-----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, RABUhGQuunvKbjHcHEXB+k4JrOexf67RCQKb1ypLHSaMM2pSfqUCeIoBvUmABaPd CNLfKu7vgb8aVMexQotqVw== 0000950150-96-001473.txt : 19961202 0000950150-96-001473.hdr.sgml : 19961202 ACCESSION NUMBER: 0000950150-96-001473 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19960831 FILED AS OF DATE: 19961127 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEGO FINANCIAL CORP CENTRAL INDEX KEY: 0000736035 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE DEALERS (FOR THEIR OWN ACCOUNT) [6532] IRS NUMBER: 135629885 STATE OF INCORPORATION: NY FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08645 FILM NUMBER: 96673680 BUSINESS ADDRESS: STREET 1: 4310 PARADISE RD CITY: LAS VEGAS STATE: NV ZIP: 89109 BUSINESS PHONE: 7027373700 FORMER COMPANY: FORMER CONFORMED NAME: MEGO CORP DATE OF NAME CHANGE: 19920703 10-K405 1 FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended August 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) 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, NEVADA 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. [x] As of November 8, 1996, 18,433,121 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 8, 1996 was approximately $170,506,369, based on a closing price of $9.25 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 PART I ITEM 1. BUSINESS GENERAL The Company is a specialty financial services company that, through its wholly-owned subsidiary, Preferred Equities Corporation (PEC), and its 81.1% owned subsidiary, Mego Mortgage Corporation (MMC), is engaged primarily in originating, selling and servicing consumer receivables generated through home improvement loans and timeshare and land sales. MMC originates Title I home improvement loans insured by the Federal Housing Administration (FHA) of the Department of Housing and Urban Development (HUD) and conventional home improvement and equity loans through a network of loan correspondents and home improvement contractors. PEC markets and finances timeshare interests in select resort areas, as well as retail lots and land parcels. By providing financing to virtually all of its customers, PEC also originates consumer receivables that it sells and services. Timeshare and land sales have historically accounted for most of the Company's revenues and profits; however, since March 1994, when MMC commenced operations, originating, selling and servicing home improvement loans have accounted for an increasing portion of revenues and profits. As further described in Management's Discussion and Analysis of Financial Condition and Results of Operations -- Subsequent Event, in November 1996 MMC issued 2,300,000 shares of its common stock and $40 million of 12.5% Senior Subordinated Notes due 2001 in public offerings. As a result of these transactions, the Company's ownership in MMC declined to 81.1% and consolidated outstanding debt increased $40 million. 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. See "Item 13. Certain Relationships and Related Transactions" and Note 2 of Notes to Consolidated Financial Statements. In February 1988, the Company acquired PEC, pursuant to an assignment by the Assignors 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. MEGO MORTGAGE CORPORATION GENERAL MMC is a specialized consumer finance company that originates, purchases, sells and services consumer loans consisting primarily of home improvement loans secured by liens on the improved property. Through its network of Correspondents and Dealers, MMC initially originated only Title I Loans. The Title I program provides for insurance of 90% of the principal balance of the loan, and certain other costs. MMC began offering Conventional Loans through its Correspondents in May 1996. The Company established MMC and entered the home improvement lending market to take advantage of PEC's servicing and collection capabilities, the experience of the Company's senior executives in home improvement lending, the similar customer profile of home improvement borrowers and purchasers of its time share interests and land parcels, and relatively stable prepayment expectations. MMC's borrowers are individuals who own their home and have appropriate verifiable income but may have limited access to traditional financing sources due to insufficient home equity, limited credit history or high ratios of debt service to income. These borrowers require or seek a high degree of personalized service and prompt response to their loan applications. As a result, MMC's borrowers generally are not averse to paying higher interest rates that MMC charges for its loan programs as compared to the interest rates charged by banks and other traditional financial institutions. MMC has developed a proprietary credit index profile that includes as a significant component the credit evaluation score methodology developed by Fair, Isaac and Company (FICO) to classify borrowers on the basis of likely future performance. The other components of MMC's scoring system include debt to income ratio, employment history and residence stability. MMC charges varying rates of interest based upon the borrower's credit profile and income. MMC quotes higher interest rates for those borrowers exhibiting a higher degree of risk. The borrowers' credit standing and/or lack of collateral may preclude them from obtaining alternate funding. For the year ended August 31, 1996, the loans originated by MMC had a weighted average interest rate of 14.03%. 2 3 The credit evaluation methodology developed by FICO takes into consideration a number of factors in the borrower's credit history. These include, but are not limited to, (i) the length of time the borrower's credit history has been on file with the respective credit reporting agency, (ii) the number of open credit accounts, (iii) the amount of open revolving credit availability, (iv) the payment history on the open credit accounts and (v) the number of recent inquiries for the borrower's credit file which may indicate additional open credit accounts not yet on file. Based on this information FICO will assign a score to the borrower's credit file which is updated periodically. Based on their statistical analysis, this score will indicate the percentage of borrowers in that score range expected to become 90 days delinquent on an additional loan. The score ascribed by FICO weighs heavily in MMC's approval process; however its effects, whether positive or negative, can be mitigated by the other factors described above. MMC's loan originations increased to $139.4 million during the fiscal year ended August 31, 1996 from $87.8 million during the fiscal year ended August 31, 1995 and $8.2 million during the six months in which it originated loans in the fiscal year ended August 31, 1994. MMC's revenues increased to $25 million for the year ended August 31, 1996 from $13.6 million for the fiscal year ended August 31, 1995 and $751,000 for the fiscal year ended August 31, 1994. For the year ended August 31, 1996, the Company had net income of $6.9 million compared to $3.6 million for the year ended August 31, 1995. As a result of the substantial growth in loan originations, MMC has operated since March 1994, and expects to continue to operate for the foreseeable future, on a negative cash flow basis. MMC sells substantially all the loans it originates through either whole loan sales to third party institutional purchasers or securitizations at a yield below the stated interest rate on the loans, retaining the right to service the loans and receive any amounts in excess of the guaranteed yield to the purchasers. MMC completed its first two securitizations of Title I Loans in March and August 1996 totalling $133 million and expects to sell a substantial portion of its loan production through securitizations in the future. At August 31, 1996, MMC serviced $209.5 million of loans it had sold, and $4.7 million of loans it owned. HOME IMPROVEMENT LOAN INDUSTRY According to data released by the Commerce Department's Bureau of the Census, expenditures for home improvement and repairs of residential properties have exceeded $100 billion per year since 1992 with 1995 expenditures estimated at $112.6 billion. MMC targets the estimated $40 billion of those expenditures which are for owner-occupied single-family properties where improvements are performed by professional remodelers. As the costs of home improvements escalate, home owners are seeking financing as a means to improve their property and maintain and enhance its value. The National Association of Home Builders Economics Forecast in 1995 estimates that home improvement expenditures will exceed $200 billion by the year 2003. Two types of home improvement financing are available to borrowers, the Title I program administered by the FHA, which is authorized to partially insure qualified lending institutions against losses, and uninsured loans where the lender relies more heavily on the borrower's creditworthiness, debt capacity and the underlying collateral. Both types of loans are generally secured with a real estate mortgage lien on the property improved. The conventional home improvement financing market continues to grow as many homeowners have limited access to traditional financing sources due to insufficient home equity, limited credit history or high ratios of debt service to income. Conventional loan proceeds can be used for a variety of improvements such as large remodeling projects, both interior and exterior, kitchen and bath remodeling, room additions and in-ground swimming pools. Borrowers also have the opportunity to consolidate a portion of their outstanding debt in order to reduce their monthly debt service. According to the FHA, the amount of single family Title I Loans originated has grown from $375 million during 1988 to $1.3 billion during 1995. Based on FHA data, MMC estimates that it had an 8.6% market share of the property improvement Title I Loan market in calendar 1995. Out of approximately 3,100 lenders participating in the program in 1995, according to FHA data, MMC was the third largest originator of property improvement Title I Loans. Under Title I, the payment of approximately 90% of the principal balance of a loan is insured by the United States of America in the event of a payment default. The Title I program generally limits the maximum amount of the loan to $25,000 and restricts the type of eligible improvements and the use of the loan proceeds. Under Title I, only property improvement loans to finance the alteration, repair or improvement of existing single family, multifamily and non-residential structures are allowed. The FHA does not review individual loans at the time of approval. In the case of a Title I Loan less than $7,500, no equity is required in the property to be improved and the loan may be unsecured. 3 4 BUSINESS STRATEGY MMC's strategic plan is to continue to expand its lending operations while maintaining its credit quality. MMC's strategies include: (i) offering new loan products; (ii) expanding its existing network of Correspondents and Dealers; (iii) entering new geographic markets; (iv) realizing operational efficiencies through economies of scale; and (v) using securitizations to sell higher volumes of loans on more favorable terms. At August 31, 1996, MMC had developed a nationwide network of approximately 310 active Correspondents and approximately 435 active Dealers. MMC's Correspondents generally offer a wide variety of loans and its Dealers typically offer home improvement loans in conjunction with debt consolidation. By offering a more diversified product line, including Conventional Loans, and maintaining its high level of service, MMC has increased the loan production from its existing network of Correspondents. MMC anticipates that as it expands its lending operations, it will realize economies of scale thereby reducing its average loan origination costs and enhancing its profitability. In addition, MMC intends to continue to sell its loan production through securitizations as opportunities arise. Through access to securitization, the Company believes that it has the ability to sell higher volumes of loans on more favorable terms than in whole loan sales. PRODUCT EXTENSION AND EXPANSION MMC intends to continue to review its loan programs and introduce new loan products to meet the needs of its customers. MMC will also evaluate products or programs that it believes are complementary to its current products for the purpose of enhancing revenue by leveraging and enhancing MMC's value to its existing network of Correspondents and Dealers. MMC believes that its introduction of new loan products will enhance its relationship with its Dealers and Correspondents and enable it to become a single source for their various financing needs. Since it commenced operations, MMC has originated Title I Loans from both its Dealers and Correspondents. In May 1996, MMC broadened these activities to include non-FHA insured home improvement loans and combination home improvement and debt consolidation loans. To date, these non-FHA insured loans have been originated solely through Correspondents. All of these loans, which permit loan amounts up to $60,000 with fixed rates and 20- year maturities, are secured by a lien, generally junior in priority, on the respective primary residence. MMC intends to offer pure debt consolidation loans in the first quarter of fiscal 1997. MMC also intends to offer non-FHA insured loans through its Dealer division in the first quarter of 1997 and to make direct debt consolidation loans to borrowers originated by the Dealer division in conjunction with home improvement financing. EXPANSION OF CORRESPONDENT OPERATIONS MMC seeks to increase originations of loans from select Correspondents. MMC has expanded its product line to include Conventional Loans to meet the needs of its existing network of Correspondents. Prior to May 1996, MMC originated only Title I Loans. This limited its ability to attract the more sophisticated Correspondent that offered a multitude of loan products and, accordingly, limited MMC's market penetration. The Company began offering Conventional Loans to existing select Correspondents in May 1996. In order to maintain MMC's customer service excellence, the Company has gradually increased the number of Correspondents to which it has offered Conventional Loans. Since MMC commenced offering Conventional Loans, the loan production of MMC's Correspondent division has significantly increased. MMC believes that it is well positioned to expand this segment without any material increase in concentration or quality risks. EXPANSION OF DEALER OPERATIONS MMC seeks to expand its Dealer network and maximize loan originations from its existing network by offering a variety of innovative products and providing consistent and prompt service at competitive prices. The Company will provide conventional products as well as its existing Title I product to its Dealers in order to meet the needs of the diverse borrower market. MMC targets Dealers that typically offer financing to their customers and attempts to retain and grow these relationships by providing superior customer service, personalized attention and prompt approvals and fundings. MMC has been unable to fully meet the needs of its Dealers because of Title I program limits on the amount and types of improvements which may be financed. MMC intends to meet the needs of its Dealers with new Conventional Loan programs. These programs allow for more expensive project financing such as in-ground swimming pools and substantial remodeling as well as financing for creditworthy borrowers with limited equity who are in need of debt consolidation and borrowers with marginal creditworthiness and substantial equity in their property. With this strategy, MMC believes it can achieve further market penetration of its existing 4 5 Dealer network and gain new Dealers and market share in areas in which the Title I product is less successful because of its restrictions. NATIONWIDE GEOGRAPHIC EXPANSION MMC intends to continue to expand its Correspondent and Dealer network on a nationwide basis and to enhance its value to its existing network. MMC's strategy involves (i) focusing on geographic areas that the Company currently underserves and (ii) tailoring MMC's loan programs to better serve its existing markets and loan sources. MAXIMIZATION OF FLEXIBILITY IN LOAN SALES MMC employs a two-pronged strategy of disposing of its loan originations primarily through securitizations and, to a lesser extent, through whole loan sales. By employing this dual strategy, MMC has the flexibility to better manage its cash flow, diversify its exposure to the potential volatility of the capital markets and maximize the revenues associated with the gain on sale of loans, given market conditions existing at the time of disposition. MMC has recently been approved by Federal National Mortgage Association (FNMA) as a seller/servicer of Title I Loans, as a result of which MMC is eligible to sell such loans to FNMA on a servicing retained basis. LOAN PRODUCTS MMC originates Title I and Conventional Loans. Both types of loans are typically secured by a first or junior lien on the borrower's principal residence, although MMC occasionally originates and purchases unsecured loans with borrowers that have an excellent credit history. Borrowers use loan proceeds for a wide variety of home improvement projects, such as exterior/interior remodeling, structural additions, roofing and plumbing, as well as luxury items such as in-ground swimming pools, and for debt consolidation. MMC lends to borrowers of varying degrees of creditworthiness. See "Loan Processing and Underwriting." CONVENTIONAL LOANS A Conventional Loan is a non-insured home improvement or home equity loan typically undertaken to pay for a home improvement project, home improvement and debt consolidation combination or a debt consolidation. Substantially all of the Conventional Loans originated by MMC are secured by a first or junior mortgage lien on the borrower's principal residence. Underwriting for Conventional Loans varies according to MMC's evaluation of the borrower's credit risk and income stability as well as the underlying collateral. MMC will rely on the underlying collateral and equity in the property for borrowers judged to be greater credit risks. MMC targets the higher credit quality segment of borrowers. MMC has begun originating Conventional Loans through its Correspondent Division and plans to begin offering such loan products to its Dealer Division. MMC has focused its Conventional Loan program on that segment of the marketplace with higher credit quality borrowers who may have limited equity in their residence after giving effect to the amount of senior liens. The portfolio of Conventional Loans generated through August 31, 1996 indicates on average that the borrowers have received an "A" grade under MMC's proprietary credit index profile, have an average debt-to-income ratio of 38% and the subject properties are 100% owner occupied. On average, the market value of the underlying property is $123,000 without added value from the respective home improvement work, the amount of senior liens of $107,000 and the loan size is $28,500. Typically, there is not enough equity in the property to cover a junior lien in the event that a senior lender forecloses on the property. More than 99% of the loans comprising MMC's Conventional Loan portfolio are secured by junior liens. TITLE I LOAN PROGRAM The National Housing Act of 1934 (Housing Act), Sections 1 and 2(a), authorized the creation of the FHA and the Title I credit insurance program (Title I). Under the Housing Act, the FHA is authorized to insure qualified lending institutions against losses on certain types of loans, including loans to finance the alteration, repair or improvement of existing single family, multi-family and nonresidential real property structures. Under Title I, the payment of approximately 90% of the principal balance of a loan and certain other amounts is insured by the United States of America in the event of a payment default. 5 6 Title I and the regulations promulgated thereunder establish criteria regarding (i) who may originate, acquire, service and sell Title I Loans, (ii) Title I Loan eligibility of improvements and borrowers, (iii) the principal amounts, terms of, and security for Title I Loans, (iv) the use and disbursement of loan proceeds, (v) verification of completion of improvements, (vi) the servicing of Title I Loans in default and (vii) the processing of claims for Title I insurance. The principal amount of a secured Title I Loan may not exceed $25,000, in the case of a loan for the improvement of a single family structure, and $60,000, in the case of a loan for the improvement of a multi-family structure. Loans up to a maximum of $7,500 in principal amount may qualify as unsecured Title I Loans. Title I Loans are required to bear fixed rates of interest and, with limited exceptions, be fully amortizing with equal weekly, bi- weekly, semi-monthly or monthly installment payments. Title I Loan terms may not be less than 6 months nor more than 240 months in the case of secured Title I Loans or 120 months in the case of unsecured Title I Loans. Subject to other federal and state regulations, the lender may establish the interest rate to be charged in its discretion. Title I generally provides for two types of Title I Loans, direct loans (Direct Title I Loans) and dealer loans (Dealer Title I Loans). Direct Title I Loans are made directly by a lender to the borrower and there is no participation in the loan process by the contractor, if any, performing the improvements. In the case of Dealer Title I Loans, the Dealer, a contractor performing the improvements, assists the borrower in obtaining the loan, contracts with the borrower to perform the improvements, executes a retail installment contract with the borrower and, upon completion of the improvements, assigns the retail installment contract to the Title I lender. Each Dealer must be approved by the Title I lender in accordance with HUD requirements. Direct Title I Loans are closed by the lender in its own name with the proceeds being disbursed directly to the borrower prior to completion of the improvements. The borrower is generally required to complete the improvements financed by a Direct Title I Loan within six months of receiving the proceeds. In the case of Dealer Title I Loans, the lender is required to obtain a completion certificate from the borrower certifying that the improvements have been completed prior to disbursing the proceeds to the Dealer. The FHA charges a lender an annual fee equal to 50 basis points of the original principal balance of a loan for the life of the loan. A Title I lender or Title I sponsored lender is permitted to require the borrower to pay the insurance premium with respect to the loan. In general, the borrowers pay the insurance premiums with respect to Title I Loans originated through the Company's Correspondents but not with respect to Title I Loans originated through MMC's Dealers. Title I provides for the establishment of an insurance coverage reserve account for each lender. The amount of insurance coverage in a lender's reserve account is equal to 10% of the original principal amount of all Title I Loans originated or purchased and reported for insurance coverage by the lender less the amount of all insurance claims approved for payment. The amount of reimbursement to which a lender is entitled is limited to the amount of insurance coverage in the lender's reserve account. LENDING OPERATIONS MMC has two principal divisions for the origination of loans, the Correspondent Division and the Dealer Division. The Correspondent Division represents MMC's largest source of loan originations. Through its Correspondent Division, MMC originates loans through a nationwide network of Correspondents including financial intermediaries, mortgage companies, commercial banks and savings and loan institutions. MMC typically originates loans from Correspondents on an individual loan basis, pursuant to which each loan is pre-approved by MMC and is purchased immediately after the closing. The Correspondent Division conducts operations from its headquarters in Atlanta, Georgia, with a Vice President of Operations responsible for underwriting and processing and five account executives supervised by the Vice President-National Marketing responsible for developing and maintaining relationships with Correspondents. At August 31, 1996, the Company had a network of approximately 310 active Correspondents. In addition to purchasing individual Direct Title I Loans and Conventional Loans, from time to time the Correspondent Division purchases portfolios of loans from Correspondents. In March 1994, MMC purchased a portfolio of Direct Title I Loans originated by another financial institution, which consisted of 211 loans with an aggregate remaining principal balance of $1.4 million. 