Any necessity of Trustee herein named, or any successor in trust, making oath or giving bond, is expressly waived. 5.14 Substitution of Trustee. Beneficiary shall be entitled to remove, substitute, or add a Trustee or Trustees, at its sole option, with or without cause or notice, by instrument duly executed, acknowledged and recorded among the land records in the jurisdictions where this Deed of Trust is recorded, subject to the laws of the applicable jurisdiction. Thereupon such additional or successor Trustee or Trustees, without further act, 39 46 deed or conveyance, shall become vested with all estates, property, title rights, powers, privileges, discretions, trusts, duties and obligations of his or their co-trustee, or predecessors in the trust hereunder with like effect as if originally named as Trustee or Trustees hereunder. Exercise of the power to substitute Trustees, no matter how often, shall not be an exhaustion thereof. 5.15 Reconveyance by Trustee. Upon (a) written request of Beneficiary stating that all sums secured hereby have been paid, (b) surrender to Trustee of this Deed of Trust and the Note for cancellation and retention and (c) payment of its fees, Trustee shall reconvey, without warranty, the Trust Property then held hereunder. The recitals in such reconveyance of any matters or facts shall be conclusive proof of the truthfulness thereof. The grantee in such reconveyance may be described as "the person or persons legally entitled thereto." 5.16 Subrogation of Beneficiary. Beneficiary shall be subrogated for further security to the lien, although released of record, of any and all encumbrances paid out of the proceeds of the loan secured by this Deed of Trust. 5.17 Trustor's Certification. Trustor, upon written request of Beneficiary made in the manner provided herein for the giving of notices, will certify in writing to Beneficiary or to any proposed assignee of the Obligations within seven (7) days after receiving such request, the amount then owing on the Note, the amount of any other Obligations then owing to Trustor's knowledge, and whether any off-sets or defenses exist against the Obligations or against this Deed of Trust or any other Loan Documents. In the event Trustor fails to return such certification to Beneficiary within the period stated, then the amount owing on the Note and the amount of any other Obligations then owing to Beneficiary, as stated in Beneficiary's request, shall be deemed accurate and correct, and Trustor shall thereby have waived and released any rights of offset or other defenses which might exist against the Obligations or against this Deed of Trust or any other Loan Documents. 5.18 Limitation in Interest. It is the intent of Trustor and Beneficiary to comply with the usury law ("Applicable Usury Law") which is applicable pursuant to the terms of Section 5.9 hereof or which is applicable if the law chosen by the parties is not. Accordingly, it is agreed that notwithstanding any provisions to the contrary in this Deed of Trust or in any of the other Loan Documents, in no event shall this Deed of Trust or the other Loan Documents require the payment or permit the collection of interest in excess of the maximum contract rate permitted by the Applicable Usury Law. If (a) any such excess of interest otherwise would be contracted for, charged or received from Trustor or otherwise in connection with the Obligations, (b) the maturity of the Obligations is accelerated in whole or in part, or (c) all or part of the principal or interest of the Obligations shall be prepaid, so that under any of such circumstances the amount of interest contracted for, charged or received in connection with the Obligations would exceed the maximum contract rate 40 47 permitted by the Applicable Usury Law, then in any such event (1) the provisions of this Section 5.18 shall govern and control, (2) neither Trustor nor any other person or entity now or hereafter liable for the payment hereof will be obligated to pay the amount of such interest to the extent that it is in excess of the maximum contract rate permitted by the Applicable Usury Law, (3) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal amount of the Obligations to Trustor or refunded to Trustor, at Beneficiary's option, and (4) the effective rate of interest will be automatically reduced to the maximum contract rate permitted by the Applicable Usury Law. It is further agreed, without limiting the generality of the foregoing, that to the extent permitted by the Applicable Usury Law: (x) all calculations of the rate of interest which are made for the purpose of determining whether such rate would exceed the maximum contract rate permitted by the Applicable Usury Law shall be made by amortizing, prorating, allocating and spreading during the period of the full stated term of the Obligations, all interest at any time contracted for, charged or received from Trustor or otherwise in connection with the Obligations; and (y) in the event that the effective rate of interest on the Obligations should at any time exceed the maximum contract rate permitted by the Applicable Usury Law, such excess interest that would otherwise have been collected had there been no ceiling imposed by the Applicable Usury Law shall be paid to Beneficiary from time to time, if and when the effective interest rate on the Obligations otherwise falls below the maximum contract rate permitted by the Applicable Usury Law, to the extent that interest paid to the date of calculation does not exceed the maximum contract rate permitted by the Applicable Usury Law, until the entire amount of interest which would have otherwise been collected to such date of calculation had there been no ceiling imposed by the Applicable Usury Law has been paid in full. Trustor further agrees that should the maximum contract rate permitted by the Applicable Usury Law be increased at any time hereafter because of a change in the law, then to the extent not prohibited by the Applicable Usury Law, such increases shall apply to all Obligations regardless of when incurred; but, again to the extent not prohibited by Applicable Usury Law, should the maximum contract rate permitted by the Applicable Usury Law be decreased because of a change in the law, such decreases shall not apply to the Obligations regardless if arising from an advance of the Loan after the effective date of such decrease. 5.19 Time of Essence. Time is of the essence in the Performance of the Obligations by Trustor. 5.20 Address. Trustor requests that a copy of any Notice of Default and a copy of any Notice of Sale hereunder be mailed to Trustor at its mailing address set forth in the introductory paragraph to this Deed of Trust. 5.21 Beneficiary's Discretion. Unless otherwise specified herein, whenever Beneficiary must exercise its discretion under the Loan Documents or give or withhold its consent under the Loan Documents, such discretion or consent may be exercised, given or withheld in Beneficiary's sole and absolute discretion except as otherwise set forth in the Loan Documents to the contrary. 41 48 ARTICLE VI SPECIAL PROVISIONS 6.1 Variable Rate. The Note contains the following language with respect to fluctuations in the rate of interest payable thereunder: Interest shall accrue initially at an annual interest rate ("Initial Interest Rate") equal to Prime (as hereinafter defined) in effect on the date of the initial advance of the loan evidenced by this Note ("Initial Prime") plus 2.250% per annum, subject to adjustment on each Interest Rate Change Date (as hereinafter defined), but in no event to exceed the maximum contract rate permitted under the Applicable Usury Law (as hereinafter defined). The interest rate shall change on each Interest Rate Change Date by adding to or subtracting from the Initial Interest Rate, as the case may be, the change, if any, between Initial Prime and Prime in effect on the applicable Interest Rate Change Date. As used in this Note, the following capitalized terms have the meaning set forth opposite them below: "Prime" shall mean the rate of interest publicly announced, from time to time, by Citibank, N.A., New York, New York ("Citibank"), as the corporate base rate of interest charged by Citibank to its most creditworthy commercial borrowers notwithstanding the fact that some borrowers of Citibank may borrow from Citibank at rates of less than such announced Prime rate; and "Interest Rate Change Date" means (a) the first business day of Citibank during the calendar month following the date of the initial advance of the loan evidenced by this Note, and (b) the first business day of Citibank during each successive month thereafter. [SIGNATURE PAGE FOLLOWS] 42 49 IN WITNESS WHEREOF, this Deed of Trust is duly executed as of the day and year first above written. PREFERRED EQUITIES CORPORATION, a Nevada corporation "Trustor" Witness: By: _________________________________ _______________________________ Name: ______________________________ Print Name: _____________________ Title: ______________________________ _____ Check here to confirm that Section 5.11 has been initialed. STATE OF ) ) ss. County of ) Personally came and appeared before me, the undersigned authority in and for the above mentioned county and state, the within named ___________________, who acknowledged that he/she is _______________ of Preferred Equities Corporation and that he/she signed, executed and delivered the above and foregoing Deed of Trust on the day and year therein given, after being duly authorized to execute the same by Preferred Equities Corporation and as and for the act and deed of Preferred Equities Corporation. GIVEN Under My Hand And Official Seal Of Office, this the ____ day of March, 1998. ----------------------------------- NOTARY PUBLIC My Commission Expires: - --------------------- 43 50 EXHIBIT A Legal Description (to be attached) 44 51 EXHIBIT B Permitted Exceptions Item 1. A ten foot water and sewer easement along the North side of Highway 90 as granted to City of Biloxi by instrument dated April 7, 1972, recorded February 1, 1973 in Book 35, Page 129; and in instrument dated April 11, 1972, recorded February 22, 1973 in Book 35, Page 139; and in instrument dated June 16, 1972, recorded February 2, 1973 in Book 35, Page 141. Item 2. A ten foot water and sewer easement running East and West through the Northerly portion of subject property as granted to the City of Biloxi by instrument dated June 8, 1972, recorded February 2, 1973 in Book 35, Page 171; and in instrument dated June 16, 1972, recorded February 2, 1973 in Book 35, Page 173. Item 3. Encroachment of open wood carport onto adjacent property along the East boundary line of subject property as shown by survey prepared by Kenny L. Alston, R.L.S., dated May 26, 1994, revised and corrected January 14, 1997. Item 4. Encroachment of chain link fence of approximately 2.38 feet along the East boundary line of subject property as shown by survey prepared by Kenny L. Alston, R.L.S., dated May 26, 1994, revised and corrected January 14, 1997. Item 5. Protective covenants contained in instrument filed for record record in the office of the Chancery Clerk and recorded in said office in Book 284 at Page 408. 45 52 ENVIRONMENTAL CERTIFICATE WITH REPRESENTATIONS, COVENANTS AND WARRANTIES [Biloxi Property] The undersigned, PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Borrower"), hereby executes this Environmental Certificate with Representations, Covenants and Warranties (this "Environmental Certificate") as of the 20th day of March, 1998, for the purpose of inducing FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender"), to make a loan to Borrower in the stated principal sum of up to $1,173,750 (the "Loan"), which Loan is to be secured by, among other things, a Deed of Trust, Assignment of Rents and Proceeds and Security Agreement [Biloxi Property] (the "Mortgage"), dated as of even date herewith, executed by Borrower, as Trustor, for the benefit of Lender, as beneficiary, and encumbering certain real and personal property as therein described, including the land more particularly described in Exhibit A attached hereto and made a part hereof and all improvements thereon (collectively, the "Property"). 1. Definitions. For those terms not specifically defined herein, meanings shall be those defined in the Loan Agreement. Capitalized terms defined herein shall have the meanings given to them; in addition, the following terms shall have the following meanings: "Contaminant" means any pollutant, hazardous, radioactive, or toxic substance, hazardous waste, medical, radioactive, or special waste, petroleum or petroleum-derived substance or waste, asbestos-containing material, polychlorinated biphenyls (PCBs), or any hazardous or toxic constituent thereof and includes, but is not limited to, any substance defined in or regulated under any Environmental Requirement (defined herein). "EHS Permits" means all environmental, health and safety permits, licenses, consents, and authorizations required by any Environmental Requirement (defined herein). "Environment" shall have the same meaning as defined under Environmental Laws (defined herein). If Environmental Laws conflict, the most expansive definition is used. "Environmental Conditions" means the presence or release into the Environment of Contaminants arising out of Operations (defined herein). "Environmental Costs" means any and all claims, demands, liabilities, damages, losses, expenses, fines, penalties, judgments, awards, settlements and costs (including, without limitation, legal, accounting, consulting, engineering, construction and other costs) arising out of Environmental Conditions. Environmental Costs include, without 1 53 limitation, all past, current and future expenses, arising out of: (a) any pending, threatened or completed action by a Governmental Authority or any person or entity for property damage, bodily injury or personal injury; (b) any inquiry, investigation, audit, study, assessment, notice of violation, administrative complaint, summons, citation directive or judicial complaint; (c) any development of remedial or response plans; and (d) any conduct or activity in any way associated therewith. "Environmental Laws" means any applicable federal, state or local laws, statutes, codes, ordinances, rules or regulations, court order or decree, administrative order or governmental agency guidelines. "Environmental Lien" means a lien in favor of any Governmental Authority for any: (a) liability under any Environmental Requirement; or (b) damages arising from, or costs incurred by such Governmental Authority in response to a Release (defined herein) of a Contaminant into the Environment. "Environmental Requirement" means all Environmental Laws or EHS Permits relating to the Environment, health or safety, including, without limitation: (a) the use, handling, treatment storage, or Release (defined herein) of any Contaminant; and (b) workplace or worker safety and health, as authorized by any Governmental Authority (defined herein). "Governmental Authority" means any federal, state or local agency, department, court or other administrative, legislative or regulatory federal, state or local governmental body, or any private individual or entity in place of such entities. "Operations" means the entire scope of activity performed or undertaken at the Property, past and present, with respect to any and all Contaminants. "Release" means the actual, partial, or threatened release, spill, emission, escape, leaking, pumping, injection, deposit, discharge, dispersal, dumping, disposal, leaching, placing, production or migrating into the Environment of any Contaminant. "Remedial Action" means actions required to: (a) clean up, remove, treat or otherwise address Contaminants in the Environment; (b) prevent or minimize the Release of Contaminants into the Environment; or (c) determine if a remedial response or corrective action is needed, design an appropriate response, compile necessary data and reports, conduct pre- and post-remedial investigation, monitoring, operation, maintenance and care. Remedial Action shall be undertaken such that the Property is utilized to its maximum economic benefit. 2. Representations, Covenants and Warranties. Except as disclosed in the Disclosure Schedule, attached hereto as Exhibit B and incorporated herein by reference, 2 54 Customer, to the best of its knowledge after due inquiry and investigation, hereby represents, covenants and warrants to FINOVA as follows: (a) Customer certifies that it investigated the present and past uses of the Property, and employed a qualified environmental consultant, acceptable to Customer, to make due inquiry of all Operations and the potential existence and/or Release of Contaminants at the Property. Customer certifies that such investigation complied with FINOVA's guidelines for conducting such investigation. (b) The Property is not listed on any federal, state, or local list identifying properties with a known or suspected Release. Customer is unaware of any condition that, if known to a Governmental Authority, would require (i) the Property be listed or (ii) Remedial Action. (c) Operations have never been, and will not be, for the purpose of the manufacture, Remedial Action, generation, Release, or refining of any Contaminant (whether legal or illegal, accidental or intentional). (d) Customer obtained, and is and shall continue to be in compliance with, all EHS Permits necessary for the Operations at the Property. (e) No Environmental Lien has, is, or will be attached to the Property or any portion thereof. (f) Customer is not, has not, and does not anticipate being, subject to any action by a Governmental Authority regarding: (i) the violation of any Environmental Requirement; (ii) any Remedial Action; (iii) any liability arising out of or related to the presence or Release of any Contaminant resulting from or pertaining to the Operations at the Property. (g) Customer certifies that to the best of its knowledge and after appropriate inquiry, except as set forth in Exhibit B, there has been no unauthorized release of any contaminant at, on, from, or beneath the property. The foregoing representations, covenants and warranties are continuing and shall be true and correct from the date hereof through the final payment of all indebtedness owed by Customer to FINOVA and the final performance of all obligations owed to FINOVA, with the same force and effect as if made each day throughout such period. All representations, covenants and warranties survive payment and performance. FINOVA warrants that it shall act, in its capacity as a lender, in compliance with all federal, state, and local laws regarding environmental lender liability, including, 3 55 without limitation, 42 U.S.C. Section 9607 under the Comprehensive Environmental Response, Compensation and Liability Act. 3. Covenant to Clean Up and Notify. (a) Customer, at its own cost, shall perform all Remedial Action: (i) in accordance with all Environmental Requirements; (ii) to the reasonable satisfaction of FINOVA; and (iii) in accordance with any Governmental Authority orders, directives, and/or terms, whether negotiated or imposed. (b) Customer shall give notice to FINOVA immediately, via certified mail, of any deviation from any of the above representations, covenants and warranties. Such notification is triggered by, but not limited to Customer's: (i) receipt of notice from any Governmental Authority of any known, alleged or suspected violation of any Environmental Requirement; (ii) receipt, or anticipated receipt, of any notice from a Governmental Authority of the Release of a Contaminant, violation of an EHS Permit, and/or damages for personal or property injury or natural resources, stemming from a violation or Release; and (iii) knowledge of the presence of any Contaminant (other than those described in Exhibit B) on the Property in a condition that may adversely impact the Environment. Notification shall include an explanation of the deviation from the representation and warranty and a description of the communication to or knowledge on the part of the Customer. Customer, at FINOVA's request, shall provide all documents pertaining to any environmental matters (including but not limited to otherwise privileged or confidential materials). (c) In the event of such deviation, Customer must: (i) promptly comply with all Environmental Requirements, including but not limited to those requiring Remedial Action and/or notification of a Release, and provide FINOVA with satisfactory evidence of such compliance; and (ii) provide FINOVA, within thirty (30) days, financial assurance evidencing, to FINOVA's reasonable satisfaction, that sufficient funds are available to pay the cost of Remedial Action, compliance with any Environmental Requirement, and discharging any Environmental Liens. 4. Site Assessment. (a) If FINOVA believes that Contaminants (other than those described in Exhibit B) affect the Property, FINOVA, at any time, may contract for the services of persons ("Site Assessors") to perform environmental site assessments ("Site Assessments") to determine whether any environmental condition exists that could result in the diminution of the value of the Property, and/or any liability, cost, or expense to the owner, occupier, or operator of the Property. Site Assessments may be performed at any time, upon reasonable notice and with minimal interference with Customer's affairs to the extent practicable, as determined by FINOVA. Site 4 56 Assessments must be performed pursuant to FINOVA's guidelines. Customer shall not impede or interfere with the Site Assessment, and shall cooperate fully with the Site Assessors. The Site Assessors, which term includes their employees, agents,subcontractors, and assigns are hereby authorized to enter upon the Property for such purposes and are further authorized to perform tests on the Property necessary to conduct the Site Assessment. Customer shall supply Site Assessors historical and operational information regarding the Property to facilitate the Site Assessment. Customer shall make appropriate personnel, having knowledge of relevant matters, available for meetings with the Site Assessors. On request, FINOVA shall make the results of such Site Assessments available to Customer. The cost of performing the Site Assessments, including, without limitation, sampling and monitoring, the preparation of any reports or studies,and the cost of laboratory analysis, shall be paid by Customer upon demand. (b) Prior to a breach, default or Event of Default under or as defined in any Loan Document, FINOVA may notify Customer of its intent to conduct a Site Assessment and allow Customer to initiate and pay for the Site Assessment directly. Unless otherwise agreed, a Site Assessment performed pursuant to this paragraph must be: (i) initiated within seven (7) business days of the date upon which Customer is contacted by FINOVA; and (ii) completed with a finalized report delivered to FINOVA within thirty (30) calendar days of the date upon which Customer is contacted. The Site Assessors hired by Customer must be acceptable to FINOVA. FINOVA must be consulted by Customer and approve the scope of any proposed Site Assessment. Site Assessors must provide a draft and final report discussing their findings. FINOVA shall be given the opportunity to review and comment on all draft reports. FINOVA shall be provided copies of all draft and final reports. Any and all representations and findings by Site Assessors shall expressly run to the benefit of FINOVA. 5. Indemnify and Hold Harmless. (a) Customer shall indemnify, defend and hold harmless FINOVA, its employees, shareholders, officers, directors, and agents from and against any and all Environmental Costs. (b) Customer agrees, upon request by FINOVA, to contest and to defend against all Environmental Costs. FINOVA may, without being obligated to, hire counsel, consultants, and others necessary to defend against any Environmental Costs. (c) Customer agrees to reimburse FINOVA upon demand for any expenses incurred in connection with any Environmental Costs. The provisions of this Section 5 are in addition to any other obligations and liabilities Customer may 5 57 have to FINOVA at common law, in equity or under documentation executed in connection with the Loan, and shall survive the closing, funding and payment in full of the Loan, as well as any foreclosure of the Loan or granting of any deed in lieu of foreclosure and the recordation of any release of the lien of the Mortgage. 6. FINOVA's Right to Remove Contaminants. (a) FINOVA shall have the right, but not the obligation, without limiting FINOVA's other rights and remedies under the Mortgage or Loan Agreement and this Environmental Certificate, to enter onto the Property or to take such other actions as it deems necessary or advisable to effectuate a Remedial Action, or to in any other way resolve or minimize the impact of, or otherwise deal with, any Contaminant on or affecting the Property in such a manner that may jeopardize FINOVA's security interest. Costs and expenses paid or incurred by FINOVA in the exercise of any such rights shall be secured by the Mortgage and Loan Agreement and shall be payable by Customer upon demand. (b) Without limiting FINOVA's other rights and remedies, FINOVA will notify Customer of its intent to undertake a Remedial Action or any other action as discussed above. Prior to FINOVA's initiation of any such action, unless otherwise agreed to by Customer and FINOVA, Customer shall have thirty (30) days from the date of receiving FINOVA's notice to complete the required action and provide FINOVA with satisfactory completion documentation. 7. Reliance and Binding Nature. Customer acknowledges that FINOVA has and will rely upon the representations, warranties, and indemnification set forth herein and that the execution and delivery of this Environmental Certificate is an essential condition but for which FINOVA would not close or fund the Loan. The representations, warranties and indemnifications herein shall be binding upon Customer, its successors, assigns and legal representatives and shall inure to the Benefit of FINOVA, its successors, assigns and legal representatives. 8. Relation to Other Documents. All terms and conditions contained in the Loan Documents, including, without limitation, this Environmental Certificate, shall be interpreted to give such terms full force and effect. In the event terms or conditions contained in this Environmental Certificate directly conflict with or are contrary to terms and conditions contained in the other Loan Documents, and the matter at issue concerns or is related to the Site Assessment or indemnity and hold harmless provisions of this Environmental Certificate, this Environmental Certificate shall govern and supersede any conflicting requirement. 6 58 IN WITNESS WHEREOF, this Environmental Certificate has been executed and delivered by an officer of Customer duly authorized thereunto as of the date first above written. PREFERRED EQUITIES CORPORATION, a Nevada corporation By: Name: Charles G. Baltuskonis Its: Vice President and Chief Accounting Officer (Form A) Rev. - 2/27/98 7 59 EXHIBIT A Description of Property ALL that certain plot, piece or parcel of land, situate, lying and being in the County of Harrison and State of Mississippi, more particularly described as follows: (to be attached) 8 60 EXHIBIT B Disclosure Schedule (None) 9 61 CONSENT OF GUARANTOR (Biloxi Property) The undersigned, MEGO FINANCIAL CORP., a New York corporation (formerly named Mego Corp.) ("Guarantor"), hereby acknowledges that Guarantor executed and delivered to GREYHOUND REAL ESTATE FINANCE COMPANY, an Arizona corporation ("GREFCO"), (i) an Amended and Restated Guarantee and Subordination Agreement dated as of May 10, 1989 (the "PEC Guaranty"), guaranteeing performance of the obligations of PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Borrower"), to Lender (as hereinafter defined) under the Loan Agreement, the Note and other Documents (as the terms "Loan Agreement," "Note" and "Documents" are defined in the PEC Guarantee); and (ii) a Guarantee and Subordination Agreement dated as of March 30, 1989 (the "VSR Guarantee", and, collectively with the PEC Guarantee, the "Guarantee"), guaranteeing performance of the obligations of Vacation Spa Resorts, Inc., a Tennessee corporation, predecessor-in-interest to Borrower, to Lender under the Loan Agreement, the Note and other Documents (as the terms "Loan Agreement," "Note" and "Documents" are defined in the VSR Guarantee). GREFCO has assigned the respective Notes and all of GREFCO's rights and obligations under the respective Loan Agreements and the other respective Documents to FINOVA CAPITAL CORPORATION, a Delaware corporation (formerly known as Greyhound Financial Corporation) ("Lender"), pursuant to a plan of liquidation between GREFCO and Lender. With Guarantor's ratification, consent and approval, Borrower and Lender amended and restated the respective Loan Agreement pursuant to that certain Second Amended and Restated Loan and Consolidated Loan and Security Agreement dated May 15, 1997 (the "Amended and Restated Loan Agreement"). Guarantor hereby acknowledges that, pursuant to the terms of the Amended and Restated Loan Agreement, Lender proposes to advance to Borrower an additional principal sum of up to One Million One Hundred Fifty Thousand United States Dollars (U.S. $1,150,000) (the "Biloxi Loan"). Guarantor further acknowledges that the Biloxi Loan is evidenced by and subject to, among other things, that certain Letter Agreement, dated March 20, 1998, by and between Borrower and Lender (the "Biloxi Letter Agreement"), as well as that certain promissory note in the original principal amount of $1,150,000 (as amended, extended or renewed from time to time, the "Biloxi Note") and secured, in part, by that certain Deed of Trust, Assignment of Rents and Proceeds and Security Agreement of even date with the Biloxi Letter Agreement executed by Borrower, as Trustor, for the benefit of Lender, as Beneficiary, and encumbering the real and personal property described therein (as from time to modified and amended, the "Biloxi Deed of Trust") 62 and that certain other documents are being executed in connection with the Biloxi Loan (as from time to time modified, extended, renewed, replaced or restated the "Biloxi Ancillary Documents"; and, together with the Biloxi Letter Agreement, the Biloxi Note, and the Biloxi Deed of Trust, the "Biloxi Documents"). Guarantor consents to the Biloxi Documents and agrees that (i)the Guarantee shall remain in full force and effect and shall extend to Borrower's Obligations arising under the Biloxi Documents, (ii) that the obligations of the Guarantor under the Guarantee are joint and several with those of each other Obligor (as that term is defined in the Guarantee), (iii) Guarantor's liability under the Guarantee shall continue undiminished by the Biloxi Documents and (iv) all terms, conditions and provisions set forth in the Biloxi Documents and all other Documents executed therewith, are hereby ratified, approved and confirmed. Guarantor reaffirms as if made on the date hereof all of Guarantor's representations and warranties contained in the Guarantee except as otherwise set forth in the Amended and Restated Loan Agreement or on Exhibit 1 attached hereto. Guarantor acknowledges that as of the date hereof, it has (a) no defense, counterclaim, offset, cross-complaint, claim or demand or any nature whatsoever which can be asserted as a basis to seek affirmative relief or damages from Lender or GREFCO or as a basis to reduce or eliminate all or any part of its liability under the Guarantee, and (b) no other claim against Lender or GREFCO with respect to any portion of the transaction described in the Documents. IN WITNESS WHEREOF, Guarantor has hereunto executed this instrument as of the 20th day of March, 1998. MEGO FINANCIAL CORP.,a New York corporation By: Name: Jon A. Joseph Its: Vice President 2 63 STATE OF _____________ ) ) ss. COUNTY OF ___________ ) BEFORE ME, the undersigned authority, a Notary Public in and for the County and State aforesaid, on this day personally appeared Jon A. Joseph, known to me to be a Vice President of MEGO FINANCIAL CORP., a New York corporation, who acknowledged to me that the same was the free act and deed of such corporation and that s/he being authorized by proper authority to do so, executed the same on behalf of such corporation for the purposes and consideration therein expressed, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF OFFICE this _____ day of March, 1998. ---------------------------------------------- Notary Public My Commission Expires: - --------------------- 3 64 EXHIBIT 1 TO CONSENT OF GUARANTOR Exceptions To Representations And Warranties Reaffirmed By Guarantor Pursuant To This Consent [If none, insert "none"] 4 65 OFFICER'S CERTIFICATE OF PREFERRED EQUITIES CORPORATION The undersigned, Jon A. Joseph, the Corporate Secretary of Preferred Equities Corporation, a Nevada corporation (the "Company"), does hereby certify that: 1. I am the duly elected and presently acting Corporate Secretary of the Company and as such have access to the corporate records of the Company and am familiar with the matters therein contained and herein certified. 2. Attached hereto as Exhibit 1 is a certificate of good standing from the Nevada Secretary of State and, since the date of such certificate, there has been no change in the status of the Company. 3. Attached hereto as Exhibit 2 is a [certificate of foreign qualification] from the Mississippi Secretary of State and, since the date of such certificate, there has been no change in the status of the Company. 4. The Articles of Incorporation of the Company are in full force and effect and have not been modified, rescinded or amended since August 16, 1996. 5. The Bylaws of the Company are in full force and effect and have not been modified, rescinded or amended since August 16, 1996. 6. Attached hereto as Exhibit 2 is a true and correct copy of resolutions, and the preamble thereto, adopted at a meeting of the Board of Directors of the Company held on March 13, 1998, and such resolutions and preamble were duly adopted by said Board of Directors and are in full force and effect on and as of the date hereof, not having been in any way amended, altered or repealed. 7. The forms of Letter Agreement, Note and Deed of Trust described in such resolutions are identical to the corresponding documents executed and delivered by the Company to FINOVA Capital Corporation. 8. There are no dissolution proceedings pending on the date hereof with respect to the Company. 9. The following persons are now, and at all times subsequent to January 1, 1997 have been duly qualified and acting officers of the Company, duly elected to the offices set forth opposite their respective names, and the signature appearing opposite the name of each such officer is his authentic signature: [Signatures are on following page] 1 66 Name Office Signature - ----------------------- --------------------------- -------------------------- Charles G. Baltuskonis Vice President and Chief Accounting Officer __________________________ IN WITNESS WHEREOF, the undersigned has executed this Certificate as of March 20, 1998. By: Name: Jon A. Joseph Title: Corporate Secretary 2 67 OFFICER'S CERTIFICATE OF MEGO FINANCIAL CORP. The undersigned, Don A. Mayerson, the Corporate Secretary of Mego Financial Corp., a New York corporation (the "Company"), does hereby certify that: 1. I am the duly elected and presently acting Corporate Secretary of the Company and as such have access to the corporate records of the Company and am familiar with the matters therein contained and herein certified. 2. Attached hereto as Exhibit 1 is a certificate of good standing from the New York Secretary of State and, since the date of such certificate, there has been no change in the status of the Company. 3. The Articles of Incorporation of the Company are in full force and effect and have not been modified, rescinded or amended since August 16, 1996. 4. The Bylaws of the Company are in full force and effect and have not been modified, rescinded or amended since August 16, 1996. 5. Attached hereto as Exhibit 2 is a true and correct copy of resolutions, and the preamble thereto, adopted at a meeting of the Board of Directors of the Company held on March 13, 1998, and such resolutions and preamble were duly adopted by said Board of Directors and are in full force and effect on and as of the date hereof, not having been in any way amended, altered or repealed. 6. There are no dissolution proceedings pending on the date hereof with respect to the Company. 7. The following persons are now, and at all times subsequent to January 1, 1997 have been duly qualified and acting officers of the Company, duly elected to the offices set forth opposite their respective names, and the signature appearing opposite the name of each such officer is his authentic signature: [Signatures appear on following page] 68 Name Office Signature - ------------------- ------------------------ --------------------------------- Jon A. Joseph Vice President ________________________________ IN WITNESS WHEREOF, the undersigned has executed this Certificate as of March 20, 1998. By:__________________________ Name: Don A. Mayerson Title: Corporate Secretary 2 69 REQUEST FOR ADVANCE AND DISBURSEMENT INSTRUCTIONS The undersigned, as Vice President and Chief Accounting Officer of PREFERRED EQUITIES CORPORATION, a Nevada corporation, hereby instructs FINOVA CAPITAL CORPORATION ("FINOVA") to advance ONE MILLION ONE HUNDRED SEVENTY-THREE THOUSAND SEVEN HUNDRED FIFTY AND NO/100 DOLLARS ($1,173,750.00) in immediate available funds, which funds shall be distributed as follows: 1. Bank: Whitney National Bank of Mississippi $ 1,150,000.00 ABA Routing No.: 065501353 For Credit to: The Trust Account of Virgil G. Gillespie Account Number: 8071500 2. FINOVA Capital Corporation $ 23,750.00 (Loan Fee - $23,750.00) Total Funds Disbursed: $ 1,173,750.00 The undersigned acknowledges and agrees that, even though all or a portion of the disbursements described above are to be directed to entities other than the undersigned, receipt of such disbursements by such payees shall constitute receipt of the proceeds by the undersigned. Dated: March 20, 1998. PREFERRED EQUITIES CORPORATION, a Nevada corporation By: _____________________________________ Name: Charles G. Baltuskonis Title: Vice President and Chief Accounting Officer 70 LETTER AGREEMENT [BILOXI PROPERTY] March 20, 1998 Preferred Equities Corporation 4310 Paradise Road Las Vegas, Nevada 89109-6597 Re: 1816 Beach Boulevard, Biloxi, Mississippi Ladies and Gentlemen: Reference is made to that certain Second Amended and Restated and Consolidated Loan and Security Agreement dated as of May 15, 1997 (as amended and supplemented to date, the "Loan Agreement"), by and between FINOVA Capital Corporation, a Delaware corporation ("Lender") and Preferred Equities Corporation, a Nevada corporation ("Borrower"). Unless otherwise defined herein, all capitalized terms used herein shall have the same meanings as set forth in the Loan Agreement. This Letter Agreement is being executed in connection with the Biloxi Advance described below, to provide to Borrower acquisition financing for certain property generally described as approximately four and three-tenths (4.3) acres of land located at 1816 Beach Boulevard, Biloxi, Mississippi (the "Biloxi Property"), as legally described in the Biloxi Deed of Trust described in Section 1 below. This Letter Agreement will confirm certain agreements between Borrower and Lender concerning the Biloxi Advance, and shall constitute an amendment and supplement to the Loan Agreement and to the other Documents as applicable. 1. Biloxi Advance. Upon the terms and subject to the conditions set forth in this Letter Agreement, Lender shall make a single-Advance Loan (the "Biloxi Advance") to Borrower in the least amount of: (a) One Million One Hundred and Seventy-Three Thousand Seven Hundred and Fifty United States Dollars (U.S. $1,173,750); (b) that amount by which the amount of Six Million Seven Hundred Thousand United States Dollars (U.S. $6,700,000) exceeds the unpaid and outstanding principal balance of the Office Note as of the date hereof; and (c) that amount by which the Maximum Loan Amount exceeds the unpaid and outstanding principal balance of all Loans as of the date hereof (prior to giving effect to the Biloxi Advance). The Biloxi Advance shall be evidenced by a promissory note, in form and substance acceptable to Lender in its sole discretion, to be dated of even date herewith (the "Biloxi Note"). The Biloxi Note shall be secured pursuant to, among other things, a Deed of Trust, Assignment of Rents and Proceeds and Security Agreement with respect to the Biloxi Property, in priority, form and substance acceptable to Lender in its sole 71 Preferred Equities Corporation March 20, 1998 Page 2 discretion, to be dated of even date herewith (the "Biloxi Deed of Trust"), as well as the provisions of the Loan Agreement, and as more fully set forth in Section 3 below. Borrower shall use the Biloxi Advance to finance the acquisition of the Biloxi Property and to pay the Biloxi Advance Loan Fee described in Section 8 below, and to that end Lender shall have no obligation to make the Biloxi Advance except in connection with Borrower's closing of the purchase contemplated by that certain Real Estate Purchase and Sale Agreement by and between Borrower and Biloxi Beach Campground Corp., a Mississippi corporation, made and entered into as of December 23, 1996, as amended to date (the "Purchase Agreement"). 2. Relationship to Office Note. Lender's consent to the making of the Biloxi Advance is relying on part upon excess availability under the Office Note and cross-collateralization of the Biloxi Note with the Headquarters Property and the FCFC Property. Accordingly, Borrower acknowledges and agrees that, notwithstanding the provisions of paragraphs 3.10 and 3.11 of the Loan Agreement, and the applicable provisions in each of the FCFC Deed of Trust and the Headquarters Deed of Trust, it shall be an additional condition precedent to the release of the lien of: (a) the lien of the FCFC Deed of Trust on the FCFC Property and (b) the lien of the Headquarters Deed of Trust on the Headquarters Property, that in each case the Biloxi Note first shall have been paid in full. 3. Security. Without limitation, as provided in paragraphs 3.1(a) and (b) of the Loan Agreement and the Mortgages now existing or hereafter arising, the payment and Performance of Borrower's Obligations under or as evidenced by this Letter Agreement and the Biloxi Note shall be and shall continue to be secured by the liens and Security Interests granted to Lender pursuant to the Loan Agreement, as amended and supplemented by this Letter Agreement, and pursuant to such Mortgages. Furthermore, as security for Borrower's payment and Performance of all Obligations owed to Lender under the Documents (as that term is amended by this Letter Agreement), and as further set forth in the Biloxi Deed of Trust, Borrower hereby grants, transfers and assigns to Lender a first and prior lien and Security Interest in and to all of Borrower's right, title and interest in and to all of the following: the Biloxi Property; all buildings and other improvements now or hereafter erected thereon; all fixtures, equipment and other personal property now or hereafter located on or attached or affixed in any manner to the Biloxi Property; all leases, income, rents, royalties, revenues, issues, accounts receivable, accounts, profits or proceeds from the Biloxi Property; and other items of collateral in connection therewith, all as more fully set forth in the Biloxi Deed of Trust. The Biloxi Deed of Trust shall include, without limitation, prohibitions against further encumbrances and against subsequent sales, assignments, conveyances or other transfers of all or any part of the Trust Property therein described. 4. Conditions Precedent. Lender's obligation to make the Biloxi Advance is subject to the following conditions precedent, all of which must be satisfied at or prior to 72 Preferred Equities Corporation March 20, 1998 Page 3 the funding of the Biloxi Advance, which in all events must occur on or before March 20, 1998, and any of which may be waived in writing by Lender at any time in its sole discretion. 4.1 Borrower shall have executed and delivered to Lender a fully-executed counterpart of this Letter Agreement. 4.2 Borrower shall have satisfied, as determined by Lender in its sole discretion, and at Borrower's sole expense, all of the conditions precedent to an Advance under the Mortgage Loan Facility set forth in Article V of the Loan Agreement (and to that end, each reference in such exhibit to a "Project" shall be deemed to refer to the Biloxi Property, each reference to the "Project Note" shall be deemed to refer to the Biloxi Note, and each reference to "the Mortgage Loan Facility" shall be deemed to refer to the Biloxi Advance pursuant to this Letter Agreement); provided, that the Phase I Environmental Assessment shall be dated not more than six (6) months prior to the funding of the Biloxi Advance. 4.3 Lender shall have received from Borrower and approved a current (dated not more than six (6) months prior to the funding of the Biloxi Advance) appraisal of the Headquarters Building and the FCFC Property, performed by a state-certified appraiser, including without limitation comparable land sales data, indicating that the FCFC Property and the Headquarters Building have a combined appraised value of not less than Six Million Seven Hundred Thousand United States Dollars (U.S. $6,700,000): (a) conforming to MAI commercial appraisal standards, or (b) in a "restricted" form, provided, that such appraisal contains supporting market information confirming the appraised value set forth therein. The appraisal and appraiser must otherwise be acceptable to Lender in all respects. 4.4 Borrower shall have paid the Biloxi Advance Loan Fee. 4.5 Borrower and Guarantor shall have provided, and Lender shall have found satisfactory, updates (covering the period of time ending not more than ten (10) days prior to the Biloxi Advance) to the status of litigation matters reported in Exhibit "8.31" to the Loan Agreement, as well as the status of any new litigation matters not set forth in such exhibit (or, in the absence of any such new litigation matters not set forth in such exhibit, an affirmative statement to that effect). The new litigation matters shall include but shall not be limited to that certain lawsuit seeking class-action status, filed in the U.S. Federal District Court for the Northern District of Georgia, purportedly naming Guarantor among others as a defendant; for this lawsuit, Lender shall have received a copy of the Complaint, any and all answers and the 73 Preferred Equities Corporation March 20, 1998 Page 4 docket to date. The status of litigation matters shall also disclose which cases are covered by insurance. 