-----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, V0E4G3ls5KgdJ2K50QMHyXfAQy+WqrJorYvgHkaHXkNSpcArCGRGCgBXf22St22i oo0u2g9C51WxCngb7k4veg== /in/edgar/work/0000950150-00-000978/0000950150-00-000978.txt : 20001130 0000950150-00-000978.hdr.sgml : 20001130 ACCESSION NUMBER: 0000950150-00-000978 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20000831 FILED AS OF DATE: 20001129 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEGO FINANCIAL CORP CENTRAL INDEX KEY: 0000736035 STANDARD INDUSTRIAL CLASSIFICATION: [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: 780206 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 a66375e10-k.txt 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, 2000 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 (IRS Employer incorporation or organization) identification no.) 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 15, 2000, 3,500,557 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 15, 2000 was approximately $8,323,840 based on a closing price of $4.81 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
PART I PAGE ------ ---- Item 1. Business....................................................................................... 1 Item 2. Properties..................................................................................... 10 Item 3. Legal Proceedings.............................................................................. 10 Item 4. Submission of Matters to a Vote of Security Holders............................................ 11 PART II Item 5. Market for the Registrant's Common Equity and Related Security Holder Matters.................. 12 Item 6. Selected Consolidated Financial Data........................................................... 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................... 15 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................... 25 Item 8. Financial Statements and Supplementary Data.................................................... 26 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................................................................... 26 PART III Item 10. Directors and Executive Officers of the Company................................................ 27 Item 11. Executive Compensation......................................................................... 29 Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 33 Item 13. Certain Relationships and Related Transactions................................................. 34 PART IV Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K............................. 35 Signatures.................................................................................... 47
i 3 PART I ITEM 1. BUSINESS GENERAL Mego Financial Corp. (Mego Financial) is a premier developer and operator of timeshare properties and a provider of consumer financing to purchasers of its timeshare intervals and land parcels through its wholly-owned subsidiary, Preferred Equities Corporation (PEC) established in 1970. PEC also manages timeshare properties and receives management fees as well as fees based on sales of timeshare interests. By providing financing to virtually all of its customers, PEC also originates consumer receivables that it hypothecates and services. Unless the context requires otherwise, the "Company" refers to Mego Financial and its consolidated subsidiaries. The terms "fiscal 2000", "fiscal 1999" and "fiscal 1998" refer to the fiscal years ended August 31, 2000, 1999 and 1998, respectively. 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 1 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. 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. 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 property in Biloxi, Mississippi, which it is considering for the possible construction of a future timeshare resort. PEC is also affiliated with Hotel Maison Pierre Lafitte Ltd. in New Orleans, Louisiana, and received management fees as well as fees based on sales of timeshare interests. 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 over 2 million families in the United States own timeshare interests in resorts worldwide and that sales of timeshare interests in the United States aggregated approximately $4 billion in 1999. Additionally, it is estimated by ARDA that sales volume is increasing at a compounded annual rate of approximately 14% due to the entry of brand-name hospitality firms and well-financed publicly held companies with lower costs of capital and strong growth among seasoned timeshare companies. TIMESHARE PROPERTIES AND SALES 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 2000, 1999 and 1998, PEC had net sales of 2,885, 2,841 and 2,237 timeshare interests, respectively, at prices ranging from $4,250 to $30,990. 1 4 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 agreement with Ramada ("Agreement") 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 in February 1996, with certain minimums that increase each year. The initial term of the Agreement was 5 years and PEC had the option to renew the Agreement for an additional term of 5 years. PEC exercised the option on April 27, 2000. The Agreement will expire on December 31, 2005. The Company believes it has benefited from the use of the Ramada name, but is unable to quantify the amount of such benefit. PEC also offers a 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's Ramada Vacation Suites at Las Vegas includes 37 buildings with a total of 489 studio, one and two bedroom units that have been converted for sale as 24,939 timeshare interests. As of August 31, 2000, 3,523 timeshare interests remained available for sale. The resort is in close proximity to "the Strip" in Las Vegas and features swimming pools and other amenities. PEC has completed the expansion of the resort common areas to include an expanded lobby, convenience store and expanded sales facilities. The Ramada Vacation Suites at Reno consists of a 95-unit hotel that has been converted for sale as 4,845 timeshare interests. As of August 31, 2000, 1,249 timeshare interests remained available for sale. The resort is undergoing major renovations and features an indoor swimming pool, exercise facilities, sauna, jacuzzi and sun deck. The 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. As of August 31, 2000, 577 timeshare interests remained available for sale. The resort is within walking distance of a public beach and features a swimming pool and jacuzzi. PEC has a leasehold interest in the buildings, equipment and furnishings which expires in December 2009. The annual rental payments total approximately $192,000. 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. As of August 31, 2000, 813 timeshare interests remained available for sale. 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 resort that features a spa and sauna. The Ramada Vacation Suites - Hilltop at Steamboat Springs is a hotel building with indoor swimming pool, restaurant, cocktail lounge and meeting room facilities. The complex contains 56 one- and two-bedroom units to be sold as 2,856 timeshare interests. 42 of the units, containing 2,142 timeshare interests, are registered for sale. As of August 31, 2000, 1,340 timeshare interests remained available for sale. 14 additional units containing 714 timeshare interests will be registered as demand dictates. The resort is located in Steamboat Springs, Colorado, in close proximity to ski slopes and other attractions. The Ramada Vacation Suites at Orlando consists of a 7-building, 102 unit complex that has been converted into 5,202 timeshare interests. As of August 31, 2000, 991 timeshare interests remained available for sale. An eighth building, containing 18 units to be sold as 918 timeshare interests, became available in November 2000. The resort features a pool and is located near the major tourist attractions. 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. As of August 31. 2000, 53 timeshare interests remained available for sale. The resort is located on the intercoastal waterway in close proximity to St. Petersburg and Clearwater, Florida. 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. As of August 31, 2000, 877 timeshare interests were available for sale. The resort, located on beach front property in close proximity to Atlantic City, New Jersey, features an enclosed swimming pool, cocktail lounge, bar and restaurant. 2 5 The Ramada Vacation Suites at New Orleans is an existing 19-suite hotel that consists of studios, as well as one-and two-bedroom suites. The resort is located next to the Fairmont Hotel, adjacent to the historic French Quarter. The location provides easy access to the City's key tourist attractions. The following table sets forth certain information regarding the timeshare interests at the Company's resort properties:
STEAMBOAT INDIAN LAS VEGAS RENO WAIKIKI SPRINGS HILLTOP ORLANDO SHORES BRIGANTINE TOTAL --------- ---- ------- ---------- ------- ------- ------- ---------- ------- Maximum number of timeshare interests 24,939 4,845 4,160 3,060 2,142 5,202 1,632 5,508 (1) 51,488 Net number of timeshare interests sold through August 31, 2000 21,416 3,596 3,583 2,247 802 4,211 1,579 4,631 42,065 Number of timeshare interests available for sale at August 31, 2000 3,523 1,249 577 813 1,340 991 53 877 9,423 Percent sold through August 31, 2000 86% 74% 86% 73% 37% 81% 97% 84% 82% Number of timeshare interests sold during the year ended August 31, 2000 2,879 107 395 426 619 1,468 289 36 6,219 Number of timeshare interests reacquired during the year ended August 31, 2000 through: Contract cancellations 444 57 119 106 23 203 68 28 1,048 Exchanges (2) 878 102 156 283 171 176 103 86 1,955 Acquired for unpaid maintenance fees 90 75 166 -- -- -- -- -- 331 -------- -------- -------- -------- -------- -------- -------- -------- -------- Total number of timeshare interests reacquired during the year 1,412 234 441 389 194 379 171 114 3,334 -------- -------- -------- -------- -------- -------- -------- -------- -------- Net number of timeshare interests sold (reacquired) during the year ended August 31, 2000 1,467 (127) (46) 37 425 1,089 118 (78) 2,885 Additional pending timeshare interests as of August 31, 2000 -- -- -- -- 714 918 -- -- 1,632 Sales price range of timeshare interests available at August 31,2000 From $ 8,550 $ 4,490 $ 4,250 $ 7,490 $ 7,990 $ 8,550 $ 8,550 $ 4,250 $ 4,250 To $ 21,690 $ 8,490 $ 6,450 $ 25,690 $ 30,990 $ 13,830 $ 16,050 $ 22,550 $ 30,990
(1) 4,823 timeshare interests were sold prior to the acquisition by the Company. (2) These exchanges are primarily related to customers exchanging and/or upgrading their current property to larger, higher-priced units. 3 6 PEC's revenue from net sales of timeshare interests was $49.1 million, $41.3 million and $37.7 million, representing 54.2%, 55.4% and 55.0% of total revenues for fiscal 2000, 1999 and 1998, respectively. RCI EXCHANGE NETWORK Timeshare interest ownership is significantly enhanced by the availability of resort exchange networks. These networks allow owners to exchange their occupancy right in their home resort for an occupancy right in another resort. Several companies, including Resorts Condominiums International (RCI), a wholly-owned subsidiary of Cendant, provide timeshare interest exchange networks. PEC's resorts participate in the RCI network. According to RCI, it has a total of more than 3,500 participating resort facilities located worldwide. PEC and the Owner's Association (as defined hereinafter) 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. The cost of the RCI subscription fee, 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. The initial five-year terms of the agreements are automatically renewable for additional five-year terms, unless either party gives the other party not less than 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. 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 resort are responsible for the payment of annual assessment fees, 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, to their respective Association. Annual assessment fees for 2000 ranged from $253 to $451. In prior years, PEC has voluntarily advanced monies to cover deficits for non-Florida located Associations. There is no certainty PEC will continue this practice. In Florida, if Association expenses exceed annual assessment fees, PEC is obligated to pay the deficit. In fiscal 2000, PEC financed a budget shortfall of $90,000 and $63,000, respectively, for the Owners' Associations at Indian Shores and Orlando. During calendar year 1999, the Associations had an excess of $904,000 in Association fees received compared to expenses paid. If the owner of a timeshare interest defaults in the payment of the annual assessment fee, the Association may impose a lien on the related timeshare interest. PEC, at its option, has agreed to pay to the Associations the annual assessment fees of timeshare interest owners who are delinquent, 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 the timeshare interest for the amount of the lien and any related foreclosure costs. PEC has entered into management agreements with the Associations pursuant to which PEC receives annual management and administrative fees in exchange for providing or arranging for various property management services including reservations, bookkeeping, staffing, budgeting, maintenance and housekeeping services. During fiscal 2000, 1999 and 1998, PEC received fees of $2.7 million, $2.5 million and $2.4 million, respectively. The management agreements are typically for initial terms ranging from three to five years and automatically renew for successive additional one-year terms unless canceled by an Association. 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. 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 and operating efficiencies of the resorts. LAND SALES 4 7 PEC is engaged in the retail sale of land in Nevada and Colorado for residential, commercial, industrial and recreational use. Residential lots generally range in size from one-quarter acre to five acres with some larger, while commercial and industrial lots vary in size. PEC's residential lots generally range in price from $15,000 to $39,000 while commercial and industrial lots generally range in price from $79,000 to $94,000. PEC sold 766, 613 and 530 residential lots, net, and 2, 14 and 12 commercial and industrial lots during fiscal 2000, 1999 and 1998, respectively. 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. NEVADA A substantial portion of PEC's land sales have occurred in subdivisions in the Pahrump Valley, located approximately 60 miles west of Las Vegas. 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, 2000 29,710 Percent of lots sold through August 31, 2000 (unsold less than .5%) 100% Number of platted lots available for sale at August 31, 2000 139 For the Year Ended August 31, 2000: Number of parcels and lots sold 867 Number of parcels and lots canceled (331) Number of parcels and lots repurchased (110) Number of parcels and lots exchanged (408) ------- Number of parcels and lots sold, net of cancellations and exchanges 18 =======
Central Nevada Utilities Company (CNUC), a wholly-owned subsidiary of PEC, provides sewer and water service within CNUC's certificated service area. As of August 31, 2000, CNUC had 3,150 customers. In the past 4 years, connections have grown at an average rate of 14.4% and 16.3%, respectively, for residential water and sewer. COLORADO 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 $12,000 to $18,000, 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 62 parcels remaining in inventory as of August 31, 2000. In September 1993, PEC acquired improved and unimproved land in Park County, Colorado, known as South Park Ranch, which is being sold for recreational use as 1,870 separate parcels typically ranging in size from 5 to 9 acres and a few larger parcels at prices beginning at $15,000. As of August 31, 2000, 1,842 parcels had been sold with 28 parcels remaining in inventory. These parcels are sold without any planned improvements, except for roads which are already in place and a recreational facility that includes a basketball court, baseball field and picnic facilities. In February 1998, PEC acquired a 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 $28,600 and five acres, respectively. As of August 31, 2000, 357 parcels remained unsold, not including 333 parcels which became available for sale in October 2000. These parcels are sold without any planned improvements, except for roads which are already in place. The following table illustrates certain statistics regarding the parcels and lots in Huerfano and Park Counties, Colorado: 5 8 Number of acres acquired since 1969 60,782 Number of lots platted 4,828 Net number of lots sold through August 31, 2000 4,381 Percent of lots sold through August 31, 2000 91% Number of platted lots available for sale at August 31, 2000 447 FOR THE YEAR ENDED AUGUST 31, 2000: Number of parcels and lots sold 1,829 Number of parcels and lots canceled (378) Number of parcels and lots exchanged (701) ------- Number of parcels and lots sold, net of cancellations and exchanges 750 =======
For fiscal 2,000, 1999 and 1998, respectively, PEC's revenue from net land sales was $19.6 million, $16.0 million and $13.8 million, representing 21.7%, 21.4% and 20.1% of total revenues. SALES OF NON-CORE ASSETS The Company owns and has listed for sale certain commercial parcels that are not necessary for its normal business activities. 22 of these parcels are located in the Pahrump Valley. The Company also owns water rights in Huerfano County that are listed for sale and a 4.25 acre parcel in Biloxi, Mississippi, which it may sell. The Company also has received interest in the acquisition of CNUC. Since the Company began listing its non-core assets for sale in the second quarter of fiscal 1999, the Company has sold $4,864,000 in non-core assets. Sales have included two golf courses, a sports complex and six other parcels located in the Pahrump Valley. Subsequent to August 31, 2000, the Company also sold its two office buildings located at 4310 Paradise Road and 1500 E. Tropicana in Las Vegas, for a total consideration of $8,300,000. The Company has leased back the building at 1500 E. Tropicana for a period of ten years with two 5-year renewal options, and the building at 4310 Paradise Road for a period of 5-1/2 years with a 4-1/2 year renewal option. The majority of sales proceeds have been used to reduce debt. The Company will continue to actively market the non-core assets; however, there is no certainty as to when additional sales will occur. 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 that 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 6 9 payments. At August 31, 2000, PEC serviced 18,130 customer receivables related to sales of timeshare interests and land, which receivables had an aggregate outstanding principal balance of $153.0 million, a weighted-average maturity of approximately 7 years and a weighted-average interest rate of 12.9%. PEC has arrangements with institutional lenders, which, provide for the financing of customer receivables of up to an aggregate of $133.5 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, 2000, an aggregate of $107.2 million was outstanding under such lines of credit and $26.3 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. These 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. Sales agreements generally provide for: (i) PEC to continue servicing the sold receivables; (ii) PEC to repurchase or replace accounts that have become more than 90 days contractually delinquent; (iii) the maintenance of cash reserve accounts for losses; and, (iv) certain minimum net worth requirements and other covenants. The sales agreements for timeshare receivables contain 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 applicable real estate taxes. Performance by PEC of such covenants generally is guaranteed by the Company. The principal balances of receivables sold by PEC were $19.6 million, $0, and $9.4 million during fiscal 2000, 1999 and 1998, respectively. At August 31, 2000, PEC was contingently liable to replace or repurchase delinquent receivables in the aggregate amount of $ 59.6 million. Delinquencies greater than 60 days have decreased in fiscal 2000 to 6.9% from 7.8% in fiscal 1999. PEC charges off or fully reserves all receivables that are more than 90 days delinquent and charges off the receivable when the Company determines that collection is no longer probable. 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, as of the dates indicated (thousands of dollars):
AUGUST 31, --------------------------------------- 2000 1999 1998 --------- --------- --------- 60-day delinquent $ 11,930 $ 11,857 $ 11,836 Total receivables $172,907 $151,709 $136,509 60-day delinquency percentage 6.90% 7.82% 8.67%
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. PEC believes, based on its experience and its analysis of economic conditions, that the allowance 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 and Steamboat Springs, Colorado as well as the Las Vegas headquarters, and at its land projects in Nevada and Colorado. Small on-site sales offices staffed with one to two sales associates are maintained in Hawaii; Indian Shores and Orlando, Florida; and Brigantine, New Jersey. PEC also maintains off-site sales offices in West Covina, California; Dallas and Houston, Texas; and Denver, Colorado. PEC's marketing efforts are targeted primarily at tourists and potential tourists meeting its customer profile. Currently, approximately 48.6% of sales is made through the Las Vegas sales offices. As part of its marketing strategy, PEC maintains an internal timeshare interest exchange program. This program enables owners of PEC's timeshare interests to exchange their occupancy right in their home resort 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. 7 10 The agreement of sale for a timeshare interest or land may be rescinded within various statutory rescission periods ranging from five to ten days. For land sales made at a location other than the property, the customer may 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 of the subject property, and then requests the cancellation. At August 31, 2000, $1.4 million 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. SEASONALITY The Company's sales are generally not subject to significant seasonality factors. For fiscal 2000, 1999 and 1998, quarterly sales as a percentage of annual sales, for each of the fiscal quarters averaged:
QUARTER ENDED % OF ANNUAL SALES -------------------------------- ------------------------- November 22.7% February 22.3 May 27.0 August 28.0 --------- 100.0% =========
The quarterly numbers in the preceding table are slightly higher in the third and fourth quarters of the fiscal year as the Company's major sales area in Las Vegas, Nevada, experiences higher tourist activity in those seasons. The Company is not dependent upon any large affinity group 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. PEC's timeshare plans compete directly with many other timeshare plans, some of which are in facilities located in Las Vegas, Reno, Honolulu, Atlantic City, Orlando, St. Petersburg/Clearwater, 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 2000, approximately 31.5% of timeshare resorts were located in the Mountain/Pacific region of the United States, 23.6% in Florida, 12.0% 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. GOVERNMENT REGULATION The Company's timeshare and real estate operations are subject to extensive regulation, and licensing requirements by federal, state and local 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 8 11 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. 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 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 and Texas for out-of-state sales is five days. The Nevada, California, New Jersey, Hawaii, Colorado, Florida 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 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 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 impose additional compliance costs on the Company that cannot be predicted. 9 12 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. EMPLOYEES As of August 31, 2000, PEC had 1,334 employees, of whom 1,137 were full-time employees and 197 were part-time employees. Full-time employees were comprised of the following: 680 sales and marketing officers and personnel, 165 general and administrative personnel, 280 hotel personnel and 12 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, 2000, the Company had 139 residential, commercial and industrial lots, 447 recreational land parcels, and 9,423 timeshare interests in 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 of which it was the owner. In November 2000, the Company entered into a Sale/Leaseback transaction for this building. The Company signed a master lease for the entire building for an initial term of 5-1/2 years with one 4-1/2 year renewal option. The current monthly rent is $30,000. The Company was the owner of a second office building located in Las Vegas, Nevada. This building has approximately 57,500 square feet of office space, of which the Company occupies approximately 33,800 square feet. Of the remaining space, approximately 7,300 square feet is leased to tenants on a short-term basis, and approximately 16,400 square feet is unoccupied. In October 2000, the Company entered into a Sale/Leaseback transaction for this building. The Company signed a master lease for the entire building for a ten-year term with two five-year renewal options. The current monthly rent is $57,446. The Company leases an executive office at 1125 N. E. 125th Street in North Miami, Florida, comprised of approximately 1,600 square feet, on a month-to-month basis. The Company leases various other facilities on a long-term, short-term or month-to-month basis for off-site marketing and sales offices. The Company has sales offices in West Covina, California; Denver, Colorado and Dallas, Texas and marketing locations in close proximity of those offices and the Las Vegas sales' offices. ITEM 3. LEGAL PROCEEDINGS On August 27, 1998, an action was filed in Nevada District Court, County of Clark, No. A392585, by Robert and Jocelyne Henry, husband and wife individually and on behalf of all others similarly situated against PEC, PEC's wholly-owned subsidiary, Central Nevada Utilities Company (CNUC), and certain other defendants. The plaintiffs' complaint asked for class action relief claiming that PEC and CNUC were guilty of collecting certain betterment fees and not providing sewer and water lines to their property. The court determined that plaintiffs had not properly pursued their administrative remedies with the Nevada Public Utilities Commission (PUC) and dismissed plaintiffs' amended complaint, without prejudice. Notwithstanding plaintiffs' appeal of the dismissal, plaintiff filed for administrative relief with the PUC. On November 17, 1999, the PUC found that CNUC, the only defendant over which the PUC has jurisdiction, was not in violation of any duties owed the plaintiffs or otherwise in violation of CNUC's approved tariffs. Subsequent to the PUC's decision, plaintiffs voluntarily dismissed their appeal of the trial court's order dismissing their case without prejudice and directing plaintiffs to exhaust their administrative remedies. On May 4, 2000, plaintiffs 10 13 refiled their complaint in Nevada District Court, naming all of the above parties with the exception of CNUC. The defendants have filed a motion to dismiss. As previously reported in the Company's Annual Report on Form 10-K for fiscal 1999 ("1999 Form 10-K"), the Company was a named defendant in three purported class actions filed by Christopher Dunleavy, Alan Peyser and Michael Nadler. A Settlement Agreement was approved by the Court in 1997 that had no material effect on the Company's Consolidated Financial Statements. On August 21, 2000, the Settlement Agreement became final, as no further appeal was taken since the appeal filed by Mr. Nadler that was denied on May 22, 2000. As previously reported in the 1999 Form 10-K, the Company was a named defendant in a purported class action filed by Robert J. Feeney. The period for appeal of the dismissal with prejudice of the action against the Company expired without an appeal having been filed. On August 9, 1999, an action was filed in Nevada District Court, County of Clark, No. A407152, by a dissident Director and a former Director of the Grand Flamingo Towers Owners Association purporting to act on behalf of the Association against PEC. The complaint alleges, among other things, breach of a fiduciary duty by the defendant with respect to the management agreement between the plaintiff and defendant. In particular, plaintiff is seeking rescission of the management agreement, an injunction requiring the defendant to turn over plaintiff's property held as plaintiff's manager, imposition of a constructive trust on plaintiffs funds and profits received and held by the defendant as plaintiff's manager, and an accounting of profits and property obtained by the defendant as plaintiff's manager. In August 2000, the Plaintiffs voluntarily dismissed this action with prejudice. In the general course of business the Company and PEC, at various times, have each 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. 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 fiscal 2000. 11 14 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 (1):
HIGH LOW -------- ------- FISCAL YEAR 1999: First Quarter $ 13.50 $ 4.13 Second Quarter 7.88 4.50 Third Quarter 7.13 4.50 Fourth Quarter 6.38 3.75 FISCAL YEAR 2000: First Quarter 4.88 3.56 Second Quarter 5.06 3.63 Third Quarter 4.22 3.63 Fourth Quarter 4.63 3.88 FISCAL YEAR 2001: First Quarter (through November 15, 2000) 4.94 4.31
(1) On September 2, 1999, the Company's shareholders approved a one for six reverse stock split of its common stock. The reverse split was effective on September 9, 1999, with respect to all of the Company's 21,009,506 shares of common stock outstanding. After payment of cash in lieu of fractional shares totaling 1,027 shares, the Company now has 3,500,557 common shares outstanding. All amounts in the above table and elsewhere in this Form 10-K have been restated to retroactively show the effect of this reverse stock split. As of November 15, 2000, there were 1,853 holders of record of the 3,500,557 outstanding shares of common stock. The closing sales price for the common stock on November 15, 2000 was $4.81. The Company did not pay any cash dividends on its common stock during fiscal 2000 and 1999. 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, 2000 and 1999 and for each of the three years in the period ended August 31, 2000 have been audited by Deloitte & Touche LLP, independent auditors, and are included elsewhere herein. The Consolidated Financial Statements as of August 31, 1998, 1997 and 1996 and for the years ended August 31, 1997 and 1996 have been audited by Deloitte & Touche LLP, independent auditors, and are not included herein. Certain reclassifications have been made to conform prior years with the current year presentation. The selected financial information set forth below should be read in conjunction with the Consolidated Financial Statements, 12 15 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, -------------------------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- INCOME STATEMENT DATA: REVENUES OF CONTINUING OPERATIONS: Timeshare interest sales, net $ 49,062 $ 41,262 $ 37,713 $ 32,253 $ 27,778 Land sales, net 19,624 15,979 13,812 16,626 17,968 Gain on sale of notes receivable 635 -- 656 2,013 1,116 Gain on sale of other investments and other assets 1,857 513 -- -- -- Interest income 12,430 9,310 7,161 7,168 6,594 Financial income 1,153 1,184 3,304 2,922 1,253 Other(3) 5,734 6,254 5,944 6,514 5,943 -------- -------- -------- -------- -------- Total revenues of continuing operations 90,495 74,502 68,590 67,496 60,652 -------- -------- -------- -------- -------- COSTS AND EXPENSES OF CONTINUING OPERATIONS: Cost of sales(4) 15,266 13,510 11,789 10,477 8,099 Marketing and sales 39,769 35,291 34,167 34,078 30,351 Depreciation 1,827 1,878 2,245 1,964 1,526 Interest expense 12,468 9,270 7,850 8,458 7,314 General and administrative 17,746 14,333 17,736 17,175 15,849 -------- -------- -------- -------- -------- Total costs and expenses of continuing operations 87,076 74,282 73,787 72,152 63,139 -------- -------- -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 3,419 220 (5,197) (4,656) (2,487) INCOME TAXES (BENEFIT) (530) (830) (1,968) (12,662) (1,068) -------- -------- -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS 3,949 1,050 (3,229) 8,006 (1,419) INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES AND MINORITY INTEREST(5) -- -- -- 11,334 6,270 -------- -------- -------- -------- -------- NET INCOME (LOSS) 3,949 1,050 (3,229) 19,340 4,851 CUMULATIVE PREFERRED STOCK DIVIDENDS -- -- -- -- 240 -------- -------- -------- -------- -------- NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 3,949 $ 1,050 $ (3,229) $ 19,340 $ 4,611 ======== ======== ======== ======== ========
13 16
FOR THE YEARS ENDED AUGUST 31, ---------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ----------- ----------- ----------- ----------- ------------- PER SHARE DATA(6)(7): BASIC: Income (loss) from continuing operations $ 1.13 $ 0.30 $ (0.92) $ 2.58 $ (0.47) Income (loss) from discontinued operations -- -- -- 3.64 2.08 Cumulative preferred stock dividends -- -- -- -- (0.08) ----------- ----------- ----------- ----------- ------------- Net income (loss) applicable to common stock $ 1.13 $ 0.30 $ (0.92) $ 6.22 $ 1.53 =========== =========== =========== =========== ============= Weighted-average number of common shares 3,500,557 3,500,557 3,500,557 3,108,510 3,108,493 =========== =========== =========== =========== ============= DILUTED(8): Income (loss) from continuing operations $ 1.13 $ 0.30 $ (0.92) $ 2.46 $ (0.45) Income from discontinued operations -- -- -- 3.48 1.97 Cumulative preferred stock dividends -- -- -- -- (0.08) ----------- ----------- ----------- ----------- ------------- Net income applicable to common stock $ 1.13 $ 0.30 $ (0.92) $ 5.94 $ 1.44 =========== =========== =========== =========== ============= Weighted-average number of common shares and common share equivalents outstanding 3,500,557 3,500,557 3,500,557 3,253,718 3,184,788 =========== =========== =========== =========== ============= BALANCE SHEET DATA: Total assets $ 168,592 $ 158,961 $ 142,076 $ 178,303 $ 145,505 Net assets of discontinued operations -- -- -- 53,276 30,514 Total liabilities excluding subordinated debt 138,524 132,650 117,049 100,745 109,963 Subordinated debt(9) 4,286 4,478 4,348 4,321 9,691 Total stockholders' equity 25,782 21,833 20,679 73,237 25,851
(1) On September 2, 1997, the Company distributed all of its 10 million shares of common stock of its former subsidiary, Mego Mortgage Corporation (MMC) 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 7. MD&A--Discontinued Operations of MMC" and Note 1 of Notes to Consolidated Financial Statements. (2) The income statement 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) Other revenues include incidental operations' income, management fees from owners' associations, amortization of negative goodwill and other miscellaneous items. (4) Cost of sales includes product costs of sales of timeshare interests and land, and incidental operations' expenses. (5) Income from discontinued operations, net of taxes of $9.1 million and minority interest of $2.4 million, 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. (6) All share and per share references have been restated to reflect the one for six reverse split of the Company's common stock, effective September 9, 1999. (7) No cash dividends per common share were declared during the fiscal years included herein. (8) The incremental shares from assumed conversions are not included in computing the diluted per share amounts for fiscal 1998 because the Company incurred a net loss and the effect would be anti-dilutive. The incremental shares from assumed conversions are not included in computing the diluted per share amounts for fiscal 2000 and 1999 because the exercise price of the options and warrants exceeded the average market price of the common shares during these fiscal years. 14 17 (9) In payment of the exercise price of $4,250,000 of warrants exercised for 166,666 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 10 of Notes to Consolidated Financial Statements and "Item 13. Certain Relationships and Related Transactions." 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 expectations 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 result of its Year 2000 compliance efforts and the impact on the Company's operations of efforts of its lenders and other third parties in respect of such compliance. 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 is primarily the marketing, financing and sale of timeshare interests, retail lots and land parcels, servicing the related receivables, and operating and managing timeshare properties. 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 servicing fee. PEC retains certain 15 18 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, as discussed below. 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 2000, 1999 and 1998. 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, historical cancellation experience, current economic conditions which 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 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" or "maintenance payments", and are included in Costs and Expenses in the Consolidated Income Statements under the caption of General and administrative. Management fees received from the associations are included in Revenues in the Consolidated Income Statements under the caption of Other. These fees are deemed not to be the result of a 16 19 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, ---------------------- 2000 1999 -------- -------- Principal balance of notes receivable additions (in thousands) $ 82,388 $ 64,112 ======== ======== Number of notes receivable additions 7,552 6,448 ======== ======== Notes receivable serviced at end of period (in thousands) $153,000 $132,240 ======== ========
Land sales as of August 31, 2000 exclude $17.3 million of sales not yet recognized under generally accepted accounting principles (GAAP) since the requisite payment amounts have not yet been received or the respective recission periods have not yet expired. Of the $17.3 million unrecognized land sales, the Company estimates that it will ultimately recognize $14.2 million of revenues, which would be reduced by a related provision for cancellations of $1.2 million, estimated deferred selling costs of $4.0 million and cost of sales of $2.0 million, for an estimated net profit of $7.0 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. RESULTS OF OPERATIONS Year Ended August 31, 2000 Compared to Year Ended August 31, 1999 Total revenues for the Company increased 21.5% or $16.0 million to $90.5 million during fiscal 2000 from $74.5 million during fiscal 1999 primarily due to: a net increase of $11.5 million in timeshare and land sales to $68.7 million in fiscal 2000 from $57.2 million in fiscal 1999 (net timeshare sales increased by $7.8 million and net land sales increased by $3.7 million); an increase in interest income to $12.4 million in fiscal 2000 from $9.3 million in fiscal 1999; and, higher gains on sales of notes receivable and sales of investments and other assets. Gross sales of timeshare interests increased to $55.3 million in fiscal 2000 from $45.8 million in fiscal 1999, an increase of 20.7%. Net sales of timeshare interests increased to $49.1 million from $41.2 million, an increase of 18.9%. This increase is primarily attributable to a favorable mix as a comparatively greater number of the high-priced units were sold during fiscal 2000, and also to certain price increases. The provision for cancellations represented 11.3% and 10.0%, respectively, of gross sales of timeshare interests for fiscal 2000 and 1999. The percentage increase in the provision for cancellations for timeshare interests was primarily due to a downward adjustment recorded during the prior fiscal year based on a review of the reserve adequacy at that time and cancellation experience during fiscal 2000. The number of cancellations during fiscal 2000 was 1,048 compared to 875 during fiscal 1999. The number of exchanges, generally for timeshare interests, which are primarily made for upgrades, was 1,955 during fiscal 2000 compared to 2,757 during fiscal 1999. 17 20 Gross sales of land increased to $20.7 million in fiscal 2000 from $17.0 million in fiscal 1999, an increase of 21.6%. Net sales of land increased to $19.6 million in fiscal 2000 from $16.0 million in fiscal 1999 an increase of 22.8%. The provision for cancellations decreased to 5.3% for the year ended August 31, 2000 from 6.2% of gross sales of land for the year ended August 31, 1999, primarily due to a downward adjustment recorded during fiscal 2000 based on a review of reserve adequacy. Gain on sale of notes receivable and investments of $2.5 million was recorded during the fiscal 2000 as the Company, in addition to notes receivable sales in the normal course of business, sold its golf courses and several commercial non-core land parcels in Pahrump Valley. This is compared to a gain of $513,000 recorded during fiscal 1999 as the Company sold a parcel of land in Pahrump Valley. Interest income increased to $12.4 million in fiscal 2000 from $9.3 million in fiscal 1999, an increase of 33.5% primarily due to increased average notes receivable balances for the current period. Total costs and expenses for the Company increased to $87.1 million for fiscal 2000 from $74.3 million for fiscal 1999, an increase of 17.2%. The increase resulted primarily from: an increase in direct costs of timeshare interest sales to $10.5 million from $8.5 million, an increase of 23.3%; an increase in marketing and sales to $39.8 million from $35.3 million, an increase of 12.7%; an increase in interest expense to $12.5 million from $9.3 million, an increase of 34.5%; and, an increase of $3.4 million, or 23.8%, in general and administrative expenses. The increase in direct costs of timeshare sales is directly attributable to higher net timeshare sales in 2000 and to the higher costs to develop new timeshare inventory. The increase in marketing and sales expenses is due primarily to the higher gross sales; however, as noted below, the increase in dollars was accompanied by a related lower percentage of marketing and sales expenses. The increase in interest expense is due to the increase in the average outstanding balance of notes and contracts payable. The increase in general and administrative expenses is due primarily to: increased sales volume; the increase in escrow costs related to the increased sales volume; a net increase in maintenance fees paid to Homeowner Associations by PEC; an increase in executive incentive plan compensation, which is directly related to the pretax income increase; the full resumption of payment of Directors' fees; and, reserves for the Company's guaranty of office and equipment leases related to a previously affiliated company. As a percentage of gross sales of timeshare interests and land, marketing and sales expenses related thereto decreased to 52.3% in fiscal 2000 from 56.1% in fiscal 1999. Cost of sales was 17.8% in fiscal 2000 and 17.9% in fiscal 1999. 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, the Company generally realizes lower profit margins from sales of timeshare interests than from sales of land. Subsequent to the first quarter of fiscal 1999, the Company restructured its marketing and sales programs, which restructuring included the closing of unprofitable sales locations, the elimination of certain marketing programs and the layoff of related personnel. Pretax income of $3.4 million was recorded in fiscal 2000 compared to a pretax income of $220,000 in fiscal 1999. The income tax benefit for fiscal 2000 was $530,000 compared to the income tax benefit of $830,000 for fiscal 1999. The benefit for both fiscal 2000 and 1999 was primarily due to the application of net operating loss (NOL) carryforwards and changes in certain income tax liability reserves as a result of facts and circumstances determined in an ongoing review and analysis of the Company's federal income tax liability. See Note 11 of Notes to Consolidated Financial Statements. Net income applicable to common stock amounted to $3.9 million during fiscal 2000 compared to net income of $1.1 million during fiscal 1999, primarily due to the foregoing reported results. Year Ended August 31, 1999 Compared to Year Ended August 31, 1998 Total revenues for the Company increased 8.6% or $5.9 million to $74.5 million during fiscal 1999 from $68.6 million during fiscal 1998 primarily due to a net increase of $5.7 million in timeshare and land sales to $57.2 million in fiscal 1999 from $51.5 million in fiscal 1998 (net timeshare sales increased by $3.5 million and net land sales increased by $2.2 million), an increase in interest income to $9.3 million in fiscal 1999 from $7.2 million in fiscal 1998, partially offset by an aggregate decrease of $2.1 million in financial income. 18 21 Gross sales of timeshare interests increased to $45.8 million in fiscal 1999 from $41.4 million in fiscal 1998, an increase of 10.6%. Net sales of timeshare interests increased to $41.2 million from $37.7 million, an increase of 9.4%. The provision for cancellations represented 10.0% and 9.0%, respectively, of gross sales of timeshare interests for fiscal 1999 and 1998. The percentage increase in the provision for cancellations for timeshare interests was primarily due to a larger downward adjustment recorded during the prior fiscal year based on a review of the reserve adequacy at that time. The number of cancellations during fiscal 1999 was 875 compared to 781 during fiscal 1998. The number of exchanges, generally for timeshares, which are primarily made for upgrades, during fiscal 1999 was 2,757 compared to 4,019 during fiscal 1998. Gross sales of land increased to $17.0 million in fiscal 1999 from $14.9 million in fiscal 1998, an increase of 14.3%. Net sales of land increased to $16.0 million in fiscal 1999 from $13.8 million in fiscal 1998 an increase of 15.7%. The provision for cancellations decreased to 6.2% for the year ended August 31, 1999 from 7.3% of gross sales of land for fiscal 1998, primarily due to a decrease in cancellation experience during fiscal 1999. Gain on sale of investments of $513,000 was recorded during the fiscal 1999 as the Company sold a parcel of land in Pahrump Valley. Interest income increased to $9.3 million in fiscal 1999 from $7.2 million in fiscal 1998, an increase of 30.0% primarily due to increased average notes receivable balances for the current period. Financial income decreased to $1.2 million in fiscal 1999 from $3.3 million in fiscal 1998, a decrease of 64.2%. The decrease was primarily a result of the termination by agreement of loan servicing for a previously affiliated company and a decrease in loans serviced for others. Total costs and expenses for the Company increased to $74.3 million for fiscal 1999 from $73.8 million for fiscal 1998, an increase of .6%. The increase resulted primarily from an increase in direct costs of land sales to $2.7 million from $1.8 million, an increase of 53.1%, an increase in direct costs of timeshare interest sales to $8.5 million from $7.4 million, an increase of 15.6%, an increase in marketing and sales to $35.3 million from $34.1 million, an increase of 3.3%, an increase in interest expense to $9.3 million from $7.9 million, an increase of 18.1%, partially offset by a decrease of $3.4 million, or 19.2%, in general and administrative expenses. The increase in direct costs of land is attributable to increased land sales, including higher cost lots sold during fiscal 1999 compared to fiscal 1998. The increase in direct costs of timeshare sales is directly attributable to higher net timeshare sales in 1999 and to the higher costs to develop new timeshare inventory. The increase in marketing and sales expenses is due primarily to the higher gross sales; however, as noted below, the increase in dollars was accompanied by a related lower percentage of marketing and sales expenses. The increase in interest expense is due to the increase in the average outstanding balance of notes and contracts payable. The decrease in general and administrative expenses is due primarily to the reduction in salaries and benefits. As a percentage of gross sales of timeshare interests and land, marketing and sales expenses related thereto decreased to 56.1% in fiscal 1999 from 60.6% in fiscal 1998, and cost of sales increased to 17.9% in fiscal 1999 from 16.2% in fiscal 1998. Interest expense was $9.3 million in fiscal 1999 and $7.9 million in fiscal 1998. The increase is a result of a higher average outstanding balance of notes and contracts payable during fiscal 1999 compared to fiscal 1998 and is related to the fact that there were no sale of receivables during fiscal 1999. Pretax income of $220,000 was recorded in fiscal 1999 compared to a pretax loss of $5.2 million in fiscal 1998. The improvement in fiscal 1999 resulted from the $5.9 million increase in revenues partially offset by the $500,000 increase in expenses. The income tax benefit for fiscal 1999 was $830,000 compared to the larger income tax benefit of $2.0 million for fiscal 1998. The benefit for both fiscal 1999 and 1998 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 ongoing review and analysis of the Company's federal income tax liability. Net income applicable to common stock amounted to $1.1 million during fiscal 1999 compared to a loss of $3.2 million during fiscal 1998, primarily due to the foregoing reported results. 19 22 LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents was $1.1 million at August 31, 2000 and $1.8 million at August 31, 1999. 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 principal and interest on subordinated debt. PEC requires continued access to sources of debt financing and sales in the secondary market for receivables. PEC's cash requirements arise from the acquisition of timeshare properties and land, payments of operating expenses, payment of taxes 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 advances under PEC's lines of credit in the aggregate amount of $133.5 million, sales of receivables and cash flows from operations. At August 31, 2000, no commitments existed for material capital expenditures. At August 31, 2000, PEC had arrangements with institutional lenders 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 lines of credit of up to an aggregate of $133.5 million. Such lines of credit are secured by timeshare and land receivables and mortgages. At August 31, 2000, an aggregate of $107.2 million was outstanding under such lines of credit, and $26.3 million was available for borrowing. Under the terms of these lines of credit, PEC may borrow 65% to 90% of the balances of the pledged timeshare and land receivables. PEC is required to comply with certain covenants under these agreements, which, among other things, require PEC to meet certain minimum tangible net worth requirements. The most stringent of such requirements provides that PEC maintains a minimum tangible net worth of $25 million. At August 31, 2000, PEC exceeded this net worth requirement by $5.9 million. Summarized lines of credit information and accompanying notes relating to these lines of credit outstanding at August 31, 2000, consist of the following (thousands of dollars):
OUTSTANDING BORROWING MAXIMUM (a) BALANCE AT BORROWING REVOLVING AUGUST 31, 2000 AMOUNTS EXPIRATION DATE MATURITY DATE INTEREST RATE - ----------------------- --------------- ----------------------- ------------------- ------------------------ $ 64,757 $ 75,000 (b) April 30, 2001 Various Prime + 2.0 - 2.25% - ----------------------- --------------- 15,733 15,000 (c) December 1, 2002 Various Prime + 2.0 4,960 11,500 (d) December 31, 2001 Various Prime + 2.0 - 3.00% - ----------------------- --------------- 20,693 26,500 Considered one borrowing line for the maximum amount. - ----------------------- --------------- 19,790 30,000 (e) June 30, 2001 Various Libor + 4.0 - 4.25% 1,972 1,972 (f) July 30, 2003 Prime + 2.25% - ----------------------- --------------- $ 107,212 $ 133,472 ======================= ===============
(a) When the revolver expires as shown, the loans convert to term loans with maturities as stated. In addition, management expects to extend the lines on similar terms. (b) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $25 million. Other restrictions, commencing with the fiscal quarter ended November 30, 1999, include: PEC's requirement to maintain costs and expenses for marketing and sales and general and administrative expenses relating to net processed sales for each fiscal quarter; PEC's requirement to maintain a minimum net processed sales requirement for each fiscal quarter; and PEC's requirement not to exceed a ratio of 4:1 of consolidated total liabilities to consolidated tangible net worth. At August 31, 2000, $52.2 million of loans secured by receivables were outstanding related to financings at prime plus 2%, of which $29.5 million of loans secured by land receivables mature May 15, 2010 and $22.7 million of loans secured by timeshare receivables mature May 15, 2007. The outstanding borrowing amount includes $6.4 million in mortgage financing maturing October 1, 2005 for the corporate office buildings, which amount was paid in full in November 2000, and a real estate loan with an outstanding balance of $1.2 million maturing December 31, 2000, all bearing interest at prime plus 2.25%. The remaining Acquisition and Development (A&D) loans, receivables loans and a resort lobby loan outstanding of $5.0 million are at prime plus 2% and mature at various dates through February 18, 2001. 20 23 In December 1998, Finova Capital Corporation (FINOVA), PEC and Mego Financial entered into an Agreement under which FINOVA agreed to make a loan in the amount of $5,662,000 to PEC with an original maturity date of June 30, 1999, which date has been extended to December 31, 2000. Mego Financial guaranteed the loan and issued warrants to FINOVA to purchase a total of 83,333 shares of common stock of Mego Financial at an exercise price of $6.00 per share, exercisable within a five-year period commencing January 1, 1999. The balance outstanding under this Agreement, which is included in the $64.8 million balance in the preceding table, was $1.2 million as of August 31, 2000. The fair market value of the warrants was estimated at $104,000 and is being amortized over the term of the Agreement. (c) 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, 2000, $6.3 million was outstanding under the A&D loan, which matures on June 30, 2004, and $9.4 million was outstanding under the receivables loan, which matures on May 31, 2004. (d) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $15 million. This credit line consists of receivable financing with a maturity date of May 31, 2004, under which $1.6 million was outstanding at August 31, 2000, and a real estate loan of $3.3 million with a maturity date of December 31, 2001. (e) 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, 2000, $2.4 million was outstanding under the A&D loans which have a maturity date of June 30, 2001 and bear interest at the 90-day London Interbank Offering Rate (LIBOR) plus 4.25%. The available receivable financings, of which $17.4 million was outstanding at August 31, 2000, are at 90-day LIBOR plus 4% and have a maturity date of June 5, 2005. (f) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $25 million. 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, -------------------------------------- 2000 1999 1998 -------- -------- -------- Marketing and sales expenses attributable to recognized and unrecognized sales $ 40,717 $ 35,856 $ 34,733 Less: Down payments (12,280) (12,452) (12,934) -------- -------- -------- Cash shortfall $ 28,437 $ 23,404 $ 21,799 ======== ======== ========
During fiscal 2000, PEC sold notes receivable of $19.6 million from which $17.1 million of the sales proceeds were used to pay down debt. The receivables, which have interest rates ranging from 11.5% - 15.5% depending on the transaction, were sold to yield returns of 9.8% fixed and 10.0% floating to the respective 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, 2000, PEC was contingently liable to replace or repurchase notes receivable sold with recourse totaling $59.6 million. The repurchase provisions provide for substitution of receivables as recourse for $51.7 million of sold notes receivable and cash payments for repurchase relating to $7.9 million of sold notes receivable. At August 31, 2000 and 1999, the undiscounted reserve amounts of the recourse obligations on such sold notes receivable were $4.5 million and $4.6 million, respectively. PEC continually 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. 21 24 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 is established at the time of each sale based upon PEC's analysis and 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 $19.6 million and $0 million, respectively, for fiscal 2000 and 1999. To improve its financial position, the Company has sold its golf courses and certain of its non-core assets, and is pursuing the sale of certain of its remaining non-core commercial real estate assets located in Pahrump Valley and elsewhere. See discussion in Item 1., "Land Sales - Non-Core Assets". 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 of the amounts due to them pursuant to an amendment to the Assignment and Assumption Agreement providing 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 (Subordinated Debt). Warrants (Warrants) to purchase 166,666 shares of common stock, at an exercise price of $25.50 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 balance of $3.3 million was paid to the Assignors as follows: $809,000 including interest of $59,000 in June 1995, and the balance of $2.6 million including interest of $45,000 in January 1997. The 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 semiannual principal payments commencing March 1, 1997. On March 1, 1997, the Assignors received the first semiannual principal payment of $1.4 million plus interest related to the repayment of the Subordinated Debt. In connection with exercise of the Warrants, payments aggregating $4.25 million were deemed paid and the semiannual payments were scheduled to resume in March 1999, with a partial payment made in September 1998. The final $4.29 million was scheduled to be paid in 3 equal installments on March 1, 1999, September 1, 1999 and March 1, 2000. In accordance with the Eleventh Amendment to Assignment and Assumption Agreement, the principal payments totaling $4.29 million have been deferred until March 1, 2001. Management anticipates that all or part of the principal payments may be extended beyond the current March 1, 2001 maturity date. Interest of $429,000 on Subordinated Debt was paid during each of fiscal year 2000 and 1999. The Subordinated Debt is collateralized by a pledge of PEC's outstanding stock. See "Item 13. Certain Relationships and Related Transactions" and Note 10 of Notes to Consolidated Financial Statements. During fiscal 2000 and 1999, the Company used cash of $5.5 million and $20.9 million, respectively, in operating activities. The most significant reason for the net decrease in cash used was the $19.6 million generated from the sales of notes receivable. During fiscal 2000 and 1999, the Company used cash of $384,000 and $1.8 million in investing activities, respectively, as a result of a decline in additions to other investments. During fiscal 2000 and 1999, the Company provided cash of $4.4 million and $22.7 million in financing activities, respectively, as a result of a decrease in borrowings, net of paydowns. Capital expenditures during fiscal years 2000 and 1999 were $4.8 million and $3.7 million, respectively, for the acquisition of timeshare and land inventory and $2.2 million and $1.6 million, respectively, for the purchase of property and equipment. No commitments existed at August 31, 2000 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 receivable 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, ---------------------- 2000 1999 -------- -------- Notes collateralized by receivables $ 80,593 $ 67,457 Mortgages collateralized by real estate properties 27,407 35,846 Installment contracts and other notes payable 1,131 1,252 -------- -------- Total $109,131 $104,555 ======== ========
FINANCIAL CONDITION 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 22 25 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 fiscal 2000, 1999, and 1998, consisted of the following (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, -------------------------------------- 2000 1999 1998 -------- -------- -------- Balance at beginning of year $ 18,149 $ 18,488 $ 19,527 Provision for cancellations 7,354 5,626 4,827 Amounts charged to allowance for cancellations and reserve for notes receivable sold with recourse (8,643) (5,965) (5,866) -------- -------- -------- Balance at end of year $ 16,860 $ 18,149 $ 18,488 ======== ======== ========
The allowance for cancellations and the reserve for notes receivable sold with recourse consisted of the following at these dates (thousands of dollars):
AUGUST 31, --------------------------------- 2000 1999 1998 ------- ------- ------- Allowance for cancellations, excluding discounts $12,827 $13,987 $11,868 Reserve for notes receivable sold with recourse 4,033 4,162 6,620 ------- ------- ------- Total $16,860 $18,149 $18,488 ======= ======= =======
The allowance for cancellations as a percentage of total notes receivable was 10.8% as of August 31, 2000 compared to 13.5% as of August 31, 1999. The reduction is primarily due to the cancellations during fiscal 2000 which were reserved as of August 31, 1999. August 31, 2000 Compared to August 31, 1999 Cash and cash equivalents was $1.1 million at August 31, 2000 and $1.8 million at August 31, 1999. Notes receivable, net, increased 20.0% to $83.2 million at August 31, 2000 from $69.3 million at August 31, 1999 as a result of the increased fiscal 2000 sales, net of notes receivable sold, during fiscal 2000. Interest only receivables increased 5.3% to $2.7 million at August 31, 2000 from $2.6 million at August 31, 1999. See Note 4 of Notes to Consolidated Financial Statements. Land and improvements inventory and timeshare interests held for sale decreased 24.2% to $27.4 million at August 31, 2000 from $36.2 million at August 31, 1999. This decrease is directly related to the increase in sales in fiscal 2000. Notes and contracts payable increased 4.4% to $109.1 million at August 31, 2000 from $104.6 million at August 31, 1999. Net borrowings related to financing customer receivables increased by $13.1 million, which was partially offset by net paydowns on other debt of $8.5 million. Reserve for notes receivable sold with recourse decreased 3.1% to $4.0 million at August 31, 2000 from $4.2 million at August 31, 1999. The majority of notes receivable sold during the fiscal year were land notes, which typically require a lower reserve. The loans previously sold prior to fiscal 2000 continue to amortize, which correspondingly lowers the required reserve. Accrued income taxes decreased 15.1% to $3.0 million at August 31, 2000 from $3.5 million, due to the changes in certain income tax liability reserves as a result of facts and circumstances determined in an ongoing review and analysis of the Company's federal income tax liability. Stockholders' equity increased to $25.8 million at August 31, 2000 from $21.8 million at August 31, 1999 as a result of net income of $3.9 million during fiscal 2000. Timeshare interest and land sales net, for fiscal 2000, 1999 and 1998, and the comparative dollar and percentage changes, are set forth in the following table (thousands of dollars): 23 26
FOR THE YEARS ENDED AUGUST 31, ------------------------------------------------------------------------------------ 2000 CHANGE 1999 CHANGE 2000 1999 FROM 1999 1998 FROM 1998 ------- ------- ------------------- ------- ------------------- Timeshare interest sales, net $49,062 $41,262 $ 7,800 18.9% $37,713 $ 3,549 9.4% Land sales, net 19,624 15,979 3,645 22.8% 13,812 2,167 15.7% ------- ------- ------- ------- ------- Total timeshare interest and land sales, net $68,686 $57,241 $11,445 20.0% $51,525 $ 5,716 11.1% ======= ======= ======= ======= =======
August 31, 1999 Compared to August 31, 1998 Cash and cash equivalents was $1.8 million at August 31, 1999 and 1998. Notes receivable, net, increased 45.0% to $69.3 million at August 31, 1999 from $47.8 million at August 31, 1998 as a result of net new receivables added, and no sales of receivables, during fiscal 1999. Interest only receivables decreased 23.8% to $2.6 million at August 31, 1999 from $3.4 million at August 31, 1998. See Note 4 of Notes to Consolidated Financial Statements. Land and improvements inventory and timeshare interests held for sale decreased 17.3% to $36.2 million at August 31, 1999 from $43.8 million at August 31, 1998. Notes and contracts payable increased 27.5% to $104.6 million at August 31, 1999 from $82.0 million at August 31, 1998. There were increased borrowings and no receivable sales, the proceeds of which are usually used to pay down debt, during fiscal 1999. Reserve for notes receivable sold with recourse decreased 37.1% to $4.2 million at August 31, 1999 from $6.7 million at August 31, 1998 due to the reduced balance of the sold notes receivable. Accrued income taxes decreased 21.6% to $3.5 million at August 31, 1999 from $4.5 million, due primarily to the fiscal 1999 tax benefit. The change in certain income tax liability reserves was a result of utilization of net operating losses and an ongoing review of the facts and circumstances. Stockholders' equity increased to $21.8 million at August 31, 1999 from $20.7 million at August 31, 1998 as a result of net income of $1.1 million during fiscal 1999. RECENTLY ISSUED/EFFECTIVE ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133 (SFAS 133) "Accounting for Derivative Instruments and Hedging Activities", which was amended by SFAS No. 137, issued in June 1999. SFAS 133 established standards for accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. SFAS 133, as amended, is effective for fiscal years beginning after June 15, 2000. The adoption will not have a material effect on the Company's financial statements. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 140). SFAS 140 replaces FASB Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" and provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. SFAS 140 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after March 31, 2001 and is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 31, 2000. Management does not believe that the adoption of SFAS 140 will have a material effect on the financial statements. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." SAB 101 provides the SEC Staff's views in applying generally accepted accounting principles to selected revenue recognition issues. The Company has adopted SAB 101 during fiscal year 2000 and the adoption has not had a material effect on the financial statements. 24 27 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. YEAR 2000 COMPLIANCE The Company believes it is Year 2000 compliant. There have been no significant problems experienced as a result of the occurrence of Year 2000 which have disrupted operations. The Company will continue to monitor its operations for any Year 2000 problems. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's various business activities generate liquidity, market and credit risk: - - liquidity risk is the possibility of being unable to meet all present and future financial obligations in a timely manner. - - market risk is the possibility that changes in future market rates or prices will make the Company's positions less valuable. - - credit risk is the possible loss from a customer's failure to perform according to the terms of the transaction. 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 (thousands of dollars):
EXPECTED MATURITY DATE ------------------------------------------------------------------------- THERE- FAIR AUGUST 31, 2001 2002 2003 2004 2005 AFTER TOTAL VALUE - ------------------------------- -------- -------- -------- --------- --------- --------- --------- ---------- ASSETS: Interest only receivables(a) Fixed rate $ 308 $ 351 $ 399 $ 454 $ 517 $ 384 $ 2,413 $ 2,413 Average interest rate 13.01% 13.01% 13.01% 13.01% 13.01% 13.01% Variable rate $ 32 $ 36 $ 41 $ 46 $ 52 $ 81 $ 288 $ 288 Average interest rate 12.11% 12.11% 12.11% 12.11% 12.11% 12.11% LIABILITIES: Notes and contracts payable(b) Fixed rate $ 830 $ 251 $ 197 $ 1,278 $ 1,278 Average interest rate 10.67% 11.31% 8.68% Variable rate $ 22,080 $ 3,086 $ 1,453 $ 11,654 $ 69,580 $107,853 $107,853 Average interest rate 11.50% 11.36% 11.46% 11.50% 11.30% Subordinated debt(c) Fixed rate $ 4,286 $ 4,286 $ 4,286 Average interest rate 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 25 28 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, 2000 and 1999 F-3 Consolidated Income Statements - Years Ended August 31, 2000, 1999 and 1998 F-4 - F-5 Consolidated Statements of Stockholders' Equity - Years Ended August 31, 2000, 1999 and 1998 F-6 Consolidated Statements of Cash Flows - Years Ended August 31, 2000, 1999 and 1998 F-7 - F-8 Notes to Consolidated Financial Statements - Years Ended August 31, 2000, 1999 and 1998 F-9 - F-36
All 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. 26 29 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth certain information with respect to the directors and executive officers of the Company.