6 7 The Dealer Division originates Dealer Title I Loans through a network of Dealers, consisting of home improvement construction contractors approved by the Company, by acquiring individual retail installment contracts (Installment Contracts) from Dealers. An Installment Contract is an agreement between the Dealer and the borrower pursuant to which the Dealer performs the improvements to the property and the borrower agrees to pay in installments the price of the improvements. Before entering into an Installment Contract with a borrower, the Dealer assists the borrower in submitting a loan application to MMC. If the loan application is approved, the Dealer enters into an Installment Contract with the borrower, the Dealer assigns the Installment Contract to MMC upon completion of the home improvements and MMC, upon receipt of the requisite loan documentation (described below) and completion of a satisfactory telephonic interview with the borrower, pays the Dealer pursuant to the terms of the Installment Contract. The Dealer Division maintains 13 branch offices located in Montvale, New Jersey; Kansas City, Missouri; Las Vegas, Nevada; Austin, Texas; Oklahoma City, Oklahoma; Seattle, Washington; Waterford, Michigan; Columbus, Ohio; Elmhurst, Illinois; Philadelphia, Pennsylvania; Denver, Colorado; Woodbridge, Virginia; and Bowie, Maryland through which it conducts its marketing to Dealers in the state in which the branch is located as well as certain contiguous states. The Dealer Division is operated with a Vice President of Operations responsible for loan processing and underwriting, two regional managers, and 13 field representatives supervised by the Vice President-National Marketing who are responsible for marketing to Dealers. At August 31, 1996, MMC had a network of approximately 435 active Dealers doing business in 32 states. MMC intends to commence offering Conventional Loans through its Dealer Division. Correspondents and Dealers qualify to participate in MMC's programs only after a review by MMC's management of their reputations and expertise, including a review of references and financial statements, as well as a personal visit by one or more representatives of MMC. Title I requires MMC to reapprove its Dealers annually and to monitor the performance of those Correspondents that are sponsored by MMC. MMC's compliance function is performed by a director of compliance and loan administration, whose staff performs periodic reviews of portfolio loans and Correspondent and Dealer performance and may recommend to senior management the suspension of a Correspondent or a Dealer. MMC believes that its system of acquiring loans through a network of Correspondents and Dealers and processing such loans through a centralized loan processing facility has (i) assisted MMC in minimizing its level of capital investment and fixed overhead costs and (ii) assisted MMC in realizing certain economies of scale associated with evaluating and acquiring loans. MMC does not believe that the loss of any particular Correspondent or Dealer would have a material adverse effect upon MMC. See "Loan Processing and Underwriting." MMC pays its Correspondents premiums on the loans it purchases based on the credit score of the borrower and the interest rate on the respective loan. Additional premiums are paid to Correspondents based on the volume of loans purchased from such Correspondents in a monthly period. During fiscal 1996 MMC originated $94.2 million of loans from Correspondents and paid total premiums of $2.8 million or 3% of such loans. None of MMC's arrangements with its Dealers or Correspondents is on an exclusive basis. Each relationship is documented by either a Dealer Purchase Agreement or a Correspondent Purchase Agreement. Pursuant to a Dealer Purchase Agreement, MMC may purchase from a Dealer loans that comply with the Company's underwriting guidelines at a price acceptable to MMC. With respect to each loan purchased, the Dealer makes customary representations and warranties regarding, among other things, the credit history of the borrower, the status of the loan and its lien priority if applicable, and agrees to indemnify MMC with respect to such representations and warranties. Pursuant to a Correspondent Purchase Agreement, MMC may purchase loans through a Correspondent, subject to receipt of specified documentation. The Correspondent makes customary representations and warranties regarding, among other things, the Correspondent's corporate status, as well as regulatory compliance, good title, enforceability and payments and advances of the loans to be purchased. The Correspondent covenants to, among other things, keep MMC information confidential, provide supplementary information, maintain government approvals with respect to Title I Loans and to refrain from certain solicitations of MMC's borrowers. The Correspondent also agrees to indemnify MMC for misrepresentations or non-performance of its obligations. MMC originates and acquires a limited variety of loan products, including: (i) fixed rate, secured Title I Loans, secured by single family residences, with terms and principal amounts ranging from 60 to 240 months and approximately $3,000 to $25,000, respectively; and (ii) fixed rate, unsecured Title I Loans with terms and principal amounts ranging from 36 to 120 months and approximately $2,500 to $7,500, respectively. As part of MMC's strategic plan, MMC has commenced originating non-FHA insured Conventional Loans utilizing its established network of Correspondents. 7 8 The following table sets forth certain data regarding loan applications processed and loans originated by MMC during the periods indicated:
YEAR ENDED AUGUST 31, ----------------------------------------------------------------------------------------------------- 1996 1995 1994 ---------------------------- ---------------------------- ------------------------------ Loan Applications: Number processed 42,236 27,608 3,512 Number approved 20,910 15,956 1,984 Approval ratio 49.5% 57.8% 56.5% Loan Originations: Principal amount of loans: Correspondents: Title I $82,596,197 59.3% $63,792,680 72.7% $5,251,647 64.3% Conventional 11,582,108 8.3 - - - - - - - - ------------ ----- ----------- ----- ---------- ----- Total Correspondents 94,178,305 67.6 63,792,680 72.7 5,251,647 64.3 ------------ ----- ----------- ----- ---------- ----- Dealers 45,188,721 32.4 23,957,829 27.3 1,492,318 18.3 Bulk purchase - - - - 1,420,150 17.4 - - - - ------------ ----- ----------- ----- ---------- ----- Total $139,367,026 100.0% $87,750,509 100.0% $8,164,115 100.0% ============ ===== =========== ===== ========== ===== Number of loans: Correspondents: Title I 4,382 50.9% 3,437 59.1% 338 47.4% Conventional 392 4.6 - - - - - - - - ------------ ----- ----------- ----- ---------- ----- Total Correspondents 4,774 55.5 3,437 59.1 338 47.4 ------------ ----- ----------- ----- ---------- ----- Dealers 3,836 44.5 2,381 40.9 164 23.0 Bulk purchase - - - - 211 29.6 ------------ ----- ----------- ----- ---------- ----- Total 8,610 100.0% 5,818 100.0% 713 100.0% ============ ===== =========== ===== ========== ===== Average principal balance of loans $16,187 $15,083 $11,450 Weighted average interest rate on loans originated 14.03% 14.55% 14.18% Weighted average term on loans originated (months) 198 188 175
LOAN PROCESSING AND UNDERWRITING MMC's loan application and approval process generally is conducted over the telephone with applications usually received at MMC's centralized processing facility from Correspondents and Dealers by facsimile transmission. Upon receipt of an application, the information is entered into MMC's system and processing begins. All loan applications are individually analyzed by employees of MMC at its loan processing headquarters in Atlanta, Georgia. MMC has developed a proprietary credit index profile (CIP) as a statistical credit based tool to predict likely future performance of a borrower. A significant component of this customized system is the credit evaluation score methodology developed by FICO, a consulting firm specializing in creating default predictive models through a high number of variable components. The other components of the CIP include debt to income analysis, employment stability, self employment criteria, residence stability and occupancy status of the subject property. By utilizing both scoring models in tandem, all applicants are considered on the basis of their ability to repay the loan obligation while allowing MMC to maintain its risk based pricing for each loan. Based upon FICO score default predictors and MMC's internal CIP score, loans are classified by MMC into gradations of descending credit risks and quality, from "A" credits to "D" credits, with subratings within those categories. Quality is a function of both the borrowers creditworthiness and the extent of the value of the collateral, which is typically a second lien on the borrower's primary residence. "A+" credits generally have a FICO score greater than 680. An applicant with a FICO score of less than 620 would be rated a "C" credit unless the loan-to- 8 9 value ratio was 75% or less which would raise the credit risk to MMC to a "B" or better depending on the borrower's debt service capability. Depending on loan size, typical loan-to-value ratios for "A" and "B" credits range from 90% to 125%, while loan-to-value ratios for "C" and "D" credits range from 60% up to 90% with extraordinary compensating factors. MMC's underwriters review the applicant's credit history, based on the information contained in the application as well as reports available from credit reporting bureaus and MMC's CIP score, to determine the applicant's acceptability under MMC's underwriting guidelines. Based on the underwriter's approval authority level, certain exceptions to the guidelines may be made when there are compensating factors subject to approval from a corporate officer. The underwriter's decision is communicated to the Correspondent or Dealer and, if approved, fully explains the proposed loan terms. MMC endeavors to respond to the Correspondent or Dealer on the same day the application is received. MMC issues a commitment to purchase a pre-approved loan upon the receipt of a fully completed loan package. Commitments indicate loan amounts, fees, funding conditions, approval expiration dates and interest rates. Loan commitments are generally issued for periods of up to 45 days in the case of Correspondents and 90 days in the case of Dealers. Prior to disbursement of funds, all loans are carefully reviewed by funding auditors to ensure that all documentation is complete, all contingencies specified in the approval have been met and the loan is closed in accordance with Company and regulatory procedures. CONVENTIONAL LOANS MMC has implemented policies for its Conventional Loan program that are designed to minimize losses by adhering to high credit quality standards or requiring adequate loan-to-value levels. MMC will only make Conventional Loans to borrowers with an "A" or "B" credit grade using the CIP. Through August 31, 1996, MMC's portfolio of Conventional Loans originated through its Correspondent Division had been evaluated as an "A" credit risk and had a weighted average (i) FICO score of 661, (ii) gross debt to income ratio of 38%, (iii) interest rate of 14% and (iv) loan-to-value ratio of 110%, as well as an average loan amount of $28,569. Substantially all of the Conventional Loans originated to date by MMC are secured by first or second mortgage liens on single family, owner occupied properties. Terms of Conventional Loans made by MMC, as well as the maximum loan-to-value ratios and debt service to income coverage (calculated by dividing fixed monthly debt payments by gross monthly income), vary depending upon the Company's evaluation of the borrower's creditworthiness. Borrowers with lower creditworthiness generally pay higher interest rates and loan origination fees. As part of the underwriting process for Conventional Loans, MMC generally requires an appraisal of the collateral property as a condition to the commitment to purchase. MMC requires independent appraisers to be state licensed and certified. MMC requires that all appraisals be completed within the Uniform Standards of Professional Appraisal Practice as adopted by the Appraisal Standards Board of the Appraisal Foundation. Prior to originating a loan, MMC audits the appraisal for accuracy and to insure that the appraiser used sufficient care in analyzing data to avoid errors that would significantly affect the appraiser's opinion and conclusion. This audit includes a review of economic demand, physical adaptability of the real estate, neighborhood trends and the highest and best use of the real estate. In the event the audit reveals any discrepancies as to the method and technique that are necessary to produce a credible appraisal, MMC will perform additional property data research or may request a second appraisal to be performed by an independent appraiser selected by MMC in order to substantiate further the value of the subject property. MMC also requires a title report on all subject properties securing its loans to verify property ownership, lien position and the possibility of outstanding tax liens or judgments. In the case of larger loan amounts or first liens, MMC requires a full title insurance policy in compliance with the American Land Title Association. TITLE I LOANS The Title I Loans originated by MMC are executed on forms meeting FHA requirements as well as federal and state regulations. Loan applications and Installment Contracts are submitted to MMC's processing headquarters for credit verification. The information provided in loan applications is first verified by, among other things, (i) written confirmations of the applicant's income and, if necessary, bank deposits, (ii) a formal credit bureau report on 9 10 the applicant from a credit reporting agency, (iii) a title report, (iv) if necessary, a real estate appraisal and (v) if necessary, evidence of flood insurance. Appraisals for Title I Loans, when necessary, are generally prepared by pre-approved independent appraisers that meet MMC's standards for experience, education and reputation. Loan applications are also reviewed to ascertain whether or not they satisfy MMC's underwriting criteria, including loan-to-value ratios (if non-owner occupied), borrower income qualifications, employment stability, purchaser requirements and necessary insurance and property appraisal requirements. MMC will make Title I Loans to borrowers with an "A" to "C" credit grade based on CIP score and lien position. Since the implementation of the CIP scoring system in February 1996, through August 31,1996, MMC's portfolio of Title I Loans originated through its Correspondent and Dealer Divisions had been evaluated as a "C+" and "B" credit risk, respectively, and had a weighted average FICO score of 637 and 645, respectively. MMC's underwriting guidelines for Title I Loans meet FHA's underwriting criteria. Completed loan packages are sent to MMC's underwriting department for predisbursement auditing and funding. Subject to underwriting approval of an application forwarded to MMC by a Dealer, MMC issues a commitment to purchase an Installment Contract from a Dealer upon MMC's receipt of a fully completed loan package and notice from the borrower of satisfactory work completion. Subject to underwriting approval of an application forwarded to MMC by a Correspondent, MMC issues a commitment to purchase a Title I Loan upon MMC's receipt of a fully completed and closed loan package. MMC's underwriting personnel review completed loan applications to verify compliance with MMC's underwriting standards, FHA requirements and federal and state regulations. In the case of Title I Loans being acquired from Dealers, MMC conducts a prefunding telephonic interview with the property owner to determine that the improvements have been completed in accordance with the terms of the Installment Contract and to the owner's satisfaction. MMC utilizes a nationwide network of independent inspectors to perform on-site inspections of improvements within the timeframes specified by the Title I program. Since MMC does not currently originate any Title I Loans with an original principal balance in excess of $25,000, the FHA does not individually review the Title I Loans originated by MMC. QUALITY CONTROL MMC employs various quality control personnel and procedures in order to insure that loan origination standards are adhered to and regulatory compliance is maintained while substantial growth is experienced in the servicing portfolio. In accordance with MMC's policy, the quality control department reviews a statistical sample of loans closed each month. This review is generally completed within 60 days of funding and circulated to appropriate department heads and senior management. Finalized reports are maintained in MMC's files for a period of two years from completion. Typical review procedures include reverification of employment and income, re-appraisal of the subject property, obtaining separate credit reports and recalculation of debt-to-income ratios. The statistical sample is intended to cover 10% of all new loan originations with particular emphasis on new Correspondents and Dealers. Emphasis will also be placed on those loan sources where higher levels of delinquency are experienced, physical inspections reveal a higher level of non-compliance, or payment defaults occur within the first six months of funding. On occasion, the quality control department may review all loans generated from a particular loan source in the event an initial review determines a higher than normal number of exceptions. The account selection of the quality control department is also designed to include a statistical sample of loans by each underwriter and each funding auditor and thereby provide management with information as to any aberration from Company policies and procedures in the loan origination process. Under the direction of the Vice President of Credit Quality and Regulatory Compliance, a variety of review functions are accomplished. On a daily basis, a sample of recently approved loans are reviewed to insure compliance with underwriting standards. Particular attention is focused on those underwriters who have developed a higher than normal level of exceptions. In addition to this review, MMC has developed a staff of post-disbursement review auditors which reviews 100% of recently funded accounts, typically within two weeks of funding. All credit reports are analyzed, debt-to-income ratios recalculated, contingencies monitored and loan documents inspected. Exception reports are forwarded to the respective Vice Presidents of Production as well as senior management. MMC also employs a Physical Inspection Group that is responsible for monitoring the inspection of all homes 10 11 which are the subject of home improvement loans. Non-compliance is tracked by loan source and serves as another method of evaluating a loan source relationship. MMC has expended substantial amounts in developing its quality control and compliance department. MMC recognizes the need to monitor its operations continually as it experiences substantial growth. Feedback from these departments provides senior management with the information necessary to take corrective action when appropriate, including the revision and expansion of its operating policies and procedures. LOAN PRODUCTION TECHNOLOGY SYSTEMS MMC utilizes a sophisticated computerized loan origination tracking system that allows it to monitor the performance of Dealers and Correspondents and supports the marketing efforts of the Dealer and Correspondent Divisions by tracking the marketing activities of field sales personnel. The system automates various other functions such as Home Mortgage Disclosure Act and HUD reporting requirements and routine tasks such as decline letters and the flood certification process. The system also affords management access to a wide range of decision support information such as data on the approval pipeline, loan delinquencies by source, and the activities and performance of underwriters and funders. MMC uses intercompany electronic mail, as well as an electronic-mail link with its affiliate, PEC, to facilitate communications and has an electronic link to PEC that allows for the automated transfer of accounts to PEC's servicing system. MMC is enhancing this system to provide for the automation of the loan origination process as well as loan file indexing and routing. These enhancements will include electronic routing of loan application facsimile transmissions, automated credit report inquiries and consumer credit scoring along with on-screen underwriting and approval functions. Where feasible the system will interface with comparable systems of MMC's Dealers and Correspondents. MMC expects that these enhancements will (i) increase loan production efficiencies by minimizing manual processing of loan documentation, (ii) enhance the quality of loan processing by use of uniform electronic images of loan files and (iii) facilitate loan administration and collections by providing easier access to loan account information. The implementation of these enhancements is expected to be substantially completed prior to December 1996. These enhancements to improve loan production systems are expected to cost approximately $50,000 and will be funded from MMC's normal operating cash flows. LOAN SERVICING MMC's strategy has been to retain the servicing rights associated with the loans it originates. MMC's loan servicing activities include responding to borrower inquiries, processing and administering loan payments, reporting and remitting principal and interest to the whole loan purchasers who own interests in the loans and to the trustee and others with respect to securitizations, collecting delinquent loan payments, processing Title I insurance claims, conducting foreclosure proceedings and disposing of foreclosed properties and otherwise administering the loans. MMC's various loan sale and securitization agreements allocate a portion of the difference between the stated interest rate and the interest rate passed through to purchasers of its loans to servicing revenue. Servicing fees are collected by MMC out of monthly loan payments. Other sources of loan servicing revenues include late charges and miscellaneous fees. MMC uses a sophisticated computer based mortgage servicing system that it believes enables it to provide effective and efficient administering of Conventional and Title I Loans. The servicing system is an on-line real time system developed and maintained by MMC's affiliate, PEC. It provides payment processing and cashiering functions, automated payoff statements, on-line collections, statement and notice mailing along with a full range of investor reporting requirements. MMC has entered into a subservicing agreement with PEC for the use of the system and continuous support. The monthly investor reporting package includes a trial balance, accrued interest report, remittance report and delinquency reports. Formal written procedures have been established for payment processing, new loan set-up, customer service, and tax and insurance monitoring. MMC is a HUD approved lender and a FNMA approved seller/servicer. As such, it is subject to a thorough due diligence review of its policies, procedures, and business, and is qualified to underwrite, sell and service Title I Loans on behalf of the FHA and FNMA. MMC's loan collection functions are organized into two areas of operation: routine collections and management of nonperforming loans. 11 12 Routine collection personnel are responsible for collecting loan payments that are less than 60 days contractually past due and providing prompt and accurate responses to all customer inquiries and complaints. These personnel report directly to MMC's Vice President of Loan Administration. Borrowers are contacted on the due date for each of the first six payments in order to encourage continued prompt payment. Generally, after six months of seasoning, collection activity will commence if a loan payment has not been made within five days of the due date. Borrowers usually will be contacted by telephone at least once every five days and also by written correspondence before the loan becomes 60 days delinquent. With respect to loan payments that are less than 60 days late, routine collections personnel utilize a system of mailed notices and telephonic conferences for reminding borrowers of late payments and encouraging borrowers to bring their accounts current. Installment payment invoices and return envelopes are mailed to each borrower on a monthly basis. MMC has bilingual customer service personnel available. Once a loan becomes 30 days past due, a collection supervisor generally analyzes the account to determine the appropriate course of remedial action. On or about the 45th day of delinquency, the supervisor determines if the property needs immediate inspection to determine if it is occupied or vacant. Depending upon the circumstances surrounding the delinquent account, a temporary suspension of payments or a repayment plan to return the account to current status may be authorized by the Vice President of Loan Administration. In any event, it is MMC's policy to work with the delinquent customer to resolve the past due balance before Title I claim processing or legal action is initiated. Nonperforming loan management personnel are responsible for collecting severely delinquent loan payments (over 60 days late), filing Title I insurance claims or initiating legal action for foreclosure and recovery. Operating from MMC's headquarters in Atlanta, Georgia, collection personnel are responsible for collecting delinquent loan payments and seeking to mitigate losses by providing various alternatives to further actions, including modifications, special refinancing and indulgence plans. Title I insurance claim personnel are responsible for managing Title I insurance claims, utilizing a claim management system designed to track insurance claims for Title I Loans so that all required conditions precedent to claim perfection are met. In the case of Conventional Loans, a foreclosure coordinator will review all previous collection activity, evaluate the lien and equity position and obtain any additional information as necessary. The ultimate decision to foreclose, after all necessary information is obtained, is made by an officer of MMC. Foreclosure regulations and practices and the rights of the owner in default vary from state to state, but generally procedures may be initiated if: (i) the loan is 90 days (120 days under California law) or more delinquent; (ii) a notice of default on a senior lien is received; or (iii) MMC discovers circumstances indicating potential loss exposure. Net loan servicing income was $3.3 million and $873,000 for the years ended August 31, 1996 and 1995, respectively, constituting 13.4% and 6.4%, respectively, of MMC's total revenues in such periods. As of August 31, 1996, MMC had increased the size of the loan portfolio it services to approximately $214.2 million from approximately $92.3 million as of August 31, 1995, an increase of approximately $121.9 million or 132.1%. MMC's loan servicing portfolio is subject to reduction by normal amortization, prepayment of outstanding loans and defaults. The following table sets forth certain information regarding MMC's loan servicing for the periods indicated (thousands of dollars):