4.6 Borrower shall have closed the purchase of the Biloxi Property as contemplated in the Purchase Agreement. 5. Conditions Subsequent. 5.1 On or before Monday, May 4, 1998, Borrower shall supply documentation to Lender, to the attention of Karen Hrushka at FINOVA Risk Management, from the Mississippi Power Company ("MPC"), wherein MPC shall confirm: (a) ownership responsibility for the two pole-mounted transformers located on the Biloxi Property, and (b) liability therefor should damage or leakage occur. The contact person at Borrower with respect to compliance with this condition is Richard L. Rodriguez. 5.2 On or before Monday, April 20, 1998, Borrower shall provide to Lender, in form and substance acceptable to Lender in all respects: (a) an ALTA Survey of the Biloxi Property conforming to the provisions of paragraph 3 of Exhibit "5.2.2" to the Loan Agreement and further conforming to the 1997 ALTA/ACSM Minimum Standard Detail Requirements for an urban-class survey, certified to Lender, including Table "A" items 1, 2, 3, 4, 7(a), 8, 10, 11, 13, 14, 15 and 16, together with (b) a revised "survey endorsement" to the Title Policy required hereunder, with respect to such survey. 5.3 Without limiting any other provision of any Document, any failure by Borrower to comply with any conditions subsequent set forth in Section 5.1 or Section 5.2 above shall constitute an "Event of Default" under and as defined in the Loan Agreement. 6. Without limiting any other provision of any Document, Borrower hereby represents, warrants and covenants as follows: 6.1 The fence encroachment disclosed on the survey by Kenny L. Alston, R.L.S., dated May 26, 1994, revised and corrected January 14, 1997, and listed as a "Permitted Encumbrance" on Exhibit "B" of the Biloxi Deed of Trust, will not materially interfere with or impair in any way Borrower's planned development of the Biloxi Property for the purpose of selling Units. 74 Preferred Equities Corporation March 20, 1998 Page 5 6.2 The protective covenants of record in that certain instrument filed for record in the office of the Chancery Clerk in and for Harrison County, Mississippi and recorded in said office in Book 284 at Page 408, will not materially interfere with or impair in any way Borrower's planned development of the Biloxi Property for the purpose of selling Units. 6.3 Neither Borrower nor Guarantor is a defendant in that certain lawsuit filed on February 23, 1998, in the United States District Court for the Northern District of Georgia, Atlanta Division, Civil Action No. 98-CV-0593, captioned "Robert J. Feeney, individually and on behalf of all those similarly situated, Plaintiff, v. Mego Mortgage Corporation, and Jeffrey S. Moore, Defendants." Borrower has furnished to Lender a true, complete and correct copy of the Complaint. If at any time during the Term either Borrower and/or Guarantor is named as a defendant in such lawsuit, Borrower shall notify Lender in writing within three (3) business days after service of process naming Borrower and/or Guarantor, as applicable, as a defendant therein, and furnish Lender by overnight delivery with a true, complete and correct copy of the Complaint and any other documents so served. The foregoing representations, warranties and covenants shall be deemed incorporated into Article VIII of the Loan Agreement for all purposes, and shall be subject to the provisions of paragraph 8.1 of the Loan Agreement. 7. Incorporation of Other Provisions of Loan Agreement. For all purposes under the Loan Agreement, including without limitation the representations, covenants and warranties under Article VIII thereof, the Biloxi Advance shall be deemed a "transaction made pursuant to this Agreement." The Biloxi Property shall be deemed a "Project" for the purposes of Article VI of the Loan Agreement. Each and every right and remedy of Lender with respect to Advances, Notes and Mortgages shall apply with full force and effect to each of the Biloxi Advance (which is hereby deemed an "Advance" under the Loan Agreement), the Biloxi Note (which is hereby deemed a "Note" under the Loan Agreement), and the Biloxi Deed of Trust (which is hereby deemed a "Mortgage" under the Loan Agreement). 8. Biloxi Advance Loan Fee. In consideration of Lender's covenants, agreements and promises under this Letter Agreement, Borrower shall pay to Lender at the time of the Biloxi Advance the amount of two and one-half percent (2.50%) of the amount of the Biloxi Advance (the "Biloxi Advance Loan Fee"). The "good faith" deposit of $5,000 previously paid by Borrower to Lender in connection with Borrower's application for the Loan contemplated herein shall be credited toward the Biloxi Advance Loan Fee. 75 Preferred Equities Corporation March 20, 1998 Page 6 9. Lender's Right of First Refusal. During the Receivables Borrowing Term, Lender shall have the right of first refusal with respect to all construction financing, hypothecation financing and/or purchase agreements secured by or in any way relating to the Biloxi Property or any portion thereof, either solicited by or offered to Borrower. If, while any portion of the Biloxi Note remains unpaid, Borrower or an affiliate of Borrower wishes to accept an offer from a third party for such financing or purchase, the entity wishing to accept the same must give Lender written notice of its intent to do so together with a copy of the written proposal for the financing or purchase, from the prospective third party lender in connection with the proposed financing or purchase. Lender shall have ten (10) business days from receipt of the notice and the items required to be given to Lender to issue a financing proposal to either extend such financing or enter into a purchase agreement upon terms substantially equivalent or better than those contained in the proposal from the prospective third party lender and failure to do so shall be deemed to be an election by Lender not to extend such financing or enter into a purchase agreement. Lender must then issue a commitment within thirty (30) days of receipt of the financing proposal timely accepted by Borrower. The failure of Lender to issue a commitment within this period of time shall be deemed to be an election by Lender not to extend such financing or enter into a purchase agreement. 10. Definition of "Documents". The definition of "Documents", as set forth in the Loan Agreement, shall be amended to include this Letter Agreement, the Biloxi Deed of Trust, and each other document executed and delivered to Lender in connection with this Letter Agreement. Each reference in the Loan Agreement to "this Agreement" shall be deemed to refer to the Loan Agreement as amended and supplemented hereby, and each reference in any other Document to "the Loan Agreement" shall be deemed to refer to the Loan Agreement as amended and supplemented hereby. 11. Entire Agreement. This Letter Agreement constitutes the entire agreement and understanding of the parties with respect to the subject matter hereof; and the Documents, as amended hereby, supersede all prior written or oral understandings and agreements between the parties in connection with its subject matter. 12. Counterparts. This Letter Agreement may be executed in one or more counterparts, and any number of which having been signed by all the parties hereto shall be taken as one original. 13. No Novation. Except as expressly provided herein, Borrower's and Guarantor's respective obligations under the Documents shall remain in full force and effect and shall not be waived, modified, superseded or otherwise affected by this Letter Agreement. This Letter Agreement is not a novation, nor is it to be construed as a release, 76 Preferred Equities Corporation March 20, 1998 Page 7 waiver or modification of any of the terms, conditions, representations, warranties, covenants, rights or remedies set forth in the Documents, except as expressly stated herein. To the extent practicable, any provisions of this Letter Agreement which conflict with any provisions of the Documents shall be construed to supplement such provisions of the Documents, provided that, in the event of irreconcilable conflict, the provisions of this Letter Agreement, construed as narrowly as practicable, shall control. [SIGNATURE PAGE FOLLOWS] 77 Preferred Equities Corporation March 20, 1998 Page 8 In the event the foregoing represents an accurate statement of the agreements that have been reached please sign and return this letter to the undersigned. FINOVA CAPITAL CORPORATION, a Delaware corporation By: /s/ Jeffrey A. Owings ------------------------------- Name: Jeffrey A. Owings Its: vice President Accepted as of March 20, 1998: PREFERRED EQUITIES CORPORATION, a Nevada corporation By: /s/ Charles G. Baltuskonis Name: Charles G. Baltuskonis Its: Vice President and Chief Accounting Officer EX-10.145 5 LOAN AND SECURITY AGREEMENT 1 EXHIBIT 10.145 LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT (this "Agreement") is made effective as of the 12th day of August, 1998, by and between DORFINCO CORPORATION, a Delaware corporation ("Lender"), and PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Borrower"). W I T N E S S E T H : WHEREAS, Borrower desires to borrow a loan in the amount of up to Four Million and 00/100 Dollars ($4,000,000.00) (the "Loan") from Lender, and Lender has agreed to make the Loan to Borrower, all subject to and accordance with the terms and conditions of this Agreement; WHEREAS, Borrower's obligations to Lender with respect to the Loan will be secured by five (5) parcels of undeveloped land located generally in Nye County, Nevada, and more particularly described in Exhibit "A" attached hereto and incorporated herein (the "Property"). NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and promises of the parties and subject to the following terms and conditions, Borrower agrees to borrow from Lender, and Lender agrees to loan to Borrower, the Loan for the purposes provided herein. The Loan shall be evidenced by a Promissory Note (the "Note") bearing even date herewith, and repayment thereof shall be secured by a Deed of Trust, Security Agreement and Fixture Filing (the "Deed of Trust"), this Agreement and, as described in on Exhibit "B" hereof, that certain loan and security agreement and that certain deed of trust, pursuant to a First Amendment to Loan and Security Agreement and a Third Amendment to Deed of Trust, respectively (collectively, the "Amendments"), and guaranteed by MEGO Financial Corp., a New York corporation (the "Guarantor"), by the execution of a Guaranty Agreement in form and content acceptable to Lender (the "Guaranty"). This Agreement, the Note, the Deed of Trust, the Amendments, the Guaranty, any assignment of rents or leases, or both, and any and all other documents now or hereafter executed by Borrower or any other affiliated person or party in connection with or to evidence or secure payment of the Loan are sometimes hereafter collectively referred to as the "Loan Documents". A. DISBURSEMENTS AND MATURITY. A.1 Conditions to Disbursement. Lender shall disburse the Loan for the purposes provided herein once Borrower has: (a) provided Lender, at Borrower's expense, with (w) copies of the recorded plat maps creating the five (5) parcels of the Property (provided, however, that upon the written request of Lender at any time prior to the Maturity Date, Borrower shall perform and deliver to Lender within sixty (60) days of any such request an ALTA survey of the Property or any one or more parcels thereof), (x) an ALTA lender's policy of title insurance (the "Title Policy") 1 2 insuring the lien of the Deed of Trust as a first lien on the Property, in form, content, and issued by a title insurer acceptable to Lender, (y) an appraisal, in form, content and performed by a licensed appraiser acceptable to Lender, showing a combined value of the Property equal to at least $12,000,000.00, and (z) a phase one environmental assessment report, in form and substance satisfactory to Lender, for the Property; (b) satisfied all conditions set forth herein; (c) deposited into escrow (or, in lieu thereof, Lender shall have disbursed to itself from the Loan proceeds) the following sums: (i) the balance due and owing on the Closing Date (as hereinafter defined) of the Lender's total loan commitment fee of $40,000.00; (ii) all closing costs and fees; and (iii) Lender's reasonable attorney's fees incurred in connection herewith; and (d) executed and delivered to Lender all Loan Documents except for the Amendments. The forms of the Amendments are attached hereto as Exhibits "C" and "D", respectively, and Borrower hereby covenants and agrees that it will execute and deliver or cause to be executed and delivered the Amendments in substantially the form and substance of the forms of the Amendments attached hereto, in recordable form, as applicable, within forty-five (45) days following the Closing Date. A.2 Disbursement Amounts. On the Closing Date, the entire amount of the Loan will be disbursed to Borrower, or, in the event that less than the entire amount of the Loan is disbursed for any reason, then at least four (4) business days prior to any requested disbursement date after the Closing Date, Borrower shall submit to Lender a request for disbursement of Loan proceeds that shall specify the amount of Loan proceeds Borrower requests be disbursed and the date on which such disbursement is requested to be made. Lender shall disburse to Borrower all of the Loan proceeds (or a lesser amount thereof as Borrower may request) on the Closing Date or the requested Loan proceeds on the requested disbursement date after the Closing Date, provided, however, that in either case, the following conditions to disbursement shall have been satisfied: (a) The requirements set forth in Section A.1 above as to the conditions for disbursement have been satisfied; (b) The amount of Loan proceeds requested to be disbursed, plus the aggregate amount of Loan proceeds previously disbursed by Lender to Borrower, does not exceed the maximum Loan amount of $4,000,000.00; (c) The disbursement date is the Closing Date or any date thereafter requested for any requested disbursement of Loan proceeds, provided, however, that a disbursement date after the Closing Date must be within the period commencing on the date (the "Closing Date") that the Deed of Trust is recorded in the Official Records of the Office of the Recorder of Clark County, Nevada and ending on the date (the "Final Disbursement Date"), which is the sixtieth (60th) day after the Closing Date; (d) No Event of Default, or event which, with the giving of notice or passage of time or both would become an Event of Default hereunder shall have occurred and be continuing as of the date of any submission by Borrower of a request for disbursement or the Closing Date or any other date on which any disbursement is to be made; 2 3 (e) The title company issuing the Title Policy shall be prepared to and shall issue to Lender as beneficiary of the Deed of Trust such title endorsements as Lender may require in connection with any such disbursement of Loan proceeds; (f) Borrower shall have paid to Lender (or, in lieu thereof, Lender shall have disbursed to itself from the Loan proceeds) a funding fee for each requested disbursement of Loan proceeds in an amount equal to one percent (1.0%) of the amount of Loan proceeds requested to be disbursed. Borrower acknowledges that the aforesaid funding fee is not imposed as a charge for the use of money, but rather is imposed to permit Lender to recoup its administrative charges and other costs in disbursing Loan proceeds, and said funding fee shall in no way be deemed an interest charge; and (g) After disbursement of any proceeds of the Loan, the Maximum LTV Ratio would not and shall not exceed 50%. "Maximum LTV Ratio" means the ratio of the total outstanding principal balance of the Loan to the appraised values of the five parcels of land comprising the Property. For purposed of this paragraph (g) only, the appraised values of such five parcels of land comprising the Property are as follows: Parcel 1: A 3.76 acre site located generally at the southwest corner of Calvada Boulevard and Highway 160. Appraised value: $780,000.00. Parcel 2: A 3.80 acre site located generally at the northwest corner of Calvada Boulevard and Highway 160. Appraised value: $785,000.00. Parcel 3: A 31.83 acre site (a circular median) located generally in Calveda Boulevard between Dandelion Street and Charleston Drive. Appraised value: $3,760,000.00. Parcel 4: A 25.45 acre site (irregular shaped) located generally at the northwest corner of Shoshone Drive and Wheeler Pass Road. Appraised value: $3,050,000.00. Parcel 5: A 32.98 acre site (irregular shaped) located between Highway 160 and Pahrump Valley Boulevard, south of Highway 372. Appraised value: $3,925,000.00. If Borrower does not request and receive disbursements of Loan proceeds in the aggregate amount of $4,000,000.00 by the Final Disbursement Date, then the excess amount of Loan proceeds over the aggregate amount of all disbursements up to the maximum Loan amount of $4,000,000.00 may not thereafter be borrowed. A.3 Use of Proceeds. Borrower shall use the proceeds of the Loan for general working capital purposes. A.4 Interest. Interest on the outstanding principal balance of the Loan will be due and payable as set forth in the Note. 3 4 A.5 Maturity Date. The outstanding principal balance of the Loan, together with all accrued and unpaid interest then due and owing and any other amounts then due and owing under any of the Loan Documents, shall be due and payable on August 31, 1999 (the "Maturity Date"). The Maturity Date may be extended for a period of one (1) year (the last day of such extension period is herein the "Extended Maturity Date"), subject to the payment of an extension fee in the amount of one and one-half percent (1.5%) of the then outstanding balance of the Loan, and subject to and in accordance with all other terms and procedures for the extension of the term of the Loan to the Extended Maturity Date set forth in the Note. A.6 Prepayment. The outstanding principal balance of the Loan may be prepaid in whole or in part at any time prior to the Maturity Date, or, if Borrower elects to extend the Maturity Date, the Extended Maturity Date, without penalty or premium, provided, however, that any such prepayment must be accompanied by the payment of all accrued and unpaid interest on the amount being prepaid plus any other amounts then due and payable under the Note or any of the other Loan Documents. Partial prepayments shall be applied to the last due payment of principal under the Note and shall be in addition to, and not in lieu of, any other payment then or thereafter due under the Note. A.7 Non-Revolving Loan. The Loan is a term loan and not a revolving loan, and amounts borrowed and repaid by Borrower may not be reborrowed. A.8 Additional Security. In addition to the Deed of Trust and any other security document (except the Amendments) given by Borrower or an affiliate to secure the Loan, the Loan, pursuant to the Amendments, shall also be cross-collateralized by and cross-defaulted to the promissory notes evidencing the loans and the deed of trust and other security instruments described on Exhibit "B" hereto (together with any and all other agreements, instruments or other documents relating to the documents described on Exhibit "B" below, collectively, the "Related Loan Documents") securing said loans (collectively, the "Related Indebtedness") made by Lender or its parent Textron Financial Corporation to Borrower or its subsidiary corporation Steamboat Suites, Inc. A.9 Release of Security. Notwithstanding any other provision of this Agreement or any other Loan Document to the contrary, and, subject to the limitation set forth in the proviso below, without regard to whether the Related Indebtedness has been repaid and satisfied in full, upon the full repayment and satisfaction of the Loan and any and all other amounts due and owing with respect to the Loan and any other secured obligations of Borrower to Lender under the Loan Documents (except for the Related Indebtedness and those arising under the Amendments), the collateral security in the real and personal property and property rights and interests encumbered by the Deed of Trust and any other Loan Document (including the Amendments to the extent of the Loan obligations secured thereby) shall be released, terminated and reconveyed to the person(s) entitled thereto, and all other Loan Documents shall be terminated and deemed to be of no further force and effect without the requirement that any additional payment of any kind, including a release payment, be made; provided, however and except that, if there exists with respect to the Related 4 5 Indebtedness at the time of repayment and performance in full of the Loan a default or event of default, or any event or circumstance which with the passage of time or giving of notice would become a default or event of default under the Related Loan Documents, then the release and reconveyance of the lien of the Deed of Trust and the release and termination of any other security interest, encumbrance or collateral assignment or transfer created under any other of the Loan Documents shall not be granted by Lender for so long as any such default or event of default or such other event or circumstance is continuing. B. REPRESENTATIONS, COVENANTS AND WARRANTIES. Borrower hereby unconditionally represents, covenants and warrants as follows: B.l Power. If Borrower or any signatory who signs on its behalf is a corporation, partnership, limited liability company, or trust, that it is a corporation duly incorporated, or a partnership, limited liability company, or trust duly organized, and in any event validly existing under the laws of the state of its incorporation or origination and duly qualified to do business in the State of Nevada, with requisite power and authority to (i) incur the indebtedness evidenced by the Note; (ii) enter into this Agreement and grant the Deed of Trust; and (iii) enter into any other Loan Documents executed and delivered to Lender concurrently herewith. B.2 Authority. That this Agreement, the Note, the Deed of Trust and all other Loan Documents executed and delivered to Lender concurrently herewith by Borrower were executed in accordance with the requirements of law, and, if Borrower or any signatory who signs on its behalf is a corporation, partnership, limited liability company, or trust, in accordance with any requirements of its articles of incorporation, articles of partnership, articles of organization and/or operating agreement, or declaration of trust, and any amendments thereto, and that the execution of the same, and the full and complete performance of the provisions thereof, is authorized by its bylaws, articles of organization, partnership agreement and/or operating agreement, or declaration of trust, and pursuant to a duly adopted resolution of its board of directors, partners, members and/or managers or trustees, and will not result in any breach of, or constitute a default under, or result in the creation of any lien, charge or encumbrance (other than those contained herein or in any instrument delivered to Lender concurrently herewith) upon any property or assets of Borrower under any indenture, mortgage, deed of trust, bank loan or credit agreement or other instrument or agreement to which Borrower is a party or by which Borrower is bound or, if applicable, under Borrower's corporate charter, bylaws, articles of organization, partnership agreement and/or operating agreement, or declaration of trust. B.3 Financial Statements. Any and all balance sheets, statements of income or loss, reconciliation of surplus and financial data of any other kind heretofore furnished Lender by or on behalf of Borrower and the Guarantor are true and correct in all material respects, and fairly and accurately present the financial condition of the subjects thereof as of the dates thereof, and no material adverse change has occurred in the financial condition reflected therein since the dates of the most recent financial data submitted to Lender. During the Loan term, Borrower shall provide 5 6 Lender with such financial information relating to the Borrower, the Guarantor or the Property as may be required in the Deed of Trust or as Lender may reasonably request. B.4 Litigation. Except as disclosed on Exhibit "E" attached hereto, there are no actions, suits or proceedings (collectively "Proceedings") pending, or to the knowledge of Borrower threatened, against or affecting Borrower, the Guarantor, the Property, or involving the validity or enforceability of the Deed of Trust or the priority of the lien and security interest thereof, and no event ("Adverse Event") has occurred (including specifically Borrower's execution of this Agreement, the Note, the Deed of Trust or any of the other Loan Documents) which will violate in any material respect, be in conflict with, result in the breach of or constitute (with due notice or lapse of time, or both) a default under any Legal Requirement (as hereafter defined), or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever on the Property other than the liens and security interests created by, or referred to in, the Loan Documents. Borrower shall give Lender written notice of any pending or threatened Proceeding or any Adverse Event promptly after Borrower obtains knowledge thereof. B.5 Permits. In addition to all other conditions to disbursement set forth in this Agreement, before requesting, or being entitled to, any disbursement of the Loan, Borrower shall have complied, and shall have caused the Property to comply, with all Legal Requirements. B.6 Year 2000 Compliance. Borrower acknowledges that it is aware of the possible impact of the year 2000 problem (that is, the risk that computer applications may not be able to properly perform date-sensitive functions after December 31, 1999) upon its computer applications and on-going business. Borrower represents that any corrective action reasonably necessary to mitigate the adverse effects of the year 2000 problem on Borrower's business and operations will be taken and that Borrower does not currently have any reason to believe that the year 2000 problem will result in a material adverse change in Borrower's or any of its affiliates' business condition (financial or otherwise), operations, properties or prospects, or Borrower's ability to repay the Loan. The foregoing representations, covenants and warranties shall survive until all sums payable pursuant to the Note or this Agreement, or which are secured by the Deed of Trust or any of the other Loan Documents, have been paid in full. C. DEFAULT. C.l Events of Default. Any of the following shall constitute a default hereunder (an "Event of Default"): (a) The occurrence of a default or Event of Default under the Deed of Trust which continues after any applicable grace or cure period; 6 7 (b) The neglect, failure or refusal of Borrower to keep in full force and effect any permit, license, consent or approval required hereunder, or under the Loan Documents, and the failure by Borrower to cure any such neglect, failure or refusal within twenty (20) days after written notice thereof is given to Borrower; (c) The false or misleading nature in any material respect of any representation or warranty of Borrower contained herein or in any representation to Lender concerning the financial condition of Borrower or of the Guarantor, or the reasonable determination by Lender of a material threat to its security by reason of a material adverse change in the financial condition of Borrower or the Guarantor; (d) The occurrence of a default, event of default or other breach by Borrower, Guarantor, or Borrower's subsidiary corporation, Steamboat Suites, Inc., under or with respect to any indebtedness or obligations of Borrower, Guarantor or Steamboat Suites, Inc. to Lender or any of Lender's affiliates which continues after any applicable grace or cure period; or (e) The failure of Borrower to execute and deliver or cause to be executed and delivered the Amendments in substantially the form and substance as the forms of the Amendments attached hereto, in recordable form within forty-five (45) days following the Closing Date. C.2 Acceleration. Upon the occurrence of an Event of Default hereunder, the entire unpaid balance of the Note including all accrued interest shall, at the option of Lender, become immediately due and payable and Lender shall have such rights of enforcement as may be afforded by law, hereunder, or under the Note, the Deed of Trust or any of the other Loan Documents. D. REMEDIES. D.l General. Upon the occurrence of an Event of Default hereunder, Lender shall have all rights and remedies available to Lender under the law, hereunder or under the Note (including but not limited to the right to accelerate the Note), the Deed of Trust or any of the other Loan Documents. D.2 Right to Advance or Post Funds. Where disputes arise which, in the good faith opinion of Lender, may endanger the performance of any covenant contained herein, Lender may, following ten (10) days written notice to Borrower, enter into such agreements or advance funds for the account of Borrower without prejudice to Borrower's rights, if any, to recover said funds from the party to whom paid. Such agreement or agreements may take the form which Lender, in its discretion, deems proper, including but not limited to agreements to indemnify a title insurer against possible assertion of lien claims or to pay disputed amounts to contractors if Borrower is unable or unwilling to pay the same. All sums paid or agreed to be paid pursuant to any such undertaking shall be for the account of Borrower, Borrower shall reimburse Lender for any such 7 8 payments made upon demand therefor, with interest at the rate then applicable under the Note until date of reimbursement, and such advances and interest shall be secured by the Deed of Trust. D.3 Curing of Defaults by Disbursement. Upon the occurrence of an Event of Default which may be cured by the payment of money, Lender, without waiving any right of acceleration or foreclosure under the Note or the Deed of Trust which Lender may have by reason of such default, or any other right Lender may have against Borrower because of such default, shall have the right to make such payment from the Loan, thereby curing the default. D.4 Remedies are Cumulative. All remedies of Lender provided for herein are cumulative and shall be in addition to any and all other rights and remedies provided in the Note, the Deed of Trust or any of the other Loan Documents or by law. The exercise of any rights of Lender hereunder shall not in any way constitute a cure or waiver of a default hereunder or elsewhere, or invalidate any act done pursuant to any notice of default, or prejudice Lender in the exercise of any of its other rights hereunder or elsewhere unless, in the exercise of said rights, Lender realizes all amounts owed to it hereunder and under the Note, the Deed of Trust and the other Loan Documents. D.5 Right of Contest. Borrower shall have the right to contest in good faith any claim, demand, levy, or assessment by a third party, the assertion or non-satisfaction of which would constitute an Event of Default hereunder. Any such contest shall be prosecuted diligently and in a manner not prejudicial to Lender or the rights of Lender hereunder. In the event that Lender reasonably determines that such claim, demand, levy or assessment could adversely affect Lender's interest in the Property, upon demand by Lender, Borrower shall deposit funds with Lender or obtain and record a bond satisfactory to Lender in an amount sufficient to cover any amounts which may be owing in the event the contest may be unsuccessful. Borrower shall make such deposit or obtain and record such bond, as the case may be, within five (5) days after demand therefor and, if made by payment of funds to Lender, the amount so deposited shall be disbursed in accordance with the resolution of the contest to Borrower or the adverse claimant. The mere fact of any such contest shall not be deemed prejudicial to Lender or any of its rights hereunder. E. MISCELLANEOUS. E.l No Waiver. No waiver of any default or breach by Borrower hereunder shall be implied from any omission by Lender to take action on account of such default, and no express waiver shall affect any default other than the default specified in the waiver and the waiver shall be operative only for the time and to the extent therein stated. Waivers of any covenant, term, or condition contained herein shall not be construed as a waiver of any subsequent breach of the same covenant, term or condition. The consent or approval by Lender to or of any act by Borrower requiring further consent or approval shall not be deemed to waive or render unnecessary the consent or approval to or of any subsequent similar act. E.2 No Third Parties Benefitted. This Agreement is made and entered into for the sole protection and benefit of Lender and Borrower. All conditions of the obligations of Lender 8 9 to make advances hereunder are imposed solely and exclusively for the benefit of Lender and may be freely modified by Lender with the concurrence of Borrower or waived by Lender in whole or in part at any time if in its sole discretion it deems it advisable to do so. No person other than Borrower shall have standing to require Lender to make any Loan advances or be a beneficiary of this Agreement or of any of the advances to be made hereunder. E.3 Intentionally Omitted. E.4 Notices, Demands and Requests. All notices, demands or requests provided for or permitted to be given pursuant to this Agreement must be in writing and shall be deemed to have been properly given or served by depositing the same with a nationally recognized overnight courier service or in the United States Mail, postpaid and registered or certified return receipt requested, and addressed to the addresses set forth on the signature page hereof. All notices, demands and requests shall be effective upon being deposited with a nationally recognized courier service or, on the date that is two (2) business days after such deposit, upon being deposited in the United States Mail. Rejection or other refusal to accept or the inability to deliver because of changed address of which no notice was given shall be deemed to be receipt of the notice, demand or request sent. By giving at least thirty (30) days written notice hereof, Borrower or Lender shall have the right from time to time and at any time during the term of this Agreement to change their respective addresses. E.5 Authority to File Notices. Borrower irrevocably appoints, designates, and authorizes Lender as its agent (said agency being coupled with an interest) to file for record any notice that Lender deems reasonably necessary or desirable to protect its interest hereunder or under the Note, the Deed of Trust or any of the other Loan Documents. Lender shall only file such notices if Borrower fails, within ten (10) days after written demand by Lender, to do so. E.6 Expenses. Borrower shall pay promptly all reasonable costs, charges, and expenses incurred by Lender in connection with the Loan, including but not limited to commitment fees, loan fees, service charges, title charges, tax and lien service charges, costs of inspection, recording fees, processing fees, appraisal fees, attorneys' fees, real property taxes and assessments and insurance premiums, and any and all fees in consideration of Lender's commitment to provide the Loan. E.7 Actions. Lender shall have the right to commence, appear in or defend any action or proceeding purporting to affect the Property, or the rights, duties, or liabilities of the parties hereunder, or the disbursement of any funds. In connection therewith, Lender may incur and pay costs and expenses, including reasonable attorneys' fees, and Borrower shall pay to Lender on demand all such costs and expenses and Lender is authorized to disburse funds from the Loan for said purpose. E.8 Commissions and Brokerage Fee. Borrower shall indemnify Lender from any responsibility and/or liability for the payment of any commission, charge or brokerage fees to 9 10 anyone which may be payable in connection with the making or refinance of the Loan, it being understood that any such commission, charge, or brokerage fees will be paid directly by Borrower to the party or parties entitled thereto. Neither Lender nor Borrower are aware of any person or entity entitled to a commission, charge or brokerage fee as a result of the Loan. E.9 Applicable Law. This Agreement and all of the other Loan Documents are to be governed by and construed in accordance with the laws of the State of Rhode Island (and Colorado to the extent of the Amendment applicable to the property located within Colorado) without regard to conflict of laws principles; provided, however, that the laws of the State of Nevada shall apply with respect to the procedural and substantive requirements of Nevada real property and personal property law with request to any foreclosure or other action to realize all real and personal property collateral security for the Loan located within the State of Nevada; and provided further, however, that the laws of the State of Colorado shall apply with respect to the procedural and substantive requirements of Colorado real property and personal property law with respect to any foreclosure or other action to realize all real and personal property collateral security for the Loan located within Colorado. Subject to the foregoing provisos, the Borrower hereby consents to the non-exclusive personal jurisdiction of the federal and state courts located in Providence County, Rhode Island in any and all actions between the Borrower and the Lender arising under or in connection with this Note, the Loan or any of the Loan Documents. E.10 Heirs, Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the heirs, successors, assigns and personal representatives of the parties hereto; provided, however, that Borrower shall not assign its rights hereunder in whole or in part without the prior written consent of Lender, which such consent may be granted or withheld in the sole and absolute discretion of Lender. Any such assignment without said consent shall be void. Lender shall have the absolute right at any time and from time to time to assign to all affiliates and subsidiaries of Lender and to participants or others all or certain of its rights and obligations hereunder but no such assignment shall, without Borrower's written consent, relieve Lender of its obligations hereunder. E.11 Time. Time is of the essence of this Agreement and each and every provision hereof in which time is an element. E.12 Supplemental Agreement. The provisions of this Agreement are not intended to supersede the provisions of the Deed of Trust but shall be construed as supplemental thereto. This Agreement, and all representations and warranties contained herein, shall remain in effect until the Loan has been paid in full. E.13 Legal Requirements. "Legal Requirements" shall mean (i) any and all present and future judicial decisions, statutes, rulings, directions, rules, regulations, permits, certificates or ordinances of any governmental authority in any way applicable to Borrower or the Property, including the ownership, use, occupancy, possession, operation, maintenance, alteration, repair or reconstruction thereof, (ii) Borrower's presently or subsequently effective bylaws and arti- 10 11 cles of incorporation or partnership, limited partnership, joint venture, trust or other form of business association agreement, (iii) any and all material terms, provisions and conditions of any commitment between Lender and Borrower which are to be performed or observed by Borrower, and (iv) any and all material terms, provisions and conditions of any leases and other contracts (written or oral) of any nature that relate, in any way, to the Property and to which Borrower may be bound, including but not limited to any lease or other contract pursuant to which Borrower is granted a possessory interest in the Property. E.14 Relationship of Parties. The relationship between Borrower and Lender is, and at all time shall remain, solely that of debtor and creditor, and shall not be, or be construed to be, a joint venture, equity venture, partnership or other relationship of any nature, and Lender neither undertakes nor assumes any responsibility or duty to Borrower or to any other person with respect to the Property or the Loan, except as expressly provided in the Loan Documents; and notwithstanding any other provision of the Loan Documents: (a) Lender is not, and shall not be construed as, a partner, joint venturer, alter ego, manager, controlling person or other business associate or participant of any kind of Borrower or its partners or members and Lender does not intend to ever assume such status; (b) Lender shall in no event be liable for any debts, expenses or losses incurred or sustained by Borrower; (c) Lender does not intend to ever assume any responsibility to any person for the quality, suitability, safety or condition of the Property; and (d) Lender shall not be deemed responsible for or a participant in any acts, omissions or decisions of Borrower or its partners or members. E.15 Attorneys' Fees and Costs. If any legal action or any arbitration or other proceeding is brought for the enforcement of this Agreement or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party shall be entitled to recover reasonable attorneys' fees and other costs incurred in that action or proceeding, in addition to any other relief to which he may be entitled. IN WITNESS WHEREOF, the parties hereto have executed this Loan and Security Agreement the day and year first above written. Preferred Equities Corporation PREFERRED EQUITIES CORPORATION, 4310 Paradise Road a Nevada corporation Las Vegas, Nevada 89109 Attn: General Counsel Telecopy: (702) 369-3194 By: /s/ FREDERICK H. CONTE ---------------------------- Name: Frederick H. Conte -------------------------- Its: President --------------------------- 11 12 DORFINCO CORPORATION DORFINCO CORPORATION, c/o Textron Financial Corporation a Delaware corporation 40 Westminster Street Providence, Rhode Island 02940 Attn: Division Counsel Telecopy: (401) 621-5040 By: ______________________________ Name: ______________________________ Its: ______________________________ 12 13 EXHIBIT "A" Legal Description All that real property situated in the State of Nevada, County of Nye, bounded and described as follows: Parcel 1: Lot One (1) Block One (1) of CALVADA VALLEY UNIT NO. 2 as shown by map recorded October 5, 1970 as File No. 20291 in the Office of the County Recorder of Nye County, Nevada. EXCEPTING THEREFROM all of its right, title and interest in and to all of the minerals, including gas, coal, oil and oil shales as disclosed by Deed recorded January 10, 1961 in Book 43, Page 374, Official Records, Nye County, Nevada. Parcel 2: Lot One hundred forty-eight (148) in Block Sixteen (16) of CALVADA VALLEY UNIT NO. 6, as shown by map recorded February 5, 1973 as Document No. 36024 in the Office of the County Recorder of Nye County, Nevada. EXCEPTING THEREFROM all of its right, title and interest in and to all of the minerals, including gas, coal, oil and oil shales as disclosed by Deed recorded January 10, 1961 in Book 43, Page 374, Official Records, Nye County, Nevada. Parcel 3: Parcels One (1) and Three (3) of Parcel Map recorded May 24, 1983 as File No. 81177 and amended by Certificate of Amendment recorded June 14, 1983 as File No. 83144 and by Certificate of Amendment recorded December 12, 1983 as File No. 99135 and by Certificate of Amendment recorded March 16, 1992 as File No. 304864 of Official Records, Nye County, Nevada. Parcel 4: Parcel Two (2) as shown by Parcel Map recorded April 26, 1994 as File No. 351410 of Official Records, Nye County, Nevada. Parcel 5: Lot Forty (40) in Block Six (6) of AMENDED PLAT OF CALVADA VALLEY UNIT 6, recorded December 28, 1993 as Document No. 345007 in the Office of the County Recorder of Nye County, Nevada. 1 14 Lots Nineteen (19) and Nineteen A (19A) (to the extent of Preferred Equities Corporation's reversionary interest in Lot Nineteen A (19A)) of Block Six (6) of CALVADA VALLEY UNIT NO. 6, recorded February 5, 1973 as File No. 36024 of Official Records, Nye County, Nevada, more particularly described as Parcel Nineteen (19) as shown on Parcel Map recorded January 6, 1983 as File No. 72610 of Official Records, Nye County, Nevada. Lot One (1) in Block Fifteen (15), Lots One hundred seventy-three (173) and One hundred seventy-four (174) in Block Eleven (11) and Lot Three hundred twenty-three (323) in Block Six (6) of CALVADA VALLEY UNIT NO. 6, as shown by map recorded February 5, 1973 as Document No. 36024 in the Office of the County Recorder of Nye County, Nevada. 2 15 EXHIBIT "B" 1. A loan made by Lender to Borrower in the amount of up to $7,500,000, evidenced by a promissory note in such amount dated August 9, 1991, and secured by, among other things, a Loan and Security Agreement dated as of July 31, 1991, by and between Borrower as borrower and Lender as lender, and guaranteed by MEGO Financial Corp. 2. A loan made by Textron Financial Corporation, a Delaware corporation and an affiliate of Lender's ("Textron"), to Borrower's subsidiary, Steamboat Suites, Inc. ("SSI"), in the amount of up to $15,000,000, evidenced by a promissory note in such amount dated November 30, 1995, and secured by, among other things, a deed of trust from SSI to Textron dated October 5, 1994, as amended or restated, and recorded in the Routt County Clerk and Recorder's office on October 6, 1994, in Book 701 at Page No. 1795, a first amendment to deed of trust from SSI to Textron dated February 27, 1995, and recorded in the Routt County Clerk and Recorder's office on March 22, 1995 in Book 706 at Page 339, a second amendment to deed of trust from SSI to Textron dated November 29, 1996, and recorded in the Routt County Clerk and Recorder's office on December 20, 1996 in Book 728 at Page 320, and as further amended or restated, and guaranteed by Borrower. 