NAME AGE POSITION (OF COMPANY UNLESS OTHERWISE NOTED) - --------------------------------------- --------- ----------------------------------------------------- Robert Nederlander 67 Chairman of the Board, Chief Executive Officer and Director Jerome J. Cohen 72 President and Director Chairman of the Board, Chief Executive Officer and President of PEC Herbert B. Hirsch 64 Senior Vice President, Chief Financial Officer, Treasurer and Director Eugene I. Schuster 63 Vice President and Director Wilbur L. Ross, Jr. 62 Director John E. McConnaughy, Jr. 71 Director Jon A. Joseph 53 Senior Vice President, General Counsel and Secretary Charles G. Baltuskonis 50 Senior Vice President and Chief Accounting Officer
Robert Nederlander has been the Chairman of the Board and Chief Executive Officer of the Company since January 1988. Mr. Nederlander is the Chairman of the Executive Committee and a member of the Audit Committee. Since July 1995, Mr. Nederlander has served on the Board of Directors of Cendant Corporation, formerly Hospitality Franchise Systems, Inc. (HFS). 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/or a director of the Nederlander Organization, Inc., owner and operator of one the world's largest chains of legitimate theaters. Since December 1998, Mr. Nederlander is co-managing member of the Nederlander Co. LLC, operator of legitimate theaters in various cities outside New York. Mr. Nederlander served as the Managing General Partner of the New York Yankees Baseball Club 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.; 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 1988. Mr. Cohen serves as a member of the Executive Committee and is Chairman of the Board, Chief Executive Officer and President 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 March 1995. From April 1992 to June 1997, Mr. Cohen was a director of Atlantic Gulf Communities Inc., formerly known as General Development Corporation, a publicly held company engaged in land development, land sales and utility operations in Florida and Tennessee. Herbert B. Hirsch has been the Senior Vice President, Chief Financial Officer, Treasurer and a Director of the Company since 1988. 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 1988. 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 27 30 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. From August 1976 to April 2000, Mr. Ross was Executive Managing Director of Rothschild Inc. and Chairman of Asia Recovery Fund. As of April 1, 2000, he founded WL Ross & Co. LLC. He remains Chairman of Asia Recovery Fund, as well as the former Rothschild Recovery Fund, now named WLR Recovery Fund, and is Chairman of Asia Recovery Co-Investment Partners. Mr. Ross is also a director of Casella Waste Systems Inc., Pacific Life Insurance Company (Korea), Syms Corporation and News Communication 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. Jon A. Joseph, Senior Vice President, General Counsel and Secretary, has been with the Company since June 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, Senior Vice President and Chief Accounting Officer, has been with the Company since March 1997. He is a certified public accountant and served as Senior Vice President and Controller of Chase 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. The following are other key employees of the Company: 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 served as Director of Sales Administration. S. Duke Campbell, Senior Vice President, Marketing and Sales of PEC, has been with the Company since July 1996. From 1995 to 1996, Mr. Campbell served as a Principal at D.I.A.L. Pro Northwest, Inc., a value added reseller for several customer management systems in the Northwest. Mr. Campbell served as Vice President of Marketing and sales for Hostar International, Inc., a manufacturer of innovative material management systems for hospitals, from 1991 to 1994. From 1989 to 1990, Mr. Campbell was the Senior Principal of Gulf American Financial Services, Inc., a financial services company that specializes in receivables management. Prior to 1990, Mr. Campbell served in various positions at Thousand Trails, Inc., a Texas company that owns and operates member campground resorts. 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 28 31 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 all Section 16(a) filing requirements applicable to its officers, Directors and greater than ten percent beneficial owners have been satisfied. 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 $30,000 in calendar 1999 and were scheduled to receive an annual fee of $40,000 for calendar 2000. Directors are 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 a former officer, 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. 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 (Named Executive Officers), and the Chief Operating Officer of PEC, whose annual salary and bonus during the fiscal years presented 29 32 exceeded $100,000.
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION ----------------------- -------------------------------------------- NUMBER OF FISCAL OTHER ANNUAL OPTIONS ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(a) COMPENSATION GRANTED COMPENSATION(b) - --------------------------------------- ------ --------- ---------- ------------ ------- --------------- Robert Nederlander, Chairman of the Board, Chief 1998 $200,002 $ -- $ 6,373 2,083 $ 1,039 Executive Officer, MFC 1999 65,424(c) -- 5,901 833 -- Chairman of the Board, PEC 2000 30,769(c) -- -- -- -- Jerome J. Cohen, President, MFC 1998 $300,002 $ -- $ 8,383 2,083 $ 2,644 Chairman of the Board, Chief Executive 1999 300,002 5,769 9,800 2,083 2,400 Officer and President, PEC 2000 300,002 92,667(a) -- -- -- Herbert B. Hirsch Senior Vice President, Chief Financial 1998 $200,000 $ -- $ 2,005 833 $ 2,341 Officer and Treasurer, MFC 1999 200,000 3,486 2,335 1,666 2,809 Senior Vice President and Chief 2000 200,000 37,067(a) -- -- -- Financial Officer, PEC Jon A. Joseph General Counsel and Secretary, MFC 1999 $200,000 $ 1,923 $ 24,000 -- $ 2,838 Senior Vice President, PEC 2000 200,000 18,533(a) 24,000 -- -- Charles G. Baltuskonis Senior Vice President and 1999 $117,500 $ 3,202 $ 12,000 833 $ 1,943 Chief Accounting Officer, MFC and PEC 2000 125,000 --(a) 5,860 -- -- Gregg A. McMurtrie Executive Vice President 1999 $142,462 $ 5,885 $ 3,910 833 $ 2,172 and Chief Operating Officer, PEC 2000 150,000 --(a) 2,127 -- --
(a) Incentive compensation is included in the fiscal year it is earned with respect to contractual arrangements. Awards to other executives are discretionary and have not as yet been determined by the Incentive Compensation Committee for fiscal 2000. (b) 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. (c) Prior to December 11, 1998, Mr. Nederlander earned an annual salary of $200,000. On that date, his salary was suspended. In April 2000, Mr. Nederlander's salary was reinstated at an annual rate of $100,000. OPTION GRANTS IN LAST FISCAL YEAR There were no grants of stock options during fiscal 2000. 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, 2000. No stock options were exercised by the Named Executive Officers during fiscal 2000. See "Stock Option Plan" below in this section. 30 33
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS HELD AT OPTIONS HELD AT AUGUST 31, 2000 AUGUST 31, 2000(1) - ------------------------ -------------------------------------------- -------------------------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------ --------------------- --------------------- --------------------- --------------------- Robert Nederlander 999 1,917 $ -- $ -- Jerome J. Cohen 1,249 2,917 $ -- $ -- Herbert B. Hirsch 666 1,833 $ -- $ -- Jon A. Joseph 2,000 3,000 $ -- $ -- Charles G. Baltuskonis 832 1,667 $ -- $ -- Gregg A. McMurtrie 832 1,667 $ -- $ --
(1) The closing sales price of the Company's Common Stock as reported on the Nasdaq National Market on August 31, 2000 was $4.50. The exercise price as of August 31, 2000 was $6.00 per share, therefore, the value of the unexercised options at August 31, 2000 was zero. EMPLOYMENT AGREEMENTS The Company entered into an employment agreement with Jerome J. Cohen, which originally was to expire on January 31, 2002. The agreement provides for an annual base salary of $300,000 plus a bonus of 2.5% of Incentive Income as defined in the Company's Incentive Plan (See "Executive Incentive Compensation Plan"). The Company's Board of Directors has authorized certain amendments to the employment agreement which, among other things, extend its expiration date to January 31, 2005. Under the agreement as amended, in the event (1) that the Company determines to terminate Mr. Cohen's employment under the agreement, (2) of a change in control of ownership of the Company or (3) of a sale of all or substantially all of the Company's assets, the Company would be required to enter into a termination agreement with Mr. Cohen under which he would receive a termination payment of $750,000. The termination payment would be payable in 36 equal monthly installments except in the case of a further change in control of ownership or sale of assets of the Company, in which case any unpaid balance of the $750,000 would become payable in a lump sum. The Company has entered into an employment agreement, which renews annually unless either party gives notice of termination, with Jon A. Joseph. The current expiration date of the employment agreement is December 31, 2001. The employment agreement provides for an annual base salary of $200,000 plus .5% of Incentive Income as defined in the Company's Incentive Plan. Further, in the event of a change in control of ownership of the Company, as defined in the employment agreement, Mr. Joseph would receive a separation payment of $200,000. On September 2, 1997, the Board of Directors authorized agreements with Mr. Herbert B. Hirsch and Mr. Don A. Mayerson, pursuant to which the Company would pay them a separation payment of $150,000 and $250,000, respectively, at such time as they no longer are employed by the Company. Payments of $10,000 per month to Mr. Mayerson commenced, upon his retirement in December 1998, and the final payment will be due in January 2001. Effective December 1998, Mr. Eugene I. Schuster no longer receives a salary. The Company has entered into a Compensation Agreement with S. Duke Campbell dated August 26, 1999, which provides for an annual base salary of $125,000. In addition, Mr. Campbell is to be paid, monthly, a sales commission of one-quarter of one percent (0.25%) of net sales, occurring after September 1, 1999, and a Profit Contribution Bonus for reducing sales and marketing costs for fiscal 2000. If Mr. Campbell's employment is terminated by the Company, other than for cause, Mr. Campbell shall receive his base salary and sales commissions to the date of termination, the portion of his Profit Contribution Bonus, if any, earned through the immediately preceding quarter, and a severance payment in an amount equal to his then current annual base salary. If Mr. Campbell resigns or terminates his employment by the Company he will be entitled to his base salary and sales commissions through the date of such termination. In addition, after the end of fiscal 2000, a new arrangement relating to profitability to take the place of the Profit Contribution Bonus will be agreed upon and added to the agreement by amendment. If the Company and Mr. Campbell have not agreed to such amendment to this agreement by November 30, 2000, and Mr. Campbell has received or earned, a Profit Contribution Bonus for fiscal 2000, Mr. Campbell may elect to resign or terminate his employment by the Company during the thirty-day period following November 30, 2000 and he then shall be entitled to a severance payment in an amount equal to his then current annual base salary in addition to his base salary and sales commissions through the date of such termination. 31 34 STOCK OPTION PLAN Under the Company's Stock Option Plan (Plan), as originally adopted, 87,500 shares of common stock were reserved for issuance upon exercise of options. In calendar year 1997, the Company's Board of Directors and shareholders approved an amendment to the Plan to increase by 83,333 shares the number of shares of common stock reserved for issuance pursuant to the Plan. As a result, an aggregate of 170,833 shares of common stock are reserved for issuance pursuant to the Plan, including 76,833 shares which have been issued upon exercise of options. 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 Plan. The amendments to the Plan 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 Plan to changes to the federal securities laws. On September 16, 1998, the shareholders approved the amendment and restatement of the Plan. The 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 Plan and is authorized, in its discretion, to grant options thereunder to all eligible employees of the Company, including officers of the Company. The 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 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 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 Plan are exercisable after the period or periods specified in the option agreement. Options granted under the Plan are not exercisable after the expiration of ten years from the date of grant (except five years 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 September 1997, an additional 58,083 incentive stock options were granted under the Plan to employees at fair market value. On September 23, 1998, an additional 18,500 incentive stock options were granted under the Plan. In addition, the exercise price of all options issued September 2, 1997 was revised from $18.75 per share to $6.00 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 compensation of all of the Company's employees (with the exception of Messrs. Nederlander, Cohen, Hirsch and Schuster) to its President, Mr. Cohen. The compensation paid to Messrs. Nederlander, Cohen, 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. 32 35 The Board of Directors has also approved an employment agreement with Mr. Cohen, President of the Company, and agreements with Mr. Hirsch and Mr. Joseph, executive officers of the Company, pursuant to which Messrs. Cohen, Hirsch and Joseph are entitled to receive 2.5%, 1% and .5%, respectively, of Incentive Income of the Company, as defined in the Incentive Plan. 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 was obligated to pay premiums for certain "second to die" life insurance policies on the lives of Messrs. Nederlander, Cohen, and Hirsch, executive officers and Directors of the Company, and their respective spouses, and for Don A. Mayerson, former executive officer of the Company, originally for a period of 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 per annum, originally for a period of five years. Pursuant to the plan, and with respect to each policy, at the end of ten years after issuance, or earlier upon the deaths of the respective insured parties, or certain other events, the Company was to receive the amount of premiums paid on the policy. Through December 31, 1998, $300,000 was paid on Mr. Schuster's policy and $400,000 was paid on each of the others, leaving a balance of premiums in the amount of $600,000 still owed by the Company on the policies. Pursuant to an amendment to the original agreement, executed in April 1999, future payments by the Company relating to the policies were waived by Messrs. Nederlander, Cohen, Hirsch, Mayerson and Schuster. In consideration of the waiver, the Company agreed to accept repayment of the lesser of the premiums paid or the cash value of the policy, upon the deaths of the respective insured parties. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of November 15, 2000, 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.
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENTAGE OF OUTSTANDING BENEFICIAL OWNER OR IDENTITY OF GROUP BENEFICIAL OWNERSHIP(1) COMMON STOCK OWNED - ----------------------------------------------------------- ---------------------------- ---------------------------- Robert Nederlander(2) 356,556 10.2% Eugene I. Schuster and Growth Realty Inc. (GRI)(3) 251,504 7.2% Jerome J. Cohen(4) 185,242 5.3% Herbert B. Hirsch(5) 271,575 7.7% John E. McConnaughy, Jr.(6) 100,511 2.8% Wilbur L. Ross, Jr.(7) 832 * Jon A. Joseph(8) 3,083 * Charles G. Baltuskonis(9) 1,332 -- Friedman Billings Ramsey Group, Inc. and affiliates(10) 611,718 17.5% All Executive Officers and Directors as a Group 1,170,635 33.4% (8 persons)(11)
* 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 15, 2000 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 41,666 shares held by an affiliate of Mr. Nederlander and 1,582 shares issuable under an option granted pursuant to the Company's Stock Option Plan. Does not include 16,666 shares of common stock owned by the Robert E. Nederlander Foundation, an 33 36 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) 211,506 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) 39,166 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) 832 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 2,082 shares issuable under options granted pursuant to the Company's Stock Option Plan. Excludes 15,583 shares owned by Mr. Cohen's spouse and 83,333 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 5,000 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. (5) 230 East Flamingo Road, Las Vegas, Nevada 89109. Includes 1,165 shares issuable under an option granted pursuant to the Company's Stock Option Plan. (6) 1011 High Ridge Road, Stamford, Connecticut 06905. Includes 1,499 shares issuable under options granted pursuant to the Company's Stock Option Plan. Excludes 500 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. (7) 1251 Avenue of the Americas, 51st Floor, New York, New York 10020. Consists of 832 shares issuable under an option granted pursuant to the Company's Stock Option Plan. Excludes 2,500 shares owned by a member of Mr. Ross' family and 41,666 shares owned by Rothschild, Inc., of which Mr. Ross is a former Managing Director, over which Mr. Ross does not have any investment or voting power and as to which he disclaims beneficial ownership. (8) 4310 Paradise Road, Las Vegas, Nevada 89109. Includes 3,000 shares issuable under options granted pursuant to the Company's Stock Option Plan. (9) 4310 Paradise Road, Las Vegas, Nevada 89109. Consists of shares issuable under options 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, as amended on February 15, 2000, filed jointly by Friedman Billings Ramsey Group, Inc., Orkney Holdings, Inc., Eric F. Billings, Emanuel J. Friedman and W. Russell Ramsey with the SEC. Consists of 601,716 shares owned by Friedman Billings Ramsey Group, Inc. and 10,002 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). 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 Mr. Cohen (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 34 37 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. 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 of the amounts due to them pursuant to an amendment to the Assignment and Assumption Agreement providing 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 (Subordinated Debt). Warrants (Warrants) to purchase 166,666 shares of common stock, at an exercise price of $25.50 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 balance of $3.3 million was paid to the assignors as follows: $809,000 including interest of $59,000 in June 1995, and the balance of $2.6 million including interest of $45,000 in January 1997. The 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 semiannual principal payments commencing March 1, 1997. On March 1, 1997, the Assignors received the first semiannual principal payment of $1.4 million plus interest related to the repayment of the Subordinated Debt. In connection with exercise of the Warrants, payments aggregating $4.25 million were deemed paid and the semiannual payments were scheduled to resume in March 1999, with a partial payment made in September 1998. The final $4.29 million was scheduled to be paid in 3 equal installments on March 1, 1999, September 1, 1999 and March 1, 2000. In accordance with the Eleventh Amendment to Assignment and Assumption Agreement, the principal payments have been deferred until March 1, 2001. Interest of $429,000 on Subordinated Debt was paid during fiscal 2000. The Subordinated Debt is collateralized by a pledge of PEC's outstanding stock. Subsequent to August 31, 2000, an advance of $100,000 at the interest rate of 10% was made to Eugene I. Schuster, an affiliate of one of the Assignors, against the amount owed to it. 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." 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, 2000. (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.
35 38 3.2(1) By-laws of the Company, as amended. 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. 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.
36 39 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. 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. 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.
37 40 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. 10.42(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. 10.47(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. 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. 10.60(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. 10.63(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. 10.74(10) Office Lease by and between MassMutual and Mego Mortgage Corporation dated April 1996. 10.77(10) Services and Consulting Agreement between Mego Mortgage Corporation and Preferred Equities Corporation dated as of September 1, 1996. 10.83(10) Form of Agreement entered into between Mego Mortgage Corporation and Mego Financial Corp.
38 41 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. 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 27, 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. 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.
39 42 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 10.112(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. 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. 10.132(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. 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.
40 43 10.141(18) Settlement letter from Preferred Equities Corporation to Mego Mortgage Corporation dated June 26, 1998. 10.142(23) 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 Note holder dated as of November 25, 1997. 10.143(23) Letter Amendment to General Loan and Security Agreement dated December 1, 1997, between Steamboat Suites, Inc. and Textron Financial Corporation. 10.144(23) Mortgage Loan Facility Agreement between FINOVA Capital Corporation and Preferred Equities Corporation dated March 20, 1998. 10.145(23) 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(23) 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(23) 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(23) Compensation Agreement between Frederick H. Conte and Preferred Equities Corporation dated September 1, 1998. 10.149(23) 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. 10.150(20) Amended and Restated and Consolidated Loan and Security Agreement between Finova and PEC & Mego Financial dated December 23, 1998 10.151(20) Common Stock Purchase Warrant issued by Mego Financial to Finova Capital Corporation dated December 23, 1998. 10.152(21) First Amended and Restated and Consolidated Promissory Note dated as of November 5, 1998 between FINOVA Capital Corporation and Preferred Equities Corporation relating to Aloha Bay Phase I. 10.153(21) Third Amended and Restated Promissory Note dated as of September 29, 1998 by and between FINOVA Capital Corporation and Preferred Equities Corporation relating to the Headquarters and FCFC Property. 10.154(21) Amendment No. 4 to Second Amended and Restated and Consolidated Loan and Security Agreement dated as of November 6, 1998 between Finova Capital Corporation and Preferred Equities Corporation. 10.155(21) Amendment No. 4 to Second Amended and Restated and Consolidated Loan and Security Agreement dated as of November 6, 1998 between Greyhound Real Estate Finance Company and Preferred Equities Corporation. 10.156(21) Amended and Restated Guarantee and Subordination Agreement dated as of September 29, 1998 between Greyhound Real Estate Finance Company and Mego Financial Corporation relating to the Headquarters Re-advance. 10.157(21) First Amended and Restated Promissory Note dated as of November 6, 1998 between FINOVA Capital Corporation and Preferred Equities Corporation relating to the IDA Building Addition. 10.158(21) Letter Agreement dated as of September 29, 1998 between FINOVA Capital Corporation and Preferred Equities Corporation relating to the Headquarters Re-advance. 10.159(21) Additional Advance Note dated as of November 6, 1998 between FINOVA Capital Corporation and Preferred Equities Corporation relating to Aloha Bay Phase II. 10.160(21) Request for Advance and Disbursement Instructions dated as of November 11, 1998 between FINOVA Capital Corporation and Preferred Equities Corporation. 10.161(21) First Amended and Restated Promissory Note dated as of November 6, 1998 between FINOVA Capital Corp. and Preferred Equities Corporation relating to the Winnick Building Addition. 10.162(21) Fourth Amendment to Assignment and Assumption Agreement dated as of February 26, 1999 by and between RER Corp, COMAY Corp., Growth Realty Inc. and H & H Financial, Inc. and Mego Financial Corporation. 10.163(21) Amended and Restated Stock Option Plan dated September 16, 1998 for Mego Financial Corp.
41 44 10.164(22) Amendment No.2 to Interval Receivables Loan and Security Agreement dated as of March 28, 1999 between Heller Financial, Inc. and Preferred Equities Corporation. 10.165(22) Sales Agreement dated as of March 8, 1999 between Great Escape Marketing, Inc. and Preferred Equities Corporation relating to 6950 Villa de Costa Dr. Orlando, Florida. 10.166(22) Sales Agreement dated as of March 10, 1999 between D&D Marketing, Inc. and Preferred Equities Corp and Brigantine Preferred Properties. 10.167(22) Forbearance and Modification Agreement dated as of May 7, 1999 by and between Preferred Equities Corporation and Heller Financial, Inc. 10.168(22) Management Agreement dated May 20, 1999 by and between Hotel Maison Pierre Lafitte, LTD. Owners Association, Inc. and Preferred Equities Corporation. 10.169(22) Fifth Amendment to Assignment and Assumption Agreement dated May 28, 1999 by and between RER Corp, COMAY Corp., Growth Realty Inc. and H&H Financial, Inc. and Mego Financial Corp. 10.170(22) Amendment No. 2 to Severance Agreement, and Consulting Agreement dated June 18, 1999 between Don A. Mayerson and Mego Financial Corp. 10.171(22) First Amendment to Forbearance Agreement and Amendment No. 6 to Second Amended and Restated and Consolidated Loan and Security Agreement dated May 7, 1999 by and among Finova Capital Corporation, Preferred Equities Corporation and Mego Financial Corp. 10.172(24) Sixth Amendment to Assignment and Assumption Agreement dated May 28, 1999 by and between RER Corp, COMAY Corp., Growth Realty Inc. and H&H Financial, Inc. and Mego Financial Corp. 10.173(24) Forbearance Agreement dated August 6, 1999 among Preferred Equities, and Mego Financial Corporation and Litchfield Financial Corporation. 10.174(24) Purchase and Sale Agreement between The Villas at Monterey Limited Partnership and Tango Bay of Orlando and Preferred Equities Corporation regarding Ramada Suites at Tango Bay Orlando. 10.175(24) Extension dated September 7, 1999 to the Second Amendment to Forbearance Agreement and Amendment No. 7 to Second Amended and Restated Consolidated Loan and Security Agreement dated December 23, 1998 between Preferred Equities Corporation and Finova Capital Corporation. 10.176(24) Purchase and Security Agreement dated June 11, 1999 between Preferred Equities Corporation and Preferred RV Resort Owners Association regarding the Preferred RV Resort. 10.177(24) Forbearance Agreement and Amendment No. 5 to Second Amended and Restated and Consolidated Loan and Security Agreement dated December 23, 1998 between Finova Capital Corporation and Preferred Equities Corp. 10.178(24) Letter Agreement dated February 8, 1999 between Preferred Equities Corporation and Finova Capital Corporation regarding additional agreements to the Forbearance Agreement and Amendment No. 5 to Second Amended and Restated Consolidated Loan and Security Agreement dated December 23, 1998. 10.179(24) Amendment No. 3 to Severance Agreement and Consulting Agreement between Mego Financial Corp. and Don A. Mayerson dated September 28, 1999. 10.180(24) Compensation Agreement between S. Duke Campbell and Preferred Equities Corporation dated July 27, 1998. 10.181(24) Amendment dated October 15, 1999 to the General Loan and Security Agreement Inventory Advance between Preferred Equities Corporation and Textron Financial Corporation dated October 5, 1994. 10.182(24) Amendment dated April 26, 1999 to the Agreement made January 1, 1995 between Mego Financial Corp. and Herbert A. Krasow, as Trustee of the Herbert B. Hirsch Property Trust Insurance Trust dated October 22, 1990 regarding the Agreement concerning "Split-Dollar" Life Insurance Plan. 10.183(24) Amended Assignment of Limited Interest in Life Insurance as Collateral Security dated April 26, 1999 to an Assignment made as of January 1, 1995 by Herbert A. Krasow, as Trustee of the Herbert B. Hirsch Property Trust Insurance Trust, dated October 22, 1990 to Mego Financial Corp.
42 45 10.184(24) Amended Agreement Concerning "Split-Dollar" Life Insurance Plan dated April 26, 1999 to the Agreement made January 1, 1995, between Mego Financial Corp., Lawrence J. Cohen and Clifford A. Schulman as Trustees of the Cohen 1994 Insurance Trust dated December 2, 1994, Jerome J. Cohen and Rita Cohen. 10.185(24) Amended Assignment of Limited Interest in Life Insurance as Collateral Security dated April 26, 1999 to an Assignment made as of January 1, 1995, by Lawrence J. Cohen and Clifford A. Schulman, as Trustees of the Cohen 1994 Insurance Trust dated December 21, 1994 to Mego Financial Corp. 10.186(24) Amended Agreement Concerning "Split-Dollar" Life Insurance Plan dated April 23, 1999 to the Agreement made as of June 1, 1995 between Mego Financial Corp, Joseph A. Schuster, as Trustee of the Eugene I Schuster Irrevocable Trust - dated May 30 1995, and Eugene I. Schuster. 10.187(24) Amended Assignment of Limited Interest in Life Insurance as Collateral Security dated April 23, 1999 to an Assignment made as of June 1, 1995, by Joseph A. Schuster, as Trustee of the Eugene I. Schuster Irrevocable Trust - Mego, dated May 30, 1995 to Mego Financial Corp. 10.188(24) Amended Agreement Concerning "Split-Dollar" Life Insurance Plan dated April 26, 1999 to the Agreement made January 1, 1995 between Mego Financial Corp., Tracy Allen, and Jane Gerard, as Trustees of the Nederlander 1994 Insurance Trust, dated December 19, 1994, Robert e. Nederlander and Gladys Nederlander. 10.189(24) Amended Assignment of Limited Interest in Life Insurance as Collateral Security Amendment made April 26, 1999 to as Assignment made January 1, 1995 by Tracy Allen and Jane Gerard, as Trustees of the Nederlander 1994 Insurance Trust, dated December 19, 1994 to Mego Financial Corp. 10.190(24) Amended Agreement Concerning "Split-Dollar" Life Insurance Plan Amendment made as of April 26, 1999 to the Agreement made as of January 1, 1995, between Mego Financial Corp., Gary Steven Mayerson and Robert Keith Mayerson, as Trustees of the Mayerson 1994 Insurance Trust, dated December 21, 1994, Don A. Mayerson and Evelyn W. Mayerson. 10.191(24) Amended Assignment of Limited Interest in Life Insurance as Collateral Security Amendment made April 26, 1999 to an Assignment made January 1, 1995, by Gary Steven Mayerson and Robert Keith Mayerson, as Trustees of the Mayerson 1994 Insurance Trust, dated December 21, 1994 to Mego Financial Corp. 10.192(24) Seventh 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 November 20, 1999. 10.193(25) Purchase and Sale Agreement dated October 6, 1999 between Preferred Equities Corporation and Covington Nevada Corp regarding the Sale of Calvada Championship Golf Course and Calvada Executive Golf Course. 10.194(25) Amendment No. One to Third Amended and Restated Promissory Note - Headquarters and FCFC Property dated November 9, 1999 between Preferred Equities Corporation and Finova Capital Corporation. 10.195(25) Amendment No. One to Promissory Note - Additional Advances dated November 9, 1999 between Preferred Equities Corporation and Finova Capital Corporation. 10.196(25) Third Amendment to Forbearance Agreement and Amendment No. 8 to Second Amended and Restated and Consolidated Loan and Security Agreement dated November 9, 1999, by and among Finova Capital Corporation, Preferred Equities Corporation, and Mego Financial Corp. 10.197(25) Fourth Amendment to Forbearance Agreement and Amendment No. 9 to Second Amended and Restated and Consolidated Loan and Security Agreement dated December 17, 1999 by and among Finova Capital Corporation, Preferred Equities Corporation, and Mego Financial Corp. 10.198(25) Second Amendment to Deed of Trust - Hartsel Springs Ranch dated December 17, 1999 by and among Preferred Equities Corporation and Finova Capital Corporation. 10.199(26) Fifth Amendment to Forbearance Agreement and Amendment Number 10 to Second Amended and Restated and Consolidated Loan and Security Agreement dated as of February 25, 2000 by and among FINOVA Capital Corporation, Preferred Equities Corporation, and Mego Financial Corp. 10.200(26) Eighth 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 January 31, 2000.
43 46 10.201(26) Amended, Restated and Increased Receivables Promissory Note No. 1 by Preferred Equities Corp. to Heller Financial, Inc. dated December 22, 1999. 10.202(26) Amended, Restated and Consolidated Acquisition Promissory Note No. 1 by Preferred Equities Corp. to Heller Financial, Inc. dated December 22, 1999. 10.203(26) Fourth Amendment to Interval Receivables Loan and Security Agreement dated December 22, 1999 between Heller Financial, Inc., and Preferred Equities Corporation. 10.204(26) Third Amendment to Acquisition and Construction Loan Agreement dated December 22, 1999 between Heller Financial, Inc., and Preferred Equities Corporation. 10.205(26) General Loan and Security Agreement (Inventory Loan) executed December 17, 1999 by and among Textron Financial Corp., Preferred Equities Corp. and Steamboat Suites, Inc. 10.206(26) General Loan and Security Agreement (Receivable Loan Facility) executed December 17, 1999 by and among Textron Financial Corp., Preferred Equities Corp. and Steamboat Suites, Inc. 10.207(26) Sixth Amendment to Forbearance Agreement and Amendment No. 11 to Second Amended and Restated and Consolidated Loan and Security Agreement dated March 31, 2000 by and among Finova Capital Corporation, Preferred Equities Corporation and Mego Financial Corp. 10.208(27) Amendment No. 4 to Severance Agreement and Consulting Agreement dated December 30, 1999 by and between Mego Financial Corp. and Don A. Mayerson. 10.209(27) Amendment No. 5 to Severance Agreement and Consulting Agreement dated May 20, 2000 by and between Mego Financial Corp. and Don A. Mayerson. 10.210 (27) Ninth 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 April 30,2000. 10.211 Seventh Amendment to Forbearance Agreement and Amendment No. 12 to Second Amended and Restated and Consolidated Loan and Security Agreement dated July 20, 2000 by and among FINOVA Capital Corporation, Preferred Equities Corporation and Mego Financial Corp. 10.212 Second Amendment to Loan and Security Agreement between Litchfield Financial Corporation and Preferred Equities Corporation dated July 15, 2000. 10.213 Tenth 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 31, 2000. 10.214 Fourth Amendment to Acquisition and Construction Loan Agreement dated September 7, 2000 between Heller Financial, Inc., and Preferred Equities Corporation. 10.215 ISDA Master Swap Agreement between Sovereign Bank and Preferred Equities Corporation dated August 31, 2000. 10.216 Five year extension of Licensing Agreement dated April 18, 1995, by and among Hospitality Franchise Systems, Inc., Ramada Franchise Systems, Inc. and Preferred Equities Corporation. 10.217 Extension of Loan and Security Agreement dated August 12, 1998 between Dorfinco Corporation and Preferred Equities Corporation to December 31, 2001. 10.218 Master Lease Agreement and Guaranty of Lease among Jozac Business Center, LLC, Landlord; Preferred Equities Corporation, Tenants; and Mego Financial Corporation, Guarantor, for 4310 Paradise Road, Las Vegas, NV dated October 2, 2000. 10.219 Master Lease Agreement and Guaranty of Lease among Jozac Business Center, LLC, Landlord; Preferred Equities Corporation, Tenants; and Mego Financial Corporation, Guarantor, for 1500 Tropicana, Las, Vegas, NV dated November 9, 2000. 10.220 Eleventh 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 November 15, 2000. 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. 44 47 (2) Filed as part of the Company's Form 10-K for fiscal year ended August 31, 1989 and incorporated herein by reference. (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. (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, 1997 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. (20) Filed as part of the Company's Form 10-Q for the quarter ended November 30, 1998 and incorporated herein by reference. (21) Filed as part of the Company's Form 10-Q for the quarter ended February 28, 1999 and incorporated herein by reference. (22) Filed as part of the Company's Form 10-Q for the quarter ended May 31, 1999 and incorporated herein by reference. (23) Filed as part of the Company's Form 10-K for the fiscal year ended August 31, 1998 and incorporated herein by reference. (24) Filed as part of the Company's Form 10K for the fiscal year ended August 31, 1999 and incorporated herein by reference. (25) Filed as part of the Company's Form 10-Q for quarter ended November 30, 1999 and incorporated herein by reference. (26) Filed as part of the Company's Form 10-Q for the quarter ended February 29, 2000 and incorporated herein by reference (27) Filed as part of the Company's Form 10-Q for the quarter ended May 31, 2000 and incorporated herein by reference. 45 48 (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. 46 49 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 27, 2000 By: /S/ JEROME J. COHEN ----------------- -------------------------------- Jerome J. Cohen, President 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 Board, Chief Executive November 27, 2000 - ------------------------------------- Officer and Director Robert Nederlander /S/ JEROME J. COHEN President and Director November 27, 2000 - ------------------------------------- Jerome J. Cohen /S/ HERBERT B. HIRSCH Senior Vice President, Chief Financial November 27, 2000 - ------------------------------------- Officer, Treasurer and Director Herbert B. Hirsch /S/ EUGENE I. SCHUSTER Vice President and Director November 27, 2000 - ------------------------------------- Eugene I. Schuster /S/ CHARLES G. BALTUSKONIS Senior Vice President and November 27, 2000 - ------------------------------------- Chief Accounting Officer Charles G. Baltuskonis /S/ WILBUR L. ROSS, JR. Director November 27, 2000 - ------------------------------------- Wilbur L. Ross, Jr. /S/ JOHN E. MCCONNAUGHY, JR. Director November 27, 2000 - ------------------------------------- John E. McConnaughy, Jr.