YEAR ENDED AUGUST 31, ------------------------------------------------ 1996 1995 1994 (1) -------------- -------------- -------------- Servicing portfolio at beginning of year $92,286 $8,026 $- Additions to servicing portfolio 139,367 87,751 8,164 Reductions in servicing portfolio (2) (17,464) (3,491) (138) -------------- -------------- -------------- Servicing portfolio at end of year $214,189 $92,286 $8,026 ============== ============== ============== Servicing portfolio (end of year): Company-owned loans $4,698 $3,720 $1,471 Sold loans 209,491 88,566 6,555 -------------- -------------- -------------- Total $214,189 $92,286 $8,026 ============== ============== ==============
- ------------------ (1) MMC commenced its Title I lending operations in March 1994. (2) Reductions result from scheduled payments, prepayments and write-offs during the period. 12 13 The following table sets forth the delinquency and Title I insurance claims experience of loans serviced by MMC as of the dates indicated (thousands of dollars):
YEAR ENDED AUGUST 31, ------------------------------------------------ 1996 1995 1994 (1) -------------- -------------- -------------- Delinquency period (2) 31-60 days past due 2.17% 2.58% 2.06% 61-90 days past due 0.85 0.73 0.48 91 days and over past due 4.53 (3) 0.99 0.36 91 days and over past due, net of claims filed (4) 1.94 0.61 0.26 Claims filed with HUD (5) 2.59 0.38 0.10 Number of Title I insurance claims 255 23 1 Total servicing portfolio at end of period $214,189 $92,286 $8,026 Amount of FHA insurance available (6) $21,205 $9,552 $813 Amount of FHA insurance available as a percentage of loans serviced (end of year) 9.90% (6) 10.35% 10.13% Losses on liquidated loans (7) $ 32 $16.8 $-
___________________________________________ (1) MMC commenced originating loans in March 1994. (2) Represents the dollar amount of delinquent loans as a percentage of total dollar amount of loans serviced by MMC (including loans owned by MMC) as of the date indicated. (3) During the year ended August 31, 1996, the processing and payment of claims filed with HUD was delayed. (4) Represents the dollar amount of delinquent loans net of delinquent Title I Loans for which claims have been filed with HUD and payment is pending as a percentage of total dollar amount of loans serviced by MMC (including loans owned by MMC) as of the date indicated. (5) Represents the dollar amount of delinquent Title I Loans for which claims have been filed with HUD and payment is pending as a percentage of total dollar amount of loans serviced by MMC (including loans owned by MMC) as of the date indicated. (6) If all claims with HUD had been processed as of period end, the amount of FHA insurance available would have been reduced to $16,215,000, which as a percentage of loans serviced would have been 7.8%. (7) A loss is recognized upon receipt of payment of a claim or final rejection thereof. Claims paid in a period may relate to a claim filed in an earlier period. Since MMC commenced its Title I lending operations in March 1994, there has been no final rejection of a claim by the FHA. Aggregate losses on liquidated Title I Loans related to 83 of the 338 Title I insurance claims made by MMC since commencing operations through August 31, 1996. Losses on liquidated loans will increase as the balance of the claims are processed by HUD. MMC has received an average payment from HUD equal to 90% of the outstanding principal balance of such Title I Loans, plus appropriate interest and costs. MMC has received an average amount equal to 96.9% of the outstanding principal balance of Title I Loans for which claims have been made, each payment including certain interest and costs. The processing and payment of claims filed with HUD have been delayed for a number of reasons including (i) furloughs experienced by HUD personnel in December 1995 and January 1996, (ii) the growth in the volume of Title I Loans originated from approximately $750 million in 1994 to $1.3 billion in 1995 without a corresponding increase in HUD personnel to service claims and (iii) the transition of processing operations to regional centers during the second and third quarters of 1996. It is expected that once appropriate staffing and training have been completed at HUD regional centers, the timeframe for payment of HUD claims will be significantly shortened. 13 14 SALE OF LOANS MMC customarily sells the loans it originates to third party purchasers or, in the case of a third party purchaser not eligible to own a Title I Loan, sells Title I Loan participation certificates backed by Title I Loans. Whether MMC sells a loan or a loan participation, MMC typically retains the right to service the loans for a servicing fee. MMC typically sells loans for an amount approximating the then remaining principal balance. The purchasers are entitled to receive interest at yields below the stated interest rates of the loans. In connection with such sales, MMC is typically required to deposit into a reserve account the excess servicing spread received by it, less its servicing fee, up to a specified percentage of the principal balance of the loans, to fund shortfalls in collections that may result from borrower defaults. To date, the purchasers in whole loan sales have been two banks and another financial institution The following table sets forth certain data regarding Title I Loans sold by MMC during the periods indicated (thousands of dollars):
YEAR ENDED AUGUST 31, ------------------------------------------------ 1996 1995 1994 (1) -------------- -------------- -------------- Principal amount of loans sold to third party purchasers $137,908 (2) $85,363 $6,555 Gain on sales of loans to third party purchasers 17,994 12,233 579 Net unrealized gain on mortgage related securities 2,697 - - Weighted average stated interest rate on loans sold to third party purchasers 14.09% 14.53% 14.15% Weighted average pass-through interest rate on loans sold to third party purchasers 7.50% 8.36% 8.54% Weighted average excess spread retained on loans sold 6.59% 6.17% 5.61%
___________________________________________________________ (1) MMC commenced originating loans in March 1994. (2) Includes $10.5 million of Conventional Loans. At August 31, 1996 and 1995, MMC's Statement of Financial Condition reflected excess servicing rights of approximately $12.1 million and $14.5 million, respectively. MMC also retains mortgage related securities through securitization transactions. At August 31, 1996, MMC's Statement of Financial Condition reflected $22.9 million of mortgage related securities. MMC derives a significant portion of its income by realizing gains upon the sale of loans and loan participations due to the excess servicing rights associated with such loans. Excess servicing rights represent the excess of the interest rate payable by a borrower on a loan over the interest rate passed through to the purchaser of an interest in the loan, less MMC's normal servicing fee and other applicable recurring fees. Mortgage related securities consist of certificates representing the excess of the interest rate payable by an obligor on a sold loan over the yield on pass-through certificates sold pursuant to a securitization transaction, after payment of servicing and other fees. When loans are sold, MMC recognizes as current revenue the present value of the excess servicing rights expected to be realized over the anticipated average life of the loans sold less future estimated credit losses relating to the loans sold. The capitalized excess servicing rights and valuation of mortgage related securities are computed using prepayment, default and interest rate assumptions that MMC believes are reasonable based on experience with its own portfolio, available market data and ongoing consultation with industry participants. The amount of revenue recognized by the Company upon the sale of loans or loan participations will vary depending on the assumptions utilized. The weighted average discount rate used to determine the present value of the balance of capitalized excess servicing rights reflected on MMC's Statement of Financial Condition at August 31, 1996 and 1995 was approximately 12%. Capitalized excess servicing rights are amortized over the lesser of the estimated or actual remaining life of the underlying loans as an offset against the excess servicing rights component of servicing income actually received in connection with such loans. Although MMC believes that it has made reasonable estimates of the excess servicing rights likely to be realized, the rate of prepayment and the amount of defaults utilized by MMC are estimates and experience may vary from its estimates. The gain recognized by the Company upon the sale of loans will have been overstated if prepayments or defaults are greater than anticipated. Higher levels of future prepayments would result in capitalized excess servicing rights amortization expense exceeding realized excess servicing rights, thereby adversely affecting MMC's servicing income and resulting in a charge to earnings in the 14 15 period of adjustment. Similarly, if delinquencies or liquidations were to be greater than was initially assumed, capitalized excess servicing rights amortization would occur more quickly than originally anticipated, which would have an adverse effect on servicing income in the period of such adjustment. MMC periodically reviews its prepayment assumptions in relation to current rates of prepayment and, if necessary, reduces the remaining asset to the net present value of the estimated remaining future excess servicing income. Rapid increases in interest rates or competitive pressures may result in a reduction of future excess servicing income, thereby reducing the gains recognized by MMC upon the sale of loans or loan participations in the future. At August 31, 1996 and 1995, MMC's Statement of Financial Condition reflected mortgage servicing rights of approximately $3.8 million and $1.1 million, respectively. The fair value of capitalized mortgage servicing rights was estimated by taking the present value of expected net cash flows from mortgage servicing using assumptions MMC believes market participants would use in their estimates of future servicing income and expense, including assumptions about prepayment, default and interest rates. Capitalized mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income. The estimate of fair value was based on a range of 100 to 125 basis points per year servicing fee, reduced by estimated costs of servicing, and using a discount rate of 12% in the years ended August 31, 1996 and 1995. MMC has developed its assumptions based on experience with its own portfolio, available market data and ongoing consultation with industry participants. In furtherance of MMC's strategy to sell loans through securitizations, in March 1996 and August 1996, MMC completed its first two securitizations pursuant to which it sold pools of $84.2 million and $48.8 million, respectively, of Title I Loans. MMC previously reacquired at par $77.7 million and $36.2 million of such loans, respectively. Pursuant to these securitizations, pass-through certificates evidencing interests in the pools of loans were sold in a public offering. MMC continues to subservice the sold loans and is entitled to receive from payments in respect of interest on the sold loans, a servicing fee equal to 1.25% of the balance of each loan with respect to the March transaction and 1% with respect to the August transaction. In addition, with respect to both transactions, MMC received certificates (carried as mortgage related securities on MMC's statements of financial condition), representing the interest differential, after payment of servicing and other fees, between the interest paid by the obligors of the sold loans and the yield on the sold certificates. MMC may be required to repurchase loans that do not conform to the representations and warranties made by MMC in the securitization agreements. MMC typically earns net interest income during the "warehouse" period between the closing or assignment of a loan and its delivery to a purchaser. On loans held for sale, MMC earns interest at long-term rates, financed by lines of credit which bear interest at short-term interest rates. Normally, short-term interest rates are lower than long-term interest rates and MMC earns a positive spread on its loans held for sale. The average warehouse period for a loan ranges from 6 to 90 days, and the balance of loans in warehouse was approximately $4.6 million and $3.7 million as of August 31, 1996 and 1995, respectively. MMC's interest income, net of interest expense was $988,000 and $473,000 for the years ended August 31, 1996 and 1995, respectively. INTEREST RATE RISKS Changes in interest rates affect MMC's business in a variety of ways, including decreased demand for loans during periods of higher interest rates, fluctuations in profits derived from the difference between short-term and long-term interest rates and increases in prepayment rates during periods of lower interest rates. The profits realized by MMC from home improvement loans are, in part, a function of the difference between fixed long-term interest rates, at which MMC originates its home improvement loans, and adjustable short-term interest rates, at which MMC finances such loans until the closing of the sale of such loans. Generally, short-term rates are lower than long-term rates and MMC benefits from the positive interest rate differentials during the time the loans are held by MMC pending the closing of the sale of such loans. During the period from 1994 through the present, the interest rate differential was high and this fact contributed significantly to MMC's net interest income. The interest rate differential may not continue at such favorable levels in the future. Changes in interest rates during the period between the time an interest rate is established on a loan and the time such loan is sold affect the revenues realized by MMC from loans. In connection with the origination of loans, MMC issues loan commitments for periods of up to 45 days in the case of Correspondents and 90 days in the case of Dealers. Furthermore, the period of time between the closing on a loan and the sale of such loan generally ranges from 10 to 90 days. Increases in interest rates during these periods will result in lower gains (or even losses) on sales of loans than would be recorded if interest rates had remained stable or had declined. Changes in interest rates after 15 16 the sale of loans also affect the profits realized by MMC with respect to loan sale transactions in which the yield to the purchaser is based on an adjustable rate. During the years ended August 31, 1996 and 1995, MMC sold loans under an agreement which provides for the yield to the purchaser to be adjusted monthly to a rate equal to 200 basis points over the one-month London Interbank Offered Rate (LIBOR). An increase in LIBOR would result in a decrease in MMC's future income from such sold loans resulting in a charge to earnings in the period of adjustment. Interest rate levels also affect MMC's excess servicing spread. MMC generally retains the servicing rights to the loans it sells. The yield to the purchaser is generally lower than the average stated interest rates on the loans, as a result of which MMC earns an excess servicing spread on the loans it sells. Increases in interest rates or competitive pressures may result in reduced servicing spreads, thereby reducing or eliminating the gains recognized by MMC upon the sale of loans in the future. SEASONALITY Home improvement loan volume tracks the seasonality of home improvement contract work. Volume tends to build during the spring and early summer months, particularly with regard to pool installations. A decline is typically experienced in late summer and early fall until temperatures begin to drop. This change in seasons precipitates the need for new siding, window and insulation contracts. Peak volume is experienced in November and early December and declines dramatically from the holiday season through the winter months. Debt consolidation and home equity loan volume are not impacted by seasonal climate changes and, with the exclusion of the holiday season, tend to be stable throughout the year. 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; and Indian Shores near St. Petersburg, Florida; as well as land in Nevada and Colorado. PEC recently acquired properties in Orlando, Florida; Steamboat Springs, Colorado; and Las Vegas, Nevada to be converted and sold as timeshare interests. In recent years, several major lodging, hospitality and entertainment companies, including The Walt Disney Company, Hilton Hotels Corporation, Marriott Ownership Resorts, Inc. and Hyatt Corporation, among others, have commenced developing and marketing timeshare interests in 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. In order to enhance its competitive position, in April 1995 PEC entered into a strategic alliance with Hospitality Franchise Systems, Inc. (HFS) 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 estimates that approximately 1.65 million families in the United States own timeshare interests in resorts worldwide and that sales of timeshare interests in the United States aggregated approximately $1.8 billion in 1994. TIMESHARE PROPERTIES AND SALES PEC acquires, develops and converts rental and condominium apartment buildings and hotels for sale as timeshare interests. PEC's strategy is to acquire properties in desirable destination resort areas that offer a range of recreational activities and amenities. The timeshare interests offered by PEC in its resorts other than in Hawaii generally consist of undivided fee interests in the land and facilities comprising the property or an undivided fee interest in a particular unit, pursuant to which the owner acquires the perpetual right to weekly occupancy of a residence unit each year. In its resort in Hawaii, PEC offers "right-to-use" interests, pursuant to which the owner has occupancy rights for one week each year until December 31, 2009, the last full year of the underlying land lease for the resort property. During fiscal 1996, 1995, and 1994, PEC sold 6,982, 5,365, and 5,441 timeshare interests, respectively, at prices ranging from $3,950 to $23,950. In order to enhance its competitive position, 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. 16 17 The Company believes that this affiliation will enable it to capitalize on the Ramada reputation, name recognition and customer profile, which closely matches PEC's customer profile. The arrangement provides for the payment by PEC of an initial access fee of $1 million, which has been paid, and monthly recurring fees equal to 1% of PEC's Gross Sales (as defined) each month through January 1996 and 1.5% of PEC's Gross Sales each month commencing in February 1996. The initial term of the arrangement is 5 years and PEC has the option to renew the arrangement for an additional term of 5 years, if PEC has met certain conditions, including the addition of at least 20,000 timeshare interests during the initial term and the payment of minimum annual fees. In addition to the grant of the license, the arrangement provides for the establishment of joint marketing programs. PEC currently operates timeshare resorts in Las Vegas and Reno, Nevada; Honolulu, Hawaii; Brigantine, New Jersey; Steamboat Springs, Colorado; and Indian Shores, Florida; and recently purchased an additional property in Orlando, Florida and Steamboat Springs, Colorado. PEC is considering the purchase of additional properties for use in its timeshare operations. PEC's Ramada Vacation Suites at Las Vegas, formerly known as The Grand Flamingo Club, includes 30 buildings with a total of 429 studio units and 1 and 2 bedroom units which have been converted for sale as 21,879 timeshare interests, of which 4,212 remained available for sale as of August 31, 1996. The resort is in close proximity to the strip in Las Vegas and features swimming pools and other amenities. PEC is in the process of converting additional adjacent properties it owns. PEC has recently completed the expansion of the common areas to include an expanded lobby, convenience store and expanded sales facilities. At August 31, 1996, a total of 5 buildings containing 64 units were under conversion to timeshare interests. The Ramada Vacation Suites at Reno, formerly known as the Reno Spa Resort, consists of a 95-unit hotel that has been converted for sale as 4,845 timeshare interests, of which 626 remained available for sale as of August 31, 1996. The resort features an indoor swimming pool, exercise facilities, sauna, jacuzzi and sundeck. PEC's White Sands Waikiki is an 80-unit hotel consisting of three buildings that have been converted for sale as 4,160 timeshare interests, of which 467 remained available for sale as of August 31, 1996. The hotel is currently being renamed Ramada Vacation Suites at Honolulu. The resort is within walking distance of a public beach and features a swimming pool and jacuzzi. PEC holds the buildings, equipment and furnishings under a land lease expiring in March 2010, under which PEC makes annual rental payments of approximately $192,000. The Ramada Vacation Suites on Brigantine Beach consists of a 91-unit hotel and a 17-unit three story building, formerly known as the Brigantine Inn and the Brigantine Villas, respectively, that have been converted for sale as 5,508 timeshare interests, of which 519 remained available for sale as of August 31, 1996. The resort is situated on beachfront property in close proximity to Atlantic City, New Jersey and features an enclosed swimming pool, cocktail lounge, bar and restaurant. The Ramada Vacation Suites at Steamboat Springs consists of 60 one and two bedroom units, which have been converted for sale as 3,060 timeshare interests. Of these, 1,813 remained available for sale as of August 31, 1996. PEC acquired this condominium resort in 1994 and completed the conversion in 1995. PEC has constructed a 5,500-square foot amenities building at this facility which features a lobby, front desk, spa and sauna. The Ramada Vacation Suites at Indian Shores, formerly known as the Aloha Bay Apartments, consists of a two building complex, that has been recently converted into a total of 32 one and two bedroom units to be sold as 1,632 timeshare interests. The Resort is located on the intercoastal waterway and is in close proximity to Tampa, Florida. The timeshare interests became available for sale upon completion of improvements and registration with the state of Florida, which occurred in September, 1996. The Ramada Vacation Suites of Orlando, formerly known as Ramada Suites at Tango Bay, consists of a 7 building complex, that upon conversion will consist of a total of 102 units to be sold as 5,202 timeshare interests. The resort is in Orlando, Florida. The timeshare interests will be available for sale upon completion of the first phase of improvements and registration with the state of Florida, which is expected to be completed by the summer of 1997. The Ramada Vacation Suites - Hilltop, formerly known as The Overlook Lodge, is a 117-room complex complete with indoor swimming pool, restaurant, cocktail lounge and meeting room facilities. Upon conversion, the complex will consist of 56 one and two-bedroom units to be sold as 2,856 timeshare interests. The resort is located in Steamboat Springs, Colorado, in close proximity to the area's ski slopes and attractions. The timeshare interests will be 17 18 available for sale upon completion of improvements and registration with the state of Colorado, which is expected to be completed by the fall of 1997. The following table set forth certain information regarding the timeshare interests at the Company's resort properties:
STEAMBOAT LAS VEGAS RENO WAIKIKI BRIGANTINE SPRINGS TOTAL --------- ---------- ------- ---------- --------- ------- Maximum number of timeshare interests 21,879 4,845 4,160 5,508 3,060 39,452 Net number of timeshare interests sold through August 31, 1996 17,667 4,219 3,693 4,989(1) 1,247 31,815 Number of timeshare interests available for sale at August 31, 1996 4,212 626 467 519 1,813 7,637 Percent sold through August 31, 1996 81% 87% 89% 91% 41% 81% Number of timeshare interests sold during the year ended August 31, 1996 4,068 585 648 90 1,591 6,982 Number of timeshare interests reacquired during the year ended August 31, 1996 through: Contract cancellations 694 213 122 89 98 1,216 Exchanges 2,003 391 350 81 480 3,305 Acquired for unpaid maintenance fees 173 44 160 27 - 404 --------- --------- --------- --------- --------- --------- Total number of timeshare interests reacquired 2,870 648 632 197 578 4,925 --------- --------- --------- --------- --------- --------- Net number of timeshare interests sold (reacquired) during the year ended August 31, 1996 1,198 (63) 16 (107) 1,013 2,057 Additional timeshare interests under development (2) 3,624 - - - - - Sales prices of timeshare interests available at August 31, 1996 range From $ 6,150 6,250 3,950 5,150 6,950 N/A To $ 15,000 9,850 5,950 15,450 23,950 N/A