1 16 EXHIBIT "C" WHEN RECORDED MAIL TO: DORFINCO CORPORATION c/o Textron Financial Corporation 40 Westminster Street Providence, Rhode Island 02940 Attention: Margaret R. Hayes-Cote, Division Counsel FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT This First Amendment to Loan and Security Agreement (this "Amendment") is made and entered into as of August 12, 1998, by and between PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Borrower"), and DORFINCO CORPORATION, a Delaware corporation ("Lender"). FACTUAL BACKGROUND A. Under a Loan and Security Agreement dated as of August 12, 1998, between Lender as lender and Borrower as borrower (the "Loan Agreement"), Lender has agreed to make a loan in the principal amount of Four Million and 00/100 Dollars ($4,000,000.00) (as defined in the Loan Agreement and herein, the "Loan") to Borrower. Capitalized terms used herein without definition have the meanings given to them in the Loan Agreement. B. Pursuant to the Loan Agreement, the Loan will be cross-collateralized by and cross-defaulted with that certain Loan and Security Agreement, dated as of July 31, 1991, between Lender as lender and Borrower as borrower (herein, the "Related Loan Agreement"), which secures indebtedness of Borrower to Lender in an amount of up to Seven Million Five Hundred Thousand Dollars ($7,500,000) (the "Related Loan"), and other deeds of trust and collateral as described in the Loan Agreement. C. Each of the Loan and the Related Loan is guaranteed by Mego Financial Corp., a New York corporation ("Guarantor"), in accordance with (i) with respect to the Loan, that certain Guaranty Agreement dated of even date herewith, and (ii) with respect to the Related Loan, that certain Guaranty Agreement dated as of July 31, 1991 (collectively, the "Guarantees"). D. Borrower is a wholly-owned subsidiary corporation of Guarantor. It is of material and substantial benefit to Guarantor that the Loan be made to Borrower, and each of Guarantor and 1 17 Borrower acknowledges that it has received full and adequate consideration for the incurrence by it of the additional obligations to Lender as set forth in this Amendment. E. This Amendment is a "Loan Document" as defined in the Loan Agreement. F. Lender and Borrower now wish to amend the Related Loan Agreement to provide that it is cross-defaulted to and cross-collateralized with the obligations of Borrower with respect to the Loan and any other indebtedness and obligations of Borrower to Lender. AGREEMENT Therefore, Lender and Borrower agree as follows: 1. Recitals. The recitals set forth above in the Factual Background are true, accurate and correct. 2. Reaffirmation of Related Loan Agreement. Borrower reaffirms all of its obligations under the Related Loan Agreement, and Borrower acknowledges that it has no claims, offset or defenses with respect to the payment of any sum due under the Related Loan Agreement or any other loan documents, promissory notes or other agreements of any kind evidencing any indebtedness of Borrower to Lender to which it is a party. 3. Amendment. The Related Loan Agreement is hereby amended as follows: (a) The occurrence of a breach, default or event of default under or with respect to the Loan and any Loan Document after the expiration of any applicable grace period shall be an Event of Default or Default under the Related Loan Agreement, as amended. (b) The lien of the Related Loan Agreement shall secure all indebtedness and other obligations of Borrower with respect to the Loan and any other indebtedness and obligations of Borrower to Lender, and to and with all indebtedness and other obligations of Steamboat Suites, Inc., a Colorado corporation, to Lender or its affiliate, Textron Financial Corporation, a Delaware corporation. 4. Conditions Precedent. Before this Amendment becomes effective and any party becomes obligated under it, all of the following conditions shall have been satisfied at Lender's sole cost and expense in a manner acceptable to Lender in the exercise of Lender's sole judgment: (a) Lender shall have received fully executed and acknowledged originals of this Amendment, the attached consent signed by Guarantor and any other documents which Lender may require or request in accordance with this Amendment or the other Loan Documents. 2 18 (b) Lender shall have received reimbursement (or in lieu thereof, shall have retained Loan proceeds in a sufficient amount to cover such costs and expenses), in immediately available funds, of all costs and expenses incurred by Lender in connection with this Amendment, including charges for title insurance (including endorsements), recording, filing and escrow charges, fees for appraisal services, and legal fees and expenses of Lender's counsel. Such costs and expenses may include the actual costs for services for Lender's in-house staffs, such as legal and appraisal services. 5. Borrower's Representation and Warranties. Borrower represents and warrants to Lender as follows: (a) Accuracy. All representations and warranties made and given by Borrower herein are true, accurate and correct. (b) No Default. No Default or Event of Default has occurred and is continuing under the Related Loan Agreement or this Amendment, and no event has occurred and is continuing which, with notice or the passage of time or both, would be a Default or Event of Default. (c) Property. Borrower continues to lawfully possess and hold title to the property encumbered by the Related Loan Agreement, as amended by this Amendment, and the security interests, collateral assignments and other collateral transfers made by Borrower in the Related Loan Agreement as amended constitute a first and prior security interest encumbering that property, subject to permitted exceptions to title approved by Lender. 6. No Prejudice: Reservation of Rights. This Amendment shall not prejudice any rights or remedies of Lender under the Loan Documents. Lender reserves, without limitation, all rights which it has against any indemnitor, guarantor, or endorser of the promissory note secured by the Related Loan Agreement. 7. No Impairment. Except as specifically hereby amended, the Related Loan Agreement shall remain unaffected by this Amendment, and the Related Loan Agreement shall remain in full force and effect. Nothing in this Amendment shall impair the security interests, collateral assignments or other collateral transfers arising under the Related Loan Agreement, which shall remain a security agreement, creating a first priority security interest in the property described therein, subject to permitted exceptions to title approved by Lender. 8. Intentionally Omitted. 9. Miscellaneous. If any court of competent jurisdiction determines any provision of this Amendment to be invalid, illegal or unenforceable, that portion shall be deemed severed from this Amendment, which shall remain in full force and effect as though the invalid, illegal or unenforceable portion had never been a part hereof. This Amendment shall be governed by the laws 3 19 of the State of Nevada, without regard to the choice of law rules of that State. As used here, the word "includes(s)" means "Include(s), without limitation", and the word "including" means "including, but not limited to." BORROWER: PREFERRED EQUITIES CORPORATION, a Nevada corporation By: /s/ Frederick H. Conte ---------------------------------------- Name: Frederick H. Conte -------------------------------------- Title: President ------------------------------------- LENDER: DORFINCO CORPORATION, a Delaware corporation By:_________________________________________ Name:_______________________________________ Title:______________________________________ 4 20 GUARANTOR'S CONSENT The undersigned Guarantor hereby consents to the terms, conditions and provisions of the foregoing First Amendment to Loan and Security Agreement and the transactions contemplated by it. Guarantor hereby affirms the full force and effectiveness of the Guarantees (as defined therein) and its obligations thereunder with respect to any indebtedness and obligations of Borrower to Lender or any of its affiliates guaranteed by Guarantor. Dated: August 12, 1998 ACKNOWLEDGED BY GUARANTOR: MEGO FINANCIAL CORP., a New York corporation By: /s/ Richard L. Rodriguez ------------------------------------ Name: Richard L. Rodriguez ---------------------------------- Title: Vice President --------------------------------- 5 21 EXHIBIT "D" WHEN RECORDED MAIL TO: TEXTRON FINANCIAL CORPORATION 40 Westminster Street Providence, Rhode Island 02940 Attention: Margaret R. Hayes-Cote, Division Counsel THIRD AMENDMENT TO COMBINATION DEED OF TRUST, SECURITY AGREEMENT AND FIXTURE FILING This Third Amendment to Combination Deed of Trust, Security Agreement and Fixture Filing (this "Amendment") is made and entered into as of August 12, 1998, by and between STEAMBOAT SUITES, INC., a Colorado corporation ("Grantor"), and TEXTRON FINANCIAL CORPORATION, a Delaware corporation ("Beneficiary"). FACTUAL BACKGROUND A. Under a Loan and Security Agreement dated as of August 12, 1998, between Dorfinco Corporation, a Delaware corporation and an affiliate of Beneficiary's, as lender ("Lender") and Preferred Equities Corporation as borrower ("Borrower") (the "Loan Agreement"), Lender has agreed to make a loan in the principal amount of up to Four Million and 00/100 Dollars ($4,000,000.00) (as defined in the Loan Agreement and herein, the "Loan") to Borrower. Capitalized terms used herein without definition have the meanings given to them in the Loan Agreement. B. Pursuant to the Loan Agreement, the Loan will be cross-collateralized by and cross-defaulted with a deed of trust securing a loan in the original principal amount of $15,000,000 from Beneficiary to Grantor dated October 5, 1994, as amended or restated, and recorded in the Routt County Clerk and Recorder's office on October 6, 1994, in Book 701 at Page No. 1795, a first amendment to deed of trust from Grantor to Beneficiary dated February 27, 1995, and recorded in the Routt County Clerk and Recorder's office on March 22, 1995 in Book 706 at Page 339, a second amendment to deed of trust from Grantor to Beneficiary dated November 29, 1996, and recorded in the Routt County Clerk and Recorder's office on December 20, 1996 in Book 728 at Page 320, and as further amended or restated (herein, the "Deed of Trust"), and other deeds of trust and collateral as described in the Loan Agreement. C. The Loan is guaranteed by Mego Financial Corp., a New York corporation ("Guarantor"), in accordance with that certain Guaranty Agreement dated of even date herewith 1 22 (the "Guaranty"). The indebtedness secured by the Deed of Trust is guaranteed by Borrower, in accordance with a guaranty agreement dated on or about the date of the Deed of Trust. D. Borrower is a wholly-owned subsidiary corporation of Guarantor. Grantor is a wholly-owned subsidiary corporation of Borrower. It is of material and substantial benefit to Guarantor and Grantor that the Loan be made to Borrower, and Grantor acknowledges that it has received full and adequate consideration for the incurrence by it of the additional obligations to Beneficiary as set forth in this Amendment. E. This Amendment is a "Loan Document" as defined in the Loan Agreement. F. Grantor and Beneficiary now wish to amend the Deed of Trust to provide that it is cross-defaulted to and cross-collateralized with the obligations of Borrower with respect to the Loan and any other indebtedness and obligations of Borrower to Beneficiary or Lender, and to and with the obligations of Steamboat Suites, Inc., a Colorado corporation, with respect to all indebtedness and other obligations of Steamboat Suites, Inc. to Beneficiary. AGREEMENT Therefore, Grantor and Beneficiary agree as follows: 1. Recitals. The recitals set forth above in the Factual Background are true, accurate and correct. 2. Reaffirmation of Deed of Trust. Grantor reaffirms all of its obligations under the Deed of Trust, and Grantor acknowledges that it has no claims, offset or defenses with respect to the payment of any sum due under the Deed of Trust or any other loan documents, promissory notes or other agreements of any kind evidencing any indebtedness of Grantor to Beneficiary to which it is a party. 3. Amendment. The Deed of Trust is hereby amended as follows: (a) The occurrence of a breach, default or event of default under or with respect to the Loan and any Loan Document after expiration of any applicable grace period shall be an Event of Default under this Deed of Trust, dated October 5, 1994, as amended or restated, and recorded in the Routt County Clerk and Recorder's office on October 6, 1994, in Book 701 at Page No. 1795, as amended by a first amendment to deed of trust from Grantor to Beneficiary dated February 27, 1995, and recorded in the Routt County Clerk and Recorder's office on March 22, 1995 in Book 706 at Page 339, as further amended by a second amendment to deed of trust from Grantor to Beneficiary dated November 29, 1996, and recorded in the Routt County Clerk and Recorder's office on December 20, 1996 in Book 728 at Page 320, and as amended by that certain Third Amendment to Combination Deed of 2 23 Trust, Security Agreement and Fixture Filing dated as of August 12, 1998, between Grantor and Beneficiary. (b) The lien of this Deed of Trust shall secure all indebtedness and other obligations of Preferred Equities Corporation, with respect to the Loan and any other indebtedness and obligations of Preferred Equities Corporation to Beneficiary or Lender, and to and with all indebtedness and other obligations of Steamboat Suites, Inc., a Colorado corporation, to Beneficiary. 4. Conditions Precedent. Before this Amendment becomes effective and any party becomes obligated under it, all of the following conditions shall have been satisfied at Grantor's sole cost and expense in a manner reasonably acceptable to Beneficiary: (a) Beneficiary shall have received fully executed and acknowledged originals of this Amendment, the attached consents signed by Guarantor and Borrower, as borrower and guarantor, and any other documents which Beneficiary may require or request in accordance with this Amendment or the other Loan Documents. (b) Beneficiary shall have received reimbursement (or in lieu thereof, shall have retained Loan proceeds in a sufficient amount to cover such costs and expenses), in immediately available funds, of all costs and expenses incurred by Beneficiary in connection with this Amendment, including charges for title insurance (including endorsements), recording, filing and escrow charges, fees for appraisal services, and legal fees and expenses of Beneficiary's or Lender's counsel. Such costs and expenses may include the actual costs for services for Beneficiary's or Lender's in-house staffs, such as legal and appraisal services. 5. Grantor's Representation and Warranties. Grantor represents and warrants to Beneficiary as follows: (a) Accuracy. All representations and warranties made and given by Grantor herein are true, accurate and correct. (b) No Default. No Default or Event of Default has occurred and is continuing under the Deed of Trust or this Amendment, and no event has occurred and is continuing which, with notice or the passage of time or both, would be a Default or Event of Default. (c) Property. Grantor continues to lawfully possess and hold fee simple title to the property encumbered by the Deed of Trust, as amended by this Amendment, and the Deed of Trust as amended is a first and prior lien on that property, subject to permitted exceptions to title approved by Beneficiary. 6. No Prejudice: Reservation of Rights. This Amendment shall not prejudice any rights or remedies of Beneficiary or Lender under the Loan Documents. Each of Beneficiary and Lender 3 24 reserves, without limitation, all rights which it has against any indemnitor, guarantor, or endorser of the promissory note secured by the Deed of Trust. 7. No Impairment. Except as specifically hereby amended, the Deed of Trust shall remain unaffected by this Amendment, and the Deed of Trust shall remain in full force and effect. Nothing in this Amendment shall impair the liens of the Deed of Trust, which shall remain a deed of trust with the power of sale, creating a first lien(s) encumbering the property described therein, subject to permitted exceptions to title approved by Beneficiary. 8. Disclosure to Title Company. Without notice to or the consent of Grantor, Beneficiary may disclose to any title insurance company which insures any interest of Beneficiary under the Deed of Trust, as amended hereby (whether as primary insurer, coinsurer or reinsurer) any information, data or material in Beneficiary's possession relating to Grantor, the indebtedness secured by the Deed of Trust, as amended hereby, and/or the property secured by the Deed of Trust. 9. Miscellaneous. If any court of competent jurisdiction determines any provision of this Amendment to be invalid, illegal or unenforceable, that portion shall be deemed severed from this Amendment, which shall remain in full force and effect as though the invalid, illegal or unenforceable portion had never been a part hereof. This Amendment shall be governed by the laws of the State of Colorado, without regard to the choice of law rules of that State. As used here, the word "includes(s)" means "Include(s), without limitation", and the word "including" means "including, but not limited to." GRANTOR: STEAMBOAT SUITES, INC., a Colorado corporation By: /s/ FREDERICK H. CONTE ------------------------------------------ Name: Frederick H. Conte ---------------------------------------- Title: President --------------------------------------- BENEFICIARY: TEXTRON FINANCIAL CORPORATION, a Delaware corporation By: ------------------------------------------ Name: ---------------------------------------- Title: --------------------------------------- 4 25 STATE OF NEVADA COUNTY OF CLARK This instrument was acknowledged before me on August 12, 1998 by Frederick H. Conte as President of Steamboat Suites, Inc., a Colorado corporation. /s/ MARY A. FAIR [NOTARY PUBLIC SEAL] ------------------------------------ Notary Public My commission expires: Oct. 30, 1998 STATE OF ____________ COUNTY OF ___________ This instrument was acknowledged before me on ________________, 1998 by _______________ as ______________ of Textron Financial Corporation, a Delaware corporation. ------------------------------------ Notary Public My commission expires: _____________ 26 CONSENTS The undersigned hereby consent to the terms, conditions and provisions of the foregoing Third Amendment to Combination Deed of Trust, Security Agreement and Fixture Filing and the transactions contemplated by it. Guarantor hereby affirms the full force and effectiveness of its guaranty agreement and obligations thereunder with respect to any indebtedness and obligations of Grantor and Borrower guaranteed by Guarantor. Borrower hereby affirms the full force and effectiveness of its obligations to Lender under the Loan Documents and its guaranty agreement and obligations with respect to any indebtedness and obligations of Grantor to Beneficiary guaranteed by Borrower. Dated: August 12, 1998 ACKNOWLEDGED: PREFERRED EQUITIES CORPORATION, a Nevada corporation By: /s/ FREDERICK H. CONTE ---------------------------------- Name: Frederick H. Conte -------------------------------- Title: President ------------------------------- ACKNOWLEDGED BY GUARANTOR: MEGO FINANCIAL CORPORATION, a New York corporation By: /s/ RICHARD L. RODRIGUEZ ---------------------------------- Name: Richard L. Rodriguez -------------------------------- Title: Vice President ------------------------------- 6 27 STATE OF NEVADA COUNTY OF CLARK This instrument was acknowledged before me on August 12, 1998 by Frederick H. Conte as President of Preferred Equities Corporation, a Nevada corporation. /s/ MARY A. FAIR [NOTARY PUBLIC SEAL] ------------------------------------ Notary Public My commission expires: Oct. 30, 1998 STATE OF NEVADA COUNTY OF CLARK This instrument was acknowledged before me on August 12, 1998 by Richard L. Rodriguez as Vice President of Mego Financial Corporation, a New York corporation. /s/ MARY A. FAIR [NOTARY PUBLIC SEAL] ------------------------------------ Notary Public My commission expires: Oct. 30, 1998 28 EXHIBIT "E" LITIGATION REPORT 1. ROBERT J. FEENEY vs. MEGO MORTGAGE CORPORATION, JEFFREY S. MOORE, AND MEGO FINANCIAL CORP. United States District Court Northern District, Atlanta Georgia Case No. 1:98CV0593-CAM; filed February 23, 1998 On February 23, 1998, an action was filed in the United States District Court of Georgia, Civil Action No. 1:98CV0593-CAM by Robert J. Feeney, plaintiff, as a purported class action against Mego Mortgage Corporation and Jeffrey S. Moore, the former President and Chief Executive Officer of Mego Mortgage Corporation. The complaint alleges, among other things, that the defendants violated the federal securities laws in connection with the preparation and issuance of certain Mego Mortgage Corporation's financial statements. The named plaintiff seeks to represent a class consisting of purchasers of the common stock of Mego Mortgage Corporation between April 11, 1997 and December 18, 1997, and seeks other such relief as the Court may deem just and proper. Mego Financial Corp. ("the Company") was served on July 30, 1998 with an amended complaint which, among other things, adds Mego Financial Corp. as a defendant, adds John Cole, Trent Hildebrand, Burt W. Price and Frank J. Murphy as plaintiffs and alleges an expansion of the purported class to certain purchaser's of Mego Mortgage Corporation's common stock from April 11, 1997 through May 20, 1998. The Company's counsel have not completed their review of the above matter; however, the Company was not the parent company of Mego Mortgage Corporation at the time when the matters which are cited in the above-described action occurred. The Company does not believe that any judgment obtained will have a material adverse effect on the Company's or Preferred Equities Corporation's business or financial condition. 2. THOMAS J. MULVEY vs. PREFERRED EQUITIES CORPORATION a.k.a. CALVADA SPRINGS CORPORATION District Court, Clark County, Nevada Case No. A371479; filed March 26, 1997 and served March 31, 1997 The Plaintiff filed this personal injury lawsuit on March 26, 1997 and is seeking (i) general damages in excess of $10,000 and (ii) special damages in excess of $10,000 for medical expenses, loss of income/wages, attorneys' fees, costs of suit and interest allowed by law. The suit is based on a third party assault and battery upon Plaintiff while entering upon Defendant's property. The assailant was not an employee, agent or servant of the Defendant. The Defendant's insurance carrier has accepted the case for insurance defense, subject to the limits of the Defendant's comprehensive general liability insurance policy maintained with Reliance Insurance Company ("Policy"). The Policy provides $1MM coverage per occurrence and $2MM aggregate coverage for all occurrences. In 1. 29 this connection, Defendant also maintains a supplemental umbrella liability insurance policy with Federal Insurance Company ("Umbrella Policy") for $20MM additional coverage for any amounts exceeding the $2MM Policy limit, or an aggregate of $22MM combined insurance coverage. The Company is of opinion that (i) the case is fully insured (ii) the Company has valid defenses and (iii) any judgement obtained will not have a material adverse effect on the Company's business or financial condition. 3. ROBERT SANBORN AND ERLINE SANBORN vs. PREFERRED EQUITIES CORPORATION d.b.a. RAMADA VACATION SUITES District Court, Clark County, Nevada Case No. A382124; filed December 9, 1997 and served January 15, 1998. The Plaintiffs' filed this personal injury lawsuit on December 9, 1997 and are seeking (i) general damages in excess of $10,000 and (ii) special damages in excess of $10,000 for medical expenses, loss of income/wages, emotional distress and (iii) punitive damages in excess of $10,000, plus attorneys' fees and costs of suit. The suit is based on a third party assault and battery upon Plaintiff Robert Sanborn in the presence of his wife, Earline Sanborn, while entering upon Defendant's property. The assailants were not employees, agents or servants of Defendant. The Defendant's insurance carrier, Reliance Insurance Company, has accepted the case for insurance defense, subject to the limits of the comprehensive general liability policy ("Policy"). In this connection, Defendant also maintains a supplemental umbrella liability insurance policy with Federal Insurance Company for $20 MM additional coverage for any amounts exceeding the $2 MM limits of the Policy or an aggregate of $22 MM combined insurance coverage. The Company is of opinion that (i) the case is fully insured (ii) the Company has valid defenses and (iii) any judgement obtained will not have a material adverse effect on the Company's business or financial condition. 4. LILLIAN MCGILL vs. PREFERRED EQUITIES CORPORATION District Court, Washoe County, Nevada Case No. CV-N-98-00307-HDM; filed June 8, 1998 and served June 15, 1998 Plaintiff filed suit under Title VII of the 1964 Civil Rights Act. Plaintiff alleges sexual harassment and an offensive work environment. Plaintiff seeks damages in the amount of $300,000.00. Defense of this matter has been tendered to the company's insurance carrier. The Company is of opinion that the case is insured. 5. JAMES BRADLEY and CAROLE BRADLEY vs. WHITE SANDS RAMADA INN RESORTS and FRANK VILIMORE First Circuit Court, State of Hawaii Civil No. 98-1932-04 Plaintiff filed suite alleging negligence. Plaintiff was illegally parked in a handicapped 2. 30 parking space. Plaintiff suffered heart pains when told to move his vehicle and has sued for negligence. Plaintiff has offered to settle for $5,000.00. The case has been referred to the Company's insurance defense carrier and is fully insured. 6. GUS CHAFOULEAS vs. PREFERRED EQUITIES CORPORATION d.b.a. RAMADA VACATION SUITES District Court, Clark County, Nevada Case No. A389814; filed June 19, 1998 and served on June 24, 1998 Plaintiff filed suit alleging negligence. After swimming Plaintiff slipped and fell when exiting the Defendant's swimming pool located at 100 Winnick Avenue, Las Vegas, Nevada. Plaintiff sustained injury to his shoulder and has sued Defendant for negligence. Plaintiff seeks general damages in excess of $10,000. The case has been referred to Defendant's insurance carrier for insurance defense. The Company is of opinion the case is fully insured. 3. 31 PROMISSORY NOTE $4,000,000.00 Las Vegas, Nevada Funding Date: The date funds August 12, 1998 are wire transferred by Lender FOR VALUE RECEIVED and pursuant to the terms of this Promissory Note ("Note"), the undersigned, PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Maker") promises to pay to the order of DORFINCO CORPORATION, a Delaware corporation ("Lender") (the Lender and all subsequent holders of this Note being hereinafter referred to as the "Holder") at 40 Westminster Street, Providence, Rhode Island 02940, Attention: Accounting Department, or at such other place as the Holder hereof may designate in writing, the principal sum of up to Four Million and no/100 Dollars ($4,000,000.00), or so much as may be outstanding hereunder from time to time (the "Loan"), together with interest on the unpaid principal balance of such indebtedness from time to time outstanding, at the rate or rates hereinafter set forth. 1. SECURITY. The payment of this Note and all interest, fees and charges herein is evidenced and/or secured by (a) a first lien Deed of Trust, Security Agreement and Fixture Filing ("Deed of Trust") by Maker for the benefit of Lender, of even date herewith encumbering certain real property (the "Property") located in the County of Nye, State of Nevada, and described more particularly on Exhibit "A" to the Deed of Trust; (b) certain other real and personal property and owned by Maker or its subsidiaries, encumbered by certain deeds of trust, or security agreements, as amended, described on Exhibit "B" to the Loan Agreement (as defined herein); (c) a Loan and Security Agreement ("Loan Agreement") of even date herewith between Maker as borrower and Lender as lender; and (d) such other documents which recite that they evidence, relate to or have been given as security for this Note (all the aforementioned documents shall herein be referred to as "Security Documents"). 2. INTEREST RATE. 1. On and after the Funding Date (until maturity or default as hereinafter provided), interest shall accrue and be due monthly in arrears at the rate per annum of three percent (3%) above the "Prime Rate" as announced by Chase Manhattan Bank, N.A. or the successor thereto (the "Basic Interest Rate"), with the Basic Interest Rate for any given calendar month being calculated by using the Prime Rate in effect on the first (1st) day of each month during the term hereof, provided, however, the Basic Interest Rate shall not be less than ten and one-half percent (10.5%) per annum at any time during the original term of this Note and any extension. In the event Chase Manhattan Bank, N.A., or any successor thereto, shall discontinue announcement of said Prime Rate, a comparable index designated by Holder shall be used in calculating the Basic Interest Rate. Interest 1 32 under this Note shall be calculated based on the actual number of days of interest accrual using a year of 360 days. 2. (a) Interest that will accrue for the period commencing with the Funding Date and continuing through August 31, 1998 at the Basic Interest Rate on the principal sum advanced shall be paid on the first day of the first full month after the Funding Date. (b) Commencing on the first (1st) day of September, 1998 and continuing on the first (1st) day of each and every month thereafter through and including the Maturity Date or the Extended Maturity Date (as defined below), as applicable, all interest accrued at the Basic Interest Rate shall be due and payable monthly in arrears. (c) Unless the term of this Note is extended as provided below, on August 31, 1999 (the "Maturity Date"), or on such earlier date as this Note becomes due and payable, whether by acceleration or otherwise, the entire outstanding principal balance hereof, together with accrued but unpaid interest thereon, and all other sums owing to Holder hereunder or under the Security Documents, shall be due and payable in full. 3. APPLICATION OF PAYMENT. All principal, interest and any other amounts due under this Note shall be payable in lawful money of the United States of America at the place or places above stated. All payments shall be credited first to costs and expenses, if any, incurred by Holder in collecting any amounts due hereunder, second to any Late Charges (as hereinafter defined) and interest accrued at the Default Rate, third to past due interest, and fourth to principal and any other amounts due hereunder or under the Security Documents. 4. EXTENSION. The term of the Loan may be extended at the option of the Maker for an additional one (1) year period (the "Extended Term") (the last day of the Extended Term shall be the "Extended Maturity Date") in accordance with and subject to the following terms and conditions: (a) there shall have been no monetary default whatsoever of any kind that extended beyond any cure period during the initial term of the Loan (including, but not limited to, non-payment of taxes and insurance premiums) and there shall have been no non-monetary default which remains uncured at the time of Maker's election to extend the term of the Loan; (b) there has been no material adverse change in the Property or in the business or financial condition of Maker that would adversely affect its ability to perform according to the Security Documents; (c) Maker may only exercise the option to extend the term of the Loan by giving written notice to Holder not less than thirty (30) days prior to the expiration of the initial term of the Loan, together with the payment of an extension fee in the amount of one and one-half percent (1.5%) of the then outstanding balance of the Loan; (d) interest will accrue on all principal outstanding hereunder throughout the Extended Term at the Basic Interest Rate; (e) during the Extended Term, monthly payments shall be made in arrears equal to the interest 2 33 accrued at the Basic Interest Rate plus fixed principal payments in the following amounts and on the following dates: (i) On November 30, 1999, an installment of principal in an amount necessary and sufficient to cause the total outstanding principal balance remaining under the Note to be Three Million Dollars ($3,000,000.00) or less; (ii) On February 28, 2000, an installment of principal in an amount necessary and sufficient to cause the outstanding principal balance remaining under the Note to be Two Million Dollars ($2,000,000.00) or less; (iii) On May 31, 2000, an installment of principal in an amount necessary and sufficient to cause the outstanding principal balance remaining under the Note to be One Million Dollars ($1,000,000.00); and (iv) On the Extended Maturity Date, which is August 31, 2000, the entire outstanding principal balance of the Loan, plus all accrued and unpaid interest thereon and any other amounts then due and payable under the Note or any of the Loan Documents shall be due and payable; (f) Maker shall provide Holder with an updated title insurance endorsement and such other documentation and evidence reasonably requested by Holder, to confirm Holder's lien position and other interests under the Security Documents; and (g) Maker shall pay, prior to the commencement of the Extended Term, all expenses incurred by Holder for which Maker is billed prior and in connection with the extension, whether or not it is consummated, unless failure to consummate the extension is attributable to the sole fault of Holder. 5. LATE PAYMENT CHARGES. In the event that any monthly payment is not received at the above said address (or at such other place as is designated pursuant to the terms hereof) before the tenth (10th) day after the due date thereof, in addition to any other permitted charges hereunder, a one-time late payment fee ("Late Charge") shall be due and owing to Holder in the amount of five percent (5%) of each monthly payment as it becomes past due and, if the Note has been accelerated, an additional five percent (5%) of the accelerated balance if not paid when due. Holder shall have no obligation to accept any payments hereunder not accompanied by all outstanding late payment fees. Notwithstanding anything contained herein or in any Security Document, this paragraph is not intended to, and shall not, create any grace period or indulgence by Holder with respect to the punctual payment by Maker of all sums owed Holder, nor shall this paragraph in any way hinder, prevent or delay Holder from exercising any remedy which it may have hereunder or under any Security Document, or at law or in equity, with respect to Maker's failure timely to make any payment when due. Maker acknowledges that the Late Charge is not imposed as a charge for the use 3 34 of money, but rather is imposed to permit Holder to recoup its administrative charges and other costs in dealing with loans not paid on time, and the Late Charge shall in no way be deemed an interest charge. 6. INTEREST UPON DEFAULT. In the event that any payment of principal, interest, Late Charge or any prepayment premium under this Note is not paid before the tenth (10th) day after its due date, whether or not by reason of acceleration, and/or if there occurs a default under the Security Documents, or in or under any other document or instrument evidencing, securing, or otherwise relating to the indebtedness evidenced hereby, which default is not cured within the applicable notice and/or grace period, if any, expressly provided therefor, such failure shall constitute a default hereunder, and such amount shall bear interest from the due date thereof until paid at the rate of five percent (5%) per annum in excess of the Basic Interest Rate (the "Default Rate"). 7. ACCELERATION. In the event of any default by Maker hereunder or under the Security Documents, and after the expiration of any applicable cure periods specified hereunder or under the Security Documents, Holder may at its option, in addition to any other remedies to which it may be entitled, declare the total unpaid principal balance of the indebtedness evidenced hereby, together with all accrued but unpaid interest thereon and all other sums owing, immediately due and payable and all such amounts shall thereafter bear interest at the Default Rate; provided, however, the Default Rate shall not accrue on any Late Charges. All such interest shall be paid at the time of and as a condition precedent to the curing of any default should Holder, in its sole discretion, allow such default to be cured. Time is of the essence in this Note. 8. PREPAYMENT. (a) The Loan may be prepaid at any time, in whole or in part, without penalty or premium, upon thirty (30) days prior written notice to Holder, and upon payment, in addition to such outstanding principal amount, all accrued and unpaid interest and all other amounts due hereunder shall be paid. (b) Notwithstanding anything in this Note or any Security Document to the contrary, no prepayment premium shall be charged with respect to the proceeds of any insurance policy or condemnation which are applied by Holder to the principal balance of this Note and any such application of insurance or condemnation proceeds shall be deemed a permitted prepayment hereunder. 9. LIMIT OF VALIDITY. All agreements between the Maker and the Holder hereof are expressly limited so that in no contingency or event whatsoever, whether by reason of advancement of the proceeds hereof, 4 35 acceleration of maturity of the unpaid principal balance hereof, or otherwise, shall the amount paid or agreed to be paid to the Holder hereof for the use, forbearance or detention of the money to be advanced hereunder exceed the highest lawful rate permissible under applicable usury laws. If, from any circumstances whatsoever fulfillment of any provision hereof or of the Security Documents shall involve transcending the limit of validity prescribed by any law which a court of competent jurisdiction may deem applicable hereto, then, ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity, and, if from any circumstance the Holder hereof shall ever receive as interest an amount which would exceed the highest lawful rate, such amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance due hereunder and not to the payment of interest. This provision shall control every other provision of all agreements between the Maker and the Holder hereof. 10. MISCELLANEOUS. (a) Any remittances hereunder by check or draft shall be credited on the date of receipt subject to the condition that such check or draft may be handled for collection in accordance with the practice of the collecting bank or banks and any receipt issued therefore shall be void unless the amount due is actually received by Holder hereof. (b) If interest, principal or other sum owing under this Note is not paid when due, after giving effect to any applicable grace period, whether at maturity or by acceleration, the Maker promises to pay all reasonable costs of collection, including but not limited to, attorneys' fees and all expenses incurred by the Holder in connection with the collection of this Note, the protection or realization of the collateral and enforcement of any guaranty on account of such collection, whether or not suit is filed hereon. Such fees shall include, without limitation, costs and attorneys' fees incurred in any appeal. (c) Maker and all sureties, endorsers, guarantors and all other parties now or hereafter liable for the payment of this Note, in whole or in part, hereby severally waive presentment for payment, demand and protest and notice of protest, acceleration, or dishonor and non-payment of this Note, and expressly consent to any extension of time of payment hereof or of any installment hereof, to the release of any party liable for this obligation, to the release, change or modification of any collateral posted as security for the payment of this Note, and any such extension, modification or release may be made without notice to any of said parties and without in any way affecting or discharging this liability, provided Maker must consent to any change or modification of collateral. (d) No single or partial exercise of any power hereunder shall preclude other or further exercise thereof or the exercise of any other power. The Holder hereof shall at all times have the right to proceed against any portions of security held herefor in such order and in such manner as the Holder may deem fit, without waiving any rights with respect to any other security. No delay or omission on the part of Holder hereof in exercising any right or remedy hereunder or the acceptance of one or more installments from any person after a default hereunder or under the Security Documents shall operate as a waiver of such right or remedy or of any other right or remedy under this Note nor as a waiver of such right or remedy in connection with any future default. 5 36 (e) If more than one person has executed this Note or becomes obligated under this Note, the obligations and covenants of each such person shall be joint and several. The release by Holder of any party liable on this Note shall not operate to release any other party liable hereon. (f) In the event any one or more of the provisions contained in this Note shall for any reason be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Note, but this Note shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. (g) All notices hereunder shall be deemed to have been duly given if delivered in accordance with the provisions set forth in Paragraph 3.07 of the Deed of Trust; references to notice provisions contained therein relating to (i) the Grantor thereunder shall be applicable to Maker, and (ii) the Beneficiary thereunder shall be applicable to Holder. (h) This Note may not be waived, changed, modified or discharged orally, except by an agreement in writing signed by the party against whom the enforcement of waiver, change, modification or discharge is sought. (i) The underlined words appearing at the commencement of the paragraphs are included only as a guide to the contents thereof and are not to be considered as controlling, enlarging or restructuring the language or meaning of those paragraphs. (j) As used herein, the terms "Maker" and "Holder" shall be deemed to include their respective heirs, successors, legal representatives and assigns, whether voluntary, by action of the parties, or involuntary by operation of law. (k) This Note is to be governed by and construed in accordance with the laws of the State of Rhode Island without regard to conflict of laws principles; provided, however, that the laws of the State of Nevada shall apply with respect to the procedural and substantive requirements of Nevada real property and personal property law with request to any foreclosure or other action to realize all real and personal property collateral security for the Loan. Subject to the foregoing proviso, the Maker hereby consents to the non-exclusive personal jurisdiction of the federal and state courts located in Providence County, Rhode Island in any and all actions between the Maker and the Holder arising under or in connection with this Note, the Loan or any of the Security Documents. FOR AND IN CONSIDERATION OF HOLDER'S ADVANCEMENT OF THE PRINCIPAL SUM HEREUNDER IN THE AMOUNT OF $4,000,000.00, THE MAKER, BEING AN EXPERIENCED DEVELOPER AND PARTICIPANT IN SOPHISTICATED REAL ESTATE VENTURES, AND HAVING CONSULTED WITH COUNSEL OF ITS CHOOSING, HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY ACTION OR PROCEEDING (I) BROUGHT BY THE MAKER, THE HOLDER OR ANY OTHER PERSON RELATING TO (A) THE LOAN OR (B) THE SECURITY DOCUMENTS, OR (II) TO WHICH THE HOLDER IS A PARTY. THE MAKER HEREBY AGREES THAT THIS NOTE CONSTITUTES A WRITTEN CONSENT TO WAIVER OF TRIAL BY JURY, AND THE MAKER DOES HEREBY CONSTITUTE AND 6 37 APPOINT THE HOLDER ITS TRUE AND LAWFUL ATTORNEY-IN-FACT, WHICH APPOINTMENT IS COUPLED WITH AN INTEREST, AND THE MAKER DOES HEREBY AUTHORIZE AND EMPOWER THE HOLDER, IN THE NAME, PLACE AND STEAD OF THE MAKER, TO FILE THIS NOTE WITH THE CLERK OR JUDGE OF ANY COURT OF COMPETENT JURISDICTION AS A STATUTORY WRITTEN CONSENT TO WAIVER OF TRIAL BY JURY. THE MAKER ACKNOWLEDGES THAT ITS WAIVER OF TRIAL BY JURY HAS BEEN MADE KNOWINGLY, INTENTIONALLY AND WILLINGLY BY MAKER AS PART OF A BARGAINED FOR LOAN TRANSACTION. EXECUTED as a sealed document as of the day and year first above written. PREFERRED EQUITIES CORPORATION, a Nevada corporation By: /s/ FREDERICK H. CONTE ------------------------------------------ Name: Frederick H. Conte ---------------------------------------- Title: President --------------------------------------- 7 38 STATE OF NEVADA UNIFORM COMMERCIAL CODE -- FINANCING STATEMENT -- FORM UCC-1 This FINANCING STATEMENT is presented for filing pursuant to the Nevada Uniform Commercial Code IMPORTANT: Read Instructions on back before filling out form Receipt No.___ - -------------------------------------------------------------------------------- 1. DEBTOR (ONE NAME ONLY) [X] LEGAL BUSINESS NAME Preferred Equities Corporation [ ] INDIVIDUAL (LAST NAME FIRST) - -------------------------------------------------------------------------------- 1A. SOCIAL SECURITY OR FEDERAL TAX NO. - -------------------------------------------------------------------------------- 1B. MAILING ADDRESS 1C. CITY, STATE 1D. ZIP CODE 4310 Paradise Road Las Vegas, Nevada 89109 - -------------------------------------------------------------------------------- 1E. RESIDENCE ADDRESS 1F. CITY, STATE 1G. ZIP CODE - -------------------------------------------------------------------------------- 2. ADDITIONAL DEBOT (IF ANY) (ONE NAME ONLY) [ ] LEGAL BUSINESS NAME [ ] INDIVIDUAL (LAST NAME FIRST) - -------------------------------------------------------------------------------- 2A. SOCIAL SECURITY OR FEDERAL TAX NO. - -------------------------------------------------------------------------------- 2B. MAILING ADDRESS 2C. CITY, STATE 2D. ZIP CODE - -------------------------------------------------------------------------------- 2E. RESIDENCE ADDRESS 2F. CITY, STATE 2G. ZIP CODE - -------------------------------------------------------------------------------- 3. [ ] ADDITION DEBTOR(S) ON ATTACHED SHEET - -------------------------------------------------------------------------------- 4. SECURED PARTY NAME DORFINCO CORPORATION MAILING ADDRESS 40 Westminster Street CITY Providence STATE Rhode Island ZIP CODE 02940 - -------------------------------------------------------------------------------- 4A. SOCIAL SECURITY NO. FEDERAL TAX NO. OR BANK TRANSIT AND A.B.A. NO. - -------------------------------------------------------------------------------- 5. ASSIGNEE OF SECURED PARTY (IF ANY) NAME MAILING ADDRESS CITY STATE ZIP CODE - -------------------------------------------------------------------------------- 5A. SOCIAL SECURITY NO. FEDERAL TAX NO. OR BANK TRANSIT AND A.B.A. NO. - -------------------------------------------------------------------------------- 6. This FINANCING STATEMENT covers the following types of items of property (if crops or timber, include description of real property on which growing or to be growing and name of record owner of such real estate; if fixtures, description of real property to which affixed or to be affixed and name of record owner of such real estate; if oil, gas or minerals, include description of real property from which to be extracted). See Exhibit "A" and "B" attached hereto and hereby incorporated herein by this reference. 