47 50 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, 2000 and 1999 ................ F-3 Consolidated Income Statements -- Years Ended August 31, 2000, 1999 and 1998 ..................................... F-4 Consolidated Statements of Stockholders' Equity -- Years Ended August 31, 2000, 1999 and 1998 ..................................... F-5 Consolidated Statements of Cash Flows -- Years Ended August 31, 2000, 1999 and 1998 ..................................... F-6 Notes to Consolidated Financial Statements ................................ F-7
F-1 51 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, 2000 and 1999, and the related consolidated income statements, statements of stockholders' equity, and statements of cash flows for each of the three years in the period ended August 31, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 2000, in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP San Diego, California November 22, 2000 F-2 52 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (thousands of dollars, except per share amounts)
AUGUST 31, ---------------------- 2000 1999 -------- -------- ASSETS Cash and cash equivalents $ 1,069 $ 1,821 Restricted cash 1,255 1,676 Notes receivable, net of allowance for cancellations and discounts of $13,234 and $14,340 at August 31, 2000 and 1999, respectively 83,156 69,300 Interest only receivables, at fair value 2,701 2,566 Timeshare interests held for sale 23,307 29,529 Land and improvements inventory 4,113 6,649 Other investments 4,492 5,111 Property and equipment, net of accumulated depreciation of $17,632 and $16,252 at August 31, 2000 and 1999, respectively 23,167 23,560 Deferred selling costs 5,231 4,285 Prepaid debt expenses 2,060 1,757 Other assets 18,041 12,707 -------- -------- TOTAL ASSETS $168,592 $158,961 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Notes and contracts payable $109,131 $104,555 Accounts payable and accrued liabilities 19,544 18,141 Reserve for notes receivable sold with recourse 4,033 4,162 Deposits 2,841 2,287 Accrued income taxes 2,975 3,505 -------- -------- Total liabilities before subordinated debt 138,524 132,650 -------- -------- Subordinated debt 4,286 4,478 Stockholders' equity: Preferred stock, $.01 par value (authorized--5,000,000 shares, none outstanding) -- -- Common stock, $.01 par value (authorized--50,000,000 shares; 3,500,557 shares issued and outstanding at August 31, 2000 and 1999) 35 35 Additional paid-in capital 13,068 13,068 Retained earnings 12,679 8,730 -------- -------- Total stockholders' equity 25,782 21,833 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $168,592 $158,961 ======== ========
F-3 53 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (thousands of dollars, except per share amounts)
FOR THE YEARS ENDED AUGUST 31, ----------------------------------------------- 2000 1999 1998 ----------- ----------- ----------- REVENUES Timeshare interest sales, net $ 49,062 $ 41,262 $ 37,713 Land sales, net 19,624 15,979 13,812 Gain on sale of notes receivable 635 -- 656 Gain on sale of investments and other assets 1,857 513 -- Interest income 12,430 9,310 7,161 Financial income 1,153 1,184 3,304 Incidental operations 2,033 2,597 2,831 Other 3,701 3,657 3,113 ----------- ----------- ----------- Total revenues 90,495 74,502 68,590 ----------- ----------- ----------- COSTS AND EXPENSES Direct cost of: Timeshare interest sales 10,518 8,527 7,375 Land sales 3,050 2,709 1,770 Incidental operations 1,698 2,274 2,644 Marketing and sales 39,769 35,291 34,167 Depreciation 1,827 1,878 2,245 Interest expense 12,468 9,270 7,850 General and administrative 17,746 14,333 17,736 ----------- ----------- ----------- Total costs and expenses of continuing operations 87,076 74,282 73,787 ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES 3,419 220 (5,197) INCOME TAXES (BENEFIT) (530) (830) (1,968) ----------- ----------- ----------- NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 3,949 $ 1,050 $ (3,229) =========== =========== =========== INCOME (LOSS) PER COMMON SHARE Basic: Net income (loss) applicable to common stock $ 1.13 $ 0.30 $ (0.92) =========== =========== =========== Weighted-average number of common shares and common share equivalents outstanding 3,500,557 3,500,557 3,500,557 =========== =========== =========== Diluted: Net income(loss) applicable to common stock $ 1.13 $ 0.30 $ (0.92) =========== =========== =========== Weighted-average number of common shares and common share equivalents outstanding 3,500,557 3,500,557 3,500,557 =========== =========== ===========
F-4 54 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (thousands of dollars, except share and per share amounts)
COMMON STOCK $.01 PAR VALUE ADDITIONAL ------------------------ PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL --------- --------- --------- --------- --------- Balances at September 1, 1997 3,500,557 $ 35 $ 34,699 $ 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 fiscal 1998 (3,229) (3,229) --------- --------- --------- --------- --------- Balances at August 31, 1998 3,500,557 35 12,964 7,680 20,679 Warrants issued 104 104 Net income fiscal 1999 1,050 1,050 --------- --------- --------- --------- --------- Balances at August 31, 1999 3,500,557 35 13,068 8,730 21,833 Net income fiscal 2000 3,949 3,949 --------- --------- --------- --------- --------- Balances at August 31, 2000 3,500,557 $ 35 $ 13,068 $ 12,679 $ 25,782 ========= ========= ========= ========= =========
F-5 55 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (thousands of dollars)
FOR THE YEARS ENDED AUGUST 31, -------------------------------------- 2000 1999 1998 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 3,949 $ 1,050 $ (3,229) -------- -------- -------- Adjustments to reconcile net income (loss) to net cash used in operating activities: Charges to allowance for cancellations (8,643) (5,987) (5,984) Provision for cancellations 7,354 5,626 4,827 Gain on sale of notes receivable (635) -- (656) Gain on sale of other investments (1,857) (513) -- Provision for uncollectible owner's association advances 200 -- (403) Cost of sales 13,568 11,236 9,145 Depreciation 1,827 1,979 2,245 Amortization of negative goodwill -- -- (53) Additions to interest only receivables (660) -- (523) Amortization of interest only receivables 525 801 452 Repayments on notes receivable 50,733 42,962 36,669 Additions to notes receivable (82,388) (64,112) (57,789) Proceeds from sales of notes receivable 19,594 -- 9,418 Purchase of land and timeshare interests (4,810) (3,651) (15,614) Changes in operating assets and liabilities: Decrease in restricted cash 421 18 355 Increase in other assets (5,179) (5,557) (1,103) Increase in deferred selling costs (946) (566) (566) Increase (decrease) in accounts payable and accrued liabilities 1,403 (632) 1,896 Increase (decrease) in deposits 554 (2,590) 1,894 Decrease in accrued income taxes (530) (963) (1,767) -------- -------- -------- Total adjustments (9,469) (21,949) (17,557) -------- -------- -------- Net cash used in operating activities (5,520) (20,899) (20,786) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (2,230) (1,589) (2,334) Proceeds from sale of property and equipment 1,617 -- 359 Proceeds from the sale of other investments 1,031 747 -- Additions to other investments (34) (950) (2,246) -------- -------- -------- Net cash provided by (used in) investing activities 384 (1,792) (4,221) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings $ 64,363 $ 59,047 $ 51,311 Reduction of debt (59,787) (36,478) (34,894) Payments on subordinated debt (192) (465) (640) Increase in subordinated debt -- 595 667 -------- -------- -------- Net cash provided by financing activities 4,384 22,699 16,444 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (752) 8 (8,563) CASH AND CASH EQUIVALENTS-BEGINNING OF YEAR 1,821 1,813 10,376 -------- -------- -------- CASH AND CASH EQUIVALENTS-END OF YEAR $ 1,069 $ 1,821 $ 1,813 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for interest net of amounts capitalized $ 12,339 $ 9,000 $ 7,595 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES Issuance of warrants $ -- $ 104 $ -- ======== ======== ========
F-6 56 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998) 1. NATURE OF OPERATIONS Mego Financial Corp. (Mego Financial) is a premier developer and operator of timeshare properties and a provider of consumer financing to purchasers of timeshare intervals and land parcels through its wholly-owned subsidiary, Preferred Equities Corporation (PEC), established in 1970. PEC is engaged 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 hypothecates and 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. 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 was a specialized consumer finance company that originated, purchased, sold, securitized and serviced 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). 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 April 1998, MMC owed the Company approximately $6,153,000, including the $5,283,000 due under the Tax Agreement at August 31, 1997. 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. 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 issuing 2 shares of its common stock to Mego Financial for a purchase price of approximately $50,000. Simultaneously 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, F-7 57 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 1995. The additional payments were collateralized by a pledge of PEC stock to the Assignors. See Note 10 for further discussion. 2. 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. Parent Company Only Basis--At August 31, 2000 and 1999, Mego Financial, on a "parent company only" basis, reflected total assets of $34,398,000 and $30,467,000, respectively, which were comprised principally of its equity investment in subsidiaries of $32,962,000 and $29,127,000, respectively, and liabilities of $4,187,000 and $4,156,000, respectively, excluding subordinated debt. At August 31, 2000 and 1999, liabilities were comprised principally of accrued income taxes of $2,975,000 and $3,505,000, respectively, excluding subordinated debt. At August 31, 2000 and 1999, subordinated debt of $4,286,000 and $4,478,000, respectively, was outstanding. See Notes 1, 10 and 17. 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. 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. 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 F-8 58 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 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 on the Balance Sheet in the amounts of $9,173,000 and $8,495,000 at August 31, 2000 and 1999, respectively. 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 $19,594,000, $0 and $9,418,000 for the years ended August 31, 2000, 1999 and 1998, 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 and is reviewed on a quarterly basis. At August 31, 2000 and 1999, the outstanding balance of notes receivable sold with recourse was $59,600,000 and $53,000,000, respectively. 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. See Note 11. 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 12 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 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, 2000, $1,445,000 of recognized sales remain subject to such F-9 59 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 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 the note's 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 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 Balance Sheet. 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 of 15% in each of fiscal years 2000, 1999 and 1998. 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. 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 Income Statement in General and Administrative Expenses. Management fees and costs received from the Associations are included in Revenues under the caption of Other. F-10 60 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 See Note 16. 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. In loss periods, or periods whereby the option and warrants' exercise price exceeds the average market price, anti-dilutive common share equivalents are excluded. Effective September 9, 1999, the Company consummated a one for six reverse stock split for all of the Company's common shares outstanding. All share and per share references have been restated to retroactively show the effect of this reverse stock split. 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. At August 31, 2000, options to purchase 51,652 shares of common stock at $6.00 per share were outstanding and warrants to purchase 83,333 shares of common stock at $6.00 per share were outstanding. The options and warrants were not included in the computation of diluted EPS because the options' and warrants' exercise price was greater than the average market price of the common shares. The options, which expire on September 2, 2002 through September 22, 2008, and the warrants, which expire on January 1, 2004, were still outstanding at August 31, 2000. Interest Rate Swap--In August 2000, the Company entered into a $25 million, 5-year, interest rate swap transaction with a financial institution to hedge potential exposure to its variable rate notes' payable portfolio. The interest rate swap is considered and is documented as a highly effective cash flow hedge. Therefore, beginning September 1, 2000, the unrealized gain or loss mark to market will be recorded into a separate Stockholders' Equity caption titled "Other Comprehensive Income". The unrealized depreciation as of August 31, 2000 was $255,000. The adoption of SFAS 133 (defined below) is not expected to have any additional effects on the Company's financial statements. Evaluation of Long-Lived Assets--Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to Be Disposed Of" required that impairment losses be recognized when the carrying value of an asset will not be recognizable based on future cash flows. The Company's policy is to evaluate, at each balance sheet date, the appropriateness of the carrying values of the unamortized balances of long-lived assets. If such evaluation were to indicate a material impairment of these assets, such impairment would be recognized by a write down of the applicable asset to its estimated fair value. Segment Information--In accordance with SFAS No. 131, the Company considers its business to consist of one reportable operating segment. The Company does not allocate revenues and expenses, or assets and liabilities, in a segmented format for internal use or decision-making processes. Recently Issued/Effective Accounting Standards--In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133 (SFAS 133) "Accounting for Derivative Instruments and Hedging Activities", which was amended by SFAS No. 137, issued in June 1999. SFAS 133 established standards for accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. SFAS 133, as amended, is effective for fiscal years beginning after June 15, 2000. The Company has not completed the process of evaluating the impact that will result from adopting SFAS 133, with the exception of the Interest Rate Swap transaction. Therefore, the Company is unable to disclose the impact that adopting SFAS 133, as amended, will have on its financial position and results of operations. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 140). SFAS 140 replaces FASB Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" and provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. SFAS 140 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after March 31, 2001 and is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 31, 2000. Management does not believe that the adoption of SFAS 140 will have a material effect on the financial statements. F-11 61 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." SAB 101 provides the SEC Staff's views in applying generally accepted accounting principles to selected revenue recognition issues. The Company has adopted SAB 101 during fiscal year 2000 and the adoption has not had a material effect on the financial statements. 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. 3. NOTES RECEIVABLE Notes receivable consist of the following (thousands of dollars):
AUGUST 31, ----------------------- 2000 1999 -------- -------- Related to timeshare sales $ 71,306 $ 52,174 Related to land sales 25,084 31,466 -------- -------- Total 96,390 83,640 -------- -------- Less: Allowance for cancellations (12,827) (13,987) Discounts (407) (353) -------- -------- (13,234) (14,340) -------- -------- Total $ 83,156 $ 69,300 ======== ========
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. These notes receivable are generally payable over a period of up to 12 years, bear interest at rates generally 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 $6,421,000 and $5,953,000 at August 31, 2000 and 1999, 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 tangible net worth requirements. The most restrictive of these agreements requires PEC to maintain a minimum tangible net worth of $25,000,000. PEC's tangible net worth at August 31, 2000 was $30,902,000. At August 31, 2000 and 1999, receivables aggregating $88,641,000 and $77,582,000, 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 9. F-12 62 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 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, -------------------------------------- 2000 1999 1998 -------- -------- -------- Balance at beginning of year $ 18,149 $ 18,488 $ 19,527 Provision for cancellations 7,354 5,626 4,827 Amounts charged to allowance for cancellations and reserve for notes receivable sold with recourse (8,643) (5,965) (5,866) -------- -------- -------- Balance at end of year $ 16,860 $ 18,149 $ 18,488 ======== ======== ======== Allowance for cancellations $ 12,827 $ 13,987 $ 11,868 Reserve for notes receivable sold with recourse 4,033 4,162 6,620 -------- -------- -------- Total $ 16,860 $ 18,149 $ 18,488 ======== ======== ========
Number of Notes Receivable Accounts Serviced--The number of notes receivable accounts serviced at August 31, 2000 and 1999, was 19,296 and 17,359, including 5,852 and 5,581, respectively, serviced for others. At August 31, 2000 and 1999, the amount of notes receivable with payment delinquencies of 90 days or more was $9,925,000 and $9,743,000, including $0 and $38,000, respectively, serviced for others. Notes Receivable Serviced and Originated--At August 31, 2000 and 1999, notes receivable serviced were $153,000,000 and $132,240,000, including $39,671,000 and $33,679,000, respectively, serviced for others. Notes receivable originated were $82,388,000 and $64,112,000 for the years ended August 31, 2000 and 1999, respectively. 4. INTEREST ONLY RECEIVABLES Activity in interest only receivables is as follows (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, ----------------------------- 2000 1999 -------- -------- Balance at beginning of year $ 2,566 $ 3,367 Additions 660 -- Amortization (525) (801) ------- ------- Balance at end of year $ 2,701 $ 2,566 ======= =======
As of August 31, 2000 and 1999, respectively, interest only receivables consisted of excess cash flows on sold loans totaling $59,588,000 and $53,797,000, yielding weighted-average interest rates of 12.6% and 12.5%, 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 2. 5. INVENTORIES Timeshare interests held for sale consist of the following (thousands of dollars):
AUGUST 31, -------------------- 2000 1999 ------- ------- Timeshare interests (including capitalized interest of $100 and $507 in fiscal 2000 and 1999, respectively) $18,755 $16,874 Timeshare interests not registered (including capitalized interest of $130 and $1,228 in fiscal 2000 and 1999, respectively) 4,552 12,655 ------- ------- $23,307 $29,529 ======= =======
F-13 63 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 At August 31, 2000 and 1999, 9,423 and 9,146 timeshare interests, respectively, were available for sale. 918 additional timeshare interests became available in November 2000. Timeshare units amounting to 14 and 62, representing 714 and 3,876 timeshare interests, at August 31, 2000 and 1999, respectively, were awaiting registration. 6. OTHER INVESTMENTS Other investments in the following locations, at lower of cost or market, consist of the following (thousands of dollars):
AUGUST 31, ------------------ 2000 1999 ------ ------ Water rights: Huerfano County, Colorado $ 548 $ 543 Nye County, Nevada 417 413 Land: Nye County, Nevada 1,108 1,435 Biloxi, Mississippi 2,080 2,380 Other 339 340 ------ ------ Total $4,492 $5,111 ====== ======
7. PROPERTY AND EQUIPMENT Property and equipment and related accumulated depreciation, consist of the following (thousands of dollars):
AUGUST 31, ----------------------- 2000 1999 -------- -------- Water and sewer systems $ 19,391 $ 18,438 Furniture and equipment 6,745 5,915 Buildings 9,737 9,868 Vehicles 3,051 2,840 Recreational facilities and equipment -- 1,050 Land 1,342 1,344 Leasehold improvements 533 357 -------- -------- 40,799 39,812 Less: Accumulated depreciation (17,632) (16,252) -------- -------- Total $ 23,167 $ 23,560 ======== ========
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 2000, 1999 and 1998 was $2,327,000, $2,112,000, and $2,035,000, respectively. Future minimum rental payments under operating leases are set forth below (thousands of dollars): F-14 64 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
FOR THE YEARS ENDING AUGUST 31, - ------------------------------- 2001 $ 2,073 2002 1,269 2003 273 2004 248 2005 199 Thereafter 875 -------- Total $ 4,937 ========
8. OTHER ASSETS Other assets consist of the following (thousands of dollars):
AUGUST 31, -------------------- 2000 1999 ------- ------- Trust deed's clearing account $ 4,450 $ 1,851 Sold receivables' reserves 2,922 2,198 Owners' association receivables 2,314 1,398 Prepaid expenses 1,527 901 Cash surrender value of split-dollar life insurance plan 1,411 1,330 Interest receivable 1,059 838 Deposits and impounds 973 696 Inventories 861 415 Ramada license 466 567 White Sands HOA maintenance fees receivable 424 448 Other 1,634 2,065 ------- ------- Total $18,041 $12,707 ======= =======
9. NOTES AND CONTRACTS PAYABLE The Company's debt consists of the following (thousands of dollars):
AUGUST 31, ---------------------- 2000 1999 -------- -------- BORROWINGS UNDER LINES OF CREDIT Notes collateralized by receivables Borrowings bearing interest at prime plus 2% $ 80,593 $ 67,457 Mortgages collateralized by real estate properties(1) Mortgages collateralized by the respective underlying assets with various repayment terms and variable rates of prime plus 2% to 3% and 90-day LIBOR plus 4.25% 26,619 34,114 -------- -------- Subtotal 107,212 101,571 OTHER Other mortgages collateralized by the respective underlying assets with various repayment terms and fixed interest rates of 8% and variable rates of prime plus 2% in 2000 and 2% to 3% in 1999 788 1,732 Installment contracts and other notes payable 1,131 1,252 -------- -------- Total $109,131 $104,555 ======== ========
The prime rate of interest was 9.50% and the 90-day LIBOR was 6.68% at August 31, 2000. F-15 65 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 In the preceding table, mortgages collateralized by real estate properties consists of the follows:
AUGUST 31, -------------------- 2000 1999 ------- ------- Acquisition and development loans $22,074 $24,930 Working capital loans 4,545 9,184 ------- ------- $26,619 $34,114 ======= =======
Lines of Credit--At August 31, 2000, PEC had arrangements with institutional lenders 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 lines of credit of up to an aggregate of $133.5 million. Such lines of credit are secured by timeshare and land receivables and mortgages. At August 31, 2000, an aggregate of $107.2 million was outstanding under such lines of credit, and $26.3 million was available for borrowing. Under the terms of these lines of credit, PEC may borrow 65% to 90% of the balances of the pledged timeshare and land receivables. PEC is required to comply with certain covenants under these agreements, which, among other things, require PEC to meet certain minimum tangible net worth requirements. The most stringent of such requirements provides that PEC maintain a minimum tangible net worth of $25 million. At August 31, 2000, PEC exceeded this net worth requirement by $5.9 million. Summarized lines of credit information and accompanying notes relating to these lines of credit outstanding at August 31, 2000, consist of the following (thousands of dollars):
OUTSTANDING BORROWING MAXIMUM (a) BALANCE AT BORROWING REVOLVING AUGUST 31, 2000 AMOUNTS EXPIRATION DATE MATURITY DATE INTEREST RATE - ------------------- ------------- ------------------- --------------- -------------------- $ 64,757 $ 75,000 (b) April 30, 2001 Various Prime + 2.0 - 2.25% ---------- --------- 15,733 15,000 (c) December 1, 2002 Various Prime + 2.0 % 4,960 11,500 (d) December 31, 2001 Various Prime + 2.0 - 3.00% ---------- --------- 20,693 26,500 Considered one borrowing line for the maximum amount. ---------- --------- 19,790 30,000 (e) June 30, 2001 Various Libor + 4.0 - 4.25% 1,972 1,972 (f) July 30, 2003 Prime + 2.25% ---------- --------- $ 107,212 $ 133,472 ========== =========
(a) When the revolver expires as shown, the loans convert to term loans with maturities as stated. In addition, management expects to extend the lines on similar terms. (b) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $25 million. Other restrictions, commencing with the fiscal quarter ended November 30, 1999, include: PEC's requirement to maintain costs and expenses for marketing and sales and general and administrative expenses relating to net processed sales for each fiscal quarter; PEC's requirement to maintain a minimum net processed sales requirement for each fiscal quarter; and PEC's requirement not to exceed a ratio of 4:1 of consolidated total liabilities to consolidated tangible net worth. At August 31, 2000, $52.2 million of loans secured by receivables were outstanding related to financings at prime plus 2%, of which $29.5 million of loans secured by land receivables mature May 15, 2010 and $22.7 million of loans secured by timeshare receivables mature May 15, 2007. The outstanding borrowing amount includes $6.4 million in mortgage financing maturing October 1, 2005 for the corporate office buildings, which amount was paid in full in November 2000, and a real estate loan with an outstanding balance of $1.2 million maturing December 31, 2000, all bearing interest at prime plus 2.25%. The remaining Acquisition and Development (A&D) loans, receivables loans and a resort lobby loan outstanding of $5.0 million are at prime plus 2% and mature at various dates through February 18, 2001. In December 1998, Finova Capital Corporation (FINOVA), PEC and Mego Financial entered into an Agreement under which FINOVA agreed to make a loan in the amount of $5,662,000 to PEC with an original maturity date of June 30, 1999, which date has been extended to December 31, 2000. Mego Financial guaranteed the loan and F-16 66 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 issued warrants (outstanding as of August 31, 2000) to FINOVA to purchase a total of 83,333 shares of common stock of Mego Financial at an exercise price of $6.00 per share, exercisable within a five-year period commencing January 1, 1999. The balance outstanding under this Agreement, which is included in the $64.8 million balance in the preceding table, was $1.2 million as of August 31, 2000. The fair market value of the warrants was estimated at $104,000 and is being amortized over the term of the Agreement. (c) 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, 2000, $6.3 million was outstanding under the A&D loan, which matures on June 30, 2004, and $9.4 million was outstanding under the receivables loan, which matures on May 31, 2004. (d) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $15 million. This credit line consists of receivable financing with a maturity date of May 31, 2004, under which $1.6 million was outstanding at August 31, 2000, and a real estate loan of $3.3 million with a maturity date of December 31, 2001. (e) 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, 2000, $2.4 million was outstanding under the A&D loans which have a maturity date of June 30, 2001 and bear interest at the 90-day London Interbank Offering Rate (LIBOR) plus 4.25%. The available receivable financings, of which $17.4 million was outstanding at August 31, 2000, are at 90-day LIBOR plus 4% and have a maturity date of June 5, 2005. (f) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $25 million. Maturities--Scheduled maturities of the Company's notes and contracts payable are as follows (thousands of dollars):
YEARS ENDING AUGUST 31, ----------------------- 2001.............................................. $ 17,958 2002.............................................. 2,633 2003.............................................. 5,937 2004.............................................. 12,382 2005.............................................. 17,388 Thereafter........................................ 52,833 ----------- $ 109,131 ===========
10. 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 166,666 shares of Mego Financial common stock, at an exercise price of $25.50 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 semi-annual payments of $1,429,000 plus interest, which commenced March 1, 1997. In connection with the exercise of Warrants, payments aggregating $4,250,000 were deemed paid and the semiannual payments were scheduled to resume in March 1999 (subsequently deferred until February 1, 2000) with a partial payment in September 1998. The final $4.29 million was scheduled to be paid in 3 equal installments on March 1, 1999, September 1, 1999 and March 1, 2000. In accordance with the Eleventh Amendment to Assignment and Assumption Agreement, the principal payments totaling $4.29 million have been deferred until March 1, 2001. Interest of $429,000 on Subordinated Debt was paid during each fiscal year 2000 and 1999. The F-17 67 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 Subordinated Debt is collateralized by a pledge of PEC's outstanding stock. See Notes 1 and 16. The following table represents Subordinated Debt activity (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, ------------------------------ 2000 1999 ----------- ---------- Balance at beginning of year $ 4,478 $ 4,348 Accreted interest 237 595 Less: Interest payments (429) (429) Principal paydowns -- (36) ------- ------- Balance at end of year $ 4,286 $ 4,478 ======= =======
11. 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 income tax benefits of $530,000, $830,000 and $1,968,000, respectively, in fiscal 2000, 1999 and 1998 are 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, certain income tax liability reserves recorded in prior periods were reversed, resulting in a deferred tax liability. 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, 2000 and 1999 are as follows (thousands of dollars):
AUGUST 31, -------------------- 2000 1999 ------- ------- Deferred tax liabilities Timing of revenue recognition $21,612 $14,368 Deferred tax assets: Difference between book and tax carrying value of assets $18,637 10,569 Other -- 294 ------- ------- $18,637 10,863 ------- ------- Net deferred income tax $ 2,975 $ 3,505 ======= =======
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): F-18 68 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
FOR THE YEARS ENDED AUGUST 31, ----------------------------------- 2000 1999 1998 ------- ------- ------- Income (loss) from continuing operations before income taxes $ 3,419 $ 220 $(5,197) ======= ======= ======= Tax at the statutory federal rate $ 1,162 $ 75 $(1,767) Decrease in income taxes resulting from application of NOL carryforwards and changes in certain income tax liability reserves (1,692) (905) (201) ------- ------- ------- Total $ (530) $ (830) $(1,968) ======= ======= =======
12. 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 generally at the cumulative rate of 20% per year for three years from the date of grant, and the remaining 40% at the end of the fourth year. 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 18,500 incentive and non-incentive stock options were granted under the Stock Option Plan. In addition, the exercise prices of 50,750 of options issued on September 2, 1997 were revised from $18.75 per share to $6.00 per share (restated for the one for six reverse stock split effective September 9, 1999), which represented the fair value at date of repricing. The following table sets forth shares reserved and options exercised, granted and forfeited for the following periods:
EXERCISE NUMBER OF PRICE PER RESERVE SHARES OPTIONS SHARE --------------- --------------- --------------- At September 1, 1997 94,000 7,500 $ 33.75 Exercised -- -- $ -- Forfeited -- (8,167) $ 18.75 / 33.75 Granted -- 58,073 $ 6.00 --------------- --------------- --------------- At August 31, 1998 94,000 57,406 $ 18.75 / 33.75 Exercised -- -- $ -- Forfeited -- (17,000) $ 15.00 / 52.50 Granted -- 18,500 $ 6.00 --------------- --------------- --------------- At August 31, 1999 94,000 58,906 $ 6.00 / 33.75 Exercised -- -- $ -- Forfeited -- (7,254) $ 6.00 / 33.75 Granted -- -- $ -- --------------- --------------- --------------- At August 31, 2000 94,000 51,652 $ 6.00 =============== =============== ===============
F-19 69 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 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) generally expire ten years subsequent to the award. A summary of the status of Mego Financial's stock options granted under the Stock Option Plan as of August 31, 2000, 1999 and 1998 and the changes during the year is presented below:
AUGUST 31, 2000 AUGUST 31, 1999 AUGUST 31, 1998 ----------------------- ---------------------- ---------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------- -------- ------- --------- ------- --------- Outstanding at beginning of year 58,906 $ 9.14 57,406 $ 9.22 7,500 $ 33.75 Granted -- -- 18,500 6.00 58,073 6.00 Exercised -- -- -- -- -- -- Forfeited (7,254) 31.50 17,000 6.00 8,167 6.00 ------- ------- ------- Outstanding at end of year 51,652 6.00 58,906 9.14 57,406 9.22 ======= ======= ======= Options exercisable at end of year 17,532 6.00 9,783 13.56 -- -- ======= ======= =======
The fair value of each option granted during fiscal 1999 and 1998 (none were granted during fiscal 2000) 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 35% and 65%, respectively, for the years ended August 31, 1999 and 1998; (3) risk-free interest rate of 6%; and, (4) expected life of 7 years. The weighted-average fair value of options granted during fiscal 2000, 1999 and 1998 was $0, $1.63 and $4.09, respectively. As of August 31, 2000, there were 51,652 options outstanding which have an exercise price of $6.00 per common share and a weighted-average remaining contractual life of 8 years. Had compensation cost for Mego Financial's fiscal 2000, 1999 and 1998 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 2000, 1999 and 1998 would approximate the pro forma amounts below (thousand of dollars, except per share amounts):
AUGUST 31, 2000 AUGUST 31, 1999 AUGUST 31, 1998 -------------------------- ------------------------- -------------------------- AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA ----------- --------- ----------- --------- ----------- --------- Net income (loss) applicable to common stock $ 3,949 $ 3,929 $ 1,050 $ 850 $ (3,229) $ (3,333) Net income (loss) per common share: Basic 1.13 1.12 0.30 0.24 (0.92) (0.95) Diluted 1.13 1.12 0.30 0.24 (0.92) (0.95)
13. 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 F-20 70 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 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, 2000 and 1999 are set forth below (thousands of dollars):
AUGUST 31, 2000 AUGUST 31, 1999 ------------------------- ------------------------ CARRYING ESTIMATED CARRYING ESTIMATED VALUE FAIR VALUE VALUE FAIR VALUE --------- ---------- --------- ---------- FINANCIAL ASSETS: Cash and cash equivalents(a) $ 1,069 $ 1,069 $ 1,821 $ 1,821 Notes receivable, net(b) 83,156 86,864 69,300 71,900 Interest only receivables(c) 2,701 2,701 2,566 2,566 Interest rate swap(d) -- (255) -- -- FINANCIAL LIABILITIES: Notes and contracts payable(e) 109,131 109,131 104,555 104,555 Subordinated debt(a) 4,286 4,286 4,478 4,478
(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 historical portfolio experience. (d) Fair value was estimated by obtaining a third-party quote. (e) 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 conditions, risk characteristics of various financial instruments and historical 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. 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. F-21 71 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 14. 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, 2000, 25.8%, 15.1% and 14.0%, respectively, of the dollar value of notes receivable serviced had been originated in California, Texas and Colorado. 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 $59,588,000 and 53,797,000 at August 31, 2000 and 1999, 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 financial institutions on notes receivable hypothecated or sold. The spread can be adversely affected after a note is originated and while it is held, by increases in the interest rate. 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. 15. TIMESHARE INTEREST SALES AND LAND SALES Timeshare interest sales, net--A summary of the components is as follows (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, -------------------------------------- 2000 1999 1998 -------- -------- -------- Timeshare interest sales $ 55,317 $ 45,830 $ 41,449 Less: Provision for cancellations (6,255) (4,568) (3,736) -------- -------- -------- Total $ 49,062 $ 41,262 $ 37,713 ======== ======== ========
Land sales, net--A summary of the components is as follows (thousands of dollars): F-22 72 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
FOR THE YEARS ENDED AUGUST 31, -------------------------------------- 2000 1999 1998 -------- -------- -------- Land sales $ 20,723 $ 17,037 $ 14,903 Less: Provision for cancellations (1,099) (1,058) (1,091) -------- -------- -------- Total $ 19,624 $ 15,979 $ 13,812 ======== ======== ========
The following table reflects the maturities of notes receivable from land sales for each of the five years after August 31, 2000 (thousands of dollars):
2001 2002 2003 2004 2005 ----------- ------------ ----------- ------------ ----------- Land notes receivable maturities $ 160 $ 918 $ 1,955 $ 365 $ 989
The range of interest rates are from 0% to 15.0% and the weighted-average interest rate at August 31, 2000 was 12.1%. The delinquency information related to land loans at August 31, 2000 is as follows (thousands of dollars):
PRINCIPAL BALANCE % OF LOANS SERVICED --------------------- ---------------------- 30 - 59 days $ 1,194 .8% 60 - 90 days 578 .4 Over 90 days 2,870 1.9
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, 2000. No material obligations for future improvements on land existed at August 31, 2000. 16. 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 $2,692,000, $2,540,000 and $2,388,000 in 2000, 1999 and 1998, respectively. Such fees were recorded in Revenues under the caption of Other. 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. 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 expenses at each of the resort facilities. The Company's share of the Association Assessments, based on unsold inventory owned, net of room income, was $1,581,000, $968,000 and $1,677,000 for 2000, 1999 and 1998, respectively, and have been recorded in Costs and Expenses under the caption of General and administrative. 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, 2000, and at the option of PEC, may be extended by PEC annually thereafter. In fiscal 2000, PEC financed a budget deficit of $90,000 and $63,000 for the Owners' Association at Indian Shores and Orlando, respectively. The Company 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 the Company in full for their timeshare interests. In F-23 73 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 exchange for the payment by the Company of such fees, the Associations assign their liens for non-payment 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 a quitclaim deed or forecloses on and acquires the timeshare interest for the amount of the lien and any related foreclosure costs. At August 31, 2000 and 1999, $2,314,000 and $1,398,000, respectively, was due from Owners Associations, and is included under the caption of Other assets. 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 1 and 10. During the years ended August 31, 2000 and 1999, respectively, approximately $429,000 and $465,000, including principal of $0 and $36,000, was paid to the Assignors. Subsequent to August 31, 2000, an advance of $100,000 at the interest rate of 10% was made to an affiliate of one of the Assignors against the amount owed to it. Subordinated Debt--See Note 10. 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 consolidated income tax returns, 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 $3,400,000 was paid by MMC 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 $6,153,000 indebtedness, since the major portion was no longer payable under the Tax Sharing and Indemnity Agreement between the Company and MMC. Under these agreements, MMC paid $1,574,000, which was separately owed to PEC. Following this transaction, MMC had no outstanding indebtedness to the Company. 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 year ended August 31, 1998, approximately $616,000 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. This agreement was terminated by agreement during fiscal 1998. Servicing Agreement between PEC and MMC. For the year ended August 31, 1998, MMC paid servicing fees to PEC of approximately $2,008,000. For the year ended August 31, 1998, MMC incurred interest expense in the amount of $29,000 related to fees payable to PEC for these services. The interest rate was based on PEC's average cost of funds and equaled 10.46% in 1998. As of August 31, 1998, PEC no longer serviced loans for MMC. 17. COMMITMENTS AND CONTINGENCIES Litigation--On August 27, 1998, an action was filed in Nevada District Court, County of Clark, No. A392585, by Robert and Jocelyne Henry, husband and wife individually and on behalf of all others similarly situated against PEC, PEC's wholly-owned subsidiary, Central Nevada Utilities Company (CNUC), and certain other defendants. The plaintiffs' complaint asked for class action relief claiming that PEC and CNUC were guilty of collecting certain betterment fees and not providing sewer and water lines to their property. The court determined that plaintiffs had not properly pursued their administrative remedies with the Nevada Public Utilities Commission (PUC) and dismissed plaintiffs' amended complaint, without prejudice. Notwithstanding plaintiffs' appeal of the dismissal, plaintiff filed for administrative relief with the PUC. On November 17, 1999, the PUC found that CNUC, the only defendant over which the PUC has jurisdiction, was not in violation of any duties owed the plaintiffs or otherwise in violation of CNUC's approved tariffs. Subsequent to the PUC's decision, plaintiffs voluntarily dismissed F-24 74 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 their appeal of the trial court's order dismissing their case without prejudice and directing plaintiffs to exhaust their administrative remedies. On May 4, 2000, plaintiffs refiled their complaint in Nevada District Court, naming all of the above parties with the exception of CNUC. The defendants have filed a motion to dismiss. As previously reported, the Company was named a defendant in three purported class actions filed by Christopher Dunleavy, Alan Peyser and Michael Nadler. A settlement agreement was approved by the Court in 1997, that had no material effect on the Company's Consolidated Financial Statements. On August 21, 2000, the Settlement Agreement became final, as no further appeal was taken since an appeal filed by Mr. Nadler that was denied on May 22, 2000. On August 9, 1999, an action was filed in Nevada District Court, County of Clark, No. A407152, by a dissident director and a former director of the Grand Flamingo Towers Owners Association purporting to act on behalf of the Association against PEC. The complaint alleges, among other things, breach of a fiduciary duty by the defendant with respect to the management agreement between the plaintiff and defendant. In particular, plaintiff is seeking rescission of the management agreement, an injunction requiring the defendant to turn over plaintiff's property held as plaintiff's manager, imposition of a constructive trust on plaintiffs funds and profits received and held by the defendant as plaintiff's manager, and an accounting of profits and property obtained by the defendant as plaintiff's manager. In August 2000, the Plaintiffs voluntarily dismissed this action with prejudice. In the general course of business the Company and PEC, at various times, have each 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. Future Improvements--Central Nevada Utilities Company (CNUC), a subsidiary, has issued performance bonds of $2,907,000 outstanding at August 31, 2000, 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. Contingencies--At August 31, 2000, 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 1994 and 1996 the Company issued guarantees of an equipment lease and an office lease on behalf of MMC on which claims have been made by the lessors. The Company believes that the entire amount of the claim will not be paid, but it has reserved on its books an amount which management believes is probable to be paid to satisfy the guarantees, and is included in the caption Accounts Payable and Accrued Liabilities on the Balance Sheet. 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 with certain minimums increasing each year. The initial term of the arrangement is five years and PEC has exercised its option to renew the arrangement for an additional term of five years, expiring December 31, 2005. 18. QUARTERLY FINANCIAL DATA (unaudited) The following tables reflect consolidated quarterly financial data for the Company for the fiscal years ended August 31, 2000 and 1999 (thousands of dollars, except share and per share amounts): F-25 75 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
FOR THE THREE MONTHS ENDED --------------------------------------------------------------- AUGUST 31, MAY 31, FEBRUARY 29, NOVEMBER 30, 2000 2000 2000 1999 ----------- ----------- ----------- ----------- REVENUES: Net timeshare interest and land sales $ 17,979 $ 19,228 $ 15,469 $ 16,010 Net gain on sale of investments and other assets 1,179 635 678 -- Interest income 3,132 3,255 3,172 2,871 Financial income and other 1,755 1,617 1,699 1,816 ----------- ----------- ----------- ----------- Total revenues 24,045 24,735 21,018 20,697 ----------- ----------- ----------- ----------- EXPENSES: Direct costs of timeshare interest and land sales 3,753 3,930 2,951 2,934 Operating expenses 16,634 16,216 13,948 14,242 Interest expense 3,295 3,194 3,113 2,866 ----------- ----------- ----------- ----------- Total expenses 23,682 23,340 20,012 20,042 ----------- ----------- ----------- ----------- Income before income taxes 363 1,395 1,006 655 Income taxes (530) -- -- -- ----------- ----------- ----------- ----------- Net income applicable to common stock $ 893 $ 1,395 $ 1,006 $ 655 =========== =========== =========== =========== INCOME PER COMMON SHARE: Basic: Net income applicable to common stock $ 0.26 $ 0.40 $ 0.29 $ 0.19 =========== =========== =========== =========== Weighted-average number of common shares 3,500,557 3,500,557 3,500,557 3,500,557 =========== =========== =========== =========== Diluted: Net income applicable to common stock $ 0.26 $ 0.40 $ 0.29 $ 0.19 =========== =========== =========== =========== Weighted-average number of common shares and common share equivalents outstanding 3,500,557 3,500,557 3,500,557 3,500,557 =========== =========== =========== ===========
F-26 76 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
FOR THE THREE MONTHS ENDED ---------------------------------------------------------------- AUGUST 31, MAY 31, FEBRUARY 28, NOVEMBER 30, 1999 1999 1999 1998 ----------- ----------- ----------- ----------- REVENUES: Net timeshare interest and land sales $ 16,869 $ 15,754 $ 12,077 $ 12,541 Net gain on sale of investments and other assets -- -- -- 513 Interest income 2,694 2,672 1,952 1,992 Financial income and other 1,861 1,901 1,857 1,819 ----------- ----------- ----------- ----------- Total revenues 21,424 20,327 15,886 16,865 ----------- ----------- ----------- ----------- EXPENSES: Direct costs of timeshare interest and land sales 3,280 3,260 2,362 2,334 Operating expenses 14,520 13,550 12,142 13,564 Interest expense 2,635 2,374 2,173 2,088 ----------- ----------- ----------- ----------- Total expenses 20,435 19,184 16,677 17,986 ----------- ----------- ----------- ----------- Income before income taxes 989 1,143 (791) (1,121) Income taxes (benefit) (180) -- (269) (381) ----------- ----------- ----------- ----------- Net income (loss) applicable to common stock $ 1,169 $ 1,143 $ (522) $ (740) =========== =========== =========== =========== INCOME (LOSS) PER COMMON SHARE: Basic: Net income (loss) applicable to common stock $ 0.33 $ 0.33 $ (0.15) $ (0.21) =========== =========== =========== =========== Weighted-average number of common share 3,500,557 3,500,557 3,550,557 3,500,557 =========== =========== =========== =========== Diluted: Net income (loss) applicable to common stock $ 0.33 $ 0.33 $ (0.15) $ (0.21) =========== =========== =========== =========== Weighted-average number of common shares and common share equivalents outstanding 3,500,557 3,500,557 3,550,557 3,500,557 =========== =========== =========== ===========
F-27 EX-10.211 2 a66375ex10-211.txt EXHIBIT 10.211 1 EXHIBIT 10.211 SEVENTH AMENDMENT TO FORBEARANCE AGREEMENT AND AMENDMENT NO. 12 TO SECOND AMENDED AND RESTATED AND CONSOLIDATED LOAN AND SECURITY AGREEMENT This Seventh Amendment to Forbearance Agreement and Amendment No. 12 to Second Amended and Restated and Consolidated Loan and Security Agreement ("Amendment") is made and entered into this ___ day of July, 2000 (the "Effective Date"), by and among FINOVA CAPITAL CORPORATION, a Delaware corporation ("FINOVA" or "Lender"), PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Borrower") and MEGO FINANCIAL CORP., a New York corporation ("Guarantor") and has reference to the following facts: A. Lender and Borrower entered into a Second Amended and Restated and Consolidated Loan and Security Agreement dated as of May 15, 1997 (the "Original Loan Agreement") that evidences a loan from Lender to Borrower. The Original Loan Agreement was amended by the Hartsel Springs Side Letter dated February 18, 1998 (the "First Amendment"); by the Letter Agreement [Biloxi Property] dated March 20, 1998 (the "Second Amendment"); by the Letter Agreement [Headquarters Readvance] dated September 29, 1998 (the "Third Amendment"); by the Amendment No. 4 to Second Amended and Restated and Consolidated Loan and Security Agreement dated November 6, 1998 (the "Fourth Amendment"); by that certain Forbearance Agreement and Amendment No. 5 to Second Amended and Restated and Consolidated Loan and Security Agreement dated December 23, 1998 ("Amendment 5"), as the same was amended by a Letter Agreement dated February 8, 1999 (the "Release Fee Letter") (the Amendment 5 and Release Fee Letter are collectively called the "Fifth Amendment"); by a First Amendment to Forbearance Agreement and Amendment No. 6 to Second Amended and Restated and Consolidated Loan and Security Agreement dated May 7, 1999 (the "Sixth Amendment"); by a Second Amendment to Forebearance Agreement and Amendment No. 7 to Second Amended and Restated and Consolidated Loan and Security Agreement dated August 6, 1999 (the "Seventh Amendment"); by a September 7, 1999 letter agreement regarding the Additional Advance Note (the "Additional Advance Letter"); by a Third Amendment to Forebearance Agreement and Amendment No. 8 to Loan and Security Agreement dated November 9, 1999 (the "Eighth Amendment"); by a letter agreement dated December 3, 1999 between the Borrower and Lender (the "Receivable Loan Lot Cap Letter"); by a Fourth Amendment to Forebearance Agreement and Amendment No. 9 to Loan and Security Agreement dated December 17, 1999 (the "Ninth Amendment"); by a Fifth Amendment to Forebearance Agreement and Amendment No. 10 to Loan and Security Agreement dated February 25, 2000 (the "Tenth Amendment"); and, a Sixth Amendment to Forbearance Agreement and Amendment No. 11 to Second Amended and Restated and Consolidated Loan Agreement (the "Eleventh Amendment"). The Original Loan Agreement, First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, Sixth Amendment, Seventh Amendment, Additional Advance Letter, Eighth 2 Amendment, the Receivable Loan Lot Cap Letter, Ninth Amendment, Tenth Amendment and Eleventh Amendment are collectively called the "Loan Agreement." Capitalized terms used in this Amendment which are defined in the Loan Agreement shall have the same meaning and definition when used herein. B. Borrower has requested the Lender to make certain modifications to the Loan Agreement and the Loan, which the Lender is willing to do, upon and subject to the terms and conditions set forth in this Amendment. Now, therefore, in consideration of the foregoing and for the good and valuable consideration provided herein, Lender, Borrower and Guarantor agree as follows: 1. On the Effective Date, Exhibit I-C of the Loan Agreement is deleted in its entirety and replaced with the Exhibit I-C that is attached to this Amendment, and by this reference incorporated herein. 2. The obligations of the Lender under this Amendment are conditioned upon the satisfaction of the following conditions: (a) This Amendment has been fully signed by the Borrower and Guarantor; (b) The Borrower executing and delivering to the Lender such additional documents or instruments as required and approved by the Lender so as to fully perfect the liens and security interest of Lender granted under the Loan Agreement and this Amendment; and (c) Borrower shall have reimbursed Lender for all of Lender's out-of-pocket costs and expenses including, without limitation, attorney's, engineers' and other consultants' fees and costs, incurred in connection with the documentation and closing of this Amendment. 3. Borrower and Guarantor each represents and warrants that: (a) All financial information and other documents it has provided to Lender in connection with this Amendment are true, complete and correct as of the date provided and the date hereof; (b) There exists no Event of Default or Incipient Default, after giving effect to the then applicable provisions of this Amendment and other than the Existing Events of Default and the Unsolidified Lot Sales Default; (c) After giving effect to this Amendment, there has been no material adverse change in any real property or in the business or financial condition 2 3 of Borrower and Guarantor since the date of the last financial statements submitted to Lender; and (d) After giving effect to this Amendment (including the disclosures contained herein) and the most recent financial and litigation reports supplied to Lender, all representations and warranties by Borrower and Guarantor remain true, complete, and correct, in all material respects as of the date hereof. 4. Guarantor acknowledges and agrees that (i) the Guarantee shall remain in full force and effect, (ii) 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 and shall include the obligations of the Borrower under this Amendment and any other documents and instruments executed by Borrower in connection with this Amendment and each of the other Documents, as amended through the date hereof and (iv) all terms, conditions and provisions set forth in this Amendment and any other documents and instruments executed by Borrower in connection with this Amendment and each of the other Documents, as amended through the date hereof, are hereby ratified, approved and confirmed. 5. Borrower and Guarantor acknowledge and agree that they have no defenses, counterclaims, setoffs, recoupments or other adverse claims or causes of action in tort, contract or of any other kind existing against Lender or with respect to the Documents, including without limitation, claims regarding the amount, validity, perfection, priority and enforceability of the Documents. 6. The Documents shall be deemed amended by the provisions of this Amendment, as and when applicable and any conflict or inconsistency between this Amendment and the Documents shall be resolved in favor of this Amendment. Except as so amended, all other consistent terms and conditions of the Documents will remain in full force and effect, and are hereby ratified and affirmed. 7. Except as may be 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 Amendment. This Amendment is not a novation, nor is it be construed as a release, waiver, extension of forbearance or modification of any of the terms, conditions, representations, warranties, covenants, rights or remedies set forth in any of the Documents, except as expressly stated herein. 8. This Amendment in no way acts as a waiver of any default of Borrower or as a release or relinquishment of any of the liens, security interests, rights or remedies securing payment and Performance of the Borrower's Obligations or the enforcement thereof. Such liens, security interests, rights and remedies are hereby ratified, confirmed, preserved, renewed and extended by Borrower in all respects. Further, Lender's execution of this Amendment shall not constitute a waiver (either express or implied) of the requirement that 3 4 any further forbearance under or modification of the Loan Agreement or any other Document shall require the express written approval of Lender. No such approval (either express or implied) has been given as of the date hereof. 9. Borrower and Guarantor acknowledge that Lender has performed, and is not in default of, its obligations under the Documents; that there are no offsets, defenses or counterclaims in tort, contract or otherwise, with respect to any of Borrower's or Guarantor's or other party's obligations under the Documents; and that Lender has not directed Borrower to pay or not pay any of Borrower's payables. 10. Borrower and Guarantor will execute and deliver such further instruments and do such things as in the judgment of Lender are necessary or desirable to effect the intent of this Amendment and to secure to Lender the benefits of all rights and remedies conferred upon Lender by the terms of this Amendment and any other documents executed in connection herewith. 11. If any provision of this Amendment is held to be unenforceable under present or future laws effective while this Amendment is in effect (all of which invalidating laws are waived to the fullest extent possible), the enforceability of the remaining provisions of this Amendment shall not be affected thereby. In lieu of each such unenforceable provision, there shall be added automatically as part of this Amendment a provision that is legal, valid and enforceable and is similar in terms to such unenforceable provisions as may be possible. 12. Any further discussions by and among Borrower, Guarantor and Lender, if any, and all such discussions in the past, together with any other actions or inactions taken by and among Borrower, Guarantor and Lender, shall not cause a modification of the Documents, establish a custom or waive (unless Lender made such express waiver in writing), limit or condition the rights and remedies of Lender under the Documents, all of which rights and remedies are expressly reserved. All of the provisions of the Documents, including, without limitation, the time of the essence provision, are hereby reiterated and if ever waived are hereby reinstated (unless Lender made such express waiver in writing), except as expressly provided herein. Notwithstanding anything to the contrary contained herein or in any other instrument executed by the parties and notwithstanding any other action or conduct undertaken by the parties on or before the date hereof, the agreements, covenants and provisions contained herein and the Loan Agreement shall constitute the only evidence of Lender's agreement to forbear or to modify the Loan Agreement. Accordingly, no express or implied consent to any further forbearances or modifications shall be inferred or implied by Lender's execution of this Amendment. The Loan Agreement and this Amendment, together with the other Documents, constitute the entire agreement and understanding among the parties relating to the subject matter hereof, and supersedes all prior proposals, negotiations, agreements and understandings relating to such subject matter. In entering into this Amendment, Borrower acknowledges that it is relying on no statement, representation, warranty, covenant or agreement of any kind made 4 5 by the Lender or any employee or agent of the Lender, except for the agreements of Lender set forth herein. 13. This Amendment shall not be binding upon Lender until accepted by Borrower and Guarantor as provided for below. This Amendment may be executed in counterpart, and any number of which have been executed by all parties shall be deemed to constitute one original. Lender, its attorneys and agents may also integrate into a single Amendment signature pages from separate counterpart Amendments. The telecopied signature of a person shall be deemed an original signature, may be relied upon by others and shall be binding upon the signer for all purposes provided however that Borrower, Guarantor or any person otherwise consenting hereto by telecopied signature shall confirm its telecopied signature by signing and returning to Lender a copy of this Amendment with an original signature. 14. Borrower's and Guarantor's representatives are experienced and knowledgeable business people and have been represented by independent legal counsel who are experienced in all matters relevant to this Amendment, including, but not limited to, bankruptcy and insolvency law. The parties hereto have accepted and agreed to this Amendment after being fully aware and advised of the effect and significance of all of its terms, conditions, and provisions. 15. Unless otherwise specifically stipulated elsewhere in the Documents, if a matter is left in the Documents or this Amendment to the decision, right, requirement, request, determination, judgment, opinion, approval, consent, waiver, satisfaction, acceptance, agreement, option or discretion of Lender, its employees, Lender's counsel or any agent for or contractor of Lender, such action shall be deemed to be exercisable by Lender or such other person in its sole and absolute discretion and according to standards established in its sole and absolute discretion. Without limiting the generality of the foregoing, "option" and "discretion" shall be implied by use of the words "if" or "may." 16. The Recitals in this Amendment are incorporated into the body hereof as fully set forth herein. 17. THIS AMENDMENT HAS BEEN EXECUTED AND DELIVERED AND SHALL BE PERFORMED IN THE STATE OF ARIZONA. THE PROVISIONS OF THIS AMENDMENT 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. EACH OF BORROWER, GUARANTOR AND LENDER: (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 THE DISTRICT OF ARIZONA, FOR THE PURPOSES OF SUIT, ACTION OR OTHER PROCEEDINGS ARISING OUT OF OR RELATING TO ANY DOCUMENT OR THE 5 6 SUBJECT MATTER THEREOF, OR, IF LENDER SHALL INITIATE SUCH ACTION, IN THE COURT IN WHICH SUCH ACTION IS INITIATED PROVIDED THAT SUCH COURT HAS JURISDICTION, AND THE CHOICE OF SUCH VENUE SHALL IN ALL INSTANCES BE AT LENDER'S ELECTION; 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 IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF THE ABOVE-NAMED COURTS, THAT SUCH SUIT, ACTION OR PROCEEDING IS BROUGHT IN ANY INCONVENIENT FORUM OR THAT THE VENUE OF SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER. EACH OF BORROWER, GUARANTOR AND LENDER HEREBY WAIVE THE RIGHT TO COLLATERALLY ATTACK ANY JUDGMENT OR ACTION IN ANY OTHER FORUM. [SIGNATURE PAGE FOLLOWS] 6 7 LENDER: FINOVA CAPITAL CORPORATION, a Delaware corporation By: ----------------------------------- Its: ------------------------------ BORROWER: PREFERRED EQUITIES CORPORATION, a Nevada corporation By: /s/ Jon A. Joseph ----------------------------------- Its: Vice President ------------------------------ Signed in the presence of: - -------------------------------------- GUARANTOR: MEGO FINANCIAL CORP., a New York corporation By: /s/ Jon A. Joseph ----------------------------------- Its: Vice President ------------------------------ Signed in the presence of: - -------------------------------------- 7 8 STATE OF NEVADA ) ) ss. County of Clark ) The foregoing instrument was acknowledged before me this 13th day of July 2000 by Jon A. Joseph as Vice President of PREFERRED EQUITIES CORPORATION, a Nevada corporation, on behalf of the corporation. Janese Doyle ------------------------------------ Notary Public My Commission Expires: May 21, 2003 STATE OF NEVADA ) ) ss. County of Clark ) The foregoing instrument was acknowledged before me this ____ day of July 2000, by Jon A. Joseph as Vice President of MEGO FINANCIAL CORP., a New York corporation, on behalf of the corporation. Janese Doyle ------------------------------------ Notary Public My Commission Expires: May 21, 2003 STATE OF ARIZONA ) ) ss. County of Maricopa ) This instrument was acknowledged before me this ___ day of July 2000, by ______________________, as _______________ of FINOVA CAPITAL CORPORATION, a Delaware corporation, on behalf of the corporation. ------------------------------------ Notary 8 EX-10.212 3 a66375ex10-212.txt EXHIBIT 10.212 1 EXHIBIT 10.212 SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT WHEREAS, on July 30, 1997, Preferred Equities Corporation, a Nevada corporation, having an address of and office at 4310 Paradise Road, Las Vegas, Nevada 89109-6597 (hereinafter referred to as "Borrower") entered into a Loan and Security Agreement (hereinafter referred to as the "Agreement") with Litchfield Financial Corporation, a Massachusetts corporation, having a mailing address of POB 488, Williamstown, Massachusetts 01267 (hereinafter referred to as "Lender"); and WHEREAS, on or about December 19, 1998, Borrower and Lender entered into a first amendment agreement revising the provisions of Section 1.1 of the Definition of Terms Section and Section 2.1(b) and Section 2.1(c) of the Loan Section of the Agreement; and WHEREAS, on or about August 6, 1999, Borrower and Lender entered into a certain Forbearance Agreement pursuant to which Lender forbore the enforcement of its rights to take possession of the Collateral (as defined in the Agreement), which rights arose as a result of the occurrence of certain Events of Default under the Agreement; and WHEREAS, Borrower and Lender have discussed and agreed to enter into a second amendment agreement revising the terms and provisions of the Agreement, to reinstate and amend provisions of the loan accommodation, to extend the Mortgage Loan Maturity Date, and to otherwise revise provisions of the Agreement as agreed to by the parties (hereinafter the Agreement, as amended, shall be referred to as the "Amended Agreement"). NOW, THEREFORE, Borrower and Lender hereby agree that: 1. The current outstanding Mortgage Loan principal balance is One Million Nine Hundred Seventy Two Thousand One Hundred Seventy and 57/100 Dollars ($1,972,170.57). 2. The Mortgage Loan shall be reinstated on the Effective Date (as hereinafter defined) and upon the compliance by Borrower with the terms of paragraph 6 hereof. 3. The definition of Mortgage Loan Maturity Date contained in Section 1.1 of the Amended Agreement shall be deleted in its entirety and the following shall be substituted in lieu therefore: MORTGAGE LOAN MATURITY DATE. July 30, 2003. 4. Section 2.5(a)(ii)(B) of the Amended Agreement shall be deleted in its entirety and the following shall be substituted in lieu therefore: (B) In addition to all other payments required herein, during such time as there is any outstanding principal balance due under the Mortgage Loan, upon the sale of -1- 2 each Interval, Borrower must make a principal reduction payment on the Mortgage Loan in an amount equal to $1,950.00 (each, a "RELEASE PAYMENT", and collectively, the "RELEASE PAYMENTS"). In addition to paying to Lender such Release Payments, upon the sale of each Interval, during such time as there is any outstanding principal balance due under the Mortgage Loan, Borrower shall also pay to Lender, as a fee and not in reduction of principal on the Mortgage Loan, a release fee ("RELEASE FEE") in the amount of $25.00. 5. Section 2.5(a)(ii)(C) of the Amended Agreement shall be deleted in its entirety and the following shall be substituted in lieu therefore: (C) In addition to the Release Payments, Borrower shall, on July 30, 2001 make a principal payment to Lender, if necessary, so that the outstanding principal balance of the Mortgage Loan after such principal payment is not greater than One Million Four Hundred Forty Seven Thousand One Hundred Seventy One and 57/100 Dollars ($1,447,171.57); and shall on July 30, 2002 make a principal payment to Lender, if necessary, so that the outstanding principal balance of the Mortgage Loan after such principal payment is not greater than Nine Hundred Twenty Two Thousand One Hundred Seventy One and 57/100 Dollars ($922,170.57); and shall on July 30, 2003 make a principal payment to Lender so that all sums due and owing to Lender under the Mortgage Loan have been paid. 6. This Second Amendment to Loan and Security Agreement shall be effective upon execution by Borrower and Lender and the receipt by Lender of the sum of Fifty Thousand Dollars ($50,000)(the "Effective Date"), which sum represents the fee payable to Lender for extending the Mortgage Loan Maturity Date and entering into this Second Amendment to Loan and Security Agreement and shall not otherwise constitute a payment of principal, interest or any other sums due under the Mortgage Loan and/or the Receivables Loan. Should the execution of this Second Amendment to Loan and Security Agreement and the receipt by Lender of the $50,000 payment, referred to herein, not occur by July 15, 2000, this Second Amendment to Loan and Security Agreement shall be null and void. 7. Borrower hereby warrants and represents that no Event of Default currently exists and that no event or condition exists which with the passage or lapse of time would become an Event of Default. 8. Borrower hereby re-affirms and re-alleges all Warranties and Representations contained in the Amended Agreement and confirms that all statements contained therein continue to be true, accurate and correct as of the date hereof. 9. Except as herein amended, all of the terms and provisions of the Amended Agreement shall remain in full force and effect. 10. Borrower and Lender agree that this Second Amendment to Loan and Security Agreement has been prepared by the mutual effort of both parties and that in the event of a conflict or interpretive question with respect to any term, provision or section contained in this Second -2- 3 Amendment to Loan and Security Agreement, this Second Amendment to Loan and Security Agreement shall not be construed more strictly against any one party than any other party; it being agreed that both Borrower and Lender have equally negotiated the terms thereof and hereof. IN WITNESS WHEREOF, the parties have executed this Second Amendment to Loan and Security Agreement on the day and year first above written. ATTEST: BORROWER: PREFERRED EQUITIES CORPORATION - ----------------------------------- Name: Its Secretary By ------------------------------------ Name: Title: Duly Authorized LENDER: LITCHFIELD FINANCIAL CORPORATION By: ------------------------------------ Name: Title: Duly Authorized -3- 4 The undersigned guarantor, Mego Financial Corp. hereby evidences its agreement, acknowledgement and consent to the foregoing amendments and revisions to the obligations of Preferred Equities Corporation to Litchfield Financial Corporation, re-affirms and re-alleges its guarantor's obligations to Litchfield Financial Corporation, all warranties and representations contained in the Guaranty Agreement executed by it and confirms that all statements contained therein continue to be true, accurate and correct as of the date hereof. GUARANTOR: MEGO FINANCIAL CORP. By: ----------------------------------- Name: Title: Duly Authorized STATE OF ) ) ss. ____________ COUNTY OF ) I HEREBY CERTIFY that on this ____th day of July, 2000, before me, the undersigned authority, personally appeared ___________ , to me known to be the _________________ of Preferred Equities Corporation, a Nevada corporation and he acknowledged before me that he executed the foregoing instrument as such officer for and on behalf of said corporation as his free act and deed and as the free act and deed of such corporation. ----------------------------------- Notary Public My commission expires: STATE OF ) ) ss. ____________ COUNTY OF ) I HEREBY CERTIFY that on this ____th day of July, 2000, before me, the undersigned authority, personally appeared ________________ , to me known to be the ____________ of Mego Financial Corp., a New York corporation and he acknowledged before me that he executed the foregoing instrument as such officer for and on behalf of said corporation as his free act and deed and as the free act and deed of such corporation. -------------------------------- Notary Public My commission expires: -4- 5 STATE OF ) ) ss. _____________ COUNTY OF ) I HEREBY CERTIFY that on this ___th day of July, 2000, before me, the undersigned authority, personally appeared ______________________ , to me known to be the _____________ of Litchfield Financial Corporation, a Massachusetts corporation and he acknowledged before me that he executed the foregoing instrument as such officer for and on behalf of said corporation as his free act and deed and as the free act and deed of such corporation. ------------------------------------ Notary Public My commission expires: -5- 6 SECOND AMENDED SECURED PROMISSORY NOTE/MORTGAGE LOAN $1,972,170.57 July 15, 2000 WHEREAS, on July 30, 1997, Preferred Equities Corporation, a Nevada corporation, having an address of and office at 4310 Paradise Road, Las Vegas, Nevada 89109-6597 (hereinafter referred to as "Borrower") entered into a Loan and Security Agreement (hereinafter referred to as the "Agreement") with Litchfield Financial Corporation, a Massachusetts corporation, having a current mailing address of 430 Main Street, Williamstown, Massachusetts 01267 (hereinafter referred to as "Lender"); and WHEREAS, on or about December 19, 1998, Borrower and Lender entered into a first amendment agreement revising the provisions of Section 1.1 of the Definition of Terms Section and Section 2.1(b) and Section 2.1(c) of the Loan Section of the Agreement; and WHEREAS, on or about August 6, 1999, Borrower and Lender entered into a certain Forbearance Agreement pursuant to which Lender forbore the enforcement of its rights to take possession of the Collateral (as defined in the Agreement, as amended), which rights arose as a result of the occurrence of certain Events of Default under the Agreement; and WHEREAS, the Agreement, as amended, is now further modified by the Second Amendment to Loan and Security Agreement dated of equal date hereof (hereinafter referred to as the "Amended Agreement"); and WHEREAS, Borrower is, as of the date hereof, indebted to Lender under the Mortgage Loan (as defined in the Amended Agreement) having a principal balance on this date of One Million Nine Hundred Seventy Two Thousand One Hundred Seventy and 57/100 Dollars ($1,972,170.57); and WHEREAS, Borrower has agreed to execute a promissory note, in form, scope and substance acceptable to Lender, to evidence the sums remaining due under the Mortgage Loan. NOW THEREFORE, Borrower and Lender agree that this Second Amended Secured Promissory Note/Mortgage Loan (hereinafter referred to as the "Mortgage Note") evidences the remaining due to Lender under the Mortgage Loan in accordance with the terms of the Amended Agreement. FOR VALUE RECEIVED, at the earlier of the Mortgage Loan Maturity Date (as defined in the Amended Agreement) or the occurrence of an Event of Default (as defined in the Amended Agreement), the undersigned, Preferred Equities Corporation, a Nevada corporation having an address of and office at 4310 Paradise Road, Las Vegas, Nevada 89109-6597, hereby promises to pay to the order of Litchfield Financial Corporation, a Massachusetts corporation, having an office -1- 7 at 430 Main Street, Williamstown, Massachusetts 01267 and having a mailing address of POB 488, Williamstown, Massachusetts 01267, in such coin or currency of the United States which shall be legal tender in payment of all debts and dues, public and private, at the time of payment, the principal sum of One Million Nine Hundred Seventy Two Thousand One Hundred Seventy and 57/100 Dollars ($1,972,170.57) or so much as shall from time to time remain outstanding, together with interest from date hereof at the rate set forth in the Amended Agreement, together with any and all fees, costs and expense due under the Amended Agreement. This Mortgage Note, together with a certain First Amended and Restated Secured Promissory Note/Receivables Loan dated December 19, 1998, each executed by Borrower in favor of Lender, has been issued by Borrower to Lender to evidence the Obligations (as defined in the Amended Agreement) due to Lender under the Amended Agreement. Interest, Principal, Release Payments and Release Fees shall all be payable as set forth in Section 2 of the Amended Agreement. This Mortgage Note may be prepaid in whole or in part in accordance with Section 2 of the Amended Agreement. Borrower, for itself and its legal representatives, successors and assigns, expressly waives presentment, protest, notice of dishonor, notice of nonpayment, notice of maturity, notice of protest, presentment for the purpose of accelerating maturity, diligence in collection and consents that Lender may release or surrender, exchange or substitute any real estate and/or personal property or other Collateral (as defined in the Amended Agreement) now held or which may hereafter be held as security for the payment of the Obligations, and may extend the time for payment, with the consent of Borrower or otherwise modify the terms of payment of any part or the whole of the debt evidenced hereby. This Second Amended Secured Promissory Note/Mortgage Loan has been issued pursuant to the Amended Agreement between Borrower and Lender of even date herewith, and all of the terms, covenants and conditions of said Amended Agreement (including all exhibits thereto) are hereby made part of this Second Amended Secured Promissory Note/Mortgage Loan and are deemed incorporated herein in full. Any Event of Default under the Amended Agreement shall entitle Lender to the remedies provided for in Section 9 of the Amended Agreement. This Second Amended Secured Promissory Note/Mortgage Loan shall be governed by, construed and enforced in accordance with the laws of the Commonwealth of Massachusetts. -2- 8 IN WITNESS WHEREOF, Borrower has caused this Second Amended Secured Promissory Note/Mortgage Loan to be signed in its corporate name and its corporate seal to be hereto affixed, by order of its Board of Directors. Preferred Equities Corporation By: ------------------------------------ Name: Title: Duly Authorized [CORPORATE SEAL] STATE OF ) ) ss. ____________ COUNTY OF ) I HEREBY CERTIFY that on this th day of July, 2000, before me, the undersigned authority, personally appeared _____________ , to me known to be the ______________ of Preferred Equities Corporation, a Nevada corporation and he acknowledged before me that he executed the foregoing instrument as such officer for and on behalf of said corporation as his free act and deed and as the free act and deed of such corporation. ------------------------------------ Notary Public My commission expires: -3- EX-10.213 4 a66375ex10-213.txt EXHIBIT 10.213 1 EXHIBIT 10.213 TENTH AMENDMENT TO ASSIGNMENT AND ASSUMPTION AGREEMENT This Tenth Amendment (the "Amendment") to Assignment and Assumption Agreement, by and between RER Corp., COMAY Corp., GROWTH REALTY INC. and H&H FINANCIAL, INC. (the "Assignors") and MEGO FINANCIAL CORP., formerly named Mego Corp., (the "Assignee") WITNESSETH: WHEREAS, the Assignors are parties to the Assignment Agreement dated October 25, 1987, with the Assignee, and the Assignment and Assumption Agreement, dated February 1, 1988, between the Assignors and the Assignee, which two agreements were amended by the Amendment to Assignment and Assumption Agreement dated July 29, 1988 and by the Second Amendment to Assignment and Assumption Agreement dated as of March 2, 1995, the Third Amendment to Assignment and Assumption Agreement dated as of August 20, 1997 and the Fourth, Fifth, Sixth, Seventh and Eighth Amendments to Assignment and Assumption Agreement dated as of February 26, 1999, May 28, 1999, August 9, 1999, November 20, 1999, and January 31, 2000, respectively, between the Assignors and the Assignee (collectively, the described agreements as so amended are hereinafter referred to as the "Assignment"); and WHEREAS, the Assignment fixed the date of January 31, 1995 as the date on which the accrual of amounts due to the Assignors under the Assignment would terminate, except for interest on any of such amounts which remained unpaid; and WHEREAS, the amount due the Assignors as of January 31, 1995 was $13,328,742.25, plus interest from January 28, 1995, in the amount of $9,322.57, collectively, and with interest from January 31, 1995 to March 2, 1995 (the "Amount Due"); and WHEREAS, $10,000,000 of the Amount Due was agreed to be considered subordinated debt (the "Subordinated Debt"), against which payments were made as follows: (i) $1,428,571.43 was paid on March 1, 1997 as scheduled, (ii) $4,250,000 was deemed paid by credit against the exercise price of certain warrants as is set forth in the Third Amendment, and (iii) $35, 714.28 was paid on September 1, 1998, leaving a remaining balance of the Subordinated Debt of $4,285,714.29; and WHEREAS, the balance of the Subordinated Debt continues to be secured by a pledge of all of the issued and outstanding common stock of Preferred Equities Corporation (and any distributions in respect thereto) pursuant to a Pledge and Security Agreement dated as of February 1, 1988 (the "Pledge Agreement") between the Assignee and the Assignors; and WHEREAS, interest on the Subordinated Debt has been paid through March 1, 2000; and 1 2 WHEREAS, under the terms of the Assignment, all of the principal in the amount of $4,285,714.29 will be due and payable on September 1, 2000; and WHEREAS, the Assignee has requested that the Assignors further defer the payment of principal of the Subordinated Debt payable on September 1, 2000, in the total amount of $4,285,714.29, to December 1, 2000. NOW THEREFORE, in consideration of the mutual covenants herein contained it is hereby agreed as follows: 1. The statements in the foregoing preamble are true and correct. 2. The payments previously deferred to September 1, 2000, totaling in the aggregate $4,285,714.29, and hereby deferred to December 1, 2000. 3. The Assignee and Assignors agree that all amounts due to Assignors pursuant to the Assignment as amended by this Amendment shall continue to be secured as set forth in the Pledge Agreement and that the Pledge Agreement remains in full force and effect. 4. The Assignee and Assignors agree that this Amendment is an amendment to the Assignment and not a novation, and that except as modified hereby, all terms and conditions of the Assignment, including but not limited to provisions with respect to the payment of interest and acceleration of the entire balance of principal and interest if any payment is not made within 30 days of its due date, shall remain in full force and effect. 5. It is agreed that this Amendment may be signed in counterparts, and all such counterparts in the aggregate shall constitute one agreement. IN WITNESS WHEREOF, the parties have duly executed this Amendment as of August 31, 2000. MEGO FINANCIAL CORP. H&H Financial, Inc By: /s/ Jerome J. Cohen By: /s/ Herbert Hirsch --------------------------- ------------------------------- Jerome J. Cohen, President Title: President RER CORP. Growth Realty Inc. By: /s/ Robert Nederlander By: /s/ Eugene Schuster --------------------------- ------------------------------- Title: President Title: C.E.O. Comay Corp By: /s/ Jerome J. Cohen --------------------------- Title: President 2 EX-10.214 5 a66375ex10-214.txt EXHIBIT 10.214 1 EXHIBIT 10.214 FOURTH AMENDMENT TO ACQUISITION AND CONSTRUCTION LOAN AGREEMENT THIS FOURTH AMENDMENT TO ACQUISITION AND CONSTRUCTION LOAN AGREEMENT (the "Third Amendment") is made as of the 7th day of September, 2000 by and between Heller Financial, Inc., a Delaware corporation ("Lender") whose address is 500 West Monroe Street, Chicago, Illinois 60661 and Preferred Equities Corporation, a Nevada corporation ("Borrower") whose address is 4310 Paradise Road, Las Vegas, Nevada 89109. WHEREAS, the parties entered into that certain Acquisition and Construction Loan Agreement dated March 27, 1996, as amended by that certain Amendment to Acquisition and Construction Loan Agreement dated December 23, 1997, that certain Second Amendment to Acquisition and Construction Loan Agreement dated July 7, 1998, and that certain Third Amendment to Acquisition and Construction Loan Agreement dated December 22, 1999 (collectively and as amended hereby, the "Agreement"); and WHEREAS, the parties desire to further amend the Agreement pursuant to the terms and conditions as set forth herein. NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein, the parties agree as follows: 1. The Recitals set forth above are true and correct and incorporated herein by reference. 2. Section 1.1 regarding Acquisition Commitment is hereby amended to provide that the term "Acquisition Commitment" shall be deemed to be increased hereby and include an additional One Million Dollars and No/100 ($1,000,000.00) which shall be hereafter referred to as the "Third Supplemental Acquisition Commitment" and shall be for the purpose of providing Borrower with additional working capital. 3. Section 1.2 regarding Acquisition Note is hereby amended to add to the end thereof the phrase "together with any and all promissory notes given to evidence funds advanced pursuant to the Third Supplemental Acquisition Commitment, and shall also include any and all amendments, modifications and substitutions thereof, including, but not limited to, that certain Future Advance Acquisition Promissory Note No. 4 dated as of September 7, 2000, in the amount of One Million Dollars and No/100 ($1,000,000.00) which shall be replaced by that certain Amended, Restated and Consolidated Acquisition Promissory Note No. 3 which shall evidence the Third Supplemental Acquisition Commitment in the amount of One Million Dollars and No/100 ($1,000,000.00) plus the outstanding balance of that certain Amended and Restated Acquisition 1 2 Promissory Note No. 2 dated February 1, 2000 in the original principal amount of Three Million Five Hundred Twenty-Eight Thousand One Hundred Sixty Dollars ($3,528,160.00)." 4. Section 1.21, Events of Default, is hereby amended to add the following: (p) Failure of the Borrower to maintain the Ratio of Indebtedness to Tangible Net Worth at or below 4.0:1.0. 5. Section 1.35, Interval Release Payment, is deleted in its entirety and replaced with the following: 1.35 Interval Release Payment. The term "Interval Release Payment" shall mean mandatory payments in the amount of Two Thousand Six Hundred Dollars and No/100 ($2,600.00) upon the sale of each Interval Unit, to be applied in the following manner: (i) Two Thousand One Hundred Dollars and No/100 ($2,100.00) per Interval Unit to be applied first to interest due and payable and then to the principal balance outstanding from time to time under the Acquisition Commitment, (ii) Five Hundred Dollars and No/100 ($500.00) per Interval Unit to be applied first to interest due and payable and then to the principal balance outstanding from time to time under the Renovation Commitment, and (iii) in the event that no interest is due or principal balance is outstanding under either (i) or (ii) above, then the entire Interval Release Payment shall be applied to the interest due and payable and then to the principal balance outstanding under the remaining Commitment. The sale of such Interval Units may be by (i) direct cash payment to Borrower, or (ii) installment purchase financed by Borrower or third parties. Upon the making of these Interval Release Payments and the Interval Incentive Fee and provided Borrower is not in default hereunder, Lender shall release such Interval Unit from the Mortgage. 6. Section 1.38 regarding Loan is deleted in its entirety and replaced by the following: The term "Loan" shall mean the loan by Lender to Borrower, in the maximum amount of the Acquisition and Renovation Commitment, not to exceed, in the aggregate, the advance of (a) the lesser of Eight Million Eight Hundred Five Thousand Dollars and No/100 ($8,805,000.00) or 90% of the costs of acquisition of the Property plus (b) 100% of the costs of labor, materials, and services supplied for the construction of the Improvements and all other expenses incident to construction of the Property, as to each item only to the extent specified in the Approved Budget which amount shall not exceed a total of Four Million Five Hundred Twenty-Three Thousand Dollars and No/100 ($4,523,000.00) over the term of the Loan and shall not exceed the amount of Two Million Five Hundred Thousand Dollars and No/100 ($2,500,000.00) outstanding at any one time. 2 3 7. Section 1.39 regarding Loan Commitment is deleted in its entirety and replaced by the following: The term "Loan Commitment" shall mean a maximum of Thirteen Million Three Hundred Twenty-Eight Thousand Dollars and No/100 ($13,328,000.00), which is the maximum amount of Advances of the Loan which Lender may be obligated to make under this Loan Agreement, and is comprised of the Acquisition Commitment and the Renovation Commitment. 8. Section 1.42 regarding Net Worth is deleted in its entirety and replaced by the following: The term "Net Worth" shall mean consolidated tangible net worth in the amount of Twenty-Five Million Dollars and No/100 ($25,000,000.00) and, upon delivery of Borrower's audited financial statements for each year commencing with fiscal year 2000, the amount of Twenty-Five Million Dollars and No/100 ($25,000,000.00) plus sixty percent (60%) of Borrower's aggregate net income for the most recently reported fiscal year, as determined on an accrual basis, including provision for all income taxes (current and deferred) in accordance with GAAP without taking into consideration any sums due Borrower from Guarantor. 9. Article 1, Definitions, is amended to include the following: The term "Ratio of Indebtedness to Tangible Net Worth" shall mean the ratio of (a) Borrower's current and long-term notes payable, determined in accordance with GAAP to (b) Borrower's Net Worth. 10. Section 1.51 regarding Title Insurance is hereby amended to provide for a title insurance policy in the amount of Fourteen Million Three Hundred Five Thousand and No/100 Dollars ($14,305,000.00). 11. Section 2.1 regarding Commitment of Lender is hereby amended to provide that the term of the of the Acquisition Loan shall be until June 30, 2002. 3 4 12. Section 4.1(b) regarding Mandatory Payments is hereby deleted and replaced with the following: So long as there is any indebtedness outstanding under the Acquisition Note or the Renovation Note, if during the period of the Loan Agreement ending on the following dates ("Ending Dates"), the outstanding principal balance of the Loan evidenced by such notes exceeds the following amounts ("Maximum Principal Balance"), the Borrower shall pay the amount of such excess immediately to Lender:
Ending Dates Maximum Principal Balance - ------------ ------------------------- November 30, 2000 $3,360,761.00 February 28, 2001 $2,814,761.00 May 31, 2001 $2,268,761.00 August 31, 2001 $1,722,761.00 November 30, 2001 $1,176,761.00 February 28, 2002 $ 630,761.00 May 31, 2002 $ 84,761.00 June 30, 2002 $ 0.00.