- --------------------------------- (1) 4,823 timeshare interests were sold by the prior developer. (2) PEC recently purchased additional units to be converted to timeshare interests, and are not included above. In Nevada, the addition was 64 units to be converted into 3,264 timeshare interests. In Florida, the addition was 134 units to be converted into 6,834 timeshare interests. In Colorado, the addition was 56 units to be converted into 2,856 timeshare interests. 18 19 For the fiscal years ended August 31, 1996, 1995, and 1994 PEC's consolidated revenue from sales of timeshare interests was $27.8 million, $20.7 million and $19.5 million, respectively, representing approximately 47.5%, 37.7% and 43.1% of total revenues, respectively. RCI EXCHANGE NETWORK The attractiveness of timeshare interest ownership in resorts is enhanced significantly by the availability of exchange networks allowing owners to exchange their occupancy right in the resort in which they own an interest for an occupancy right in another participating network resort. Several companies, including Resorts Condominiums International (RCI), provide broad based timeshare interest exchange networks, and PEC has qualified its resort properties for participation in the RCI network. RCI has a total of more than 2,983 participating resort facilities located worldwide. Approximately 41.8% of the participating facilities are located in the United States and Canada. The cost of the annual subscription renewal fee in RCI, which is at the option and expense of PEC's customers, is approximately $67 per year. Membership in RCI entitles PEC's customers, based upon availability, trading power and the payment of a variable exchange fee to RCI, to exchange their occupancy right in the resort in which they own an interest for an occupancy right at the same or a different time in another participating resort of equal trading power. 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 (Associations). Owners of timeshare interests in each of these resorts are responsible for the payment of annual assessment fees to the respective Association, which are intended to fund all of the operating expenses at the resort facilities and accumulate reserves for replacement of furnishings, fixtures and equipment, and building maintenance. Annual assessment fees for 1996 ranged from $258 to $445. PEC has in the past financed budget deficits of the Associations, but is not obligated to do so in the future. If the owner of a timeshare interest defaults in the payments of the annual assessment fee, the Association may impose a lien on the related timeshare interest. PEC has agreed to pay to the Associations the annual assessment fees of timeshare interest owners who are delinquent with respect to such fees, but have paid PEC in full for their timeshare interest. In exchange for the payment by PEC of such fees, the Associations assign their liens for non-payment on the respective timeshare interests to PEC. In the event the timeshare interest holder does not satisfy the lien after having an opportunity to do so, PEC typically acquires a quitclaim deed or forecloses on and acquires the timeshare interest for the amount of the lien and any foreclosure costs. PEC has entered into management arrangements with the Associations pursuant to which PEC receives annual management and administrative fees in exchange for providing or arranging for various property management services, such as bookkeeping, staffing, budgeting, maintenance, and housekeeping services. The management arrangements are typically for initial terms ranging from three to five years, and automatically renew for successive additional one year terms unless canceled by the Association. No management arrangement has been canceled to date. The Company believes that proper management is important for maintaining customer satisfaction and protecting PEC's investment in its inventory of unsold timeshare interests. LAND SALES PEC is engaged in the retail sale of land in Nevada and Colorado for residential, commercial, industrial and recreational use. PEC acquires lots and large tracts of unimproved land and then subdivides the land into lots and parcels for retail sale. Residential lots range in size from one-quarter acre to one and one-half acres, while commercial and industrial lots vary in size. PEC's residential lots range in price from $11,500 to $46,500, commercial lots range in price from $17,000 to $76,500 and industrial lots range in price from $16,750 to $45,750. Improvements such as roads and utilities and, in some cases, amenities are typically part of the development program in Nevada. During fiscal 1996, 1995 and 1994, PEC sold 1,617, 1,467 and 1,699 residential lots, and 30, 51 and 61 commercial and industrial lots, respectively. PEC has a continuing program to plat the properties that it owns. Purchasers of lots and parcels frequently exchange their property after the initial purchase for other property interests offered by PEC. Additionally, 19 20 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 and pursuant to contractual provisions. A substantial portion of PEC's sales of retail lots and land parcels have been in its Calvada subdivisions, containing approximately 30,000 lots in the Pahrump Valley, Nye County, Nevada, located approximately 60 miles from Las Vegas. The lots are designated single family residential, multiple family residential, mobile home, hotel/motel, industrial or commercial. PEC owns a public utility company that provides water and sewer service to portions of the subdivisions and two golf courses that are available to property owners and the public. The community of Pahrump has a population estimated at approximately 23,000 and contains an urgent care medical facility, shopping, fast food restaurants, hotel/casino facilities and several schools. The following table illustrates certain statistics regarding the Pahrump Valley subdivisions: Number of acres acquired since 1969 18,614 Number of lots platted 29,246 Net number of lots sold through August 31, 1996 28,970 Percent of lots sold through August 31, 1996 99% Number of platted lots available for sale at August 31, 1996 305 Number of acres available for platting 205 Number of lots to be platted 581 FOR THE YEAR ENDED AUGUST 31, 1996: ----------------------------------- Number of lots sold 1,648 Number of lots canceled 452 Number of lots exchanged 710 --------- Number of lots sold, net of cancellations and exchanges 486 =========
Central Nevada Utilities Company, a wholly-owned subsidiary of PEC, operates a public sewer and water utility for portions of PEC's Nevada subdivisions and certain other properties located within that subsidiary's certificated service area (which is subject to the regulation of the Nevada Public Service Commission). PEC also sells larger unimproved tracts of land in Colorado. PEC has acquired unimproved land in Huerfano County, Colorado, which is being sold for recreational use in parcels of at least 35 acres and at prices ranging from $11,000 to $42,750 depending on location and size. These parcels are sold without any planned improvements and without water rights, which have been reserved by PEC. Substantially all of the parcels have been sold, with approximately 120 parcels remaining in inventory. PEC has also acquired improved and unimproved land in Park County, Colorado, which is being sold for recreational use in parcels typically ranging in size from five to nine acres or larger and at prices ranging from $12,000 to $29,995. These parcels are sold without any planned improvements, except for a recreational facility which includes a basketball court, baseball field and picnic facilities. 20 21 The following table illustrates certain statistics regarding the parcels in Huerfano and Park Counties, Colorado: Number of acres acquired since 1969 51,474 Number of parcels platted 2,952 Net number of parcels sold through August 31, 1996 2,718 Percent of parcels sold through August 31, 1996 92% Number of platted parcels available for sale at August 31, 1996 234 FOR THE YEAR ENDED AUGUST 31, 1996: ----------------------------------- Number of parcels sold 870 Number of parcels canceled 276 Number of parcels exchanged 454 --------- Number of lots sold, net of cancellations and exchanges 140 =========
For the fiscal years ended August 31, 1996, 1995 and 1994, PEC's net revenue from land sales was approximately $18 million, $20.8 million and $13.5 million, respectively, representing approximately 30.7%, 38% and 29.9% of total revenues, respectively. TRUST ARRANGEMENTS Title to certain of PEC's resort properties and land parcels in Huerfano County, Colorado is held in trust by trustees in order to meet regulatory requirements applicable at the time of commencement of sales. Trustees administer the collection of certain of PEC's notes receivable, collect the proceeds generated by the sale of timeshare interests and the annual assessment fees from timeshare interest owners and retain funds for the payment of insurance, taxes and capital improvements. The trustee pays the balance of the collections on timeshare projects over to PEC on a regular basis, after deducting certain impounds, provided that annual assessment fees have been disbursed by PEC according to a budget submitted by PEC. Under the trust and management agreements, PEC has the exclusive rights to the control and management of the facilities held in trust. CUSTOMER FINANCING PEC provides financing to virtually all the purchasers of its timeshare interests, retail lots and land parcels, most of whom 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. The term of the financing generally ranges from two to ten years with principal and interest payable monthly in level payments. Interest rates are fixed and generally range from 0% to 16% 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 no stated interest is charged on those sales where the aggregate down payment is at least 50% of the purchase price and the balance is payable in 24 or fewer monthly payments. PEC believes its financing is attractive to purchasers who find it convenient to handle all facets of the purchase through a single source. At August 31, 1996, PEC had a serviced portfolio of 18,408 notes receivable relating to sales of timeshare interests and land, which receivables had an aggregate outstanding principal balance of $120.5 million, a weighted average maturity of approximately 6.6 years and a weighted average interest rate of 11.5%. PEC has financing arrangements with four institutional lenders for the financing of customer receivables, which provide for borrowings of up to an aggregate of $109.5 million. These lines of credit bear interest at variable rates tied to the prime rate and are secured by timeshare and land receivables and inventory. At August 31, 1996, an aggregate of $59.3 million was outstanding under such lines of credit and $43.2 million was available for borrowing. PEC periodically sells its timeshare and land receivables to various third party purchasers and uses a portion of the sales proceeds to reduce the outstanding balances of its lines of credit, thereby increasing the borrowing availability under such lines by the amount of prepayment. The sales have been for yields to the purchaser less than the weighted average yield on the receivables, with PEC entitled to retain the difference. The sales agreements generally provide for PEC to continue servicing the sold receivables, and require that PEC repurchase or replace accounts that have become more than 90 days contractually delinquent, or as to which certain warranties and representations are determined to be 21 22 incorrect. In addition, the sales agreements generally require the maintenance of cash reserve accounts for losses and contain minimum net worth requirements and other covenants, the non-compliance with which would allow the purchaser to replace PEC as the servicer. The sales agreements for timeshare receivables contain covenants that generally require PEC to use its best efforts to remain the manager of the related resorts, and to cause the homeowners associations to maintain appropriate insurance and pay real estate taxes. Performance by PEC of such covenants generally are guaranteed by the Company. The following table sets forth the principal balances of receivables sold by PEC in the periods indicated (thousands of dollars):
YEAR ENDED AUGUST 31, ------------------------------------------------------- 1996 1995 1994 -------------- -------------- -------------- $16,003 $32,517 $23,993
At August 31, 1996, PEC was contingently liable to replace or repurchase receivables sold with recourse in the aggregate amount of $69.6 million, if and as such receivables become delinquent. PEC generally writes off or fully reserves all receivables that are more than 90 days delinquent. The following table sets forth information with respect to receivables owned and sold that were more than 60 but less than 90 days delinquent as of the dates indicated (thousands of dollars):
AUGUST 31, -------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------ ------------- ------------ ------------ ------------- 60-day delinquent $2,547 $2,330 $2,144 $2,930 $3,749 Total receivables $128,299 $120,675 $109,360 $103,280 $101,234 60-day delinquency percentage 1.99% 1.93% 1.96% 2.84% 3.70%
PEC provides an allowance for cancellation at the time it recognizes revenues from sales of timeshare interests, which PEC believes, based on its experience and its analysis of economic conditions, will be 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 future estimated contingency for notes receivables 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 of 339 persons receive 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 principal offices, and at its land projects in Nevada and Colorado. At its other timeshare properties, PEC maintains smaller on-site sales offices staffed with one to two sales persons. PEC also maintains off-site sales offices in West Covina, California; San Diego, California; Dallas, Texas; and Denver, Colorado. PEC is exploring additional locations for off-site sales offices. PEC's marketing efforts are targeted primarily at tourists meeting its customer profile. Currently, approximately 63% of sales are made through the Las Vegas sales office. One of the principal sales techniques utilized by PEC in Las Vegas is to offer pre- screened potential customers a gift such as show tickets in exchange for attending PEC's sales presentations. The marketing techniques utilized at PEC's sales offices at locations other than Las Vegas include (i) exhibition booths located at shows, fairs and other attractions, that generate inquiries from prospective customers, whom PEC then contacts by telephone, (ii) referrals from existing customers, (iii) limited direct mail programs, and (iv) brokers specializing in lead generation. Various premiums and inducements are offered to prospective customers to obtain their attendance at sales presentations, primarily the offer of short term accommodations at certain of PEC's timeshare resorts. As part of its marketing strategy, PEC maintains an internal exchange program. This program enables owners of PEC's timeshare interests to exchange their occupancy right in the resort in which they own an interest for an occupancy right at the same or a different time in another of PEC's timeshare resorts. In addition, PEC has a sales program pursuant to which purchasers of its timeshare interests, retail lots and land may exchange their equity interests in one property for an interest in another of PEC's properties. For example, a purchaser of a timeshare interest in one of PEC's timeshare resorts may exchange his equity interest for an interest in a different unit within the same resort, for an 22 23 interest in one of PEC's other resorts or for a retail lot or land parcel. The agreement of sale for a timeshare interest or land may be rescinded within various statutory rescission periods. For land sales made at a location other than the property, the customer may generally cancel the contract within a specified period, usually five months from the date of purchase, provided that the contract is not in default, and provided the customer has completed a developer guided inspection and tour of the subject property first, and then requests the cancellation. At August 31, 1996, $131,975 of recognized sales remained subject to such cancellation. If a customer defaults after all rescission and cancellation periods have expired, all payments are generally retained by PEC, and the customer forfeits all rights to the property. COMPETITION The consumer finance, timeshare and real estate industries are highly competitive. Competitors in the home improvement and debt consolidation loan business include mortgage banking companies, commercial banks, credit unions, thrift institutions, credit card issuers and finance companies. 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. MMC faces substantial competition within both the home improvement and debt consolidation loan industry. The home improvement and debt consolidation loan industry is dominated by widely diversified mortgage banking companies, commercial banks, savings and loan institutions, credit card companies, financial service affiliates of dealers and unregulated financial service companies, many of which have substantially greater personnel and financial resources than those of MMC. At present, these types of competitors dominate the home improvement and debt consolidation loan industry; however, no one lender or group of lenders dominates the industry. According to a report issued by HUD, MMC was the fourth largest lender of Title I Loans, based on volume of loans originated, for the quarter ended June 30, 1996. Due to the variance in the estimates of the size of the conventional home improvement loan market, MMC is unable to accurately estimate its competitive position in that market. MMC believes that Greentree Financial Corp., The Money Store, First Plus Financial Inc., Associates First Capital Corporation and Empire Funding Corp. are some of its largest direct competitors. MMC competes principally by providing prompt, professional service to its Correspondents and Dealers and, depending on circumstances, by providing competitive lending rates. Competition can take many forms including convenience in obtaining a loan, customer service, marketing and distribution channels, amount and term of the loan, and interest rates. In addition, the current level of gains realized by MMC and its existing competitors on the sale of loans could attract additional competitors into this market with the possible effect of lowering gains on future loan sales owing to increased loan origination competition. PEC's timeshare plans compete directly with many other timeshare plans, some of which are in facilities located in Las Vegas, Reno, Lake Tahoe, Honolulu, Atlantic City, Orlando, Tampa, and Steamboat Springs. In recent years, several major lodging, hospitality and entertainment companies have begun to develop and market timeshare properties. In addition, PEC competes with condominium projects and with traditional hotel accommodations in these areas. Certain of these competing projects and accommodations are larger and more luxurious than PEC's facilities. There are currently available approximately 95,000 hotel and motel rooms in Las Vegas, Nevada, 36,000 in Honolulu, Hawaii, 20,600 in Washoe County, Nevada, which includes Reno and Lake Tahoe, 23,400 in Atlantic City, New Jersey and 1,366 in Steamboat Springs, Colorado. 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 23 24 properly remediate such property, may adversely affect the owner's ability to sell or rent such property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances also may be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not the facility is owned or operated by such person. In addition, the owner or former owners of a site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site. GOVERNMENT REGULATION The Company's consumer finance, timeshare and real estate operations are subject to extensive regulation, suspension and licensing by federal and state authorities. The following is a summary of the regulations applicable to the Company. MMC's consumer lending activities are subject to the Federal Truth-in-Lending Act and Regulation Z (including the Home Ownership and Equity Protection Act of 1994), ECOA, the Fair Credit Reporting Act of 1970, as amended, RESPA and Regulation X, the Home Mortgage Disclosure Act, the Federal Debt Collection Practices Act and the Housing Act, as well as other federal and state statutes and regulations affecting MMC's activities. Failure to comply with these requirements can lead to loss of approved status, termination or suspension of servicing contracts without compensation to the servicer, demands for indemnifications or mortgage loan repurchases, certain rights of rescission for mortgage loans, class action lawsuits and administrative enforcements actions. TITLE I LOAN AND CONSUMER FINANCING MMC presently is subject to the rules and regulations of, and examinations by, HUD, FHA and other federal and state regulatory authorities with respect to originating, underwriting, funding, acquiring, selling and servicing consumer and mortgage loans. In addition, there are other federal and state statutes and regulations affecting such activities. These rules and regulations, among other things, impose licensing obligations on the Company, establish eligibility criteria for loans, prohibit discrimination, provide for inspection and appraisals of properties, require credit reports on prospective borrowers, regulate payment features and, in some cases, fix maximum interest rates, fees and loan amounts. MMC is required to submit annual audited financial statements to various governmental regulatory agencies that require the maintenance of specified net worth levels. MMC's affairs are also subject to examination, at all times, by the Federal Housing Commissioner to assure compliance with FHA regulations, policies and procedures. For more information regarding regulation of MMC under Title I, see "Title I Loan Program." MMC is a HUD approved Title I mortgage lender and is subject to the supervision of HUD. MMC is also a FNMA approved seller/servicer and is subject to the supervision of FNMA. In addition, MMC's operations are subject to supervision by state authorities (typically state banking or consumer credit authorities), many of which generally require that MMC be licensed to conduct its business. This normally requires state examinations and reporting requirements on an annual basis. The Federal Consumer Credit Protection Act (FCCPA) requires a written statement showing an annual percentage rate of finance charges and requires that other information be presented to debtors when consumer credit contracts are executed. The Fair Credit Reporting Act requires certain disclosures to applicants concerning information that is used as a basis for denial of credit. ECOA prohibits discrimination against applicants with respect to any aspect of a credit transaction on the basis of sex, marital status, race, color, religion, national origin, age, derivation of income from public assistance program, or the good faith exercise of a right under the FCCPA. The interest rates which MMC may charge on its loans are subject to state usury laws, which specify the maximum rate which may be charged to consumers. In addition, both federal and state truth-in-lending regulations require that MMC disclose to its customers prior to execution of the loans, all material terms and conditions of the financing, including the payment schedule and total obligation under the loans. MMC believes that it is in compliance in all material respects with such regulations. 