6A. ______________________________ 6C. $________________________________ SIGNATURE OF RECORD OWNER MAXIMUM AMOUNT OF INDEBTEDNESS TO BE SECURED AT ANY ONE TIME 6B. ______________________________ (OPTIONAL) (TYPE) RECORD OWNER OF REAL PROPERTY - -------------------------------------------------------------------------------- 7. CHECK IF APPLICABLE [X] A. [X] Proceeds of collateral are also covered B. [ ] Products of collateral are also covered C. [ ] Proceeds of above described original collateral in which a security interest was perfected (Debtor's Signature Not Required) D. [ ] Collateral was brought into this State subject to security interest in another jurisdiction (Debtor's Signature Not Required) - -------------------------------------------------------------------------------- 8. CHECK IF APPLICABLE [X] [ ] DEBTOR IS A "TRANSMITTING UTILITY" IN ACCORDANCE WITH NRS 704.205 AND NRS 104.9403. - -------------------------------------------------------------------------------- 9. (Date) August 12 1998 ----------------------------- Preferred Equities Corporation By /s/ [SIG] President --------------------------------------------------------------------------- SIGNATURE(S) OF DEBTOR(S) (TITLE) --------------------------------------------------------------------------- DORFINCO CORPORATION TYPE NAME(S) By --------------------------------------------------------------------------- SIGNATURE(S) OF SECURED PARTY(IES) (TITLE) --------------------------------------------------------------------------- TYPE NAME(S) - -------------------------------------------------------------------------------- 10. Return Copy to: NAME Margaret R. Hayes-Cote, Division Counsel TRUST ADDRESS Textron Financial Corporation ACCOUNT CITY, STATE 40 Westminster Street NUMBER AND ZIP Providence, Rhode Island 02940 (If Applicable) ---------- - -------------------------------------------------------------------------------- 11. This Space for Use of Filing Officer: (Date, Time, File Number and Filing Officer) - -------------------------------------------------------------------------------- 39 Debtor: Preferred Equities Corporation Secured Party: DORFINCO CORPORATION Item 6 - continued EXHIBIT "A" This Financing Statement covers all of Debtor's interest in and to the following, whether now existing or hereafter coming into existence, and all substitutions, replacements, renewals and additions thereto or thereof: (a) all interests in land, estates, easements, rights, improvements, property, fixtures, equipment, furniture, furnishings, appliances and appurtenances, of every nature whatsoever (collectively, the "Premises") now or hereafter situated on the real estate described on Exhibit "B" hereto (the "Land"); (b) all construction materials, vaults, gas, electric and other utility fixtures, radiators, heaters, engines, machinery, boilers, ranges, elevators, plumbing and heating fixtures, draperies, carpeting and other floor coverings, fire extinguishers and any other safety equipment, washers, dryers, water heaters, water fountains, mirrors, mantels, air conditioning apparatus, refrigerating plants, refrigerators, cooking apparatus and appurtenances, window screens, awnings and storm sashes, which are or shall be attached to said buildings, structures or improvements and all other furnishings, furniture, goods which are or are to become fixtures, machinery, equipment, inventory, supplies, appliances, and tangible personal property of every kind and nature whatsoever now or hereafter owned by Debtor and located in, on or about, or used or intended to be used with or in connection with the use, operation or enjoyment of the Land and the improvements thereon, and all attachments, additions, improvements, after-acquired property, renewals, proceeds and replacements of any of the foregoing and all the right, title and interest of Debtor in any of the foregoing property which is subject to or covered by any conditional sales contract, chattel mortgage or similar lien or claim, together with the benefit of any deposits or payments now or hereafter made by Debtor or on behalf of Debtor with respect thereto, all of which are hereby declared and shall be deemed to be fixtures and accessions to the freehold and a part of the Premises as between the parties hereto and all persons claiming by, through or under them, and which shall be deemed to be a portion of the security for the indebtedness described in and to be secured by, among other things, that certain Loan and Security Agreement (the "Loan Agreement") dated as of August 12, 1998, between Secured Party as lender and Debtor as borrower, and that certain Deed of Trust and Security Agreement and Fixture Filing (the "Deed") dated as of August 12, 1998, by and among Debtor, as grantor, United Title of Nevada, a Nevada corporation, as trustee and Secured Party, as beneficiary; 1 40 (c) all now owned or hereafter acquired easements, rights-of-way, strips, gores of land, streets, ways, alleys, passages, sewer rights, waters, water courses, water rights and powers, and all estates, rights, titles, interests, privileges, liberties, tenements, hereditaments and appurtenances whatsoever, in any way belonging, relating or appertaining to the Premises or any part thereof, or which hereafter shall in any way belong, relate or be appurtenant thereto, and the reversions, remainders, rents, issues, profits, revenues, accounts, contract rights and general intangibles of or arising from the Premises (including without limitation all payments under room occupancy agreements, all leases or tenancies, proceeds of insurance, prepaid insurance premiums, condemnation payments, tenant security deposits, escrow funds and payments from motel guests), and all the estate, right, title, interest, property, possession, claim and demand whatsoever at law, as well as in equity, of Debtor of, in and to the same; (d) any and all leases, subleases, rental agreements, occupancy agreements, licenses, concessions, entry fees, other agreements which grant a possessory interest in all or any part of the Premises, together with all rents, issues, profits, revenues, proceeds, awards, accounts, security deposits and other benefits now or hereafter arising from the use and enjoyment of the Land and improvements thereon or any part thereof; (e) all other personal property in any way connected with the use or enjoyment of the Premises; and (f) all proceeds of any of the foregoing. 2 41 Debtor: Preferred Equities Corporation Secured Party: DORFINCO CORPORATION Item 6 - continued EXHIBIT "B" Legal Description of Land All that real property situated in the State of Nevada, County of Nye, bounded and described as follows: Parcel 1: Lot One (1) Block One (1) of CALVADA VALLEY UNIT NO. 2 as shown by map recorded October 5, 1970 as File No. 20291 in the Office of the County Recorder of Nye County, Nevada. EXCEPTING THEREFROM all of its right, title and interest in and to all of the minerals, including gas, coal, oil and oil shales as disclosed by Deed recorded January 10, 1961 in Book 43, Page 374, Official Records, Nye County, Nevada. Parcel 2: Lot One hundred forty-eight (148) in Block Sixteen (16) of CALVADA VALLEY UNIT NO. 6, as shown by map recorded February 5, 1973 as Document No. 36024 in the Office of the County Recorder of Nye County, Nevada. EXCEPTING THEREFROM all of its right, title and interest in and to all of the minerals, including gas, coal, oil and oil shales as disclosed by Deed recorded January 10, 1961 in Book 43, Page 374, Official Records, Nye County, Nevada. Parcel 3: Parcels One (1) and Three (3) of Parcel Map recorded May 24, 1983 as File No. 81177 and amended by Certificate of Amendment recorded June 14, 1983 as File No. 83144 and by Certificate of Amendment recorded December 12, 1983 as File No. 99135 and by Certificate of Amendment recorded March 16, 1992 as File No. 304864 of Official Records, Nye County, Nevada. Parcel 4: Parcel Two (2) as shown by Parcel Map recorded April 26, 1994 as File No. 351410 of Official Records, Nye County, Nevada. 3 42 Parcel 5: Lot Forty (40) in Block Six (6) of AMENDED PLAT OF CALVADA VALLEY UNIT 6, recorded December 28, 1993 as Document No. 345007 in the Office of the County Recorder of Nye County, Nevada. Lots Nineteen (19) and Nineteen A (19A) (to the extent of Preferred Equities Corporation's reversionary interest in Lot Nineteen A (19A)) of Block Six (6) of CALVADA VALLEY UNIT NO. 6, recorded February 5, 1973 as File No. 36024 of Official Records, Nye County, Nevada, more particularly described as Parcel Nineteen (19) as shown on Parcel Map recorded January 6, 1983 as File No. 72610 of Official Records, Nye County, Nevada. Lot One (1) in Block Fifteen (15), Lots One hundred seventy-three (173) and One hundred seventy-four (174) in Block Eleven (11) and Lot Three hundred twenty-three (323) in Block Six (6) of CALVADA VALLEY UNIT NO. 6, as shown by map recorded February 5, 1973 as Document No. 36024 in the Office of the County Recorder of Nye County, Nevada. 4 43 Las Vegas, Nevada 89102 STATE OF NEVADA 18315 Phone 800-945-0092 UNIFORM COMMERCIAL CODE -- FINANCING STATEMENT -- FORM UCC-1 THIS FINANCING STATEMENT IS PRESENTED FOR FILING PURSUANT TO THE NEVADA UNIFORM COMMERCIAL CODE IMPORTANT: READ INSTRUCTIONS ON BACK BEFORE FILLING OUT FORM. RECEIPT NO. ____________________ ==================================================================================================================================== 1. DEBTOR 1A. SOCIAL SECURITY OR FEDERAL TAX NO. [X] LEGAL BUSINESS NAME Preferred Equities Corporation [ ] INDIVIDUAL (LAST NAME FIRST) - ------------------------------------------------------------------------------------------------------------------------------------ 1B. MAILING ADDRESS 1C. CITY, STATE 1D. ZIP CODE 4310 Paradise Road Las Vegas, Nevada 89109 - ------------------------------------------------------------------------------------------------------------------------------------ 1E. RESIDENCE ADDRESS 1F. CITY, STATE 1G. ZIP CODE - ------------------------------------------------------------------------------------------------------------------------------------ 2. ADDITIONAL DEBTOR (IF ANY) (ONE NAME ONLY) 2A. SOCIAL SECURITY OR FEDERAL TAX NO. [ ] LEGAL BUSINESS NAME [ ] INDIVIDUAL (LAST NAME FIRST) - ------------------------------------------------------------------------------------------------------------------------------------ 2B. MAILING ADDRESS 2C. CITY, STATE 2D. ZIP CODE - ------------------------------------------------------------------------------------------------------------------------------------ 2E. RESIDENCE ADDRESS 2F. CITY, STATE 2G. ZIP CODE ==================================================================================================================================== 3. [ ] ADDITIONAL DEBTOR(S) ON ATTACHED SHEET ==================================================================================================================================== 4. SECURED PARTY 4A. SOCIAL SECURITY NO. FEDERAL TAX NO. NAME DORFINCO CORPORATION OR BANK TRANSIT AND A.B.A. NO. MAILING ADDRESS 40 Westminster Street CITY Providence STATE Rhode Island ZIP CODE 02940 ==================================================================================================================================== 5. ASSIGNEE OF SECURED PARTY (IF ANY) 5A. SOCIAL SECURITY NO. FEDERAL TAX NO. NAME OR BANK TRANSIT AND A.B.A. NO. MAILING ADDRESS CITY STATE ZIP CODE ==================================================================================================================================== 6. This FINANCING STATEMENT covers the following types or items of property (if crops or timber, include description of real property on which growing or to be growing and name of record owner of such real estate; if fixtures, include description of real property to which affixed or to be affixed and name of record owner of such real estate; if oil, gas or minerals, include description of real property from which to be extracted). See Exhibit "A" and "B" attached hereto and hereby incorporated herein by this reference [THIS SPACE FOR USE OF FILING OFFICER] 6a. _________________________________________________________ 6C. $________________________________________________________ SIGNATURE OF RECORD OWNER MAXIMUM AMOUNT OF INDEBTEDNESS TO BE SECURED AT ANY ONE TIME (OPTIONAL) 6B. _________________________________________________________ (TYPE) RECORD OWNER OF REAL PROPERTY ==================================================================================================================================== 7. Check A. [X] Proceeds of B. [ ] Products of C. [ ] Proceeds of above described D. [ ] Collateral was brought if collateral collateral original collateral in which into this State subject Applicable are also are also a security interest was to security interest in [X] covered covered perfected (Debtor's Signature another jurisdiction Not Required) (Debtor's signature Not Required) ==================================================================================================================================== 8. Check if [ ] DEBTOR IS A "TRANSMITTING UTILITY" IN ACCORDANCE WITH NRS 704.205 AND NRS 104.9403. Applicable [X] ==================================================================================================================================== 9. (Date) August 12, 1998 11. This Space for Use of Filing Officer: (Date, Time, PREFERRED SECURITIES CORPORATION File Number and Filing Officer) PRESIDENT By /s/ [SIG] ________________________________________________________________ SIGNATURE(S) OF DEBTOR(S) TITLE ___________________________________________________________________ DORFINCO CORPORATION TYPE NAME(S) By ________________________________________________________________ SIGNATURE(S) OF SECURED PARTY(IES) (TITLE) ___________________________________________________________________ TYPE NAME(S) ======================================================================== RETURN COPY TO: NAME Margaret R. Hayes-Cote, Division Counsel TRUST ADDRESS Textron Financial Corporation ACCOUNT CITY, STATE 40 Westminster Street NUMBER AND ZIP Providence, Rhode Island 02940 (IF APPLICABLE) WHITE -- Alphabetical; PINK -- Acknowledgement; _______________ GREEN -- Secured Party; BLUE -- Debtor.
44 ENVIRONMENTAL INDEMNITY AGREEMENT THIS ENVIRONMENTAL INDEMNITY AGREEMENT (this "Agreement") is entered into as of the 12th day of August, 1998 by and between DORFINCO CORPORATION, a Delaware corporation ("Indemnitee") and PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Indemnitor"). The parties hereto enter into this contract with reference to the following facts: A. Indemnitee has agreed to make a loan to Indemnitor in the amount of Four Million and 00/100 Dollars ($4,000,000.00) (the "Loan"). The Loan is to be evidenced by a Promissory Note (the "Note"), and the Note is to be secured by a Deed of Trust, Security Agreement and Fixture Filing (the "Deed of Trust") encumbering certain property located in the County of Nye, State of Nevada (such property or any parcel or portion thereof is herein the "Property") as more particularly described on Exhibit "A" attached hereto and incorporated herein by this reference. The making of the Loan is subject to a condition precedent that Indemnitor make and deliver this Indemnity Agreement to Indemnitee. B. Indemnitor acknowledges that Indemnitee would not make the Loan in the absence of this Agreement. C. Indemnitor acknowledges that Indemnitee may sustain Losses (as defined herein) both prior to and following a foreclosure of Indemnitee's security interest in the Property pursuant to the Deed of Trust. D. Indemnitor acknowledges and agrees that any amounts owed to Indemnitee by Indemnitor pursuant to the provisions of this Agreement are not secured by the Deed of Trust nor are they related in any manner to any amounts owed to Indemnitee pursuant to the Note and that said liabilities shall survive and continue to be of full force and effect notwithstanding a sale or foreclosure conducted pursuant to the Deed of Trust, the making of a deed in lieu of foreclosure in favor of Indemnitee or a transfer of any other interest in the Property, whether by Indemnitor or Indemnitee or by any successor or assignee of Indemnitor or Indemnitee. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. Hazardous Substances. As used herein, "Hazardous Substance" means any substance, material, element, compound, mixture, solution, waste, pollutant or matter that may give rise to liability under (i) the Resource Conservation Recovery Act, as amended by the Hazardous and Solid Waste Amendments of 1984 (RCRA, 42 U.S.C. Sections 6901 et seq.); (ii) the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 (CERCLA, 42 U.S.C. Sections 9601 et. seq.); (iii) the Clean Water Act (CWA, 33 U.S.C. Sections 1251, et seq.); (iv) the Safe Drinking Water Act (14 U.S.C. Sections 1401, et seq.); (v) the Toxic Substances Control Act (TSCA, 15 U.S.C. Sections 2601 et seq.); (vi) the Hazardous Materials Transportation Act (49 U.S.C. Sections 1801, et seq.); (vii) the Emergency Planning and Community Right to Know Act of 1986 (42 U.S.C., Sections 11001, et seq.); 1 45 (viii) the Clean Air Act (42 U.S.C. Sections 7401, et seq.); (ix) the Endangered Species Act (16 U.S.C. Sections 1531, et seq.); (x) any regulations promulgated pursuant to Items (i) - (ix) above; (xi) any similar local, state or federal laws, rules, ordinances or regulations either in existence as of the date hereof, or enacted or promulgated after the date of this Agreement, that concern the management, control, storage, discharge, treatment, containment, removal and/or transport of substances or materials that are or may become a threat to public health or the environment; or (xii) any common law theory involving materials or substances which are (or alleged to be) hazardous to human health or the environment, based on nuisance, trespass, negligence, strict liability or other tortious conduct (items (i) through (xi) are collectively referred to herein as "Environmental Laws"). 2. Indemnity. Indemnitor hereby agrees to indemnify, save, defend (at Indemnitor's sole cost and expense) and hold harmless Indemnitee, Textron Financial Corporation and Textron, Inc., and their respective officers, directors, agents, and employees, and the successors and assigns of each of the foregoing (all of such persons or entities being collectively referred to herein as "Indemnified Persons" and each such reference shall refer jointly and severally to each such person), from and against the full amount of any and all Losses, except, however, to the extent that any such Losses are caused by the gross negligence or wilful misconduct of Indemnitee, Textron Financial Corporation and/or Textron, Inc. "Losses" shall mean any and all liabilities, obligations, losses, damages, penalties, claims, actions, suits, costs, expenses and disbursements (including, but not limited to, all attorneys' fees and all other professional or consultants' expenses incurred in investigating, preparing for, serving as a witness in or defending against any action or proceeding, whether actually commenced or threatened, which may be asserted against any Indemnified Person), arising from, in respect of, as a consequence of, or in connection with any of the following: (a) the removal of any Hazardous Substance on or released from the Property, whether such removal is done or completed by Indemnitor, Indemnitee, or any other person or entity and regardless of whether or not such removal is rendered pursuant to a court order or the order of an administrative agency; (b) claims asserted by any person or entity (including, without limitation, any governmental agency or quasi-governmental authority, board, bureau, commission, department, instrumentality or public body, court, or administrative tribunal (a "Governmental Agency")), in connection with or in any way arising out of the presence, storage, use, disposal, generation, transportation, or treatment of any Hazardous Substance on, in or under the Property, either prior to or after the date of this Agreement and either prior to, during, or after the time that Indemnitor became owner of the Property; (c) the violation or claimed violation of any Environmental Laws in regard to the Property, whether such violation or claimed violation occurred prior to or after the date of this Agreement and regardless of whether such violation occurred prior to, during, or after the time that Indemnitor became owner of the Property; or (d) the preparation of an environmental audit on the Property, whether conducted or authorized by Indemnitor, Indemnitee, or a third party or the implementation of any environmental audit's recommendations, provided, however, that Indemnitee shall have had reasonable grounds to believe that an environmental audit was justified due to such Indemnitee's reasonable belief as to the presence or probable presence of any Hazardous Substance on the Property and that such presence could give rise to a material adverse effect on the Property or the ability of Indemnitor to 2 46 repay the Loan or perform its obligations with respect thereto. Nothing in this Agreement shall be deemed to imply a right by Indemnitee to go onto the Property except as specifically set forth herein or in any of the Security Documents. 3. Payments. Payments under this indemnity in respect of all Losses shall be due and payable as such Losses are incurred. The Indemnified Person shall provide Indemnitor notice of any claim that may result in a Loss with reasonable promptness, and Indemnitor shall have the right to defend the same; provided, however, that failure by an Indemnified Person to give such notice shall not relieve Indemnitor from any liability, duty or obligation hereunder, except to the extent Indemnitor has been prejudiced by any delay or failure to provide such notice. Indemnitor will pay interest on any amount not paid from the time such Losses are incurred prior to the date of notice at the non-Default Rate described in the Note and shall pay interest on any such amount not paid within ten (10) days of notice from Indemnitee to Indemnitor that such amount is due and payable at the Default Rate, but in no event to exceed the maximum interest rate allowed by law. The Indemnified Persons shall be entitled to recover the full amount of all items to be indemnified or reimbursed pursuant to this Agreement, regardless of whether (i) such items are incurred or suffered pursuant to an order of any Governmental Agency relating to the cleaning up, remedying or other responsive action required by applicable law, or (ii) any Indemnified Person now or hereafter has or should have had actual knowledge of any environmental condition giving rise to an indemnification or reimbursement obligations under this Agreement. 4. Obligation to Defend. (a) Assumption of Defense. Indemnitor is bound to defend any and all actions or proceedings that may be brought against any Indemnified Person in connection with or arising out of the matters covered by this Agreement upon receipt of written notice from any Indemnified Person that a claim of a nature described in this indemnity has been asserted against such Indemnified Person. In the event that Indemnitor is defending an Indemnified Person, Indemnitor may settle the claim only with the Indemnified Person's prior written consent, said consent or the denial thereof to be in the Indemnified Person's reasonable discretion. (b) Delivery of Acknowledgment. Within thirty (30) days from the date of receipt by Indemnitor from Indemnified Person of a notice of claim pursuant to the foregoing Paragraph 4(a), Indemnitor must acknowledge in a writing satisfactory to the Indemnified Person its duty to defend (the "Acknowledgment"); provided, however, that until the Indemnified Person receives the Acknowledgment, the Indemnified Person shall be entitled to defend such claim and Indemnitor shall be bound in the manner set forth in subparagraph 4(d) hereof. (c) Conduct of Defense; Participation by Indemnified Person. In the event that Indemnitor is defending an Indemnified Person, such defense shall be conducted by reputable attorneys retained by Indemnitor, satisfactory to said Indemnified Person in its reasonable discretion, at Indemnitor's sole cost and expense. In addition, said Indemnified Person shall have the right to participate in such proceedings and to be represented by attorneys of its own choosing. The Indemnified Person shall be responsible for the costs of such participation unless the Indemnified 3 47 Person shall have concluded in its reasonable discretion that the interests of the Indemnified Person and of Indemnitor in the action conflict in such a manner and to such an extent as to require, consistent with applicable standards of professional responsibility, retention of separate counsel for the Indemnified Person, in which case Indemnitor shall pay for separate counsel chosen by the Indemnified Person. (d) Indemnitor's Failure to Defend. If Indemnitor fails to deliver the Acknowledgment or fails to choose counsel satisfactory to the Indemnified Person, Indemnitor shall not thereafter be entitled to elect to defend, and Indemnitor shall be bound by and shall be conclusively liable for the results obtained by the Indemnified Person, including without limitation the amount of any judgment or good faith out-of-court settlement or compromise and all costs and fees of counsel incurred by the Indemnified Person in connection therewith. 5. Intentionally Omitted. 6. Notification by Indemnitor. Indemnitor agrees promptly, upon its receipt of notice thereof, to notify Indemnitee of the commencement of any litigation or proceedings pending, threatened or commenced (whether or not served) against Indemnitor or any other party in connection with Hazardous Substances and the Property and of the receipt of any notice from any Governmental Agency in regard to Hazardous Substances and the Property. Indemnitor shall immediately upon receipt provide the Indemnified Person with true, complete and correct copies of all such notices and other documentation related to said notices, litigation or proceedings. 7. Invalidity. If any terms of this Agreement shall be held invalid, illegal or unenforceable, such provisions shall be severable from the rest of this Agreement and the validity, legality, or enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 8. Attorneys' Fees. In any action to enforce or interpret this Agreement, the prevailing party shall be entitled to receive from the losing party its attorneys' fees and costs incurred in connection therewith. 9. No Time Limit. There is no time limitation on Indemnitor' obligations hereunder, and the Indemnitor waives all present and future statutes of limitations as a defense to any action to enforce the provisions of this Agreement. 10. Notice. All notices, demands or requests provided for or permitted to be given pursuant to this Agreement must be in writing and shall be deemed to have been properly given or served by depositing the same with a nationally recognized overnight courier service or in the United States Mail, postpaid and registered or certified return receipt requested, and addressed to the addresses specified below. All notices, demands and requests shall be effective upon being deposited with a nationally recognized courier service or, on the date that is two (2) business days after such deposit, upon being deposited in the United States Mail. Rejection or other refusal to accept or the inability to deliver because of changed address of which no notice was given shall be deemed to be receipt of the notice, demand or request sent. By giving at least thirty (30) days written notice hereof, 4 48 Indemnitor or the Indemnitee shall have the right from time to time and at any time during the term of this Agreement to change their respective addresses. "Indemnitee" and "Indemnified Persons" DORFINCO CORPORATION c/o Textron Financial Corporation 40 Westminster Street Providence, Rhode Island 02940 Attn: Division Counsel "Indemnitor" PREFERRED EQUITIES CORPORATION 4310 Paradise Road Las Vegas, Nevada 89109 Attn: President and General Counsel 11. Captions, Gender, and Number. Any section or paragraph, title or caption contained in this Agreement is for convenience only and shall not be deemed a part of this Agreement. As used in this Agreement, the masculine, feminine or neuter gender, and the singular or plural number, shall each be deemed to include the others whenever the context so allows. 12. Indemnified Persons' Rights. The parties hereto expressly acknowledge that this Agreement is made expressly only for the benefit of the Indemnified Persons. 13. Successors and Assigns. This Agreement shall be binding upon, and inure to the benefit of, the parties named herein and their respective successors and assigns. Indemnitor's obligations hereunder shall survive and continue to be of full force and effect notwithstanding a foreclosure conducted pursuant to the Deed of Trust, the making of a deed in lieu of foreclosure by Indemnitor in favor of Indemnitee or a transfer of any other interest in the Property, whether by Indemnitor or Indemnitee or by any successor or assignee of Indemnitor or Indemnitee. 14. Failure or Indulgence Not Waiver. No failure or delay on the part of an Indemnified Person in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any power, right or privilege preclude any other or further exercise of any such power, right or privilege. All powers, rights and privileges hereunder are cumulative to, and not exclusive of, any powers, rights or privileges otherwise available. 15. Governing Law. This Agreement is to be governed by and construed in accordance with the laws of the State of Rhode Island without regard to conflict of laws principles; provided, however, that the laws of the State of Nevada shall apply with respect to the procedural and substantive requirements of Nevada real property and personal property law with respect to any 5 49 foreclosure or other action to realize all real and personal property collateral security for the Loan located within the State of Nevada. 16. Joint and Several Obligation. If more than one person has executed this Agreement as Indemnitor or becomes obligated under this Agreement as Indemnitor, the obligations and covenants of each such person shall be joint and several. The release by Indemnitee of any party liable under this Agreement shall not operate to release any other party liable hereunder. 17. Effect of this Agreement. This Agreement shall remain in full force and effect and continue to be effective should any petition be filed by or against the Indemnitor under the Bankruptcy Code, as the same may be amended, for liquidation or reorganization, or should Indemnitor become insolvent or make an assignment for the benefit of creditors or should a receiver or trustee be appointed for the benefit of creditors or should a receiver or trustee be appointed for all or any significant part of the Indemnitor's assets. This Agreement shall continue to be effective if at any time payment or performance of the Indemnitor's obligations (or any part thereof) under the Deed of Trust or the other Security Documents (as defined in the Deed of Trust) is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by Indemnitee, whether as a "preferential transfer," "voidable preference," "fraudulent conveyance," or otherwise, as if the portion of such payment rescinded, reduced, restored, or returned had never been made. 18. Jury Trial; Jurisdiction. Indemnitor hereby waives the right to trial by jury in any litigation arising out of, relating to, or connected with this Agreement, it being acknowledged by Indemnitor that Indemnitor is a professional developer engaged and knowledgeable in sophisticated commercial real estate transactions and that Indemnitor makes this waiver of trial by jury knowingly and voluntarily and only after consultation with sophisticated legal counsel of Indemnitor's choosing. Indemnitor hereby consents to the non-exclusive personal jurisdiction of the federal and state courts located in Providence County, Rhode Island in any and all actions between the Indemnitor and the Indemnitee arising under or in connection with this Agreement, the Loan or any of the Security Documents. IN WITNESS WHEREOF, Indemnitor has executed this Agreement as of the date and year first written above. "Indemnitor" PREFERRED EQUITIES CORPORATION, a Nevada corporation By: /s/ FREDERICK H. CONTE ----------------------------------- Name: Frederick H. Conte ---------------------------------- Title: President --------------------------------- 50 "Indemnitee" DORFINCO CORPORATION, a Delaware corporation By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- 7 51 EXHIBIT "A" LEGAL DESCRIPTION OF PROPERTY All that real property situated in the State of Nevada, County of Nye, bounded and described as follows: Parcel 1: Lot One (1) Block One (1) of CALVADA VALLEY UNIT NO. 2 as shown by map recorded October 5, 1970 as File No. 20291 in the Office of the County Recorder of Nye County, Nevada. EXCEPTING THEREFROM all of its right, title and interest in and to all of the minerals, including gas, coal, oil and oil shales as disclosed by Deed recorded January 10, 1961 in Book 43, Page 374, Official Records, Nye County, Nevada. Parcel 2: Lot One hundred forty-eight (148) in Block Sixteen (16) of CALVADA VALLEY UNIT NO. 6, as shown by map recorded February 5, 1973 as Document No. 36024 in the Office of the County Recorder of Nye County, Nevada. EXCEPTING THEREFROM all of its right, title and interest in and to all of the minerals, including gas, coal, oil and oil shales as disclosed by Deed recorded January 10, 1961 in Book 43, Page 374, Official Records, Nye County, Nevada. Parcel 3: Parcels One (1) and Three (3) of Parcel Map recorded May 24, 1983 as File No. 81177 and amended by Certificate of Amendment recorded June 14, 1983 as File No. 83144 and by Certificate of Amendment recorded December 12, 1983 as File No. 99135 and by Certificate of Amendment recorded March 16, 1992 as File No. 304864 of Official Records, Nye County, Nevada. Parcel 4: Parcel Two (2) as shown by Parcel Map recorded April 26, 1994 as File No. 351410 of Official Records, Nye County, Nevada. 1 52 Parcel 5: Lot Forty (40) in Block Six (6) of AMENDED PLAT OF CALVADA VALLEY UNIT 6, recorded December 28, 1993 as Document No. 345007 in the Office of the County Recorder of Nye County, Nevada. Lots Nineteen (19) and Nineteen A (19A) (to the extent of Preferred Equities Corporation's reversionary interest in Lot Nineteen A (19A)) of Block Six (6) of CALVADA VALLEY UNIT NO. 6, recorded February 5, 1973 as File No. 36024 of Official Records, Nye County, Nevada, more particularly described as Parcel Nineteen (19) as shown on Parcel Map recorded January 6, 1983 as File No. 72610 of Official Records, Nye County, Nevada. Lot One (1) in Block Fifteen (15), Lots One hundred seventy-three (173) and One hundred seventy-four (174) in Block Eleven (11) and Lot Three hundred twenty-three (323) in Block Six (6) of CALVADA VALLEY UNIT NO. 6, as shown by map recorded February 5, 1973 as Document No. 36024 in the Office of the County Recorder of Nye County, Nevada. 2 53 GUARANTY AGREEMENT This GUARANTY AGREEMENT ("Guaranty") made as of the 12th day of August, 1998, by the undersigned party ("Guarantor") to, with, and for the benefit of DORFINCO CORPORATION ("Lender"), a Delaware corporation, having its principal office at 40 Westminster Street, Providence, Rhode Island 02940. WITNESSETH: WHEREAS, PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Borrower") desires to obtain a $4,000,000.00 loan ("Loan") from Lender; WHEREAS, Lender is unwilling to make the Loan to Borrower unless Guarantor guarantees to Lender the full and timely payment and satisfaction of the Obligations (as hereinafter defined) of Borrower; and WHEREAS, Guarantor acknowledges that the making of the Loan by Lender to Borrower provides direct benefits to Guarantor; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and of other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and in order to induce Lender to make the Loan to Borrower, and intending to be legally bound, Guarantor does hereby warrant, represent and covenant unto Lender as follows: 1. GUARANTY AND SURETY. Guarantor hereby absolutely and unconditionally guarantees, and becomes surety for, the full and timely payment and performance of the Obligations. 2. OBLIGATIONS. 2.1 The word "Obligations" as used throughout this Guaranty means all debts, obligations, and liabilities of Borrower arising out of or relating to the following documents each of even date herewith: 2.1.1. Promissory Note ("Note") made by Borrower to the order of Lender in an original face amount of $4,000,000.00; 2.1.2. Loan and Security Agreement (the "Loan Agreement") by and between Borrower and Lender; 2.1.3 Environmental Indemnity Agreement given by Borrower to Lender; and 1 54 2.1.4 The other documents, instruments and agreements described in the Loan Agreement as loan or security documents. (All of the foregoing, including any future modifications thereto, are hereinafter collectively referred to as the "Loan Documents"). Without limiting the generality of the foregoing, "Obligations" is used herein in its most comprehensive sense to include all debts, obligations and indebtedness described in the Loan Documents, whether now or hereafter made, incurred, or created, voluntary or involuntary, due to not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and regardless of whether there is any recourse with respect to any portion of such Obligations as against Borrower. 3. SUBSEQUENT ACTS BY LENDER. Lender may, at its sole discretion and without notice to Guarantor, take any action permitted under the Loan Documents which might otherwise be deemed a legal or equitable release or discharge of Guarantor's obligations hereunder without either impairing or affecting the liability of Guarantor for payment of the Obligations, which actions might include, by way of illustration and not limitation: 3.1 the renewal or extension of any of the Obligations or any payments hereunder; 3.2 the acceptance of partial payment of the Obligations; 3.3 the settlement, release, compounding, compromise, cancellation, rearrangement or consolidation of any of the Obligations; 3.4 the collection of or other liquidation of any claims Lender may have in respect to the Obligations; 3.5 the granting of indulgences, forebearances, compromises, extensions or adjustments in respect to any covenant or agreement under the Loan Documents; 3.6 the release from liability of any Guarantor and/or any additional parties who may guarantee payment of the Obligations or any portion thereof; 3.7 the release, surrender, exchange or compromise to or with Borrower of any lien, security or collateral held by Lender as security for the Obligations; or 3.8 the release or compromise of any lien or security held by Lender as security for the liability of any person who is guarantying the Obligations. 2 55 4. EXPENSES. Guarantor agrees to reimburse Lender for all reasonable expenses that are not reimbursed by Borrower (including without limitation reasonable attorneys' fees and expenses) incurred in good faith by Lender in enforcing the Obligations, pursuing any remedies set forth in the Loan Documents, and enforcing this Guaranty. Guarantor shall not have any obligation for payment of reimbursement of any cost or expense incurred by Lender, Textron Financial Corporation or any assignee of this Guaranty for salaries or wages of their respective officers or employees or for any fixed overhead expenses. 5. PAYMENT BY GUARANTOR. Upon the occurrence and during the continuance of an Event of Default under the Loan Documents, Guarantor agrees to pay or perform on written demand all the Obligations. Lender shall not be required to liquidate any lien or any other form of security, instrument, or note held by Lender prior to making such demand. THIS IS A GUARANTY OF PAYMENT AND PERFORMANCE AND NOT OF COLLECTION, and Guarantor hereby waives all rights that Guarantor may have, if any, to require that any action be brought against Borrower (or any other person) or to require that resort be first made against any security prior to demanding payment or performance hereunder. 6. CUMULATIVE REMEDIES. Guarantor hereby agrees that all rights and remedies that Lender is afforded by reason of this Guaranty are separate and cumulative and may be pursued separately, successively, or concurrently, as Lender deems advisable. In addition, all such rights and remedies are non-exclusive and shall in no way limit or prejudice Lender's ability to pursue any other legal or equitable rights or remedies that may be available. Without limiting the generality of the foregoing, Guarantor agrees that in any action by Lender by reason of the Obligations, Lender at its election may proceed (a) against Guarantor together with Borrower, (b) against Guarantor and Borrower individually, or (c) against Guarantor only without having commenced any action against or having obtained any judgment against Borrower. 7. WAIVERS BY GUARANTOR. 7.1 Guarantor hereby waives: 7.1.1. notice of acceptance of this Guaranty and of creation of the Obligations; 7.1.2. presentment and notice of non-payment; 7.1.3. protest, notice of protest, and notice of dishonor to Guarantor or to 3 56 any other party with respect to any of the Obligations; 7.1.4. all other notices to which Guarantor might otherwise be entitled; 7.1.5. any defense or circumstance (including, without limitation, disability, insolvency, lack of authority or power, insanity, minority, death or dissolution) which might otherwise constitute a legal or equitable discharge of Guarantor's liability hereunder other than a defense based on the gross negligence or wilful misconduct of Lender; 7.1.6. any defense of Borrower to the Obligations other than a defense based on the gross negligence or wilful misconduct of Lender or satisfaction of the Obligations; 7.1.7. any rights to extension, composition or otherwise under the Bankruptcy Code or any amendments thereof, or under any state or other federal statute; 7.1.8. the right to trial by jury in any litigation arising out of, relating to, or connected with this Guaranty, if being acknowledged by Guarantor that Guarantor is knowledgeable in sophisticated commercial real estate transactions, and that Guarantor makes this waiver of trial by jury knowingly and voluntarily and only after consultation with sophisticated legal counsel of Guarantor's choosing; and 7.1.9. the benefits of Nevada's "one-action rule" under Nev. Rev. Stat. Section 40.430. /s/ [SIG] -------------------- Guarantor's Initials 7.2 It is expressly agreed that Guarantor shall remain liable hereon regardless of whether Borrower is held to be not liable on the Obligations (other than in the case of satisfaction thereof) and regardless of whether all or any portion of the Obligations are "non-recourse" or "limited recourse". It is agreed between Guarantor and Lender that the foregoing waivers are of the essence of the Loan transaction and that, but for this Guaranty and such waivers, Lender would decline to make the Loan. 8. WAIVER AND RELEASE OF SUBROGATION AND PARTICIPATION. Except as otherwise provided in NRS 40.475 and 40.485, Guarantor shall have no right of subrogation in or under the Loan Documents, and no rights of reimbursement, indemnity or 4 57 contribution from the Borrower or any other rights by law, equity, statute or contract that would give rise to a creditor-debtor relationship between Guarantor and the Borrower. Except as otherwise provided in NRS 40.475 and 40.485, Guarantor shall have no right to participate in any way in any of the collateral which is conveyed under the Loan Documents as security for the Obligations. Guarantor hereby explicitly waives and releases any of the above-described rights of subrogation, reimbursement, indemnity, contribution, participation, and any right to require the marshaling of Borrower's assets under any circumstances to the extent Guarantor is legally permitted to do so. /s/ [SIG] -------------------- Guarantor's Initials 9. INDEMNIFICATION. Guarantor expressly agrees that if either Borrower or the Guarantor makes any payment under any Loan Documents (as defined in the Loan Agreement) to Lender, which payment or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, or otherwise required to be repaid to a trustee, receiver or any other party under any bankruptcy act, state or federal law, common law or equitable cause, then to the extent of such repayment, the indebtedness or any part thereof intended to be satisfied, the liens securing the same and this Guaranty shall be revived and continued in full force and effect as if said payment had not been made. 10. REPRESENTATIONS AND WARRANTIES. Guarantor hereby represents and warrants to Lender that: 10.1 Guarantor is a corporation duly organized, validly existing and in good standing under the laws of the State of New York, and has all requisite power, corporate or otherwise, to conduct its business and to execute and deliver, and to perform its obligations under, this Guaranty. 10.2 The execution, delivery and performance by Guarantor of this Guarantor has been duly authorized by all necessary corporate action by Guarantor and does not and will not (i) violate any provisions of the certificate or articles of incorporation, bylaws, or any agreement, law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect to which Guarantor is a party or is subject; (ii) result in, or require the creation or imposition of, any lien upon or with respect to any asset of Guarantor; or (iii) result in a breach of, or constitute a default by Guarantor under, any indenture, loan or credit agreement or any other agreement, document, instrument or certificate to which Guarantor is a party or by which it or any of its assets are bound or affected. 