13. Section 6.16 regarding Commitment Fee is hereby amended by adding the following thereto: Borrower has agreed to pay Lender a commitment fee in the amount of one percentage point in connection with the Third Supplemental Acquisition Commitment, in accordance with which the amount of Ten Thousand Dollars and No/100 ($10,000.00) shall be withheld by Lender from disbursement of the Third Supplemental Acquisition Commitment. 14. In connection with this Amendment, Borrower hereby certifies that (a) all Borrower's representations, warranties, covenants and agreements contained in the Agreement are true and correct and in full force and effect as of the date hereof with the exception that (i) the Financial Statements referenced in Section 3.3 of the Agreement are true, correct and complete as reflected in the quarterly financial report dated May 31, 2000, and the monthly financial report dated June 30, 2000, and (ii) there are no material adverse changes to the information reflected in the disclosure of litigation matters concerning PEC and dated October 6, 1999, (b) as of the date hereof there are no Events of Default thereunder, and (c) all of the Loan Instruments as defined therein are in full force and effect. 15. Except as modified by this Amendment, all other terms and conditions of the Agreement and other Loan Instruments shall remain in full force and effect. Should Borrower 4 5 currently be in default under the Agreement, which default would not have existed if this Amendment were effective, such default is hereby waived. 16. As consideration for, and as a mutual inducement to Lender entering into this Amendment, Borrower hereby waives and releases any and all setoffs, counterclaims and defenses it has of the date hereof with respect to the Loans and performance by Lender under the Loan Instruments, and hereby acknowledges that Lender has fully performed all of its obligations and is not in default under the Loan Instruments. Execution of this Amendment shall not be deemed to constitute a waiver or release by Lender of any its rights or remedies under the Loan Instruments. IN WITNESS whereof the parties have executed this Agreement as of the date above. PREFERRED EQUITIES CORPORATION, HELLER FINANCIAL, INC., a a Nevada corporation Delaware corporation By: /s/ CHARLES G. BALTUSKONIS By: - ------------------------------- --------------------------- CHARLES G. BALTUSKONIS - ------------------------------- --------------------------- Print Name Print Name Its: VP/CAO Its: --------------------------- ----------------------- APPROVED BY GUARANTOR: MEGO FINANCIAL CORP., a New York corporation By: /s/ CHARLES G. BALTUSKONIS ----------------------------------- CHARLES G. BALTUSKONIS -------------------------------------- Print Name Its: VP/CAO ---------------------------------- 5 EX-10.215 6 a66375ex10-215.txt EXHIBIT 10.215 1 EXHIBIT 10.215 (Multicurrency--Cross Border) ISDA(R) International Swap Dealers Association, Inc. MASTER AGREEMENT Dated as of 07/12/00 SOVEREIGN BANK and PREFERRED EQUITIES CORPORATION have entered and/or anticipate entering into one or more transactions (each a "Transaction") that are or will be governed by this Master Agreement, which includes the schedule (the "Schedule"), and the documents and other confirming evidence (each a "Confirmation") exchanged between the parties confirming those Transactions. Accordingly, the parties agree as follows: -- 1. INTERPRETATION (a) Definitions. The terms defined in Section 14 and in the Schedule will have the meanings therein specified for the purpose of this Master Agreement. (b) Inconsistency. In the event of any inconsistency between the provisions of the Schedule and the other provisions of this Master Agreement, the Schedule will prevail. In the event of any inconsistency between the provisions of any Confirmation and this Master Agreement (including the Schedule), such Confirmation will prevail for the purpose of the relevant Transaction. (c) Single Agreement. All Transactions are entered into in reliance on the fact that this Master Agreement and all Confirmations form a single agreement between the parties (collectively referred to as this "Agreement"), and the parties would not otherwise enter into any Transactions. 2. OBLIGATIONS (a) General Conditions. (i) Each party will make each payment or delivery specified in each Confirmation to be made by it, subject to the other provisions of this Agreement. (ii) Payments under this Agreement will be made on the due date for value on that date in the place of the account specified in the relevant Confirmation or otherwise pursuant to this Agreement, in freely transferable funds and in the manner customary for payments in the required currency. Where settlement is by delivery (that is, other than by payment), such delivery will be made for receipt on the due date in the manner customary for the relevant obligation unless otherwise specified in the relevant Confirmation or elsewhere in this Agreement. (iii) Each obligation of each party under Section 2(a)(i) is subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing, (2) the condition precedent that no Early Termination Date in respect of the relevant Transaction has occurred or been effectively designated and (3) each other applicable condition precedent specified in this Agreement. Copyright (C) 1992 by International Swap Dealers Association. Inc. 1 2 (b) Change of Account. Either party may change its account for receiving a payment or delivery by giving notice to the other party at least five Local Business Days prior to the scheduled date for the payment or delivery to which such change applies unless such other party gives timely notice of a reasonable objection to such change. (c) Netting. If on any date amounts would otherwise be payable: --- (i) in the same currency; and (ii) in respect of the same Transaction, by each party to the other, then, on such date, each party's obligation to make payment of any such amount will be automatically satisfied and discharged and, if the aggregate amount that would otherwise have been payable by one party exceeds the aggregate amount that would otherwise have been payable by the other party, replaced by an obligation upon the party by whom the larger aggregate amount would have been payable to pay to the other party the excess of the larger aggregate amount over the smaller aggregate amount. The parties may elect in respect of two or more Transactions that a net amount will be determined in respect of all amounts payable on the same date in the same currency in respect of such Transactions, regardless of whether such amounts are payable in respect of the same Transaction. The election may be made in the Schedule or a Confirmation by specifying that subparagraph (ii) above will not apply to the Transactions identified as being subject to the election, together with the starting date (in which case subparagraph (ii) above will not, or will cease to, apply to such Transactions from such date). This election may be made separately for different groups of Transactions and will apply separately to each pairing of Offices through which the parties make and receive payments or deliveries. (d) Deduction or Withholding for Tax. (i) Gross-Up. All payments under this Agreement will be made without any deduction or withholding for or on account of any Tax unless such deduction or withholding is required by any applicable law, as modified by the practice of any relevant governmental revenue authority, then in effect. If a party is so required to deduct or withhold, then that party ("X") will:-- (1) promptly notify the other party ("Y") of such requirement: (2) pay to the relevant authorities the full amount required to be deducted or withheld (including the full amount required to be deducted or withheld from any additional amount paid by X to Y under this Section 2(d)) promptly upon the earlier of determining that such deduction or withholding is required or receiving notice that such amount has been assessed against Y: (3) promptly forward to Y an official receipt (or a certified copy), or other documentation reasonably acceptable to Y, evidencing such payment to such authorities; and (4) if such Tax is an Indemnifiable Tax, pay to Y, in addition to the payment to which Y is otherwise entitled under this Agreement, such additional amount as is necessary to ensure that the net amount actually received by Y (free and clear of Indemnifiable Taxes, whether assessed against X or Y) will equal the full amount Y would have received had no such deduction or withholding been required. However, X will not be required to pay any additional amount to Y to the extent that it would not be required to be paid but for: -- (A) the failure by Y to comply with or perform any agreement contained in Section 4(a)(i), 4(a)(iii) or 4(d); or (B) the failure of a representation made by Y pursuant to Section 3(f) to be accurate and true unless such failure would not have occurred but for (I) any action taken by a taxing authority, or brought in a court of competent jurisdiction, on or after the date on which a Transaction is entered into (regardless of whether such action is taken or brought with respect to a party to this Agreement) or (II) a Change in Tax Law. 2 3 (ii) Liability. If:-- (1) X is required by any applicable law, as modified by the practice of any relevant governmental revenue authority, to make any deduction or withholding in respect of which X would not be required to pay an additional amount to Y under Section 2(d)(i)(4); (2) X does not so deduct or withhold; and (3) a liability resulting from such Tax is assessed directly against X, then, except to the extent Y has satisfied or then satisfies the liability resulting from such Tax, Y will promptly pay to X the amount of such liability (including any related liability for interest, but including any related liability for penalties only if Y has failed to comply with or perform any agreement contained in Section 4(a)(i), 4(a)(iii) or 4(d)). (e) Default Interest; Other Amounts. Prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party that defaults in the performance of any payment obligation will, to the extent permitted by law and subject to Section 6(c), be required to pay interest (before as well as after judgment) on the overdue amount to the other party on demand in the same currency as such overdue amount, for the period from (and including) the original due date for payment to (but excluding) the date of actual payment, at the Default Rate. Such interest will be calculated on the basis of daily compounding and the actual number of days elapsed. If, prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party defaults in the performance of any obligation required to be settled by delivery, it will compensate the other party on demand if and to the extent provided for in the relevant Confirmation or elsewhere in this Agreement. 3. Representations Each party represents to the other party (which representations will be deemed to be repeated by each party on each date on which a Transaction is entered into and, in the case of the representations in Section 3(f), at all times until the termination of this Agreement) that:-- (a) Basic Representations. (i) Status. It is duly organized and validly existing under the laws of the jurisdiction of its organization or incorporation and, if relevant under such laws, in good standing; (ii) Powers. It has the power to execute this Agreement and any other documentation relating to this Agreement to which it is a party, to deliver this Agreement and any other documentation relating to this Agreement that it is required by this Agreement to deliver and to perform its obligations under this Agreement and any obligations it has under any Credit Support Document to which it is a party and has taken all necessary action to authorize such execution, delivery and performance; (iii) No Violation or Conflict. Such execution, delivery and performance do not violate or conflict with any law applicable to it, any provision of its constitutional documents, any order or judgment of any court or other agency of government applicable to it or any of its assets or any contractual restriction binding on or affecting it or any of its assets; (iv) Consents. All governmental and other consents that are required to have been obtained by it with respect to this Agreement or any Credit Support Document to which it is a party have been obtained and are in full force and effect and all conditions of any such consents have been complied with: and (v) Obligations Binding. Its obligations under this Agreement and any Credit Support Document to which it is a party constitute its legal, valid and binding obligations, enforceable in accordance with their respective terms (subject to applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting creditors' rights generally and subject, as to enforceability, to equitable principles of general application (regardless of whether enforcement is sought in a proceeding in equity or at law)). 3 4 (b) Absence of Certain Events. No Event of Default or Potential Event of Default or, to its knowledge, Termination Event with respect to it has occurred and is continuing and no such event or circumstance would occur as a result of its entering into or performing its obligations under this Agreement or any Credit Support Document to which it is a party. (c) Absence of Litigation. There is not pending or, to its knowledge, threatened against it or any of its Affiliates any action, suit or proceeding at law or in equity or before any court, tribunal, governmental body, agency or official or any arbitrator that is likely to affect the legality, validity or enforceability against it of this Agreement or any Credit Support Document to which it is a party or its ability to perform its obligations under this Agreement or such Credit Support Document. (d) Accuracy of Specified Information. All applicable information that is furnished in writing by or on behalf of it to the other party and is identified for the purpose of this Section 3(d) in the Schedule is, as of the date of the information, true, accurate and complete in every material respect. (e) Payer Tax Representation. Each representation specified in the Schedule as being made by it for the purpose of this Section 3(e) is accurate and true. (f) Payee Tax Representations. Each representation specified in the Schedule as being made by it for the purpose of this Section 3(f) is accurate and true. 4. Agreements Each party agrees with the other that, so tong as either party has or may have any obligation under this Agreement or under any Credit Support Document to which it is a party:-- (a) Furnish Specified Information. It will deliver to the other party or, in certain cases under subparagraph (iii) betow, to such government or taxing authority as the other party reasonably directs:-- (i) any forms, documents or certificates relating to taxation specified in the Schedule or any Confirmation: (ii) any other documents specified in the Schedule or any Confirmation; and (iii) upon reasonable demand by such other party, any form or document that may be required or reasonably requested in writing in order to allow such other party or its Credit Support Provider to make a payment under this Agreement or any applicable Credit Support Document without any deduction or withholding for or on account of any Tax or with such deduction or withholding at a reduced rate (so tong as the completion, execution or submission of such form or document would not materially prejudice the legal or commercial position of the party in receipt of such demand), with any such form or document to be accurate and completed in a manner reasonably satisfactory to such other party and to be executed and to be delivered with any reasonably required certification, in each case by the date specified in the Schedule or such Confirmation or, if none is specified, as soon as reasonably practicable. (b) Maintain Authorizations. It will use all reasonable efforts to maintain in full force and effect all consents of any governmental or other authority that arc required to be obtained by it with respect to this Agreement or any Credit Support Document to which it is a party and will use all reasonable efforts to obtain any that may become necessary in the future. (c) Comply with Laws. It will comply in all material respects with all applicable laws and orders to which it may be subject if failure so to comply would materially impair its ability to perform its obligations under this Agreement or any Credit Support Document to which it is a party. (d) Tax Agreement. It will give notice of any failure of a representation made by it under Section 3(f) to be accurate and true promptly upon learning of such failure. (e) Payment of Stamp Tax. Subject to Section 11, it will pay any Stamp Tax levied or imposed upon it or in respect of its execution or performance of this Agreement by a jurisdiction in which it is incorporated, organized, managed and controlled, or considered to have its seat, or in which a branch or office through which it is acting for the purpose of this Agreement is located ("Stamp Tax Jurisdiction") and will indemnify the other party against any Stamp Tax levied or 4 5 imposed upon the other party or in respect of the other party's execution or performance of this Agreement by any such Stamp Tax Jurisdiction which is not also a Stamp Tax Jurisdiction with respect to the other party. 5. Events of Default and Termination Events (a) Events of Default. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any of the following events constitutes an event of default (an "Event of Default") with respect to such party:-- (i) Failure to Pay or Deliver. Failure by the party to make, when due, any payment under this Agreement or delivery under Section 2(a)(i) or 2(e) required to be made by it if such failure is not remedied on or before the third Local Business Day after notice of such failure is given to the party; (ii) Breach of Agreement. Failure by the party to comply with or perform any agreement or obligation (other than an obligation to make any payment under this Agreement or delivery under Section 2(a)(i) or 2(e) or to give notice of a Termination Event or any agreement or obligation under Section 4(a)(i), 4(a)(iii) or 4(d)) to be complied with or performed by the party in accordance with this Agreement if such failure is not remedied on or before the thirtieth day after notice of such failure is given to the party; (iii) Credit Support Default. (1) Failure by the party or any Credit Support Provider of such party to comply with or perform any agreement or obligation to be complied with or performed by it in accordance with any Credit Support Document if such failure is continuing after any applicable grace period has elapsed; (2) the expiration or termination of such Credit Support Document or the failing or ceasing of such Credit Support Document to be in full force and effect for the purpose of this Agreement (in either case other than in accordance with its terms) prior to the satisfaction of all obligations of such party under each Transaction to which such Credit Support Document relates without the written consent of the other party; or (3) the party or such Credit Support Provider disaffirms, disclaims, repudiates or rejects, in whole or in part. or challenges the validity of, such Credit Support Document: (iv) Misrepresentation. A representation (other than a representation under Section 3(e) or (f)) made or repeated or deemed to have been made or repeated by the party or any Credit Support Provider of such party in this Agreement or any Credit Support Document proves to have been incorrect or misleading in any material respect when made or repeated or deemed to have been made or repeated; (v) Default under Specified Transaction. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party (1) defaults under a Specified Transaction and, after giving effect to any applicable notice requirement or grace period, there occurs a liquidation of, an acceleration of obligations under, or an early termination of, that Specified Transaction, (2) defaults, after giving effect to any applicable notice requirement or grace period, in making any payment or delivery due on the last payment, delivery or exchange date of, or any payment on early termination of, a Specified Transaction (or such default continues for at least three Local Business Days if there is no applicable notice requirement or grace period) or (3) disaffirms, disclaims, repudiates or rejects, in whole or in part. a Specified Transaction (or such action is taken by any person or entity appointed or empowered to operate it or act on its behalf); (vi) Cross Default. If "Cross Default" is specified in the Schedule as applying to the party, the occurrence or existence of (1) a default, event of default or other similar condition or event (however described) in respect of such party, any Credit Support Provider of such party or any applicable Specified Entity of such party under one or more agreements or instruments relating to Specified Indebtedness of any of them (individually or collectively) in an aggregate amount of not less than the applicable Threshold Amount (as specified in the Schedule) which has resulted in such Specified Indebtedness becoming, or becoming capable at such time of being declared, due and payable under such agreements or instruments, before it would otherwise have been due and payable or (2) a default by such party, such Credit Support Provider or such Specified Entity (individually or collectively) in making one or more payments on the due date thereof in an aggregate amount of not less than the applicable Threshold Amount under such agreements or instruments (after giving effect to any applicable notice requirement or grace period); 5 6 (vii) Bankruptcy. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party:-- (1) is dissolved (other than pursuant to a consolidation, amalgamation or merger); (2) becomes insolvent or is unable to pay its debts or fails or admits in writing its inability generally to pay its debts as they become due: (3) makes a general assignment, arrangement or composition with or for the benefit of its creditors; (4) institutes or has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors' rights, or a petition is presented for its winding-up or liquidation, and, in the case of any such proceeding or petition instituted or presented against it, such proceeding or petition (A) results in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an order for its winding-up or liquidation or (B) is not dismissed, discharged, stayed or restrained in each case within 30 days of the institution or presentation thereof; (5) has a resolution passed for its winding-up, official management or liquidation (other than pursuant to a consolidation, amalgamation or merger); (6) seeks or becomes subject to the appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or for all or substantially all its assets: (7) has a secured party lake possession of all or substantially all its assets or has a distress, execution, attachment, sequestration or other legal process levied, enforced or sued on or against all or substantially all its assets and such secured party maintains possession, or any such process is not dismissed, discharged, stayed or restrained, in each case within 30 days thereafter: (8) causes or is subject to any event with respect to it which, under the applicable laws of any jurisdiction, has an analogous effect to any of the events specified in clauses (1) to (7) (inclusive); or (9) takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the foregoing acts: or (viii) Merger Without Assumption. The party or any Credit Support Provider of such party consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, another entity and, at the time of such consolidation, amalgamation, merger or transfer:-- (1) the resulting, surviving or transferee entity fails to assume all the obligations of such party or such Credit Support Provider under this Agreement or any Credit Support Document to which it or its predecessor was a party by operation of law or pursuant to an agreement reasonably satisfactory to the other party to this Agreement; or (2) the benefits of any Credit Support Document fail to extend (without the consent of the other party) to the performance by such resulting, surviving or transferee entity of its obligations under this Agreement. (b) Termination Events. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any event specified below constitutes an Illegality if the event is specified in (i) below, a Tax Event if the event is specified in (ii) below or a Tax Event Upon Merger if the event is specified in (iii) below, and, if specified to be applicable, a Credit Event Upon Merger if the event is specified pursuant to (iv) below or an Additional Termination Event if the event is specified pursuant to (v) below:-- (i) Illegality. Due to the adoption of, or any change in, any applicable law after the date on which a Transaction is entered into, or due to the promulgation of, or any change in, the interpretation by any court, tribunal or regulatory authority with competent jurisdiction of any applicable law after such date, it becomes unlawful (other than as a result of a breach by the party of Section 4(b)) for such party (which will be the Affected Party):-- (1) to perform any absolute or contingent obligation to make a payment or delivery or to receive a payment or delivery in respect of such Transaction or to comply with any other material provision of this Agreement relating to such Transaction; or (2) to perform, or for any Credit Support Provider of such party to perform, any contingent or other obligation which the party (or such Credit Support Provider) has under any Credit Support Document relating to such Transaction; (ii) Tax Event. Due to (x) any action taken by a taxing authority, or brought in a court of competent jurisdiction, on or after the date on which a Transaction is entered into (regardless of whether such action is taken or brought with respect to a party to this Agreement) or (y) a Change in Tax Law, the party (which will be the Affected Party) will, 6 7 or there is a substantial likelihood that it will, on the next succeeding Scheduled Payment Date ( 1 ) be required to pay to the other party an additional amount in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in respect of interest under Section 2(e), 6(d)(ii) or 6(e)) or (2) receive a payment from which an amount is required to be deducted or withheld for or on account of a Tax (except in respect of interest under Section 2(e), 6(d)(ii) or 6(e)) and no additional amount is required to be paid in respect of such Tax under Section 2(d)(i)(4) (other than by reason of Section 2(d)(i)(4)(A) or (B)); (iii) Tax Event Upon Merger. The party (the "Burdened Party") on the next succeeding Scheduled Payment Date will either (1) be required to pay an additional amount in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in respect of interest under Section 2(e), 6(d)(ii) or 6(e)) or (2) receive a payment from which an amount has been deducted or withheld for or on account of any Indemnifiable Tax in respect of which the other party is not required to pay an additional amount (other than by reason of Section 2(d)(i)(4)(A) or (B)), in either case as a result of a party consolidating or amalgamating with, or merging with or into, or transferring all or substantially all its assets to. another entity (which will be the Affected Party) where such action does not constitute an event described in Section 5(a)(viii); (iv) Credit Event Upon Merger. If "Credit Event Upon Merger" is specified in the Schedule as applying to the party, such party ("X"), any Credit Support Provider of X or any applicable Specified Entity of X consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, another entity and such action does not constitute an event described in Section 5(a)(viii) but the creditworthiness of the resulting, surviving or transferee entity is materially weaker than that of X, such Credit Support Provider or such Specified Entity, as the case may be, immediately prior to such action (and, in such event, X or its successor or transferee, as appropriate, will be the Affected Party); or (v) Additional Termination Event. If any "Additional Termination Event" is specified in the Schedule or any Confirmation as applying, the occurrence of such event (and, in such event, the Affected Party or Affected Parties shall be as specified for such Additional Termination Event in the Schedule or such Confirmation). (c) Event of Default and Illegality. If an event or circumstance which would otherwise constitute or give rise to an Event of Default also constitutes an Illegality, it will be treated as an Illegality and will not constitute Event of Default. 6. Early Termination (a) Right to Terminate Following Event of Default. If at any time an Event of Default with respect to a party (the "Defaulting Party") has occurred and is then continuing, the other party (the "Non-defaulting Party") may. by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions. If, however, "Automatic Early Termination" is specified in the Schedule as applying to a party, then an Early Termination Date in respect of all outstanding Transactions will occur immediately upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(l), (3), (5), (6) or, to the extent analogous thereto, (8), and as of the time immediately preceding the institution of the relevant proceeding or the presentation of the relevant petition upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8). (b) Right to Terminate Following Termination Event. (i) Notice. If a Termination Event occurs, an Affected Party will, promptly upon becoming aware of it, notify the other party, specifying the nature of that Termination Event and each Affected Transaction and will also give such other information about that Termination Event as the other party may reasonably require. (ii) Transfer to Avoid Termination Event. If either an Illegality under section 5(b)(i)(l) or a Tax Event occurs and there is only one Affected Party, or if a Tax Event Upon Merger occurs and the Burdened Party is the Affected Party, the Affected Party will, as a condition to its right to designate an Early Termination Date under Section 6(b)(iv), use all reasonable efforts (which will not require such party to incur a loss, excluding immaterial, incidental expenses) to transfer within 20 days after it gives notice under Section 6(b)(i) all its rights and obligations under this Agreement in respect of the Affected Transactions to another of its Offices or Affiliates so that such Termination Event ceases to exist. 7 8 If the Affected Party is not able to make such a transfer it will give notice to the other party to that effect within such 20 day period, whereupon the other party may effect such a transfer within 30 days after the notice is given under Section 6(b)(i). Any such transfer by a party under this Section 6(b)(ii) will be subject to and conditional upon the prior written consent of the other party, which consent will not be withheld if such other party's policies in effect at such time would permit it to enter into transactions with the transferee on the terms proposed. (iii) Two Affected Parties. If an Illegality under Section 5(b)(i)(l) or a Tax Event occurs and there are two Affected Parties, each party will use all reasonable efforts to reach agreement within 30 days after notice thereof is given under Section 6(b)(i) on action to avoid that Termination Event. (iv) Right to Terminate. If:- (1) a transfer under Section 6(b)(ii) or an agreement under Section 6(b)(iii). as the case may be, has not been effected with respect to all Affected Transactions within 30 days after an Affected Party gives notice under Section 6(b)(i): or (2) an Illegality under Section 5(b)(i)(2), a Credit Event Upon Merger or an Additional Termination Event occurs, or a Tax Event Upon Merger occurs and the Burdened Party is not the Affected Party, either party in the case of an Illegality, the Burdened Party in the case of a Tax Event Upon Merger, any Affected Party in the case of a Tax Event or an Additional Termination Event if there is more than one Affected Party, or the party which is not the Affected Party in the case of a Credit Event Upon Merger or an Additional Termination Event if there is only one Affected Party may, by not more than 20 days notice to the other party and provided that the relevant Termination Event is then continuing, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all Affected Transactions. (c) Effect of Designation. (i) If notice designating an Early Termination Date is given under Section 6(a) or (b), the Early Termination Date will occur on the date so designated, whether or not the relevant Event of Default or Termination Event is then continuing. (ii) Upon the occurrence or effective designation of an Early Termination Date, no further payments or deliveries under Section 2(a)(i) or 2(e) in respect of the Terminated Transactions will be required to be made, but without prejudice to the other provisions of this Agreement. The amount, if any, payable in respect of an Early Termination Date shall be determined pursuant to Section 6(e). (d) Calculations. (i) Statement. On or as soon as reasonably practicable following the occurrence of an Early Termination Date, each party will make the calculations on its part, if any, contemplated by Section 6(e) and will provide to the other party a statement (1) showing, in reasonable detail, such calculations (including all relevant quotations and specifying any amount payable under Section 6(e)) and (2) giving details of the relevant account to which any amount payable to it is to be paid. In the absence of written confirmation from the source of a quotation obtained in determining a Market Quotation, the records of the party obtaining such quotation will be conclusive evidence of the existence and accuracy of such quotation. (ii) Payment Date. An amount calculated as being due in respect of any Early Termination Date under Section 6(e) will be payable on the day that notice of the amount payable is effective (in the case of an Early Termination Date which is designated or occurs as a result of an Event of Default) and on the day which is two Local Business Days after the day on which notice of the amount payable is effective (in the case of an Early Termination Date which is designated as a result of a Termination Event). Such amount will be paid together with (to the extent permitted under applicable law) interest thereon (before as well as after judgment) in the Termination Currency, from (and including) the relevant Early Termination Date to (but excluding) the date such amount is paid, at the Applicable Rate. Such interest will be calculated on the basis of daily compounding and the actual number of days elapsed. 8 9 (e) Payments on Early Termination. If an Early Termination Date occurs, the following provisions shall apply based on the parties' election in the Schedule of a payment measure, either "Market Quotation" or "Loss", and a payment method, either the "First Method" or the "Second Method". If the parties fail to designate a payment measure or payment method in the Schedule, it will be deemed that "Market Quotation" or the "Second Method", as the case may be, shall apply. The amount, if any, payable in respect of an Early Termination Date and determined pursuant to this Section will be subject to any Set-off. (i) Events of Default, if the Early Termination Date results from an Event of Default:-- (1) First Method and Market Quotation. If the First Method and Market Quotation apply, the Defaulting Party will pay to the Non-defaulting Party the excess, if a positive number, of (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated Transactions and the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party over (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. (2) First Method and Loss. If the First Method and Loss apply, the Defaulting Party will pay to the Non-defaulting Party, if a positive number, the Non-defaulting Party's Loss in respect of this Agreement. (3) Second Method and Market Quotation. If the Second Method and Market Quotation apply, an amount will be payable equal to (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated Transactions and the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party less (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party. (4) Second Method and Loss. If the Second Method and Loss apply, an amount will be payable equal to the Non-defaulting Party's Loss in respect of this Agreement. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party. (ii) Termination Events. If the Early Termination Date results from a Termination Event:-- (1) One Affected Party. If there is one Affected Party, the amount payable will be determined in accordance with Section 6(e)(i)(3), if Market Quotation applies, or Section 6(e)(i)(4), if Loss applies, except that, in either case, references to the Defaulting Party and to the Non-defaulting Party will be deemed to be references to the Affected Party and the party which is not the Affected Party, respectively, and, if Loss applies and fewer than all the Transactions are being terminated. Loss shall be calculated in respect of all Terminated Transactions. (2) Two Affected Parties. If there are two Affected Parties:-- (A) if Market Quotation applies, each party will determine a Settlement Amount in respect of the Terminated Transactions, and an amount will be payable equal to (I) the sum of (a) one-half of the difference between the Settlement Amount of the party with the higher Settlement Amount ("X") and the Settlement Amount of the party with the tower Settlement Amount ("Y") and (b) the Termination Currency Equivalent of the Unpaid Amounts owing to X less (II) the Termination Currency Equivalent of the Unpaid Amounts owing to Y; and (B) if Loss applies, each party will determine its Loss in respect of this Agreement (or, if fewer than all the Transactions are being terminated, in respect of all Terminated Transactions) and an amount will be payable equal to one-half of the difference between the Loss of the party with the higher Loss ("X") and the Loss of the party with the tower Loss ("Y"). If the amount payable is a positive number, Y will pay it to X; if it is a negative number, X will pay the absolute value of that amount to Y. (iii) Adjustment for Bankruptcy. In circumstances where an Early Termination Date occurs because "Automatic Early Termination" applies in respect of a party, the amount determined under this Section 6(e) will be subject to 9 10 such adjustments as are appropriate and permitted by law to reflect any payment or deliveries made by one party to the other under this Agreement (and retained by such other party) during the period from the relevant Early Termination Date to the date for payment determined under Section 6(d)(ii). (iv) Pre-Estimate. The panics agree that if Market Quotation applies an amount recoverable under this Section 6(e) is a reasonable pre-estimate of loss and not a penalty. Such amount is payable for the loss of bargain and the loss of protection against future risks and except as otherwise provided in this Agreement neither party will be entitled to recover any additional damages as a consequence of such losses. 7. Transfer Subject to Section 6(b)(ii), neither this Agreement nor any interest or obligation in or under this Agreement may be transferred (whether by way of security or otherwise) by either party without the prior written consent of the other party, except that:-- (a) a party may make such a transfer of this Agreement pursuant to a consolidation or amalgamation with, or merger with or into, or transfer of all or substantially all its assets to, another entity (but without prejudice to any other right or remedy under this Agreement); and (b) a party may make such a transfer of all or any part of its interest in any amount payable to it from a Defaulting Party under Section 6(e). Any purported transfer that is not in compliance with this Section will be void. 8. Contractual Currency (a) Payment in the Contractual Currency. Each payment under this Agreement will be made in the relevant currency specified in this Agreement for that payment (the "Contractual Currency"). To the extent permitted by applicable law, any obligation to make payments under this Agreement in the Contractual Currency will not be discharged or satisfied by any tender in any currency other than the Contractual Currency, except to the extent such tender results in the actual receipt by the party to which payment is owed, acting in a reasonable manner and in good faith in convening the currency so tendered into the Contractual Currency, of the full amount in the Contractual Currency of all amounts payable in respect of this Agreement. If for any reason the amount in the Contractual Currency so received falls short of the amount in the Contractual Currency payable in respect of this Agreement, the party required to make the payment will, to the extent permitted by applicable law, immediately pay such additional amount in the Contractual Currency as may be necessary to compensate for the shortfall. If for any reason the amount in the Contractual Currency so received exceeds the amount in the Contractual Currency payable in respect of this Agreement, the party receiving the payment will refund promptly the amount of such excess. (h) Judgments. To the extent permitted by applicable law, if any judgment or order expressed in a currency other than the Contractual Currency is rendered (i) for the payment of any amount owing in respect of this Agreement, (ii) for the payment of any amount relating to any early termination in respect of this Agreement or (iii) in respect of a judgment or order of another court for the payment of any amount described in (i) or (ii) above, the party seeking recovery, after recovery in full of the aggregate amount to which such party is entitled pursuant to the judgment or order, will be entitled to receive immediately from the other party the amount of any shortfall of the Contractual Currency received by such party as a consequence of sums paid in such other currency and will refund promptly to the other party any excess of the Contractual Currency received by such party as a consequence of sums paid in such other currency if such shortfall or such excess arises or results from any variation between the rate of exchange at which the Contractual Currency is converted into the currency of the judgment or order for the purposes of such judgment or order and the rate of exchange at which such party is able, acting in a reasonable manner and in good faith in converting the currency received into the Contractual Currency, to purchase the Contractual Currency with the amount of the currency of the judgment or order actually received by such party. The term "rate of exchange" includes, without limitation, any premiums and costs of exchange payable in connection with the purchase of or conversion into the Contractual Currency. (c) Separate Indemnities. To the extent permitted by applicable law, these indemnities constitute separate and independent obligations from the other obligations in this Agreement, will be enforceable as separate and independent causes of action, will apply notwithstanding any indulgence granted by the party to which any payment is owed and will 10 11 not be affected by judgment being obtained or claim or proof being made for any other sums payable in respect of this Agreement. (d) Evidence of Loss. For the purpose of this Section 8, it will be sufficient for a party to demonstrate that it would have suffered a loss had an actual exchange or purchase been made. 9. Miscellaneous (a) Entire Agreement. This Agreement constitutes the entire agreement and understanding of the parties with respect to its subject matter and supersedes all oral communication and prior writings with respect thereto. (b) Amendments. No amendment, modification or waiver in respect of this Agreement will be effective unless in writing (including a writing evidenced by a facsimile transmission) and executed by each of the parties or confirmed by an exchange of telexes or electronic messages on an electronic messaging system. (c) Survival of Obligations. Without prejudice to Sections 2(a)(iii) and 6(c)(ii), the obligations of the parties under this Agreement will survive the termination of any Transaction. (d) Remedies Cumulative. Except as provided in this Agreement, the rights, powers, remedies and privileges provided in this Agreement are cumulative and not exclusive of any rights, powers, remedies and privileges provided by law. (e) Counterparts and Confirmations. (i) This Agreement (and each amendment, modification and waiver in respect of it) may be executed and delivered in counterparts (including by facsimile transmission), each of which will be deemed an original. (ii) The parties intend that they are legally bound by the terms of each Transaction from the moment they agree to those terms (whether orally or otherwise). A Confirmation shall be entered into as soon as practicable and may be executed and delivered in counterparts (including by facsimile transmission) or be created by an exchange of telexes or by an exchange of electronic messages on an electronic messaging system, which in each case will be sufficient for all purposes to evidence a binding supplement to this Agreement. The parties will specify therein or through another effective means that any such counterpart, telex or electronic message constitutes a Confirmation. (f) No Waiver of Rights. A failure or delay in exercising any right, power or privilege in respect of this Agreement will not be presumed to operate as a waiver, and a single or partial exercise of any right, power or privilege will not be presumed to preclude any subsequent or further exercise, of that right, power or privilege or the exercise of any other right, power or privilege. (g) Headings. The headings used in this Agreement are for convenience of reference only and are not to affect the construction of or to be taken into consideration in interpreting this Agreement. 10. Offices; Multibranch Parties (a) If Section 10(a) is specified in the Schedule as applying, each party that enters into a Transaction through an Office other than its head or home office represents to the other party that, notwithstanding the place of booking office or jurisdiction of incorporation or organization of such party, the obligations of such party are the same as if it had entered into the Transaction through its head or home office. This representation will be deemed to be repeated by such party on each date on which a Transaction is entered into. (b) Neither party may change the Office through which it makes and receives payments or deliveries for the purpose of a Transaction without the prior written consent of the other party. (c) If a party is specified as a Multibranch Party in the Schedule, such Multibranch Party may make and receive payments or deliveries under any Transaction through any Office listed in the Schedule, and the Office through which it makes and receives payments or deliveries with respect to a Transaction will be specified in the relevant Confirmation. 11. Expenses 11 12 A Defaulting Party will, on demand, indemnify and hold harmless the other party for and against all reasonable out-of-pocket expenses, including legal fees and Stamp Tax, incurred by such other party by reason of the enforcement and protection of its rights under this Agreement or any Credit Support Document to which the Defaulting Party is a party or by reason of the early termination of any Transaction, including, but not limited to, costs of collection. 12. Notices (a) Effectiveness. Any notice or other communication in respect of this Agreement may be given in any manner set forth below (except that a notice or other communication under Section 5 or 6 may not be given by facsimile transmission or electronic messaging system) to the address or number or in accordance with the electronic messaging system details provided (see the Schedule) and will be deemed effective as indicated:-- (i) if in writing and delivered in person or by courier, on the date it is delivered; (ii) if sent by telex, on the date the recipient's answerback is received; (iii) if sent by facsimile transmission, on the date that transmission is received by a responsible employee of the recipient in legible form (it being agreed that the burden of proving receipt will be on the sender and will not be met by a transmission report generated by the sender's facsimile machine): (iv) if sent by certified or registered mail (airmail, if overseas) or the equivalent (return receipt requested), on the date that mail is delivered or its delivery is attempted; or (v) if sent by electronic messaging system, on the date that electronic message is received, unless the date of that delivery (or attempted delivery) or that receipt, as applicable, is not a Local Business Day or that communication is delivered (or attempted) or received, as applicable, after the close of business on a Local Business Day, in which case that communication shall be deemed given and effective on the first following day that is a Local Business Day. (b) Change of Addresses. Either party may by notice to the other change the address, telex or facsimile number or electronic messaging system details at which notices or other communications are to be given to it. 13. Governing Law and Jurisdiction (a) Governing Law. This Agreement will be governed by and construed in accordance with the law specified in the Schedule. (b) Jurisdiction. With respect to any suit, action or proceedings relating to this Agreement ("Proceedings"), each party irrevocably:-- (i) submits to the jurisdiction of the English courts, if this Agreement is expressed to be governed by English law, or to the non-exclusive jurisdiction of the courts of the State of New York and the United Suites District Court located in the Borough of Manhattan in New York City, if this Agreement is expressed to be governed by the laws of the State of New York: and (ii) waives any objection which it may have at any time to the laying of venue of any Proceedings brought in any such court, waives any claim that such Proceedings have been brought in an inconvenient forum and further waives the right to object, with respect to such Proceedings, that such court does not have any jurisdiction over such party. Nothing in this Agreement precludes either party from bringing Proceedings in any other jurisdiction (outside, if this Agreement is expressed to he governed by English law, the Contracting Stales, as defined in Section 1(3) of the Civil Jurisdiction and Judgments Act 1982 or any modification, extension or re-enactment thereof for the time being in force) nor will the bringing of Proceedings in any one or more jurisdictions preclude the bringing of Proceedings in any other jurisdiction. 12 13 (c) Service of Process. Each party irrevocably appoints the Process Agent (if any) specified opposite its name in the Schedule to receive, for it and on its behalf, service of process in any Proceedings. If for any reason any party's Process Agent is unable to act as such, such party will promptly notify the other party and within 30 days appoint a substitute process agent acceptable to the other party. The parties irrevocably consent to service of process given in the manner provided for notices in Section 12. Nothing in this Agreement will affect the right of either party to serve process in any other manner permitted by law. (d) Waiver of Immunities. Each party irrevocably waives, to the fullest extent permitted by applicable law, with respect to itself and its revenues and assets (irrespective of their use or intended use), all immunity on the grounds of sovereignty or other similar grounds from (i) suit, (ii) jurisdiction of any court, (iii) relief by way of injunction, order for specific performance or for recovery of property, (iv) attachment of its assets (whether before or after judgment) and (v) execution or enforcement of any judgment to which it or its revenues or assets might otherwise be entitled in any Proceedings in the courts of any jurisdiction and irrevocably agrees, to the extent permitted by applicable law, that it will not claim any such immunity in any Proceedings. 14. Definitions As used in this Agreement:-- "Additional Termination Event" has the meaning specified in Section 5(b). "Affected Party" has the meaning specified in Section 5(b). "Affected Transactions" means (a) with respect to any Termination Event consisting of an Illegality, Tax Event or Tax Event Upon Merger, all Transactions affected by the occurrence of such Termination Event and (b) with respect to any other Termination Event, all Transactions. "Affiliate" means, subject to the Schedule, in relation to any person, any entity controlled, directly or indirectly, by the person, any entity that controls, directly or indirectly, the person or any entity directly or indirectly under common control with the person. For this purpose, "control" of any entity or person means ownership of a majority of the voting power of the entity or person. "Applicable Rate" means:-- (a) in respect of obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Defaulting Party, the Default Rate: (b) in respect of an obligation to pay an amount under Section 6(e) of either party from and after the date (determined in accordance with Section 6(d)(ii)) on which that amount is payable, the Default Rate; (c) in respect of all other obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Non-defaulting Party, the Non-default Rate: and (d) in all other cases, the Termination Rate. "Burdened Party" has the meaning specified in Section 5(b). "Change in Tax Law" means the enactment, promulgation, execution or ratification of. or any change in or amendment to, any law (or in the application or official interpretation of any law) that occurs on or after the date on which the relevant Transaction is entered into. "consent" includes a consent, approval, action, authorization, exemption, notice, filing, registration or exchange control consent. "Credit Event Upon Merger" has the meaning specified in Section 5(b). "Credit Support Document" means any agreement or instrument that is specified as such in this Agreement. 13 14 "Credit Support Provider" has the meaning specified in the Schedule. "Default Rate" means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the relevant payee (as certified by it) if it were to fund or of funding the relevant amount plus 1 % per annum. "Defaulting Party" has the meaning specified in Section 6(a). "Early Termination Date" means the date determined in accordance with Section 6(a) or 6(b)(iv). "Event of Default" has the meaning specified in Section 5(a) and, if applicable, in the Schedule. "Illegality" has the meaning specified in Section 5(b). "Indemnifiable Tax" means any Tax other than a Tax that would not be imposed in respect of a payment under this Agreement but for a present or former connection between the jurisdiction of the government or taxation authority imposing such Tax and the recipient of such payment or a person related to such recipient (including, without limitation, a connection arising from such recipient or related person being or having been a citizen or resident of such jurisdiction, or being or having been organized, present or engaged in a trade or business in such jurisdiction, or having or having had a permanent establishment or fixed place of business in such jurisdiction, but excluding a connection arising solely from such recipient or related person having executed, delivered, performed its obligations or received a payment under, or enforced, this Agreement or a Credit Support Document). "law" includes any treaty, law, rule or regulation (as modified, in the case of tax matters, by the practice of any relevant governmental revenue authority) and "lawful" and "unlawful" will be construed accordingly. "Local Business Day" means, subject to the Schedule, a day on which commercial banks are open for business (including dealings in foreign exchange and foreign currency deposits) (a) in relation to any obligation under Section 2(a)(i), in the place(s) specified in the relevant Confirmation or, if not so specified, as otherwise agreed by the parties in writing or determined pursuant to provisions contained, or incorporated by reference, in this Agreement, (b) in relation to any other payment, in the place where the relevant account is located and, if different, in the principal financial center, if any, of the currency of such payment, (c) in relation to any notice or other communication, including notice contemplated under Section 5(a)(i), in the city specified in the address for notice provided by the recipient and, in the case of a notice contemplated by Section 2(b), in the place where the relevant new account is to be located and (d) in relation to Section 5(a)(v)(2), in the relevant locations for performance with respect to such Specified Transaction. "Loss" means, with respect to this Agreement or one or more Terminated Transactions, as the case may be, and a party, the Termination Currency Equivalent of an amount that party reasonably determines in good faith to be its total losses and costs (or gain, in which case expressed as a negative number) in connection with this Agreement or that Terminated Transaction or group of Terminated Transactions, as the case may be, including any loss of bargain, cost of funding or, at the election of such party but without duplication, loss or cost incurred as a result of its terminating, liquidating, obtaining or reestablishing any hedge or related trading position (or any gain resulting from any of them). Loss includes losses and costs (or gains) in respect of any payment or delivery required to have been made (assuming satisfaction of each applicable condition precedent) on or before the relevant Early Termination Date and not made, except, so as to avoid duplication, if Section 6(e)(i)(l) or (3) or 6(e)(ii)(2)(A) applies. Loss does not include a party's legal fees and out-of-pocket expenses referred to under Section 11. A party will determine its Loss as of the relevant Early Termination Date, or, if that is not reasonably practicable, as of the earliest date thereafter as is reasonably practicable. A party may (but need not) determine its Loss by reference to quotations of relevant rates or prices from one or more leading dealers in the relevant markets. "Market Quotation" means, with respect to one or more Terminated Transactions and a party making the determination, an amount determined on the basis of quotations from Reference Market-makers. Each quotation will be for an amount, if any, that would be paid to such party (expressed as a negative number) or by such party (expressed as a positive number) in consideration of an agreement between such party (taking into account any existing Credit Support Document with respect to the obligations of such party) and the quoting Reference Market-maker to enter into a transaction (the "Replacement Transaction") that would have the effect of preserving for such party the economic equivalent of any payment or delivery (whether the underlying obligation was absolute or contingent and assuming the satisfaction of each applicable condition precedent) by the panics under Section 2(a)(i) in respect of such Terminated Transaction or group of Terminated Transactions that would, but for the occurrence of the relevant Early Termination Date, have been required after that date. For this purpose, Unpaid Amounts in respect of the Terminated Transaction or group of Terminated Transactions are to be 14 15 excluded but, without limitation, any payment or delivery that would, but for the relevant Early Termination Date, have been required (assuming satisfaction of each applicable condition precedent) after that Early Termination Date is to be included. The Replacement Transaction would be subject to such documentation as such party and the Reference Market-maker may, in good faith, agree. The party making the determination (or its agent) will request each Reference Market-maker to provide its quotation to the extent reasonably practicable as of the same day and time (without regard to different time zones) on or as soon as reasonably practicable after the relevant Early Termination Date. The day and time as of which those quotations are to be obtained will be selected in good faith by the party obliged to make a determination under Section 6(e), and, if each party is so obliged, after consultation with the other. If more than three quotations are provided, the Market Quotation will be the arithmetic mean of the quotations, without regard to the quotations having the highest and lowest values. If exactly three such quotations are provided, the Market Quotation will be the quotation remaining after disregarding the highest and lowest quotations. For this purpose, if more than one quotation has the same highest value or lowest value, then one of such quotations shall be disregarded. If fewer than three quotations are provided, it will be deemed that the Market Quotation in respect of such Terminated Transaction or group of Terminated Transactions cannot be determined. "Non-default Rate" means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the Non-defaulting Party (as certified by it) if it were to fund the relevant amount. "Non-defaulting Party" has the meaning specified in Section 6(a). "Office" means a branch or office of a party, which may be such party's head or home office. "Potential Event of Default" means any event which, with the giving of notice or the lapse of time or both, would constitute an Event of Default. "Reference Market-makers" means four leading dealers in the relevant market selected by the party determining a Market Quotation in good faith (a) from among dealers of the highest credit standing which satisfy all the criteria that such party applies generally at the time in deciding whether to offer or to make an extension of credit and (b) to the extent practicable, from among such dealers having an office in the same city. "Relevant Jurisdiction" means, with respect to a party, the jurisdictions (a) in which the party is incorporated, organized, managed and controlled or considered to have its seat, (b) where an Office through which the party is acting for purposes of this Agreement is located, (c) in which the party executes this Agreement and (d) in relation to any payment, from or through which such payment is made. "Scheduled Payment Date" means a date on which a payment or delivery is to be made under Section 2(a)(i) with respect to a Transaction. "Set-off" means set-off, offset, combination of accounts, right of retention or withholding or similar right or requirement to which the payer of an amount under Section 6 is entitled or subject (whether arising under this Agreement, another contract. applicable law or otherwise) that is exercised by, or imposed on, such payer. "Settlement Amount" means, with respect to a party and any Early Termination Date, the sum of:-- (a) the Termination Currency Equivalent of the Market Quotations (whether positive or negative) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation is determined; and (b) such party's Loss (whether positive or negative and without reference to any Unpaid Amounts) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation cannot be determined or would not (in the reasonable belief of the party making the determination) produce a commercially reasonable result. "Specified Entity'" has the meaning specified in the Schedule. "Specified Indebtedness" means, subject to the Schedule, any obligation (whether present or future, contingent or otherwise, as principal or surety or otherwise) in respect of borrowed money. "Specified Transaction" means, subject to the Schedule, (a) any transaction (including an agreement with respect thereto) now existing or hereafter entered into between one party to this Agreement (or any Credit Support Provider of such party or 15 16 any applicable Specified Entity of such party) and the other party to this Agreement (or any Credit Support Provider of such other party or any applicable Specified Entity of such other party) which is a rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions), (b) any combination of these transactions and (c) any other transaction identified as a Specified Transaction in this Agreement or the relevant confirmation. "Stamp Tax" means any stamp, registration, documentation or similar tax. "Tax" means any present or future tax, levy, impost, duty, charge, assessment or fee of any nature (including interest, penalties and additions thereto) that is imposed by any government or other taxing authority in respect of any payment under this Agreement other than a stamp, registration, documentation or similar tax. "Tax Event" has the meaning specified in Section 5(b). "Tax Event Upon Merger" has the meaning specified in Section 5Cb). "Terminated Transactions" means with respect to any Early Termination Date (a) if resulting from a Termination Event, all Affected Transactions and (b) if resulting from an Event of Default, all Transactions (in either case) in effect immediately before the effectiveness of the notice designating that Early Termination Date (or, if "Automatic Early Termination" applies, immediately before that Early Termination Date). "Termination Currency" has the meaning specified in the Schedule. "Termination Currency Equivalent" means, in respect of any amount denominated in the Termination Currency, such Termination Currency amount and, in respect of any amount denominated in a currency other than the Termination Currency (the "Other Currency"), the amount in the Termination Currency determined by the party making the relevant determination as being required to purchase such amount of such Other Currency as at the relevant Early Termination Date, or, if the relevant Market Quotation or Loss (as the case may be), is determined as of a later date, that later date, with the Termination Currency at the rate equal to the spot exchange rate of the foreign exchange agent (selected as provided below) for the purchase of such Other Currency with the Termination Currency at or about 11:00 a.m. (in the city in which such foreign exchange agent is located) on such date as would he customary for the determination of such a rate for the purchase of such Other Currency for value on the relevant Early Termination Date or that later date. The foreign exchange agent will. if only one party is obliged to make a determination under Section 6(e), be selected in good faith by that party and otherwise will be agreed by the parties. "Termination Event" means an Illegality, a Tax Event or a Tax Event Upon Merger or, if specified to be applicable, a Credit Event Upon Merger or an Additional Termination Event. "Termination Rate" means a rate per annum equal to the arithmetic mean of the cost (without proof or evidence of any actual cost) to each party (as certified by such party) if it were to fund or of funding such amounts. "Unpaid Amounts" owing to any party means, with respect to an Early Termination Date, the aggregate of (a) in respect of all Terminated Transactions, the amounts that became payable (or that would have become payable but for Section 2(a)(iii)) to such party under Section 2(a)(i) on or prior to such Early Termination Date and which remain unpaid as at such Early Termination Date and (b) in respect of each Terminated Transaction, for each obligation under Section 2(a)(i) which was (or would have been but for Section 2(a)(iii)) required to be settled by delivery to such party on or prior to such Early Termination Date and which has not been so settled as at such Early Termination Date, an amount equal to the fair market value of that which was (or would have been) required to be delivered as of the originally scheduled date for delivery, in each case together with (to the extent permitted under applicable law) interest, in the currency of such amounts, from (and including) the date such amounts or obligations were or would have been required to have been paid or performed to (but excluding) such Early Termination Date, at the Applicable Rate. Such amounts of interest will be calculated on the basis of daily compounding and the actual number of days elapsed. The fair market value of any obligation referred to in clause (b) above shall be reasonably determined by the party obliged to make the determination under Section 6(e) or, if each party is so obliged, it shall be the average of the Termination Currency Equivalents of the fair market values reasonably determined by both parties. 16 17 IN WITNESS WHEREOF the parties have executed this document on the respective dates specified below with effect from the date specified on the first page of this document. - ------------------------------ ----------------------------------- Sovereign Bank Preferred Equities Corporation By: s/s Thomas J. Morris By: s/s Charles G. Baltuskonis --------------------------- -------------------------------- Name: Thomas J. Morris Name: Charles G. Baltuskonis Title: Director Title: Vice President and Chief Accounting Office Date: 8/31/00 Date: 8/31/00 17 EX-10.216 7 a66375ex10-216.txt EXHIBIT 10.216 1 EXHIBIT 10.216 [PREFERRED EQUITIES CORPORATION LETTERHEAD] July 7, 2000 Joel R. Buckberg, Esq. Executive Vice President Deputy General Counsel Cendant Corporation One Sylvan Way Parsippany, New Jersey 07054 Via Facsimile (973) 496-5915 & US Mail Re: Renewal of Agreement Dear Joel, Preferred Equities Corporation (PEC) provided the information requested in your letter of June 2, 2000 on June 5,2000. As PEC has duly given the required notice pursuant to the Agreement and provided the requested follow up information, PEC considers the Agreement renewed and extended pursuant to the terms of the Agreement. We look forward to continuing to work with Cendant. Very truly yours, /s/ JON A. JOSEPH - ----------------------------------- Jon A. Joseph Vice President & General Counsel JAJ/lad cc: R. Nederlander - Via Facsimile (212) 586-5862 J. Cohen G. McMurtrie D. Campbell EX-10.217 8 a66375ex10-217.txt EXHIBIT 10.217 1 EXHIBIT 10.217 DORFINCO CORPORATION Subsidiary of Commerce Center Textron Financial Corporation 333 East River Dr. E. Hartford, CT 06108 Telephone (880) 282-7776 Fax: (880) 282-9053 September 18, 2000 Preferred Equities Corporation 4310 Paradise Road Las Vegas, Nevada 89109 ATTENTION: Jon Joseph, General Counsel Re: Amendment to Working Capital Loan Gentlemen: Reference is made to the Loan and Security Agreement dated August 12, 1998 between Dorfinco Corporation and Preferred Equities Corporation, as amended ("Loan Agreement") and the Deed of Trust, Security Agreement and Fixture Filing dated August 12, 1998 among Preferred Equities Corporation as Grantor, United Title of Nevada as Trustee and Dorfinco Corporation as Beneficiary recorded as Document 450693 in the Official Records of Nye County, Nevada on August 13, 1998 (the "Deed of Trust") securing a $4,000,000 loan made to Guarantor (the "Loan") as evidenced by promissory note dated August 12, 1998 by Guarantor (the "Note"). All defined terms used herein shall have the meanings assigned in the Loan Agreement and/or Deed of Trust and/or Note. Previously, Grantor exercised its rights for an Extended Maturity Date of August 30, 2000 and paid the required extension fee. In addition the Note and Deed of Trust were revised on March 10, 2000 with respect to payments of the principal balances and other terms. Grantor has requested a further extension until December 31, 2001 and has requested a modification to the mandatory principal pay-down schedule. Borrower has indicated that the remaining three parcels of property have been listed for sale at the amounts below:
Property Original Appraised Value List Price -------- ------------------------ ---------- Parcel 3 3,760,000 3,000,000 Parcel 4 3,050,000 2,500,000 Parcel 5 3,925,000 1,750,000
Borrower has requested and Beneficiary has agreed to amend the terms of the Loan Agreement, Deed of Trust and Note under the following terms and conditions: 2 1. Sub Section 4(i)-(iv) of the Note shall be revised as follows: (i) On December 31, 2000, an installment of principal in an amount necessary and sufficient to cause the total outstanding principal balance remaining under the Note to be Two Million Five Hundred Thousand Dollars ($2,500,000.00) or less; (ii) On July 31, 2001, an installment of principal in an amount necessary and sufficient to cause the outstanding principal balance remaining under the Note to be One Million Five Hundred Thousand Dollars ($1,500,000.00) or less; (iii) On the Extended Maturity Date, which is December 31, 2001, 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. (iv) In addition to the mandatory principal payments above, Borrower shall pay a monthly principal payment commencing on October 1, 2000 in an amount equal to $13,900 or such amount based on a twenty (20) year amortization together with the interest payment payable under Section 2 of this Note. 2. The Maturity Date under the Loan Agreement and Note shall be December 31, 2001. 3. Section 1.16 (b)(i) of the Deed of Trust was revised on March 10, 2000 and continues to be effective as follows: ...(i) Grantor shall pay to Beneficiary a release payment equal to 100% gross sales proceeds 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) minus a 6% brokers commission and reasonable closing costs. 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. 4. The Loan Agreement and Section 10 of the Subordination Agreement dated August 12, 1998 issued by Mego Financial Corporation ("Mego") was amended on March 10, 2000 and shall be reaffirmed to reflect that Guarantor shall not without prior written consent of Beneficiary, make any principal payments to Mego or any other shareholders of Mego holding notes payable by Guarantor or Mego unless the Loan is paid or the revised schedule payments are met. Mego and such creditors shall acknowledge such restriction hereunder. 5. In consideration of the above amendments and as a condition precedent thereto: a. Grantor shall pay Beneficiary an amendment fee equal to 1% of the outstanding principal balance of the Loan or $33,000 within 30 days upon execution of this letter; and 2 3 b. Grantor reaffirms all of its obligations under the Note, Loan Agreement and 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 Loan or any loan documents, promissory notes or other agreements of any kind evidencing any indebtedness of Grantor to Beneficiary to which it is a party. 6. Except as specifically hereby amended, the Loan Agreement, Note, Deed of Trust, Subordination Agreement and any other loan documents ("the Loan Documents") shall remain unaffected by this Amendment, and shall remain in full force and effect. Nothing in this Amendment shall impair the liens of the Loan Documents, 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. Notwithstanding the foregoing, the Loan Documents will be formally amended and recorded as necessary including but not limited to the Note and Deed of Trust. Borrower shall deliver by November 1, 2000 appropriate title insurance endorsements, updated corporate certifications and opinions as deemed necessary by Beneficiary and its counsel. All fees associated with such amendment shall be payable by Beneficiary in accordance with the Loan Documents. 7. In the event a proposed loan is made to an affiliate of Grantor by Beneficiary in the approximate principal amount of Ten Million One Hundred Thousand Dollars ($10,100,000) then Grantor shall guarantee such loan and security such guaranty with the property described in the Deed of Trust together with any other collateral required by the approval for such loan. Very truly yours, DORFINCO CORPORATION By: /s/ John T. D'Annibale ----------------------------------- AVP CONSENTS The undersigned hereby consent to the terms, conditions and provisions of the foregoing Letter Amendment to the Loan Agreement, Note, Deed of Trust and Subordination Agreement 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: October 4, 2000 3 4 ACKNOWLEDGED: PREFERRED EQUITIES CORPORATION, A Nevada corporation (Borrower) By: /s/ Jon Joseph ----------------------------------- Name: Jon A. Joseph --------------------------------- Title: Senior Vice President -------------------------------- ACKNOWLEDGED BY GUARANTOR: MEGO FINANCIAL CORPORATION, A New York corporation (Guarantor/Subordinated Creditor) By: /s/ Jon Joseph ----------------------------------- Name: Jon A. Joseph --------------------------------- Title: Vice President -------------------------------- - -------------------------------------------- Additional Creditors of Preferred Equities Corporation/Mego Financial Corporation: By: By: --------------------------------- ---------------------------------- By: By: --------------------------------- ---------------------------------- 4 EX-10.218 9 a66375ex10-218.txt EXHIBIT 10.218 1 EXHIBIT 10.218 GUARANTY OF LEASE THIS GUARANTY OF LEASE (this "Guaranty") is given this 2nd day of October, 2000, by MEGO FINANCIAL CORP., a New York corporation, having an office address at 4310 Paradise Road, Las Vegas, Nevada, ("Guarantor"), to JOZAC BUSINESS CENTER, LLC, a California limited liability company ("Landlord"). I. RECITALS A. A certain lease of even date herewith has been, or will be, executed by and between Landlord, and Preferred Equities Corporation, a Nevada corporation, ("Tenant"), for certain premises in the County of Clark, State of Nevada ("Lease"). B. Landlord requires as a condition to its execution of the Lease that the undersigned guarantee the full performance of the obligations of Tenant thereunder. C. Guarantor is desirous that Landlord enter into the Lease with Tenant. NOW, THEREFORE, in consideration of the execution of the Lease by Landlord, Guarantor hereby unconditionally guarantees the full performance of each and all of the terms, covenants and conditions of the Lease to be kept and performed by Tenant, as hereinafter provided. II. TERMS A. GUARANTOR'S OBLIGATIONS: 1. GUARANTY OF TENANT'S PERFORMANCE. Guarantor unconditionally guarantees to Landlord the full and complete performance of each and all of the terms, covenants and conditions of the Lease and any amendments thereto required to be performed by Tenant including, but not limited to, the payment of all Monthly Minimum Rent and Additional Rent (as each term is defined in the Lease), and any and all other charges or sums 2 or any portion thereof to accrue or become due from Tenant to Landlord pursuant to the terms of the Lease ("Monetary Sums"). 2. TENANT'S FAILURE TO PERFORM. In the event of a "default" as defined in the Lease of payment of any of the Monetary Sums when due under the Lease, then, upon demand by Landlord, Guarantor, by certified or cashier's check or by wire transfer, shall pay to Landlord or Landlord's designated agent all Monetary Sums due and owing from Tenant to Landlord under the Lease. 3. OTHER PROVISIONS. In the event of a "default" as defined in the Lease in the performance of any covenants, terms or conditions of the Lease as required to be performed, other than as provided for in Part II, Section A.2 of this Guarantee, then, upon demand by Landlord, Guarantor shall commence and complete performance of the conditions, covenants and terms within five (5) days after the date of Landlord's demand; provided, in the event the performance by Guarantor cannot be completed within five (5) days, Guarantor shall commence performance within that time and diligently pursue same to completion within a reasonable period of time. Notwithstanding the foregoing, nothing contained in this Guarantee shall obligate or require Landlord to give Guarantor notice of any default or failure to perform on the part of Tenant, and Landlord's failure to give such notice shall have no effect on Guarantor's liability hereunder. 4. ADDITIONAL DAMAGES AND INTEREST. In addition to the payment of the Monetary Sums and the performance of any and all other provisions, conditions and terms of the Lease which may be required of Guarantor by reason of Tenant's failure to perform, Guarantor agrees to pay to Landlord any and all costs and expenses incurred by Landlord resulting from Tenant's failure to perform, including all costs and expenses and 2 3 attorney's fees incurred in the enforcement of this Guarantee, whether or not litigation is commenced to enforce such rights. This provision shall also specifically include any and all attorneys' fees incurred by Landlord in connection with any bankruptcy filing by Tenant, Guarantor or any other party to the Lease or this Guaranty. Guarantor further agrees to pay to Landlord interest on any and all sums due and owing Landlord by reason of Tenant's failure to pay same at the rate of fifteen percent (15%) per annum until paid in full. B. LANDLORD'S RIGHTS: 1. ENFORCEMENT. Notwithstanding the provisions of Section A above, Landlord reserves the right, in the event of any failure of Tenant to pay the Monetary Sums, to proceed against Tenant or Guarantor, or both, and to enforce against Guarantor or Tenant, or both, any and all rights that Landlord may have to the Monetary Sums. Guarantor understands and agrees that its liability under this Guarantee shall be primary and that, in any right of action which may accrue to Landlord under the Lease or this Guarantee, Landlord, at its option, may proceed against Guarantor without having taken any action or obtained any judgment against Tenant. 2. DELAY IN ENFORCEMENT. Guarantor understands and agrees that any failure or delay of Landlord to enforce any of its rights under the Lease or this Guarantee shall in no way affect Guarantor's obligations under this Guarantee. C. GUARANTOR'S WAIVERS: Guarantor hereby waives: 1. Any and all notices, presentments and notices of nonpayment or nonperformance; 3 4 2. All defenses based upon any disability of Tenant, release of Tenant's liability for any reason or any statute of limitations controlling obligations accruing under the Lease or this Guarantee; 3. Any and all rights it may have now or in the future to require or demand that Landlord pursue any right or remedy Landlord may have against Tenant or any third party, 4. Any and all rights it may have to enforce any remedies available to Landlord against Tenant now or in the future; 5. Any and all right to participate in any security deposit held by Landlord under the Lease now or in the future; 6. The right to require Landlord to proceed against Tenant, exhaust any security which Landlord now holds or may hold in the future from Tenant or pursue any other right or remedy available to Landlord; 7. All benefits and defenses under Nevada law that Guarantor's liability may be larger in amount and more burdensome than the liability of Tenant, and that Guarantor is liable even if Tenant had no liability at the time of the execution of the Lease or ceases for any reason to be liable; 8. All rights and benefits under Nevada law that Guarantor's liability shall continue even if Landlord alters the obligations of Tenant under the Lease; and 9. All benefits and defenses under Nevada law, including the right to require Landlord to proceed against Tenant, any other guarantor, or any security Landlord may hold, before enforcing this Guaranty against Guarantor, and the right to require Landlord to pursue any other right or remedy for the benefit of Guarantor, and Guarantor agrees that Landlord may 4 5 proceed against Guarantor without proceeding against or exhausting any security that Landlord holds. D. CHANGES DO NOT AFFECT LIABILITY: Guarantor understands and agrees that its obligations under this Guaranty shall not be affected in any way by any extension of time or other indulgence granted to Tenant, any amendment, modification, renewal or extension of the Lease, or any assignment or subletting of the Lease, and in no way shall any such occurrence release or discharge Guarantor from its obligations under this Guaranty. Guarantor agrees that its obligations under this Guaranty shall not be affected by Landlord's failure to notify Guarantor of any default or failure to perform on the part of Tenant. E. TENANT'S INSOLVENCY: 1. ASSUMPTION OF LIABILITY. Guarantor understands and agrees that, if Tenant becomes insolvent or is adjudicated bankrupt, whether by voluntary or involuntary petition, or if any bankruptcy action involving Tenant is commenced or filed, or if a petition for reorganization, arrangement or similar relief is filed against Tenant, or if a receiver of any part of Tenant's property or assets is appointed by any court, Guarantor will pay to Landlord the amount of all accrued, unpaid and accruing Monetary Sums to the date when the trustee or administrator accepts or assumes the Lease and commences paying same; provided, however, at such time as the trustee or administrator rejects the Lease, Guarantor shall pay to Landlord all accrued, unpaid and accruing Monetary Sums under the Lease for the remainder of the Term. 2. LANDLORD'S OPTION. Pursuant to the provisions of Part II, Section E.1 above, at the option of Landlord as to the amounts owing for the unexpired term of the Lease if the Lease is rejected, Guarantor shall either: 5 6 a. Pay to Landlord an amount equal to the Monetary Sums which would have been payable for the unexpired term of the Lease reduced to its present day value; or b. Execute and deliver to Landlord a new lease for the balance of the Term with the same terms and conditions as the Lease and with Guarantor as tenant thereunder. 3. EFFECT OF OPERATION OF LAW. Any operation of any present or future debtor's relief act or similar act or law or decision of any court shall in no way affect the obligations of Guarantor or Tenant to perform any of the terms, covenants or conditions of the Lease or of this Guaranty. III. MISCELLANEOUS: A. EXTENT OF OBLIGATIONS. Notwithstanding anything to the contrary in this Guaranty, it is understood and agreed that this Guaranty shall extend to any and all obligations of Tenant to Landlord under the Lease and any amendments to the Lease. B. SUBROGATION. Guarantor understands and agrees that it shall have no right of subrogation against Tenant until such time as all of Tenant's obligations to Landlord have been fully paid and discharged. C. ASSIGNABILITY. This Guaranty may be assigned in whole or in part by Landlord upon written notice to Guarantor. D. SUCCESSORS AND ASSIGNS. The terms and provisions of this Guaranty shall be binding upon and inure to the benefit of the successors and assigns of the parties hereto. E. MODIFICATION OF GUARANTY. This Guaranty constitutes the full and complete agreement between the parties hereto and it is understood and agreed that the provisions hereof may only be modified by a writing executed by the parties hereto. 6 7 F. NUMBER AND GENDER. As used herein, the singular shall include the plural and, as used herein, the masculine shall include the feminine and neuter genders. G. CAPTIONS/HEADINGS. Any captions or headings used in this Guaranty are for reference purposes only and are in no way to be construed as part of this Guaranty. H. INVALIDITY. If any term, provision, covenant or condition of this Guaranty is held to be void, invalid or unenforceable, the remainder of the provisions hereof shall remain in full force and effect and shall in no way be affected, impaired or invalidated. I. JURISDICTION. The validity of this Guaranty and of any of its terms or provisions, and the rights and duties of the parties hereunder, shall be interpreted and construed in accordance with the laws of the State of Nevada. J. ATTORNEYS' FEES. In the event that either Landlord or Guarantor shall institute or otherwise become involved in any action or proceeding, including, but not limited to, any bankruptcy case commenced by Tenant, Guarantor or any other party, the party not prevailing in such action or proceeding shall reimburse the prevailing party for its actual attorneys' fees, and all fees, costs and expenses incurred in connection with such action or proceeding, including, without limitation, any postjudgment fees, costs or expenses incurred on any appeal or in collection of any judgment. K. GUARANTY OF PAYMENT AND PERFORMANCE. It is understood and agreed that this Guaranty is unconditional and continuing and is a guarantee of payment and performance and not of collection. L. JOINT AND SEVERAL OBLIGATION. If Guarantor is more than one (1) person, the obligations of the persons comprising Guarantor shall be joint and several and the unenforceability of this Guaranty or Landlord's election not to enforce this Guaranty against one 7 8 (1) or more of the persons comprising Guarantor shall not affect the obligations of the remaining persons comprising Guarantor or the enforceability of this Guaranty against such remaining persons. M. CORPORATE AUTHORITY. If Guarantor is a corporation, each individual signing this Guaranty on behalf of Guarantor represents and warrants that he or she is duly authorized to execute and deliver this Guaranty on behalf of the corporation, and that this Guaranty is binding on Guarantor in accordance with its terms. Guarantor shall, prior to execution or within three (3) days thereafter, deliver to Landlord a certified copy of a resolution of its board of directors authorizing such execution. IN WITNESS WHEREOF, the undersigned have executed this Guaranty and made it effective on the date first written above. Addresses for notices: GUARANTOR: Jon A. Joseph, Vice President MEGO FINANCIAL CORP., a New York ----------------------------- corporation 4310 Paradise Road ---------------------------- Las Vegas, Nevada 89109 ---------------------------- By: /s/ Jon A. Joseph, V.P ---------------------------------- Its Authorized Representative 8 9 MASTER LEASE AGREEMENT Landlord: JOZAC Business Center, LLC Tenant: Preferred Equities Corporation Guarantor: MEGO Financial Corporation TABLE OF CONTENTS
PAGE ---- SECTION 1 PREMISES......................................................... 1 SECTION 2 EFFECTIVENESS - SALE/LEASE BACK - CONDITION OF PREMISES.......... 2 SECTION 3 TERM/OPTION TO EXTEND............................................ 2 SECTION 4 RENT............................................................. 6 SECTION 5 GAMING........................................................... 12 SECTION 6 SECURITY DEPOSIT................................................. 12 SECTION 7 POSSESSION AND SURRENDER......................................... 13 SECTION 8 USE OF PREMISES/REPAIRS/COMPLIANCE............................... 14 SECTION 9 IMPROVEMENTS/SIGNAGE AND CONSTRUCTION............................ 18 SECTION 10 LANDLORD'S REPAIRS.............................................. 21 SECTION 11 TAXES........................................................... 21 SECTION 12 UTILITIES AND SERVICES.......................................... 25 SECTION 13 INSURANCE....................................................... 26 SECTION 14 LIENS........................................................... 31 SECTION 15 INDEMNIFICATION................................................. 31 SECTION 16 SUBORDINATION................................................... 32 SECTION 17 EXISTING LEASES/ASSIGNMENT -- SUBLETTING........................ 33 SECTION 18 SUBLEASES/COLLATERAL ASSIGNMENT/NON-DISTURBANCE AND ATTORNMENT.. 36 SECTION 19 INSOLVENCY AND DEATH............................................ 38 SECTION 20 CONDEMNATION.................................................... 38
i 10 SECTION 21 DAMAGE OR DESTRUCTION........................................................ 40 SECTION 22 RIGHT OF ACCESS.............................................................. 41 SECTION 23 EXPENDITURES BY LANDLORD..................................................... 42 SECTION 24 ESTOPPEL CERTIFICATE......................................................... 43 SECTION 25 TENANT'S DEFAULT; LANDLORD'S REMEDIES........................................ 43 SECTION 26 QUIET POSSESSION............................................................. 49 SECTION 27 CONVEYANCE BY LANDLORD....................................................... 49 SECTION 28 DEFAULT BY LANDLORD.......................................................... 50 SECTION 29 NOTICES...................................................................... 50 SECTION 30 REMEDIES CUMULATIVE.......................................................... 51 SECTION 31 SUCCESSORS AND ASSIGNS....................................................... 52 SECTION 32 PARTIAL INVALIDITY........................................................... 52 SECTION 33 TIME OF THE ESSENCE.......................................................... 52 SECTION 34 ENTIRE AGREEMENT............................................................. 52 SECTION 35 NO PARTNERSHIP............................................................... 52 SECTION 36 BROKERS...................................................................... 53 SECTION 37 ATTORNEYS' FEES.............................................................. 53 SECTION 38 GENERAL PROVISIONS........................................................... 54
ii 11 M A S T E R L E A S E 1500 E. TROPICANA AVENUE LAS VEGAS, NEVADA THIS LEASE ("LEASE") is made and entered into this 2nd day of October, 2000, by and between JOZAC BUSINESS CENTER, LLC, a California limited liability company (herein referred to as "LANDLORD"), and PREFERRED EQUITIES CORPORATION, a Nevada corporation (herein referred to as "TENANT"). SECTION 1 PREMISES 1.1 Upon the conditions, limitations, covenants and agreements herein set forth, Landlord hereby agrees to lease to Tenant, and Tenant hereby accepts, hires and leases from Landlord certain real property improved with a two-story building containing approximately Sixty One Thousand One Hundred Twenty Two (61,122) gross square feet, bearing a street address of 1500 East Tropicana Avenue, Las Vegas, Nevada 89119 as more particularly set out on Exhibits A and A1 attached hereto and incorporated herein by reference (herein referred to as the "Premises"). The Premises shall include the building located thereon, parking areas, landscaping, walkways, driveways, service areas and any other improvements now existing or hereafter erected thereon. 1.2 This Lease shall be subject to all existing and future covenants, conditions, restrictions, reservations and easements now or hereafter recorded against the Property; provided however that no future covenant, condition, restriction, reservation or easement shall materially and adversely affect Tenant's or any subtenant's use of the Premises, including its quiet possession thereof. Page 1 12 SECTION 2 EFFECTIVENESS - SALE/LEASE BACK - CONDITION OF PREMISES 2.1 The effectiveness of this Lease shall be expressly subject to the Closing of the real estate purchase transaction between Tenant, as seller, and Landlord, as buyer, for the Premises pursuant to that certain Real Estate Purchase Agreement and Receipts for Deposit dated as of June 1, 2000, and subsequent amendments thereto dated June 6, 2000 and June 7, 2000 ("Purchase Agreement"). It is the intent of the parties hereto that the Lease will commence on the Date of Closing of the foregoing transaction. The effectiveness of this Lease shall also be expressly subject to the execution and delivery to Landlord of a Guaranty of Lease by MEGO FINANCIAL CORP. in favor of Landlord in the form attached hereto as Exhibit B. Tenant has been the owner of the Premises prior to the commencement of this Lease and is familiar with the condition of the Premises, the status of title, the building, all improvements located thereon, all tenancies and all contracts affecting the Premises. Tenant represents that it has examined the Premises, is satisfied with the physical condition thereof and agrees to accept the same "as is". Tenant further acknowledges that Landlord has not made any representation as to such physical condition, the rents, leases, expenses of operation or any other matter or thing affecting or relating to the Premises. SECTION 3 TERM/OPTION TO EXTEND 3.1 The term of this Lease shall be ten (10) years commencing on the "Commencement Date", which shall be the Date of Closing of the real estate transaction referred to in Section 2.1 Page 2 13 hereof and terminating on the last day of the One Hundred Twentieth (120th) full calendar month thereafter ("Initial Term"), unless sooner terminated or extended as hereinafter provided. 3.2 Tenant shall have an option to extend the Initial Term for two (2) consecutive periods of five (5) years each ("Option Periods") on the terms and conditions set forth herein; provided that said options may be exercised only in the event Tenant is not in default either at the time said option is exercised or at the time either of said Option Periods is to commence. Further, said options may not be severed from the Lease or separately sold, assigned or otherwise transferred. The words "Lease Term" or "Term" as used in this Lease, shall mean the term of this Lease, as the same may be extended by Tenant pursuant to this section. 3.3 To exercise the option set forth herein, Tenant shall notify Landlord in writing no later than One Hundred Twenty (120) calendar days and no earlier than Three Hundred Sixty Five (365) calendar days prior to the expiration of the Initial Term or prior Option Period. 3.4 In the event Tenant properly exercises its option(s) as provided herein, all of the terms and conditions of this Lease shall apply during the Option Period(s), except as to the option right then exercised and subject to the security deposit and rent adjustments set forth hereinbelow. The Minimum Monthly Rent for each Option Period shall be increased to initially reflect the Fair Market Rental Value (as defined below) of the Premises as of the commencement of each Option Period, which Minimum Monthly Rent shall in no event be less than the Minimum Monthly Rent for the last Lease Year of the Initial Term or first Option Period, respectively, and which shall be increased annually during the Option Periods in accordance with the CPI adjustment formula set forth in Section 4.3 hereof. Page 3 14 Additionally, the Security Deposit required by Section 6 hereof shall be increased as of the commencement of each Option Period to an amount identical to the Minimum Monthly Rent for the first month of such Option Period. 3.4.1 The term Fair Market Rental Value shall mean the price, as of the date in question, which a landlord, willing but not obligated to lease, would accept for the Premises, and which a tenant, willing but not obligated to lease, would pay therefor in an arms length lease transaction. For purposes of determining Fair Market Rental Value only, the use of the Premises shall be restricted to the permissible uses set forth in this Lease. Fair Market Rental Value shall be determined by the parties or, if the parties are unable to agree thereon, by the following procedure: When the parties are unable to agree as to the Fair Market Rental Value of the Premises within thirty (30) after Tenant exercises a renewal option, either party may give written notice of such disagreement to the other party and in such notice shall designate the "First Appraiser". Within thirty (30) days after the service of such notice, the other party shall give written notice to the party giving the first notice, which notice shall designate the "Second Appraiser". If the Second Appraiser is not so designated within said notice or by the time above specified, then the First Appraiser shall designate the Second Appraiser. The First and Second Appraisers so designated or appointed shall meet within twenty (20) days after the Second Appraiser is appointed and shall appoint a "Third Appraiser". If the First and Second Appraisers are unable to agree upon a Third Appraiser within twenty (20) days after the Second Appraiser is appointed, then either party, on behalf of both, may request that such appointment be made by the presiding judge of the United States District Court for the district in which the Premises is located, or any successor Federal Court of original Page 4 15 jurisdiction, or by the Chief Judge of the Clark County District Court (the "Presiding Judge"). In the event of a failure, refusal or inability of any appraiser to act, a new appraiser shall be appointed in his stead, which appointment shall be made by the Presiding Judge. Each party shall pay the fees and expenses of the appraiser appointed by such party, or in whose stead, as provided above, such appraiser was appointed, and the fees and expenses of the Third Appraiser, and all other expenses, if any, shall be born equally by both parties. Any appraiser designated to serve as above provided, shall be disinterested, shall be a member of the American Institute of Real Estate Appraisers (or any successor association or body of comparable standing if such institute is not then in existence), and shall be familiar with property values in Southern Nevada. The appraisers shall determine the Fair Market Rental Value of the Premises. A decision joined in by two of the three appraisers shall be the decision of all the appraisers. After reaching a decision, the appraisers shall give written notice thereof to Landlord and Tenant, which notice shall state the Fair Market Rental Value so determined, and the Fair Market Rental Value so stated shall be considered the Fair Market Rental Value for purposes of this Lease and shall be binding upon Landlord and Tenant. If the appraisers shall fail to reach a decision as provided above within thirty (30) days after the appointment of the Third Appraiser, the Fair Market Rental Value shall be the average of the two closest appraisals. Subject to the provisions of this Lease, the appraisers shall make their appraisal in the same manner as other real estate appraisals and no hearings shall be held in connection therewith. Page 5 16 SECTION 4 RENT 4.1 The following definitions shall pertain hereto: 4.1.1 "RENTAL YEAR" shall mean a twelve (12) calendar month year beginning on the first day of the calendar month following the Commencement Date and ending twelve (12) full calendar months thereafter and each full twelve (12) calendar months respectively thereafter. 4.1.2 "LEASE YEAR" shall mean a twelve (12) month calendar year, except that in the event the Commencement Date occurs on a date other than January 1, the first Lease Year hereunder shall be that fractional part of the calendar year from the Commencement Date to December 31 of the same year and the final Lease Year shall be that fractional part of the calendar year from January 1 to the expiration date. 4.1.3 "BASE YEAR" shall mean the calendar year in which this Lease is executed. 4.1.4 "MINIMUM MONTHLY RENT" shall mean the base monthly rent payable in accordance with Section 4.2 below. 4.1.5 "ADDITIONAL RENT" shall mean all rent and other payments due Landlord hereunder, other than the Minimum Monthly Rent. 4.1.6 "AGGREGATE MONTHLY RENT" shall mean all monthly rent, including the Minimum Monthly Rent and all Additional Rent. 4.2 Tenant covenants and agrees to pay Landlord, promptly when due, without notice or demand and without deduction or setoff of any amount for any reason whatsoever, as Minimum Monthly Rent for the Premises the sum of $689,352 per rental year in equal monthly installments of $57,446 each, in advance, on the first day of each and every calendar month during the Initial Term. Minimum Monthly Rent for any period between the Commencement Date, as defined in Page 6 17 Section 3.1 hereof, and the first day of the first "Rental Year", as defined in Section 4.1.1 hereof shall be computed on a per diem basis and paid along with the first monthly installment to be paid hereunder. All amounts payable as Aggregate Monthly Rent or otherwise under this Lease, shall be paid to Landlord at the address set forth herein or at such other place as Landlord shall from time to time designate by notice to Tenant, in lawful money of the United States, which shall be legal tender and payment of all debts and dues, public and private, at the time of payment. 4.3 The Minimum Monthly Rent, as defined above, shall be subject to being increased by the percentage of increase, if any, in the Consumer Price Index for Urban Wage Earners and Clerical Workers, Los Angeles-Anaheim-Riverside Average "All Items", (1982-84=100), published by the United States Department of Labor's Bureau of Labor Statistics. The initial base period month for the purposes of such adjustment shall be the month of December of the calendar year in which this Lease is executed and the adjustment for the initial year of this Lease shall be the increase in the Index from the Commencement Date month to such December. Each December subsequent to the base period month, as aforesaid, shall then be used for comparison purposes and the increase in such Index for the then-current December over the immediately preceding December shall cause an equal adjustment in Minimum Monthly Rent which adjustment shall be effective as of the next-following January 1, and be retroactive, if necessary. The actual computation and determination will be made as soon as the current December Index is published. In no event shall the Minimum Monthly Rent be less than the amount of such Minimum Monthly Rent payable hereunder for the previous Lease Year. Further, it is understood that increases in Minimum Monthly Rent under this Section 4.3 shall not exceed fifteen percent (15%) over the ten (10) year Initial Term. Page 7 18 Should the aforementioned Index be discontinued, the parties shall select another similar index which reflects consumer prices and if the parties cannot agree on another index, such replacement index or measuring criteria shall be selected by Landlord in the exercise of its reasonable judgment. 4.3.1 Landlord shall, within a reasonable time after obtaining the appropriate data necessary for computing such increase, give Tenant written notice of any adjusted Minimum Monthly Rent so determined, and Landlord's computation thereof shall be conclusive and binding, but shall not preclude any adjustment which may be required in the event of a published amendment of the Index figures upon which the computation was based, unless Tenant shall, within thirty (30) days after the giving of such notice, notify Landlord in writing of any claimed error therein. Landlord will promptly investigate the claimed error, determine in good faith whether it is valid and, if necessary, adjust the rental within thirty (30) days of such determination. The upward adjusted Minimum Monthly Rent shall be due and payable for each month commencing with January 1 of the next Lease Year. 4.4 In addition to the Minimum Monthly Rent, and as a part of the Aggregate Monthly Rent, beginning on the Commencement Date, Tenant shall pay Landlord, at the time and in the manner herein set forth, the following "Additional Rent": 4.4.1 It is the intent of the parties that Tenant shall be directly responsible for any and all Property Operating Cost, defined below. Accordingly, Tenant will use its best efforts to arrange to pay for all Property Operating Costs directly, and will provide Landlord with written proof of timely payment for each such cost. Further, Tenant shall pay as Additional Rent, any Property Operating Cost paid by Landlord pursuant to Section 23.1, whether or not Landlord is required to pay the same under this Lease. Page 8 19 (a) The term "Property Operating Cost" shall mean the total cost and expense incurred in managing, operating, equipping, lighting, repairing, replacing and maintaining the Premises, including janitorial, cleaning, refuse and trash disposal, lightbulb replacement and other services and repairs listed in this Lease, as well as any other costs and expenses necessary to maintain the Premises as a first-class office building. Such operating and maintenance costs shall include all costs and expenses of operating and maintaining the Premises, including, without limitation, all Impositions (as that term is defined below); providing private police protection, security patrol, or night watchmen (including, but not limited to uniforms); fire protection and security alarm systems and equipment; preventative maintenance, replacement and repair for heating and air conditioning; workers compensation insurance; payroll taxes; materials, supplies, and all other costs of operating and repairing the Premises, including structures, sidewalks and parking areas, including but not limited to, lighting, cleaning, sweeping, painting, striping, sealing of the parking lot, roof repairs, structure repairs, removing of rubbish or debris, policing and inspecting; depreciation on or rentals of machinery and equipment; all utility expenses; costs and expenses for the rental of music program services and loudspeaker systems, including, but not limited to, furnishing electricity therefor; insurance, including fire and extended coverage, liability, property damage, rent loss, boiler insurance, vandalism, malicious mischief, earthquake, insurance against liability for defamation and claims of false arrest, and such other insurance in such amounts and covering hazards deemed appropriate by Tenant or required under this Lease; fidelity bonds; and all costs of repairs, maintenance, or replacement of paving, curbs, walkways, remarking, directional or other signs, landscaping, drainage, lighting facilities, repair and maintenance of the Premises including parking areas; costs and expenses of planting, replanting and replacing flowers, shrubbery and other landscaping, and the cost of servicing and maintaining any sprinkler system. There shall Page 9 20 also be included the cost of leasing and operating any signs; the cost of personnel to implement any service described above, to direct traffic and to police the Premises. Costs of capital improvements or additions to the Premises which will result in overall cost-savings to Tenant hereunder shall also be included hereunder as a Property Operating Cost. 4.4.2 In addition to all other rental amounts specified herein, as further Additional Rent, Tenant shall pay prior to delinquency, all "Impositions" relative to of the Premises. Accordingly, Tenant will use its best efforts to arrange to pay all Impositions directly, and will provide Landlord with written proof of timely payment for each Imposition. For the purpose of this Lease "Impositions" means: (i) Any real estate taxes, fees, assessments or other charges assessed against the Premises or any improvements thereon. Tenant will use its best efforts to arrange with appropriate Clark County officials to have all real estate tax bills/invoices sent directly to Tenant, will pay the same prior to the due dates thereof, and will provide Landlord with proof of payment on or before applicable due dates. (ii) All personal property taxes on personal property used in connection with the Premises other than taxes payable by Tenant under Section 11 hereof. (iii) Any and all environmental levies or charges now in force affecting the Premises or any portion thereof, or which may hereafter become effective, including, but not limited to parking taxes, levies, or charges, employer parking regulations, and any other parking or vehicular regulations, levies, or charges imposed by any municipal, state or federal agency or authority. Page 10 21 (iv) Any other taxes levied or assessed in addition to, as a replacement, alternative or substitute for, or in lieu of such real or personal property taxes. (v) Any expenses incurred in connection with any requirement subsequent to the date hereof for changes at the Premises so as to comply with then-existing laws, ordinances or codes imposed by federal, state or local governmental authorities. Impositions do not include Landlord's general income taxes, inheritance, estate or gift taxes. 4.5 All rents and other monies required to be paid by Tenant hereunder to Landlord shall be paid to Landlord without deduction or offset, prior notice or demand, in legal tender of the United States of America, at P.O. Box 4754, Thousand Oaks, California 91359, or at such other place as Landlord may, from time to time, designate in writing. Tenant agrees that all monies required to be paid by Tenant pursuant to this Lease, except for the Minimum Monthly Rent are hereby conclusively deemed to be "Additional Rent." 4.5.1 If Tenant shall fail, within five (5) days after the same is due and payable, to pay to Landlord or reimburse Landlord for, as applicable, any Aggregate Monthly Rent, Additional Rent or any other amount or charge to be paid as Additional Rent by Tenant hereunder, such unpaid amount shall be subject to a late charge equal to five percent (5%) of such unpaid amount. In addition, any such unpaid amount shall bear interest from the thirtieth (30th) day after the due date thereof to the date of payment at the rate of fifteen percent (15%) per annum. The foregoing are not exclusive of Landlord's rights due to Tenant's default under this Lease and the remedies therefor. Page 11 22 SECTION 5 GAMING 5.1 No slot machine, gambling device or other "gaming" of any type as defined by Nevada law or requiring a gaming license issued by the State of Nevada shall be permitted in or on the Premises without the prior written consent of Landlord, which consent is strictly within Landlord's discretion. SECTION 6 SECURITY DEPOSIT 6.1 Tenant shall on the Date of Closing through escrow deposit with Landlord the sum of $57,446.00, receipt of which is hereby acknowledged by Landlord ("Deposit"). Said Deposit shall be held by Landlord as security for the faithful performance by Tenant of all the terms, covenants and conditions of this Lease by Tenant to be kept and performed during the Term hereof, including the vacating of the Premises by Tenant; provided that Tenant shall not be excused from the payment of any rent herein reserved or any other charge herein provided. If Tenant defaults with respect to any provision of this Lease, Landlord may, but shall not be required to, use or retain all or any part of the Deposit for the payment of any rent or other monies due Landlord, to repair damages to the Premises, to clean the Premises or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of the Deposit is so used or applied, Tenant shall, within five (5) days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore the Deposit to its original amount; otherwise such failure shall be a default under this Lease. 6.1.1 Landlord shall not be required to keep the Deposit separate from its general funds, and Tenant shall not be entitled to interest on the Deposit. Should Tenant comply with all of Page 12 23 the terms, covenants and conditions of this Lease and promptly pay all the rent herein provided for and all other sums payable by Tenant to Landlord hereunder as the same fall due, then the Deposit shall be returned to Tenant thirty (30) days after the end of the Term, or after the last payment due from Tenant to Landlord, whichever last occurs. In the event of sale or transfer of the Premises, if Landlord transfers the Deposit to the vendee or transferee for the benefit of Tenant, or if such vendee or transferee assumes all liability with respect to the Deposit, then Landlord shall be considered released by Tenant from all liability for the return of the Deposit, and Tenant agrees to look solely to the new landlord for the return of the Deposit, and it is agreed that this Section 6.1.1 shall apply to every transfer or assignment to a new landlord. No mortgagee or beneficiary holding a lien on the Premises or any portion thereof shall be liable to Tenant for any Deposit, unless said Deposit has actually been delivered to such mortgagee or beneficiary. 6.1.2 Tenant shall have no right or privilege to mortgage, encumber, transfer or assign the Deposit without the prior written consent of Landlord. 6.2 Tenant may not deduct the Deposit or any portion thereof from its Aggregate Monthly Rent, Minimum Monthly Rent, Additional Rent, or from other payments to Landlord under this Lease; and Landlord's right to possession of the Premises or to take appropriate action for nonpayment of any rent or for any other reason shall not be affected by the fact that Landlord holds the Deposit and does not use, apply or retain same as set forth herein. SECTION 7 POSSESSION AND SURRENDER 7.1 Tenant shall by entering upon and occupying the Premises, be deemed to have accepted the Premises "as is". Page 13 24 7.2 Upon the expiration or termination of the Term of this Lease, if Tenant has fully and faithfully performed all of the terms, conditions and covenants of this Lease to be performed by Tenant, Tenant shall, at its sole cost and expense, remove all personal property and trade fixtures which Tenant has installed or placed in or on the Premises (all of which are hereinafter referred to as "Tenant's Property") from the Premises and repair all damage thereto resulting from such removal; and Tenant shall thereupon surrender the Premises in the same condition as on the date when the Premises was ready for occupancy, reasonable wear and tear excepted. If Tenant has not fully and faithfully performed all of the terms, conditions and covenants of this Lease to be performed by Tenant, Tenant shall nevertheless remove Tenant's Property from the Premises in the manner aforesaid within five (5) days after receipt of written direction to do so from Landlord. In the event Tenant shall fail to remove any of Tenant's Property as provided herein, Landlord may, but is not obligated to, at Tenant's expense, remove all of such Tenant's Property not so removed and repair all damage to the Premises resulting from such removal, and Landlord shall have no responsibility to Tenant for any loss or damage to Tenant's Property caused by or resulting from such removal or otherwise. If the Premises is not surrendered at the end of the Term, Tenant shall indemnify Landlord against all loss or liability resulting from delay by Tenant in so surrendering the Premises including, without limitation, any claims made by any succeeding tenant due to such delay. SECTION 8 USE OF PREMISES/REPAIRS/COMPLIANCE 8.1 The Premises is leased to Tenant solely for office building purposes. Tenant shall not use or suffer the Premises, or any portion thereof, to be used for any other purpose or purposes whatsoever, without Landlord's prior written consent. Tenant shall conduct business under the trade name(s) normally utilized by Tenant in its business operations. Page 14 25 8.2 Tenant shall not use or permit the use of the Premises or any portion thereof as living quarters, sleeping quarters or lodging rooms. 8.3 Tenant shall refrain from keeping or permitting the keeping of any animals of any kind in, about or upon the Premises without Landlord's prior written approval. 8.4 Tenant shall at its own cost and expense keep and maintain, in good order, condition and repair the Premises and every part thereof and any and all appurtenances thereto wherever located, including, but without limitation, the roof, foundation, structural portions, HVAC and all other systems of the building located on the Premises, all exterior and interior portions of all doors, door checks, windows, plate glass, signage, all plumbing and sewage facilities within or serving the Premises, including free flow up to the main sewer line, fixtures, sprinkler systems, walls, floors and ceilings, it being understood that any and all repair, replacement and maintenance responsibilities shall be the Tenant's. Tenant shall establish a program of preventive maintenance for all systems servicing the building on the Premises and for all other responsibilities of Tenant under this Lease, including, without limitation, landscaping, parking facilities, landscaping, roof, HVAC and other responsibilities hereunder. 8.5 Tenant shall store all trash and garbage in containers so as not to be visible or create a nuisance to customers and business invitees to the Premises, and so as not to create or permit any health or fire hazard, and shall arrange for the regular removal thereof. 8.5.1 In the event Tenant's business activity at the Premises shall entail potentially hazardous or dangerous waste material or debris, then Tenant shall be responsible for installing, maintaining and properly utilizing appropriate waste and disposal containers and providing for the safe storage, removal and disposal of same. Page 15 26 8.6 Tenant hereby covenants and agrees that it, its agents, employees, servants, contractors, subtenants and licensees shall abide by such commercially reasonable rules and regulations, which shall be hereafter reasonably adopted by Tenant for the Premises, and amendments and modifications of any of the foregoing, for the safety, care and cleanliness of the Premises or for the preservation of good order thereon and therein. 8.7 INTENTIONALLY OMITTED. 8.8 Tenant will not commit or permit any nuisance on the Premises or commit or suffer any immoral or illegal act to be committed thereon. 8.9 The use of the Premises by Tenant, its employees, agents, customers, subtenants, licensees, invitees and contractors, shall at all times be in compliance with all covenants, conditions and restrictions; easements; reciprocal easement agreements; and all matters presently of public record; or which may hereafter be placed of public record, which do not materially and adversely affect Tenant's or any subtenant's use of the Premises or any part thereof, or the quiet enjoyment of same. 8.10 Tenant shall, at its sole cost and expense, comply with all federal, state, city and municipal statutes, ordinances, rules and regulations (including compliance with the Americans With Disabilities Act) as from time to time in effect and the orders and regulations of any ISO (Insurance Services Office) or any other body or entity exercising similar functions in force during the Term and affecting the Premises or Tenant's use thereof. Further, Tenant shall not use the Premises so as to create waste or constitute a nuisance. 8.10.1 Tenant shall not use the Premises for the generation, storage, manufacture, production, releasing, discharge, or disposal or any hazardous substance (defined below) or allow or suffer any other entity or person to do so. "Hazardous substance" shall mean any flammable or Page 16 27 related material and any other substance or material defined or designated as a hazardous or toxic substance, material or waste by a governmental law, order, regulation or ordinance presently in effect or as amended or promulgated in the future and shall include, without limitation: (i) Those substances included within the definitions of "hazardous substances," "hazardous materials," "toxic substances" or "solid waste" in CERCLA, RCRA, the Hazardous Materials Transportation Act, 40 U.S.C. Sections 1801 et seq., the Clean Water Act, 33 U.S.C. 1251 et seq., the Clean Air Act, 42 U.S.C. 7401 et seq. the Toxic Substance Control Act, 15 U.S.C. 2601 et seq., and the Safe Drinking Water Act, 42 U.S. C. 300f through 300j, and in the regulations promulgated pursuant to said laws; (ii) Those substances listed in the United States Department of Transportation Table (49 CFR 172.101 and amendments thereto) or by the Environmental Protection Agency (or any successor agency) as hazardous substances (40 CFR Part 302 and amendments thereto); (iii) Such other substances, materials and wastes which are or become regulated as hazardous or dangerous under applicable local, state or federal law, or the United States government, or which are classified as hazardous or toxic under federal, state or local laws or regulations; and (iv) Any material, waste or substance which is (A) petroleum, (B) asbestos, (C) polychlorinated biphenyls or (D) designated as a "hazardous substance" pursuant to Section 311 of the Clean Water Act, 33 U.S.C. Sections 1251 et seq. (33 U.S.C. 1321) or listed pursuant to Section 307 of the Clean Water Act (33 U.S.C. 1317). The foregoing notwithstanding, Tenant shall be entitled to use and maintain such limited quantities of materials that may otherwise be defined as hazardous substances, as used in the ordinary course Page 17 28 of Tenant's or any subtenant's business; provided, that such hazardous substances are properly maintained, stored, and disposed of, Tenant complies with all laws, ordinances, rules and regulations applicable thereto and Tenant bears all responsibility and liability therefor. 8.10.2 Tenant shall protect, indemnify and hold harmless Landlord, its partners, directors, members, officers, employees, agents, successors and assigns, and the Premises from and against any and all claims, losses, damages, costs, expenses, liabilities, fines, penalties, charges, administrative and judicial proceedings and orders, judgments, remedial action requirements, and enforcement actions of any kind (including, without limitation, attorney's fees and costs at trial and on appeal) directly or indirectly arising out of or attributable to, in whole or in part, the breach by Tenant of any of the covenants, representations and warranties of this Section 8.10 et seq., or the use, generation, manufacture, production, storage, release, threatened release, discharge, disposal, or presence of a hazardous substance on, under, from or about the Premises. The foregoing indemnity shall further apply to any residual contamination on, under, from or about the Premises, or affecting any natural resources arising in connection with the use, generation, manufacturing, production, handling, storage, transport, discharge or disposal of any such hazardous substance, and irrespective of whether any of such activities were or will be undertaken in accordance with environmental laws or other applicable laws, regulations, codes and ordinances. SECTION 9 IMPROVEMENTS/SIGNAGE AND CONSTRUCTION 9.1 It is acknowledged that Tenant has been the owner of the Premises prior to the commencement of this Lease and is familiar with the Premises, the building located thereon, all improvements, tenancies and contracts that are a part of or affect the Premises. Tenant represents that it has examined the Premises, and is satisfied with the physical condition thereof and agrees to Page 18 29 accept the same "as is". Tenant further acknowledges that Landlord has not made any representation as to the physical condition, the rents, leases, expenses of operation or any other matter or thing affecting or relating to the Premises. Tenant shall be completely responsible for the cost of erection; maintenance; replacement and, upon termination of this Lease, removal of all signage on the Premises; provided however, that signage related to any subtenant occupying a part of the Premises pursuant to a sublease, the term of which extends beyond the termination of this Lease, shall not be subject to removal in accordance with the terms hereof. All signage must be maintained in good condition and be in conformance with all governmental laws, ordinances and regulations. 9.2 Tenant shall not make any "material" additions, alterations, improvements or changes ("Improvements") in or to the Premises (i.e., any single Improvement costing more than $50,000) without the prior written approval of Landlord which approval shall not be unreasonably withheld, conditioned or delayed. Any Improvements shall be at the sole cost and expense of Tenant, and shall be made promptly and in good and workmanlike manner and in compliance with all insurance requirements and with all applicable permits, authorizations, building regulations, zoning laws, environmental regulations, laws regarding the physically disabled and all other governmental rules, regulations, ordinances, statutes and laws, now or hereafter in effect pertaining to the Premises or Tenant's use thereof. Any Improvements made by Tenant shall at Landlord's option become the property of Landlord upon the expiration or sooner termination of this Lease. However, Landlord shall have the right to require Tenant to remove such Improvements at Tenant's sole cost and expense upon such termination of this Lease and to surrender the Premises in the same condition as it was prior to the making of any or all such Improvements, ordinary wear and tear excepted. Page 19 30 Notwithstanding the foregoing sentence, Tenant shall not be required to remove Improvements that are "embedded" within the Premises, such as electrical and wiring systems. 9.3 Tenant shall indemnify and hold Landlord and the Premises free of and harmless from any and all liabilities, losses, claims, damages or otherwise based upon or in any manner growing out of any alterations or construction respectively undertaken by Tenant whether specifically under the terms of this Lease or otherwise, including all costs, damages, expenses, court costs and attorneys' fees incurred in or resulting from claims made by any person or persons, by other tenants in the Premises, or any of Tenant's subtenants, agents, employees, customers and invitees. 