24 25 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 Hawaii Revised Statutes provides for similar information to be provided to all prospective purchasers through the use of the Hawaii Disclosure 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 Time Share 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. 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 for out-of-state sales is five days. The Nevada, California, New Jersey, Hawaii, Colorado and Florida timeshare statutes have stringent restrictions on sales and advertising practices and require the Company to utilize licensed sales personnel. The Company believes that it has made all required filings with state, city and county authorities and is in material compliance with all state and local regulations governing sales of 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 over-all cost of acquiring property. Compliance with or changes in official interpretations of regulations might, however, impose additional compliance costs on the Company that cannot be predicted. REAL ESTATE REGULATION The real estate industry is subject to extensive regulation. The Company is subject to compliance with various federal, state and local environmental, zoning and other statutes and regulations regarding the acquisition, subdivision, development and sale of real estate and various aspects of its financing operations. The Interstate Land Sales Full Disclosure Act establishes strict guidelines with respect to the subdivision and sale of land in interstate commerce. HUD has enforcement powers with respect to this statute. In many instances, (e.g., Huerfano County, Colorado land sales) the Company has been exempt from HUD registration requirements because of the size or number of the subdivided parcels and the limited nature or type of its offerings. The Company registers its timeshare properties with various state agencies. The Company must disclose financial information concerning the property, evidence of title, a description of the intended manner of offering, proposed advertising materials, and must bear the costs of such registration, which include legal and filing fees. The Company believes that it is in compliance in all material respects with all applicable federal, state and local regulations. The Company believes that such regulations have not had a material adverse effect on any phase of its operations. Compliance with future changes in regulations might, however, impose additional compliance costs on the Company that cannot be predicted. The city and county governments in areas where the Company operates have enacted licensing and other ordinances that affect timeshare projects. EMPLOYEES As of August 31, 1996, the Company had 1,433 employees, of whom 1,190 were full-time employees and 243 were part-time employees. Of these, 166 were employed full-time in consumer finance activities, including 6 executive officers, 74 managerial and staff professional personnel, 13 marketing and sales specialists and 73 general administrative and support personnel and loan processors, and 1,256 were employed in timeshare and real estate activities, including 661 sales and marketing officers and personnel, 213 general and administrative officers, managers and support staff, 382 hotel personnel, and 11 utility company personnel. None of the Company's employees are represented by a collective bargaining unit. The Company believes that its relations with its employees are satisfactory. 25 26 ITEM 2. PROPERTIES At August 31, 1996, the Company had 305 residential, commercial and industrial lots, 234 recreational land parcels, 190 recreational vehicle pads, and 7,637 timeshare interests in its inventory. In addition, the Company maintains the following properties: The Company's principal executive offices are located at 4310 Paradise Road, Las Vegas, Nevada 89109, where it occupies approximately 31,000 square feet of office space in a building it owns. Title to the property is held by the Company. The Company has acquired a second office building located in Las Vegas, Nevada. The building is approximately 60,000 square feet, of which the Company initially intends to occupy approximately 30,000 square feet. The remaining approximately 30,000 square feet will be leased to tenants on a short term basis. The Company leases an executive office at 1125 N.E. 125th Street in North Miami, Florida, comprising approximately 3,200 square feet, at a rental of $2,400 per month. The lease expires in August 1998. MMC leases 45,950 square feet of office space at 1000 Parkwood Circle, Atlanta, Georgia. This lease is for an initial six year term expiring August 2002 with a conditional option to extend the term to August 2007 at a monthly rental of $73,711 with 2% annual increases. MMC also leases 10,478 square feet of office space in Atlanta, Georgia, at a rental of $13,193 per month, pursuant to a lease that expires in March 1999. The Company leases various other facilities on a short-term or month to month basis for off-site sales offices and lending offices in various cities throughout the United States. ITEM 3. LEGAL PROCEEDINGS In the matter of the PEC Apartment Subsidiaries litigation previously reported upon, an order for judgment of $3,346,000 was rendered against PEC on its limited guaranty, in connection with the defendants' counterclaim. Pursuant to a stipulation between the parties dated as of May 15, 1995, PEC paid the amount of $2,900,000 on June 15, 1995 in full settlement of this matter. Because the reserve recorded in the financial statements of the Company exceeded the amount of the settlement, the Company recognized a gain on discontinued operations of $1,323,000. On July 5, 1995, Pahrump Valley Vineyards, Inc. filed a complaint in the 5th Judicial District Court, Nye County, Nevada, against CNUC, a subsidiary of PEC. The plaintiff claimed compensatory damages in excess of $25,000 in each of 4 counts alleging trespass, nuisance, negligence and breach of contract for the alleged supplying of contaminated water by CNUC to the plaintiff, and also prayed for punitive damages in excess of $25,000. Following discovery, PEC's insurance carrier settled the case by payment of $35,000 to the plaintiffs. Following the Company's November 10, 1995 announcement disclosing certain accounting adjustments, an action was filed on November 13, 1995, in the United States District Court, District of Nevada by Christopher Dunleavy, as a purported class action against the Company, certain of the Company's officers and directors and the Company's independent auditors. The complaint alleges, among other things, that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder in connection with the preparation and issuance of certain of the Company's financial reports issued in 1994 and 1995, including certain financial statements reported on by the Company's independent auditors. The complaint also alleges that one of the director defendants violated the federal securities laws by engaging in "insider trading." The named plaintiff seeks to represent a class consisting of purchasers of the Company's Common stock between January 14, 1994 and November 9, 1995, and seeks damages in an unspecified amount, costs, attorney's fees and such other relief as the court may deem just and proper. The Company believes that it has substantial defenses to the action, however, the Company presently cannot predict the outcome of this matter. On November 16, 1995, a second action was filed in the United States District Court for the District of Nevada by Alan Peyser as a purported class action against the Company and certain of its officers and directors, which was served on the Company on December 20, 1995. The complaint alleges, among other things, that the defendants violated the federal securities laws by making statements and issuing certain financial reports in 1994 and 1995 that overstated the Company's earnings and business prospects. The named plaintiff seeks to represent a class consisting of purchasers of the Company's common stock between November 28, 1994 and November 9, 26 27 1995. The complaint seeks damages in an unspecified amount, cost, attorney's fees and such other relief as the Court may deem just and proper. The Company believes that it has substantial defenses to the action, however, the Company presently cannot predict the outcome of this matter. On or about June 10, 1996, the Dunleavy Action and Peyser Action were consolidated under the caption "In re Mego Financial Corp. Securities Litigation," Master File No. CV-9-95-01082-LD (RLJ), pursuant to a stipulation by the parties. On or about July 26, 1996, Michael Nadler filed a motion in the above matter requesting that he be added as a class representative and that his attorney be added as additional counsel for the class. On or about August 26, 1996, a Motion in Opposition to the motion to add a class representative was filed by the Company and certain other defendants. Neither motion has been heard or decided by the court. In the general course of business the Company, at various times, has been named in other lawsuits. The Company believes that it has meritorious defenses to these lawsuits and that resolution of these matters will not have a material adverse affect on the business or financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year ended August 31, 1996. 27 28 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 (the "NSCM") 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:
High Low -------------- -------------- FISCAL YEAR 1995: ----------------- First Quarter $4 3/4 $3 1/4 Second Quarter 4 5/8 3 3/4 Third Quarter 7 3 11/16 Fourth Quarter 10 3/8 6 11/16 FISCAL YEAR 1996: ----------------- First Quarter $11 1/8 $4 1/2 Second Quarter 8 5/8 6 Third Quarter 9 3/4 7 3/4 Fourth Quarter 9 3/8 5 3/8 FISCAL YEAR 1997: ----------------- First Quarter (through November 8, 1996) $10 $5 5/8
As of November 8, 1996, there were 2,596 holders of record of the 18,433,121 outstanding shares of common stock. The closing sales price for the common stock on November 8, 1996 was $9.25. The Company did not pay any dividends on the common stock during the fiscal years ended August 31, 1996 and 1995. The Company intends to retain future earnings for the operation and expansion of its business and does not currently anticipate paying cash dividends on the 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. 28 29 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected Income Statement Data and Balance Sheet Data set forth below have been derived from the consolidated financial statements of the Company. The consolidated financial statements as of August 31, 1996, 1995, and 1994 and for each of the three years in the period ended August 31, 1996 have been audited by Deloitte & Touche LLP, independent auditors, and are included elsewhere herein. The consolidated financial statements as of August 31, 1993 and 1992 and for each of the two years in the period ended August 31, 1993 have been audited by Deloitte & Touche LLP, independent auditors, and are not included herein. The selected financial information set forth below should be read in conjunction with the consolidated financial statements, the related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein (thousands of dollars):
YEAR ENDED AUGUST 31, --------------------------------------------------------------- 1996 1995 1994 1993 1992 ------- ------- -------- --------- ----------- OPERATING INCOME (LOSS) BY SUBSIDIARIES: MMC: Revenues: Gain on sale of loans $17,994 $12,233 $579 $ - $ - Net unrealized gain on mortgage related securities 2,697 - - - - Interest income, net of interest expense 988 473 172 - - Loan servicing income 3,348 873 - - - --------- --------- --------- --------- --------- Total revenues 25,027 13,579 751 - - Total costs and expenses 13,872 7,660 2,262 - - --------- --------- --------- --------- --------- Operating income (loss) $11,155 $5,919 $(1,511) $ - $ - ========= ========= ========= ========= ========= PEC: Revenues: Timeshare and land sales, net $45,746 $41,494 $33,055 $34,933 $28,439 Gain on sale of receivables 1,116 1,586 875 631 - Interest income 6,560 6,838 7,914 8,238 8,175 Other 5,115 4,898 3,463 3,630 2,729 --------- --------- --------- --------- --------- Total revenues 58,537 54,816 45,307 47,432 39,343 Total costs and expenses 57,200 46,510 39,756 41,844 36,188 --------- --------- --------- --------- --------- Operating income $1,337 $8,306 $5,551 $5,588 $3,155 ========= ========= ========= ========= ========= INCOME STATEMENT DATA: Consolidated operating income from subsidiaries $12,492 $14,225 $4,040 $5,588 $3,155 Payments to assignors - (7,252) (8,526) (4,632) (3,325) Other income (expense), net (4,474) (2,786) (527) 409 1,509 --------- --------- --------- --------- --------- Income (loss) from continuing operations before income taxes 8,018 4,187 (5,013) 1,365 1,339 Income taxes 3,167 3,293 761 2,218 2,382 --------- --------- --------- --------- --------- Income (loss) from continuing operations 4,851 894 (5,774) (853) (1,043) Income from discontinued operations - 873 - - - --------- --------- --------- --------- --------- Income (loss) before minority interest 4,851 1,767 (5,774) (853) (1,043) Minority interest in income of 80%-owned subsidiary - - - 126 63 --------- --------- --------- --------- --------- Net income (loss) 4,851 1,767 (5,774) (979) (1,106) Cumulative preferred stock dividends 240 360 360 - - --------- --------- --------- --------- --------- Net income (loss) applicable to common stock $4,611 $1,407 $(6,134) $(979) $(1,106) ========= ========= ========= ========= =========
29 30
YEAR ENDED AUGUST 31, -------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------ ------------- ------------ ------------ -------------- EARNINGS (LOSS) PER SHARE: Primary: Income (loss) from continuing operations, net of minority interest $.24 $.03 $(.34) $(.06) $(.07) Income from discontinued operations - .05 - - - --------- --------- --------- --------- --------- Net income (loss) $.24 $.08 $(.34) $(.06) $(.07) ========= ========= ========= ========= ========= Weighted average number of shares outstanding (thousands) 19,087 18,087 17,820 17,145 16,701 ========= ========= ========= ========= ========= Fully diluted: Income from continuing operations, net of minority interest $.24 $.02 Income from discontinued operations - .05 --------- --------- Net income $.24 $.07 ========= ========= Weighted average number of shares outstanding (thousands) 19,087 18,939 ========= =========
AUGUST 31, ------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------ ------------- ------------ ------------ ------------- (THOUSANDS OF DOLLARS) BALANCE SHEET DATA: Total assets $165,597 $112,757 $88,302 $91,153 $88,937 Total liabilities 130,055 81,175 68,779 66,144 65,412 Minority interest - - - - 1,619 Subordinated debt 9,691 9,352 - - - Redeemable preferred stock - 3,000 3,000 3,000 - Total stockholders' equity 25,851 19,230 16,523 22,009 21,906
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements, including the notes thereto, contained elsewhere herein. GENERAL The business of the Company, after the acquisition of PEC (see "Business--Purchase of Preferred Equities Corporation") and the commencement of operations of MMC (see "Business of MMC"), is primarily the business of generating consumer receivables by marketing timeshare interests, retail lots and land parcels and generating home improvement loans; and collecting the related notes receivable and loans. MMC MMC began originating loans on March 1, 1994 and, accordingly, MMC's results of operations for the years ended August 31, 1996 and 1995 include full years' of operations, while results for the year ended August 31, 1994 include only six months of loan originations. MMC recognizes revenue from the gain on sale of loans, interest income and servicing income. Interest income, net, represents the interest received on loans in MMC's portfolio prior to their sale, net of interest paid under its credit agreements. MMC continues to service all loans sold to date. Net loan servicing income represents servicing fee income and other ancillary fees received for servicing loans less the amortization of capitalized mortgage servicing rights. Mortgage servicing rights are amortized over the estimated life of the future net servicing fee income. 30 31 MMC sells its loans through whole loan sales to third party purchasers, retaining the right to service the loans and to receive any amounts in excess of the guaranteed yield to the purchasers. In addition, MMC has commenced the sale of loans through securitizations. Certain of the regular interests of the related securitizations are sold, with the interest only and residual class securities retained by MMC. Gain on sale of loans includes the gain on sale of mortgage related securities and loans held for sale. The gain on sale of mortgage related securities is determined by an allocation of the cost of the securities based on the relative fair value of the securities sold and the securities retained. MMC generally retains an interest only strip security and residual interest security. The fair value of the interest only strip and residual interest security is the present value of the estimated cash flows to be received after considering the effects of estimated prepayments and credit losses, net of FHA insurance recoveries. The net unrealized gain on mortgage related securities represents the difference between the allocated cost basis of the securities and the estimated fair value. As the holder of the residual securities, MMC is entitled to receive certain excess cash flows. These excess cash flows are calculated as the difference between (a) principal and interest paid by borrowers and (b) the sum of (i) pass-through interest and principal to be paid to the holders of the regular securities and interest only securities, (ii) trustee fees, (iii) third-party credit enhancement fees, (iv) servicing fees and (v) estimated loan pool losses. MMC's right to receive the excess cash flows is subject to the satisfaction of certain reserve requirements which are specific to each securitization and are used as a means of credit enhancement. MMC carries interest only and residual securities at fair value. As such, the carrying value of these securities is affected by changes in market interest rates and prepayment and loss experiences of these and similar securities. MMC estimates the fair value of the interest only and residual securities utilizing prepayment and credit loss assumptions MMC believes to be appropriate for each particular securitization. To MMC's knowledge, there is no active market for the sale of these interest only and residual securities. The range of values attributable to the factors used in determining fair value is broad. Although MMC believes that it has made reasonable estimates of the fair value of the mortgage related securities, the rate of prepayments and default rates utilized are estimates, and actual experience may vary from its estimates. The present value of expected net cash flows from the sale of loans is recorded at the time of sale as excess servicing rights and mortgage related securities. Excess servicing rights are amortized as a charge to income, as payments are received on the retained interest differential over the estimated life of the underlying loans. The expected cash flows used to determine the excess servicing rights asset and mortgage related securities have been reduced for potential losses, net of FHA insurance recoveries, under recourse provisions of the sales agreements. The allowance for credit losses on loans sold with recourse represents MMC's estimate of losses to be incurred in connection with the recourse provisions of the sales agreements. To determine the fair value of the mortgage servicing rights and excess servicing rights, MMC projects net cash flows expected to be received over the life of the loans. Such projections assume certain servicing costs, prepayment rates and credit losses. These assumptions are similar to those used by MMC to value the residual securities. As of August 31, 1996, mortgage servicing rights totaled $3.8 million, excess servicing rights totaled $12.1 million and mortgage related securities totaled $22.9 million for MMC. There can be no assurance that MMC's estimates used to determine the fair value of mortgage and excess servicing rights will remain appropriate for the life of the loans. If actual loan prepayments or credit losses exceed MMC's estimates, the carrying value of MMC's mortgage and excess servicing rights may have to be written down through a charge against earnings. MMC will not write up such assets to reflect slower than expected prepayments, although slower prepayments may increase future earnings as MMC will receive cash flows in excess of those anticipated. MMC discounts cash flows on its loan sales at the rate it believes an independent third-party purchaser would require as a rate of return. The cash flows were discounted to present value using discount rates which averaged 12% for the years ended August 31, 1996, 1995, and 1994. MMC has developed its assumptions based on experience with its own portfolio, available market data and ongoing consultation with its financial advisors. The weighted average discount rate used to determine the present value of the balance of capitalized excess servicing rights and capitalized mortgage servicing rights reflected on MMC's Statement of Financial Condition at August 31, 1996 and 1995 was approximately 12%. Capitalized excess servicing rights are amortized over the lesser 31 32 of the estimated or actual remaining life of the underlying loans as an offset against the excess servicing rights component of servicing income actually received in connection with such loans. Although MMC believes that it has made reasonable estimates of the fair value of the mortgage related securities, the excess servicing rights and mortgage servicing rights likely to be realized, the rate of prepayment and the amount of defaults utilized by MMC are estimates and actual experience may vary from its estimates. The gain recognized by MMC upon the sale of loans and unrealized gain on mortgage related securities will have been overstated if prepayments or defaults are greater than anticipated. Higher levels of future prepayments could result in excess servicing rights and mortgage servicing rights amortization expense exceeding realized excess servicing rights and mortgage servicing rights, thereby adversely affecting MMC's servicing income and resulting in a charge to earnings in the period of adjustment. Similarly, if delinquencies or liquidations were to be greater than initially assumed, excess servicing rights and mortgage servicing rights amortization would occur more quickly than originally anticipated, which would have an adverse effect on loan servicing income in the period of such adjustment. MMC periodically reviews its prepayment assumptions in relation to current rates of prepayment and, if necessary, reduces the remaining asset to the net present value of the estimated remaining future excess servicing rights. Rapid increases in interest rates or competitive pressures may result in a reduction of excess servicing income recognized by MMC upon the sale of loans in the future, thereby reducing the gains recognized by MMC upon such sales. Higher levels of prepayments than initially assumed would result in a charge to earnings in the period of adjustment. Increases in interest rates or higher than anticipated rates of loan prepayments or credit losses on the underlying loans of MMC's mortgage related securities or similar securities may require MMC to write down the value of such mortgage related securities and result in a material adverse impact on MMC's results of operations and financial condition. MMC is not aware of an active market for the mortgage related securities, excess servicing rights or mortgage servicing rights MMC continues to implement its business growth strategy through both product line and geographic diversification and expansion of its Correspondent and Dealer operations, in an effort to increase both loan origination volume and servicing volume. Implementation of this strategy has increased MMC's total assets through growth in excess servicing rights, mortgage servicing assets and mortgage related securities and has been funded through increased borrowings. While this growth has increased MMC's revenues through increased gain on sales of loans, loan servicing income and net interest income, it has also increased the general and administrative expense and provision for credit losses associated with the growth in loans originated and serviced. Continued increases in MMC's total assets and increasing earnings can continue only so long as origination volumes continue to exceed paydowns of loans serviced and previous period origination volumes. Additionally, the fair value of mortgage related securities, mortgage servicing rights and excess servicing rights owned by MMC may be adversely affected by changes in the interest rate environment which could affect the discount rate and prepayment assumptions used to value the assets. Any such adverse change in assumptions could have a material adverse effect on MMC's results of operations and financial condition. PEC PEC recognizes revenue primarily from sales of timeshare interests in resort areas and land, gain on sale of receivables and interest income. PEC also 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 eight to ten months from 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 cancellation. 