10.3 No approval, authorization, order, license, permit, franchise or consent of, or 5 58 registration, declaration, qualification or filing with, any governmental authority is required in connection with the execution, delivery and performance by Guarantor of this Guaranty. 10.4 Guarantor's last annual financial statements were prepared in accordance with generally accepted accounting principles ("GAAP") and fairly present the financial condition and results of operation of Guarantor as of the date or dates thereof and for the periods covered thereby. There were no material liabilities, direct or indirect, fixed or contingent, of Guarantor as of the dates of such financial statements which were not reflected therein or in the notes thereto, which have not otherwise been disclosed to Lender in writing. Except for any such changes heretofore expressly disclosed in writing to Lender, there has been no material adverse change in the financial condition of Guarantor from the financial conditions shown in the foregoing financial statements, nor has Guarantor incurred any material liabilities, direct or indirect, fixed or contingent, which are not shown in its financial statements. Guarantor is able to pay all of its debts as they become due. Guarantor shall maintain such solvent financial condition, giving effect to this Guaranty, as long as Guarantor is obligated to Lender hereunder. Guarantor's obligations under this Guaranty will not render Guarantor unable to pay its total liabilities. 10.5 Except as otherwise disclosed in the financial statements referred to in Section 10.4 above or in Exhibit "E" to the Loan Agreement, there are no actions, suits, proceedings, orders or injunctions pending or threatened against or affecting Borrower, at law or in equity, or before or by any governmental authority, which could have a material adverse effect on Guarantor. 10.6 No information, exhibit or written report furnished by or on behalf of Borrower to Lender in connection with the Loan contains any material misstatement of fact or omits the statement of a material fact necessary to make any statements contained herein or therein not misleading. 10.7 Guarantor now has no defense whatever to any action, suit or proceeding whatsoever that may be instituted on this Guaranty. 10.8 No other agreement exists between Guarantor and Lender regarding the liability of Guarantor hereunder. 10.9 This Guaranty constitutes a valid obligation of Guarantor. 6 59 11. STRICT PERFORMANCE; WAIVERS. No failure, delay or omission by Lender to exercise any of the rights, powers, remedies and privileges hereunder shall be deemed a waiver thereof and every such right, power, remedy and privilege may be exercised repeatedly. No notice to or demand on Guarantor shall be deemed to be a waiver of the right of Lender to take further action without notice or demand as provided herein. In no event shall any modification or waiver of the provisions of this Guaranty be effective unless in writing executed by Lender. Any waiver granted shall be applicable only in the specific instance for which it is given. Failure of Lender to insist upon strict performance or observance of any of the terms, provisions and covenants hereof or to exercise any right herein contained shall not be construed as a waiver or relinquishment of the right to demand strict performance on the Obligations and shall not be deemed a waiver of the breach of any provision hereof or of any of the Loan Documents. 12. CAPTIONS. The captions appearing herein are used for reference only and shall not be construed as limiting anything set forth herein. 13. SEVERABILITY. The invalidity or unenforceability of any provision of this Guaranty shall not affect the other provisions hereof, and this Guaranty shall be construed as if the invalid or unenforceable provision had never been a part of this Guaranty. 14. GOVERNING LAW. All questions with respect to the construction of this Guaranty and the rights and liabilities of the parties hereto shall be determined in accordance with the applicable provisions of the internal laws of the State of Nevada without regard to the principles of conflicts of laws. 15. ASSIGNMENT; DELEGATION; BINDING EFFECT. After funding of the Loan by Lender, this Guaranty is assignable and transferable by Lender. Each reference herein to Lender shall be deemed to include its successors and assigns, in whose favor the rights and privileges of this Guaranty shall also run. The duties and obligations of Guarantor may not be transferred by Guarantor without the prior written consent of Lender. The duties and obligations of Guarantor shall bind Guarantor's heirs, personal representatives, executors, successors and assigns. 16. TERMINATION; REINSTATEMENT. 16.1 Guarantor's obligations hereunder shall terminate, and this Guaranty shall be 7 60 released, upon payment and performance in full of the Obligations; provided, however and except that, if there exists with respect to the Related Indebtedness (as defined in the Loan Agreement at the time of repayment and performance in full of the Obligations a default or event of default, or any event or circumstance which with the passage of time or giving of notice would become a default or event of default under the Related Loan Documents (as defined in the Loan Agreement), then the release and termination of this Guaranty shall not be granted by Lender for so long as any such default or event of default or such other event or circumstance is continuing. 16.2 This Guaranty shall remain in full force and effect and continue to be effective should any petition be filed by or against Borrower under the Bankruptcy Code, as at any time amended, for liquidation or reorganization, or should Borrower become insolvent or make an assignment for the benefit of creditors or a receiver or trustee be appointed for all or any significant part of Borrower's assets, and this Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time payment of the Obligations, or any part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by Lender, whether as a "preferential transfer," "voidable preference," "fraudulent conveyance," or otherwise, as if the portion of such payment rescinded, reduced, restored or returned had never been made. 17. NOTICES. All notices, demands or requests provided for or permitted to be given pursuant to this Agreement must be in writing and shall be deemed to have been properly given or served by depositing the same with a nationally recognized overnight courier service or in the United States Mail, postpaid and registered or certified return receipt requested, and addressed to the addresses specified below. All notices, demands and requests shall be effective upon being deposited with a nationally recognized courier service or, on the date that is two (2) business days after such deposit, upon being deposited in the United States Mail. Rejection or other refusal to accept or the inability to deliver because of changed address of which no notice was given shall be deemed to be receipt of the notice, demand or request sent. By giving at least thirty (30) days written notice hereof, Guarantor and Lender shall have the right from time to time and at any time during the term of this Agreement to change their respective addresses. 8 61 The addresses are: Lender: Dorfinco Corporation 40 Westminster Street Providence, Rhode Island 02940 Attention: Division Counsel Telecopy No. (401) 621-5040 Guarantor: 4310 Paradise Road Las Vegas, NV 89109 Attention: President and General Counsel Telecopy No. (702) 369-4398 w/copy to: Mr. Jerome J. Cohen, President 1125 N.E. 125th Street Suite 206 North Miami, FL 33161 Telecopy No. (305) 899-1824 18. JURISDICTION. Guarantor hereby consents to the non-exclusive personal jurisdiction of the federal and state courts located in Clark County, Nevada in any and all actions between the Guarantor and Lender arising under or in connection with this Guaranty, the Loan or any of the Loan Documents. IN WITNESS WHEREOF, Guarantor has duly executed this Guaranty the day and year first above written. MEGO FINANCIAL CORP., a New York corporation By /s/ RICHARD L. RODRIGUEZ -------------------------------- Name: Richard L. Rodriguez ------------------------------ Its: Vice President ------------------------------ 9 62 SUBORDINATION AGREEMENT TO: DORFINCO CORPORATION 40 Westminster Street Providence, Rhode Island 02940 Ladies and Gentlemen: The undersigned Mego Financial Corp., a New York corporation ("Creditor") is or may be a creditor of Preferred Equities Corporation, a Nevada corporation ("Debtor"). Creditor understands that Debtor has requested you to extend credit to Debtor, but that you are unwilling to do so unless you first receive Creditor's subordination agreement as herein contained. In order to induce you at any time or from time to time at your option, to make loans or extend credit or other accommodation or benefit to or for the account of Debtor, under the Loan Agreement (as hereinafter defined), or to grant such renewals or extensions as you may deem advisable, it is agreed as follows: 1. Creditor and Debtor represent and warrant to you that, (a) At May 31, 1998, the total PEC Indebtedness owing by Debtor to Creditor is $961,000.00. "PEC Indebtedness" as used herein shall mean present indebtedness and any future indebtedness of Debtor to Creditor which may be from time to time directly or indirectly incurred, including any negotiable instruments evidencing same, all debts, demands, monies, indebtedness, liabilities and obligations owed or to become owing including interest, principal, costs and other charges, and all claims, rights, causes of action, judgments, decrees or other obligations of any kind whatsoever; provided, however, that the term "PEC Indebtedness" does not include any sums 1 63 payable by Debtor to Creditor from time to time under income tax sharing arrangements between Debtor and Creditor. (b) there is no default in the PEC Indebtedness from Debtor to Creditor. 2. Creditor agrees with you that the PEC Indebtedness and all security therefor shall be and hereby is subordinated to the obligations of Debtor to you with respect to the Loan (as defined in the Loan Agreement) and all other obligations of Debtor to you under any and all of the Loan Documents (as defined in the Loan Agreement) (collectively, the "Obligations") to the extent (and only to the extent) hereinafter provided. After the occurrence and during the continuance of an Event of Default under, and as defined in, that certain Loan and Security Agreement (the "Loan Agreement"), of even date herewith between you, as lender, and Debtor, as borrower: (a) the payment of the PEC Indebtedness shall be deferred until the full payment of the Obligations (including all interest accruing after the date of filing of a petition by or against Debtor under any bankruptcy act or code) of any nature whatsoever now due to you from Debtor or which may hereafter be incurred and become due to you from Debtor. (b) Creditor will not, without your prior written consent, assert, collect, enforce or release the PEC Indebtedness or any part thereof or take any action to foreclose, realize upon or release any collateral securing the PEC Indebtedness or enforce any security agreements, real estate mortgages, lien instruments, or other encumbrances securing the PEC Indebtedness. (c) Creditor will hold in trust and immediately pay to you in the same form of payment received from application upon the amount now or hereafter owing to you by Debtor, any amount Debtor pays to Creditor on the PEC Indebtedness. 2 64 (d) Creditor will forthwith assign, deliver or cause to be delivered to you any collateral for the PEC Indebtedness now held by Creditor or anyone on its behalf, or in the future received by it or anyone on its behalf. (e) Creditor, in its capacity hereunder as Creditor, agrees that it will not, without your prior written consent, commence, prosecute or participate in any administrative, legal, or equitable action against Debtor for collection of the PEC Indebtedness or in any administrative, legal, or equitable action for collection of the PEC Indebtedness that might adversely affect Debtor or its properties. 3. If Creditor in violation of this Agreement shall commence, prosecute or participate in any suit, action or proceeding against Debtor, Debtor may interpose as a defense or plea the making of this Agreement and you may intervene and interpose such defense or plea in your name or in the name of Debtor. If after the occurrence and during the continuance of an Event of Default, Creditor shall attempt to enforce any security agreements, real estate mortgages or deeds of trust or any lien instruments or other encumbrances securing payment of any PEC Indebtedness, you or Debtor may by virtue of this Agreement restrain the enforcement thereof in your name or in the name of Debtor. If after the occurrence and during the continuance of an Event of Default, Creditor obtains any assets of Debtor for application to any PEC Indebtedness as a result of any administrative, legal, or equitable action, or otherwise, Creditor agrees to forthwith pay, deliver, and assign to you any such assets for application upon the Obligations. 4. As additional security for the Obligations due you and in furtherance hereof, upon the occurrence of and during the continuance of an Event of Default, Creditor: 3 65 (a) shall assign to you the PEC Indebtedness as security for any and all of the Obligations now and hereafter owing by Debtor to you; and (b) irrevocably authorizes you or any person you may designate to, after the security for the Obligations has been exhausted, collect and receive the proceeds of the PEC Indebtedness and to do any and all things with the same power and authority that Creditor might or could have done if this Agreement had not been executed, including the filing and proving of claims in your name or in the name of Creditor, in receiverships, bankruptcies, and proceedings under any bankruptcy act or any amendments thereto. The net amount received by you from the PEC Indebtedness shall be applied to the payment of the Obligations due and to become due from Debtor to you, and the excess, if any, shall be returned to Creditor. 5. Upon the occurrence of and during the continuance of an Event of Default, Debtor agrees with you that it will not, without your prior written consent, pay to Creditor any sum on account of the PEC Indebtedness, or execute or delivery any negotiable instruments as evidence of the PEC Indebtedness or any part thereof. 6. Creditor agrees that you may grant extensions of the time of payment or performance to and make compromises, including releases of collateral, and settlements with Debtor and all other persons without the consent of Creditor and without affecting the agreements of Creditor or Debtor hereunder. 7. If, at any time hereafter, you shall, pursuant to the Loan Agreement determine to discontinue the extension of credit to Debtor, you may do so. This Agreement shall continue in full force and effect until Debtor shall have satisfied all of the Obligations and you shall have been paid 4 66 in full all Obligations that may be due to you from Debtor under the Loan Agreement and the other Loan Documents. Upon the full payment and satisfaction by Debtor of all of the Obligations under the Loan Agreement and the other Loan Documents, this Agreement shall automatically terminate and be of no further force and effect. 8. This Agreement shall be binding upon the successors and assigns of Creditor and Debtor, and shall inure to the benefit of your successors and assigns. 9. This Agreement and the Obligations which it secures and all rights and liabilities of the parties shall be governed as to validity, interpretation, enforcement and effect by the laws of the State of Nevada. 10. Unless an Event of Default shall have occurred and be continuing, nothing in this Agreement is intended or shall be construed to prohibit, restrict or otherwise limit any payment to or remedy by Creditor at any time so long as Debtor's cash flow and working capital are sufficient. In addition, nothing in this Agreement is intended or shall be construed to interfere with Debtor's payment or Creditor's collection at any time of amounts due by Debtor under the tax sharing arrangements between Debtor and Creditor; provided, however, (i) that Creditor shall promptly advise Lender of any change in such tax sharing arrangements and (ii) that Debtor's cash flow and working capital shall remain sufficient following any change in such tax sharing arrangement. 11. In the event Creditor received any cash or other property in payment of PEC Indebtedness which is not permitted under the provisions of Paragraph 10 or other provisions of this Agreement, you shall have the right to recover such payment from Creditor and apply the same to the Obligations. In the event Creditor receives any cash or other property in payment of PEC Indebtedness which is permitted under the provisions of this Agreement, including, without 5 67 limitation, Paragraph 10 hereof, Creditor shall not be required to make any payment to or reimbursement of yourself or Debtor as a result of such payment. IN WITNESS WHEREOF, Creditor and Debtor have severally duly executed this Agreement as of the 12th day of August, 1998. DEBTOR: PREFERRED EQUITIES CORPORATION, a Nevada corporation By: /s/ FREDERICK H. CONTE ------------------------------------ Its: President ----------------------------------- CREDITOR: MEGO FINANCIAL CORP., a New York corporation By: /s/ RICHARD L. RODRIGUEZ ------------------------------------ Its: Vice President ----------------------------------- ACCEPTED BY: DORFINCO CORPORATION By: ------------------------------ Its: ---------------------------- 6 68 BORROWER'S CERTIFICATE Re: $4,000,000 loan by Dorfinco Corporation, a Delaware corporation, to Preferred Equities Corporation, a Nevada corporation. Borrower's address: 4310 Paradise Blvd., Las Vegas, Nevada 89109. Real property security located in Nye County, Nevada (the "Real Property"). * * * * * * In order to induce DORFINCO CORPORATION ("Lender") to make the above-referenced loan (the "Loan") to Preferred Equities Corporation, a Nevada corporation ("Borrower"), Borrower hereby certifies and represents as of the date of the funding of the Loan, and warrants as follows: (a) Except as set forth on Exhibit "E" to the Loan and Security Agreement dated August 12, 1998 (the "Loan Agreement"), between Borrower and Lender, there are no actions, suits or proceedings pending, and, to the best knowledge and belief of Borrower, there are no actions, suits, claims, investigations or proceedings threatened, against or affecting Borrower, or the business, operations, properties or assets of Borrower, before or by any governmental department, commission, board, regulatory authority, bureau, agency or instrumentality, domestic, foreign, Federal, state or municipal (herein collectively called "governmental agency"), or any court, arbitrator or grand jury, which may result in any material adverse change in the business operations, properties or assets or in the condition, financial or otherwise, of Borrower, or in the ability of Borrower to perform its obligations under the documents to be executed in connection with the Loan (the "Loan Documents"). Borrower is not in default with respect to any judgment, order, writ, injunction, decree, demand, rule or regulation of any court, arbitrator, grand jury or of any governmental agency, default under which might have consequences which would materially and adversely affect the business, operations, properties or assets or the condition, financial or otherwise, of Borrower. (b) Neither the execution and delivery by Borrower of the Loan Documents, nor the consummation of the transaction contemplated therein, nor compliance with the terms and conditions thereof will conflict with or result in a breach of, or constitute a breach under any of the terms, obligations, covenants, conditions or provisions of Borrower's articles of incorporation or bylaws or of any indenture, mortgage, lease, deed of trust, pledge, bank loan or credit agreement, or any other agreement or instrument to which Borrower is now a party or by which its properties may be bound or affected, or any judgment, order, writ, injunction, decree or demand of any court, arbitrator, grand jury or governmental agency, or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any property or asset of Borrower under the terms or provisions of any of the foregoing. Borrower is not in default in the performance or observance of any of the terms, obligations, covenants, conditions or provisions contained in any indenture or other agreement creating, evidencing or securing an indebtedness of Borrower or pursuant to which Borrower is a party or by which Borrower or its properties may be bound or affected. 1 69 (c) To the best of Borrower's knowledge after diligent inquiry, Borrower has obtained all required consents and releases in order to enter into the loan transaction and execute the Loan Documents and has complied with and is not in violation of all applicable statutes, laws, ordinances and regulations of any kind or nature in order to effectively vest in Lender a valid first lien in the Real Property pursuant to the Loan Documents. (d) Borrower has the power and authority to enter into the Loan and execute the Loan Documents and the parties executing the Loan Documents on behalf of Borrower have been authorized to do so. The Loan is a valid obligation of Borrower. (e) To Borrower's best knowledge after diligent inquiry, except as may be set forth in Exhibit "E" to the Loan Agreement, Borrower has complied in all material respects with all applicable statutes, rules, regulations, orders, restrictions, licenses and permits of any domestic or foreign government or any instrumentality or agency thereof, having jurisdiction over the conduct of its business and ownership of its properties (including, without limitation, applicable statutes, rules, regulations, orders and restrictions relating to equal employment opportunities, zoning, building, fire, health and safety and environmental standards or controls) and Borrower has no knowledge of any event or condition that would cause any of the above to be violated in any material respect. (f) Borrower has filed all United States income tax returns and all state and municipal tax returns which are required to be filed, and has paid, or made provision for the payment of, all taxes which have become due pursuant to said returns or pursuant to any assessment received by Borrower, except such filings and taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided. (g) Subject to the Permitted Encumbrances described on Exhibit "B" to the Deed of Trust (as defined in the Loan Agreement), Borrower has good and marketable title in fee simple absolute to all of the Real Property (except Parcel 19A thereof) free and clear of any interest which could divest Borrower's interest therein, divest Lender's interest therein or which could adversely affect the validity and/or priority of the lien of the Deed of Trust given as security for the Loan. (h) Borrower is not a foreign corporation, foreign partnership, foreign trust, foreign estate or foreign person (as those terms are defined in the Internal Revenue Code of 1986, as amended) and Borrower's U.S. Federal Tax I.D. Number is 88-0106662. Borrower's address is as set forth on page 1 hereof. Borrower is a Nevada corporation duly formed and validly existing under the laws of the State of Nevada. (i) To the best of Borrower's knowledge after diligent inquiry, the Real Property and soil and ground water thereof are free from any toxic and/or hazardous materials including asbestos, PCBs, pesticides, herbicides and any other material(s) defined as "hazardous substances," "hazardous materials," or "toxic substances" in the Comprehensive Environmental Response, Compensation and Liability act of 1980 as Amended, the Hazardous Materials Transportation Act, The Resource Conservation and Recovery Act, and those substances defined as hazardous or toxic wastes under 2 70 applicable state law (other than any landscaping or maintenance products of a type or quantity typically used at a location having a use consistent with Borrower's use of the Real Property as of the Loan closing). Further, the Borrower agrees that it will not permit the storage of any toxic and/or hazardous material, as described above, in, on and/or around the Real Property now or at any future time. Borrower will indemnify and save Lender harmless from any and all claims, judgments, damages, penalties, fines, costs, liabilities or losses (including, without limitation, diminution in value of the Real Property) which may result from contamination of the Real Property by hazardous and/or toxic material(s), except to the extent that any such claim, judgment, damage, penalty, fine, cost, liability or loss arises from the gross negligence or wilful misconduct of Lender. (j) All work, labor, services and materials, if any, furnished to or in connection with the Real Property have been fully paid for, with the exception of any work currently in progress as to which Borrower has properly posted a Notice of Nonresponsibility and as to which no mechanic's, materialman's or other liens have been previously filed, so that no mechanic's, materialman's or other lien may properly be filed against the Real Property or any portion thereof for work done up to the funding of the Loan, except as to unpaid items which the title policy will insure over. (k) Neither Borrower nor Guarantor is the subject of any insolvency or bankruptcy proceeding or the subject of any suit or proceeding at law or in equity or otherwise, the result of any of which might affect the title to the Real Property or the improvements thereon or Borrower's ability to perform its obligations and agreements under the Loan Documents or under Borrower's articles of incorporation or bylaws. (l) Borrower has no actual knowledge of any violations in connection with the use and operation of the Real Property, whether filed or threatened, or of any restriction against the sale of the Real Property or any portion thereof; all required permits and licenses have been obtained for the Real Property. (m) At the time of disbursement of the funds in connection with the Loan: (i) The Real Property has not been taken, in whole or in part, in condemnation or any other similar proceedings, and no such proceedings were pending; and (ii) The representations made in the materials submitted in connection with the application for the Loan by Borrower, including but not limited to the type of development, income and expenses of the Real Property and the financial condition and credit of Borrower are as represented in said materials without material adverse change, except such change as has been approved in writing by Lender. 3 71 DATED as of August 12, 1998. PREFERRED EQUITIES CORPORATION, a Nevada corporation By: /s/ FREDERICK H. CONTE ------------------------------------ Name: Frederick H. Conte --------------------------------- Title: President -------------------------------- 4 72 GUARANTOR'S CERTIFICATE Re: $4,000,000 loan by Dorfinco Corporation, a Delaware corporation, to Preferred Equities Corporation, a Nevada corporation, to be guaranteed by Mego Financial Corp., a New York corporation. Guarantor's address: 4310 Paradise Blvd., Las Vegas, Nevada 89109. * * * * * * In order to induce DORFINCO CORPORATION ("Lender") to make the above-referenced loan (the "Loan") to Preferred Equities Corporation, a Nevada corporation ("Borrower") and to accept the Guaranty Agreement of Mego Financial Corp. ("Guarantor") in connection therewith, Guarantor hereby certifies and represents as of the date of the funding of the Loan, and warrants as follows: (a) Except as set forth on Exhibit "E" to the Loan and Security Agreement dated August 12, 1998 (the "Loan Agreement"), between Borrower and Lender, there are no actions, suits or proceedings pending, and, to the best knowledge and belief of Guarantor, there are no actions, suits, claims, investigations or proceedings threatened, against or affecting Guarantor, or the business, operations, properties or assets of Guarantor, before or by any governmental department, commission, board, regulatory authority, bureau, agency or instrumentality, domestic, foreign, Federal, state or municipal (herein collectively called "governmental agency"), or any court, arbitrator or grand jury, which may result in any material adverse change in the business operations, properties or assets or in the condition, financial or otherwise, of Guarantor, or in the ability of Guarantor to perform its obligations under the Guaranty Agreement (the "Guaranty") to be executed by Guarantor in connection with the Loan. Guarantor is not in default with respect to any judgment, order, writ, injunction, decree, demand, rule or regulation of any court, arbitrator, grand jury or of any governmental agency, default under which might have consequences which would materially and adversely affect the business, operations, properties or assets or the condition, financial or otherwise, of Guarantor. (b) Neither the execution and delivery by Guarantor of the Guaranty, nor the consummation of the transaction contemplated therein, nor compliance with the terms and conditions thereof will conflict with or result in a breach of, or constitute a breach under any of the terms, obligations, covenants, conditions or provisions of Guarantor's articles of incorporation or bylaws or of any indenture, mortgage, lease, deed of trust, pledge, bank loan or credit agreement, or any other agreement or instrument to which Guarantor is now a party or by which its properties may be bound or affected, or any judgment, order, writ, injunction, decree or demand of any court, arbitrator, grand jury or governmental agency, or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any property or asset of Guarantor under the terms or provisions of any of the foregoing. Guarantor is not in default in the performance or observance of any of the terms, obligations, covenants, conditions or provisions contained in any indenture or other 1 73 agreement creating, evidencing or securing an indebtedness of Guarantor or pursuant to which Guarantor is a party or by which Guarantor or its properties may be bound or affected. (c) To the best of Guarantor's knowledge after diligent inquiry, Guarantor has obtained all required consents and releases in order to execute the Guaranty. (d) Guarantor has the power and authority to enter into and execute the Guaranty, and the parties executing the Guaranty on behalf of Guarantor have been authorized to do so. The Guaranty is a valid obligation of Guarantor. (e) To Guarantor's best knowledge after diligent inquiry, except as may be set forth in Exhibit "E" to the Loan Agreement, Guarantor has complied in all material respects with all applicable statutes, rules, regulations, orders, restrictions, licenses and permits of any domestic or foreign government or any instrumentality or agency thereof, having jurisdiction over the conduct of its business and ownership of its properties (including, without limitation, applicable statutes, rules, regulations, orders and restrictions relating to equal employment opportunities, zoning, building, fire, health and safety and environmental standards or controls) and Guarantor has no knowledge of any event or condition that would cause any of the above to be violated in any material respect. (f) Guarantor has filed all United States income tax returns and all state and municipal tax returns which are required to be filed, and has paid, or made provision for the payment of, all taxes which have become due pursuant to said returns or pursuant to any assessment received by Guarantor, except such filings and taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided. (g) Guarantor is not a foreign corporation, foreign partnership, foreign trust, foreign estate or foreign person (as those terms are defined in the Internal Revenue Code of 1986, as amended) and Guarantor's U.S. Federal Tax I.D. Number is 13-5629885. Guarantor's address is as set forth on page 1 hereof. Guarantor is a New York corporation duly formed and validly existing under the laws of the State of New York and in good standing and qualified as a foreign corporation in all jurisdictions in which such good standing and/or qualification is required. (h) Guarantor is not the subject of any insolvency or bankruptcy proceeding or the subject of any suit or proceeding at law or in equity or otherwise, the result of any of which might affect Guarantor's ability to perform its obligations and agreements under the Guaranty or under Guarantor's articles of incorporation or bylaws. (i) The representations made in the materials submitted by Guarantor in connection with the application for the Loan by Borrower, including but not limited to the financial condition and credit of Guarantor are as represented in said materials without material adverse change, except such change as has been approved in writing by Lender. 2 74 DATED as of August 12, 1998. MEGO FINANCIAL CORP., a New York corporation By: /s/ RICHARD L. RODRIGUEZ ------------------------------------ Name: Richard L. Rodriguez -------------------------------- Title: Vice President -------------------------------- 3 75 DEED OF TRUST, SECURITY AGREEMENT AND FIXTURE FILING Dated as of August 12, 1998 in the amount of: $4,000,000.00 PREFERRED EQUITIES CORPORATION, a Nevada corporation having its principal office at 4310 Paradise Road Las Vegas, Nevada 89109 (the "Grantor"); UNITED TITLE OF NEVADA, a Nevada corporation having its principal office at 2389-A Renaissance Drive Las Vegas, Nevada 89119 (the "Trustee"); and DORFINCO CORPORATION, a Delaware corporation having an office at 40 Westminster Street Providence, Rhode Island 02940. (the "Beneficiary"). LOCATION OF PREMISES Nye County State of Nevada ------------------------------------------- After recording, please return to: DORFINCO CORPORATION c/o Textron Financial Corporation 40 Westminster Street Providence, Rhode Island 02940 Attention: Margaret R. Hayes-Cote, Division Counsel 76 STATE OF NEVADA ) ) ss. COUNTY OF NYE ) DEED OF TRUST AND SECURITY AGREEMENT AND FIXTURE FILING KNOW ALL MEN BY THESE PRESENTS: THIS DEED OF TRUST (hereinafter referred to as this "Deed") is made and entered into as of the 12th day of August, 1998, by and among PREFERRED EQUITIES CORPORATION, a Nevada corporation, having as a mailing address 4310 Paradise Road, Las Vegas, Nevada 89109 (hereinafter referred to as Grantor"), UNITED TITLE OF NEVADA, a Nevada corporation, having as a mailing address 2389-A Renaissance Drive, Las Vegas, Nevada 89119 (hereinafter referred to as the "Trustee") and DORFINCO CORPORATION, a Delaware corporation, having a mailing address of 40 Westminster Street, Providence, Rhode Island 02940 (hereinafter referred to as the "Beneficiary"). In order to secure the payment, performance and observance of the indebtedness and other obligations of Grantor hereinafter set forth, Grantor has granted and conveyed, and does by these presents mortgage, grant, warrant, assign, convey, pledge and set over unto the Trustee, IN TRUST, WITH POWER OF SALE, all of the following described land and interests in land, estates, easements, rights, improvements, property, fixtures, equipment, furniture, furnishings, appliances and appurtenances (hereinafter collectively referred to as the "Premises"): (a) All those certain tracts, or parcels of land more particularly described in Exhibit "A" attached hereto and by this reference made a part hereof (hereinafter referred to as the "Land"). (b) All buildings, structures and improvements (the "Improvements") of every nature whatsoever now or hereafter situated on the Land. (c) All construction materials, vaults, gas, electric and other utility fixtures, radiators, heaters, engines, machinery, boilers, ranges, elevators, plumbing and heating fixtures, draperies, carpeting and other floor coverings, fire extinguishers and any other safety equipment, washers, dryers, water heaters, water fountains, mirrors, mantels, air conditioning apparatus, refrigerating plants, refrigerators, cooking apparatus and appurtenances, window screens, awnings and storm sashes, which are or shall be attached to said buildings, structures or improvements and all other furnishings, furniture, goods which are or are to become fixtures, machinery, equipment, inventory, supplies, appliances, and tangible personal property of every kind and nature whatsoever 1 77 now or hereafter owned by Grantor and located in, on or about, or used or intended to be used with or in connection with the use, operation or enjoyment of the Land and Improvements, and all attachments, additions, improvements, after-acquired property, renewals, proceeds and replacements of any of the foregoing and all the right, title and interest of Grantor in any of the foregoing property which is subject to or covered by any conditional sales contract, chattel mortgage or similar lien or claim, together with the benefit of any deposits or payments now or hereafter made by Grantor or on behalf of Grantor with respect thereto, all of which are hereby declared and shall be deemed to be fixtures and accessions to the freehold and a part of the Premises as between the parties hereto and all persons claiming by, through or under them, and which shall be deemed to be a portion of the security for the indebtedness herein described and to be secured by this Deed. (d) All now owned or hereafter acquired easements, rights-of-way, strips, gores of land, streets, ways, alleys, passages, sewer rights, waters, water courses, water rights and powers, and all estates, rights, titles, interests, privileges, liberties, tenements, hereditaments and appurtenances whatsoever, in any way belonging, relating or appertaining to the Premises or any part thereof, or which hereafter shall in any way belong, relate or be appurtenant thereto, and the reversions, remainders, rents, issues, profits, revenues, accounts, contract rights and general intangibles of or arising from the Premises (including without limitation all payments under room occupancy agreements, all leases or tenancies, proceeds of insurance, prepaid insurance premiums, condemnation payments, tenant security deposits, escrow funds and payments from motel guests), and all the estate, right, title, interest, property, possession, claim and demand whatsoever at law, as well as in equity, of Grantor of, in and to the same. (e) Any and all leases, subleases, rental agreements, occupancy agreements, licenses, concessions, entry fees, other agreements which grant a possessory interest in all or any part of the Land and Improvements, together with all rents, issues, profits, revenues, proceeds, awards, accounts, security deposits and other benefits now or hereafter arising from the use and enjoyment of the Land and Improvements or any part thereof. TO HAVE AND TO HOLD the Premises, with all privileges and appurtenances thereunto belonging, unto the Trustee, forever. Grantor covenants that Grantor is lawfully seized and possessed of the Premises as aforesaid, and has all requisite right and authority to convey the same, that the same is unencumbered except for those matters expressly set forth in Exhibit "B" attached hereto and by this reference made a part hereof, and that Grantor does warrant and will forever defend the title thereto to the Trustee and the Beneficiary against the claims of all persons whomsoever, except as to those matters set forth in said Exhibit "B" or otherwise permitted in the Security Documents (as hereinafter defined). This Deed is given to secure the following described indebtedness (collectively the "Indebtedness"): 2 78 (a) All sums evidenced by that certain Promissory Note (hereinafter referred to as the "Note" dated of even date herewith, made by Grantor, payable to the order of the Beneficiary in the principal face amount of up to FOUR MILLION AND NO/100 U.S. DOLLARS ($4,000,000.00), together with interest thereon, with the final payment being due on August 31, 1999, unless extended as provided in the Note; together with any and all modifications, renewals and/or extensions of the Note. (b) Any and all additional advances made by the Beneficiary to protect or preserve the Premises or the lien hereof on the Premises, or for taxes, assessments or insurance premiums as hereinafter provided (whether or not the original Grantor remains the owner of the Premises at the time of such advances). (c) Any and all other sums owed by Grantor to the Beneficiary hereunder, under the Note, or any and all other indebtedness, liabilities, or obligations of Grantor to the Beneficiary, of any nature whatsoever, whether now existing or hereafter created, whether direct, indirect or secondary, and any and all modifications, extensions or renewals thereof, including without limitation sums owed under any other instrument evidencing, securing or in any way concerning the debt evidenced by the Note. Without limiting the foregoing, this Deed shall also secure the following indebtedness: (i) A loan made by Beneficiary to Grantor in the amount of up to $7,500,000, evidenced by a promissory note in such amount dated August 9, 1991, and secured by, among other things, a Loan and Security Agreement dated as of July 31, 1991, by and between Grantor as borrower and Beneficiary as lender, and guaranteed by Mego Financial Corp.; and (ii) A loan made by Beneficiary's affiliate, Textron Financial Corporation, a Delaware corporation ("Lender") to Grantor's subsidiary, Steamboat Suites, Inc. ("SSI"), in the amount of up to $15,000,000, evidenced by a promissory note in such amount dated November 30, 1995, guaranteed by Grantor, and secured by, among other things, a deed of trust from SSI to Textron dated October 5, 1994, as amended or restated, and recorded in the Routt County Clerk and Recorder's office on October 6, 1994, in Book 701 at Page No. 1795, a first amendment to deed of trust from SSI to Textron dated February 27, 1995, and recorded in the Routt County Clerk and Recorder's office on March 22, 1995 in Book 706 at Page 339, a second amendment to deed of trust from SSI to Textron dated November 29, 1996, and recorded in the Routt County Clerk and Recorder's office on December 20, 1996 in Book 728 at Page 320, and as further amended or restated. The indebtedness described in the foregoing clauses (i) and (ii) is herein defined as the "Related Indebtedness", and the documents described in the foregoing clauses (i) and (ii), together with the referenced guaranties and any and all other documents or instruments evidencing, securing or executed in connection with any of the Related Indebtedness are herein collectively defined as the "Related Loan Documents". 3 79 The Note, this Deed and the following instruments which evidence, secure and/or relate to the loan evidenced by the Note are hereinafter referred to as the "Security Documents:" (a) Loan and Security Agreement dated of even date herewith by and between Grantor as Borrower and Beneficiary as Lender (the "Loan Agreement"); (b) Guaranty Agreement dated of even date herewith by Mego Financial Corp. as guarantor (the "Guarantor") in favor of the Beneficiary (the "Guaranty"); and (c) All other documents, instruments or agreements now or hereafter securing, evidencing and/or relating to the debt secured by the Note, except for the Environmental Indemnity Agreement of even date herewith from Grantor to Beneficiary. Should the Indebtedness be paid according to the tenor and effect thereof when the same shall become due and payable, and should Grantor perform all covenants, terms and conditions herein contained in a timely manner, then this conveyance shall be released, terminated and reconveyed to the persons entitled thereto of record at the request and the expense of Grantor. Grantor hereby further covenants and agrees as follows: ARTICLE I 1.01 Payment of Indebtedness. Grantor will pay the Note according to the tenor thereof and all other sums now or hereafter secured hereby promptly as the same shall become due. 1.02 Taxes, Liens and Other Charges. (a) In the event of the passage of any state, federal, municipal or other governmental law, order, rule or regulation, subsequent to the date hereof, in any manner changing or modifying the laws now in force governing the taxation of the Indebtedness or this Deed or the manner of collecting taxes with respect thereto so as to adversely affect the Beneficiary (exclusive of any tax on Beneficiary's income), Grantor will promptly pay any such tax. If Grantor fails to make such prompt payment or if, in the reasonable opinion of the Beneficiary, any such state, federal, municipal, or other governmental law, order, rule or regulation prohibits Grantor from making such payment or would penalize the Beneficiary if Grantor makes such payment or if, in the reasonable opinion of the Beneficiary, the making of such payment might result in the imposition of interest beyond the maximum amount permitted by applicable law, then the entire balance of the principal sum secured by this Deed and all interest accrued thereon shall, at the option of the Beneficiary, become immediately due and payable. (b) Grantor will pay (to the extent same are not paid from the escrowed funds provided for in Paragraph 1.04), before the same become delinquent, all taxes, liens, assessments and charges of every character including all utility charges, now or hereafter levied or 4 80 assessed upon the Premises; and upon demand will furnish the Beneficiary receipted bills evidencing such payment. (c) Grantor will not suffer or permit any mechanic's, materialman's, laborer's, statutory or other lien to remain outstanding upon all or any part of the Premises. (d) Grantor, at its expense, may contest, after prior written notice to Beneficiary, by appropriate legal proceedings conducted in good faith and with due diligence, the amount, validity or application, in whole or in part, of any taxes, liens, assessments or charges levied or assessed upon the Premises or any mechanic's, materialman's, laborer's, statutory or other lien filed against the Premises, so long as such proceedings operate to prevent the collection or other realization thereon, the sale or forfeiture of the Premises or any part thereof to satisfy the same or the impairment of Beneficiary's lien; provided that (i) during such contest the Grantor shall, at the option of the Beneficiary, provide Beneficiary with security satisfactory to the Beneficiary, assuring the payment of any additional interest, charge, penalty or expense arising from or incurred as a result of such contest, and (ii) if at any time payment of any obligation imposed upon the Grantor under this Paragraph 1.02 shall become necessary to prevent the sale or forfeiture of the Premises or any part thereof to satisfy the same, then Grantor shall pay the same in sufficient time to prevent sale or forfeiture. 