9.3.1 Before undertaking any alterations or construction, Tenant shall obtain and pay for a commercial liability insurance policy insuring Landlord and Tenant against any liability which may arise on account of such proposed alterations or construction work in limits of not less than $1,000,000.00 combined single limit coverage. A copy of such policy shall be delivered to Landlord prior to the commencement of any such proposed work. Tenant shall also maintain at all times fire insurance with extended coverage in the name of Landlord and Tenant as their interests may appear in the amount adequate to cover the cost of replacement of all Tenant improvements, alterations, decorations, additions, including any plate glass, doors and windows, in and to the Premises and all trade fixtures therein, in the event of fire or extended coverage loss. Tenant shall deliver to Landlord copies of such fire insurance policies which shall contain a clause requiring the insurer to give Landlord not less than thirty (30) days' prior written notice of cancellation of such policies. 9.4 Tenant will not create or permit to be created or to remain, and will discharge, any lien, encumbrance or charge upon fixtures, equipment, or personal property located within the Premises. Page 20 31 SECTION 10 LANDLORD'S REPAIRS 10.1 It is understood that any and all repair, replacement, maintenance and other responsibilities and costs relating to the Premises shall be Tenant's, and that Landlord shall have no monetary or other responsibilities relative thereto. SECTION 11 TAXES 11.1 Tenant agrees that it will pay and discharge, or cause to be paid and discharged, punctually as and when the same shall become due and payable without penalty, all real estate taxes, personal property taxes, privilege taxes, excise taxes, business and occupation taxes, gross sales taxes, occupational license taxes, water charges, sewer charges, assessments (including, but not limited to, assessments for public improvements or benefits) and all other governmental impositions and charges of every kind and nature whatsoever, whether or not now customary or within the contemplation of the parties hereto and regardless of whether the same shall be extraordinary or ordinary, general or special, unforeseen or foreseen, or similar or dissimilar to any of the foregoing (all of such taxes, water charges, sewer charges, assessments and other governmental impositions and charges which Tenant is obligated to pay hereunder being; hereinafter collectively called "Tax" or "Taxes") which, at any time during the Initial or any extended Term hereof, shall be or become due and payable and which: (a) shall be levied, assessed or imposed upon or against the Premises or any buildings or improvements on or above the Premises or any portion thereof, or any interest of Landlord or Tenant therein or under this Lease; or (b) shall be or become liens upon or against said Premises or any Page 21 32 buildings or improvements on or above the Premises. or any portion thereof, or any such interest of Landlord or Tenant therein, or under this Lease; or (c) shall be levied, assessed or imposed upon or against Landlord by reason of any actual or asserted engagement by Landlord or Tenant, directly or indirectly, in any business, occupation or other activity in connection with the Premises or any portion thereof; or (d) shall be levied, assessed or imposed upon or in connection with the ownership, leasing, operation, management, maintenance, repair, rebuilding, use or occupancy of the Premises or the buildings and improvements on or above the Premises or any portion thereof; under or by virtue of any present or future law, statutes, ordinance, regulation or other requirement of any governmental authority whatsoever, whether federal, state, county, city, municipal, or otherwise, it being the intention of the parties hereto that, insofar as the same may lawfully be done, Landlord shall be free from all such expenses and all such real estate taxes, personal property taxes, privilege taxes, excise taxes, business and occupation taxes, gross sales taxes, occupational license taxes, water charges, sewer charges, assessments and all other governmental impositions and charges of every kind and nature whatsoever. Taxes shall not include Landlord's general income taxes, inheritance, estate or gift taxes. 11.2 If by law any Tax is payable, or may at the option of the taxpayer be paid, in installments, Tenant may, whether or not interest shall accrue on the unpaid balance thereof, pay the same, and any accrued interest on any unpaid balance thereof, in installments as each installment becomes due and payable, but in any event before any fine, penalty, additional interest or cost may be added thereto for non-payment of any installment or interest. Page 22 33 11.3 Any Tax relating to a fiscal period of the taxing authority, a part of which is within the Term and a part of which is subsequent to the Term, shall, whether or not such Tax shall be assessed, levied, imposed or become a lien upon the Premises or the buildings and improvements on or above the Premises, or shall become payable, during the Term, be apportioned and adjusted between Landlord and Tenant as of the stated date of expiration of the Term, so that Landlord shall pay that proportion of such Tax which that part of such fiscal period included in the period of time after the expiration of the Term bears to such fiscal period, and Tenant shall pay the remainder thereof. With respect to any Tax for public improvements or benefits which by law is payable, or at the option of the taxpayer may be paid, in installments, Landlord shall pay the installments thereof which become due and payable subsequent to the expiration of the Term, and Tenant shall pay all such installments which become due and payable at any time during the Term even though payment is postponed beyond the end of the Term by Tenant. 11.4 Tenant covenants to furnish to Landlord, within ten (10) days after the last date when any Tax must be paid by Tenant as provided in this Section, official receipts, if such receipts are then available to Tenant, of the appropriate taxing authority, or other proof satisfactory to Landlord, evidencing the payment thereof. 11.5 Tenant shall have the right to contest or review the amount or validity of any such Tax by appropriate legal proceedings (but which is not to be deemed or construed in any way as relieving, modifying or extending Tenant's covenants to pay any such Tax at the time and in the manner as in this Section provided), on condition, however, that if such contested Tax is not paid beforehand and if such legal proceedings shall not operate to prevent the enforcement of the collection of the Tax so contested and shall not prevent the sale of the Premises or the buildings and improvements on or above the Premises or any part thereof to satisfy the same, then before Page 23 34 instituting any such proceedings Tenant shall furnish to Landlord and to any lender of Landlord a surety company bond, cash deposit or other security reasonably satisfactory to Landlord and any such lender, as security for the payment of such Tax in an amount sufficient to pay such Tax, together with all interest and penalties in connection therewith and all charges that may or might be assessed against or be charges on the Premises or the buildings on or above the Premises or any part thereof in said legal proceedings. Upon termination of such legal proceedings or at any time when the Landlord or such lender shall deem the security to be insufficient for the purpose, Tenant shall forthwith, upon demand, deliver to Landlord or such lender additional security as is sufficient and necessary for the purpose, and upon failure of the Tenant so to do, the security originally deposited shall be applied to the payment, removal and discharge of said Tax and the interest and penalties in connection therewith and the charges and costs accruing in such legal proceedings and the balance, if any, shall be paid to Tenant provided the Tenant is not in default under this Lease. In the event that such security shall be insufficient for this purpose, Tenant shall forthwith pay over to Landlord or to such lender an amount sufficient, together with the security originally deposited hereunder, to pay the same. In the event of any default by Tenant under this Lease, Landlord and/or such lender are authorized to use the security deposited under this Section to apply on account of such default or to pay the said Tax. The Tenant shall not be entitled to interest on any moneys deposited pursuant to this Section. 11.6 Any contest as to the validity or amount of any Tax, or assessed valuation upon which such Tax was computed or based, whether before or after payment, may be made by Tenant in the name of Landlord or of Tenant, or both, as Tenant shall determine, and Landlord agrees that it will, at Tenant's expense, cooperate with Tenant in any such contest to such extent as Tenant may reasonably request; it being understood, however, that Landlord shall not be subject to any liability Page 24 35 for the payment of any costs or expenses in connection with any proceeding brought by Tenant, and Tenant covenants to indemnify and save harmless Landlord from any such costs or expenses. Tenant shall be entitled to any refund of any such Tax and penalties or interest thereon which have been paid by Tenant or by Landlord and reimbursed to Landlord by Tenant. 11.7 The certificate, advice or bill of the appropriate official (designated by law to make or issue the same or to receive payment of any such Tax) of the non-payment of any such Tax, shall be prima facie evidence that such Tax was due and unpaid at the time of the making or issuance of such certificate, advice or bill. 11.8 If at any time during the Term, under the laws of the United States, Nevada or any political subdivision thereof, a tax or excise on rents or other tax (except income tax), however described, is levied or assessed by the United States, Nevada or said political subdivision against Landlord on account of any rent reserved under this Lease, all such tax or excise on rents or other taxes shall be paid by Tenant. Whenever Landlord shall receive any statement or bill for any such tax or shall otherwise be required to make any payment on account thereof, Tenant shall pay, as Additional Rent, the amount due hereunder within ten (10) days after demand therefor accompanied by delivery to Tenant of a copy of such tax statement, if any. SECTION 12 UTILITIES AND SERVICES 12.1 Tenant shall be responsible for and pay as Additional Rent all charges for all utilities, and all other installations, metering, services or utilities used in, upon or about the Premises by Tenant; any of its assignees, subtenants, licensees or concessionaires or any other occupant thereof. 12.2 Tenant shall also at its sole cost and expense, procure or cause to be procured any and all necessary permits, licenses or other authorizations required for the lawful and proper use, Page 25 36 occupation, operation and management of the Premises and of such buildings and improvements above the Premises, and for the lawful and proper installation and maintenance thereon and therein of wires, pipes, conduits, tubes and other equipment and appliances for use in supplying any such service thereto. 12.3 Tenant shall provide to Landlord proof of the on-going existence of service contracts for the maintenance of all equipment located in the Premises, which Tenant is required to maintain under this Lease. SECTION 13 INSURANCE 13.1 At all times during the Term, at its own cost and expense and as Additional Rent hereunder, Tenant shall keep or cause to be kept all buildings and improvements now existing or hereafter erected upon or above the Premises and all equipment, fixtures, motors, machinery, furnishings and furniture installed and owned by Tenant and used in connection with the Premises or with the buildings and improvements upon or above the Premises, including all alterations, rebuildings, replacements and additions thereto, insured against loss or damage by earthquake and by fire, vandalism, malicious mischief, sprinkler leakage (if sprinklered) and such other hazards, casualties, risks and contingencies now covered by or that may hereafter be considered, as included within the standard form extended coverage endorsement, in an amount at least equal to one hundred percent (100%) of the Full Insurable Value thereof, but in any event in an amount not less than that required to avoid the operation and effect of any co-insurance provisions in said policies. If an insurer, or any governmental agency or authority, shall at any time require that the foundation(s) be insured in order to relieve the insured from the responsibility as a co-insurer or for any other purpose, Page 26 37 the obligations of Tenant with respect to the insurance shall thenceforth be increased to the extent so required. 13.2 The term "Full Insurable Value" shall mean actual replacement cost exclusive of cost of excavation, foundations and footings. Such "Full Insurable Value" shall be determined from time to time [but not more frequently than once in any twenty four (24) calendar months] at the request of Landlord but at the expense of Tenant by the fire insurance company carrying the highest amount of fire insurance on the Premises or its agent, or by an appraiser selected by Tenant and approved in writing by Landlord. The failure of the Landlord to request such appraisal shall not release Tenant of its obligations hereunder. At all times during the Term, at its own cost and expense and as Additional Rent, Tenant shall provide and keep in force comprehensive general liability insurance policies, in standard form, protecting Tenant, and the Landlord as an additional insured, against any and all liability in the amount of not less than Five Million ($5,000,000.00) Dollars in respect to any one occurrence, in the amount of not less than Two Million ($2,000,000.00) Dollars in respect to injuries to or death of any one person, and in the amount of not less than One Million ($1,000,000.00) Dollars in respect to destruction or damage to property of others. All such policies shall cover the entire Premises and all buildings and improvements on or above the Premises, including elevators and escalators, as well as parking, common areas, means of access and roadways therein, and streets and sidewalks adjacent thereto. 13.3 At all times during the Term, at its own cost and expense and as Additional Rent, Tenant shall provide and keep in force boiler and machinery insurance on all steam boilers and high pressure boilers, if any, or such other apparatus as Landlord may deem necessary to be covered by such insurance, installed within any building on or above the Premises, in such amounts and in such forms of policies as may from time to time be reasonably required by Landlord. Page 27 38 13.4 Intentionally Omitted. 13.5 At all times during the Term, at its own cost and expense and as Additional Rent, Tenant shall provide and keep in force such other insurance and in such amounts as may from time to time be reasonably required by Landlord against other insurable hazards which, at the time, are normally insured against in the case of similar premises and improvements, similarly situated, due regard being given to the height and type of buildings and improvements on and above the Premises, their construction, use and occupancy. 13.6 All such insurance to be provided by Tenant under this Section shall name the Tenant and Landlord as insureds and, at the option of Landlord any other parties permitted by Landlord as additional insureds, all as their respective interests may appear. 13.7 All of the policies of insurance provided for in this Lease shall be issued by insurance carriers in good financial standing, authorized to transact business in Nevada and pre-approved in writing by Landlord. 13.8 In the event that Tenant fails to obtain and maintain insurance as in this Lease provided and such failure shall continue for a period of ten (10) days after notice by Landlord, Landlord may, but shall not be obligated to, effect and maintain any such insurance coverage and pay premiums therefor. All premiums so paid by Landlord, together with interest thereon at the rate of fifteen percent (15%) per annum from the date of such payment by Landlord, shall be deemed Additional Rent hereunder, and payable by Tenant to Landlord as such in accordance with the provisions of this Lease but not later than the first day of the month following the month in which payment therefor is made by Landlord. In addition thereto, Landlord may recover from Tenant, and Tenant covenants and agrees to pay as Additional Rent to Landlord, any and all damages which Landlord may have sustained by reason of the failure of Tenant to obtain and maintain such Page 28 39 insurance, it being expressly declared that the damages of Landlord shall not be limited to the amount of premiums thereon. Tenant shall make payment to Landlord on the first day of the month following the month in which any payments were made by Landlord or in which the amount of such damage was determined. The payment by Landlord shall not be a waiver or release of Tenant with respect thereto or the right of Landlord to pursue any other remedy permitted hereunder or by law as in the case of any other default hereunder or of default in the payment of Aggregate Rent. 13.9 A certificate issued by the insurance carrier for each policy of insurance required to be maintained by Tenant hereunder shall be delivered to Landlord and all other named insureds on or before the Commencement Date hereof and thereafter, as to policy renewals, within thirty (30) days prior to the expiration of the term of each such policy. Each certificate of insurance required to be maintained by Tenant hereunder shall be in form and substance satisfactory to Landlord and shall expressly evidence insurance coverage as required by this Lease and shall contain an endorsement or provision requiring not less than thirty (30) days' prior written notice to Landlord of such cancellation. As to any proposed diminution in the perils insured against, or reduction of the amount of coverage of the particular policy in question, initiated (i) by the insurer shall require not less than thirty (30) days prior written notice to Landlord, and (ii) by Tenant shall require not less than thirty (30) days prior written notice to Landlord. 13.10 Provided it does not violate any laws or regulations or jeopardize Tenant's or Landlord's insurance coverage(s), each policy of property insurance (and to the extent obtainable with respect to public liability insurance) provided for in this Section 13 shall contain an express waiver of any and all rights of subrogation thereunder whatsoever against both Landlord and Tenant, their respective shareholders, directors, members, officers, partners, agents and employees. Except for the negligent or willful acts or omissions of Landlord, all such policies carried by Tenant shall Page 29 40 be written as primary policies and not contributing with or in excess of the coverage, if any, which Landlord may carry. Any other provision contained in this Section or elsewhere in this Lease notwithstanding, the amounts of all insurance required hereunder to be paid by Landlord or Tenant shall be not less than an amount sufficient to prevent the applicable party from becoming a co-insurer. 13.11 Tenant agrees that it will not keep, use, sell, offer for sale or allow in or upon the Premises any article or permit any activity which may be prohibited by any standard form of insurance policy. 13.12 Tenant shall not use or occupy the Premises or any part thereof, or suffer or permit the same to be used or occupied for any business or purpose deemed extra hazardous and thus affect the Premises. 13.13 During the Term of this Lease, Tenant shall indemnify and save harmless Landlord and the Premises, from and against any and all claims and demands whether for injuries to persons or loss of life, or damage to property, occurring within the Premises, and immediately adjoining areas and arising out of the use and occupancy of the Premises by Tenant, or occasioned wholly or in part by any act or omission of Tenant, its subtenants, agents, contractors, employees, servants, licensees or concessionaires, excepting, however, such claims and demands, whether for injuries to persons or loss of life, or damage to property caused by an indemnified party. In case Landlord shall be made a party to any litigation, then Tenant shall protect and hold Landlord harmless and shall pay all costs, expenses and reasonable attorneys' fees that may be incurred or paid by Landlord in connection therewith. Page 30 41 SECTION 14 LIENS 14.1 Tenant shall at all times indemnify, save and hold Landlord, the Premises and the leasehold created by this Lease free of and harmless from any claims, liens, demands, charges, encumbrances, litigation and judgments arising directly or indirectly out of any use, occupancy or activity of Tenant, or Tenant's subtenants, licensees or concessionaires, or out of any work performed, material furnished, or obligations incurred by Tenant or Tenant's subtenants, licensees or concessionaires, in, upon or otherwise in connection with the Premises. Tenant shall give Landlord written notice at least twenty (20) business days prior to the commencement of any such work on the Premises. Tenant shall, at its sole cost and expense, within fifteen (15) days after filing of any lien of record, obtain the discharge and release thereof. Nothing contained herein shall prevent Landlord, at the cost and for the account of Tenant, from obtaining said discharge and release in the event Tenant fails or refuses to do the same within said fifteen (15) day period. Any amounts paid by Landlord hereunder shall be deemed Additional Rent. SECTION 15 INDEMNIFICATION 15.1 Tenant hereby indemnifies, saves and holds Landlord, the Premises and the leasehold estate free of and harmless from any and all liabilities, losses, costs, expenses, including reasonable attorneys' fees (at trial and on appeal), causes of action, suits, judgments, claims, liens and demands of any kind whatsoever in connection with, arising out of, or by reason of any act, omission or negligence of Tenant, its agents, employees, servants, contractors, subtenants, licensees, concessionaires, customers or business invitees while in, upon, about or in any way connected with the Premises, or arising from any accident, injury or damage, howsoever caused, to any person or Page 31 42 property whatsoever, occurring in, upon, about or in any way connected with the Premises, or arising from any accident, injury or damage, howsoever and by whomsoever caused, to any person or property whatsoever, occurring in, upon, about or in any way connected with the Premises or any portion thereof, unless the same is caused by the negligent act or omission of Landlord or Landlord's agents. SECTION 16 SUBORDINATION 16.1 Tenant agrees upon request of Landlord to subordinate this Lease and its rights hereunder to the lien of any mortgage, deed of trust or other encumbrance, together with any renewals, extensions or replacements thereof, now or hereafter placed, charged or enforced against the Premises, or any portion thereof, and to execute and deliver at any time, and from time to time, upon ten (10) days demand by Landlord, such documents as may be reasonably required and mandatory to effectuate such subordination, and in the event that Tenant shall fail, neglect or refuse to execute and deliver any such documents to be executed by it within ten (10) days after request by Landlord, Tenant hereby appoints Landlord, its successors and assigns, the attorney-in-fact of Tenant irrevocably to execute and deliver any and all such documents for and on behalf of Tenant; provided, however, the Tenant shall not be required to effectuate such subordination, unless the mortgagee or beneficiary named in such mortgage, deed of trust, or other encumbrance shall first agree in writing, for the benefit of Tenant, that so long as Tenant is not in default under any of the provisions, covenants or conditions of this Lease on the part of Tenant to be kept and performed, that neither this Lease nor any of the rights to Tenant hereunder shall be terminated or modified or be subject to termination or modification. Tenant acknowledges that the power of attorney granted hereby is coupled with an interest. Page 32 43 16.2 In the event that the mortgagee or beneficiary of any such mortgage or deed of trust elects to have this Lease a prior lien to its mortgage or deed of trust, then and in such event, upon such mortgagee's or beneficiary's giving written notice to Tenant to that effect, this Lease shall be deemed a prior lien to such mortgage or deed of trust, whether this Lease is dated prior to or subsequent to the date of recordation of such mortgage or deed of trust. 16.2.1 Tenant shall, in the event of the exercise of any power of sale under any deed of trust or, if any proceedings are brought for the foreclosure of a lien affecting property in which the Premises are situated, attorn to the purchaser upon any such foreclosure or sale and recognize such purchaser as the Landlord under this Lease. 16.3 Upon Landlord's request, and within twenty (20) days thereof, Tenant agrees to modify this lease to meet the reasonable requirements of a lender selected by Landlord who demands such modification as a condition precedent to granting a loan and placing a deed of trust or other mortgage encumbrance upon the Premises; provided, such modifications do not alter the basic business terms of this Lease or otherwise materially diminish any rights or materially increase the obligations of Tenant. SECTION 17 EXISTING LEASES/ASSIGNMENT -- SUBLETTING 17.1 All right, title and interest of Landlord in and to each of the leases identified in Exhibit C, attached hereto, are hereby assigned to Tenant together with full right and power to collect and retain all rents and other payments due and to become due thereunder. Tenant does hereby accept such assignment and in consideration therefor does hereby unconditionally and irrevocably assume each and every obligation and liability of the Landlord as landlord under such leases heretofore accrued or which may hereafter accrue under and in connection therewith, and will Page 33 44 indemnify and hold Landlord harmless from any and all claims, actions, judgments, liabilities, losses, penalties, fines, damages, costs and expenses, including attorneys' fees, of any kind and nature whatsoever with respect thereto. 17.2 Tenant shall not without the prior written consent of Landlord first had and obtained in each case, sell, assign or in any manner transfer this Lease or any interest therein or the estate of the Tenant hereunder, or sublease or underlet the Premises, except as otherwise set forth herein. Notwithstanding anything to the contrary contained in this Section 17, an assignment or subletting of all or a portion of the Premises to an "Affiliate" of Tenant shall not be deemed a violation of this section, provided that (a) Tenant notifies Landlord of any such assignment or sublease within five (5) days after its effective date, and promptly supplies Landlord with any documents or information reasonably requested by Landlord regarding such assignment or sublease or such "Affiliate" and (b) such assignment or sublease is not a subterfuge by Tenant to avoid its obligations under this Lease. The term "Affiliate" of Tenant shall mean any other entity which is controlled by, controls, or is under common control with Tenant, or an entity that results from a reorganization, merger, or the sale of substantially all the assets, interest or stock of Tenant. The term "control" or "controlled," as used in this Section 17.2, shall mean the ownership, directly or indirectly, of more than fifty percent (50%) of the voting securities of, or more than fifty percent (50%) of the voting interest in, any entity. In no event shall a transfer, assignment, or subletting of all or a portion of the Premises to an Affiliate release Tenant from the payment and performance of its obligations in the Lease, but rather Tenant and its assignee will be jointly and severally primarily liable for such payment and performance. 17.3 Tenant, shall have the right to sublet portions of the Premises and/or of the buildings and improvements thereon at any time and from time to time, provided it is not in default hereunder. Page 34 45 For a sublease to be entitled to the benefits of Section 18.3, it must be approved in advance by Landlord or be in the form attached hereto as Exhibit D, the sub-rental must reflect fair market rental for the sub-premises, and the terms and provisions set forth hereinbelow must be complied with. Tenant covenants and agrees that each sublease of any portion of the Premises and/or of said buildings and improvements shall be in writing; and, among other things, shall provide (a) that the said sublease is subject and subordinate to this Master Lease, and to any extensions, modifications or amendments hereof, and (b) that in the case of a sublease entitled to the benefit of Section 18.3, in the event of cancellation or termination of the this Master Lease in accordance with its terms or by the surrender thereof, whether voluntarily, involuntarily or by operation of law, such sublease shall not thereby be cancelled or terminated but the subtenant under each such sublease shall make full and complete attornment to the Landlord for the balance of the term of such sublease with the same force and effect as though said sublease were originally made directly from the Landlord hereunder to the subtenant under such sublease. 17.4 If the Premises or any part thereof be sublet or occupied by anybody other than Tenant in violation hereof, Landlord may, but shall not be required to after default by Tenant, (i) collect rent from any purchaser, assignee, subtenant or occupant and apply the net amount collected to the rent herein reserved (but no such subletting, sale, assignment, occupancy or collection shall be deemed a waiver of any covenant contained in this Section 17), (ii) accept any such purchaser, assignee, subtenant or occupant as tenant, and/or (iii) release Tenant from violation of or the further performance by Tenant of any or all terms, covenants and conditions of this Lease on the part of Tenant to be performed. 17.5 Tenant may not at any time during the Term of this Lease, without the prior written consent of Landlord, pledge, mortgage or hypothecate the leasehold estate hereby created. Page 35 46 SECTION 18 SUBLEASES/COLLATERAL ASSIGNMENT/NON-DISTURBANCE AND ATTORNMENT 18.1 Tenant does hereby reassign, transfer and set over unto Landlord all of its rights, title and interest in and to each of the leases identified on Exhibit C attached hereto, and does hereby also assign, transfer and set over unto Landlord all of its rights, title and interest in and to each and every sublease now or hereafter executed affecting the Premises or any part thereof (which now or hereafter existing leases and subleases are hereinafter collectively called "subleases"), as well as all of the rents or other sums of money now or hereafter due and payable thereunder (hereinafter called "sub-rents") and all security now held by or hereafter paid to Tenant which has been or may hereafter be deposited for the payment of sub-rents or the performance of any of the terms of such sublease, upon condition, however, that such assignment shall become operative and effective only as to such subleases as Landlord shall so designate by notice at such time and only in the event the within Lease and the term thereof shall be terminated or cancelled pursuant to the terms and conditions hereof, or in the event of the issuance and execution of a dispossess warrant or of any other re-entry or re-possession by Landlord under the provisions hereof, or in the event Tenant is in uncured default of any of the terms and conditions thereof. 18.2 Tenant does hereby covenant and agree, in respect to each and every sublease now or hereafter executed affecting the Premises or any part thereof, that it shall not, without the prior written consent of Landlord first had and obtained, which shall not be unreasonably withheld, conditioned or delayed, (i) receive or collect any sub-rents (payable under any such sublease from any present or future subtenant of the said Premises or any part thereof) for a period of more than one (1) month in advance; (ii) pledge, transfer, mortgage, encumber or assign future payments of such sub-rental; (iii) in the case of subleases entitled to the benefit of Section 18.3, waive, excuse, Page 36 47 condone, discount, set-off, compromise or in any manner release or discharge any subtenants thereof, of and from any obligations, covenants and conditions by said subtenants to be paid, observed and performed under the said subleases after termination of this Lease; (iv) in the case of subleases entitled to the benefit of Section 18.3, cancel, terminate or consent to any surrender of any such sublease; (v) in the case of subleases entitled to the benefit of Section 18.3, modify or in any way alter the terms thereof so as to reduce the sub-rent or anywise affect, to any material extent, the rights of the landlord thereunder. 18.3 In the event of the cancellation or termination of the within Lease in accordance with the terms hereof or by the surrender hereof, whether voluntary, involuntary or by operation of law, prior to the expiration date of any sublease hereafter executed affecting a portion of the Premises (including extensions and renewals thereunder), which sublease (i) has been previously approved in writing by the Landlord or pursuant to Section 17.3 does not require such approval in order to be entitled to the benefits of this Section, and (ii) contains the provisions required under Sections 17 and 18 hereof, Landlord for itself, successors and assigns, as well as for any subsequent owner of the Premises, does hereby covenant and warrant for the benefit of the subtenant under any such sublease, subject to the observance and performance by the subtenant under such sublease of all of the terms, covenants and conditions thereunder, as follows: (a) The quiet and peaceful possession of subtenant under the said sublease; (b) That the sublease shall continue in full force and effect and Landlord shall recognize the sublease and the subtenant's rights thereunder and will thereby establish direct privity of estate and contract as between Landlord and the subtenant under said sublease with the same force and effect as though the Page 37 48 sublease were originally made from Landlord in favor of the subtenant thereunder; (c) That it will assume such obligations on the part of the landlord under such sublease which are deemed to run with the land for so long as Landlord shall be the owner in fee of the Premises provided, however, Landlord shall not be liable in any way to subtenant for any act or omission, neglect or default on the part of Tenant, as sub-landlord under said sublease, or be responsible for any moneys owing by or on deposit with Tenant to the credit of subtenant and subtenant shall not have the right to set-off or assert against Landlord any such claim or any damages arising therefrom. SECTION 19 INSOLVENCY AND DEATH 19.1 It is understood and agreed that neither this Lease nor any interest herein or hereunder, nor any estate hereby created in favor of Tenant, shall pass by operation of law under any state or federal insolvency, bankruptcy or inheritance act, or any similar law now or hereafter in effect, to any trustee, receiver, assignee for the benefit of creditors, heir, legatee, devisee, or any other person whomsoever without the express prior written consent of Landlord. SECTION 20 CONDEMNATION 20.1 In the event of any taking of or damage to all or any part of the Premises (or any interest therein) prior to the expiration or earlier termination of this Lease by reason of any exercise of the power of eminent domain (whether by condemnation proceedings or otherwise) or by reason of any transfer of all or any part of the Premises (or any interest therein) made in avoidance of such Page 38 49 an exercise, the rights and obligations of Landlord and Tenant with respect thereto shall be as set forth in this Section. Such taking, damage and/or transfer are all referred to as "appropriation". 20.2 If the entire Premises be appropriated, this Lease shall terminate and expire as of the date of such appropriation, and Landlord and Tenant shall be released from further liability hereunder. 20.3 If the appropriation shall be greater than one-third (1/3) of the Premises and the remainder will not be reasonably adequate for the operation of Tenant's business after Tenant completes such repairs or alterations as Tenant elects to make, either Landlord or Tenant shall have the option to terminate this Lease by notifying the other party hereto of such election in writing within thirty (30) days after such appropriation. 20.3.1 If after such appropriation the remaining part thereof is suitable for the purposes for which Tenant has leased the Premises, this Lease shall continue in full force and effect, but the Minimum Monthly Rent shall be reduced in an amount equal to that proportion of the Minimum Monthly Rent which the floor space of the portion taken bears to the total floor space of the building located on the Premises. In the event a partial appropriation does not terminate this Lease and if appropriation proceeds are sufficient to cover all restoration costs and are made available to Tenant, Tenant, using such appropriation proceeds, shall make repairs and restorations to the remaining premises and shall also repair or replace its fixtures, furniture, furnishings and equipment. If Tenant had ceased business operations during such repair and restoration work, Tenant shall promptly reopen for business upon completion thereof. 20.4 All awards payable on account of such appropriation shall be payable to Landlord, and Tenant hereby waives any and all rights thereto and interest therein; provided, however, that Tenant shall be entitled to a separate award for any necessary repairs to the Premises and all other Page 39 50 Improvements as contemplated hereby, the value of its leasehold estate and relocation costs of Tenant, but Landlord shall have no obligation with respect thereto. SECTION 21 DAMAGE OR DESTRUCTION 21.1 In the case of the total or partial destruction of the building located on the Premises, or any portion thereof, whether by fire or other casualty, this Lease shall not terminate except as otherwise specifically provided herein. Tenant shall be entitled to a reduction in the Minimum Monthly Rent in an amount equal to that proportion of the Minimum Monthly Rent which the number of square feet of floor space in the unusable portion bears to the total number of rentable square feet of the building located on the Premises. Said reduction shall be prorated so that the Minimum Monthly Rent shall only be reduced for those days any given area is actually unusable. Further, if a portion of the Premises is so damaged or destroyed so as to preclude Tenant from practically operating its business, then there shall be a full abatement of Minimum Monthly Rent until operations may be resumed. Subject to the availability of property insurance proceeds as provided hereinabove, Tenant shall promptly undertake to repair and restore the building located on the Premises, and shall, with reasonable diligence, repair and reconstruct the Premises to a condition at least equal in quality and condition to that existing immediately prior to the damage or destruction in question. To the extent insurance proceeds are insufficient therefor, Tenant shall be liable for any such difference. It is understood that Landlord shall have no repair or restoration responsibilities whatsoever. 21.2 All insurance proceeds payable under any property insurance policy procured and maintained by Landlord or Tenant shall be payable solely to Landlord and/or its mortgagee(s), and Tenant shall have no interest therein. Notwithstanding the foregoing, however, and subject to the Page 40 51 rights of any mortgagee, if less than fifty percent (50%) of the Premises is damaged or destroyed and more than two (2) years remain in the then operative Term or Option Period, the insurance proceeds shall be made available to Tenant for the repair and restoration work required hereunder. In the event all insurance proceeds are not made available to Tenant, Tenant shall be entitled to terminate this Lease upon written notice to Landlord given within thirty (30) days of Tenant being advised of the non-availability of insurance proceeds. Tenant shall in no case be entitled to compensation or damages on account of any annoyance or inconvenience in making repairs under any provision of this Lease. Except to the extent provided for in this Section 21, neither the rent payable by Tenant nor any of Tenant's other obligations under any provision of this Lease shall be affected by any damage to or destruction of the Premises or any portion thereof by any cause whatsoever. SECTION 22 RIGHT OF ACCESS 22.1 Landlord and its authorized agents and representatives shall be entitled to enter the Premises at any reasonable time for the purpose of observing, posting or keeping posted thereon notices provided for hereunder, if any, and such other notices as Landlord may deem necessary or appropriate for protection of Landlord, its interest or the Premises; for the purpose of inspecting the Premises or any portion thereof; to inspect the Premises relative to concerns over use, storage or disposal of hazardous waste and chemicals; and for the purpose of making repairs to the Premises and performing any work therein or thereon which Landlord may elect to make hereunder, or which may be necessary to comply with any laws, ordinances, rules, regulations or requirements of any public authority or any applicable standards that may, from time to time, be established by an Insurance Services Office or any similar body, or which Landlord may deem necessary or appropriate to prevent waste, loss, damage or deterioration to or in connection with the Premises or for any other Page 41 52 lawful purpose. Landlord shall have the right to use any reasonable means which Landlord may deem proper to open all doors in the Premises in an emergency. Entry into the Premises obtained by Landlord by any such means shall not be deemed to be forcible or unlawful entry into, or a detainer of, the Premises, or an eviction of Tenant from the Premises or any portion thereof. Nothing contained herein shall impose or be deemed to impose any duty on the part of Landlord to do any work or repair, maintenance, reconstruction or restoration, which under any provision of this Lease is required to be done by Tenant, but the cost thereof shall be deemed Additional Rents. The performance thereof by Landlord shall not constitute a waiver of Tenant's default in failing to do the same. 22.2 Landlord, its authorized agents and representatives, shall be entitled to enter the Premises at all reasonable times for the purpose of exhibiting the same to prospective purchasers and, during the final year of the Term of this Lease, Landlord shall be entitled to exhibit the Premises for lease and post signs therein announcing same. SECTION 23 EXPENDITURES BY LANDLORD 23.1 Whenever under any provision of this Lease, Tenant shall be obligated to make any payment or expenditure, or to do any act or thing, or to incur any liability whatsoever, and Tenant fails, refuses or neglects to perform as herein required, and, except in the case of an emergency, continues not to perform for five (5) days after notice, Landlord shall be entitled, but shall not be obligated, to make any such payment or to do any such act or thing, or to incur any such liability, all on behalf of and at the cost and for the account of Tenant. In exercising this right, Landlord shall be permitted to charge Tenant the cost thereof plus interest thereon at the per annum rate of the greater of (i) fifteen percent (15%), or (ii) Bank of America NT & SA "Reference Rate" plus 500 Page 42 53 basis points (5%) which shall constitute and be collectible by Landlord as Additional Rent on demand. SECTION 24 ESTOPPEL CERTIFICATE 24.1 Tenant agrees that within ten (10) days of any demand therefor by Landlord, Tenant will execute and deliver to Landlord and/or Landlord's designee a recordable certificate stating that this Lease is in full force and effect, such defenses or offsets as are claimed by Tenant, if any, the date to which all rentals have been paid, and such other information as reasonably and customarily contained in a commercial estoppel certificate concerning the Lease, the Premises and Tenant as Landlord or said designee may request. In the event that Tenant fails to execute and/or deliver any such certificate or offset statement to Landlord within said ten (10) days, Tenant shall be deemed in violation of this Lease and Landlord shall have the rights and remedies for default under Section 25 below. SECTION 25 TENANT'S DEFAULT; LANDLORD'S REMEDIES 25.1 Tenant's compliance with each and every covenant and obligation hereof on its part to be performed hereunder is a condition precedent to each and every covenant and obligation of Landlord hereunder. Any one or more of the following shall be a "default" under this Lease: 25.1.1 Tenant shall default in the payment of any sum of money required to be paid hereunder and such default continues for five (5) days after written notice thereof from Landlord to Tenant; or 25.1.2 Tenant shall default in the performance of any other term, covenant or condition of this Lease on the part of Tenant to be kept and performed and such default continues Page 43 54 for thirty (30) days after written notice thereof from Landlord to Tenant; provided, however, that if the default complained of in such notice is of such a nature that the same can be rectified or cured, but cannot with reasonable diligence be done within said thirty (30) day period, then such default shall be deemed to be rectified or cured if Tenant shall, within said thirty (30) day period, commence to rectify and cure the same and shall thereafter complete such rectification and cure with all due diligence; or 25.1.3 Tenant should vacate or abandon the Premises during the Term and not otherwise be current in its rental and other obligations under this Lease; or 25.1.4 There is filed any petition in bankruptcy or Tenant is adjudicated as a bankrupt or insolvent, or there is appointed a receiver or trustee to take possession of Tenant or of all or substantially all of the assets of Tenant, or there is a general assignment by Tenant for the benefit of creditors, or any action is taken by or against Tenant under any state or federal insolvency or bankruptcy act, or any similar law now or hereafter in effect, including, without limitation, the filing of execution or attachment against Tenant and such levy continues in effect for a period of sixty (60) days. The provisions hereof shall also apply to any guarantor of this Lease; or 25.1.5 Tenant does, or permits to be done, any act which creates a mechanic's lien or claim thereof against the Premises or the Property and fails to timely discharge same; or 25.1.6 Tenant fails to furnish Landlord with a copy of any insurance policy required to be furnished by Tenant to Landlord when due, and such default shall continue for fifteen (15) days after written notice from Landlord; or 25.1.7 Tenant's causing, permitting or suffering to be done any act (i) required by this Lease to have the prior written consent of Landlord, unless such consent is so obtained, or (ii) prohibited by this Lease unless cured as provided in Section 25.1.2; or Page 44 55 25.1.8 In addition to the events constituting a default and breach of the Lease by Tenant as stated above, if within any twelve (12) month period during the term of the Lease, Tenant shall have failed to perform any monetary obligation required of Tenant hereunder more than two (2) times, or has been in breach for any other provision of this Lease more than three (3) times, and Landlord, because of any such failure and/or breach, shall have served upon Tenant within said twelve (12) month period two (2) (for monetary obligations) or three (3) (for non-monetary obligations) or more notices of any such failure or breach, then any subsequent failure or breach shall be deemed a noncurable default, without requirement of notice or opportunity to cure, and Landlord shall be immediately entitled to exercise any and all rights, remedies and/or elections specified below otherwise available at law or in equity. 25.2 In the event of a default as designated in this Section or elsewhere herein, in addition to any other rights or remedies provided for herein or available at law or in equity, Landlord, at its sole option, shall have the following rights: 25.2.1 The right to declare the Term of this Lease ended and to re-enter the Premises and take possession thereof, and to terminate all of the rights of Tenant in and to the Premises; or 25.2.2 The right, without declaring the Term of this Lease ended, to re-enter the Premises and to occupy the same, or any portion thereof, for and on account of Tenant as hereinafter provided, applying any moneys received first to the payment of such expenses as Landlord may have paid, assumed or incurred in recovering possession of the Premises, including costs, expenses, attorneys' fees, and expenditures placing the same in good order and condition, or preparing or altering the same for reletting, and all other expenses, commissions and charges paid, assumed or incurred by Landlord in or in connection with reletting the Premises and then to the fulfillment of the covenants of Tenant. Any such reletting as provided for herein may be for the remainder of the Page 45 56 Term of this Lease or for a longer or shorter period. Such reletting shall be for such rent and on such other terms and conditions as Landlord, in its sole reasonable discretion, deems appropriate. Landlord may execute any lease made pursuant to the terms hereof either in Landlord's own name or in the name of Tenant, or subject to the provisions of Section 18 hereof, assume Tenant's interest in and to any existing subleases to any tenant of the Premises, as Landlord may see fit, and Tenant shall have no right or authority whatsoever to collect any rent from such tenants, subtenants, licensees or concessionaires on the Premises. In any case, and whether or not the Premises or any part thereof be relet, Tenant, until the end of what would have been the term of this Lease in the absence of such default and whether or not the Premises or any part thereof shall have been relet, shall be liable to Landlord and shall pay to Landlord monthly an amount equal to the amount due as Aggregate Monthly Rent, less the net proceeds for said month, if any, of any reletting effected for the account of Tenant pursuant to the provisions of this subsection, after deducting all of Landlord's expenses in connection with such reletting, including, without limitation, all repossession costs, brokerage commissions, legal expenses, court costs, attorneys' fees, expenses of employees, alteration costs, and expenses of preparation for such reletting (all said costs are cumulative and shall be applied against proceeds of reletting until paid in full). Landlord reserves the right to bring such actions for the recovery of any deficits remaining unpaid by Tenant to Landlord hereunder as Landlord may deem advisable from time to time without being obligated to await the end of the Term for a final determination of Tenant's account and the commencement or maintenance of one or more actions by Landlord in this connection shall not bar Landlord from bringing any subsequent actions for further accruals pursuant to the provisions of this Section; or 25.2.3 The right, even though it may have relet all or any portion of the Premises in accordance with the provisions above, to thereafter at any time elect to terminate this Lease for such Page 46 57 previous default on the part of Tenant, and to terminate all of the rights of Tenant in and to the Premises. 25.3 Pursuant to said rights of re-entry above, Landlord may remove all persons from the Premises and may, but shall not be obligated to, remove all property therefrom, and may, but shall not be obligated to, enforce any rights Landlord may have against said property or store the same in any public or private warehouse or elsewhere at the cost and for the account of Tenant or the owner or owners thereof. Tenant agrees to hold Landlord free of and harmless from any liability whatsoever for the removal and/or storage of any such property, whether of Tenant or any third party whomsoever. Notwithstanding anything contained herein to the contrary, Landlord shall not be deemed to have terminated this Lease or the liability of Tenant to pay any rent or other sum of money thereafter to accrue hereunder, or Tenant's liability for damages under any of the provisions hereof, by any such re-entry, or by any action in unlawful detainer or otherwise to obtain possession of the Premises, unless Landlord shall have specifically, with reference to this Section, notified Tenant in writing that it has so elected to terminate this Lease. Tenant covenants and agrees that the service by Landlord of any notice pursuant to the unlawful detainer statutes of the State of Nevada and the surrender of possession pursuant to such notice shall not (unless Landlord elects to the contrary at the time of, or at any time subsequent to, the service of such notice to Tenant) be deemed to be a termination of this Lease, or the termination of any liability hereunder of Tenant to Landlord. 25.4 Tenant acknowledges and agrees that, in the event of any failure of Tenant to pay any Aggregate Monthly Rent, Minimum Monthly Rent, Additional Rent or other charges or moneys required to be paid by Tenant to Landlord pursuant to this Lease, Tenant shall immediately be in the status of default such that, at Landlord's option, the five (5) day written notice required by Section 25.1.1 (i) may be a five-day notice as contemplated by N.R.S. Section 40.250 or N.R.S. Section 40.253, Page 47 58 or (ii) may be given simultaneously or may run concurrently with any five day notice given by Landlord pursuant to N.R.S. Section 40.250 or N.R.S. Section 40.253. 25.5 In any action brought by Landlord or Tenant to enforce any of its rights under or arising from this Lease, the prevailing party shall be entitled to receive its court costs and legal expenses, including reasonable attorneys' fees, at trial and on appeal, whether such action is prosecuted to judgment or not. The parties shall and do hereby waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matters whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises, and/or any claim of injury or damage. In the event Landlord commences any proceedings for non-payment of any rent, Tenant will not interpose any counterclaim of whatever nature or description in any such proceedings. This shall not, however, be construed as a waiver of the Tenant's right to assert such claims in any separate action or actions brought by Tenant. 25.6 The waiver by Landlord of any particular default or breach of any of the terms, covenants or conditions hereof on the part of Tenant to be kept and performed shall not be a waiver of any preceding or subsequent breach of the same or any other term, covenant or condition contained herein. Landlord's failure to insist upon strict performance of any of the terms, conditions or covenants herein shall not be deemed to be a waiver of any rights or remedies of Landlord. The subsequent acceptance of rent or any other payment hereunder by Tenant to Landlord shall not be construed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease other than the failure of Tenant to pay the particular rental or other payment or portion thereof so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rental or other payment. No payment by Tenant or receipt by Landlord of a lesser Page 48 59 amount than the rent herein provided shall be deemed to be other than on account of the earliest rent due and payable hereunder, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept any such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy provided in this Lease. The term of this Section 25 may not be waived. SECTION 26 QUIET POSSESSION 26.1 Tenant, upon paying the Minimum Monthly Rent, Additional Rent and all other charges and moneys herein required of Tenant, and upon Tenant's performance of all of the terms, covenants and conditions of this Lease on its part to be kept and performed, may quietly have, hold and enjoy the Premises during the Term of this Lease without any disturbance from Landlord or from any other person claiming through Landlord. SECTION 27 CONVEYANCE BY LANDLORD 27.1 In the event of any sale, transfer and exchange of the Premises or other property by Landlord to the extent that such purchaser, transferee or other party acquires the interest of the Landlord in the Premises, Landlord shall be and is hereby relieved of all liability under any and all of its covenants and obligations contained in or derived from this Lease, arising out of any act, occurrence or omission relating to the Premises occurring after the consummation of such sale, transfer or exchange. Tenant agrees to attorn to such purchaser, transferee or grantee. Page 49 60 SECTION 28 DEFAULT BY LANDLORD 28.1 It is agreed that in the event Landlord fails or refuses to perform any of the provisions, covenants or conditions of this Lease on Landlord's part to be kept or performed, that Tenant, prior to exercising any right or remedy Tenant may have against Landlord on account of such default, shall give written notice to Landlord of such default, specifying in said notice the default with which Landlord is charged and Landlord shall not be deemed in default if the same is cured within thirty (30) days of receipt of said notice. Notwithstanding any other provision hereof, Tenant agrees that if the default complained of in the notice provided for by this Section is of such a nature that the same can be rectified or cured by Landlord, but cannot with reasonable diligence be rectified or cured by Landlord within said thirty (30) day period, then such default shall be deemed to be rectified or cured if Landlord within a thirty (30) day period shall commence the rectification and curing thereof and shall continue thereafter with all due diligence to cause such rectification and curing to proceed. SECTION 29 NOTICES 29.1 Any and all notices and demands by or from Landlord to Tenant, or by or from Tenant to Landlord, required or desired to be given hereunder shall be in writing and shall be validly given or made if served either personally, or delivered by recognized commercial courier (such as Federal Express), or if deposited in the United States mail, certified or registered, postage prepaid, return receipt requested. If such notice or demand be served by registered or certified mail in the manner provided, service shall be conclusively deemed given two (2) days after mailing or upon receipt, whichever is sooner. Page 50 61 29.1.1 Any notice or demand to Landlord shall be addressed to Landlord at: P.O. Box 4754 Thousand Oaks, California 91359 With a copy to: Kolesar & Leatham, Chtd. 3320 West Sahara Avenue Suite 380 Las Vegas, Nevada 89102 ATTN: Robert J. Kolesar, Esq. 29.1.2 Any notice or demand to Tenant shall be addressed to Tenant at: 1500 East Tropicana Avenue Las Vegas, Nevada 89119 ATTN: Jon A. Joseph, Esq. With a copy to: Jon A. Joseph, Esq. 4310 Paradise Road Las Vegas, Nevada 89109 29.2 Any party hereto may change its address for the purpose of receiving notices or demands as herein provided by a written notice given in the manner aforesaid to the other party hereto, which notice of change of address shall not become effective, however, until the actual receipt thereof by the other party. SECTION 30 REMEDIES CUMULATIVE 30.1 The various rights, options, elections and remedies of Landlord and Tenant contained in this Lease shall be cumulative and no one of them shall be construed as exclusive of any other, or of any right, priority or remedy allowed or provided for by law and not expressly waived in this Lease. Page 51 62 SECTION 31 SUCCESSORS AND ASSIGNS 31.1 The terms, provisions, covenants and conditions contained in this Lease shall apply to, bind and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of Landlord and Tenant (where permitted), respectively. SECTION 32 PARTIAL INVALIDITY 32.1 If any term, covenant or condition of this Lease, or any application thereof, should be held by a court of competent jurisdiction to be invalid, void or unenforceable, all terms, covenants and conditions of this Lease, and all applications thereof, not held invalid, void or unenforceable, shall continue in full force and effect and shall in no way be affected, impaired or invalidated thereby. SECTION 33 TIME OF THE ESSENCE 33.1 Time is of the essence as to this Lease and all of the terms, covenants and conditions hereof. SECTION 34 ENTIRE AGREEMENT 34.1 This Lease contains the entire agreement between the parties and shall not be amended, changed or terminated orally. SECTION 35 NO PARTNERSHIP 35.1 Nothing contained in this Lease shall be deemed or construed by the parties hereto or by any third party to create the relationship of principal and agent or of partnership or of joint Page 52 63 venture or of any association between Landlord and Tenant. Neither the method of computation of rent nor any other provisions contained in this Lease nor any acts of the parties hereto shall be deemed to create any relationship between Landlord and Tenant other than the relationship of landlord and tenant. SECTION 36 BROKERS 36.1 This Lease is an integral part of the real estate purchase transaction referred to in Section 2.1 hereof, and any and all brokerage commissions shall be paid at the Closing of that transaction. No separate lease commissions shall be due and payable. Tenant warrants that it has had no dealings with any broker or agent in connection with this Lease creating any liability for which Landlord is obligated to pay, and hereby holds harmless and indemnifies Landlord from and against any and all cost, expense or liability including legal fees and costs in defense thereof for any compensation, commissions and charges claimed to be due by any broker or agent with respect to this Lease or the negotiation hereof based on any such broker's or agent's representation of Tenant. The foregoing shall not apply to any internal or related commission or fee to be paid by Landlord. SECTION 37 ATTORNEYS' FEES 37.1 In the event any action at law or in equity, or any special proceeding, be instituted by either of the parties hereof against the other to enforce this Lease, or any rights arising hereunder, or in connection with the subject matter hereof, the prevailing party shall be entitled to recover all costs of suit and reasonable attorneys' fees at trial and on appeal. Page 53 64 SECTION 38 GENERAL PROVISIONS 38.1 The captions appearing at the commencement of the Sections hereof are descriptive only and for convenience of reference to this Lease and in no way whatsoever define, limit or describe the scope or intent of this Lease, nor in any way affect this Lease. 38.2 Masculine or feminine pronouns shall be substituted for the neuter form and vice versa, and the plural shall be substituted for the singular form and vice versa, in any place or places herein in which the context requires such substitution(s). 38.3 The laws of the State of Nevada shall govern the validity, construction, performance, enforcement and effect of this Lease. Any legal action under this Lease or in any way pertaining to this Lease must be instituted and maintained in Clark County, Nevada. 38.4 Whenever in this Lease any words of obligation or duty are used in connection with either party, such words shall have the same force and effect as though framed in the form of express covenants on the part of the party obligated. 38.5 In the event Tenant now or hereafter shall consist of more than one person, firm or corporation, then and in such event, all such persons, firms or corporations shall be jointly and severally liable as Tenant hereunder. 