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 year the revenue is recognized is accounted for as a reversal of the revenue. Cancellation of a note receivable subsequent to the year the revenue was recognized is charged to the allowance for cancellation. 32 33 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 generally retains the servicing rights and participation in certain cash flows from the sold notes receivable. PEC generally sells its notes receivable at par value. The present value of expected net cash flows from the sale of notes receivable are recorded at the time of sale as excess servicing rights. Excess servicing rights are amortized as expense, as payments are received on the retained interest differential over the estimated life of the underlying notes receivable. Excess servicing rights are recorded at the lower of unamortized cost or estimated fair value. The expected cash flows used to determine the excess servicing rights asset have been reduced for potential losses under recourse provisions of the sales agreements. The future estimated contingency for notes receivable sold with recourse represents PEC's estimate of losses to be incurred in connection with the recourse provisions of the sales agreements and is shown separately as a liability in the Company's Consolidated Statements of Financial Condition. 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 in financial income. The cash flows were discounted to present value using discount rates which averaged 15% in both fiscal 1996 and fiscal 1995. PEC has developed its assumptions based on experience with its own portfolio, available market data and ongoing consultation with its investment bankers. In determining expected cash flows, management considers economic conditions at the date of sale. In subsequent periods, these estimates may be revised as necessary using the original discount rate, and any losses arising from prepayment and loss experience will be recognized as realized. Provision for cancellation 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. PEC records a provision for cancellations at the time revenue is recognized, based on historical experience and current economic factors. The related allowance for cancellation represents PEC's estimate of the amount of its probable future credit losses on the recognized notes receivable which may become uncollectable. 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 liability for future estimated cancellation as notes receivable are sold. PEC's judgment in determining the adequacy of this allowance is based upon a periodic review of its portfolio of notes receivable. These reviews take into consideration changes in the nature and level of the portfolio, current economic conditions which may affect the purchasers' ability to pay, collateral values 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 future estimated contingency for notes receivable sold with recourse represents PEC's estimate of its probable future credit losses to be incurred over the lives of the notes receivable. A liability for future estimated contingency for notes receivable sold with recourse was established at the time of each sale based upon PEC's analysis of all probable losses resulting from PEC's recourse obligations under each agreement of sale. For notes receivable sold after September 30, 1992, the liability is determined in accordance with Emerging Issues Task Force (EITF) Issue No. 92-2, on a "discounted to present value" basis using an interest rate equivalent to the risk-free 33 34 market rate for securities with a duration similar to that estimated for the underlying notes receivable. For notes receivable sold prior to September 30, 1992, the liability remains on a non-discounted basis. 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. Capitalized excess servicing rights 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 excess servicing rights and interest on cash funds. Total costs and expenses consist primarily of commissions and selling expenses, general and administrative expenses, direct costs of sales of timeshare interests and land, depreciation and amortization and interest expense. Commissions and selling 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 owners' associations based on ownership of unsold timeshare interests at each of the respective timeshare properties. These costs are referred to as "association assessments" and are included in the Consolidated Statements of Operations in general and administrative expense. 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 timeshares could also delay or preclude entirely the development of such properties. RESTATEMENT AND SEC INVESTIGATION As previously reported, the Company has restated certain of its previously issued financial statements, including for the year ended August 31, 1994, upon which its independent auditors had rendered unqualified opinions. As a result of the restatement of the Company's financial statements and certain trading in its common stock, the Securities and Exchange Commission has commenced a formal investigation to determine, among other things, whether the Company, and/or its officers and directors, violated applicable federal securities laws in connection with the preparation and filing of the Company's previously issued financial statements or such trading. Possible penalties for violation of federal securities laws include civil remedies, such as fines and injunctions, as well as criminal sanctions. CERTAIN PAYMENTS AND AMORTIZATION OF NEGATIVE GOODWILL In connection with the assignment to the Company in 1988 by affiliates of certain officers and directors of the Company (Assignors) of the right to acquire PEC, the Company became obligated to make quarterly payments to the Assignors equal to 63% of the cash balances of PEC, during the 7 year period ended January 31, 1995, that could be used to pay a dividend without violating PEC's loan agreements. Accrual of amounts owed under such assignment agreement to the Assignors ended on January 31, 1995, when their right to the accrual expired, at which time PEC owed the Assignors $13.3 million. On March 2, 1995, $10 million of such amount was converted to Subordinated debt. See Note 22 of Notes to the Consolidated Financial Statements for further discussion. At the time of the acquisition of PEC, the underlying book value of the net assets acquired exceeded the purchase price paid by the Company by $42.3 million resulting in the creation of negative goodwill in that amount (Revaluation Adjustment). Of this amount $20 34 35 million was not amortized but was instead reduced as additional payments were accrued to the Assignors. Amounts accrued to the Assignors in excess of $20 million were expensed as such accruals were made. The amortization of the remaining $22.3 million of the Revaluation Adjustment was directly affected by the level of collections of the receivables of PEC included in the acquired assets. As proceeds of these receivables were collected, through installment payments or sale, a portion of the Revaluation Adjustment included as a contra account in notes receivable was recorded to income as amortization of negative goodwill, which amortization was completed at February 28, 1995. The Company also amortizes over a five-year period ending February 1998, negative goodwill related to the excess of the underlying book value over the purchase price paid in 1993 for the acquisition of the minority interest of Vacation Spa Resorts, Inc. (VSR), formerly an 80%-owned subsidiary. The Consolidated Financial Statements of the Company accordingly reflect amortization of a portion of the Revaluation Adjustment (Revaluation Amortization), amortization of the negative goodwill associated with the acquisition of the VSR minority interest and accrual of payments to Assignors. RESULTS OF OPERATIONS Year Ended August 31, 1996 Compared to Year Ended August 31, 1995 MMC MMC originated $139.4 million of loans during fiscal 1996 compared to $87.8 million of loans during fiscal 1995, an increase of 58.8%. The increase is a result of the overall growth in MMC's business, including an increase in the number of active Correspondents and Dealers and an increase in the number of states served. At August 31, 1996, MMC had approximately 310 active Correspondents and 435 active Dealers, compared to approximately 150 active Correspondents and 170 active Dealers at August 31, 1995. Of the $139.4 million of loans originated in fiscal 1996, $11.6 million were conventional loans. MMC did not originate conventional loans in fiscal 1995. The following table sets forth certain data regarding loans originated by MMC during fiscal 1996 and 1995 (thousands of dollars):
YEAR ENDED AUGUST 31, ------------------------------------------------------------- 1996 1995 --------------------------- --------------------------- Loan Originations: Principal amount of loans: Correspondents: Title I $82,596,197 59.3% $63,792,680 72.7% Conventional 11,582,108 8.3 - - ------------- ------ ---------- ------ Total Correspondents 94,178,305 67.6 63,792,680 72.7 ------------- ------ ---------- ------ Dealers - Title I 45,188,721 32.4 23,957,829 27.3 ------------- ------ ---------- ------ Total $139,367,026 100.0% $87,750,509 100.0% ============= ====== ========== ====== Number of loans: Correspondents: Title I 4,382 50.9% 3,437 59.1% Conventional 392 4.6 - - ------------- ------ ---------- ------ Total Correspondents 4,774 55.5 3,437 59.1 ------------- ------ ---------- ------ Dealers - Title I 3,836 44.5 2,381 40.9 ------------- ------ ---------- ------ Total 8,610 100.0% 5,818 100.0% ============= ====== ========== ======
See Notes 4 and 7 of Notes to Consolidated Financial Statements for further discussion. 35 36 Total revenues increased 84.3% to $25 million for fiscal 1996 from $13.6 million for fiscal 1995. The increase was primarily the result of the increased volume of loans originated and the sale of such loans. The following table sets forth the principal balance of loans sold or securitized and related gain on sale data for fiscal 1996 and 1995 (thousands of dollars):
YEAR ENDED AUGUST 31, ----------------------------- 1996 1995 ------------ ------------ Loans Sold: Title I Loans $127,414 $85,363 Conventional 10,494 - ------------ ------------ Total $137,908 $85,363 ============ ============ Gain on sale of loans $17,994 $12,233 Net unrealized gain on mortgage related securities 2,697 - ------------ ------------ Gain on sale of loans and unrealized gain on mortgage related securities $20,691 $12,233 ============ ============ Gain on sale of loans as a percentage of principal balance of loans sold 13.0% 14.3% ============ ============ Gain on sale of loans and unrealized gain on mortgage related securities as a percentage of principal balance of loans sold 15.0% 14.3% ============ ============
See Note 4 of Notes to Consolidated Financial Statements for further discussion. Loan servicing income increased 283.5% to $3.3 million for fiscal 1996 from $873,000 for fiscal 1995. The increase was primarily the result of a 61.6% increase in the amount of loan sale activity in fiscal 1996 with the servicing rights retained by MMC, to $137.9 million for fiscal 1996 from $85.4 million for fiscal 1995. Interest income on loans held for sale and mortgage related securities, net of interest expense, increased 108.9% to $988,000 during fiscal 1996 from $473,000 during fiscal 1995. The increase was primarily the result of the increase in the average size of the portfolio of loans held for sale, and the increased mortgage related securities portfolio. MMC intends to consider strategies to mitigate the interest rate risks associated with the loan origination/warehousing function, funding its portfolio of mortgage related securities, excess servicing rights, mortgage servicing rights, and valuation of these assets. Implementation of interest rate risk management strategies may decrease spreads, decrease gain on sale of loans, or otherwise decrease revenues from that which might otherwise occur in a stable interest rate environment without such strategies in place. MMC intends to thoroughly analyze the cost of such strategies compared to the risks which would be mitigated prior to implementation of any strategy. The provision for credit losses increased 74.8% to $1.5 million for fiscal 1996 from $864,000 for fiscal 1995. The increase in the provision was directly related to the increase in volume of loans originated in fiscal 1996 compared to fiscal 1995. The provision for credit losses is based upon periodic analysis of the portfolio, economic conditions and trends, historical credit loss experience, borrowers' ability to repay, collateral values, and estimated FHA insurance recoveries on loans originated and sold. As MMC increases its mix of conventional loan originations as compared to Title I loan originations, the provision for credit losses as a percentage of loans originated can be expected to increase due to the increased credit risk associated with conventional loans. Servicing costs on a per loan basis may also increase as problem conventional loans may require greater costs to service. Total general and administrative expenses increased 90.2% to $11.8 million for fiscal 1996 from $6.2 million for fiscal 1995. The increase was primarily a result of increased payroll related to the hiring of additional underwriting, loan processing, administrative, loan quality control and other personnel in contemplation of the expansion of MMC's business and costs related to the opening of additional offices. 36 37 Payroll and benefits expense increased 39.3% to $5 million for fiscal 1996 from $3.6 million for fiscal 1995. The number of employees increased from 105 as of fiscal year end 1995 to 170 as of fiscal year end 1996, due to increased staff necessary to support the business expansion and improve quality control. Commissions and selling expenses increased 264.7% to $2 million for fiscal 1996 from $552,000 for fiscal 1995 while loan originations increased by $51.6 million from fiscal 1995 to 1996. The sales network expanded to substantially all states, adding new personnel and offices to further the loan origination growth strategy. Professional services increased 313.6% to $732,000 for fiscal 1996 from $177,000 for fiscal 1995 due primarily to increased audit and legal services and consultation fees. FHA insurance increased 147.6% to $572,000 for fiscal 1996 from $231,000 for fiscal 1995. The increase was primarily attributable to the increased volume of loan originations and loans serviced. Other general and administrative expenses increased 190.7% to $2.1 million for fiscal 1996 from $713,000 for fiscal 1995 primarily due to increased expenses related to expansion of facilities and increased communications expense. MMC is enhancing its loan production systems. These enhancements are expected to cost approximately $50,000 and will be funded from MMC's normal operating cash flow. Income before income taxes increased 88.5% to $11.2 million for fiscal 1996 from $5.9 million for fiscal 1995. As a result of the foregoing, MMC's net income increased 90% to $6.9 million for fiscal 1996 from $3.6 million for fiscal 1995. PEC Total revenues for PEC increased 6.8% or $3.7 million during fiscal 1996 compared to fiscal 1995 primarily due to an increase in timeshare sales to $27.8 million in fiscal 1996 from $20.7 million in fiscal 1995. Timeshare interests and land sales, net, increased to $45.7 million in fiscal 1996 from $41.5 million in fiscal 1995, an increase of 10.2%. Gross sales of timeshare interests increased to $33.2 million in fiscal 1996 from $26.3 million in fiscal 1995, an increase of 26.3%. Net sales of timeshare interests increased to $27.8 million from $20.7 million, an increase of 34.3%. The provision for cancellation represented 16.3% and 21.3% of gross sales of timeshare interests for the years ended August 31, 1996 and 1995, respectively. The decrease in the provision for cancellation was primarily due to an improvement in historical performance of cancellations, resulting in a lower allowance requirement. Gross sales of land decreased to $22.3 million in fiscal 1996 from $24.7 million in fiscal 1995, a decrease of 9.6%. Net sales of land decreased to $18 million in fiscal 1996 from $20.8 million in fiscal 1995, a decrease of 13.7%. The provision for cancellation represented 19.6% and 15.8% of gross sales of land for the years ended August 31, 1996 and 1995, respectively. The 1996 decrease in land sales was the result of PEC shifting its emphasis as part of its strategic plan from sales of land to sales of timeshare interests due to its diminishing inventory of land. PEC's gain on sale of receivables decreased to $1.1 million for fiscal 1996 from $1.6 million for fiscal 1995. This decrease resulted from sales of timeshare receivables and land receivables decreasing to $16 million in fiscal 1996 from $32.5 million in fiscal 1995. PEC periodically sells receivables in order to reduce the outstanding balances under its lines of credit. PEC's interest income decreased to $6.6 million in fiscal 1996 from $6.8 million for fiscal 1995, primarily due to a relatively flat interest rate environment combined with a decrease in the average balance of notes receivable outstanding. Financial income increased to $544,000 in fiscal 1996 from $276,000 in fiscal 1995, an increase of 97.1%. The increase is a result of the increased number of loans serviced by PEC, generating increased servicing fees. 37 38 Revenues from incidental operations decreased to $3 million in fiscal 1996 from $3.6 million in fiscal 1995, a decrease of 17.3%, primarily due to a decrease in utility fees partially offset by an increase in golf fee revenue. Other revenues increased to $1.6 million in fiscal 1996 from $797,000 in fiscal 1995, an increase of 97.7%. As a result of the foregoing, total PEC revenues increased to $58.5 million during fiscal 1996 from $54.8 million during fiscal 1995. Total costs and expenses increased to $57.2 million for fiscal 1996 from $46.5 million for fiscal 1995, an increase of 23%. The increase resulted primarily from an increase in commission and selling expenses to $30.4 million from $23.7 million, an increase of 28.1%; an increase in general and administrative costs to $11.6 million from $9.3 million, an increase of 25.3%, and an increase in direct costs of timeshare interest sales to $4 million from $3 million, an increase of 34.3%. PEC's selling expenses increased primarily as a result of costs relating to the establishment of new marketing programs and strategies designed to increase sales of timeshare interests, market research costs, additional staffing, increased advertising costs, costs associated with the re-naming of PEC's timeshare resorts to Ramada Vacation Suites and additional sales offices. The increase in general and administrative costs is primarily due to increases in payroll related to hiring of additional administrative personnel, maintenance fees related to unsold timeshare inventory, owners' association costs, and professional fees. The increase in direct costs of timeshare interest sales is primarily due to the increased volume of sales. As a percentage of gross sales of timeshare interests and land, commission and selling expenses relating thereto increased to 54.7% in fiscal 1996 from 46.5% in fiscal 1995, and cost of sales increased to 10.5% in fiscal 1996 from 10.1% in fiscal 1995. Sales prices of timeshare interests are typically lower than those of land while selling costs are generally the same for timeshare interests and land; accordingly, PEC generally realizes lower profit margins from sales of timeshare interests than sales of land. Depreciation expense increased to $1.5 million in fiscal 1996 from $1.1 million in fiscal 1995, an increase of 34.9%. The increase is a result of the additions made to property and equipment during fiscal 1996. Property and equipment, net of accumulated depreciation increased to $19.4 million at August 31, 1996 from $12.3 million at August 31, 1995, an increase of 58.3%. Interest expense increased to $5.6 million in fiscal 1996 from $4.7 million in fiscal 1995, an increase of 20.1%. The increase is a result of an increase in outstanding balances of notes payable including two additional lines of credit. As a result of the foregoing, PEC's income before income taxes decreased to $1.3 million in fiscal 1996 from $8.3 million in fiscal 1995, a decrease of 83.9%. The decrease is largely due to the increase of commissions and selling expense and in general and administrative expense, together with a decrease in land sales. COMPANY Income from continuing operations increased $4 million to $4.9 million in fiscal 1996 from $894,000 in fiscal 1995, due principally to an increase of $3.3 million in MMC net income and a decrease in payments to assignors expense to $0 in 1996 compared to $7.3 million in 1995. These were partially offset by a decrease of $5.4 million in PEC net income, due to increased expenses related to expansion of selling operations. See prior discussion for MMC and PEC. Total costs and expenses during fiscal 1996 were $76.7 million, an increase of 17.3% over $65.4 million in fiscal 1995. Increased commissions and selling expenses and general and administrative expenses increased 37.9% for fiscal 1996 compared to 1995 due primarily to the expansion of timeshare and land marketing efforts in PEC. Additionally, Mego Financial incurs interest expense payable to assignors and Subordinated debt. Total general and administrative expenses for Mego Financial Corp. (parent only) were primarily comprised of professional services, external financial reporting expenses, and regulatory and other public company corporate expenses. 38 39 Year Ended August 31, 1995 Compared to Year Ended August 31, 1994 MMC MMC commenced originating loans in March 1994. Total revenues increased 1,708.1% to $13.6 million for fiscal 1995 from $751,000 for fiscal 1994. The increase was primarily the result of the increased volume of loans originated and the sale of such loans. MMC originated $87.8 million of loans during fiscal 1995 compared to $8.2 million of loans during fiscal 1994, an increase of 974.9%. The increase was a result of the overall growth in Company's business. At August 31, 1995, MMC had approximately 150 active Correspondents and 170 active Dealers in 34 states, compared to approximately 14 active Correspondents and 30 active Dealers in 14 states at August 31, 1994. The following table sets forth certain data regarding Title I Loans originated by MMC during fiscal 1994 and 1995 (thousands of dollars):