1.03 Insurance. (a) Grantor shall deliver to and maintain for the benefit of the Beneficiary during the term of this Deed, original paid up insurance policies (or certified copies thereof) of acceptable insurance companies, in amounts, in form and in substance, and with expiration dates all reasonably acceptable to the Beneficiary and containing a waiver of subrogation rights by the insuring company, non-contributory standard mortgage benefit clause, or their equivalents, and a mortgage loss payable endorsement in favor of and satisfactory to the Beneficiary and breach of warranty coverage, providing the following types of insurance on the Premises: (i) unless waived in writing by Beneficiary, insurance against loss or damage by hazards as are customarily insured against with respect to unimproved land (or, if the Land is subsequently improved, then as are customarily insured against with respect to improved land) as are presently included in so-called "all risk extended coverage" and against other such insurable hazards as, under good insurance practices, from time to time are insured against for properties of similar character and location. The amount of the foregoing insurance shall not be less than the greater of (a) the full replacement value of the Premises including any or all improvements and personal property now or hereafter thereon, or (b) the aggregate of the face amount of the Indebtedness plus any other debt encumbering the Premises, provided, however, that nothing herein shall be deemed to require insurance in excess of amounts available from one or more insurance companies 5 81 acceptable to Beneficiary pursuant to Section 1.03(a); and said policies of insurance shall provide for a deductible acceptable to the Beneficiary, provide for breach of warranty coverage, replacement cost endorsements satisfactory to the Beneficiary, and shall not permit co-insurance; (ii) such other insurance on the Premises or any replacements or substitutions therefor, including public/general liability and, if the Land is subsequently improved, property damage insurance in an amount reasonably satisfactory to the Beneficiary, and flood insurance (if the Premises are or become located in an area which is considered a flood risk by the U.S. Department of Housing and Urban Development), and in such amounts as may from time to time be reasonably required by the Beneficiary against other insurable casualties which at the time are commonly insured against in the case of premises similarly situated, due regard being given to the height and type of the improvements, their construction, location, use and occupancy, or any replacements or substitutions therefor. (b) The Beneficiary is hereby authorized and empowered, at its option, to adjust or compromise any loss under any insurance policies maintained pursuant to this Paragraph 1.03, and to collect and receive the proceeds from any such policies. Each insurance company is hereby authorized and directed to make payment for all such losses directly to the Beneficiary, instead of to Grantor and the Beneficiary jointly. In the event any insurance company fails to disburse directly and solely to the Beneficiary but disburses instead either solely to Grantor or to Grantor and the Beneficiary jointly, Grantor agrees immediately to endorse and transfer such proceeds to the Beneficiary. Upon the failure of Grantor to endorse and transfer such proceeds as aforesaid, the Beneficiary may execute such endorsements or transfers for and in the name of Grantor and Grantor hereby unconditionally and irrevocably appoints the Beneficiary as Grantor's agent and attorney-in-fact, coupled with an interest to endorse and transfer such proceeds to Beneficiary. After deducting from said insurance proceeds all of its expenses incurred in the collection and administration of such sums, including attorneys' fees, the Beneficiary may apply the net proceeds or any part thereof, at its option (i) to the payment of the Indebtedness, whether or not due and in whatever order the Beneficiary elects, (ii) to the repair and/or restoration of the Premises or (iii) for any other purposes or objects for which the Beneficiary is entitled to advance funds under this Deed; all without affecting the lien of this Deed. The Beneficiary shall not be held responsible for any failure to collect any insurance proceeds due under the terms of any policy regardless of the cause of such failure. (c) All insurance policies required pursuant to this Deed shall provide that the coverage afforded thereby shall not expire or be amended, canceled or otherwise terminated without at least thirty (30) days prior written notice to the Beneficiary. At least thirty (30) days prior to the expiration date of each policy maintained pursuant to this Paragraph 1.03, a renewal or replacement thereof satisfactory to the Beneficiary shall be delivered to the Beneficiary. Grantor shall deliver to the Beneficiary receipts 6 82 evidencing the payment for all such insurance policies and renewals or replacements. The delivery of any insurance policies hereunder shall constitute an assignment of all unearned premiums as further security hereunder. In the event of the foreclosure of this Deed or any other transfer of title to the Premises in full or partial extinguishment of the Indebtedness, all right, title and interest of Grantor in and to all insurance policies then in force, to the extent applicable to the Premises, shall pass to the purchaser or grantee. 1.04 Monthly Deposits. From and after the occurrence of one or more Events of Default under this Deed (subject to all applicable cure or grace periods), and upon the written request of Beneficiary to Grantor, Grantor will deposit with the Beneficiary, on the due date of each monthly installment under the Note, a sum which, in the estimation of the Beneficiary, shall be equal to one-twelfth (1/12) of the annual taxes, assessments and insurance premiums on or with respect to the Premises. Said deposits shall be held by the Beneficiary, free of interest, and free of any liens or claims on the part of creditors of Grantor and as part of the security of the Beneficiary, and to be used by the Beneficiary to pay current taxes, assessments and insurance premiums on the Premises as the same are due. Said deposits shall not be trust funds but may be commingled with the general funds of the Beneficiary. If said deposits are insufficient to pay the taxes, assessments and insurance premiums in full as the same become due, Grantor will deposit with the Beneficiary such additional sum or sums as may be required in order for the Beneficiary to pay such taxes, assessments and insurance premiums in full, in accordance with all applicable law. Upon the occurrence of any default or Event of Default at any time when the Beneficiary is in possession of such deposits, the Beneficiary may, at its option, apply any of said deposits to the payment of the Indebtedness in such manner as it may elect. 1.05 Condemnation. If all or any portion of the Premises shall be damaged or taken through condemnation (which term when used in this Deed shall include any damage or taking by any governmental authority and any transfer by private sale in lieu thereof), either temporarily or permanently, then the entire Indebtedness shall, at the option of the Beneficiary, become immediately due and payable. The Beneficiary shall be entitled to receive all compensation, awards and other payments or relief thereof, provided, however, that Grantor may participate in any such condemnation proceedings to the extent of its interest in the Premises and retain any such payments only to the extent of its interest in the Premises remaining after the Beneficiary has received full compensation for its interest in the Premises. The Beneficiary is hereby authorized, at its option, to commence, appear in and prosecute, in its own or, subject to the foregoing sentence, in Grantor's name, any action or proceeding relating to any condemnation, and to settle or compromise any claim in connection therewith. All such compensation, awards, damages, claims, rights of action and proceeds and the right thereto are hereby assigned by Grantor to the Beneficiary. After deducting from said condemnation proceeds all of its expenses incurred in the collection and administration of such sums, including attorneys' fees, the Beneficiary may apply the net proceeds or any part thereof, at its option: (a) to the payment of the Indebtedness, whether or not due and in whatever order the Beneficiary elects, (b) to the repair and/or restoration of the Premises, or 7 83 (c) for any other purposes for which the Beneficiary is entitled to advance funds under this Deed, all without affecting the lien or priority of this Deed, and any balance of such moneys then remaining shall be paid to Grantor. Grantor agrees to execute such further assignment of any such compensation, awards, damages, claims, rights of action and proceeds as the Beneficiary may require. 1.06 Care of Premises. (a) Grantor will keep the buildings, parking areas, roads and walkways, recreational facilities, landscaping and all other improvements of any kind now or hereafter erected on the Land or any part thereof, and the fixtures, furnishings and equipment therein and thereon, in good condition and repair, will not commit or suffer any waste and will not do or suffer to be done anything which will increase the risk of fire or other hazard to the Premises or any part thereof. (b) Grantor will not remove or demolish or alter the structural character of any improvement located on the Land without the written consent of the Beneficiary. (c) If the Premises or any part thereof is damaged by fire or any other cause, Grantor will give immediate written notice thereof to the Beneficiary. (d) The Beneficiary, Trustee or their respective representatives are hereby authorized to enter upon and inspect the Premises at any time during normal business hours or, upon an occurrence of an Event of Default, at any time. (e) Subject to Grantor's right of contest set forth in Section D.5 of the Loan Agreement, Grantor will promptly comply with all present and future laws, ordinances, rules and regulations of any governmental authority affecting the Premises or any part thereof. Grantor will deliver to the Beneficiary within ten (10) days after Grantor's receipt thereof copies of any additional governmental permits or approvals or disapprovals or notices that relate to any matter that would materially adversely affect the Premises issued with regard to the Premises or any portion thereof. (f) If all or any part of the Premises shall be damaged by fire or other casualty, Grantor will promptly restore the Premises to the equivalent of its original condition; and if a part of the Premises shall be damaged through condemnation, Grantor will promptly restore, repair or alter the remaining portions of the Premises in a manner satisfactory to the Beneficiary. Notwithstanding the foregoing, Grantor shall not be obligated to so restore unless in each instance, the Beneficiary agrees to make available to Grantor (pursuant to a procedure satisfactory to the Beneficiary) any net insurance or condemnation proceeds actually received by the Beneficiary hereunder in connection with such casualty loss or condemnation, to the extent such proceeds are required to defray the expense of such restoration; provided, however, that the unavailability or insufficiency of any such insurance or condemnation proceeds to defray the entire expense of 8 84 restoration shall in no way relieve Grantor of its obligation to restore. In the event all or any portion of the Premises shall be damaged or destroyed by fire or other casualty or by condemnation, Grantor shall promptly deposit with the Beneficiary a sum equal to the amount by which an architect's estimate (acceptable to Beneficiary) of cost of the restoration of the Premises exceeds the actual net insurance or condemnation proceeds received by the Beneficiary in connection with such damage or destruction. 1.07 Leases and Other Agreements Affecting Property. Grantor will duly and punctually perform all terms, covenants, conditions and agreements binding upon it under any lease, sublease, rental agreement, occupancy agreement or any other agreement of any nature whatsoever which involves or affects the Premises or any part thereof if such failure to perform would have a materially adverse effect on the Premises or Grantor's ability to repay or perform the Indebtedness. Grantor will furnish the Beneficiary with executed copies of all leases, subleases, rental agreements or occupancy agreements now or hereafter created upon the Premises or any part thereof. Grantor will not, without the express written consent of the Beneficiary, enter into any lease, sublease or occupancy agreements with respect to the Premises or any portion thereof; provided, however, that the Beneficiary's prior written consent shall not be required with respect to the entering into, modification or termination of any occupancy agreement for any of the Premises consisting of a portion of any legally subdivided parcel and having a term of less than sixty (60) days. Grantor will not, without the express written consent of the Beneficiary, terminate or modify either orally or in writing, any lease, sublease, rental agreement or occupancy agreement now existing or hereafter created upon the Premises or any part thereof, nor will Grantor permit any assignment or a subletting by any Tenant without the prior express written consent of the Beneficiary. Grantor will not accept payment of rent more than one (1) month in advance without the prior express written consent of the Beneficiary. In order to further secure payment of the Note and the observance, performance and discharge of Grantor's obligations, Grantor hereby assigns, transfers and sets over unto the Beneficiary, and grants the Beneficiary a security interest in, all of Grantor's right, title and interest in, to and under all leases, subleases, rental agreements, occupancy agreements, licenses, concessions, entry fees, other agreements which grant a possessory interest and other contracts now or hereafter affecting the Premises or any part thereof and in and to all of the rents, issues, profits, revenues, proceeds, awards and other benefits now or hereafter arising from the use and enjoyment of the Premises or any part thereof; provided, however, that Beneficiary hereby licenses back to Grantor the right to collect the same unless and until an Event of Default has occurred hereunder. 1.08 Security Agreement and Fixture Filing. Insofar as (i) any of the property listed in paragraphs (b) through (e) on pages 1 and 2 hereof and, (ii) all other personal property in any way connected with the use or enjoyment of the Premises (hereinafter all collateral defined in Sections (i) and (ii) hereof shall be collectively referred to as "Collateral") this Deed, in compliance with the provisions of the Uniform Commercial Code as enacted in the State of Nevada as it may be amended from time to time (the "UCC"), is hereby made and declared to be: (x) a security agreement, encumbering the Collateral and (y) a fixture filing. Grantor does hereby grant to the Beneficiary a continuing lien and security interest in and to all of said Collateral and all replacements, substitutions, additions and proceeds thereof and all after-acquired property relating thereto. A financing statement or statements reciting this Deed to be a security agreement, affecting all of said 9 85 Collateral aforementioned, shall be executed by Grantor and the Beneficiary and appropriately filed. Grantor covenants and agrees that, prior to changing its name, identity or structure, it will so notify the Beneficiary and will promptly execute any financing statements or other instruments deemed necessary by the Beneficiary to prevent any filed financing statement from becoming seriously misleading or losing its perfected status. The remedies for any violation of the covenants, terms and conditions of the security agreement herein contained shall be (i) as prescribed herein, or (ii) as prescribed by general law, or (iii) as prescribed by the specific statutory consequences now or hereafter enacted and specified in the UCC, all at the Beneficiary's sole election. Grantor and the Beneficiary agree that the filing of such financing statement(s) in the records normally having to do with personal property shall never be construed in anywise derogating from or impairing this declaration and hereby stated intention of Grantor and the Beneficiary that everything used in connection with the production of income from the Premises, adapted for use therein, and/or which is described in this Deed, is, and at all times and for all purposes and in all proceedings both legal or equitable shall be, regarded as part of the real estate irrespective of whether (a) any such item is physically attached to the improvements, (b) serial numbers are used for the better identification of certain items capable of being thus identified in a recital contained herein, or (c) any such item is referred to or reflected in any such financing statement(s) so filed at any time. Similarly, the mention in any such financing statement(s) of the rights in and to (aa) the proceeds of any insurance policy relating to the Premises, or (bb) any award in eminent domain proceedings for a taking or for loss of value, or (cc) Grantor's interest as lessor in any present or future lease, sublease, or rights to income growing out of the use and/or occupancy of the Premises, whether pursuant to lease, sublease, or otherwise, shall never be construed as in anywise altering any of the rights of the Beneficiary as determined by this instrument or impugning the priority of the Beneficiary's lien granted hereby or by any other recorded document, but such mention in such financing statement(s) is declared to be for the protection of the Beneficiary in the event any court shall at any time hold with respect to the foregoing (aa), (bb) or (cc), that notice of the Beneficiary's priority of interest to be effective against a particular class of persons, must be filed in the UCC records. The information contained herein is provided in order that this Deed shall comply with the requirements of the UCC for instruments to be filed as financing statements. The "Debtor" is the Grantor hereunder; the "Secured Party" is the Beneficiary herein, the principal place of business of the "Debtor" is as set forth on Page 1 of this Deed, the mailing addresses of the "Debtor and "Secured Party" are as set forth on Page 1 of this Deed, and the types or items of collateral are as described hereinabove. 1.09 Further Assurances; After Acquired Property. At any time, and from time to time, upon request by the Beneficiary, Grantor will make, execute and deliver or cause to be made, executed and delivered, to the Beneficiary and, where appropriate, cause to be recorded and/or filed and from time to time thereafter to be re-recorded and/or refiled at such time and in such offices and places as shall be deemed desirable by the Beneficiary, any and all such other and further deeds to secure debt, security agreements, financing statements, continuation statements, instruments of further assurance, certificates and other documents as may, in the reasonable opinion of the Beneficiary, be necessary or desirable in order to effectuate, complete, or perfect, or to continue and preserve (a) the obligation of Grantor under the Note and under this Deed, and (b) the lien of this Deed as a lien upon and security title in and to all of the Premises, whether now owned or hereafter acquired by Grantor. Upon any failure by Grantor so to do, the Beneficiary may make, execute, record, file, re-record 10 86 and/or refile any and all such deeds to secure debt, deeds of trust, security agreements, financing statements, continuation statements, instruments, certificates, and documents for and in the name of Grantor and Grantor hereby irrevocably appoints the Beneficiary the agent and attorney-in-fact of Grantor so to do. The lien hereof will automatically attach, without further act, to all after acquired property attached to and/or used in the operation of the Premises or any part thereof. 1.10 Expenses. (a) If any action or proceeding is commenced regarding the Premises or the Loan and to which action or proceeding the Beneficiary or the Trustee is made a party or in which it becomes necessary to defend or uphold the lien of this Deed, the Grantor shall, on demand, reimburse the Beneficiary and the Trustee for all expenses (including, without limitation, reasonable attorneys' fees and appellate attorneys' fees) incurred by the Beneficiary and/or the Trustee in any such action or proceeding. In any action or proceeding to foreclose this Deed or to recover or collect all or any portion of the Indebtedness, the provisions of law relating to the recovering of costs, disbursements and allowances shall remain unaffected by this covenant. (b) Subject to the contest rights of Grantor set forth in Section D.5 of the Loan Agreement, the Grantor shall pay when due all payments and charges on all liens, encumbrances, ground and other leases, and security interests which may be or become superior or inferior to the lien of this Deed, and, if Grantor shall not make such payments within five (5) days following receipt of written notice of Grantor's failure to pay from Beneficiary (unless circumstances require that the Beneficiary make any such payment(s) immediately in order to protect its secured interest and/or lien in any of the Premises), the Beneficiary shall have the right, but shall not be obligated, to pay such payments and charges and the Grantor shall, on demand, reimburse the Beneficiary for amounts so paid. In addition, upon default of the Grantor in the performance of any other terms, covenants, conditions or obligations by it to be performed under any such prior or subordinate lien, encumbrance, lease or security interest, the Beneficiary shall have the right, but shall not be obligated, to cure such default in the name and on behalf of the Grantor. All sums advanced and reasonable expenses incurred at any time by the Beneficiary pursuant to this Paragraph 1.10 or as otherwise provided under the terms and provisions of this Deed or under applicable law shall bear interest from the date that such sum is advanced or expense incurred, to and including the date of reimbursement, computed at an interest rate equal to the lesser of the Default Rate under the Note, or the highest lawful contract rate. (c) The Grantor agrees to bear and pay all expenses (including reasonable attorneys' fees and appellate attorneys' fees actually incurred) of or incidental to the enforcement of any provision hereof, or the enforcement, compromise or settlement of this Deed or the Indebtedness, and for the curing thereof, or for defending or asserting the rights and claims of the Beneficiary in respect thereof, by litigation or otherwise. All rights and remedies of the Beneficiary shall be cumulative and may be exercised singly or 11 87 concurrently. Notwithstanding anything herein contained to the contrary, the Grantor, being an experienced developer and participant in sophisticated real estate ventures, and having consulted with counsel of its choosing: (a) hereby waives trial by jury in any action brought by Beneficiary to enforce any provisions of this Deed; (b) will not (i) at any time insist upon, or plead, or in any manner whatever claim or take any benefit or advantage of any stay or extension or moratorium law, any exemption from execution or sale of the Premises or any part thereof, wherever enacted, now or at any time hereafter in force, which may affect the covenants and terms of performance of this Deed, nor (ii) claim, take or insist upon any benefit or advantage of any law now or hereafter in force providing for the valuation or appraisal of the Premises, or any part thereof, prior to any sale or sales thereof which may be made pursuant to any provision herein, or pursuant to the decree, judgment or order of any court of competent jurisdiction, nor (iii) after any such sale or sales, claim or exercise any right under any statute heretofore or hereafter enacted to redeem the property so sold or any part thereof; (c) hereby expressly waives all benefit or advantage of any such law or laws referred to in subparagraph (b) above; and (d) covenants not to hinder, delay or impede the execution of any power herein granted or delegated to the Beneficiary, but to suffer and permit the execution of every power as though no such law or laws had been made or enacted. The Grantor, for itself and all who may claim under it, waives, to the extent that it lawfully may, all right to have the Premises marshaled upon any foreclosure hereof. 1.11 Estoppel Affidavits. Grantor, upon fifteen (15) days prior written notice, shall furnish to the Beneficiary a written statement, duly acknowledged, setting forth the unpaid principal of, and interest on, the Indebtedness and whether or not any offsets or defenses are claimed to exist against such principal and interest, and such other information as may be reasonably requested by the Beneficiary. 1.12 Subrogation. The Beneficiary shall be subrogated to the claims and liens of all parties whose claims or liens are discharged or paid with the proceeds of the Indebtedness. 1.13 Books, Records, Accounts and Annual Reports. Grantor covenants and agrees to deliver to Beneficiary such books, records, accounts and annual reports in the form, at the times and containing such information as may be required to be delivered by Grantor or SSI to Beneficiary pursuant to the terms and provisions of any Related Loan Documents. 1.14 Limit of Validity. All agreements between the Grantor and the Beneficiary are expressly limited so that in no contingency or event whatsoever, whether by reason of advancement of the proceeds of the Note, acceleration of maturity of the unpaid principal balance of the Note or otherwise, shall the amount paid or agreed to be paid to the Beneficiary for the use, forbearance or detention of the money to be advanced hereunder exceed the highest lawful rate permissible under applicable usury laws. If, from any circumstances whatsoever, fulfillment of any provision hereof or of the Security Documents shall involve transcending the limit of validity prescribed by any law which a court of competent jurisdiction may deem applicable hereto, then ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity, and, if from any circumstance the 12 88 Beneficiary shall ever receive as interest an amount which would exceed the highest lawful rate, such amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance due under the Note and not to the payment of interest. This provision shall control every other provision of all agreements between the Grantor and the Beneficiary. 1.15 No Further Encumbrances. Grantor shall not, directly or indirectly (including, without limitation, by equipment leasing or similar arrangements, or by pledging or hypothecation of partnership interests in Grantor), further encumber the Premises, or any part thereof, it being understood by Grantor that the Premises, and all parts thereof, shall remain free and clear of any and all debt instruments or other obligations for repayment of money except those given in connection with the loan evidenced by the Note. 1.16 Restrictions on Transfers. Grantor shall comply with the following restrictions on transfers, provided, however, that nothing in Paragraph 1.15 hereof or this Paragraph 1.16 shall be deemed to apply to, restrict or otherwise limit to any degree any sale, transfer, encumbrance, hypothecation or other assignment or transfer of any of the publicly traded stock of Mego Financial Corp.: (a) Grantor shall not, without first obtaining the prior written consent of the Beneficiary (which consent may be given or withheld by the Beneficiary in the Beneficiary's sole discretion), whether voluntarily or involuntarily by operation of law or otherwise (i) transfer, sell, convey or assign all or any portion of the Premises, or contract to do any of the foregoing, including, without limitation, options to purchase and installment sales contracts, land contracts, real estate contracts or contracts for deed, (ii) lease all or any portion of the Premises or change the legal possession or use thereof, except as otherwise permitted pursuant to Paragraph 1.07 hereof, or (iii) except as provided in this Paragraph, permit the dilution, transfer, pledge, hypothecation or encumbrance of any partnership interest of Grantor, or of any stock, partnership or beneficial interests in any partner of Grantor which is a corporation, partnership or a trust (exclusive of Grantor limited partner transfers). Without limiting the generality of the preceding sentence, the prior written consent of the Beneficiary shall be required for (i) any transfer made to a subsidiary or affiliate entity of Grantor, (ii) any transfer made to a reconstituted general or limited partnership, (iii) transfers by any partnership to its individual partners or vice versa, (iv) any transfer by any corporation to its stockholders or vice versa, and (v) any corporate merger or consolidation. In the event that the Beneficiary, in the Beneficiary's sole discretion, is willing to consent to a transfer which would otherwise be prohibited by this Paragraph 1.16(a), the Beneficiary may condition its consent on such terms as it desires, including, without limitation, an increase in the interest rate of the Note (and recalculation of the amortization provisions thereof), and the requirement that Grantor pay a transfer fee, together with any expenses incurred by the Beneficiary in connection with the granting of such consent (including, without limitation, attorneys' fees). (b) Notwithstanding anything contained in this Paragraph 1.16 to the contrary, in the event that Grantor requests, prior to the maturity or other repayment in full of the Indebtedness, that Beneficiary consent to the transfer of and the release of the lien of this 13 89 Deed on any one or more of the five (5) parcels of Land, then, in addition to the conditions that Beneficiary must grant its prior written consent to such transfer and that no Event of Default or circumstance that with the passage of time or giving of notice or both would constitute an Event of Default shall then exist and be continuing, Grantor shall also satisfy the following conditions to any such release: (i) Grantor shall pay to Beneficiary a release payment equal to at least the greater of (x) fifty percent (50%) of the total stated purchase price for the applicable parcel of Land (including any deferred, contingent or earn-out portions thereof or any additional consideration to be paid by the purchaser or transferee subsequent to the closing of the acquisition of the applicable parcel of Land); or (y) fifty percent (50%) of the following appraised values of such parcels of Land: Parcel 1 on Exhibit "A": $ 780,000.00 Parcel 2 on Exhibit "A": 785,000.00 Parcel 3 on Exhibit "A": 3,760,000.00 Parcel 4 on Exhibit "A": 3,050,000.00 Parcel 5 on Exhibit "A": 3,925,000.00
Notwithstanding the foregoing, if an Event of Default or circumstance that with the passage of time or giving of notice or both would constitute an Event of Default shall then exist and be continuing, Beneficiary may in its sole discretion require that any such release payment be increased. No additional release payment shall be payable upon the repayment and satisfaction in full of the Indebtedness. (ii) The Maximum LTV Ratio (as defined in Section A.2(g) of the Loan Agreement) shall not, after any such transfer and release payment to Beneficiary, exceed 50%. (c) If Grantor violates the terms of Paragraph 1.16 hereof, in addition to any other rights or remedies which Grantor may have herein, in any other Security Document, or at law or in equity, Beneficiary may increase the interest rate charged on the Indebtedness up to the Default Rate, such interest being due on demand and being secured by this Deed. 1.17 Representations and Warranties. As a special inducement to the Beneficiary to make the loan evidenced by the Note, and with knowledge that the Beneficiary will rely thereon, Grantor represents and warrants to the Beneficiary as follows: (a) There exist no leases or subleases, occupancy agreements or similar arrangements affecting all or any portion of the Premises other than those identified on Exhibit "C" attached hereto and by this reference made a part hereof; (b) There are no license, franchise, commission, management, service, maintenance, or other contracts or agreements in existence affecting in any way the operation, 14 90 maintenance or conduct of business at the Premises other than those identified on Exhibit "C". (c) There are no equipment leases, rental agreements or similar arrangements affecting in any way the operating, maintenance or conduct of business at the Premises other than those identified on Exhibit "C". (d) All licenses, permits and other approvals necessary or appropriate for conduct of the business carried out at the Premises have been obtained by Grantor and same are current and in full force and effect. (e) All sales and payroll tax obligations of Grantor which are due and payable have been satisfied. (f) There are no UCC Financing Statements which affect or encumber any portion of the Premises or any other security for the Indebtedness other than those in favor of Beneficiary or its affiliates. 1.18. Environmental Matters. Grantor warrants that (a) to the best of Grantor's knowledge, the Premises do not contain any Hazardous Material the presence of which would violate any Environmental Law, as hereinafter defined, (b) Grantor has not received any notice from any governmental agency, entity or other person with regard to Hazardous Materials on or affecting the Premises, and (c) to the best of Grantor's knowledge, neither Borrower nor the Premises, or any portion thereof are in violation of any applicable Environmental Laws, as hereinafter defined, relating to or affecting the Premises or Grantor. Grantor hereby indemnifies and agrees to defend and hold the Beneficiary harmless from and against any and all liens, damages, losses, liabilities, obligations, fines, penalties, claims, litigation, demands, judgments, suits, proceedings, costs, disbursements, response costs, or expenses of any kind or nature whatsoever (including, without limitation, attorneys', consultants' and experts' fees and expenses) (except to the extent that any of the foregoing are caused by any gross negligence or wilful misconduct of Beneficiary) which may at any time (whether prior to or after foreclosure of this Deed and whether prior to or after payment of the Note) be imposed upon, incurred by or asserted or awarded against Grantor, the Beneficiary or the Premises and arising directly or indirectly from or out of (i) the presence of any Hazardous Materials at any time on, in, under or affecting all or any portion of the Premises, regardless of whether or not caused by or within the control of Grantor, (ii) the violation or alleged violation of any Environmental Law with respect to the Premises or any portion thereof, and (iii) any attempts by the Beneficiary to enforce the foregoing rights. The foregoing rights shall include, without limitation, the cost of removal of any and all Hazardous Materials from all or any portion of the Premises or any surrounding areas, additional costs required to take necessary precautions to protect against the discharge, spillage, emission, leakage, seepage or release of Hazardous Materials on, in, under or affecting the Premises or into the air, water, or soil, and costs incurred to comply with Environmental Laws in connection with all or any portion of the Premises or any surrounding areas. For purposes of this Deed, "Hazardous Material" or "Hazardous Materials" means and includes petroleum products, flammable explosives, radioactive materials, asbestos or any material containing 15 91 asbestos, polychlorinated biphenyls, and/or any hazardous, toxic or dangerous waste, substance, element, compound, mixture, solution, pollutant or material now or hereafter defined as such, or as a hazardous substance, or any similar term, by or in any Environmental Law. For purposes of this Deed, "Environmental Law" or "Environmental Laws" shall mean any law commonly referred to or generally known as "Superfund" or "Superlien" law, or any other federal, state or local statute, law, ordinance, code, rule, regulation, order or decree, regulating, relating to or imposing liability or standards of conduct concerning, any hazardous materials as may now or at any time hereafter be in effect, including without limitation, the following as the same may be amended or replaced from time to time, and all regulations promulgated thereunder or in connection therewith: the Superfund Amendments and Reauthorization Act of 1986; the Comprehensive Environmental Response, Compensation and Liability Act of 1980; the Clean Air Act; the Clean Water Act; the Toxic Substances Control Act; the Resource Conservation and Recovery Act as amended by the Solid Waste Disposal Act; the Safe Drinking Water Act; the Emergency Planning and Community Right to Know Act of 1986; the Hazardous Materials Transportation Act; and the Endangered Species Act. 1.19 Use of Premises. Grantor represents and warrants that as of the date of this Deed, the Premises are vacant (except for any occupancy agreement permitted pursuant to Paragraph 1.07 hereof), and consist of undeveloped land. Grantor covenants that Grantor will not allow any other uses on the Premises unless Beneficiary has given its prior written consent thereto. ARTICLE II 2.01 Events of Default. The terms "Event of Default" or "Events of Default", wherever used in this Deed, shall mean any one or more of the following events: (a) Failure by Grantor to pay any sum within five (5) days after its due date and, upon the first occurrence only of any such failure to pay, written notice from Beneficiary that payment is due under the Note, this Deed, or any payment of tax or insurance premium when due; or (b) Failure by Grantor to duly observe, comply with or perform within twenty (20) days after written notice of such failure is given to Grantor, any other term, covenant, condition or agreement of this Deed not requiring the payment of money by Grantor except Paragraphs 1.15 and 1.16; or (c) The occurrence of a default or event of default under or failure by Grantor or any Guarantor to perform any of its or their obligations under any of the Security Documents, which is not cured within any applicable cure period; or (d) Any warranty or representation of Grantor contained in this Deed or in any other instrument, document, transfer, conveyance, assignment, loan agreement or financial statement given by Grantor with respect to the Indebtedness secured hereby, is incomplete, untrue or misleading in any material respect; or 16 92 (e) The filing by Grantor, its general partners (if any) or any Guarantor of a voluntary petition in bankruptcy or adjudication of Grantor or any Guarantor as a bankrupt or insolvent, or the filing by Grantor or any Guarantor of any petition or answer seeking or acquiescing in any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief for itself under any present or future federal, state or other law or regulation relating to bankruptcy, insolvency or other relief for debtors, or the seeking or consenting to or acquiescing in the appointment of any trustee, receiver or liquidator of Grantor or any Guarantor or of all or any substantial part of the Premises or of any or all of the rents, issues, profits or revenues thereof, or the making by Grantor or any Guarantor of any general assignment for the benefit of creditors, or the admission in writing by Grantor or any Guarantor of its inability to pay its debts generally as they become due; or (f) The entry by a court of competent jurisdiction of an order, judgment or decree approving a petition, filed against Grantor or any Guarantor, seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or other relief under any present or future federal, state or other law or regulation relating to bankruptcy, insolvency or other relief for debtors, which order, judgment or decree remains unvacated and unstayed for an aggregate of sixty (60) days (whether or not consecutive) from the date of entry thereof, or the appointment of any trustee, receiver or liquidator of Grantor, or any Guarantor, or of all or any substantial part of the Premises or of any or all of the rents, issues, profits or revenues thereof without the consent or acquiescence of Grantor, which appointment shall remain unvacated and unstayed for an aggregate of sixty (60) days (whether or not consecutive); or (g) Failure by Grantor to comply with the terms of Paragraphs 1.15 or 1.16 hereof; or (h) The termination, liquidation or dissolution of Grantor; or (i) Failure to maintain or cause any occupant of any portion of the Premises to maintain, any license, permit, or contract necessary or appropriate for conduct of any business now or hereafter being operated at the Premises which would have a material adverse effect on the Premises or any business conducted thereon by Grantor; or (j) Any default or event of default occurs under any Related Loan Documents or otherwise with respect to the Related Indebtedness, and the same is continuing after lapse of any applicable grace or cure period; or (k) Any default continuing after the expiration of any applicable cure or grace period under any other note or mortgage, evidencing or securing indebtedness of an entity affiliated with Grantor in favor of the Beneficiary or its affiliates. 2.02 Acceleration of Maturity. If any Event of Default shall have occurred (subject to any applicable grace or cure period), then the entire Indebtedness shall, at the option of the Beneficiary, 17 93 immediately become due and payable without notice or demand, time being of the essence of this Deed; and no omission on the part of the Beneficiary to exercise such option when entitled to do so shall be construed as a waiver of such right. 2.03 Beneficiary's Right to Enter and Take Possession, Operate and Apply Revenues. (a) If any Event of Default shall have occurred (subject to any applicable grace or cure period), Grantor upon demand of the Beneficiary, shall forthwith surrender to the Beneficiary the actual possession of the Premises, and if, and to the extent, permitted by law, the Beneficiary itself, or by such officers or agents as it may appoint, may enter and take possession of all the Premises without the appointment of a receiver, or an application therefor, and may exclude Grantor and its agents and employees wholly therefrom, and may have joint access with Grantor to the books, papers and accounts of Grantor regarding the Premises. (b) If Grantor shall for any reason fail to surrender or deliver the Premises or any part thereof after such demand by the Beneficiary, the Beneficiary may obtain a judgment or decree conferring upon the Beneficiary the right to immediate possession or requiring Grantor to deliver immediate possession of the Premises to the Beneficiary, to the entry of which judgment or decree Grantor hereby specifically consents. Grantor will pay to the Beneficiary, upon demand, all expenses of obtaining such judgment or decree, including reasonable compensation to the Beneficiary, its attorneys and agents; and all such expenses and compensation shall, until paid, be secured by the lien of this Deed. (c) Upon every such entering upon or taking of possession, the Beneficiary may hold, store, use, operate, manage and control the Premises and conduct the business thereof, and, from time to time (i) make all necessary and proper maintenance, repairs, renewals, replacements, additions, and improvements thereto and thereon and purchase or otherwise acquire additional fixtures, personalty and other property; (ii) insure or keep the Premises insured; (iii) manage and operate the Premises and exercise all the rights and powers of Grantor to the same extent as Grantor could in its own name or otherwise with respect to the same; and (iv) enter into any and all agreements with respect to the exercise by others of any of the powers herein granted the Beneficiary, all as the Beneficiary from time to time may determine to be in its best interest. In such event, the Beneficiary may collect and receive all the rents, issues, profits and revenues from the Premises, including those past due as well as those accruing thereafter, and shall have the benefit of all operating expenses and deposits prepaid by Grantor, and, after deducting (aa) all out-of-pocket and administrative expenses of taking, holding, managing and operating the Premises (including compensation for the services of all persons employed for such purposes); (bb) the cost of all such maintenance, repairs, renewals, replacements, additions, improvements, purchases and acquisitions; (cc) the cost of such insurance; (dd) such taxes, assessments and other similar charges as the Beneficiary may at its option pay; (ee) other proper charges upon the Premises or any part thereof; and (ff) the reasonable compensation, expenses and disbursements of the 18 94 attorneys and agents of the Beneficiary, and (gg) the payment of deposits required in Paragraph 1.04, the Beneficiary shall apply the remainder of the moneys so received by the Beneficiary as set forth in the Note. (d) Whenever all Events of Default have been cured pursuant to the terms and conditions of any applicable Loan Document, and if the Beneficiary in the Beneficiary's sole discretion shall have accepted such cure, the Beneficiary shall surrender possession of the Premises to Grantor, its successors or assigns. The same right of taking possession, however, shall exist if any subsequent Event of Default shall occur and be continuing. 