38.6 The submission of this Lease for examination does not constitute a reservation of or option to lease the Premises; this Lease becomes effective as a Lease only upon execution by both parties, delivery thereof by Landlord to Tenant and the Closing of the real estate transaction referred to in Section 2.1 hereof. Page 54 65 38.7 Should any claim or lien be filed against the Premises, or any action or proceeding be instituted affecting the title to the Premises, Tenant shall give Landlord written notice thereof as soon as Tenant obtains actual knowledge thereof. 38.8 This Lease shall not be construed either for or against Landlord or Tenant, but this Lease shall be interpreted in accordance with the general tenor of its language. 38.9 Tenant agrees and acknowledges that Landlord has bargained for Tenant's full and faithful compliance with the terms of the Lease, and Tenant's full and faithful payment of all Aggregate Monthly Rent, Minimum Monthly Rent, Additional Rent and other charges and moneys to be paid by Tenant. Therefore, if Landlord has granted Tenant any monetary concession or benefits, all such concessions and/or benefits to Tenant shall be effective only so long as Tenant is not in default of any term, covenant or provision of this Lease. Thus, should Tenant default hereunder, in addition to any amounts owing from Tenant to Landlord as a result of such default, the full amount of any such monetary concession or benefit not included within Landlord's damage with respect to Tenant's general obligations for all rent and Additional Rent above shall be immediately due and payable by Tenant to Landlord upon demand. 38.10 Landlord and Tenant acknowledge the fact that this Lease and the terms hereof are confidential and are to remain so. Therefore, each party hereto agrees that it will not disclose the terms hereof to any third party or unrelated or unaffiliated party except in the event of litigation, regulatory reporting requirements, financial planning and/or a public offering or sale of all or virtually all of the assets of the respective party hereto, as otherwise required in the ordinary course of each party's business. This Lease shall not be recorded. However, upon the request of either party, both parties shall for the purposes of recordation, execute a memorandum or "short form" of this Lease, Page 55 66 which shall describe only the parties; the Premises; the Lease Term and any Option Periods and shall incorporate this Lease by reference. 38.11 Tenant understands and agrees that any claims by Tenant against Landlord with respect to this Lease shall be limited to the assets of the beneficial owner of the Premises. Tenant expressly waives any and all rights to proceed against the individual partners or against the officers, directors or shareholders of any corporate partner of such beneficial owner, except to the extent of their interests therein. 38.12 If Tenant is a corporation, each individual signing this Lease on behalf of Tenant represents and warrants that he or she is duly authorized to execute and deliver this Lease on behalf of the corporation, and that this Lease is binding on Tenant in accordance with its terms. Tenant shall, prior to or within three (3) days after execution of this Lease, deliver to Landlord a certified copy of a resolution of its board of directors authorizing such execution. IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the date set forth above. LANDLORD TENANT JOZAC BUSINESS CENTER, LLC, PREFERRED EQUITIES CORPORATION, a California limited a Nevada corporation liability company By: /s/ Michael D. White By: /s/ Jon A. Joseph --------------------------- -------------------------------- Manager Jon A. Joseph, Vice President Page 56 EX-10.219 10 a66375ex10-219.txt EXHIBIT 10.219 1 EXHIBIT 10.219 GUARANTY OF LEASE THIS GUARANTY OF LEASE (this "Guaranty") is given this 9th day of November, 2000, by MEGO FINANCIAL CORP., a New York corporation, having an office address at 4310 Paradise Road, Las Vegas, Nevada, ("Guarantor"), to JOZAC BUSINESS CENTER, LLC, a California limited liability company ("Landlord"). I. RECITALS A. A certain lease of even date herewith has been, or will be, executed by and between Landlord, and Preferred Equities Corporation, a Nevada corporation, ("Tenant"), for certain premises in the County of Clark, State of Nevada ("Lease"). B. Landlord requires as a condition to its execution of the Lease that the undersigned guarantee the full performance of the obligations of Tenant thereunder. C. Guarantor is desirous that Landlord enter into the Lease with Tenant. NOW, THEREFORE, in consideration of the execution of the Lease by Landlord, Guarantor hereby unconditionally guarantees the full performance of each and all of the terms, covenants and conditions of the Lease to be kept and performed by Tenant, as hereinafter provided. II. TERMS A. GUARANTOR'S OBLIGATIONS: 1. GUARANTY OF TENANT'S PERFORMANCE. Guarantor unconditionally guarantees to Landlord the full and complete performance of each and all of the terms, covenants and conditions of the Lease and any amendments thereto required to be performed by Tenant including, but not limited to, the payment of all Monthly Minimum Rent and Additional Rent (as each term is defined in the Lease), and any and all other charges or sums 2 or any portion thereof to accrue or become due from Tenant to Landlord pursuant to the terms of the Lease ("Monetary Sums"). 2. TENANT'S FAILURE TO PERFORM. In the event of a "default" as defined in the Lease of payment of any of the Monetary Sums when due under the Lease, then, upon demand by Landlord, Guarantor, by certified or cashier's check or by wire transfer, shall pay to Landlord or Landlord's designated agent all Monetary Sums due and owing from Tenant to Landlord under the Lease. 3. OTHER PROVISIONS. In the event of a "default" as defined in the Lease in the performance of any covenants, terms or conditions of the Lease as required to be performed, other than as provided for in Part II, Section A.2 of this Guarantee, then, upon demand by Landlord, Guarantor shall commence and complete performance of the conditions, covenants and terms within five (5) days after the date of Landlord's demand; provided, in the event the performance by Guarantor cannot be completed within five (5) days, Guarantor shall commence performance within that time and diligently pursue same to completion within a reasonable period of time. Notwithstanding the foregoing, nothing contained in this Guarantee shall obligate or require Landlord to give Guarantor notice of any default or failure to perform on the part of Tenant, and Landlord's failure to give such notice shall have no effect on Guarantor's liability hereunder. 4. ADDITIONAL DAMAGES AND INTEREST. In addition to the payment of the Monetary Sums and the performance of any and all other provisions, conditions and terms of the Lease which may be required of Guarantor by reason of Tenant's failure to perform, Guarantor agrees to pay to Landlord any and all costs and expenses incurred by Landlord resulting from Tenant's failure to perform, including all costs and expenses and 2 3 attorney's fees incurred in the enforcement of this Guarantee, whether or not litigation is commenced to enforce such rights. This provision shall also specifically include any and all attorneys' fees incurred by Landlord in connection with any bankruptcy filing by Tenant, Guarantor or any other party to the Lease or this Guaranty. Guarantor further agrees to pay to Landlord interest on any and all sums due and owing Landlord by reason of Tenant's failure to pay same at the rate of fifteen percent (15%) per annum until paid in full. B. LANDLORD'S RIGHTS: 1. ENFORCEMENT. Notwithstanding the provisions of Section A above, Landlord reserves the right, in the event of any failure of Tenant to pay the Monetary Sums, to proceed against Tenant or Guarantor, or both, and to enforce against Guarantor or Tenant, or both, any and all rights that Landlord may have to the Monetary Sums. Guarantor understands and agrees that its liability under this Guarantee shall be primary and that, in any right of action which may accrue to Landlord under the Lease or this Guarantee, Landlord, at its option, may proceed against Guarantor without having taken any action or obtained any judgment against Tenant. 2. DELAY IN ENFORCEMENT. Guarantor understands and agrees that any failure or delay of Landlord to enforce any of its rights under the Lease or this Guarantee shall in no way affect Guarantor's obligations under this Guarantee. C. GUARANTOR'S WAIVERS: Guarantor hereby waives: 1. Any and all notices, presentments and notices of nonpayment or nonperformance; 3 4 2. All defenses based upon any disability of Tenant, release of Tenant's liability for any reason or any statute of limitations controlling obligations accruing under the Lease or this Guarantee; 3. Any and all rights it may have now or in the future to require or demand that Landlord pursue any right or remedy Landlord may have against Tenant or any third party, 4. Any and all rights it may have to enforce any remedies available to Landlord against Tenant now or in the future; 5. Any and all right to participate in any security deposit held by Landlord under the Lease now or in the future; 6. The right to require Landlord to proceed against Tenant, exhaust any security which Landlord now holds or may hold in the future from Tenant or pursue any other right or remedy available to Landlord; 7. All benefits and defenses under Nevada law that Guarantor's liability may be larger in amount and more burdensome than the liability of Tenant, and that Guarantor is liable even if Tenant had no liability at the time of the execution of the Lease or ceases for any reason to be liable; 8. All rights and benefits under Nevada law that Guarantor's liability shall continue even if Landlord alters the obligations of Tenant under the Lease; and 9. All benefits and defenses under Nevada law, including the right to require Landlord to proceed against Tenant, any other guarantor, or any security Landlord may hold, before enforcing this Guaranty against Guarantor, and the right to require Landlord to pursue any other right or remedy for the benefit of Guarantor, and Guarantor agrees that Landlord may 4 5 proceed against Guarantor without proceeding against or exhausting any security that Landlord holds. D. CHANGES DO NOT AFFECT LIABILITY: Guarantor understands and agrees that its obligations under this Guaranty shall not be affected in any way by any extension of time or other indulgence granted to Tenant, any amendment, modification, renewal or extension of the Lease, or any assignment or subletting of the Lease, and in no way shall any such occurrence release or discharge Guarantor from its obligations under this Guaranty. Guarantor agrees that its obligations under this Guaranty shall not be affected by Landlord's failure to notify Guarantor of any default or failure to perform on the part of Tenant. E. TENANT'S INSOLVENCY: 1. ASSUMPTION OF LIABILITY. Guarantor understands and agrees that, if Tenant becomes insolvent or is adjudicated bankrupt, whether by voluntary or involuntary petition, or if any bankruptcy action involving Tenant is commenced or filed, or if a petition for reorganization, arrangement or similar relief is filed against Tenant, or if a receiver of any part of Tenant's property or assets is appointed by any court, Guarantor will pay to Landlord the amount of all accrued, unpaid and accruing Monetary Sums to the date when the trustee or administrator accepts or assumes the Lease and commences paying same; provided, however, at such time as the trustee or administrator rejects the Lease, Guarantor shall pay to Landlord all accrued, unpaid and accruing Monetary Sums under the Lease for the remainder of the Term. 2. LANDLORD'S OPTION. Pursuant to the provisions of Part II, Section E.1 above, at the option of Landlord as to the amounts owing for the unexpired term of the Lease if the Lease is rejected, Guarantor shall either: 5 6 a. Pay to Landlord an amount equal to the Monetary Sums which would have been payable for the unexpired term of the Lease reduced to its present day value; or b. Execute and deliver to Landlord a new lease for the balance of the Term with the same terms and conditions as the Lease and with Guarantor as tenant thereunder. 3. EFFECT OF OPERATION OF LAW. Any operation of any present or future debtor's relief act or similar act or law or decision of any court shall in no way affect the obligations of Guarantor or Tenant to perform any of the terms, covenants or conditions of the Lease or of this Guaranty. III. MISCELLANEOUS: A. EXTENT OF OBLIGATIONS. Notwithstanding anything to the contrary in this Guaranty, it is understood and agreed that this Guaranty shall extend to any and all obligations of Tenant to Landlord under the Lease and any amendments to the Lease. B. SUBROGATION. Guarantor understands and agrees that it shall have no right of subrogation against Tenant until such time as all of Tenant's obligations to Landlord have been fully paid and discharged. C. ASSIGNABILITY. This Guaranty may be assigned in whole or in part by Landlord upon written notice to Guarantor. D. SUCCESSORS AND ASSIGNS. The terms and provisions of this Guaranty shall be binding upon and inure to the benefit of the successors and assigns of the parties hereto. E. MODIFICATION OF GUARANTY. This Guaranty constitutes the full and complete agreement between the parties hereto and it is understood and agreed that the provisions hereof may only be modified by a writing executed by the parties hereto. 6 7 F. NUMBER AND GENDER. As used herein, the singular shall include the plural and, as used herein, the masculine shall include the feminine and neuter genders. G. CAPTIONS/HEADINGS. Any captions or headings used in this Guaranty are for reference purposes only and are in no way to be construed as part of this Guaranty. H. INVALIDITY. If any term, provision, covenant or condition of this Guaranty is held to be void, invalid or unenforceable, the remainder of the provisions hereof shall remain in full force and effect and shall in no way be affected, impaired or invalidated. I. JURISDICTION. The validity of this Guaranty and of any of its terms or provisions, and the rights and duties of the parties hereunder, shall be interpreted and construed in accordance with the laws of the State of Nevada. J. ATTORNEYS' FEES. In the event that either Landlord or Guarantor shall institute or otherwise become involved in any action or proceeding, including, but not limited to, any bankruptcy case commenced by Tenant, Guarantor or any other party, the party not prevailing in such action or proceeding shall reimburse the prevailing party for its actual attorneys' fees, and all fees, costs and expenses incurred in connection with such action or proceeding, including, without limitation, any postjudgment fees, costs or expenses incurred on any appeal or in collection of any judgment. K. GUARANTY OF PAYMENT AND PERFORMANCE. It is understood and agreed that this Guaranty is unconditional and continuing and is a guarantee of payment and performance and not of collection. L. JOINT AND SEVERAL OBLIGATION. If Guarantor is more than one (1) person, the obligations of the persons comprising Guarantor shall be joint and several and the unenforceability of this Guaranty or Landlord's election not to enforce this Guaranty against one 7 8 (1) or more of the persons comprising Guarantor shall not affect the obligations of the remaining persons comprising Guarantor or the enforceability of this Guaranty against such remaining persons. M. CORPORATE AUTHORITY. If Guarantor is a corporation, each individual signing this Guaranty on behalf of Guarantor represents and warrants that he or she is duly authorized to execute and deliver this Guaranty on behalf of the corporation, and that this Guaranty is binding on Guarantor in accordance with its terms. Guarantor shall, prior to execution or within three (3) days thereafter, deliver to Landlord a certified copy of a resolution of its board of directors authorizing such execution. IN WITNESS WHEREOF, the undersigned have executed this Guaranty and made it effective on the date first written above. Addresses for notices: GUARANTOR: Jon Joseph, Vice President MEGO FINANCIAL CORP., a New York - -------------------------------- corporation 4310 Paradise Road - -------------------------------- Las Vegas, Nevada 89109 - -------------------------------- By: /s/ Jon A. Joseph ------------------------------ Jon A. Joseph, V.P Its Authorized Representative 8 9 MASTER LEASE AGREEMENT Landlord: JOZAC Business Center, LLC Tenant: Preferred Equities Corporation Guarantor: MEGO Financial Corporation TABLE OF CONTENTS
PAGE SECTION 1 PREMISES..................................................................1 SECTION 2 EFFECTIVENESS - SALE/LEASE BACK - CONDITION OF PREMISES...................2 SECTION 3 TERM/OPTION TO EXTEND.....................................................2 SECTION 4 RENT......................................................................5 SECTION 5 GAMING...................................................................11 SECTION 6 SECURITY DEPOSIT.........................................................12 SECTION 7 POSSESSION AND SURRENDER.................................................13 SECTION 8 USE OF PREMISES/REPAIRS/COMPLIANCE.......................................14 SECTION 9 IMPROVEMENTS AND CONSTRUCTION............................................18 SECTION 10 LANDLORD'S REPAIRS......................................................20 SECTION 11 TAXES...................................................................21 SECTION 12 UTILITIES...............................................................25 SECTION 13 INSURANCE...............................................................26 SECTION 14 LIENS...................................................................30 SECTION 15 INDEMNIFICATION.........................................................31 SECTION 16 SUBORDINATION...........................................................32 SECTION 17 EXISTING LEASES/ASSIGNMENT -- SUBLETTING................................33 SECTION 18 SUBLEASES/COLLATERAL ASSIGNMENT/NON-DISTURBANCE AND ATTORNMENT..........36 SECTION 19 INSOLVENCY AND DEATH....................................................38 SECTION 20 CONDEMNATION............................................................38
i 10
SECTION 21 DAMAGE OR DESTRUCTION...................................................40 SECTION 22 RIGHT OF ACCESS.........................................................41 SECTION 23 EXPENDITURES BY LANDLORD................................................42 SECTION 24 ESTOPPEL CERTIFICATE....................................................43 SECTION 25 TENANT'S DEFAULT; LANDLORD'S REMEDIES...................................43 SECTION 26 QUIET POSSESSION........................................................49 SECTION 27 CONVEYANCE BY LANDLORD..................................................49 SECTION 28 DEFAULT BY LANDLORD.....................................................50 SECTION 29 NOTICES.................................................................50 SECTION 30 REMEDIES CUMULATIVE.....................................................51 SECTION 31 SUCCESSORS AND ASSIGNS..................................................52 SECTION 32 PARTIAL INVALIDITY......................................................52 SECTION 33 TIME OF THE ESSENCE.....................................................52 SECTION 34 ENTIRE AGREEMENT........................................................52 SECTION 35 NO PARTNERSHIP..........................................................52 SECTION 36 BROKERS.................................................................53 SECTION 37 ATTORNEYS' FEES.........................................................53 SECTION 38 GENERAL PROVISIONS......................................................54
ii 11 M A S T E R L E A S E 4310 PARADISE ROAD LAS VEGAS, NEVADA THIS LEASE ("LEASE") is made and entered into this 9th day of November, 2000, by and between JOZAC BUSINESS CENTER, LLC, a California limited liability company (herein referred to as "LANDLORD"), and PREFERRED EQUITIES CORPORATION, a Nevada corporation (herein referred to as "TENANT"). SECTION 1 PREMISES 1.1 Upon the conditions, limitations, covenants and agreements herein set forth, Landlord hereby agrees to lease to Tenant, and Tenant hereby accepts, hires and leases from Landlord certain real property improved with three (3) one-story and one (1) two-story office buildings containing a total of approximately thirty thousand nine hundred nineteen (30,919) gross square feet, bearing a street address of 4310 Paradise Road, Las Vegas, Nevada 89109 as more particularly set out on Exhibits "A" and "A-1" attached hereto and incorporated herein by reference (herein referred to as the "Premises"). The Premises shall include the buildings located thereon, parking areas, landscaping, walkways, driveways, service areas and any other common areas and improvements now existing or hereafter erected thereon. 1.2 This Lease shall be subject to all existing and future covenants, conditions, restrictions, reservations and easements now or hereafter recorded against the Property; provided however that no future covenant, condition, restriction, reservation or easement shall materially and adversely affect Tenant's or any subtenant's use of the Premises, including its quiet possession thereof. Page 1 12 SECTION 2 EFFECTIVENESS - SALE/LEASE BACK - CONDITION OF PREMISES 2.1 The effectiveness of this Lease shall be expressly subject to the Closing of the real estate purchase transaction between Tenant, as seller, and Landlord, as buyer, for the Premises pursuant to that certain Real Estate Purchase Agreement and Receipts for Deposit dated as of September 8, 2000 ("Purchase Agreement"). It is the intent of the parties hereto that the Lease will commence on the Date of Closing of the foregoing transaction. The effectiveness of this Lease shall also be expressly subject to the execution and delivery to Landlord of a Guaranty of Lease by MEGO FINANCIAL CORP. in favor of Landlord in the form attached hereto as Exhibit "B". Tenant has been the owner of the Premises prior to the commencement of this Lease and is familiar with the condition of the Premises, the status of title, the building, all improvements located thereon, all tenancies and all contracts affecting the Premises. Tenant represents that it has examined the Premises, is satisfied with the physical condition thereof and agrees to accept the same "as is". Tenant further acknowledges that Landlord has not made any representation as to such physical condition, the rents, leases, expenses of operation or any other matter or thing affecting or relating to the Premises. SECTION 3 TERM/OPTION TO EXTEND 3.1 The term of this Lease shall be five and one-half (5 1/2) years commencing on the "Commencement Date", which shall be the Date of Closing of the real estate transaction referred to in Section 2.1 hereof and terminating on the last day of the Sixty Sixth (66th) full calendar month thereafter ("Initial Term"), unless sooner terminated or extended as hereinafter provided. Page 2 13 3.2 Tenant shall have an option to extend the Initial Term for an additional period of four and one-half (4 1/2) years ("Option Period") on the terms and conditions set forth herein; provided that said option may be exercised only in the event Tenant is not in default either at the time said option is exercised or at the time the Option Period is to commence. Further, said option may not be severed from the Lease or separately sold, assigned or otherwise transferred. The words "Lease Term" or "Term" as used in this Lease, shall mean the term of this Lease, as the same may be extended by Tenant pursuant to this section. 3.3 To exercise the option set forth herein, Tenant shall notify Landlord in writing no later than One Hundred Eighty (180) calendar days and no earlier than Three Hundred Sixty Five (365) calendar days prior to the expiration of the Initial Term. 3.4 In the event Tenant properly exercises its option as provided herein, all of the terms and conditions of this Lease shall apply during the Option Period, except as to the option right then exercised and subject to the security deposit and rent adjustments set forth hereinbelow. The Minimum Monthly Rent for the Option Period shall be increased to initially reflect the Fair Market Rental Value (as defined below) of the Premises as of the commencement of the Option Period, which Minimum Monthly Rent shall in no event be less than the Minimum Monthly Rent for the last Lease Year of the Initial Term, and which shall be increased annually during the Option Period in accordance with the CPI adjustment formula set forth in Section 4.3 hereof. Additionally, the Security Deposit required by Section 6 hereof shall be increased as of the commencement of the Option Period to an amount identical to the Minimum Monthly Rent for the first month of such Option Period. Page 3 14 3.4.1 The term Fair Market Rental Value shall mean the price, as of the date in question, which a landlord, willing but not obligated to lease, would accept for the Premises, and which a tenant, willing but not obligated to lease, would pay therefor in an arms length lease transaction. For purposes of determining Fair Market Rental Value only, the use of the Premises shall be restricted to the permissible uses set forth in this Lease. Fair Market Rental Value shall be determined by the parties or, if the parties are unable to agree thereon, by the following procedure: When the parties are unable to agree as to the Fair Market Rental Value of the Premises within thirty (30) after Tenant exercises the renewal option, either party may give written notice of such disagreement to the other party and in such notice shall designate the "First Appraiser". Within thirty (30) days after the service of such notice, the other party shall give written notice to the party giving the first notice, which notice shall designate the "Second Appraiser". If the Second Appraiser is not so designated within said notice or by the time above specified, then the First Appraiser shall designate the Second Appraiser. The First and Second Appraisers so designated or appointed shall meet within twenty (20) days after the Second Appraiser is appointed and shall appoint a "Third Appraiser". If the First and Second Appraisers are unable to agree upon a Third Appraiser within twenty (20) days after the Second Appraiser is appointed, then either party, on behalf of both, may request that such appointment be made by the presiding judge of the United States District Court for the district in which the Premises is located, or any successor Federal Court of original jurisdiction, or by the Chief Judge of the Clark County District Court (the "Presiding Judge"). In the event of a failure, refusal or inability of any appraiser to act, a new appraiser shall be appointed in his stead, which appointment shall be made by the Page 4 15 Presiding Judge. Each party shall pay the fees and expenses of the appraiser appointed by such party, or in whose stead, as provided above, such appraiser was appointed, and the fees and expenses of the Third Appraiser, and all other expenses, if any, shall be born equally by both parties. Any appraiser designated to serve as above provided, shall be disinterested, shall be a member of the American Institute of Real Estate Appraisers (or any successor association or body of comparable standing if such institute is not then in existence), and shall be familiar with property values in Southern Nevada. The appraisers shall determine the Fair Market Rental Value of the Premises. A decision joined in by two of the three appraisers shall be the decision of all the appraisers. After reaching a decision, the appraisers shall give written notice thereof to Landlord and Tenant, which notice shall state the Fair Market Rental Value so determined, and the Fair Market Rental Value so stated shall be considered the Fair Market Rental Value for purposes of this Lease and shall be binding upon Landlord and Tenant. If the appraisers shall fail to reach a decision as provided above within thirty (30) days after the appointment of the Third Appraiser, the Fair Market Rental Value shall be the average of the two closest appraisals. Subject to the provisions of this Lease, the appraisers shall make their appraisal in the same manner as other real estate appraisals and no hearings shall be held in connection therewith. SECTION 4 RENT 4.1 The following definitions shall pertain hereto: Page 5 16 4.1.1 "RENTAL YEAR" shall mean a twelve (12) calendar month year beginning on the first day of the calendar month following the Commencement Date and ending twelve (12) full calendar months thereafter and each full twelve (12) calendar months respectively thereafter. 4.1.2 "LEASE YEAR" shall mean a twelve (12) month calendar year, except that in the event the Commencement Date occurs on a date other than January 1, the first Lease Year hereunder shall be that fractional part of the calendar year from the Commencement Date to December 31 of the same year and the final Lease Year shall be that fractional part of the calendar year from January 1 to the expiration date. 4.1.3 "BASE YEAR" shall mean the calendar year in which this Lease is executed. 4.1.4 "MINIMUM MONTHLY RENT" shall mean the base monthly rent payable in accordance with Section 4.2 below. 4.1.5 "ADDITIONAL RENT" shall mean all rent and other payments due Landlord hereunder, other than the Minimum Monthly Rent. 4.1.6 "AGGREGATE MONTHLY RENT" shall mean all monthly rent, including the Minimum Monthly Rent and all Additional Rent. 4.2 Tenant covenants and agrees to pay Landlord, promptly when due, without notice or demand and without deduction or setoff of any amount for any reason whatsoever, as Minimum Monthly Rent for the Premises the sum of $360,000 per rental year in equal monthly installments of $30,000 each, in advance, on the first day of each and every calendar month during the Initial Term. Minimum Monthly Rent for any period between the Commencement Date, as defined in Section 3.1 hereof, and the first day of the first "Rental Year", as defined in Section 4.1.1 hereof shall be computed on a per diem basis and paid along with the first monthly installment to be paid hereunder. Page 6 17 All amounts payable as Aggregate Monthly Rent or otherwise under this Lease, shall be paid to Landlord at the address set forth herein or at such other place as Landlord shall from time to time designate by notice to Tenant, in lawful money of the United States, which shall be legal tender and payment of all debts and dues, public and private, at the time of payment. 4.3 The Minimum Monthly Rent, as defined above, shall be subject to being increased by the percentage of increase, if any, in the Consumer Price Index for Urban Wage Earners and Clerical Workers, Los Angeles-Anaheim-Riverside Average "All Items", (1982-84=100), published by the United States Department of Labor's Bureau of Labor Statistics. The initial base period month for the purposes of such adjustment shall be the month of December of the calendar year in which this Lease is executed and the adjustment for the initial year of this Lease shall be the increase in the Index from the Commencement Date month to such December. Each December subsequent to the base period month, as aforesaid, shall then be used for comparison purposes and the increase in such Index for the then-current December over the immediately preceding December shall cause an equal adjustment in Minimum Monthly Rent which adjustment shall be effective as of the next-following January 1, and be retroactive, if necessary. The actual computation and determination will be made as soon as the current December Index is published. In no event shall the Minimum Monthly Rent be less than the amount of such Minimum Monthly Rent payable hereunder for the previous Lease Year. Should the aforementioned Index be discontinued, the parties shall select another similar index which reflects consumer prices and if the parties cannot agree on another index, such replacement index or measuring criteria shall be selected by Landlord in the exercise of its reasonable judgment. Page 7 18 4.3.1 Landlord shall, within a reasonable time after obtaining the appropriate data necessary for computing such increase, give Tenant written notice of any adjusted Minimum Monthly Rent so determined, and Landlord's computation thereof shall be conclusive and binding, but shall not preclude any adjustment which may be required in the event of a published amendment of the Index figures upon which the computation was based, unless Tenant shall, within thirty (30) days after the giving of such notice, notify Landlord in writing of any claimed error therein. Landlord will promptly investigate the claimed error, determine in good faith whether it is valid and, if necessary, adjust the rental within thirty (30) days of such determination. The upward adjusted Minimum Monthly Rent shall be due and payable for each month commencing with January 1 of the next Lease Year. 4.4 In addition to the Minimum Monthly Rent, and as a part of the Aggregate Monthly Rent, beginning on the Commencement Date, Tenant shall pay Landlord, at the time and in the manner herein set forth, the following "Additional Rent": 4.4.1 It is the intent of the parties that Tenant shall be directly responsible for any and all Property Operating Cost, defined below. Accordingly, Tenant will use its best efforts to arrange to pay for all Property Operating Costs directly, and will provide Landlord with written proof of timely payment for each such cost. Further, Tenant shall pay as Additional Rent, any Property Operating Cost paid by Landlord pursuant to Section 23.1, whether or not Landlord is required to pay the same under this Lease. (a) The term "Property Operating Cost" shall mean the total cost and expense incurred in managing, operating, equipping, lighting, repairing, replacing and maintaining the Premises, including janitorial, cleaning, refuse and trash disposal, lightbulb replacement and other services and repairs listed in this Lease, as well as any other costs and expenses necessary to Page 8 19 maintain the Premises as a first-class office building complex. Such operating and maintenance costs shall include all costs and expenses of operating and maintaining the Premises, including, without limitation, all Impositions (as that term is defined below); providing private police protection, security patrol, or night watchmen (including, but not limited to uniforms); fire protection and security alarm systems and equipment; preventative maintenance, replacement and repair for heating and air conditioning; workers compensation insurance; payroll taxes; materials, supplies, and all other costs of operating and repairing the Premises, including structures, sidewalks and parking areas, including but not limited to, lighting, cleaning, sweeping, painting, striping, sealing of the parking lot, roof repairs, structure repairs, removing of rubbish or debris, policing and inspecting; depreciation on or rentals of machinery and equipment; all utility expenses; costs and expenses for the rental of music program services and loudspeaker systems, including, but not limited to, furnishing electricity therefor; insurance, including fire and extended coverage, liability, property damage, rent loss, boiler insurance, vandalism, malicious mischief, earthquake, insurance against liability for defamation and claims of false arrest, and such other insurance in such amounts and covering hazards deemed appropriate by Tenant or required under this Lease; fidelity bonds; and all costs of repairs, maintenance, or replacement of paving, curbs, walkways, remarking, directional or other signs, landscaping, drainage, lighting facilities, repair and maintenance of the Premises including parking areas; costs and expenses of planting, replanting and replacing flowers, shrubbery and other landscaping, and the cost of servicing and maintaining any sprinkler system. There shall also be included the cost of leasing and operating any signs; the cost of personnel to implement any service described above, to direct traffic and to police the Premises. Costs of capital improvements or additions to the Premises which will result in overall cost-savings to Tenant hereunder shall also be included hereunder as a Property Operating Cost. Page 9 20 4.4.2 In addition to all other rental amounts specified herein, as further Additional Rent, Tenant shall pay prior to delinquency, all "Impositions" relative to of the Premises. Accordingly, Tenant will use its best efforts to arrange to pay all Impositions directly, and will provide Landlord with written proof of timely payment for each Imposition. For the purpose of this Lease "Impositions" means: (i) Any real estate taxes, fees, assessments or other charges assessed against the Premises or any improvements thereon. Tenant will use its best efforts to arrange with appropriate Clark County officials to have all real estate tax bills/invoices sent directly to Tenant, will pay the same prior to the due dates thereof, and will provide Landlord with proof of payment on or before applicable due dates. (ii) All personal property taxes on personal property used in connection with the Premises other than taxes payable by Tenant under Section 11 hereof. (iii) Any and all environmental levies or charges now in force affecting the Premises or any portion thereof, or which may hereafter become effective, including, but not limited to parking taxes, levies, or charges, employer parking regulations, and any other parking or vehicular regulations, levies, or charges imposed by any municipal, state or federal agency or authority. (iv) Any other taxes levied or assessed in addition to, as a replacement, alternative or substitute for, or in lieu of such real or personal property taxes. (v) Any expenses incurred in connection with any requirement subsequent to the date hereof for changes at the Premises so as to comply with then-existing laws, ordinances or codes imposed by federal, state or local governmental authorities. Page 10 21 Impositions do not include Landlord's general income taxes, inheritance, estate or gift taxes. 4.5 All rents and other monies required to be paid by Tenant hereunder to Landlord shall be paid to Landlord without deduction or offset, prior notice or demand, in legal tender of the United States of America, at P.O. Box 4754, Thousand Oaks, California 91359, or at such other place as Landlord may, from time to time, designate in writing. Tenant agrees that all monies required to be paid by Tenant pursuant to this Lease, except for the Minimum Monthly Rent are hereby conclusively deemed to be "Additional Rent." 4.5.1 If Tenant shall fail, within five (5) days after the same is due and payable, to pay to Landlord or reimburse Landlord for, as applicable, any Aggregate Monthly Rent, Additional Rent or any other amount or charge to be paid as Additional Rent by Tenant hereunder, such unpaid amount shall be subject to a late charge equal to five percent (5%) of such unpaid amount. In addition, any such unpaid amount shall bear interest from the thirtieth (30th) day after the due date thereof to the date of payment at the rate of fifteen percent (15%) per annum. The foregoing are not exclusive of Landlord's rights due to Tenant's default under this Lease and the remedies therefor. SECTION 5 GAMING 5.1 No slot machine, gambling device or other "gaming" of any type as defined by Nevada law or requiring a gaming license issued by the State of Nevada shall be permitted in or on the Premises without the prior written consent of Landlord, which consent is strictly within Landlord's discretion. Page 11 22 SECTION 6 SECURITY DEPOSIT 6.1 Tenant shall on the Date of Closing through escrow deposit with Landlord the sum of $30,000.00, receipt of which is hereby acknowledged by Landlord ("Deposit"). Said Deposit shall be held by Landlord as security for the faithful performance by Tenant of all the terms, covenants and conditions of this Lease by Tenant to be kept and performed during the Term hereof, including the vacating of the Premises by Tenant; provided that Tenant shall not be excused from the payment of any rent herein reserved or any other charge herein provided. If Tenant defaults with respect to any provision of this Lease, Landlord may, but shall not be required to, use or retain all or any part of the Deposit for the payment of any rent or other monies due Landlord, to repair damages to the Premises, to clean the Premises or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of the Deposit is so used or applied, Tenant shall, within five (5) days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore the Deposit to its original amount; otherwise such failure shall be a default under this Lease. 6.1.1 Landlord shall not be required to keep the Deposit separate from its general funds, and Tenant shall not be entitled to interest on the Deposit. Should Tenant comply with all of the terms, covenants and conditions of this Lease and promptly pay all the rent herein provided for and all other sums payable by Tenant to Landlord hereunder as the same fall due, then the Deposit shall be returned to Tenant thirty (30) days after the end of the Term, or after the last payment due from Tenant to Landlord, whichever last occurs. In the event of sale or transfer of the Premises, if Landlord transfers the Deposit to the vendee or transferee for the benefit of Tenant, or if such vendee or transferee assumes all liability with respect to the Deposit, then Landlord shall be Page 12 23 considered released by Tenant from all liability for the return of the Deposit, and Tenant agrees to look solely to the new landlord for the return of the Deposit, and it is agreed that this Section 6.1.1 shall apply to every transfer or assignment to a new landlord. No mortgagee or beneficiary holding a lien on the Premises or any portion thereof shall be liable to Tenant for any Deposit, unless said Deposit has actually been delivered to such mortgagee or beneficiary. 6.1.2 Tenant shall have no right or privilege to mortgage, encumber, transfer or assign the Deposit without the prior written consent of Landlord. 6.2 Tenant may not deduct the Deposit or any portion thereof from its Aggregate Monthly Rent, Minimum Monthly Rent, Additional Rent, or from other payments to Landlord under this Lease; and Landlord's right to possession of the Premises or to take appropriate action for nonpayment of any rent or for any other reason shall not be affected by the fact that Landlord holds the Deposit and does not use, apply or retain same as set forth herein. SECTION 7 POSSESSION AND SURRENDER 7.1 Tenant shall by entering upon and occupying the Premises, be deemed to have accepted the Premises "as is". 7.2 Upon the expiration or termination of the Term of this Lease, if Tenant has fully and faithfully performed all of the terms, conditions and covenants of this Lease to be performed by Tenant, Tenant shall, at its sole cost and expense, remove all personal property and trade fixtures which Tenant has installed or placed in or on the Premises (all of which are hereinafter referred to as "Tenant's Property") from the Premises and repair all damage thereto resulting from such removal; and Tenant shall thereupon surrender the Premises in the same condition as on the date when the Premises was ready for occupancy, reasonable wear and tear excepted. If Tenant has not fully and Page 13 24 faithfully performed all of the terms, conditions and covenants of this Lease to be performed by Tenant, Tenant shall nevertheless remove Tenant's Property from the Premises in the manner aforesaid within five (5) days after receipt of written direction to do so from Landlord. In the event Tenant shall fail to remove any of Tenant's Property as provided herein, Landlord may, but is not obligated to, at Tenant's expense, remove all of such Tenant's Property not so removed and repair all damage to the Premises resulting from such removal, and Landlord shall have no responsibility to Tenant for any loss or damage to Tenant's Property caused by or resulting from such removal or otherwise. If the Premises is not surrendered at the end of the Term, Tenant shall indemnify Landlord against all loss or liability resulting from delay by Tenant in so surrendering the Premises including, without limitation, any claims made by any succeeding tenant due to such delay. SECTION 8 USE OF PREMISES/REPAIRS/COMPLIANCE 8.1 The Premises is leased to Tenant solely for office building purposes. Tenant shall not use or suffer the Premises, or any portion thereof, to be used for any other purpose or purposes whatsoever, without Landlord's prior written consent. Tenant shall conduct business under the trade name(s) normally utilized by Tenant in its business operations. 8.2 Tenant shall not use or permit the use of the Premises or any portion thereof as living quarters, sleeping quarters or lodging rooms. 8.3 Tenant shall refrain from keeping or permitting the keeping of any animals of any kind in, about or upon the Premises without Landlord's prior written approval. 8.4 Tenant shall at its own cost and expense keep and maintain, in good order, condition and repair the Premises and every part thereof and any and all appurtenances thereto wherever located, including, but without limitation, the roofs, foundations, structural portions, HVAC and all Page 14 25 other systems of the buildings located on the Premises, all exterior and interior portions of all doors, door checks, windows, plate glass, signage, all plumbing and sewage facilities within or serving the Premises, including free flow up to the main sewer line, fixtures, sprinkler systems, walls, floors and ceilings, it being understood that any and all repair, replacement and maintenance responsibilities shall be the Tenant's. Tenant shall establish a program of preventive maintenance for all systems servicing the buildings on the Premises and for all other responsibilities of Tenant under this Lease, including, without limitation, landscaping, parking facilities, landscaping, roofs, HVAC and other responsibilities hereunder. 8.5 Tenant shall store all trash and garbage in containers so as not to be visible or create a nuisance to customers and business invitees to the Premises, and so as not to create or permit any health or fire hazard, and shall arrange for the regular removal thereof. 8.5.1 In the event Tenant's business activity at the Premises shall entail potentially hazardous or dangerous waste material or debris, then Tenant shall be responsible for installing, maintaining and properly utilizing appropriate waste and disposal containers and providing for the safe storage, removal and disposal of same. 8.6 Tenant hereby covenants and agrees that it, its agents, employees, servants, contractors, subtenants and licensees shall abide by such commercially reasonable rules and regulations, which shall be hereafter reasonably adopted by Tenant for the Premises, and amendments and modifications of any of the foregoing, for the safety, care and cleanliness of the Premises or for the preservation of good order thereon and therein. 8.7 INTENTIONALLY OMITTED. 8.8 Tenant will not commit or permit any nuisance on the Premises or commit or suffer any immoral or illegal act to be committed thereon. Page 15 26 8.9 The use of the Premises by Tenant, its employees, agents, customers, subtenants, licensees, invitees and contractors, shall at all times be in compliance with all covenants, conditions and restrictions; easements; reciprocal easement agreements; and all matters presently of public record; or which may hereafter be placed of public record, which do not materially and adversely affect Tenant's or any subtenant's use of the Premises or any part thereof, or the quiet enjoyment of same. 8.10 Tenant shall, at its sole cost and expense, comply with all federal, state, city and municipal statutes, ordinances, rules and regulations (including compliance with the Americans With Disabilities Act) as from time to time in effect and the orders and regulations of any ISO (Insurance Services Office) or any other body or entity exercising similar functions in force during the Term and affecting the Premises or Tenant's use thereof. Further, Tenant shall not use the Premises so as to create waste or constitute a nuisance. 8.10.1 Tenant shall not use the Premises for the generation, storage, manufacture, production, releasing, discharge, or disposal or any hazardous substance (defined below) or allow or suffer any other entity or person to do so. "Hazardous substance" shall mean any flammable or related material and any other substance or material defined or designated as a hazardous or toxic substance, material or waste by a governmental law, order, regulation or ordinance presently in effect or as amended or promulgated in the future and shall include, without limitation: (i) Those substances included within the definitions of "hazardous substances," "hazardous materials," "toxic substances" or "solid waste" in CERCLA, RCRA, the Hazardous Materials Transportation Act, 40 U.S.C. Sections 1801 et seq., the Clean Water Act, 33 U.S.C. 1251 et seq., the Clean Air Act, 42 U.S.C. 7401 et seq. the Toxic Substance Page 16 27 Control Act, 15 U.S.C. 2601 et seq., and the Safe Drinking Water Act, 42 U.S. C. 300f through 300j, and in the regulations promulgated pursuant to said laws; (ii) Those substances listed in the United States Department of Transportation Table (49 CFR 172.101 and amendments thereto) or by the Environmental Protection Agency (or any successor agency) as hazardous substances (40 CFR Part 302 and amendments thereto); (iii) Such other substances, materials and wastes which are or become regulated as hazardous or dangerous under applicable local, state or federal law, or the United States government, or which are classified as hazardous or toxic under federal, state or local laws or regulations; and (iv) Any material, waste or substance which is (A) petroleum, (B) asbestos, (C) polychlorinated biphenyls or (D) designated as a "hazardous substance" pursuant to Section 311 of the Clean Water Act, 33 U.S.C. Sections 1251 et seq. (33 U.S.C. 1321) or listed pursuant to Section 307 of the Clean Water Act (33 U.S.C. 1317). The foregoing notwithstanding, Tenant shall be entitled to use and maintain such limited quantities of materials that may otherwise be defined as hazardous substances, as used in the ordinary course of Tenant's or any subtenant's business; provided, that such hazardous substances are properly maintained, stored, and disposed of, Tenant complies with all laws, ordinances, rules and regulations applicable thereto and Tenant bears all responsibility and liability therefor. 8.10.2 Tenant shall protect, indemnify and hold harmless Landlord, its partners, directors, members, officers, employees, agents, successors and assigns, and the Premises from and against any and all claims, losses, damages, costs, expenses, liabilities, fines, penalties, charges, administrative and judicial proceedings and orders, judgments, remedial action requirements, and Page 17 28 enforcement actions of any kind (including, without limitation, attorney's fees and costs at trial and on appeal) directly or indirectly arising out of or attributable to, in whole or in part, the breach by Tenant of any of the covenants, representations and warranties of this Section 8.10 et seq., or the use, generation, manufacture, production, storage, release, threatened release, discharge, disposal, or presence of a hazardous substance on, under, from or about the Premises. The foregoing indemnity shall further apply to any residual contamination on, under, from or about the Premises, or affecting any natural resources arising in connection with the use, generation, manufacturing, production, handling, storage, transport, discharge or disposal of any such hazardous substance, and irrespective of whether any of such activities were or will be undertaken in accordance with environmental laws or other applicable laws, regulations, codes and ordinances. SECTION 9 IMPROVEMENTS/SIGNAGE AND CONSTRUCTION 9.1 It is acknowledged that Tenant has been the owner of the Premises prior to the commencement of this Lease and is familiar with the Premises, the buildings located thereon, and all improvements, tenancies and contracts that are a part of or affect the Premises. Tenant represents that it has examined the Premises, and is satisfied with the physical condition thereof and agrees to accept the same "as is". Tenant further acknowledges that Landlord has not made any representation as to the physical condition, the rents, leases, expenses of operation or any other matter or thing affecting or relating to the Premises. Tenant shall be completely responsible for the cost of erection; maintenance; replacement and, upon termination of this Lease, removal of all signage on the Premises; provided however, that signage related to any subtenant occupying a part of the Premises pursuant to a sublease, the term of which extends beyond the termination of this Lease, shall not be subject to Page 18 29 removal in accordance with the terms hereof. All signage must be maintained in good condition and be in conformance with all governmental laws, ordinances and regulations. 9.2 Tenant shall not make any "material" additions, alterations, improvements or changes ("Improvements") in or to the Premises (i.e., any single Improvement costing more than $50,000) without the prior written approval of Landlord which approval shall not be unreasonably withheld, conditioned or delayed. Any Improvements shall be at the sole cost and expense of Tenant, and shall be made promptly and in good and workmanlike manner and in compliance with all insurance requirements and with all applicable permits, authorizations, building regulations, zoning laws, environmental regulations, laws regarding the physically disabled and all other governmental rules, regulations, ordinances, statutes and laws, now or hereafter in effect pertaining to the Premises or Tenant's use thereof. Any Improvements made by Tenant shall at Landlord's option become the property of Landlord upon the expiration or sooner termination of this Lease. However, Landlord shall have the right to require Tenant to remove such Improvements at Tenant's sole cost and expense upon such termination of this Lease and to surrender the Premises in the same condition as it was prior to the making of any or all such Improvements, ordinary wear and tear excepted. Notwithstanding the foregoing sentence, Tenant shall not be required to remove Improvements that are "embedded" within the Premises, such as electrical and wiring systems. 9.3 Tenant shall indemnify and hold Landlord and the Premises free of and harmless from any and all liabilities, losses, claims, damages or otherwise based upon or in any manner growing out of any alterations or construction respectively undertaken by Tenant whether specifically under the terms of this Lease or otherwise, including all costs, damages, expenses, court costs and attorneys' fees incurred in or resulting from claims made by any person or persons, by other tenants in the Premises, or any of Tenant's subtenants, agents, employees, customers and invitees. Page 19 30 9.3.1 Before undertaking any alterations or construction, Tenant shall obtain and pay for a commercial liability insurance policy insuring Landlord and Tenant against any liability which may arise on account of such proposed alterations or construction work in limits of not less than $1,000,000.00 combined single limit coverage. A copy of such policy shall be delivered to Landlord prior to the commencement of any such proposed work. Tenant shall also maintain at all times fire insurance with extended coverage in the name of Landlord and Tenant as their interests may appear in the amount adequate to cover the cost of replacement of all Tenant improvements, alterations, decorations, additions, including any plate glass, doors and windows, in and to the Premises and all trade fixtures therein, in the event of fire or extended coverage loss. Tenant shall deliver to Landlord copies of such fire insurance policies which shall contain a clause requiring the insurer to give Landlord not less than thirty (30) days' prior written notice of cancellation of such policies. 9.4 Tenant will not create or permit to be created or to remain, and will discharge, any lien, encumbrance or charge upon fixtures, equipment, or personal property located within the Premises. SECTION 10 LANDLORD'S REPAIRS 10.1 It is understood that any and all repair, replacement, maintenance and other responsibilities and costs relating to the Premises shall be Tenant's, and that Landlord shall have no monetary or other responsibilities relative thereto. Page 20 31 SECTION 11 TAXES 11.1 Tenant agrees that it will pay and discharge, or cause to be paid and discharged, punctually as and when the same shall become due and payable without penalty, all real estate taxes, personal property taxes, privilege taxes, excise taxes, business and occupation taxes, gross sales taxes, occupational license taxes, water charges, sewer charges, assessments (including, but not limited to, assessments for public improvements or benefits) and all other governmental impositions and charges of every kind and nature whatsoever, whether or not now customary or within the contemplation of the parties hereto and regardless of whether the same shall be extraordinary or ordinary, general or special, unforeseen or foreseen, or similar or dissimilar to any of the foregoing (all of such taxes, water charges, sewer charges, assessments and other governmental impositions and charges which Tenant is obligated to pay hereunder being; hereinafter collectively called "Tax" or "Taxes") which, at any time during the Initial or any extended Term hereof, shall be or become due and payable and which: (a) shall be levied, assessed or imposed upon or against the Premises or any buildings or improvements on or above the Premises or any portion thereof, or any interest of Landlord or Tenant therein or under this Lease; or (b) shall be or become liens upon or against said Premises or any buildings or improvements on or above the Premises. or any portion thereof, or any such interest of Landlord or Tenant therein, or under this Lease; or (c) shall be levied, assessed or imposed upon or against Landlord by reason of any actual or asserted engagement by Landlord or Tenant, directly or indirectly, in any business, occupation or other activity in connection with the Premises or any portion thereof; or Page 21 32 (d) shall be levied, assessed or imposed upon or in connection with the ownership, leasing, operation, management, maintenance, repair, rebuilding, use or occupancy of the Premises or the buildings and improvements on or above the Premises or any portion thereof; under or by virtue of any present or future law, statutes, ordinance, regulation or other requirement of any governmental authority whatsoever, whether federal, state, county, city, municipal, or otherwise, it being the intention of the parties hereto that, insofar as the same may lawfully be done, Landlord shall be free from all such expenses and all such real estate taxes, personal property taxes, privilege taxes, excise taxes, business and occupation taxes, gross sales taxes, occupational license taxes, water charges, sewer charges, assessments and all other governmental impositions and charges of every kind and nature whatsoever. Taxes shall not include Landlord's general income taxes, inheritance, estate or gift taxes. 11.2 If by law any Tax is payable, or may at the option of the taxpayer be paid, in installments, Tenant may, whether or not interest shall accrue on the unpaid balance thereof, pay the same, and any accrued interest on any unpaid balance thereof, in installments as each installment becomes due and payable, but in any event before any fine, penalty, additional interest or cost may be added thereto for non-payment of any installment or interest. 11.3 Any Tax relating to a fiscal period of the taxing authority, a part of which is within the Term and a part of which is subsequent to the Term, shall, whether or not such Tax shall be assessed, levied, imposed or become a lien upon the Premises or the buildings and improvements on or above the Premises, or shall become payable, during the Term, be apportioned and adjusted between Landlord and Tenant as of the stated date of expiration of the Term, so that Landlord shall pay that proportion of such Tax which that part of such fiscal period included in the period of time Page 22 33 after the expiration of the Term bears to such fiscal period, and Tenant shall pay the remainder thereof. With respect to any Tax for public improvements or benefits which by law is payable, or at the option of the taxpayer may be paid, in installments, Landlord shall pay the installments thereof which become due and payable subsequent to the expiration of the Term, and Tenant shall pay all such installments which become due and payable at any time during the Term even though payment is postponed beyond the end of the Term by Tenant. 11.4 Tenant covenants to furnish to Landlord, within ten (10) days after the last date when any Tax must be paid by Tenant as provided in this Section, official receipts, if such receipts are then available to Tenant, of the appropriate taxing authority, or other proof satisfactory to Landlord, evidencing the payment thereof. 11.5 Tenant shall have the right to contest or review the amount or validity of any such Tax by appropriate legal proceedings (but which is not to be deemed or construed in any way as relieving, modifying or extending Tenant's covenants to pay any such Tax at the time and in the manner as in this Section provided), on condition, however, that if such contested Tax is not paid beforehand and if such legal proceedings shall not operate to prevent the enforcement of the collection of the Tax so contested and shall not prevent the sale of the Premises or the buildings and improvements on or above the Premises or any part thereof to satisfy the same, then before instituting any such proceedings Tenant shall furnish to Landlord and to any lender of Landlord a surety company bond, cash deposit or other security reasonably satisfactory to Landlord and any such lender, as security for the payment of such Tax in an amount sufficient to pay such Tax, together with all interest and penalties in connection therewith and all charges that may or might be assessed against or be charges on the Premises or the buildings on or above the Premises or any part thereof in said legal proceedings. Upon termination of such legal proceedings or at any time when the Page 23 34 Landlord or such lender shall deem the security to be insufficient for the purpose, Tenant shall forthwith, upon demand, deliver to Landlord or such lender additional security as is sufficient and necessary for the purpose, and upon failure of the Tenant so to do, the security originally deposited shall be applied to the payment, removal and discharge of said Tax and the interest and penalties in connection therewith and the charges and costs accruing in such legal proceedings and the balance, if any, shall be paid to Tenant provided the Tenant is not in default under this Lease. In the event that such security shall be insufficient for this purpose, Tenant shall forthwith pay over to Landlord or to such lender an amount sufficient, together with the security originally deposited hereunder, to pay the same. In the event of any default by Tenant under this Lease, Landlord and/or such lender are authorized to use the security deposited under this Section to apply on account of such default or to pay the said Tax. The Tenant shall not be entitled to interest on any moneys deposited pursuant to this Section. 11.6 Any contest as to the validity or amount of any Tax, or assessed valuation upon which such Tax was computed or based, whether before or after payment, may be made by Tenant in the name of Landlord or of Tenant, or both, as Tenant shall determine, and Landlord agrees that it will, at Tenant's expense, cooperate with Tenant in any such contest to such extent as Tenant may reasonably request; it being understood, however, that Landlord shall not be subject to any liability for the payment of any costs or expenses in connection with any proceeding brought by Tenant, and Tenant covenants to indemnify and save harmless Landlord from any such costs or expenses. Tenant shall be entitled to any refund of any such Tax and penalties or interest thereon which have been paid by Tenant or by Landlord and reimbursed to Landlord by Tenant. 