YEAR ENDED AUGUST 31, --------------------------------------------------- 1995 1994 ------------------------- -------------------- Principal amount of loans: Correspondents $63,792,680 72.7% $5,251,647 64.3% Dealers 23,957,829 27.3 1,492,318 18.3 Bulk purchase - - 1,420,150 17.4 ------------ ---------- ------------ ---------- Total $87,750,509 100.0% $8,164,115 100.0% ============ ========== ============ ========== Number of loans: Correspondents 3,437 59.1% 338 47.4% Dealers 2,381 40.9 164 23.0 Bulk purchase - - 211 29.6 ------------ ---------- ------------ ---------- Total 5,818 100.0% 713 100.0% ============ ========== ============ ==========
MMC sold $85.4 million in principal balance of loans during fiscal 1995, recognizing a gain on sale of loans of $12.2 million. MMC sold $6.6 million in principal balance of loans during fiscal 1994 recognizing a gain on sale of loans of $579,000. As a percentage of loans sold, gain on sale of loans was 14.3% during fiscal 1995 compared to 8.8% during fiscal 1994. The increase in gain on sale was primarily a result of increased volume of loans sold and a wider differential between the stated interest rate on the loans and the yield to purchasers. The weighted average gross excess spread on sold loans was 6.2% and 5.6% for fiscal 1995 and 1994, respectively. The weighted average discount rate used in the determination of the gain on sale for both periods was 12%. Loan servicing income was $873,000 during fiscal 1995. This income was the result of the sale of $85.4 million of Title I Loans, with the right to service the loans being retained by MMC. MMC had no loan servicing income in fiscal 1994 because MMC did not sell any loans until August 31, 1994. Interest income, net of interest expense, increased 175% to $473,000 during fiscal 1995 from $172,000 during fiscal 1994. The increase was primarily the result of the growth in the size of the portfolio of loans held for sale of 151.3% to $3.7 million at August 31, 1995 from $1.5 million at August 31, 1994. The provision for credit losses increased 800% to $864,000 for fiscal 1995 from $96,000 for fiscal 1994 due to increased loan originations. Provision for credit losses relating to unsold loans is recorded as expense in amounts sufficient to maintain the allowance at a level considered adequate to provide for anticipated losses resulting from liquidation of outstanding loans. The provision for credit losses is based upon periodic analysis of the portfolio, economic conditions and trends, historical credit loss experience, borrowers' ability to repay, collateral values, and estimated FHA insurance recoveries on Title I Loans. Depreciation and amortization expense increased 196.3% to $403,000 for fiscal 1995 from $136,000 for fiscal 1994 as a result of the purchase of additional equipment, the expansion of MMC's facilities and additional software development costs. 39 40 Other interest expense increased 750% to $187,000 for fiscal 1995 from $22,000 for fiscal 1994 as a result of increased capitalized lease obligations. Total general and administrative expenses increased 209.1% to $6.2 million for fiscal 1995 from $2 million for fiscal 1994. The increase was primarily a result of increased payroll related to the hiring of additional personnel in contemplation of the expansion and projected growth of MMC's business and costs related to the opening of additional offices. Commissions and selling expenses increased to $552,000 for fiscal 1995 from $13,000 for fiscal 1994 due to the expansion of the sales network and facilities to support increased loan origination growth. Included in general and administrative expenses were servicing fees paid to PEC in the amount of $232,000 and $13,000 for fiscal 1995 and 1994, respectively, and management fees paid to PEC in the amount of $690,000 and $442,000 for fiscal 1995 and 1994, respectively. FHA insurance expense increased to $231,000 for fiscal 1995 from $11,000 for fiscal 1994 due to increased volume of Title I Loan originations. Income (loss) before income taxes increased to income of $5.9 million for fiscal 1995 from a loss of $1.5 million for its six months of operations in fiscal 1994. Effective September 1, 1994, MMC adopted SFAS 122 which requires that a mortgage banking enterprise recognize as separate assets the rights to service mortgage loans for others, regardless of how those servicing rights are acquired. The effect of adopting SFAS 122 on MMC's financial statements was to increase income before income taxes by $1.1 million for fiscal 1995. As a result of the foregoing, net income (loss) increased to net income of $3.6 million for fiscal 1995 from a net loss of $1.5 million for fiscal 1994. PEC Total revenues of PEC increased 21% to $54.8 million for fiscal 1995 from $45.3 million for fiscal 1994. The increase was primarily the result of increased net land sales of $20.8 million during fiscal 1995 compared to $13.5 million during fiscal 1994, an increase of 53.8%, and an 80.4% increase in incidental operations to $3.6 million for fiscal 1995 from $2 million in fiscal 1994. Timeshare interests and land sales, net, increased to $41.5 million for fiscal 1995 from $33.1 million for fiscal 1994, an increase of 25.5%. Gross sales of timeshare interests increased to $26.3 million in fiscal 1995 from $24.7 million in fiscal 1994, an increase of 6.5%. Net sales of timeshare interests increased to $20.7 million in fiscal 1995 from $19.5 million in fiscal 1994, an increase of 5.9%. The provision for cancellation represented 21.3% and 20.9% of gross sales of timeshare interests for the years ended August 31, 1995 and 1994, respectively. Gross sales of land increased to $24.7 million in fiscal 1995 from $15.4 million in fiscal 1994, an increase of 60.1%. Net sales of land increased to $20.8 million from $13.5 million, an increase of 53.8%. The provision for cancellation represented 15.8% and 12.3% of gross sales of land for the years ended August 31, 1995 and 1994, respectively. The increase in sales of timeshare interests and the increase in sales of land were primarily the result of additional sales programs and new properties in Colorado. Gain on sale of notes receivables increased to $1.6 million for fiscal 1995 from $875,000 for fiscal 1994, an increase of 81.3%. This increase resulted from net sales of timeshare interest and land receivables increasing to $41.5 million during fiscal 1995 from $33.1 million during fiscal 1994, an increase of 25.5%. PEC periodically sells receivables in order to reduce the outstanding balances under its lines of credit. Interest income decreased to $6.8 million for fiscal 1995 from $7.9 million for fiscal 1994, a decrease of 13.6%. This decrease resulted primarily from a reduction in PEC's portfolio of receivables arising from sales of receivables exceeding originations. Income from incidental operations increased to $3.6 million for fiscal 1995 from $2 million for fiscal 1994, an increase of 80.4%. The increase was primarily due to increased utility fees and golf fee revenue. Total costs and expenses increased to $46.5 million for fiscal 1995 from $39.8 million for fiscal 1994, an increase of 17%. This increase resulted primarily from an increase in commissions and selling expenses to $23.7 million for fiscal 1995 from $18.9 million, an increase of 25%, and an increase in cost of sales to $5.4 million in fiscal 40 41 1995 from $4.7 million in fiscal 1994, an increase of 16.3%. As a percentage of gross sales of timeshare interests, housing sales, land sales, and commissions and expenses relating thereto decreased to 46.5% for fiscal 1995 from 47.2% for fiscal 1994, and cost of sales relating thereto decreased to 10.6% for fiscal 1995 from 11.4% for fiscal 1994. Timeshare costs of sales increased 10.9% to $3 million for fiscal 1995 from $2.7 million for fiscal 1994. Land sale costs increased to $2.2 million for fiscal 1995 from $1.4 million for fiscal 1994, an increase of 50.8%. Cost of housing sales decreased to $265,000 for fiscal 1995 from $531,000 for fiscal 1994, a decrease of 50.1%. General and administrative costs increased 9.5% to $9.3 million for fiscal 1995 compared to $8.5 million for fiscal 1994, primarily due to increased staffing and training for sales of land and timeshares and other administrative related expansion costs. As a result of the foregoing, PEC's income from continuing operations, excluding income from discontinued operations, increased to $5.4 million for fiscal 1995 from $3.7 million for fiscal 1994, an increase of 44.9%. COMPANY Income from continuing operations increased to $894,000 in fiscal 1995 from a loss of $5.8 million in fiscal 1994, due principally to an increase of $5.2 million in MMC net income due to a full year of operation in 1995 compared to 6 months of operations in 1994. PEC's net income increased $2.5 million due to increased land and timeshare sales activity. Net timeshare and land sales increased to $41.5 million for fiscal 1995 compared to $33.1 million for fiscal 1994, due to increased marketing efforts, expansion of marketing areas and focus on increasing volume. Net timeshare and land inventories increased 50.8% or $8.5 million during fiscal 1995 compared to fiscal 1994. See prior discussion for MMC and PEC. Amortization of negative goodwill decreased to $216,000 for fiscal 1995, from $472,000 for fiscal 1994, a decrease of 54.2%. Included in such amortization was $170,000 and $420,000 in fiscal 1995 and 1994, respectively relating to the purchase of PEC in 1988, with $50,000 in both fiscal 1995 and fiscal 1994 relating to the acquisition of the minority interest in Vacation Spa Resorts . As a result of the foregoing, total revenues increased to $69.6 million for fiscal 1995, from $46.8 million for fiscal 1994, an increase of 48.6%. Gain on discontinued operations occurred as a result of an order for judgment against the Company in litigation involving certain subsidiaries of PEC in the amount of $3.4 million, which amount was settled for $2.9 million in May 1995 and paid in June 1995. Excess of liability over assets of discontinued operations (a provision for loss) had been provided in the amount of $4.2 million, which was adjusted to reflect the actual loss, resulting in a gain on discontinued operations of $1.3 million during fiscal 1995. Total costs and expenses increased to $65.4 million for fiscal 1995 from $51.8 million for fiscal 1994, an increase of 26.1%. This increase is primarily the result of an increase in the operations of MMC and an increase in commissions and selling expenses resulting from a higher volume of sales of timeshare interests and land during the 1995 period. Payments to assignors decreased to $7.3 million for fiscal 1995 from $8.5 million for fiscal 1994, a decrease of 14.9%. Accrual of amounts payable to assignors ceased on January 31, 1995. As a result of the foregoing, net income from continuing operations increased to $894,000 for fiscal 1995 from a net loss of $5.8 million for fiscal 1994. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents for the Company was $3.2 million at August 31, 1996 compared to $7.3 million at August 31, 1995. 41 42 The Company's principal cash requirements relate to loan originations, the acquisition of timeshare properties and land, and the payment of commissions and selling expenses in connection with timeshare and land sales. MMC and PEC each require continued access to sources of debt financing and sales in the secondary market of loans and receivables, respectively. MMC -- Dependence On Securitization Transactions The values of and markets for the sale of MMC's loans are dependent upon a number of factors, including general economic conditions, interest rates and government regulations. Adverse changes in those factors may affect MMC's ability to originate or sell loans in the secondary market for acceptable prices within reasonable time frames. The ability of MMC to sell loans in the secondary market is essential for continuation of MMC's loan origination activities. A reduction in the size of the secondary market for home improvement loans would adversely affect MMC's ability to sell its loans in the secondary market with a consequent adverse impact on MMC's profitability and future originations. MMC entered into its first two securitization transactions, which involve the pooling and sale of loans, in March 1996 and August 1996 and intends to continue to sell loans through securitization transactions from time to time as opportunities arise. Pursuant to these securitizations, pass-through certificates evidencing interests in the pools of loans were sold in public offerings. There can be no assurance that MMC will be able to securitize its loan production efficiently. Securitization transactions may be affected by a number of factors, some of which are beyond MMC's control, including, among other things, conditions in the securities markets in general, conditions in the asset- backed securitization market, the conformity of loan pools to rating agency requirements and, to the extent that monoline insurance is used, the requirements of such insurers. Adverse changes in the securitization market could impair MMC's ability to originate and sell loans through securitizations on a favorable or timely basis. Any such impairment could have a material adverse effect upon MMC's results of operations and financial condition. Furthermore, MMC's quarterly operating results can fluctuate significantly as a result of the timing and level of securitizations. MMC -- Negative Cash Flow As a result of the substantial growth in loan originations, MMC has operated since March 1994, and expects to continue to operate for the foreseeable future, on a negative cash flow basis. During the year ended August 31, 1996, MMC operated on a negative cash flow basis using $15.3 million in operations that was funded primarily from borrowings, due primarily to an increase in loans originated and MMC's sale of loans. In connection with whole loan sales and securitizations, MMC recognizes a gain on sale of the loans upon the closing of the transaction and the delivery of the loans, but does not receive the cash representing such gain until it receives the excess servicing spread, which is payable over the actual life of the loans sold. MMC incurs significant expenses in connection with securitizations and incurs tax liabilities as a result of the gain on sale. MMC must maintain external sources of cash to fund its operations and pay its taxes and therefore must maintain warehouse lines of credit and other external funding sources. If the capital sources of MMC were to decrease, the rate of growth of MMC would be negatively affected. The pooling and servicing agreements relating to MMC's securitizations require MMC to build over-collateralization levels through retention within each securitization trust of excess servicing distributions and application thereof to reduce the principal balances of the senior interests issued by the related trust or cover interest shortfalls. This retention causes the aggregate principal amount of the loans in the related pool to exceed the aggregate principal balance of the outstanding investor certificates. Such over-collateralization amounts serve as credit enhancement for the related trust and therefore are available to absorb losses realized on loans held by such trust. MMC continues to be subject to the risks of default and foreclosure following the sale of loans through securitizations to the extent excess servicing distributions are required to be retained or applied to reduce principal or cover interest shortfalls from time to time. Such retained amounts are predetermined by the entity issuing the guarantee of the related senior interests and are a condition to obtaining insurance and an AAA/Aaa rating thereon. In addition, such retention delays cash distributions that otherwise would flow to MMC through its retained interest, thereby adversely affecting the flow of cash to MMC. MMC's cash requirements arise from loan originations, payments of operating and interest expenses and deposits to reserve accounts related to loan sale transactions. Loan originations are initially funded principally through MMC's $20 million warehouse line of credit pending the sale of loans in the secondary market. 42 43 Substantially all of the loans originated by MMC are sold. Net cash used in MMC's operating activities for the years ended August 31, 1995 and 1996 was approximately $11.8 million and $15.3 million, respectively. This use was funded primarily from the reinvestment of proceeds from the sale of loans in the secondary market totaling approximately $85 million and $135.5 million for the years ended August 31, 1995 and 1996, respectively. The loan sale transactions required the subordination of certain cash flows payable to MMC to the payment of scheduled principal and interest due to the loan purchasers. In connection with certain of such sale transactions, a portion of amounts payable to MMC from the excess interest spread is required to be maintained in a reserve account to the extent of the subordination requirements. The subordination requirements generally provide that the excess interest spread is payable to the reserve account until a specified percentage of the principal balances of the sold loans is accumulated therein. Excess interest spread payable to MMC is subject to being utilized first to replenish cash paid from the reserve account to fund shortfalls in collections of interest from borrowers who default on the payments on the loans until MMC's deposits into the reserve account equal the specified percentage. The excess interest required to be deposited and maintained in the respective reserve accounts is not available to support the cash flow requirements of MMC. At August 31, 1996, amounts on deposit in such reserve accounts totaled $4.5 million. Adequate credit facilities and other sources of funding, including the ability of MMC to sell loans in the secondary market, are essential for the continuation of MMC's loan origination operations. At August 31, 1996, MMC had a $20 million warehouse line of credit (Warehouse Line) for the financing of loan originations which expires in August 1997. At August 31, 1996, $3.3 million was outstanding under the Warehouse Line and $16.7 million was available. The Warehouse Line bears interest at the prime rate plus 1% per year and is secured by loans prior to sale. The agreement with the lender requires MMC to maintain a minimum tangible net worth of $12.5 million plus 50% of MMC's cumulative net income after May 1, 1996, and a minimum level of profitability of at least $500,000 per rolling six month period. In addition, MMC had a $10 million revolving credit facility from the same lender, with respect to which $10 million was outstanding on that date. This facility was secured by a pledge of MMC's excess servicing rights and the interest only and residual class certificates (Certificates) relating to securitizations carried as mortgage related securities on MMC's statements of financial condition, payable to MMC pursuant to its securitization agreements. The revolving loan has an 18-month revolving credit period followed by a 30-month amortization period, and requires MMC to maintain a minimum tangible net worth of $12.5 million plus 50% of MMC's cumulative net income after May 1, 1996, and a minimum level of profitability of at least $500,000 per rolling six month period. Borrowings under the revolving loan cannot exceed the lesser of (i) 40% of MMC's excess servicing rights and Certificates or (ii) 6 times the aggregate of the excess servicing rights and Certificate payments actually received by MMC over the most recent 3-month period. While MMC believes that it will be able to maintain its existing credit facilities and obtain replacement financing as its credit arrangements mature and additional financing, if necessary, there can be no assurance that such financing will be available on favorable terms, or at all. From time to time, MMC has sold loans through whole loan sales. In August 1994, MMC entered into an agreement with a bank pursuant to which an aggregate of $38.3 million in principal amount of loans had been sold at December 31, 1995, for an amount equal to their remaining principal balance and accrued interest. Pursuant to the agreement, the purchaser is entitled to receive interest at a rate equal to the sum of 187.5 basis points and the yield paid on 4 year Federal Government Treasury obligations at the time of the sale. MMC retained the right to service the loans and the right to receive the difference (Excess Interest) between the sold loans' stated interest rate and the yield to the purchaser. MMC is required to maintain a reserve account equal to 1% of the declining principal balance of the loans sold pursuant to the agreement funded from the Excess Interest received by MMC less its servicing fee to fund shortfalls in collections from borrowers who default in the payment of principal or interest. In April 1995, MMC entered into a continuing agreement with a financial institution pursuant to which an aggregate of approximately $175.8 million in principal amount of loans had been sold at August 31, 1996 for an amount equal to their remaining principal balances. Pursuant to the agreement, the purchaser is entitled to receive interest at a variable rate equal to the sum of 200 basis points and the one- month LIBOR rate as in effect from time to time. MMC retained the right to service the loans and the right to receive the Excess Interest. MMC is required to maintain a reserve account equal to 2.5% of the proceeds received by MMC from the sale of loans pursuant to the agreement plus the Excess Interest received by MMC less its servicing fee to fund shortfalls in collections from borrowers who default in the payment of principal or interest. In May 1995 and June 1995, MMC reacquired an aggregate of approximately $25 million of such Title I Loans for an amount equal to their remaining principal balance, which were sold to a financial institution. In March 1996 and August 1996, MMC reacquired an additional $77.7 million and $36.2 million, respectively, of the Title I Loans in connection with its first two securitization 43 44 transactions. In September 1996, MMC entered into a repurchase agreement with the financial institution pursuant to which MMC pledged the interest only certificates from its two 1996 securitizations in exchange for a $3 million advance. In November 1996, MMC entered into an agreement with the same financial institution, providing for the purchase of up to $2 billion of loans over a 5 year period. Pursuant to the agreement, Mego Financial issued to the financial institution four-year warrants to purchase 1,000,000 shares of Mego Financial's common stock at an exercise price of $7.125 per share. The agreement also provides (i) that so long as the aggregate principal balance of loans purchased by the financial institution and not resold to third parties exceeds $100 million, the financial institution shall not be obligated to purchase, and MMC shall not be obligated to sell, loans under the agreement and (ii) that the percentage of conventional loans owned by the financial institution at any one-time and acquired pursuant to the agreement shall not exceed 65% of the total amount of loans owned by the financial institution at such time and acquired pursuant to the agreement. The value of the warrants, estimated at $3 million (0.15% of the commitment amount) as of the commitment date, will be charged to MMC and amortized as the commitment for the purchase of loans is utilized. The financial institution has also agreed to provide MMC a separate one-year facility of up to $11 million, less any amounts advanced under the repurchase agreement, for the financing of the interest only and residual certificates from future securitizations. In May 1995, MMC entered into an agreement with a bank pursuant to which an aggregate of $25 million in principal amount of loans had been sold at June 30, 1995 for an amount equal to their remaining principal balance. Pursuant to the agreement, the purchaser is entitled to receive interest at a rate equal to the sum of 190 basis points and the yield paid on four-year Federal Government Treasury obligations at the time of the sale. MMC retained the right to service the loans and the right to receive the Excess Interest. The agreement requires MMC to maintain a reserve account equal to 1% of the declining principal balance of the loans sold pursuant to the agreement funded from the Excess Interest received by MMC less its servicing fee to fund shortfalls in collections from borrowers who default in the payment of principal or interest. In furtherance of MMC's strategy to sell loans through securitizations, in March 1996 and August 1996, MMC completed its first two securitizations pursuant to which it sold pools of $84.2 million and $48.8 million, respectively, of Title I Loans. MMC previously reacquired at par $77.7 million and $36.2 million of such loans, respectively. Pursuant to these securitizations, pass-through certificates evidencing interests in the pools of loans were sold in a public offering. MMC continues to subservice the sold loans and is entitled to receive from payments in respect of interest on the sold loans, a servicing fee equal to 1.25% of the balance of each loan with respect to the March transaction and 1% with respect to the August transaction. In addition, with respect to both transactions, MMC certificates received are carried as mortgage related securities on MMC's Statement of Financial Condition representing the interest differential, after payment of servicing and other fees, between the interest paid by the obligors of the sold loans and the yield on the sold certificates. MMC may be required to repurchase loans that do not conform to the representations and warranties made by MMC in the securitization agreements. As further described in Management's Discussion and Analysis of Financial Condition and Results of Operations -- Subsequent Event, in November 1996, MMC issued 2,300,000 shares of its common stock and $40 million of 12.5% Senior Subordinated Notes due 2001 in public offerings. MMC currently intends to use approximately $13.2 million of the aggregate net proceeds received from the offerings to repay amounts due to Mego Financial Corp. and PEC and approximately $17 million to reduce the amounts outstanding under MMC's warehouse and revolving lines of credit which currently bear interest at rates ranging from 1% to 2% over the prime rate and which expire in August 1997 and December 1997, respectively and to repay $3 million under a repurchase agreement. Funds received by Mego Financial Corp. and PEC will be used in their respective operations. The remaining net proceeds will be used by MMC to provide capital to originate and securitize loans. Pending such use, the net proceeds received by the Company will be invested in high quality, short term interest-bearing investment and deposit accounts. PEC -- Liquidity PEC's cash requirements arise from the acquisition of timeshare properties and land, payments of operating expenses, payments of principal and interest on debt obligations, and payments of commissions and selling expenses in connection with the sale of timeshare interests and land. Commissions and selling expenses payable by PEC in connection with sales of timeshare interests and land typically exceed the down payments received at the time of sale, as a result of which PEC generates a cash shortfall. This cash shortfall and PEC's other cash requirements are funded primarily through sales of receivables, PEC's lines of credit in the aggregate amount of $109.5 million and cash flows from operations. 