2.04 Performance by the Beneficiary of Defaults by Grantor. If Grantor shall default in the payment, performance or observance of any term, covenant or condition of this Deed, the Beneficiary may, at its option, without waiving the right to accelerate the maturity of the Indebtedness, pay, perform or observe the same if Grantor shall not make such payment or perform or observe any such term, covenant or condition within five (5) days following receipt of written notice of Grantor's failure to pay, perform or observe from Beneficiary (unless circumstances require that the Beneficiary make any such payment or perform or observe any such term, covenant or condition immediately in order to protect its secured interest and/or lien in any of the Premises). The Beneficiary shall determine in its reasonable discretion the necessity for any such actions and of the amounts to be paid. The Beneficiary is hereby empowered to enter and to authorize others to enter upon the Premises or any part thereof for the purpose of performing or observing any such defaulted term, covenant or condition without thereby becoming liable to Grantor or any person in possession holding under Grantor. 2.05 Receiver. If an Event of Default shall have occurred, the Beneficiary, upon application to a court of competent jurisdiction, shall be entitled without notice and without regard to the occupancy or value of any security for the Indebtedness or the solvency of any party bound for its payment, to the appointment of a receiver to take possession of and to operate the Premises and to collect, apply and use the rents, issues, profits and revenues thereof, including those past due as well as those accruing thereafter, and said receiver shall have the benefit of all operating expenses and deposits prepaid by Grantor it being acknowledged by Grantor that if an Event of Default shall have occurred, that Beneficiary shall have the right to the Premises and that the Premises and the rents and profits therefrom in such event will be in danger of being lost, or materially injured or impaired. The receiver shall have all of the rights and powers permitted under the laws of the state wherein the Land is situated. Grantor will pay to the Beneficiary upon demand all reasonable expenses, including receiver's fees, attorney's fees, costs and agent's compensation, incurred pursuant to the provisions of this Paragraph 2.05; and all such expenses shall be secured by this Deed. 2.06 Enforcement. (a) Upon the occurrence of an Event of Default, the Beneficiary may take such action in accordance with all applicable law, without notice or demand, as it deems advisable to protect and enforce its rights against the Grantor and to the Premises, including, but not limited to, the following actions, each of which may be pursued concurrently or 19 95 otherwise, at such time and in such order as the Beneficiary may determine, in its sole discretion, and to the fullest extent permitted by applicable law, without impairing or otherwise affecting the other rights and remedies of the Beneficiary: (1) exercise the rights granted in Paragraphs 2.02 through 2.05 hereof, (2) exercise the power of sale and/or institute proceedings for the complete judicial foreclosure of this Deed; (3) with or without entry, to the extent permitted and pursuant to the procedures provided by applicable law, institute proceedings for the partial foreclosure of this Deed for the portion of the Indebtedness then due and payable, subject to the continuing lien of this Deed for the balance of the Indebtedness not then due; (4) institute an action, suit or proceeding in equity for the specific performance of any covenant, condition or agreement contained herein or in the Note to the extent permitted by applicable law; or (5) pursue such other remedies as Beneficiary may have under applicable law. (b) Upon the occurrence of an Event of Default and the election of the Beneficiary to effect a trustee's sale of the Premises in lieu of judicial foreclosure, then the Beneficiary may instruct the Trustee to commence such sale and consummate such sale in the following manner: The Trustee shall sell the Premises at public auction for cash, after having first given such notice of hearing as to the commencement of foreclosure proceedings and obtaining such findings or leave of court as may be then required by law in giving such notice and advertising the time and place of such sale in such manner as may be provided by law, and upon such and any resales and upon compliance with the law then relating to foreclosure proceedings, to convey title to purchaser as hereinafter set forth. The Trustee shall deliver to the purchaser at any such Trustee's sale its deed, without warranty, which shall convey to the purchaser the interest in the Premises which the Grantor has or has the power to convey at the time of the execution of this Deed, and such as it may have acquired hereafter. The Trustee's deed shall recite the facts showing that the sale was conducted in compliance with all the requirements of law and of this Deed, which recital shall be prima facie evidence of such compliance and conclusive evidence thereof in favor of bona fide purchasers and encumbrances. (c) The proceeds of any sale made under this Article II, together with any other sums which then may be held by the Beneficiary under this Deed, whether under the provisions of this Article II or other otherwise, shall be applied as follows, subject to the requirements of all applicable law: First: To the payment of the cost and expenses of any such sale, including reasonable compensation to the Beneficiary, its agents and counsel, of the cost and expenses of any judicial proceedings wherein the same may be made, of any reasonable trustee's commission, and a reasonable auctioneer's fee if such expense has been incurred. 20 96 Second: To payment of taxes due and unpaid on the property sold, unless the notice of sale provided that the property be sold subject to taxes thereon and the property was so sold. Third: To payment of all reasonable expenses, liabilities and advances made or incurred by the Beneficiary under this Deed, together with interest as provided herein on all advances made by the Beneficiary. Fourth: To the payment of the whole amount then due, owing or unpaid under the Indebtedness. Fifth: To the payment of the surplus, if any, to whomever may be lawfully entitled to receive the same. The Beneficiary and any receiver of the Premises, or any part thereof, shall be liable to account for only those rents, issues, profits and proceeds actually received by it. (d) In case of a sale under this Deed, the Premises, real, personal and mixed, may be sold in one parcel or more than one parcel. (e) The purchaser of the Premises sold pursuant to this Deed may, during any redemption period allowed to Grantor or any other party, make such repairs or alterations on said property as may be reasonably necessary for the proper operation, care, preservation, protection and insuring thereof. Any sums so paid together with interest thereon from the time of such expenditure at the rate of the lesser of the Default Rate under the Note or the highest lawful contract rate shall be added to and become a part of the amount required to be paid for redemption from such sale. (f) Upon any sale made under this Deed, the Beneficiary may bid for and acquire the Premises or any part thereof and in lieu of paying cash therefor may make settlement for the purchase price by crediting upon the Indebtedness the net sale price after deducting therefrom the expenses of the sale and the costs of the action and any other sums which the Beneficiary is authorized to deduct under this Deed. (g) No recovery of any judgment by the Beneficiary and no levy of an execution under any judgment upon the Premises or upon any other property of the Grantor shall affect in any manner or to any extent, the lien of this Deed upon the Premises or any part thereof, or any liens, rights, powers or remedies of the Beneficiary hereunder, but such liens, rights, powers, and remedies of the Beneficiary shall continue unimpaired as before. (h) In the event of any sale made under or by virtue of this Deed the entire Indebtedness secured hereby, if not previously due and payable, immediately thereupon shall, 21 97 anything in the Note or in this Deed to the contrary notwithstanding, become due and payable. 2.07 Interest After Default. If any payment due hereunder is not paid when due, subject to any applicable grace or cure periods, then and in such event, the Grantor shall pay interest thereon from and after the date on which such payment first becomes due at the Default Rate provided in the Note and such interest shall be due and payable, on demand, whether or not any action shall have been taken or proceeding commenced to recover the same or to foreclose this Deed. Nothing in this Paragraph 2.07 or in any other provision of this Deed shall constitute an extension of the time of payment of the Indebtedness. 2.08 Grantor's Actions After Default. After the happening of any Event of Default and immediately upon the commencement of any action, suit or other legal proceeding by the Beneficiary to obtain judgment for the Indebtedness, or any portion thereof, or of any other nature in and of the enforcement of the Note or of this Deed, the Grantor will, if required by the Beneficiary, consent to the appointment of a receiver or receivers of the Premises and of all the earnings, revenues, rents, issues, profits and income thereof. 2.09 Control By Beneficiary After Default. Notwithstanding the appointment of any receiver, liquidator or trustee of the Grantor, or of any of its property, or of the Premises or any part thereof, the Beneficiary shall be entitled to retain possession and control of all property now and hereafter covered by this Deed. 2.10 Waiver of Appraisement, Valuation, Stay, Execution and Redemption Laws. Grantor agrees to the full extent permitted by law, that in the case of a default on the part of Grantor hereunder, neither Grantor nor anyone claiming through or under it shall or will set up, claim or seek to take advantage of any appraisement, valuation, stay, extension, homestead, exemption or redemption laws now or hereafter in force, in order to prevent or hinder the enforcement or foreclosure of this Deed, or the absolute sale of the Premises, or the final and absolute putting into possession thereof, immediately after such sale, of the purchasers thereof, and Grantor, for itself and all who may at any time claim through or under it, hereby waives to the full extent that it may lawfully so do, the benefit of all such laws, and any and all right to have the assets comprised in the security intended to be created hereby marshaled upon any foreclosure of the lien hereof. 2.11 Remedies Cumulative. No right, power or remedy conferred upon or reserved to the Beneficiary by this Deed is intended to be exclusive of any other right, power or remedy, but each and every right, power and remedy shall be cumulative and concurrent and shall be in addition to any other right, power and remedy given hereunder now or hereafter existing at law or in equity or by statute to the fullest extent permitted by law. 2.12 Waiver. (a) No delay or omission of the Beneficiary or of any holder of the Note to exercise any right, power or remedy accruing upon any default shall exhaust or impair any such right, 22 98 power or remedy or shall be construed to be a waiver of any such default, or acquiescence therein; and every right, power and remedy given by this Deed to the Beneficiary may be exercised from time to time and as often as may be deemed expedient by the Beneficiary. No consent or waiver, express or implied, by the Beneficiary to or of any breach or default by Grantor in the performance of the obligations hereunder shall be deemed or construed to be a consent or waiver to or of any other breach or default in the performance of the same or any other obligations of Grantor hereunder. Failure on the part of the Beneficiary to complain of any act or failure to act or to declare an Event of Default, irrespective of how long such failure continues, shall not constitute a waiver by the Beneficiary of its rights hereunder or impair any rights, powers or remedies arising by virtue of any breach or default by Grantor. (b) If the Beneficiary (i) grants forbearance or an extension of time for the payment of any sums secured hereby; (ii) takes other or additional security for the payment of any sums secured hereby; (iii) waives or does not exercise any right granted herein or in the Note; (iv) releases any part of the Premises from the lien of this Deed or otherwise changes any of the terms, covenants, conditions or agreements of the Note or this Deed; (v) consents to the filing of any map, plat or replat affecting the Premises; (vi) consents to the granting of any easement or other right affecting the Premises; or (vii) makes or consents to any agreement subordinating the lien hereof, any such act or omission shall not release, discharge, modify, change or affect the original liability under the Note, this Deed or any other obligation of Grantor or any subsequent purchaser of the Premises or any part thereof, or any maker, co-signer, endorser, surety or guarantor except to the extent of any such waiver, release or modification actually given; nor shall any such act or omission preclude the Beneficiary from exercising any right, power or privilege herein granted or intended to be granted in the event of any default then made or of any subsequent default; nor, except as otherwise expressly provided in an instrument or instruments executed by the Beneficiary, shall the lien of this Deed be altered thereby. In the event of the sale or transfer by operation of law or otherwise of all or any part of the Premises, the Beneficiary, without notice, is hereby authorized and empowered to deal with any such vendee or transferee with reference to the Premises or the Indebtedness, or with reference to any of the terms, covenants, conditions or agreements hereof, as fully and to the same extent as it might deal with the original parties hereto and without in any way releasing or discharging any liabilities or obligations. 2.13 Suits to Protect the Premises. Beneficiary shall have the power, with at least ten (10) days' prior written notice to Grantor (unless circumstances require that Beneficiary act immediately without any such notice, as determined by Beneficiary in its sole discretion): (a) to institute and maintain such suits and proceedings as it may deem expedient to prevent any impairment of the Premises by any acts which may be unlawful or any violation of this Deed, 23 99 (b) to preserve or protect its interest in the Premises and in the rents, issues, profits and revenues arising therefrom, and (c) to restrain the enforcement of or compliance with any legislation or other governmental enactment, rule or order that may be unconstitutional or otherwise invalid, if the enforcement of or compliance with such enactment, rule or order would impair the security hereunder or be prejudicial to the interest of the Beneficiary. 2.14 Beneficiary May File Proofs of Claim. In the case of any receivership, insolvency, bankruptcy, reorganization, arrangement, adjustment, composition or other proceedings affecting Guarantor, Grantor, or any of them or any of their creditors or property, the Beneficiary, to the extent permitted by law, shall be entitled to file such proofs of claim and other documents as may be necessary or advisable in order to have the claims of the Beneficiary allowed in such proceedings for the entire amount due and payable by Grantor under this Deed at the date of the institution of such proceedings and for any additional amount which may become due and payable by Grantor hereunder after such date. ARTICLE III 3.01 Credits Waived. Grantor will not claim nor demand nor be entitled to any credit or credits against the Indebtedness for the taxes assessed against the Premises or any part thereof, and no deductions shall otherwise be made or claimed from the taxable value of the Premises or any part thereof by reason of this Deed or the Indebtedness. 3.02 No Release. Grantor agrees that in the event the Premises are sold and the Beneficiary enters into any agreement with the then owner of the Premises extending the time of payment of the Indebtedness, or otherwise modifying the terms hereof, Grantor shall continue to be liable to pay the Indebtedness according to the tenor of any such agreement unless expressly released and discharged in writing by the Beneficiary. Nothing in this Paragraph 3.02 shall be deemed to be a waiver of Paragraph 1.16 hereof. 3.03 Successors and Assigns. The provisions and covenants of this Deed shall run with the land, shall be binding on Grantor, and shall inure to the benefit of and be binding upon Grantor and the Beneficiary and their respective heirs, executors, legal representatives, successors and permitted assigns. Whenever a reference is made in this Deed to Guarantor, the Trustee, Grantor or the Beneficiary such reference shall be deemed to include a reference to the heirs, executors, legal representatives, successors and permitted assigns thereof. 3.04 Terminology. All personal pronouns used in this Deed whether used in the masculine, feminine or neuter gender, shall include all other genders; the singular shall include the plural, and vice versa. Titles and Articles are for convenience only and neither limit nor amplify the provisions of this Deed itself. 3.05 Severability. If any provision of this Deed or the application thereof to any person or circumstance shall be invalid or unenforceable to any extent, the remainder of this Deed and the 24 100 application of such provisions to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 3.06 Applicable Law. Grantor agrees that this Deed shall be construed, interpreted and enforced in accordance with the laws of the State of Nevada; provided, however, that if any applicable conflict or choice of law rules would choose the law of another state, Grantor waives such rules and agrees that Nevada substantive, procedural and constitutional law shall nonetheless govern. Notwithstanding any provision of this Deed, Note or any other agreement between Grantor or Beneficiary, nothing in this Deed shall require the Grantor to pay, or the Beneficiary to accept, interest in an amount which would subject the Beneficiary to any penalty under applicable law. In the event that the payment of any interest due hereunder would subject the Beneficiary to any penalty under applicable law, then ipso facto the obligations of the Grantor to make payment shall be reduced to the highest rate authorized under applicable law. 3.07 Notices, Demands and Requests. All notices, demands or requests provided for or permitted to be given pursuant to this Deed must be in writing and shall be deemed to have been properly given or served by depositing the same with a nationally recognized overnight courier service or in the United States Mail, postpaid and registered or certified return receipt requested, and addressed to the addresses set forth on the first page hereof. All notices, demands and requests shall be effective upon being deposited with a nationally recognized courier service or, on the date that is two (2) business days after such deposit, upon being deposited in the United States Mail. Rejection or other refusal to accept or the inability to deliver because of changed address of which no notice was given shall be deemed to be receipt of the notice, demand or request sent. By giving at least thirty (30) days written notice hereof, Grantor or the Beneficiary shall have the right from time to time and at any time during the term of this Deed to change their respective addresses. 3.08 Time of the Essence. Time is of the essence with respect to each and every covenant, agreement and obligation of Grantor under this Deed. 3.09 Title Acts by Trustee. At any time upon written request of the Beneficiary, payment of its fees and presentation of this Deed and the Note for endorsement (in case of full reconveyance, for cancellation and retention) without affecting the liability of any person for the payment of the Indebtedness secured by this Deed, the Trustee may (a) consent to the making of any map or plat of the Premises, (b) join in granting any easement or creating any restriction thereon, (c) join in any subordination or other agreement affecting this Deed or the lien or charge thereof, (d) reconvey, without warranty, all or any part of the Premises. The grantee in any reconveyance may be described as the "person or persons legally entitled thereto", and the recitals therein of any matters of facts shall be conclusive proof of the truthfulness thereof. The Grantor agrees to pay a reasonable Trustee's fee for full or partial reconveyance, together with a recording fee for said reconveyance. 3.10 Successor Trustee. At the option of the Beneficiary, with or without any reason, a successor or substitute trustee may be appointed by the Beneficiary without any formality other than a designation in writing of a successor or substitute trustee, who shall thereupon become vested with and succeed to all the powers and duties given to the Trustee herein named, the same as if the 25 101 successor or substitute trustee had been named original Trustee herein; and such right to appoint a successor or substitute trustee shall exist as often and whenever the Beneficiary desires. 3.11 Acknowledgments by Grantor. Grantor acknowledges that the information set forth on the cover hereof is incorporated herein by reference and that Grantor has received a true copy of this Deed. 3.12 Releases. Section A.9 of the Loan Agreement provides for the release and reconveyance of the lien of this Deed encumbering the Premises upon the repayment and performance in full of the Indebtedness, subject to the conditions set forth in said Section A.9, prior to the full repayment and performance of the Related Indebtedness; provided, however and except that, if there exists with respect to the Related Indebtedness at the time of repayment and performance in full of the Indebtedness a default or event of default, or any event or circumstance which with the passage of time or giving of notice would become a default or event of default under the Related Loan Documents, then the release and reconveyance of the lien of the Deed hereof shall not be granted by Beneficiary for so long as any such default or event of default or such other event or circumstance is continuing. IN WITNESS WHEREOF, Grantor has executed this Deed under seal, as of the day and year first above written. PREFERRED EQUITIES CORPORATION, a Nevada corporation By : /s/ FREDERICK H. CONTE ------------------------------------ Name: Frederick H. Conte --------------------------------- Title: President and COO -------------------------------- 26 102 STATE OF NEVADA ) ) .ss COUNTY OF CLARK ) This instrument was acknowledged before me on August 12, 1998 by Frederick H. Conte as President & COO of PREFERRED EQUITIES CORPORATION, a Nevada corporation. /s/ MARY A. FAIR --------------------------------- NOTARY PUBLIC [NOTARY PUBLIC SEAL] My Commission Expires: Oct. 30, 1998 27 103 EXHIBIT "A" LEGAL DESCRIPTION All that real property situated in the State of Nevada, County of Nye, bounded and described as follows: Parcel 1: Lot One (1) Block One (1) of CALVADA VALLEY UNIT NO. 2 as shown by map recorded October 5, 1970 as File No. 20291 in the Office of the County Recorder of Nye County, Nevada. EXCEPTING THEREFROM all of its right, title and interest in and to all of the minerals, including gas, coal, oil and oil shales as disclosed by Deed recorded January 10, 1961 in Book 43, Page 374, Official Records, Nye County, Nevada. Parcel 2: Lot One hundred forty-eight (148) in Block Sixteen (16) of CALVADA VALLEY UNIT NO. 6, as shown by map recorded February 5, 1973 as Document No. 36024 in the Office of the County Recorder of Nye County, Nevada. EXCEPTING THEREFROM all of its right, title and interest in and to all of the minerals, including gas, coal, oil and oil shales as disclosed by Deed recorded January 10, 1961 in Book 43, Page 374, Official Records, Nye County, Nevada. Parcel 3: Parcels One (1) and Three (3) of Parcel Map recorded May 24, 1983 as File No. 81177 and amended by Certificate of Amendment recorded June 14, 1983 as File No. 83144 and by Certificate of Amendment recorded December 12, 1983 as File No. 99135 and by Certificate of Amendment recorded March 16, 1992 as File No. 304864 of Official Records, Nye County, Nevada. Parcel 4: Parcel Two (2) as shown by Parcel Map recorded April 26, 1994 as File No. 351410 of Official Records, Nye County, Nevada. Parcel 5: Lot Forty (40) in Block Six (6) of AMENDED PLAT OF CALVADA VALLEY UNIT 6, recorded December 28, 1993 as Document No. 345007 in the Office of the County Recorder of Nye County, Nevada. 1 104 Lots Nineteen (19) and Nineteen A (19A) (to the extent of Preferred Equities Corporation's reversionary interest in Lot Nineteen A (19A)) of Block Six (6) of CALVADA VALLEY UNIT NO. 6, recorded February 5, 1973 as File No. 36024 of Official Records, Nye County, Nevada, more particularly described as Parcel Nineteen (19) as shown on Parcel Map recorded January 6, 1983 as File No. 72610 of Official Records, Nye County, Nevada. Lot One (1) in Block Fifteen (15), Lots One hundred seventy-three (173) and One hundred seventy-four (174) in Block Eleven (11) and Lot Three hundred twenty-three (323) in Block Six (6) of CALVADA VALLEY UNIT NO. 6, as shown by map recorded February 5, 1973 as Document No. 36024 in the Office of the County Recorder of Nye County, Nevada. 2 105 EXHIBIT "B" PERMITTED ENCUMBRANCES All Permitted Encumbrances are those items set forth in that certain Commitment for Title Insurance dated July 8, 1998 as issued by Chicago Title Insurance Company as items 1 and 2 (as to non-delinquent amounts), 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17 and 18. 1 106 EXHIBIT "C" LEASES, SUBLEASES, CONTRACTS AND AGREEMENTS None. 1 107 [PEC LOGO] PREFERRED EQUITIES CORPORATION 4310 Paradise Road, Las Vegas, NV 89109-6597 o 702.737.3700 o Toll Free 1.800.634.6431 o Fax 702.369.3194 August 12, 1998 Dorfinco Corporation c/o Textron Financial Corporation 40 Westminster Street Providence, Rhode Island 02940 Ladies and Gentlemen: I have acted as Nevada counsel for Preferred Equities Corporation, a Nevada corporation ("Borrower"), in connection with certain matters related to a Four Million and no/100 Dollar ($4,000,000.00) loan ("Loan") dated as August 12, 1998, from Dorfinco Corporation, ("Lender"), to Borrower. I have also acted as Nevada counsel for Mego Financial Corp., guarantor of the Loan ("Guarantor"). The Loan is secured by the Deed (as hereinafter defined) in favor of Dorfinco on certain parcels of land in Pahrump, Nevada as described in said Deed ("the Property"). This opinion is being delivered in accordance with certain requirements of the Loan. I have reviewed the following documents, all of which are dated August 12, 1998: a. Loan and Security Agreement, between Lender and Borrower; b. Promissory Note, in the stated principal amount of $4,000,000.00, executed by Borrower; c. Deed of Trust, Security Agreement and Fixture Filing (the "Deed"), from Borrower, as grantor, to United Title of Nevada, as trustee, and for the benefit of Lender as beneficiary; d. County and Secretary of State of Nevada UCC-1 financing statement (the "UCC Financing Statements") executed by Borrower; e. Guaranty Agreement (the "Guaranty"), executed by Guarantor; f. Environmental Indemnity Agreement, executed by the Borrower; 108 g. Subordination Agreement, executed by Borrower, as debtor, and Guarantor, as creditor, in favor of and accepted by Lender; h. Borrower's Certificate, executed by Borrower; and i. Guarantor's Certificate, executed by Guarantor. For the purpose of this opinion, the foregoing documents listed in paragraphs a. through i. are referred to herein as the "Loan Documents". It is the opinion of the undersigned that: 1. Borrower is a corporation, duly formed, validly existing and in good standing under the laws of the State of Nevada. Borrower has full right, power and authority to carry out and consummate all transactions contemplated by the Loan Documents and has duly authorized the taking of any and all action necessary to carry out and consummate the transactions contemplated to be performed on its part by the Loan Documents. Borrower has executed and delivered each Loan Document. 2. Guarantor has the right, power, authority and capacity to execute the Guaranty. Guarantor has duly authorized, executed and delivered the Guaranty. The Guaranty constitutes the legal, valid and binding obligations of Guarantor, enforceable against Guarantor, subject to the limiting conditions of 8. infra of this opinion, in accordance with its terms. 3. No consent, approval, order, authorization, registration, declaration or designation of or filing with any governmental authority of the United States or the State of Nevada, or any subdivision thereof, is required in connection with the authorization, execution, delivery or performance by Borrower and Guarantor, as applicable, of the Loan Documents or the consummation of any of the transactions contemplated thereby, except for the recordation or filing of the Deed and the UCC Financing Statements. 4. Other than as shown on Exhibit "A" attached hereto there are no suits, actions, proceedings or investigations pending or, to the best of my knowledge, threatened against or involving Borrower, Guarantor or the Property before any court, arbitrator or administrative or governmental body. None of the matters shown on Exhibit "A" including but not limited to Robert J. Feeney vs. Mego Mortgage Corporation, Jeffrey S. Moore and Mego Financial Corp., shall, to the best of my knowledge after reasonable inquiry, result in any material adverse change in the contemplated business, condition or operation of Borrower, Guarantor or the Property. 2 109 5. The execution, delivery and performance of the Loan Documents and the documents, instruments and agreements provided for therein will not result in a breach of or default under (i) any other document, instrument or agreement to which Borrower is a party or to which Guarantor is a party or by which Borrower or Guarantor or any of Borrower's or Guarantor's property is subject or bound; or (ii) any law, statute, ordinance, judgement, order, writ, injunction, decree, rule or regulation of any court, administrative agency or other governmental authority, or any determination or award of any arbitrator, of the United States or the State of Nevada, or any subdivision thereof, by which Borrower or Guarantor or any of Borrower's or Guarantor's property is subject or bound. 6. All certificates, licenses, permits or approvals which must be issued by any federal, state or municipal authority as a condition for the present use or occupancy of the Property have been duly issued and are in full force and effect. 7. Assuming the collection of interest and other charges provided for in the Loan Documents is undertaken strictly in accordance with the terms thereof, the Loan Documents will not violate the usury laws of the State of Nevada. 8. If governed by Nevada law, the Loan Documents are legal, valid, binding and enforceable against Borrower in accordance with their terms, subject to bankruptcy, insolvency, moratorium and similar laws affecting the rights of creditors generally and to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law), and except that certain provisions of the Loan Documents may not be enforceable in whole or in part under the laws of the State of Nevada, but the inclusion of such provisions does not affect the validity of the Loan Documents, and the Loan Documents contain adequate provisions for enforcing payment of the monetary obligations of Borrower under the Promissory Note, and for the practical realization of the rights and benefits afforded by the Loan Documents, provided such enforcement is conducted in accordance with the procedures established by the laws of the State of Nevada. 9. Without limiting the opinion expressed in 5 supra, to the best of my knowledge, the execution and delivery of and performance by Borrower and Guarantor under the Loan Documents do not and will not violate any state statute, rule or regulation. As used herein, the term "to the best of my knowledge" means to my Actual Knowledge as the term "Actual Knowledge" is defined in the Legal Opinion Accord of the ABA Section of Business Law (1991). 3 EX-10.146 6 PURCHASE MONEY PROMISSORY NOTE 1 EXHIBIT 10.146 Exhibit F-1 PURCHASE MONEY PROMISSORY NOTE U.S. $ 1,439,750.00 Denver, Colorado February 20, 1998 1. FOR VALUE RECEIVED, the undersigned (the "Borrower") promises to pay to MERCANTILE EQUITIES CORPORATION, a Nevada Corporation and HARTSEL SPRINGS RANCH OF COLORADO, INC., a Colorado Corporation, or order (collectively the "Noteholder"), the principal sum of One million four hundred thirty nine thousand seven hundred fifty DOLLARS ($1,439,750.00) with interest on the unpaid principal balance from the date hereof until paid at a rate per annum equal at all times to 2% of the "Prime Rate" (as hereinafter defined). The principal balance shall be paid in 20 equal, consecutive, quarterly installments of $71,987.50 payable on the last day of each March, June, September and December, with the first such payment due on the first of such dates to occur after the "Closing Date" (as defined in that certain Amended and Restated Real Estate Purchase and Sale Agreement dated as of November 25, 1997 (the "Purchase Agreement")). Accrued interest shall be due and payable on each principal installment due date and shall be calculated on the actual number of days elapsed on the basis of a year consisting of 360 days. In the event any installment due date is not a business day, than such payment shall be made on the next business day and interest shall continue to accrue during any such extension. For the purposes hereof: (1) the "Prime Rate" shall mean the rate of interest indicated in the Wall Street Journal as the prime rate. Any change in the Prime Rate shall take effect on the date announced by the Wall Street Journal as the effective date of such change. The Noteholder shall furnish to Borrower no later than five days before each installment due date a statement satisfying the amount due on the next installment due date; provided, however, that any failure to timely furnish such statement shall not affect the Borrower's obligations hereunder other than to extend the date payment is due until the fifth day after such statement is furnished. All such extensions shall be taken into account in calculating interest hereunder. All payments shall be made by wire transfer of immediately available funds to such account as the Noteholder shall specify in writing. 2. If an "Event of Default" (as hereinafter defined) occurs, than, upon written notice to the Borrower, the Noteholder shall have the option to declare the entire unpaid principal balance hereof, together with all interest accrued hereon, to be immediately due and payable, whereupon the same shall at once become due and payable (an "Acceleration"). Upon an Acceleration, the unpaid principal balance hereof shall automatically accrue interest until paid in full at a default rate equal to the Prime Rate plus 5%. For purposes hereof, each of the following shall constitute an "Event of Default": (1) the failure to make, within five (5) days of the date due, any payment required to be made by the terms of Note, that certain Deed of Trust dated as of the date hereof and securing the Borrower's obligations hereunder (the "Deed of Trust"), and the Purchase Agreement; (2) the Borrower fails to comply with, breaches any representation or warranty contained in, or is otherwise in default under any other provision of, this Note, the Deed of Trust, the Purchase Agreement, or any other promissory note, deed of trust, or other instrument or document between the Borrower and the Noteholder (or any one of them), including, without limitation, that certain "Post-72 Lots Purchase Money Note" and the "Post-72 Lots Purchase Money Mortgage" (both as defined in the Purchase Agreement); (3) the Borrower becomes insolvent or commences or has commenced against it any bankruptcy, reorganization, receivership, or like proceeding. The Noteholder shall be entitled to collect all reasonable costs and expense of collection and/or suit, including, but not limited to, reasonable attorney fees. 2 3. The Borrower may prepay the principal amount outstanding under this Note, in whole or part, at any time without penalty. All such payments shall be applied to principal installments in the inverse order of maturity. In addition, the Borrower shall be required to prepay the principal amount outstanding hereunder at the times and in the manner set forth in the Deed of Trust securing this Note. Without limiting the foregoing, as a condition to releasing each "Lot" (as defined in the Deed of Trust), the Borrower shall be required to prepay $5,000 of this Promissory Note. All payments made on account of any release shall (provided no Event of Default has occurred and is continuing) be applied to principal installments next maturing (and not to installments in the inverse order of maturity). 4. The Borrower and all other makers, sureties, guarantors, and endorsers hereby waiver presentment, notice of dishonor and protest, and they hereby agree to any extension of time of payment and partial payments before, at or after maturity. This Note shall be joint and several obligations of Borrower and all other makers, sureities, guarantors and endorsers, and their successors and assigns. 5. Any notice to Borrower or the Noteholder provided for in this Note shall be in writing and shall be deemed to have been given if delivered by hand, sent by recognized overnight courier (such as Federal Express), sent by facsimile transmission, or mailed by certified or registered mail, return receipt requested, in a postage prepaid envelope, and addressed as follows (or to such address as may be specified by like notice): If to the borrower at: Preferred Equities Corporation 4310 Paradise Road Las Vegas, Nevada 89109 Attn: Frederick H. Conte and Jon Joseph Fax: (702) 369-4398 If to Noteholder at: Hartsel Springs Ranch P. O. Box 5 Hartsel, Colorado 80449 Attn: Richard Grumet Fax No. (719) 836-0321 With a copy to: Gregory Lattimer 2870 Juniper Drive Golden, Colorado 80401 Fax No. (303) 215-1204 6. The indebtedness evidenced by this Note is secured by the Deed of Trust, and, until released, said Deed of Trust contains additional rights of the Noteholder. Reference is made to said Deed of Trust for such additional terms. Such Deed of Trust covers the property identified to Exhibit A hereto which is incorporated by reference herein. 7. Payments received for application of this Note shall be applied first to all reasonable out of pocket costs and expenses to which the Noteholder is entitled to reimbursement (whether under this Note, the Deed of Trust or otherwise), next to accrued and unpaid interest, and finally to the unpaid principal balance hereof. Payments made to release Lots from the Deed of Trust shall be applied as provided in paragraph 3 above. 8. The Noteholder may sell the Note and assign Deed of Trust or may otherwise assign the Note and the Deed of Trust to a bank or finanical institution as collateral security for a loan. In the event it does so, the Borrower agrees to execute such acknowledgement as to amounts owing under the Note 3 as the Noteholder may request and will, provided all release and any other obligations of Noteholder under the Deed of Trust are met, agree to make all payments under the Note without offset, deduction or counterclaim of any type or nature whatsoever. 9. This Note shall be governed by and construed in accordance with the internal laws of the State of Colorado. ATTEST: /s/ JON A. JOSEPH PREFERRED EQUITIES CORPORATION By: /s/ RICHARD L. RODRIGUEZ It: Vice President EX-10.147 7 POST-72 LOTS PURCHASE MONEY PROMISSORY NOTE 1 EXHIBIT 10.147 Exhibit G-1 POST-72 LOTS PURCHASE MONEY PROMISSORY NOTE U.S. $847,800.00 Denver, Colorado February 20, 1998 1. FOR VALUE RECEIVED, the undersigned (the "Borrower") promises to pay to MERCANTILE EQUITIES CORPORATION, a Nevada Corporation, and HARTSEL SPRINGS RANCH OF COLORADO, INC., a Colorado corporation, or order (collectively, the "Noteholder"), and amount equal to the difference between: (1) Eight hundred forty seven thousand eight hundred dollars (U.S.$847,800.00); and (2) the adjustments permitted under Section 9-A of that certain Amended and Restated Real Estate Purchase and Sales Agreement dated as of November 25, 1997, between Noteholder and the Borrower (the "Purchase Agreement"). Without limiting the foregoing, in the event: (a) a "Plan of Augmentation" (as defined in the Purchase Agreement) is approved by a final non-appealable order of the Water Court (or any court to which a decision of the Water Court has been appealed) on or before two (2) years and six (6) months from the "Closing Date" (as defined in the Purchase Agreement), then the principal balance of this Note shall be reduced by the Borrower's costs and expenses expended in obtaining approval of the Plan of Augmentation (such costs and expenses to included but not be limited to engineering fees, legal fees and court costs, but exclude all internal costs and expenses of Borrower for its staff personnel or otherwise). The Borrower shall, within ten (10) days of the date the order becomes final, furnish to Noteholder a written statement of the qualifying expenses incurred by the Borrower in obtaining approval of the Plan of Augmentation and Noteholder shall agree within ten (10) days of receipt of such written expenses. Failure of Noteholder to disagree within such ten (10) day period shall constitute the Noteholder's agreement with such expenses. (b) a Plan of Augmentation is not so approved, then: (1) in the event the Borrower elects, pursuant to Section 9-A of the Purchase Agreement, to proceed with the purchase, the principal balance of this Note shall be reduced to $640,874.00; or (2) in the event the Borrower elects, pursuant to Section 9-A of the Purchase Agreement, to reconvey the "Post-72 Lots" (as defined in the Purchase Agreement), then upon such reconveyance this Note shall (provided all payments of accrued interest are made to the date of reconveyance) be deemed paid in full. Notwithstanding the foregoing or any provision of the Purchase Agreement: (i) the Borrower shall not be obligated to reconvey any Post-72 Lost which the Borrower sold prior to the date the Borrower elects to reconvey the Lots (provided the Borrower has remitted the release price to the Noteholder as provided herein); (ii) any such reconveyance shall be subject to the provisions of Section 14 of the Purchase Agreement; and (iii) the Noteholder's obligation to accept a reconveyance shall be subject to the condition that Noteholder receive an Owner's ALTA Form B Marketability Policy effective as of the date of reconveyance at minimum promulgated risk rate premiums, without any guarantees and without any exceptions, standard or otherwise, other than the "Title Exceptions" (as defined in the Purchase Agreement). Except with respect to the obligation to pay accrued interest, this Post-72 Lots Purchase Money Promissory Note shall be recourse only to the Post-72 Lots as defined in the Purchase Agreement. Notwithstanding the foregoing, in the event a Plan of Augmentation is so approved or the Borrower elects to proceed with the purchase notwithstanding the fact that no such Plan of Augmentation has 2 been approved or the Borrower's option to reconvey is terminated, then the Noteholder shall have full recourse to the Borrower (for principal and interest) and the adjusted principal of this Post-72 Lots Purchase Money Promissory Note shall be payable as follows: (1) In the event an Augmentation Plan has been approved, the adjusted principal balance hereof shall be payable in twenty (20) equal consecutive quarterly installments. Such installments shall be due and payable the last day of each March, June, September, and December, with the first such installment due on the first of such dates to occur after the Augmentation Plan becomes final and nonappealable. The principal amount of each installment shall be determined after the Augmentation Plan becomes final by dividing the adjusted balance of this Post-72 Lots Purchase Money Promissory Note by twenty (20). (2) In the event an Augmentation Plan has not been approved but the Borrower desires to purchase the Post 72 Lots, then the adjusted balance hereof shall be payable in twenty (20) equal consecutive quarterly installments of principal payable on the last day of each calendar quarter with the first such payment due on 9/30/2000 and the last such payment due on 6/30/2005. 2. In addition to the foregoing, the Borrower promises to pay interest on the unpaid principal balance hereof at a rate per annum equal at all times to 2% above the "Prime Rate" (as hereinafter defined). Accrued interest shall be due and payable quarterly in arrears on the last day of each March, June, September and December, with the first such payment due on the first of such dates to occur after the Closing Date. For purposes hereof, the "Prime Rate" shall mean the rate of interest indicated in the Wall Street Journal as the prime rate. Any change in the Prime Rate shall take effect on the date announced by the Wall Street Journal as the effective date of such change. Interest shall be calculated on the actual number of days elapsed on the basis of a year consisting of 360 days. However, for purposes of calculating interest, until a Plan of Augmentation is approved, or the Borrower elects to proceed with the purchase notwithstanding the fact that no Plan of Augmentation has occurred, or the Post-72 Lots are reconveyed, the unpaid principal balance of this Note shall be deemed to be $640,874.00 (less the aggregate amount remitted to the Noteholder to release any Lot or Lots). 3. Notwithstanding the foregoing: (a) in the event that any day on which principal or interest is due and payable is not a business day, then such payment shall be made on the next business day; and (b) the Noteholder shall furnish to the Borrower not later than five (5) days before the date of each payment is due hereunder a statement specifying the amount due on the next payment date (provided, however, that any failure to timely furnish such statement shall not affect the Borrower's obligations hereunder other than to extend the date payment is due until the fifth day after such statement is furnished). Interest shall continue to accrue during each extension contemplated in (a) and (b) of this paragraph. All payments shall be made by wire transfer of immediately available funds to such account as the Noteholder shall specify in writing. 