11.7 The certificate, advice or bill of the appropriate official (designated by law to make or issue the same or to receive payment of any such Tax) of the non-payment of any such Tax, shall Page 24 35 be prima facie evidence that such Tax was due and unpaid at the time of the making or issuance of such certificate, advice or bill. 11.8 If at any time during the Term, under the laws of the United States, Nevada or any political subdivision thereof, a tax or excise on rents or other tax (except income tax), however described, is levied or assessed by the United States, Nevada or said political subdivision against Landlord on account of any rent reserved under this Lease, all such tax or excise on rents or other taxes shall be paid by Tenant. Whenever Landlord shall receive any statement or bill for any such tax or shall otherwise be required to make any payment on account thereof, Tenant shall pay, as Additional Rent, the amount due hereunder within ten (10) days after demand therefor accompanied by delivery to Tenant of a copy of such tax statement, if any. SECTION 12 UTILITIES AND SERVICES 12.1 Tenant shall be responsible for and pay as Additional Rent all charges for all utilities, and all other installations, metering, services or utilities used in, upon or about the Premises by Tenant; any of its assignees, subtenants, licensees or concessionaires or any other occupant thereof. 12.2 Tenant shall also at its sole cost and expense, procure or cause to be procured any and all necessary permits, licenses or other authorizations required for the lawful and proper use, occupation, operation and management of the Premises and of such buildings and improvements above the Premises, and for the lawful and proper installation and maintenance thereon and therein of wires, pipes, conduits, tubes and other equipment and appliances for use in supplying any such service thereto. Page 25 36 12.3 Tenant shall provide to Landlord proof of the on-going existence of service contracts for the maintenance of all equipment located in the Premises, which Tenant is required to maintain under this Lease. SECTION 13 INSURANCE 13.1 At all times during the Term, at its own cost and expense and as Additional Rent hereunder, Tenant shall keep or cause to be kept all buildings and improvements now existing or hereafter erected upon or above the Premises and all equipment, fixtures, motors, machinery, furnishings and furniture installed and owned by Tenant and used in connection with the Premises or with the buildings and improvements upon or above the Premises, including all alterations, rebuildings, replacements and additions thereto, insured against loss or damage by earthquake and by fire, vandalism, malicious mischief, sprinkler leakage (if sprinklered) and such other hazards, casualties, risks and contingencies now covered by or that may hereafter be considered, as included within the standard form extended coverage endorsement, in an amount at least equal to one hundred percent (100%) of the Full Insurable Value thereof, but in any event in an amount not less than that required to avoid the operation and effect of any co-insurance provisions in said policies. If an insurer, or any governmental agency or authority, shall at any time require that the foundation(s) be insured in order to relieve the insured from the responsibility as a co-insurer or for any other purpose, the obligations of Tenant with respect to the insurance shall thenceforth be increased to the extent so required. 13.2 The term "Full Insurable Value" shall mean actual replacement cost exclusive of cost of excavation, foundations and footings. Such "Full Insurable Value" shall be determined from time to time [but not more frequently than once in any twenty four (24) calendar months] at the request Page 26 37 of Landlord but at the expense of Tenant by the fire insurance company carrying the highest amount of fire insurance on the Premises or its agent, or by an appraiser selected by Tenant and approved in writing by Landlord. The failure of the Landlord to request such appraisal shall not release Tenant of its obligations hereunder. At all times during the Term, at its own cost and expense and as Additional Rent, Tenant shall provide and keep in force comprehensive general liability insurance policies, in standard form, protecting Tenant, and the Landlord as an additional insured, against any and all liability in the amount of not less than Five Million ($5,000,000.00) Dollars in respect to any one occurrence, in the amount of not less than Two Million ($2,000,000.00) Dollars in respect to injuries to or death of any one person, and in the amount of not less than One Million ($1,000,000.00) Dollars in respect to destruction or damage to property of others. All such policies shall cover the entire Premises and all buildings and improvements on or above the Premises, including elevators and escalators, as well as parking, common areas, means of access and roadways therein, and streets and sidewalks adjacent thereto. 13.3 At all times during the Term, at its own cost and expense and as Additional Rent, Tenant shall provide and keep in force boiler and machinery insurance on all steam boilers and high pressure boilers, if any, or such other apparatus as Landlord may deem necessary to be covered by such insurance, installed within any building on or above the Premises, in such amounts and in such forms of policies as may from time to time be reasonably required by Landlord. 13.4 Intentionally Omitted. 13.5 At all times during the Term, at its own cost and expense and as Additional Rent, Tenant shall provide and keep in force such other insurance and in such amounts as may from time to time be reasonably required by Landlord against other insurable hazards which, at the time, are normally insured against in the case of similar premises and improvements, similarly situated, due Page 27 38 regard being given to the height and type of buildings and improvements on and above the Premises, their construction, use and occupancy. 13.6 All such insurance to be provided by Tenant under this Section shall name the Tenant and Landlord as insureds and, at the option of Landlord any other parties permitted by Landlord as additional insureds, all as their respective interests may appear. 13.7 All of the policies of insurance provided for in this Lease shall be issued by insurance carriers in good financial standing, authorized to transact business in Nevada and pre-approved in writing by Landlord. 13.8 In the event that Tenant fails to obtain and maintain insurance as in this Lease provided and such failure shall continue for a period of ten (10) days after notice by Landlord, Landlord may, but shall not be obligated to, effect and maintain any such insurance coverage and pay premiums therefor. All premiums so paid by Landlord, together with interest thereon at the rate of fifteen percent (15%) per annum from the date of such payment by Landlord, shall be deemed Additional Rent hereunder, and payable by Tenant to Landlord as such in accordance with the provisions of this Lease but not later than the first day of the month following the month in which payment therefor is made by Landlord. In addition thereto, Landlord may recover from Tenant, and Tenant covenants and agrees to pay as Additional Rent to Landlord, any and all damages which Landlord may have sustained by reason of the failure of Tenant to obtain and maintain such insurance, it being expressly declared that the damages of Landlord shall not be limited to the amount of premiums thereon. Tenant shall make payment to Landlord on the first day of the month following the month in which any payments were made by Landlord or in which the amount of such damage was determined. The payment by Landlord shall not be a waiver or release of Tenant with Page 28 39 respect thereto or the right of Landlord to pursue any other remedy permitted hereunder or by law as in the case of any other default hereunder or of default in the payment of Aggregate Rent. 13.9 A certificate issued by the insurance carrier for each policy of insurance required to be maintained by Tenant hereunder shall be delivered to Landlord and all other named insureds on or before the Commencement Date hereof and thereafter, as to policy renewals, within thirty (30) days prior to the expiration of the term of each such policy. Each certificate of insurance required to be maintained by Tenant hereunder shall be in form and substance satisfactory to Landlord and shall expressly evidence insurance coverage as required by this Lease and shall contain an endorsement or provision requiring not less than thirty (30) days' prior written notice to Landlord of such cancellation. As to any proposed diminution in the perils insured against, or reduction of the amount of coverage of the particular policy in question, initiated (i) by the insurer shall require not less than thirty (30) days prior written notice to Landlord, and (ii) by Tenant shall require not less than thirty (30) days prior written notice to Landlord. 13.10 Provided it does not violate any laws or regulations or jeopardize Tenant's or Landlord's insurance coverage(s), each policy of property insurance (and to the extent obtainable with respect to public liability insurance) provided for in this Section 13 shall contain an express waiver of any and all rights of subrogation thereunder whatsoever against both Landlord and Tenant, their respective shareholders, directors, members, officers, partners, agents and employees. Except for the negligent or willful acts or omissions of Landlord, all such policies carried by Tenant shall be written as primary policies and not contributing with or in excess of the coverage, if any, which Landlord may carry. Any other provision contained in this Section or elsewhere in this Lease notwithstanding, the amounts of all insurance required hereunder to be paid by Landlord or Tenant Page 29 40 shall be not less than an amount sufficient to prevent the applicable party from becoming a co-insurer. 13.11 Tenant agrees that it will not keep, use, sell, offer for sale or allow in or upon the Premises any article or permit any activity which may be prohibited by any standard form of insurance policy. 13.12 Tenant shall not use or occupy the Premises or any part thereof, or suffer or permit the same to be used or occupied for any business or purpose deemed extra hazardous and thus affect the Premises. 13.13 During the Term of this Lease, Tenant shall indemnify and save harmless Landlord and the Premises, from and against any and all claims and demands whether for injuries to persons or loss of life, or damage to property, occurring within the Premises, and immediately adjoining areas and arising out of the use and occupancy of the Premises by Tenant, or occasioned wholly or in part by any act or omission of Tenant, its subtenants, agents, contractors, employees, servants, licensees or concessionaires, excepting, however, such claims and demands, whether for injuries to persons or loss of life, or damage to property caused by an indemnified party. In case Landlord shall be made a party to any litigation, then Tenant shall protect and hold Landlord harmless and shall pay all costs, expenses and reasonable attorneys' fees that may be incurred or paid by Landlord in connection therewith. SECTION 14 LIENS 14.1 Tenant shall at all times indemnify, save and hold Landlord, the Premises and the leasehold created by this Lease free of and harmless from any claims, liens, demands, charges, encumbrances, litigation and judgments arising directly or indirectly out of any use, occupancy or Page 30 41 activity of Tenant, or Tenant's subtenants, licensees or concessionaires, or out of any work performed, material furnished, or obligations incurred by Tenant or Tenant's subtenants, licensees or concessionaires, in, upon or otherwise in connection with the Premises. Tenant shall give Landlord written notice at least twenty (20) business days prior to the commencement of any such work on the Premises. Tenant shall, at its sole cost and expense, within fifteen (15) days after filing of any lien of record, obtain the discharge and release thereof. Nothing contained herein shall prevent Landlord, at the cost and for the account of Tenant, from obtaining said discharge and release in the event Tenant fails or refuses to do the same within said fifteen (15) day period. Any amounts paid by Landlord hereunder shall be deemed Additional Rent. SECTION 15 INDEMNIFICATION 15.1 Tenant hereby indemnifies, saves and holds Landlord, the Premises and the leasehold estate free of and harmless from any and all liabilities, losses, costs, expenses, including reasonable attorneys' fees (at trial and on appeal), causes of action, suits, judgments, claims, liens and demands of any kind whatsoever in connection with, arising out of, or by reason of any act, omission or negligence of Tenant, its agents, employees, servants, contractors, subtenants, licensees, concessionaires, customers or business invitees while in, upon, about or in any way connected with the Premises, or arising from any accident, injury or damage, howsoever caused, to any person or property whatsoever, occurring in, upon, about or in any way connected with the Premises, or arising from any accident, injury or damage, howsoever and by whomsoever caused, to any person or property whatsoever, occurring in, upon, about or in any way connected with the Premises or any portion thereof, unless the same is caused by the negligent act or omission of Landlord or Landlord's agents. Page 31 42 SECTION 16 SUBORDINATION 16.1 Tenant agrees upon request of Landlord to subordinate this Lease and its rights hereunder to the lien of any mortgage, deed of trust or other encumbrance, together with any renewals, extensions or replacements thereof, now or hereafter placed, charged or enforced against the Premises, or any portion thereof, and to execute and deliver at any time, and from time to time, upon ten (10) days demand by Landlord, such documents as may be reasonably required and mandatory to effectuate such subordination, and in the event that Tenant shall fail, neglect or refuse to execute and deliver any such documents to be executed by it within ten (10) days after request by Landlord, Tenant hereby appoints Landlord, its successors and assigns, the attorney-in-fact of Tenant irrevocably to execute and deliver any and all such documents for and on behalf of Tenant; provided, however, the Tenant shall not be required to effectuate such subordination, unless the mortgagee or beneficiary named in such mortgage, deed of trust, or other encumbrance shall first agree in writing, for the benefit of Tenant, that so long as Tenant is not in default under any of the provisions, covenants or conditions of this Lease on the part of Tenant to be kept and performed, that neither this Lease nor any of the rights to Tenant hereunder shall be terminated or modified or be subject to termination or modification. Tenant acknowledges that the power of attorney granted hereby is coupled with an interest. 16.2 In the event that the mortgagee or beneficiary of any such mortgage or deed of trust elects to have this Lease a prior lien to its mortgage or deed of trust, then and in such event, upon such mortgagee's or beneficiary's giving written notice to Tenant to that effect, this Lease shall be deemed a prior lien to such mortgage or deed of trust, whether this Lease is dated prior to or subsequent to the date of recordation of such mortgage or deed of trust. Page 32 43 16.2.1 Tenant shall, in the event of the exercise of any power of sale under any deed of trust or, if any proceedings are brought for the foreclosure of a lien affecting property in which the Premises are situated, attorn to the purchaser upon any such foreclosure or sale and recognize such purchaser as the Landlord under this Lease. 16.3 Upon Landlord's request, and within twenty (20) days thereof, Tenant agrees to modify this lease to meet the reasonable requirements of a lender selected by Landlord who demands such modification as a condition precedent to granting a loan and placing a deed of trust or other mortgage encumbrance upon the Premises; provided, such modifications do not alter the basic business terms of this Lease or otherwise materially diminish any rights or materially increase the obligations of Tenant. SECTION 17 EXISTING LEASES/ASSIGNMENT -- SUBLETTING 17.1 All right, title and interest of Landlord in and to each of the leases identified .in Exhibit C, attached hereto, are hereby assigned to Tenant together with full right and power to collect and retain all rents and other payments due and to become due thereunder. Tenant does hereby accept such assignment and in consideration therefor does hereby unconditionally and irrevocably assume each and every obligation and liability of the Landlord as landlord under such leases heretofore accrued or which may hereafter accrue under and in connection therewith, and will indemnify and hold Landlord harmless from any and all claims, actions, judgments, liabilities, losses, penalties, fines, damages, costs and expenses, including attorneys' fees, of any kind and nature whatsoever with respect thereto. It is understood that the Lease between Tenant and for a sign on the Premises (Sign Sublease) dated , 199__, is not listed on Exhibit C and that said Sublease shall be assigned to Landlord effective as of the Date of Closing. Page 33 44 17.2 Tenant shall not without the prior written consent of Landlord first had and obtained in each case, sell, assign or in any manner transfer this Lease or any interest therein or the estate of the Tenant hereunder, or sublease or underlet the Premises, except as otherwise set forth herein. Notwithstanding anything to the contrary contained in this Section 17, an assignment or subletting of all or a portion of the Premises to an "Affiliate" of Tenant shall not be deemed a violation of this section, provided that (a) Tenant notifies Landlord of any such assignment or sublease within five (5) days after its effective date, and promptly supplies Landlord with any documents or information reasonably requested by Landlord regarding such assignment or sublease or such "Affiliate" and (b) such assignment or sublease is not a subterfuge by Tenant to avoid its obligations under this Lease. The term "Affiliate" of Tenant shall mean any other entity which is controlled by, controls, or is under common control with Tenant, or an entity that results from a reorganization, merger, or the sale of substantially all the assets, interest or stock of Tenant. The term "control" or "controlled," as used in this Section 17.2, shall mean the ownership, directly or indirectly, of more than fifty percent (50%) of the voting securities of, or more than fifty percent (50%) of the voting interest in, any entity. In no event shall a transfer, assignment, or subletting of all or a portion of the Premises to an Affiliate release Tenant from the payment and performance of its obligations in the Lease, but rather Tenant and its assignee will be jointly and severally primarily liable for such payment and performance. 17.3 Tenant, shall have the right to sublet portions of the Premises and/or of the buildings and improvements thereon at any time and from time to time, provided it is not in default hereunder. For a sublease to be entitled to the benefits of Section 18.3, it must be approved in advance by Landlord or be in the form attached hereto as Exhibit D, the sub-rental must reflect fair market rental for the sub-premises, and the terms and provisions set forth hereinbelow must be complied with. Page 34 45 Tenant covenants and agrees that each sublease of any portion of the Premises and/or of said buildings and improvements shall be in writing; and, among other things, shall provide (a) that the said sublease is subject and subordinate to this Master Lease, and to any extensions, modifications or amendments hereof, and (b) that in the case of a sublease entitled to the benefit of Section 18.3, in the event of cancellation or termination of the this Master Lease in accordance with its terms or by the surrender thereof, whether voluntarily, involuntarily or by operation of law, such sublease shall not thereby be cancelled or terminated but the subtenant under each such sublease shall make full and complete attornment to the Landlord for the balance of the term of such sublease with the same force and effect as though said sublease were originally made directly from the Landlord hereunder to the subtenant under such sublease. 17.4 If the Premises or any part thereof be sublet or occupied by anybody other than Tenant in violation hereof, Landlord may, but shall not be required to after default by Tenant, (i) collect rent from any purchaser, assignee, subtenant or occupant and apply the net amount collected to the rent herein reserved (but no such subletting, sale, assignment, occupancy or collection shall be deemed a waiver of any covenant contained in this Section 17), (ii) accept any such purchaser, assignee, subtenant or occupant as tenant, and/or (iii) release Tenant from violation of or the further performance by Tenant of any or all terms, covenants and conditions of this Lease on the part of Tenant to be performed. 17.5 Tenant may not at any time during the Term of this Lease, without the prior written consent of Landlord, pledge, mortgage or hypothecate the leasehold estate hereby created. Page 35 46 SECTION 18 SUBLEASES/COLLATERAL ASSIGNMENT/NON-DISTURBANCE AND ATTORNMENT 18.1 Tenant does hereby reassign, transfer and set over unto Landlord all of its rights, title and interest in and to each of the leases identified on Exhibit C attached hereto, and does hereby also assign, transfer and set over unto Landlord all of its rights, title and interest in and to each and every sublease now or hereafter executed affecting the Premises or any part thereof (which now or hereafter existing leases and subleases are hereinafter collectively called "subleases"), as well as all of the rents or other sums of money now or hereafter due and payable thereunder (hereinafter called "sub-rents") and all security now held by or hereafter paid to Tenant which has been or may hereafter be deposited for the payment of sub-rents or the performance of any of the terms of such sublease, upon condition, however, that such assignment shall become operative and effective only as to such subleases as Landlord shall so designate by notice at such time and only in the event the within Lease and the term thereof shall be terminated or cancelled pursuant to the terms and conditions hereof, or in the event of the issuance and execution of a dispossess warrant or of any other re-entry or re-possession by Landlord under the provisions hereof, or in the event Tenant is in uncured default of any of the terms and conditions thereof. 18.2 Tenant does hereby covenant and agree, in respect to each and every sublease now or hereafter executed affecting the Premises or any part thereof (with the exception of the Sign Sublease which shall be assigned to Landlord at Closing in accordance with ss.17.1 hereof), that it shall not, without the prior written consent of Landlord first had and obtained, which shall not be unreasonably withheld, conditioned or delayed, (i) receive or collect any sub-rents (payable under any such sublease from any present or future subtenant of the said Premises or any part thereof) for a period of more than one (1) month in advance; (ii) pledge, transfer, mortgage, encumber or assign Page 36 47 future payments of such sub-rental; (iii) in the case of subleases entitled to the benefit of Section 18.3, waive, excuse, condone, discount, set-off, compromise or in any manner release or discharge any subtenants thereof, of and from any obligations, covenants and conditions by said subtenants to be paid, observed and performed under the said subleases after termination of this Lease; (iv) in the case of subleases entitled to the benefit of Section 18.3, cancel, terminate or consent to any surrender of any such sublease; (v) in the case of subleases entitled to the benefit of Section 18.3, modify or in any way alter the terms thereof so as to reduce the sub-rent or anywise affect, to any material extent, the rights of the landlord thereunder. 18.3 In the event of the cancellation or termination of the within Lease in accordance WITH the terms hereof or by the surrender hereof, whether voluntary, involuntary or by operation of law, prior to the expiration date of any sublease hereafter executed affecting a portion of the Premises (including extensions and renewals thereunder), which sublease (i) has been previously approved in writing by the Landlord or pursuant to Section 17.3 does not require such approval in order to be entitled to the benefits of this Section, and (ii) contains the provisions required under Sections 17 and 18 hereof, Landlord for itself, successors and assigns, as well as for any subsequent owner of the Premises, does hereby covenant and warrant for the benefit of the subtenant under any such sublease, subject to the observance and performance by the subtenant under such sublease of all of the terms, covenants and conditions thereunder, as follows: (a) The quiet and peaceful possession of subtenant under the said sublease; (b) That the sublease shall continue in full force and effect and Landlord shall recognize the sublease and the subtenant's rights thereunder and will thereby establish direct privity of estate and contract as between Landlord and the subtenant under said sublease with the same force and effect as though the Page 37 48 sublease were originally made from Landlord in favor of the subtenant thereunder; (c) That it will assume such obligations on the part of the landlord under such sublease which are deemed to run with the land for so long as Landlord shall be the owner in fee of the Premises provided, however, Landlord shall not be liable in any way to subtenant for any act or omission, neglect or default on the part of Tenant, as sub-landlord under said sublease, or be responsible for any moneys owing by or on deposit with Tenant to the credit of subtenant and subtenant shall not have the right to set-off or assert against Landlord any such claim or any damages arising therefrom. SECTION 19 INSOLVENCY AND DEATH 19.1 It is understood and agreed that neither this Lease nor any interest herein or hereunder, nor any estate hereby created in favor of Tenant, shall pass by operation of law under any state or federal insolvency, bankruptcy or inheritance act, or any similar law now or hereafter in effect, to any trustee, receiver, assignee for the benefit of creditors, heir, legatee, devisee, or any other person whomsoever without the express prior written consent of Landlord. SECTION 20 CONDEMNATION 20.1 In the event of any taking of or damage to all or any part of the Premises (or any interest therein) prior to the expiration or earlier termination of this Lease by reason of any exercise of the power of eminent domain (whether by condemnation proceedings or otherwise) or by reason of any transfer of all or any part of the Premises (or any interest therein) made in avoidance of such Page 38 49 an exercise, the rights and obligations of Landlord and Tenant with respect thereto shall be as set forth in this Section. Such taking, damage and/or transfer are all referred to as "appropriation". 20.2 If the entire Premises be appropriated, this Lease shall terminate and expire as of the date of such appropriation, and Landlord and Tenant shall be released from further liability hereunder. 20.3 If the appropriation shall be greater than one-third (1/3) of the Premises and the remainder will not be reasonably adequate for the operation of Tenant's business after Tenant completes such repairs or alterations as Tenant elects to make, either Landlord or Tenant shall have the option to terminate this Lease by notifying the other party hereto of such election in writing within thirty (30) days after such appropriation. 20.3.1 If after such appropriation the remaining part thereof is suitable for the purposes for which Tenant has leased the Premises, this Lease shall continue in full force and effect, but the Minimum Monthly Rent shall be reduced in an amount equal to that proportion of the Minimum Monthly Rent which the floor space of the portion taken bears to the total floor space of the buildings located on the Premises. In the event a partial appropriation does not terminate this Lease and if appropriation proceeds are sufficient to cover all restoration costs and are made available to Tenant, Tenant, using such appropriation proceeds, shall make repairs and restorations to the remaining premises and shall also repair or replace its fixtures, furniture, furnishings and equipment. If Tenant had ceased business operations during such repair and restoration work, Tenant shall promptly reopen for business upon completion thereof. 20.4 All awards payable on account of such appropriation shall be payable to Landlord, and Tenant hereby waives any and all rights thereto and interest therein; provided, however, that Tenant shall be entitled to a separate award for any necessary repairs to the Premises and all other Page 39 50 Improvements as contemplated hereby, the value of its leasehold estate and relocation costs of Tenant, but Landlord shall have no obligation with respect thereto. SECTION 21 DAMAGE OR DESTRUCTION 21.1 In the case of the total or partial destruction of the buildings located on the Premises, or any portion thereof, whether by fire or other casualty, this Lease shall not terminate except as otherwise specifically provided herein. Tenant shall be entitled to a reduction in the Minimum Monthly Rent in an amount equal to that proportion of the Minimum Monthly Rent which the number of square feet of floor space in the unusable portion bears to the total number of rentable square feet of the buildings located on the Premises. Said reduction shall be prorated so that the Minimum Monthly Rent shall only be reduced for those days any given area is actually unusable. Further, if a portion of the Premises is so damaged or destroyed so as to preclude Tenant from practically operating its business, then there shall be a full abatement of Minimum Monthly Rent until operations may be resumed. Subject to the availability of property insurance proceeds as provided hereinabove, Tenant shall promptly undertake to repair and restore the building or buildings located on the Premises, and shall, with reasonable diligence, repair and reconstruct the Premises to a condition at least equal in quality and condition to that existing immediately prior to the damage or destruction in question. To the extent insurance proceeds are insufficient therefor, Tenant shall be liable for any such difference. It is understood that Landlord shall have no repair or restoration responsibilities whatsoever. 21.2 All insurance proceeds payable under any property insurance policy procured and maintained by Landlord or Tenant shall be payable solely to Landlord and/or its mortgagee(s), and Tenant shall have no interest therein. Notwithstanding the foregoing, however, and subject to the Page 40 51 rights of any mortgagee, if less than fifty percent (50%) of the Premises is damaged or destroyed and more than two (2) years remain in the Term or Option Period, the insurance proceeds shall be made available to Tenant for the repair and restoration work required hereunder. In the event all insurance proceeds are not made available to Tenant, Tenant shall be entitled to terminate this Lease upon written notice to Landlord given within thirty (30) days of Tenant being advised of the non-availability of insurance proceeds. Tenant shall in no case be entitled to compensation or damages on account of any annoyance or inconvenience in making repairs under any provision of this Lease. Except to the extent provided for in this Section 21, neither the rent payable by Tenant nor any of Tenant's other obligations under any provision of this Lease shall be affected by any damage to or destruction of the Premises or any portion thereof by any cause whatsoever. SECTION 22 RIGHT OF ACCESS 22.1 Landlord and its authorized agents and representatives shall be entitled to enter the Premises at any reasonable time for the purpose of observing, posting or keeping posted thereon notices provided for hereunder, if any, and such other notices as Landlord may deem necessary or appropriate for protection of Landlord, its interest or the Premises; for the purpose of inspecting the Premises or any portion thereof; to inspect the Premises relative to concerns over use, storage or disposal of hazardous waste and chemicals; and for the purpose of making repairs to the Premises and performing any work therein or thereon which Landlord may elect to make hereunder, or which may be necessary to comply with any laws, ordinances, rules, regulations or requirements of any public authority or any applicable standards that may, from time to time, be established by an Insurance Services Office or any similar body, or which Landlord may deem necessary or appropriate to prevent waste, loss, damage or deterioration to or in connection with the Premises or for any other Page 41 52 lawful purpose. Landlord shall have the right to use any reasonable means which Landlord may deem proper to open all doors in the Premises in an emergency. Entry into the Premises obtained by Landlord by any such means shall not be deemed to be forcible or unlawful entry into, or a detainer of, the Premises, or an eviction of Tenant from the Premises or any portion thereof. Nothing contained herein shall impose or be deemed to impose any duty on the part of Landlord to do any work or repair, maintenance, reconstruction or restoration, which under any provision of this Lease is required to be done by Tenant, but the cost thereof shall be deemed Additional Rents. The performance thereof by Landlord shall not constitute a waiver of Tenant's default in failing to do the same. 22.2 Landlord, its authorized agents and representatives, shall be entitled to enter the Premises at all reasonable times for the purpose of exhibiting the same to prospective purchasers and, during the final year of the Term of this Lease, Landlord shall be entitled to exhibit the Premises for lease and post signs therein announcing same. SECTION 23 EXPENDITURES BY LANDLORD 23.1 Whenever under any provision of this Lease, Tenant shall be obligated to make any payment or expenditure, or to do any act or thing, or to incur any liability whatsoever, and Tenant fails, refuses or neglects to perform as herein required, and, except in the case of an emergency, continues not to perform for five (5) days after notice, Landlord shall be entitled, but shall not be obligated, to make any such payment or to do any such act or thing, or to incur any such liability, all on behalf of and at the cost and for the account of Tenant. In exercising this right, Landlord shall be permitted to charge Tenant the cost thereof plus interest thereon at the per annum rate of the greater of (i) fifteen percent (15%), or (ii) Bank of America NT & SA "Reference Rate" plus 500 Page 42 53 basis points (5%) which shall constitute and be collectible by Landlord as Additional Rent on demand. SECTION 24 ESTOPPEL CERTIFICATE 24.1 Tenant agrees that within ten (10) days of any demand therefor by Landlord, Tenant will execute and deliver to Landlord and/or Landlord's designee a recordable certificate stating that this Lease is in full force and effect, such defenses or offsets as are claimed by Tenant, if any, the date to which all rentals have been paid, and such other information as reasonably and customarily contained in a commercial estoppel certificate concerning the Lease, the Premises and Tenant as Landlord or said designee may request. In the event that Tenant fails to execute and/or deliver any such certificate or offset statement to Landlord within said ten (10) days, Tenant shall be deemed in violation of this Lease and Landlord shall have the rights and remedies for default under Section 25 below. SECTION 25 TENANT'S DEFAULT; LANDLORD'S REMEDIES 25.1 Tenant's compliance with each and every covenant and obligation hereof on its part to be performed hereunder is a condition precedent to each and every covenant and obligation of Landlord hereunder. Any one or more of the following shall be a "default" under this Lease: 25.1.1 Tenant shall default in the payment of any sum of money required to be paid hereunder and such default continues for five (5) days after written notice thereof from Landlord to Tenant; or 25.1.2 Tenant shall default in the performance of any other term, covenant or condition of this Lease on the part of Tenant to be kept and performed and such default continues Page 43 54 for thirty (30) days after written notice thereof from Landlord to Tenant; provided, however, that if the default complained of in such notice is of such a nature that the same can be rectified or cured, but cannot with reasonable diligence be done within said thirty (30) day period, then such default shall be deemed to be rectified or cured if Tenant shall, within said thirty (30) day period, commence to rectify and cure the same and shall thereafter complete such rectification and cure with all due diligence; or 25.1.3 Tenant should vacate or abandon the Premises during the Term and not otherwise be current in its rental and other obligations under this Lease; or 25.1.4 There is filed any petition in bankruptcy or Tenant is adjudicated as a bankrupt or insolvent, or there is appointed a receiver or trustee to take possession of Tenant or of all or substantially all of the assets of Tenant, or there is a general assignment by Tenant for the benefit of creditors, or any action is taken by or against Tenant under any state or federal insolvency or bankruptcy act, or any similar law now or hereafter in effect, including, without limitation, the filing of execution or attachment against Tenant and such levy continues in effect for a period of sixty (60) days. The provisions hereof shall also apply to any guarantor of this Lease; or 25.1.5 Tenant does, or permits to be done, any act which creates a mechanic's lien or claim thereof against the Premises or the Property and fails to timely discharge same; or 25.1.6 Tenant fails to furnish Landlord with a copy of any insurance policy required to be furnished by Tenant to Landlord when due, and such default shall continue for fifteen (15) days after written notice from Landlord; or 25.1.7 Tenant's causing, permitting or suffering to be done any act (i) required by this Lease to have the prior written consent of Landlord, unless such consent is so obtained, or (ii) prohibited by this Lease unless cured as provided in Section 25.1.2; or Page 44 55 25.1.8 In addition to the events constituting a default and breach of the Lease by Tenant as stated above, if within any twelve (12) month period during the term of the Lease, Tenant shall have failed to perform any monetary obligation required of Tenant hereunder more than two (2) times, or has been in breach for any other provision of this Lease more than three (3) times, and Landlord, because of any such failure and/or breach, shall have served upon Tenant within said twelve (12) month period two (2) (for monetary obligations) or three (3) (for non-monetary obligations) or more notices of any such failure or breach, then any subsequent failure or breach shall be deemed a noncurable default, without requirement of notice or opportunity to cure, and Landlord shall be immediately entitled to exercise any and all rights, remedies and/or elections specified below otherwise available at law or in equity. 25.2 In the event of a default as designated in this Section or elsewhere herein, in addition to any other rights or remedies provided for herein or available at law or in equity, Landlord, at its sole option, shall have the following rights: 25.2.1 The right to declare the Term of this Lease ended and to re-enter the Premises and take possession thereof, and to terminate all of the rights of Tenant in and to the Premises; or 25.2.2 The right, without declaring the Term of this Lease ended, to re-enter the Premises and to occupy the same, or any portion thereof, for and on account of Tenant as hereinafter provided, applying any moneys received first to the payment of such expenses as Landlord may have paid, assumed or incurred in recovering possession of the Premises, including costs, expenses, attorneys' fees, and expenditures placing the same in good order and condition, or preparing or altering the same for reletting, and all other expenses, commissions and charges paid, assumed or incurred by Landlord in or in connection with reletting the Premises and then to the fulfillment of the covenants of Tenant. Any such reletting as provided for herein may be for the remainder of the Page 45 56 Term of this Lease or for a longer or shorter period. Such reletting shall be for such rent and on such other terms and conditions as Landlord, in its sole reasonable discretion, deems appropriate. Landlord may execute any lease made pursuant to the terms hereof either in Landlord's own name or in the name of Tenant, or subject to the provisions of Section 18 hereof, assume Tenant's interest in and to any existing subleases to any tenant of the Premises, as Landlord may see fit, and Tenant shall have no right or authority whatsoever to collect any rent from such tenants, subtenants, licensees or concessionaires on the Premises. In any case, and whether or not the Premises or any part thereof be relet, Tenant, until the end of what would have been the term of this Lease in the absence of such default and whether or not the Premises or any part thereof shall have been relet, shall be liable to Landlord and shall pay to Landlord monthly an amount equal to the amount due as Aggregate Monthly Rent, less the net proceeds for said month, if any, of any reletting effected for the account of Tenant pursuant to the provisions of this subsection, after deducting all of Landlord's expenses in connection with such reletting, including, without limitation, all repossession costs, brokerage commissions, legal expenses, court costs, attorneys' fees, expenses of employees, alteration costs, and expenses of preparation for such reletting (all said costs are cumulative and shall be applied against proceeds of reletting until paid in full). Landlord reserves the right to bring such actions for the recovery of any deficits remaining unpaid by Tenant to Landlord hereunder as Landlord may deem advisable from time to time without being obligated to await the end of the Term for a final determination of Tenant's account and the commencement or maintenance of one or more actions by Landlord in this connection shall not bar Landlord from bringing any subsequent actions for further accruals pursuant to the provisions of this Section; or 25.2.3 The right, even though it may have relet all or any portion of the Premises in accordance with the provisions above, to thereafter at any time elect to terminate this Lease for such Page 46 57 previous default on the part of Tenant, and to terminate all of the rights of Tenant in and to the Premises. 25.3 Pursuant to said rights of re-entry above, Landlord may remove all persons from the Premises and may, but shall not be obligated to, remove all property therefrom, and may, but shall not be obligated to, enforce any rights Landlord may have against said property or store the same in any public or private warehouse or elsewhere at the cost and for the account of Tenant or the owner or owners thereof. Tenant agrees to hold Landlord free of and harmless from any liability whatsoever for the removal and/or storage of any such property, whether of Tenant or any third party whomsoever. Notwithstanding anything contained herein to the contrary, Landlord shall not be deemed to have terminated this Lease or the liability of Tenant to pay any rent or other sum of money thereafter to accrue hereunder, or Tenant's liability for damages under any of the provisions hereof, by any such re-entry, or by any action in unlawful detainer or otherwise to obtain possession of the Premises, unless Landlord shall have specifically, with reference to this Section, notified Tenant in writing that it has so elected to terminate this Lease. Tenant covenants and agrees that the service by Landlord of any notice pursuant to the unlawful detainer statutes of the State of Nevada and the surrender of possession pursuant to such notice shall not (unless Landlord elects to the contrary at the time of, or at any time subsequent to, the service of such notice to Tenant) be deemed to be a termination of this Lease, or the termination of any liability hereunder of Tenant to Landlord. 25.4 Tenant acknowledges and agrees that, in the event of any failure of Tenant to pay any Aggregate Monthly Rent, Minimum Monthly Rent, Additional Rent or other charges or moneys required to be paid by Tenant to Landlord pursuant to this Lease, Tenant shall immediately be in the status of default such that, at Landlord's option, the five (5) day written notice required by Section 25.1.1 (i) may be a five-day notice as contemplated by N.R.S. ss. 40.250 or N.R.S. ss. 40.253, Page 47 58 or (ii) may be given simultaneously or may run concurrently with any five day notice given by Landlord pursuant to N.R.S. ss. 40.250 or N.R.S. ss. 40.253. 25.5 In any action brought by Landlord or Tenant to enforce any of its rights under or arising from this Lease, the prevailing party shall be entitled to receive its court costs and legal expenses, including reasonable attorneys' fees, at trial and on appeal, whether such action is prosecuted to judgment or not. The parties shall and do hereby waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matters whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises, and/or any claim of injury or damage. In the event Landlord commences any proceedings for non-payment of any rent, Tenant will not interpose any counterclaim of whatever nature or description in any such proceedings. This shall not, however, be construed as a waiver of the Tenant's right to assert such claims in any separate action or actions brought by Tenant. 25.6 The waiver by Landlord of any particular default or breach of any of the terms, covenants or conditions hereof on the part of Tenant to be kept and performed shall not be a waiver of any preceding or subsequent breach of the same or any other term, covenant or condition contained herein. Landlord's failure to insist upon strict performance of any of the terms, conditions or covenants herein shall not be deemed to be a waiver of any rights or remedies of Landlord. The subsequent acceptance of rent or any other payment hereunder by Tenant to Landlord shall not be construed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease other than the failure of Tenant to pay the particular rental or other payment or portion thereof so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rental or other payment. No payment by Tenant or receipt by Landlord of a lesser Page 48 59 amount than the rent herein provided shall be deemed to be other than on account of the earliest rent due and payable hereunder, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept any such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy provided in this Lease. The term of this Section 25 may not be waived. SECTION 26 QUIET POSSESSION 26.1 Tenant, upon paying the Minimum Monthly Rent, Additional Rent and all other charges and moneys herein required of Tenant, and upon Tenant's performance of all of the terms, covenants and conditions of this Lease on its part to be kept and performed, may quietly have, hold and enjoy the Premises during the Term of this Lease without any disturbance from Landlord or from any other person claiming through Landlord. SECTION 27 CONVEYANCE BY LANDLORD 27.1 In the event of any sale, transfer and exchange of the Premises or other property by Landlord to the extent that such purchaser, transferee or other party acquires the interest of the Landlord in the Premises, Landlord shall be and is hereby relieved of all liability under any and all of its covenants and obligations contained in or derived from this Lease, arising out of any act, occurrence or omission relating to the Premises occurring after the consummation of such sale, transfer or exchange. Tenant agrees to attorn to such purchaser, transferee or grantee. Page 49 60 SECTION 28 DEFAULT BY LANDLORD 28.1 It is agreed that in the event Landlord fails or refuses to perform any of the provisions, covenants or conditions of this Lease on Landlord's part to be kept or performed, that Tenant, prior to exercising any right or remedy Tenant may have against Landlord on account of such default, shall give written notice to Landlord of such default, specifying in said notice the default with which Landlord is charged and Landlord shall not be deemed in default if the same is cured within thirty (30) days of receipt of said notice. Notwithstanding any other provision hereof, Tenant agrees that if the default complained of in the notice provided for by this Section is of such a nature that the same can be rectified or cured by Landlord, but cannot with reasonable diligence be rectified or cured by Landlord within said thirty (30) day period, then such default shall be deemed to be rectified or cured if Landlord within a thirty (30) day period shall commence the rectification and curing thereof and shall continue thereafter with all due diligence to cause such rectification and curing to proceed. SECTION 29 NOTICES 29.1 Any and all notices and demands by or from Landlord to Tenant, or by or from Tenant to Landlord, required or desired to be given hereunder shall be in writing and shall be validly given or made if served either personally, or delivered by recognized commercial courier (such as Federal Express), or if deposited in the United States mail, certified or registered, postage prepaid, return receipt requested. If such notice or demand be served by registered or certified mail in the manner provided, service shall be conclusively deemed given two (2) days after mailing or upon receipt, whichever is sooner. Page 50 61 29.1.1 Any notice or demand to Landlord shall be addressed to Landlord at: P.O. Box 4754 Thousand Oaks, California 91359 With a copy to: Kolesar & Leatham, Chtd. 3320 West Sahara Avenue Suite 380 Las Vegas, Nevada 89102 ATTN: Robert J. Kolesar, Esq. 29.1.2 Any notice or demand to Tenant shall be addressed to Tenant at: 1500 East Tropicana Avenue Las Vegas, Nevada 89119 ATTN: Jon A. Joseph, Esq. With a copy to: Jon A. Joseph, Esq. 4310 Paradise Road Las Vegas, Nevada 89109 29.2 Any party hereto may change its address for the purpose of receiving notices or demands as herein provided by a written notice given in the manner aforesaid to the other party hereto, which notice of change of address shall not become effective, however, until the actual receipt thereof by the other party. SECTION 30 REMEDIES CUMULATIVE 30.1 The various rights, options, elections and remedies of Landlord and Tenant contained in this Lease shall be cumulative and no one of them shall be construed as exclusive of any other, or of any right, priority or remedy allowed or provided for by law and not expressly waived in this Lease. Page 51 62 SECTION 31 SUCCESSORS AND ASSIGNS 31.1 The terms, provisions, covenants and conditions contained in this Lease shall apply to, bind and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of Landlord and Tenant (where permitted), respectively. SECTION 32 PARTIAL INVALIDITY 32.1 If any term, covenant or condition of this Lease, or any application thereof, should be held by a court of competent jurisdiction to be invalid, void or unenforceable, all terms, covenants and conditions of this Lease, and all applications thereof, not held invalid, void or unenforceable, shall continue in full force and effect and shall in no way be affected, impaired or invalidated thereby. SECTION 33 TIME OF THE ESSENCE 33.1 Time is of the essence as to this Lease and all of the terms, covenants and conditions hereof. SECTION 34 ENTIRE AGREEMENT 34.1 This Lease contains the entire agreement between the parties and shall not be amended, changed or terminated orally. SECTION 35 NO PARTNERSHIP 35.1 Nothing contained in this Lease shall be deemed or construed by the parties hereto or by any third party to create the relationship of principal and agent or of partnership or of joint Page 52 63 venture or of any association between Landlord and Tenant. Neither the method of computation of rent nor any other provisions contained in this Lease nor any acts of the parties hereto shall be deemed to create any relationship between Landlord and Tenant other than the relationship of landlord and tenant. SECTION 36 BROKERS 36.1 This Lease is an integral part of the real estate purchase transaction referred to in Section 2.1 hereof, and any and all brokerage commissions shall be paid at the Closing of that transaction. No separate lease commissions shall be due and payable. Tenant warrants that it has had no dealings with any broker or agent in connection with this Lease creating any liability for which Landlord is obligated to pay, and hereby holds harmless and indemnifies Landlord from and against any and all cost, expense or liability including legal fees and costs in defense thereof for any compensation, commissions and charges claimed to be due by any broker or agent with respect to this Lease or the negotiation hereof based on any such broker's or agent's representation of Tenant. The foregoing shall not apply to any internal or related commission or fee to be paid by Landlord. SECTION 37 ATTORNEYS' FEES 37.1 In the event any action at law or in equity, or any special proceeding, be instituted by either of the parties hereof against the other to enforce this Lease, or any rights arising hereunder, or in connection with the subject matter hereof, the prevailing party shall be entitled to recover all costs of suit and reasonable attorneys' fees at trial and on appeal. Page 53 64 SECTION 38 GENERAL PROVISIONS 38.1 The captions appearing at the commencement of the Sections hereof are descriptive only and for convenience of reference to this Lease and in no way whatsoever define, limit or describe the scope or intent of this Lease, nor in any way affect this Lease. 38.2 Masculine or feminine pronouns shall be substituted for the neuter form and vice versa, and the plural shall be substituted for the singular form and vice versa, in any place or places herein in which the context requires such substitution(s). 38.3 The laws of the State of Nevada shall govern the validity, construction, performance, enforcement and effect of this Lease. Any legal action under this Lease or in any way pertaining to this Lease must be instituted and maintained in Clark County, Nevada. 38.4 Whenever in this Lease any words of obligation or duty are used in connection with either party, such words shall have the same force and effect as though framed in the form of express covenants on the part of the party obligated. 38.5 In the event Tenant now or hereafter shall consist of more than one person, firm or corporation, then and in such event, all such persons, firms or corporations shall be jointly and severally liable as Tenant hereunder. 38.6 The submission of this Lease for examination does not constitute a reservation of or option to lease the Premises; this Lease becomes effective as a Lease only upon execution by both parties, delivery thereof by Landlord to Tenant and the Closing of the real estate transaction referred to in Section 2.1 hereof. Page 54 65 38.7 Should any claim or lien be filed against the Premises, or any action or proceeding be instituted affecting the title to the Premises, Tenant shall give Landlord written notice thereof as soon as Tenant obtains actual knowledge thereof. 38.8 This Lease shall not be construed either for or against Landlord or Tenant, but this Lease shall be interpreted in accordance with the general tenor of its language. 38.9 Tenant agrees and acknowledges that Landlord has bargained for Tenant's full and faithful compliance with the terms of the Lease, and Tenant's full and faithful payment of all Aggregate Monthly Rent, Minimum Monthly Rent, Additional Rent and other charges and moneys to be paid by Tenant. Therefore, if Landlord has granted Tenant any monetary concession or benefits, all such concessions and/or benefits to Tenant shall be effective only so long as Tenant is not in default of any term, covenant or provision of this Lease. Thus, should Tenant default hereunder, in addition to any amounts owing from Tenant to Landlord as a result of such default, the full amount of any such monetary concession or benefit not included within Landlord's damage with respect to Tenant's general obligations for all rent and Additional Rent above shall be immediately due and payable by Tenant to Landlord upon demand. 38.10 Landlord and Tenant acknowledge the fact that this Lease and the terms hereof are confidential and are to remain so. Therefore, each party hereto agrees that it will not disclose the terms hereof to any third party or unrelated or unaffiliated party except in the event of litigation, regulatory reporting requirements, financial planning and/or a public offering or sale of all or virtually all of the assets of the respective party hereto, as otherwise required in the ordinary course of each party's business. This Lease shall not be recorded. However, upon the request of either party, both parties shall for the purposes of recordation, execute a memorandum or "short form" of this Lease, Page 55 66 which shall describe only the parties; the Premises; the Lease Term and any Option Periods and shall incorporate this Lease by reference. 38.11 Tenant understands and agrees that any claims by Tenant against Landlord with respect to this Lease shall be limited to the assets of the beneficial owner of the Premises. Tenant expressly waives any and all rights to proceed against the individual partners or against the officers, directors or shareholders of any corporate partner of such beneficial owner, except to the extent of their interests therein. 38.12 If Tenant is a corporation, each individual signing this Lease on behalf of Tenant represents and warrants that he or she is duly authorized to execute and deliver this Lease on behalf of the corporation, and that this Lease is binding on Tenant in accordance with its terms. Tenant shall, prior to or within three (3) days after execution of this Lease, deliver to Landlord a certified copy of a resolution of its board of directors authorizing such execution. IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the date set forth above. LANDLORD TENANT JOZAC BUSINESS CENTER, LLC, PREFERRED EQUITIES CORPORATION, a California limited liability company a Nevada corporation By: /s/ Michael D. White By: /s/ Jon A. Joseph ----------------------------------- -------------------------------- Manager Jon A. Joseph, Vice President Page 56 EX-10.220 11 a66375ex10-220.txt EXHIBIT 10.220 1 EXHIBIT 10.220 ELEVENTH AMENDMENT TO ASSIGNMENT AND ASSUMPTION AGREEMENT This Eleventh Amendment (the "Amendment") to Assignment and Assumption Agreement, by and between RER Corp., COMAY Corp., GROWTH REALTY INC. and H&H FINANCIAL, INC. (the "Assignors") and MEGO FINANCIAL CORP., formerly named Mego Corp., (the "Assignee") WITNESSETH: WHEREAS, the Assignors are parties to the Assignment Agreement dated October 25, 1987, with the Assignee, and the Assignment and Assumption Agreement, dated February 1, 1988, between the Assignors and the Assignee, which two agreements were amended by the Amendment to Assignment and Assumption Agreement dated July 29, 1988 and by the Second Amendment to Assignment and Assumption Agreement dated as of March 2, 1995, the Third Amendment to Assignment and Assumption Agreement dated as of August 20, 1997 and the Fourth, Fifth, Sixth, Seventh and Eighth, Ninth and Tenth Amendments to Assignment and Assumption Agreement dated as of February 26, 1999, May 28, 1999, August 9, 1999, November 20, 1999, January 31, 2000, April 30, 2000 and August 31, 2000, respectively, between the Assignors and the Assignee (collectively, the described agreements as so amended are hereinafter referred to as the "Assignment"); and WHEREAS, the Assignment fixed the date of January 31, 1995 as the date on which the accrual of amounts due to the Assignors under the Assignment would terminate, except for interest on any of such amounts which remained unpaid; and WHEREAS, the amount due the Assignors as of January 31, 1995 was $13,328,742.25, plus interest from January 28, 1995, in the amount of $9,322.57, collectively, and with interest from January 31, 1995 to March 2, 1995 (the "Amount Due"); and WHEREAS, $10,000,000 of the Amount Due was agreed to be considered subordinated debt (the "Subordinated Debt"), against which payments were made as follows: (i) $1,428,571.43 was paid on March 1, 1997 as scheduled, (ii) $4,250,000 was deemed paid by credit against the exercise price of certain warrants as is set forth in the Third Amendment, and (iii) $35, 714.28 was paid on September 1, 1998, leaving a remaining balance of the Subordinated Debt of $4,285,714.29; and WHEREAS, the balance of the Subordinated Debt continues to be secured by a pledge of all of the issued and outstanding common stock of Preferred Equities Corporation (and any distributions in respect thereto) pursuant to a Pledge and Security Agreement dated as of February 1, 1988 (the "Pledge Agreement") between the Assignee and the Assignors; and 1 2 WHEREAS, interest on the Subordinated Debt has been paid through September 1, 2000; and WHEREAS, under the terms of the Assignment, all of the principal in the amount of $4,285,714.29 will be due and payable on December 1, 2000; and WHEREAS, the Assignee has requested that the Assignors further defer the payment of principal of the Subordinated Debt payable on December 1, 2000, in the total amount of $4,285,714.29, to March 1, 2001. NOW THEREFORE, in consideration of the mutual covenants herein contained it is hereby agreed as follows: 1. The statements in the foregoing preamble are true and correct. 2. The payments previously deferred to December 1, 2000, totaling in the aggregate $4,285,714.29, and hereby deferred to March 1, 2001. 3. The Assignee and Assignors agree that all amounts due to Assignors pursuant to the Assignment as amended by this Amendment shall continue to be secured as set forth in the Pledge Agreement and that the Pledge Agreement remains in full force and effect. 4. The Assignee and Assignors agree that this Amendment is an amendment to the Assignment and not a novation, and that except as modified hereby, all terms and conditions of the Assignment, including but not limited to provisions with respect to the payment of interest and acceleration of the entire balance of principal and interest if any payment is not made within 30 days of its due date, shall remain in full force and effect. 5. It is agreed that this Amendment may be signed in counterparts, and all such counterparts in the aggregate shall constitute one agreement. IN WITNESS WHEREOF, the parties have duly executed this Amendment as of November 15, 2000. MEGO FINANCIAL CORP. H&H Financial, Inc By: /s/ Jerome J. Cohen By: /s/ Herbert Hirsch ------------------------------ ---------------------------- Jerome J. Cohen, President Title: President RER CORP. Growth Realty Inc. By: /s/ Robert Nederlander By: /s/ Eugene Schuster ------------------------------ ---------------------------- Title: President Title: C.E.O. Comay Corp By: /s/ Jerome J. Cohen ------------------------------ Title: President 2 EX-27.01 12 a66375ex27-01.txt FINANCIAL DATA SCHEDULE
5 1,000 12-MOS AUG-31-2000 SEP-01-1999 AUG-31-2000 2,324 0 96,390 13,234 27,420 0 40,799 17,632 168,592 0 109,131 0 0 35 25,747 168,592 68,686 90,495 13,568 55,035 32,041 0 12,468 3,419 (530) 3,419 0 0 0 3,949 1.13 1.13
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