4. If an "Event of Default" (as hereinafter defined) occurs, than, upon written notice to the Borrower, the Noteholder shall have the option to declare the entire unpaid principal balance hereof, together with all interest accrued hereon, to be immediately due and payable, whereupon the same shall at once become due and payable (an "Acceleration"). Upon an Acceleration, the unpaid principal balance hereof shall automatically accrue interest until paid in full at a default rate equal to the Prime Rate plus 5%. For purposes hereof, each of the following shall constitute an "Event of Default": (1) the failure to make, within five (5) days of the date due, any payment required to be made by the terms of this Post-72 Lots Purchase Money Promissory Note, that certain Post-72 Lots Deed of Trust dated as of the date hereof and securing the Borrower's obligations hereunder (the "Deed of Trust"), and the Purchase Agreement; (2) the Borrower fails to comply with, breaches any representation or warranty contained in, or is otherwise in default under any other provision of, this Note, the Deed of Trust, the Purchase Agreement, or any other promissory note, deed of trust, or other instrument or document between the Borrower and the Noteholder (or any one of them), including, without limitation, that 3 certain "Purchase Money Note" and the "Purchase Money Mortgage" (both as defined in the Purchase Agreement); (3) the Borrower becomes insolvent or commences or has commenced against it any bankruptcy, reorganization, receivership, or like proceeding. The Noteholder shall be entitled to collect all reasonable costs and expense of collection and/or suit, including, but not limited to, reasonable attorney fees. 5. The Borrower shall prepay this Post-72 Lots Purchase Promissory Note at the times and in the amounts set forth in the Deed of Trust. without limiting the foregoing, the Borrower shall prepay $3,000 of this Post-72 Lots Purchase Money Promissory Note each time a Lot is sold. In addition, the Borrower may prepay the principal amount outstanding under this Post-72 Lots Purchase Money Prommisory Note, in whole or in part at any time. No penalties shall be assessed on any prepayment. Until the number and the amount of the installments have been established, prepayments will be applied to amounts ultimately determined, prepayment (other than prepayments arising from the sale of Lots) will be applied to principal installments in the inverse order of maturity. Prepayments arising as a result of the sale of Lots will (as long as no Event of Defaul shall have occurred and be continuing) be applied to installments in the order of maturity. All prepayments shall be irrevocable. 6. The Borrower and all other makers, sureties, guarantors, and endorsers hereby waiver presentment, notice of dishonor and protest, and they hereby agree to any extension of time of payment and partial payments before, at or after maturity. This Note shall be joint and several obligations of Borrower and all other makers, surities, guarantors and endorsers, and their successors and assigns. 7. Any notice to Borrower or the Noteholder provided for in this Post-72 Lots Purchase Money Promissory Note shall be in writing and shall be deemed to have been given if delivered by hand, snet by recognized overnight courier (such as Federal Express), sent by facsimile transmission, or mailed by certified or registered mail, return receipt requested, in a postage prepaid envelope, and addressed as follows (or to such address as may be specified by like notice): If to the borrower at: Preferred Equities Corporation 4310 Paradise Road Las Vegas, Nevada 89109 Attn: Frederick H. Conte and Jon Joseph Fax: (702) 369-4398 If to Noteholder at: Hartsel Springs Ranch P. O. Box 5 Hartsel, Colorado 80449 Attn: Richard Grumet Fax No. (719) 836-0321 With a copy to: Gregory Lattimer 2870 Juniper Drive Golden, Colorado 80401 Fax No. (303) 215-1204 8. The indebtedness evidenced by this Note is secured by the Deed of Trust, and, until released, said Deed of Trust contains additional rights of the Noteholder. Reference is made to said Deed of Trust for such additional terms. Such Deed of Trust covers the property identified to Exhibit A hereto which is incorporated by reference herein. 4 9. Payments received for application of this Note shall be applied first to all out of pocket costs and expenses to which the Noteholder is entitled to reimbursement (whether under this Note, the Deed of Trust or otherwise), next to accrued and unpaid interest, and finally to the unpaid principal balance hereof. Payments made to release Post-72 Lots from the Deed of Trust shall be applied as provided in paragraph 5 above. 10. Once adjusted principal amount of this Note has been determined, the Noteholder may sell the Note and assign Deed of Trust or may otherwise assign the Note and the Deed of Trust to a bank or financial institution as collateral security for a loan. In the event it does so, the Borrower agrees to execute such acknowledgement as to amounts owing under the Note (or restate this Note with the proper amount owing) as the Noteholder may request and will, provided all release and any other obligation under the Deed of Trust are met, agree to make all payments under the Note without offset, deduction or counterclaim of any type or nature whatsoever. 11. This Note shall be governed by and construed in accordance with the internal laws of the State of Colorado. ATTEST: /s/ JON A. JOSEPH PREFERRED EQUITIES CORPORATION By: /s/ RICHARD L. RODRIGUEZ It: Vice President EX-10.148 8 COMPENSATION AGREEMENT 1 EXHIBIT 10.148 COMPENSATION AGREEMENT THIS COMPENSATION AGREEMENT ("Agreement") dated as of September 1, 1998, is entered into by and between Frederick H. Conte ("Conte"), an individual residing at 1117 Nawkee Drive, North Las Vegas, Nevada, 89031 and Preferred Equities Corporation, ("PEC") a Nevada corporation with its principal address being 4310 Paradise Road, Las Vegas, Nevada 89109. RECITAL Conte currently is employed as the President and Chief Operating Officer of PEC. In his role as President, Conte is responsible for the supervision of all of the Executive Officers and employees of PEC. Conte reports to the Chairman of the Board and Chief Executive Officer of PEC, Jerome J. Cohen. Conte and PEC desire to enter into this Agreement in order to reduce to writing Conte's compensation arrangement with PEC for such period of time as Conte is employed by PEC as President or until modified by mutual agreement of the parties. In consideration of the foregoing, the parties hereto agree as follows. 1. EMPLOYEE AT WILL. Conte recognizes and acknowledges that he is an employee-at-will. PEC may terminate Conte at any time with or without Cause as that term is hereinafter defined. 2. BASE SALARY. Conte shall be paid a base salary of two hundred forty thousand dollars ($240,000) per annum payable bi-weekly as part of the regular PEC payroll. Base salary payments shall be subject to ordinary withholding for taxes and withholding for items designated by Conte such as for 401(k) contributions. 3. INCENTIVE BONUS. In addition to his base salary due under this Agreement, Conte shall be paid a bonus (the "Incentive Bonus") as hereinafter set forth and defined. For each full (but not partial) fiscal year of PEC during Conte's employment commencing with fiscal 1999, Conte shall receive a sum of money (herein called the "Incentive Bonus") in an amount equal to three-quarters of one percent (0.75%) of the Incentive Income of PEC's parent, Mego Financial Corp. ("Mego") as defined in and calculated pursuant to, Mego's Executive Incentive Compensation Plan, adopted by Mego's Board of Directors on June 22, 1994, a copy of which is attached hereto as Exhibit "A". Such amount shall be due and payable whether or not Mego's Executive Compensation Plan shall be in effect for such fiscal year, and shall be paid no later than ninety days after the amount of Incentive Income can be calculated. 1 2 4. AUTOMOTIVE ALLOWANCE. Conte shall have the use of a PEC car including al gas, oil, repairs and insurance paid by PEC. 5. STOCK OPTIONS. Conte shall receive stock options under the Stock Option Plan of PEC's parent, Mego Financial Corp., at the discretion of the Board of Directors of Mego Financial Corp. 6. TRAVEL AND BUSINESS EXPENSE. Conte shall be reimbursed for usual business and travel expenses. Conte shall be entitled to fly first class on any flight or combination of flights longer than two hours in scheduled duration. 7. BENEFITS. Conte shall be eligible for all benefits afforded to PEC executives from time to time provided Conte meets any eligibility requirements set forth for employees participating therein. 8. VACATION. Conte shall have four (4) weeks paid vacation during each PEC fiscal year. 9. SEVERANCE. If Conte's employment is terminated by PEC for any reason other than for Cause, Conte shall receive his base salary as set forth in Section 2. to the date of termination, and a severance payment in the amount of two hundred thousand dollars ($200,000), payable fifty thousand dollars ($50,000) at the time of termination, and in three payments of fifty thousand dollars ($50,000) three months, six months and nine months thereafter. If Conte resigns or terminates his employment by PEC for any reason, or his employment terminates due to he death or permanent disability, he will only be entitled to his base salary through the date of such termination. 10. DEFINITION OF CAUSE. "Cause" shall mean any one of the following acts of, or omissions by, or actions of others relating to, Conte: (a) Conviction of a felony, whether or not such conviction is appealed. (b) Deliberate and premeditated acts against the best interests of PEC. (c) Conte is found guilty of or is enjoined from violation of any state or federal security law, state or federal laws governing the business of PEC, or rules or regulations of any state or federal agency regulating any of the business of PEC. (d) Misappropriation of PEC funds or property. 2 3 (e) Habitual use of alcohol or drugs to a degree that such use interferes in any way with Conte's performance of his duties. 11. COVENANT NOT TO SOLICIT. Conte agrees that so long as he is employed by PEC and or a period of one year after termination of his employment by PEC with or without Cause, or resignation or termination of his employment by Conte, Conte shall not solicit or encourage other employees or officers of PEC to terminate their employment by PEC for any purpose whatsoever. 12. MISCELLANEOUS. (a) This Agreement is personal to Conte and the duties and responsibilities hereunder may not be assigned by Conte except as approved by the Chairman of the Board of PEC. (b) This Agreement shall terminate except, to the extent applicable, for the provisions of Sections 9 and 11 hereof, on the date of termination of Conte's employment by PEC, or Conte's resignation, his termination of employment, death or permanent disability. (c) This Agreement may only be modified by mutual written agreement of the parties. (d) The headings to this Agreement are for convenience of reference only and are not to be considered in the interpretation of this Agreement. (e) This Agreement shall be governed by the laws of the state of Nevada. Entered into in Las Vegas, Nevada, as of the date set forth above. Preferred Equities Corporation /s/ JEROME J. COHEN /s/ FREDERICK H. CONTE - -------------------------- --------------------------- Jerome J. Cohen Frederick H. Conte Chairman of the Board 3 EX-10.149 9 INDEMNIFICATION AGREEMENT 1 EXHIBIT 10.149 INDEMNIFICATION AGREEMENT THIS INDEMNIFICATION AGREEMENT, dated as of the 23rd day of September, 1998, between MEGO FINANCIAL CORP., a New York corporation (the "Company"), and [NAME] (the "Indemnitee"). RECITALS A. The Indemnitee is currently serving as a director and/or executive officer of the Company and/or its subsidiaries and the Company desires to continue to retain the services of the Indemnitee as a director and/or executive officer of the Company and/or its subsidiaries and/or as a consultant to the Company. B. The Company and the Indemnitee recognize the increased risk of litigation and other claims being asserted against directors, officers and/or employees of, and consultants to, public companies and the subsidiaries of such companies. C. The Certificate of Incorporation and By-laws of the Company require the Company to indemnify its directors and officers to the fullest extent permitted by law and the Indemnitee has been serving and continues to serve as a director and/or officer of the Company and/or its subsidiaries, in part, in reliance on such provisions of the Certificate of Incorporation and By-laws. D. The Indemnitee has indicated that he does not regard the indemnities available under the Company's Certificate of Incorporation and By-laws and available insurance, if any, as adequate to protect him against the risks associated with his services to the Company and/or its subsidiaries. As a condition to the Indemnitee's agreement to continue to serve as such, the Indemnitee requires that he be indemnified from liability in accordance with the provisions of this Agreement to the fullest extent permitted by law. E. The Company recognizes that the Indemnitee needs substantial protection against personal liability in order to maintain the Indemnitee's continued service to the Company and/or its subsidiaries in an effective manner and is willing to indemnify the Indemnitee in accordance with the provisions of this Agreement to the fullest extent permitted by law in order to continue to retain the services of the Indemnitee. F. The Company desires to provide in this Agreement for indemnification of, and the advance of expenses to, Indemnitee to the fullest extent (whether partial or complete) permitted by law, as set forth in this Agreement and, to the extent officers' and directors' liability insurance is maintained by the Company, to provide for the continued coverage of the Indemnitee under the Company's officers' and directors' liability insurance policies, in part to provide the Indemnitee with specific contractual assurance that the protection promised by the indemnification provisions of the Certificate of Incorporation and By-laws will be available to the Indemnitee 2 (regardless of, among other things, any amendment to or revocation of such provisions of the Certificate of Incorporation or By-laws or any change in the composition of the Company's Board of Directors or any acquisition transaction relating to the Company). NOW, THEREFORE, for and in consideration of the premises and the mutual covenants contained herein and the Indemnitee's past and continued service to the Company, the Company and the Indemnitee agree as follows: SECTION 1. MANDATORY INDEMNIFICATION IN PROCEEDINGS OTHER THAN THOSE BY THE COMPANY. Subject to Section 4 hereof, the Company shall indemnify and hold harmless the Indemnitee from and against any and all claims, damages, expenses, costs (including attorneys' fees and costs of other professionals), judgments, penalties, fines (including excise taxes assessed with respect to an employee benefit plan), settlements, and all other liabilities incurred or paid by him in connection with the investigation, defense, prosecution, settlement or appeal of, or being or preparing to be a witness in, or participating in, any threatened, pending or completed action, suit, investigation that the Indemnitee in good faith believes might lead to the institution of such action, or proceeding, whether civil, criminal, administrative or investigative (other than an action by the Company) and to which the Indemnitee was or is a party or is threatened to be made a party or was or is a witness or participates or may participate in by reason of the fact that the Indemnitee is or was an officer, director, manager, consultant, stockholder, employee or agent of the Company or any of its subsidiaries, or is or was serving at the request of the Company or any of its subsidiaries as an officer, director, consultant, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, or by reason of anything done or not done by the Indemnitee in any such capacity or capacities, provided that the Indemnitee 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, did not know his conduct was unlawful. SECTION 2. MANDATORY INDEMNIFICATION IN PROCEEDINGS BY THE COMPANY. Subject to Section 4 hereof, the Company shall indemnify and hold harmless the Indemnitee from and against any and all expenses (including attorneys' fees) and amounts actually and reasonably incurred or paid by him in connection with the investigation, defense, prosecution, settlement or appeal of, or being or preparing to be a witness in, or participating in, any threatened, pending or completed action, suit, investigation that the Indemnitee in good faith believes might lead to the institution of such action, or proceeding by the Company to procure a judgment in its favor, whether civil, criminal, administrative or investigative, and to which the Indemnitee was or is a party or is threatened to be made a party or was or is a witness or participate or may participate in by reason of the fact that the Indemnitee is or was an officer, director, manager, consultant, stockholder, employee or agent of the Company or any of its subsidiaries, or is or was serving at the request of the Company or any of its subsidiaries as an officer, director, consultant, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, or by reason of anything done or not done by the Indemnitee in any such capacity or capacities, provided that (i) the Indemnitee acted in good faith and in a manner he reasonably believed to be in or not 2 3 opposed to the best interests of the Company and (ii) no indemnification shall be made under this Section 2 in respect of any claim, issue or matter as to which the Indemnitee shall have been adjudged to be liable to the Company unless, and only to the extent that, the court in which such proceeding was brought (or any other court of competent jurisdiction) shall determine upon application that, despite the adjudication of such liability but in view of all the circumstances of the case, the Indemnitee is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. SECTION 3. REIMBURSEMENT OF EXPENSES FOLLOWING ADJUDICATION FOR OTHER THAN WILLFUL MISCONDUCT. The Company shall reimburse the Indemnitee for any expenses (including attorney's fees) and amounts actually and reasonably incurred or paid by him in connection with the investigation, defense, settlement or appeal of any action, suit or proceeding described in Section 2 hereof that results in an adjudication that the Indemnitee was liable other than for willful misconduct in the performance of his duty to the Company; provided, however, that the Indemnitee acted in good faith and in a manner he believed to be in the best interests of the Company. SECTION 4. AUTHORIZATION OF INDEMNIFICATION. 4.1. Determination of Indemnification. Any indemnification under Sections 1 and 2 hereof (unless ordered by a court) and any reimbursement made under Section 3 hereof shall be made by the Company only as authorized in the specific case upon a determination (the "Determination") that indemnification or reimbursement of the Indemnitee is proper in the circumstances because the Indemnitee has met the applicable standard of conduct set forth in subsection 1, 2 or 3 hereof, as the case may be. Subject to Sections 5.6, 5.7 and 8 of this Agreement, the Determination shall be made in the following order of preference: (1) first, by the Company's Board of Directors (the "Board") by majority vote or consent of a quorum consisting of directors ("Disinterested Directors") who are not, at the time of the Determination, named parties to such action, suit or proceeding; or (2) next, if such a quorum of Disinterested Directors cannot be obtained or, even if obtainable, a quorum of Disinterested Directors so directs, by the Board upon the opinion in writing of independent legal counsel selected in accordance with Section 5.5, or (3) next, if the Board declines or fails to make a Determination within the time specified in Section 5.2, by any independent legal counsel selected in accordance with Section 5.5. 4.2. No Presumptions. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Indemnitee did not act in good faith and in a manner that 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, knew that his conduct was unlawful. 3 4 4.3. Benefit Plan Conduct. The Indemnitee's conduct with respect to an employee benefit plan for a purpose he reasonably believed to be in the interests of the participants in and beneficiaries of the plan shall be deemed to be conduct that the Indemnitee reasonably believed to be not opposed to the best interests of the Company. 4.4. Reliance as Safe Harbor. For purposes of any Determination hereunder, the Indemnitee shall be deemed to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, or, with respect to any criminal action or proceeding, to have had no reasonable cause to believe or did not know his conduct was unlawful, if his action is based on (i) the records or books of account of the Company or another enterprise, including financial statements, (ii) information supplied to him by the officers of the Company or another enterprise in the course of their duties, (iii) the advice of legal counsel for the Company or another enterprise, or (iv) information or records given or reports made to the Company or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Company or another enterprise. The term "another enterprise" as used in this Section 4.4 shall mean any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise of which the Indemnitee is or was serving at the request of the Company or any of its subsidiaries as an officer, director, consultant, partner, trustee, employee or agent. The provisions of this Section 4.4 shall not be deemed to be exclusive or to limit in any way the other circumstances in which the Indemnitee may be deemed to have met the applicable standard of conduct set forth in Sections 1, 2 or 3 hereof, as the case may be. 4.5. Success on Merits or Otherwise. Notwithstanding any other provision of this Agreement, to the extent that the Indemnitee has been successful on the merits or otherwise in defense of any action, suit or proceeding described in Section 1 or 2 hereof, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the investigation, defense, settlement or appeal thereof. For purposes of this Section 4.5, the term "successful on the merits or otherwise" shall include, but not be limited to, (i) any termination, withdrawal, or dismissal (with or without prejudice) of any claim, action, suit or proceeding against the Indemnitee without any express finding of liability or guilt against him, (ii) the expiration of 120 days after the making of any claim or threat of an action, suit or proceeding without the institution of the same and without any promise or payment made to induce a settlement, or (iii) the settlement of any action, suit or proceeding under Section 1, 2 or 3 hereof pursuant to which the Indemnitee pays less than $100,000. 4.6. Partial Indemnification or Reimbursement. If the Indemnitee is entitled under any provision of this Agreement to indemnification and/or reimbursement by the Company for some or a portion of the claims, damages, expenses (including attorneys' fees and costs of other professionals), judgments, fines or amounts paid in settlement by the Indemnitee in connection with the investigation, defense, settlement or appeal of any action specified in Section 1, 2 or 3 hereof, but not, however, for the total amount thereof, the Company shall nevertheless indemnify and/or reimburse the Indemnitee for the portion thereof to which the Indemnitee is entitled. The party or parties making the Determination shall determine the portion (if less than all) of such 4 5 claims, damages, expenses (including attorneys' fees), judgments, fines or amounts paid in settlement for which the Indemnitee is entitled to indemnification and/or reimbursement under this Agreement. 4.7. Subsidiary Conduct. The Indemnitee's conduct with respect to any subsidiary of the Company for a purpose he reasonably believed to be in the interests of the Company and/or any of its subsidiaries shall be deemed to be conduct that the Indemnitee reasonably believed to be not opposed to the best interests of the Company. SECTION 5. PROCEDURES FOR DETERMINATION OF WHETHER STANDARDS HAVE BEEN SATISFIED. 5.1. Costs. All costs of making any Determination required by Section 4 or 5 hereof shall be borne solely by the Company, including, but not limited to, the costs of legal counsel and judicial determinations. The Company shall also be solely responsible for paying (i) all reasonable expenses incurred by the Indemnitee to enforce this Agreement, including, but not limited to, the costs incurred by the Indemnitee to obtain court-ordered indemnification pursuant to Section 8 hereof, regardless of the outcome of any such application or proceeding, and (ii) all costs of defending any suits or proceedings challenging payments to the Indemnitee under this Agreement. 5.2. Timing of the Determination. The Company shall use its best efforts to make the Determination contemplated by Section 4 or 5 hereof promptly. In addition, the Company agrees: (a) if the Determination is to be made by the Board pursuant to subsection (1) of Section 4.1, such Determination shall be made not later than 15 days after a written request for a Determination (a "Request") is delivered to the Company by the Indemnitee; and (b) if the Determination is to be made by the Board pursuant to Sections 5.6 or 5.7 or subsection (2) of Section 4.1, such Determination shall be made not later than 30 days after a Request is delivered to the Company by the Indemnitee; and (c) if the Determination is to be made by independent legal counsel pursuant to subsection (3) of Section 4.1, such Determination shall be made not later than 30 days after a Request is delivered to the Company by the Indemnitee. The failure to make a Determination within the above-specified time period shall constitute a Determination approving full indemnification or reimbursement of the Indemnitee. Notwithstanding anything herein to the contrary, the Determination may be made in advance of (i) the Indemnitee's payment (or incurring) of expenses with respect to which indemnification or reimbursement is sought, and/or (ii) final disposition of the action, suit or proceeding with respect to which indemnification or reimbursement is sought. 5.3. Reasonableness of Expenses. The evaluation and finding as to the reasonableness of expenses incurred by the Indemnitee for purposes of this Agreement shall be made (in the 5 6 following order of preference) within 15 days of the Indemnitee's delivery to the Company of a Request that includes a reasonable accounting of expenses incurred: (a) first, by the Board by a majority vote of a quorum consisting of Disinterested Directors; or (b) next, if a quorum cannot be obtained under subdivision (a), by majority vote or consent of a committee duly designated by the Board (in which designation all directors, whether or not Disinterested Directors, may participate), consisting solely of two or more Disinterested Directors; or (c) next, if such a committee cannot be designated, by any independent legal counsel. All expenses shall be considered reasonable for purposes of this Agreement if the finding contemplated by this Section 5.3 is not made within the prescribed time. The finding required by this Section 5.3 may be made in advance of the payment (or incurring) of the expenses for which indemnification or reimbursement is sought. 5.4. Payment of Indemnified Amount. Immediately following a Determination that the Indemnitee has met the applicable standard of conduct set forth in Section 1, 2 or 3 hereof, as the case may be, and the finding of reasonableness of expenses contemplated by Section 5.3 hereof, or the passage of time prescribed for making such determination(s), the Company shall pay to the Indemnitee in cash the amount to which the Indemnitee is entitled to be indemnified and/or reimbursed, as the case may be, without further authorization or action by the Board; provided, however, that the expenses for which indemnification or reimbursement is sought have actually been incurred by the Indemnitee. 5.5. Selection of Independent Legal Counsel. If the Determination required under Section 4 or 5 is to be made by or based upon the written opinion of independent legal counsel, such counsel shall be selected by the Indemnitee with the approval of the Board, which approval shall not be unreasonably withheld. The fees and expenses incurred by counsel in making any Determination (including Determinations pursuant to Sections 5.6 and 5.7 hereof) shall be borne solely by the Company regardless of the results of any Determination and, if requested by counsel, the Company shall give such counsel an appropriate written agreement with respect to the payment of their fees and expenses and such other matters as may be reasonably requested by counsel. 5.6. Right of Indemnitee to Appeal an Adverse Determination by Board. If a Determination is made by the Board or a committee thereof that the Indemnitee did not meet the applicable standard of conduct set forth in Section 1, 2 or 3 hereof or that the Indemnitee's expenses are not reasonable as set forth in Section 5.3 hereof, upon the written request of the Indemnitee and the Indemnitee's delivery of $500 to the Company, the Company shall cause a new Determination to be made by independent legal counsel, which independent legal counsel shall be selected in accordance with Section 5.5. Subject to Section 8 hereof, such Determination 6 7 by such independent legal counsel shall be binding and conclusive for all purposes of this Agreement. 5.7. Right of Indemnitee To Select Forum For Determination. If, at any time subsequent to the date of this Agreement, "Continuing Directors" do not constitute a majority of the members of the Board, or there is otherwise a change in control of the Company (as contemplated by Item 403(c) of Regulation S-K), then the Determination required by Section 4 or 5 hereof shall be made by independent legal counsel selected by the Indemnitee and approved by the Board (which approval shall not be unreasonably withheld), which counsel shall be deemed to satisfy the requirements of clause (3) of Section 4 and clause (c) of Section 5.3 hereof. If none of the legal counsel selected by the Indemnitee are willing and/or able to make the Determination, then the Company shall cause the Determination to be made by a majority vote or consent of a Board committee consisting solely of Continuing Directors. For purposes of this Agreement, a "Continuing Director" means either a member of the Board at the date of this Agreement or a person nominated to serve as a member of the Board by a majority of the then Continuing Directors. 5.8. Access by Indemnitee to Determination. The Company shall afford to the Indemnitee and his representatives ample opportunity to present evidence of the facts upon which the Indemnitee relies for indemnification or reimbursement, together with other information relating to any requested Determination. 5.9. Judicial Determinations in Suits by the Company. In each action or suit described in Section 2 hereof, the Company shall cause its counsel to use its best efforts to obtain from the Court in which such action or suit was brought (i) an express adjudication whether the Indemnitee is liable for willful misconduct in the performance of his duty to the Company, and, if the Indemnitee is so liable, (ii) a determination whether and to what extent, despite the adjudication of liability but in view of all the circumstances of the case (including this Agreement), the Indemnitee is fairly and reasonably entitled to indemnification. 5.10. Burden of Proof. In the event of any claim by the Indemnitee for indemnification hereunder, there shall be a presumption that the Indemnitee is entitled to indemnification hereunder and the Company shall have the burden of proving that the Indemnitee is not entitled to such indemnification. SECTION 6. SCOPE OF INDEMNITY. The actions, suits and proceedings described in Sections 1 and 2 hereof shall include, for purposes of this Agreement, any actions that involve, directly or indirectly, activities of the Indemnitee both in his official capacities as a director or officer of, or consultant to, the Company and/or any of its subsidiaries and actions taken in another capacity while serving as director, officer or consultant, including, but not limited to, actions or proceedings involving (i) compensation paid to the Indemnitee by the Company and/or its subsidiaries, (ii) activities by the Indemnitee on behalf of the Company, including actions in which the Indemnitee is plaintiff, (iii) actions alleging a misappropriation of a "corporate opportunity," (iv) responses to a takeover attempt or threatened takeover attempt of the Company, (v) transactions by the Indemnitee in Company securities, and (vi) the Indemnitee's 7 8 preparation for and appearance (or potential appearance) as a witness in any proceeding relating, directly or indirectly, to the Company. In addition, the Company agrees that, for purposes of this Agreement, all services performed by the Indemnitee on behalf of, in connection with or related to any subsidiary of the Company, any employee benefit plan established for the benefit of employees of the Company or any subsidiary, any corporation or partnership or other entity in which the Company or any subsidiary has a 5% ownership interest, any homeowners or similar association on which the Indemnitee is serving at the request of the Company or any of its subsidiaries, or any other affiliate shall be deemed to be at the request of the Company. SECTION 7. ADVANCE FOR EXPENSES. 7.1. Mandatory Advance. Expenses (including attorneys' fees) incurred by the Indemnitee in investigating, defending, settling or appealing, or being or preparing to be a witness in, any action, suit or proceeding described in Section 1 or 2 hereof shall be paid by the Company in advance of the final disposition of such action, suit or proceeding. The Company shall promptly pay the amount of such expenses to the Indemnitee, but in no event later than 5 days following the Indemnitee's delivery to the Company of a written request for an advance pursuant to this Section 7, together with a reasonable accounting of such expenses. 7.2. Undertaking to Repay. The Indemnitee hereby undertakes and agrees to repay to the Company any advances made pursuant to this Section 7 if and to the extent that it shall ultimately be found that the Indemnitee is not entitled to be indemnified by the Company for such amounts. 7.3. Miscellaneous. The Company shall make the advances contemplated by this Section 7 regardless of the Indemnitee's financial ability to make repayment, and regardless whether indemnification of the Indemnitee by the Company will ultimately be required. Any advances and undertakings to repay pursuant to this Section 7 shall be unsecured and interest-free. SECTION 8. COURT-ORDERED INDEMNIFICATION. Regardless of whether the Indemnitee has met the standard of conduct set forth in Sections 1, 2 or 3 hereof, as the case may be, and notwithstanding the presence or absence of any Determination whether such standards have been satisfied and notwithstanding any other provision hereof, the Indemnitee may apply for indemnification (and/or reimbursement pursuant to Section 3 or 12 hereof) to the court conducting any proceeding to which the Indemnitee is a party or a witness or to any other court of competent jurisdiction. On receipt of an application, the court, after giving any notice the court considers necessary, may order indemnification (and/or reimbursement) if it determines the Indemnitee is fairly and reasonably entitled to indemnification (and/or reimbursement) in view of all the relevant circumstances (including this Agreement). SECTION 9. CONTRIBUTION. If and to the extent that a final adjudication shall specify that the Company is not obligated to indemnify Indemnitee under this Agreement for any reason (by reason of public policy, as a matter of law or otherwise), then in respect of any threatened, pending or completed action, suit or proceeding in which the Company is jointly 8 9 liable with Indemnitee (or would be so liable if joined in such action, suit or proceeding), the Company shall contribute to the amount of expenses (including attorneys' fees and costs of other professionals), judgments, penalties, fines (including excise taxes assessed), settlements and all other liabilities incurred and paid or payable by Indemnitee in connection with such action, suit or proceeding in such proportion as is appropriate to reflect (i) the relative benefits received by the Company on the one hand and Indemnitee on the other hand from the transaction with respect to which such action, suit or proceeding arose, and (ii) the relative fault of the Company on the one hand and of Indemnitee on the other hand in connection with the circumstances which resulted in such expenses, judgments, fines or settlement amounts, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of Indemnitee on the other hand shall be determined by reference to among other things, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such expense, judgments, fines or settlement amounts. The Company agrees that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation or any other method of allocation which does not take account of the foregoing equitable considerations. SECTION 10. NONDISCLOSURE OF PAYMENTS. Except as expressly required by Federal securities laws, neither party shall disclose any payments under this Agreement unless prior approval of the other party is obtained. Any payments to the Indemnitee that must be disclosed shall, unless otherwise required by law, be described only in Company proxy or information statements relating to special and/or annual meetings of the Company's shareholders, and the Company shall afford the Indemnitee the reasonable opportunity to review all such disclosures and, if requested, to explain in such statement any mitigating circumstances regarding the events reported. SECTION 11. COVENANT NOT TO SUE, LIMITATION OF ACTIONS AND RELEASE OF CLAIMS. No legal action shall be brought and no cause of action shall be asserted by or on behalf of the Company (or any of its subsidiaries) against the Indemnitee, his spouse, heirs, executors, personal representatives or administrators after the expiration of 2 years from the date the Indemnitee ceases (for any reason) to serve as either an officer or a director of the Company and/or its subsidiaries, and any claim or cause of action of the Company (or any of its subsidiaries) shall be extinguished and deemed released unless asserted by filing of a legal action within such 2-year period. SECTION 12. INDEMNIFICATION OF INDEMNITEE'S ESTATE. Notwithstanding any other provision of this Agreement, and regardless whether indemnification of the Indemnitee would be permitted and/or required under this Agreement, if the Indemnitee is deceased, the Company shall indemnify and hold harmless the Indemnitee's estate, spouse, heirs, administrators, personal representatives and executors (collectively the "Indemnitee's Estate") against, and the Company shall assume, any and all claims, damages, expenses, costs (including attorneys' fees and costs of other professionals), penalties, judgments, fines and amounts paid in settlement actually incurred by the Indemnitee or the Indemnitee's Estate in connection with the investigation, defense, settlement or appeal of any action described in Section 1 or 2 hereof. Indemnification of the Indemnitee's Estate pursuant to this Section 12 shall be mandatory and not 9 10 require a Determination or any other finding that the Indemnitee's conduct satisfied a particular standard of conduct. SECTION 13. REIMBURSEMENT OF ALL LEGAL EXPENSES. Notwithstanding any other provision of this Agreement, and regardless of the presence or absence of any Determination, the Company promptly (but not later than 10 days following the Indemnitee's submission of a reasonable accounting) shall reimburse the Indemnitee for all attorneys' fees and related court costs and other expenses incurred by the Indemnitee in connection with the investigation, defense, settlement or appeal of or preparation to be a witness in or participating in (including an appeal) or preparing to defend any action described in Section 1 or 2 hereof (including, but not limited to, the matters specified in Section 6 hereof). SECTION 14. MAINTENANCE OF INSURANCE. The Company represents that a copy of the policies of directors and officers liability insurance that are in effect are set forth as Exhibit A hereto. The Company hereby agrees that during the period commencing on the date hereof and ending six years from the date the Indemnitee ceases to serve the Company and/or its subsidiaries, the Company shall purchase and maintain in effect for the benefit of the Indemnitee such insurance providing coverage at least as favorable to the Indemnitee as that presently provided, if such insurance can be purchased for premiums not in excess of 200% of the amount of the current premiums, adjusted from time to time in accordance with the Consumer Price Index, or, if such coverage cannot be obtained, the maximum coverage that can be obtained for 200% of the amount of the current premiums adjusted from time to time in accordance with the Consumer Price Index. SECTION 15. CHANGES IN THE LAW. If any change after the date of this Agreement in any applicable law, statute or rule or the Company's Certificate of Incorporation or By-laws expands the power of the Company to indemnify the Indemnitee, such change shall be within the purview of the Indemnitee's rights and the Company's obligations under this Agreement. If any change in any applicable law, statute or rule or the Company's Certificate of Incorporation or By-laws narrows the right of the Company to indemnify a person such as the Indemnitee, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations thereunder. SECTION 16. MISCELLANEOUS. 16.1. Notice Provision. Any notice, payment, demand or communication required or permitted to be delivered or given by the provisions of this Agreement shall be deemed to have been effectively delivered or given and received on the date personally delivered to the respective party to whom it is directed, or when deposited by registered or certified mail, with postage and charges prepaid and addressed to the parties at the addresses set forth below opposite their signatures to this Agreement. 16.2. Entire Agreement. Except for the Company's Certificate of Incorporation and By-laws solely to the extent that such instruments expand the rights of the Indemnitee, this 10 11 Agreement constitutes the entire understanding of the parties and supersedes all prior understandings, whether written or oral, between the parties with respect to the subject matter of this Agreement. Without limiting the foregoing, it is expressly agreed that the Indemnification Agreement dated as of March 26, 1998 between the Company and the Indemnitee is hereby terminated and superseded by this Agreement. Nothing in this Agreement shall be deemed to limit any other indemnification to which the Indemnitee may be entitled, including under the Company's Certificate of Incorporation and By-laws, without duplication of payment. 16.3. Severability of Provisions. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws effective during the term of this Agreement, such provision shall be fully severable; this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part of this Agreement; and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance from this Agreement. Furthermore, in lieu of each such illegal, invalid, or unenforceable provision there shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid, and enforceable. 16.4. Applicable Law. This Agreement shall be governed by and construed under the laws of the State of New York. 16.5. Execution in Counterparts. This Agreement and any amendment may be executed simultaneously or in counterparts, each of which together shall constitute one and the same instrument. 16.6. Cooperation and Intent. The Company shall cooperate in good faith with the Indemnitee and use its best efforts to ensure that the Indemnitee is indemnified and/or reimbursed for liabilities described herein to the fullest extent permitted by law. 16.7. Amendment. No amendment, modification or alteration of the terms of this Agreement shall be binding unless in writing, dated subsequent to the date of this Agreement, and executed by the parties. 16.8. Binding Effect. The obligations of the Company to the Indemnitee hereunder shall survive and continue as to the Indemnitee even if the Indemnitee ceases to be a director, officer, consultant, employee and/or agent of the Company and/or its subsidiaries. Each and all of the covenants, terms and provisions of this Agreement shall be binding upon and inure to the benefit of the successors to the Company and, upon the death of the Indemnitee, to the benefit of the estate, heirs, executors, administrators and personal representatives of the Indemnitee. 16.9. Nonexclusivity. The rights of indemnification and reimbursement provided in this Agreement shall be in addition to any rights to which the Indemnitee may otherwise be entitled by statute, bylaw, agreement, vote of shareholders or otherwise. 11 12 16.10. Effective Date. The provisions of this Agreement shall cover claims, actions, suits and proceedings whether now pending or hereafter commenced and shall be retroactive to cover acts or omissions or alleged acts or omissions which heretofore have taken place. EXECUTED AS OF THE DATE FIRST ABOVE WRITTEN. ADDRESS: THE COMPANY: 4310 Paradise Road MEGO FINANCIAL CORP. Las Vegas, Nevada 89109 Attention: [ATTENTION] By: ---------------------------------- Name: ------------------------------- Title: ------------------------------- ADDRESS: THE INDEMNITEE: - ------------------------------- ------------------------------------- Name: [NAME] - ------------------------------- - ------------------------------- 12 EX-27.1 10 FINANCIAL DATA SCHEDULE
5 1,000 YEAR AUG-31-1998 SEP-01-1997 AUG-31-1998 3,507 0 60,192 12,403 43,763 0 38,069 14,119 142,076 0 81,986 0 0 210 20,469 142,076 51,525 68,590 9,145 45,956 27,831 0 7,850 (5,197) (1,968) (3,229) 0 0 0 (3,229) (.15) (.15)
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