44 45 At August 31, 1996, PEC had arrangements with 4 institutional lenders for 5 agreements for the financing of receivables in connection with sales of timeshare interests and land and the acquisition of timeshare properties and land, which provide for 5 lines of credit of up to an aggregate of $109.5 million. Such lines of credit are secured by timeshare and land receivables. At August 31, 1996, an aggregate of $65.9 million was outstanding under such lines of credit, and $43.6 million was available for borrowing. At August 31, 1996 and 1995, $65.9 million and $38.1 million, respectively, had been borrowed under these lines. Under the terms of these lines of credit, the Company may borrow up to a range of 75% to 85% of the balances of the pledged timeshare and land receivables. Summarized line of credit information and accompanying notes relating to these five lines of credit outstanding at August 31, 1996, consist of the following (thousands of dollars):
BORROWING AMOUNT AT MAXIMUM AUGUST 31, BORROWING REVOLVING MATURITY INTEREST 1996 AMOUNT EXPIRATION DATE (D) DATE RATE - ------------- ------------- ------------------- ------------------- ------------------- $47,297 $57,000 (a) December 31, 1996 September 22, 2003 Prime + 2.25% 7,821 15,000 (b) December 31, 1996 August 1, 2000 Prime + 2.5% 4,865 15,000 (c) June 27, 1998 June 27, 2005 LIBOR + 4.25% 2,925 15,000 (c) February 6, 1998 August 6, 2005 LIBOR + 4.25% 2,967 7,500 (b) December 31, 1996 June 30, 2000 Prime + 2.5%
(a) Restrictions include PEC's requirement to maintain a tangible net worth of at least $25 million during the borrowing term, and thereafter this requirement is permitted to decrease to $15 million depending on the loan balance. (b) Restrictions include PEC's requirement to maintain a tangible net worth of $25 million during the life of the loan. (c) Restrictions include PEC's requirement to maintain a tangible net worth of $17 million during the life of the loan. (d) Revolving expiration date represents the expiration of the revolving features of the lines of credit, at which time the credit lines assume fixed maturity. Set forth below is a schedule of the cash shortfall arising from recognized and unrecognized sales for the periods indicated (thousands of dollars):
YEAR ENDED AUGUST 31, ---------------------------------------- 1996 1995 1994 ---------- ---------- ---------- Commissions and selling expenses attributable to recognized and unrecognized sales $29,863 $23,969 $19,924 Less: Down payments 13,231 12,796 10,792 ------------ ------------ ------------ Cash Shortfall $16,632 $11,173 $9,132 ============ ============ ============
During the fiscal years ended August 31, 1996 and 1995, PEC sold notes receivable of $16 million and $32.5 million to three major financial institutions from which $9.7 million and $20.6 million of the proceeds were used to pay down debt for the fiscal years ended August 31, 1996 and 1995, respectively. The receivables which have interest rates depending on the transaction, of 11.8% - 13.9% and 11.8% - 13.7% in 1996 and 1995, respectively, were sold to yield returns of 8.3% - 10.6% and 8.8% - 11% in 1996 and 1995, respectively, to the purchasers, with any excess interest received from the obligors being payable to PEC. At August 31, 1996, PEC was contingently liable to replace or repurchase notes receivable sold with recourse totalling $69.6 million. 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 otherwise subject to replacement or repurchase. The repurchase provisions provides for substitution of receivables as recourse for $67 million of sold notes receivable and cash payments for repurchase relating to $2.5 45 46 million of sold notes receivable. At August 31, 1996 and 1995, the undiscounted amounts of the $8.4 million and $7.1 million recourse obligations on such notes receivable were $9.6 million and $8.1 million, respectively. PEC periodically reviews the adequacy of this liability. These reviews take into consideration changes in the nature and level of the portfolio, current and future economic conditions which may affect the obligors' ability to pay, collateral values and overall portfolio quality. Recourse to PEC on sales of notes receivable is governed by the agreements between the purchasers and PEC. The future estimated contingency for notes receivable sold with recourse represents PEC's estimate of its probable future credit losses to be incurred over the lives of the notes receivable. Proceeds from the sale of notes receivable sold with recourse were $17.1 million and $34.1 million for the years ended August 31, 1996 and 1995, respectively. A liability for future estimated contingency for notes receivable sold with recourse was established at the time of each sale based upon PEC's analysis of all probable losses resulting from PEC's recourse obligations under each agreement of sale. For notes receivable sold after September 30, 1992, the liability is determined in accordance with Emerging Issues Task Force (EITF) Issue No. 92-2, on a "discounted to present value" basis using an interest rate equivalent to the risk-free market rate for securities with a duration similar to that estimated for the underlying notes receivable. Company -- Liquidity During November 1994 and January 1995, payments aggregating $1.1 million were made to the Assignors to pay a portion of the accrued liability. At January 31, 1995, when accruals ceased, $13.3 million was payable to the Assignors. On March 2, 1995, the Assignors agreed to defer payment of $10 million (Subordinated Debt) of the amounts due to them pursuant to an amendment to the Assignment and Assumption Agreement providing for the subordination of such amounts to payment of debt for money borrowed by the Company or obligations of the Company's subsidiaries guaranteed by the Company. Warrants to purchase 1 million shares of common stock, at an exercise price of $4.25 per share (the closing market price per share on March 2, 1995), were granted to the Assignors in consideration of the payment deferral and subordination. The warrants contain restrictions on transfer and are exercisable after March 1, 1996 and until March 1, 2000. Interest on the Subordinated Debt is to be paid semi-annually at the rate of 10% per year starting September 1, 1995, and the Subordinated Debt is to be repaid in seven equal semi-annual payments of $1.4 million plus interest commencing March 1, 1997. On June 14, 1995, the Company paid an aggregate of $809,000 to the Assignors, including interest in the amount of $59,000. At August 31, 1996, $2.6 million, other than the Subordinated Debt, was payable to the Assignors, which amount also bears interest at the rate of 10% per year. Payments to Assignors are secured by a pledge of all of PEC's outstanding stock. During fiscal 1996, the Company paid interest of $1,196,000 to the Assignors on Subordinated debt and other amounts payable. See "Item 13. Certain Relationships and Related Transactions." During fiscal years 1996 and 1995, the Company used cash of $33.2 million and $5.1 million, respectively, in operating activities. The increase was due primarily to increased loan fundings by MMC. During fiscal years 1996 and 1995, the Company used cash of $9.7 million and $3.7 million, respectively, in investing activities, which was substantially expended for the purchase of property and equipment. During fiscal years 1996 and 1995, the Company provided cash of $38.8 million and $5.2 million, respectively, in financing activities as a result of borrowings. Capital expenditures during fiscal years 1996 and 1995 were $21.1 million and $14 million, respectively, for the acquisition of inventory and $9.3 million and $3.8 million, respectively, for the purchase of property and equipment. The Company made additional capital expenditures in 1996 for the acquisition of inventory, renovation of future timeshare inventory, refurbishment of present timeshare inventory, and the acquisition of replacement equipment. The Company believes that its capital requirements will be met from cash balances, internally generated cash, existing lines of credit, sales of receivables, and the modification, replacement or addition to its lines of credit. 46 47 FINANCIAL CONDITION August 31, 1996 Compared to August 31, 1995 Cash decreased 56.6% to $3.2 million at August 31, 1996 from $7.3 million at August 31, 1995 primarily as a result of the timing of loan originations, sales, and borrowings. Restricted cash deposits increased 2.9% to $6.7 million at August 31, 1996 from $6.5 million at August 31, 1995 due to increased volume of loans serviced for others pursuant to agreements which restrict a small percentage of cash relative to the volume of loans serviced, as well as loan payments collected from borrowers on accounts serviced for others. Notes receivable, net, increased 30.4% to $40.5 million at August 31, 1996 from $31.1 million at August 31, 1995 primarily as a result of MMC loan originations increasing to $139.4 million for fiscal 1996 from $87.8 million for fiscal 1995, and the timing of loan sales. The following table sets forth certain data regarding loans originated by MMC during fiscal 1996 and 1995:
1996 1995 ----------------------------- ------------------------------ Principal amount of loans: Correspondents: Title I $82,596,197 59.3% $63,792,680 72.7% Conventional 11,582,108 8.3 - - ------------- ------------- ------------- ------------- Total Correspondent 94,178,305 67.6 63,792,680 72.7 ------------- ------------- ------------- ------------- Dealers - Title I 45,188,721 32.4 23,957,829 27.3 ------------- ------------- ------------- ------------- Total $139,367,026 100.0% $87,750,509 100.0% ============= ============= ============= ============= Number of loans: Correspondents: Title I 4,382 50.9% 3,437 59.1% Conventional 392 4.6 - - ------------- ------------- ------------- ------------- Total Correspondent 4,774 55.5 3,437 59.1 ------------- ------------- ------------- ------------- Dealers - Title I 3,836 44.5 2,381 40.9 ------------- ------------- ------------- ------------- Total 8,610 100.0% 5,818 100.0% ============= ============= ============= =============
Net timeshare and land sales increased to $45.7 million at August 31, 1996 from $41.5 million at August 31, 1995 which increased net notes receivable. Net timeshare and land sales are set forth in the following table (thousands of dollars).
AUGUST 31, ---------------------------- 1996 1995 $ CHANGE % CHANGE ----------- ----------- ----------- ----------- Timeshare sales, net $27,778 $20,682 $7,096 34.3% Land sales, net 17,968 20,812 (2,844) (13.7) ----------- ----------- ---------- Total timeshare and land sales, net $45,746 $41,494 $4,252 10.2% =========== =========== ==========
Excess servicing rights decreased 13.9% to $14.3 million at August 31, 1996 from $16.6 million at August 31, 1995. Excess servicing rights are calculated using prepayment, default and interest rate assumptions that the Company believes market participants would use for similar rights. The Company believes that the excess servicing rights recognized at the time of sale do not exceed the amount that would be received if such rights were sold at fair market value in the marketplace. The decrease in excess servicing rights was primarily a result of loans sold with excess servicing rights recognized which were reacquired and included in the fiscal 1996 securitizations as well as 47 48 normal amortization of such excess servicing rights. The excess cash flow created through securitization which had been recognized as excess servicing rights on loans reacquired and securitized are included in the cost basis of the mortgage related securities. Mortgage related securities were $22.9 million at August 31, 1996 as a result of MMC's securitization transactions during fiscal 1996. There was no corresponding asset at August 31, 1995. See Notes 8 and 9 of Notes to Consolidated Financial Statements. Mortgage servicing rights increased 255.7% to $3.8 million at August 31, 1996 from $1.1 million at August 31, 1995 as a result of additional sales of mortgage originations and the resulting increase in sales of loans serviced to $137.9 million during fiscal 1996 from $85.4 million during fiscal 1995. Timeshare and land inventories increased 60.1% to $40.6 million at August 31, 1996 from $25.4 million at August 31, 1995 primarily in Nevada, as a result of additional inventory previously under construction and made available for sale in fiscal 1996. Property and equipment, net, increased 59.8% to $20.3 million at August 31, 1996 from $12.7 million at August 31, 1995 due to increased purchases of office equipment related to facility expansion. Notes and contracts payable increased 88.9% to $84.4 million at August 31, 1996 from $44.7 million at August 31, 1995 due to increased levels of excess mortgage servicing rights and mortgage related securities created through loan securitization which were available for financing to meet the Company's cash requirements. Accounts payable and accrued liabilities increased to $19.7 million at August 31, 1996 from $14 million at August 31, 1995, primarily as a result of increases in accrued payroll, interest and other unpaid operational costs. Future estimated contingency for notes receivable sold with recourse increased 16.2% to $9.3 million at August 31, 1996 from $8 million at August 31, 1995. Loans sold with recourse which were reacquired and included in the 1996 securitizations decreased the amount needed for this allowance while increased loan sales increased the allowance requirements. Recourse to the Company on sales of loans is governed by the agreements between the purchasers and the Company. The allowance for credit losses on loans sold with recourse represents the Company's estimate of its probable future credit losses to be incurred over the lives of the loans considering estimated future FHA insurance recoveries on Title I Loans. No allowance for credit losses on loans sold with recourse is established on loans sold through securitizations, as the Company has no recourse obligation under those securitization agreements. Estimated credit losses on loans sold through securitizations are considered in MMC's valuation of its residual interest securities. Deferred income taxes payable increased 35.5% to $11 million at August 31, 1996 from $8.1 million at August 31, 1995 due to increased income. Stockholder's equity increased 34.4% to $25.9 million at August 31, 1996 from $19.2 million at August 31, 1995 as a result of net income applicable to common stock of $4.6 million during fiscal 1996. August 31, 1995 Compared to August 31, 1994 Cash decreased 33.2% to $7.3 million at August 31, 1995 from $11 million at August 31, 1994 primarily as a result of the timing of loan originations, sales and borrowings. Restricted cash deposits increased 760% to $6.5 million at August 31, 1995 from $752,000 at August 31, 1994, due to activity on loans serviced for others pursuant to agreements which restrict a small percentage of cash relative to the volume of loans serviced, as well as loan payments collected from borrowers Notes receivable, net, decreased 15% to $31.1 million at August 31, 1995 from $36.5 million at August 31, 1994 primarily due to sales of receivables exceeding increases in newly recognized notes receivable. Excess servicing rights increased 671.9% to $16.6 million at August 31, 1995 from $2.1 million at August 31, 1994. Excess servicing rights are calculated using prepayment, default and interest rate assumptions that the Company believes market participants would use for similar rights. The Company believes that the excess servicing 48 49 rights recognized at the time of sale do not exceed the amount that would be received if such rights were sold at fair market value in the marketplace. The increase in excess servicing rights was primarily a result of increases in loans sold with excess servicing rights. Mortgage servicing rights were $1.1 million at August 31, 1995 as a result of sales of loans which resulted in an increase in the principal balance of sold loans serviced and implementation of SFAS No. 122. There was no corresponding asset at August 31, 1994. Timeshare and land inventories increased to $25.4 million at August 31, 1995 from $16.8 million at August 31, 1994, an increase of 50.8%. The increase was primarily due to the acquisition and renovation of timeshare interests. Notes and contracts payable increased 12.3% to $44.7 million at August 31, 1995 from $39.8 million at August 31, 1994 due to increased borrowings under the Company's lines of credit and the timing of loan sales. Accounts payable and accrued liabilities increased 129.1% to $14 million at August 31, 1995 from $6.1 million at August 31, 1994, primarily as a result of increases in accrued payroll, interest and other operational costs, due to expansion and growth of the Company. Future estimated contingency for notes receivable sold with recourse increased 117.6% to $8 million at August 31, 1995 from $3.7 million at August 31, 1994, primarily due to increased loans sold under recourse provisions. Recourse to the Company on sales of loans is governed by the agreements between the purchasers and the Company. The allowance for credit losses on loans sold with recourse represents the Company's estimate of its probable future credit losses to be incurred over the lives of the loans, considering estimated future FHA insurance recoveries on Title I Loans and other factors. Payable to assignors decreased 63.8% to $2.6 million at August 31, 1995 from $7.1 million at August 31, 1994, as a result of accrued amounts payable exceeding payments made and the reclassification of $10 million to subordinated debt. Excess of liability over assets of discontinued operations decreased to $0 at August 31, 1995 from $4.2 million at August 31, 1994, as a result of an order for judgment against the Company in litigation involving certain subsidiaries of PEC in the amount of $3.4 million, which amount was settled for $2.9 million in May 1995 and paid in June 1995. Deposits, which represent the cash funds received on unrecognized land sales, increased by 63% to $3.6 million at August 31, 1996 from $2.2 million at August 31, 1994. Deferred income taxes payable increased 49.7% to $8.1 million at August 31, 1995 from $5.4 million at August 31, 1994 due to increased income. Stockholder's equity increased 16.4% to $19.2 million at August 31, 1995 from $16.5 million at August 31, 1994 as a result of net income applicable to common stock of $1.4 million and the issuance of 1,000,000 common stock warrants valued at $1.3 million. POSSIBLE TERMINATION OF SERVICING RIGHTS As described in Note 10 of Notes to Consolidated Financial Statements, the pooling and servicing agreements relating to the Company's securitization transactions contain provisions with respect to the maximum permitted loan delinquency rates and loan default rates, which, if exceeded, would allow the termination of the Company's right to service the related loans. At September 30, 1996, the default rates on the pool of loans sold in the March 1996 securitization transaction exceeded the permitted limit set forth in the related pooling and servicing agreement. Accordingly, this condition could result in the termination of the Company's servicing rights with respect to that pool of loans by the trustee, the master servicer or the insurance company providing credit enhancement for that transaction. The mortgage servicing rights on this pool of loans were approximately $1.4 million at August 31, 1996. Although the insurance company has indicated that it, and to its knowledge, the trustee and the master servicer has no present intention to terminate the Company's servicing rights, no assurance can be given that one or more of such parties will not exercise its right to terminate. In the event of such termination, there would be an adverse effect on the valuation of the Company's mortgage servicing rights and the results of 49 50 operations in the amount of the mortgage servicing rights ($1.4 million before tax and $870,000 after tax at August 31, 1996) on the date of termination. SUBSEQUENT EVENT In November 1996, MMC issued 2,300,000 shares of its common stock in a public offering at $10.00 per share. As a result of this transaction, the Company's ownership in MMC declined from 100% at August 31, 1996 to 81.1%. The Company continues to have voting control on all matters submitted to shareholders of MMC, including the election of directors and approval of extraordinary corporate transactions. Concurrently with the common stock offering, MMC issued $40 million of 12.5% Senior Subordinated Notes due in 2001 in a public offering . MMC currently intends to use approximately $13.2 million of the aggregate net proceeds received from the offerings to repay amounts due to Mego Financial Corp. and PEC and approximately $17 million to reduce the amounts outstanding under MMC's warehouse and revolving lines of credit which currently bear interest at rates ranging from 1% to 2% over the prime rate and which expire in August 1997 and December 1997, respectively, and to repay $3 million under a repurchase agreement. Funds received by Mego Financial Corp. and PEC will be used in their respective operations. The remaining net proceeds will be used by MMC to provide capital to originate and securitize loans. Pending such use, the net proceeds received by the Company will be invested in high quality, short term interest-bearing investment and deposit accounts. 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 results in lower sales closing rates and higher cancellations. The Company's notes receivable consist primarily of fixed-rate long term installment contracts that do not increase or decrease as a result of changes in interest rates charged to the Company. In addition, delinquency and cancellation rates may be affected by changes in the national economy. SEASONALITY Sales of timeshare interests and land are seasonal. For the fiscal years ended August 31, 1996, 1995 and 1994 quarterly sales as a percentage of annual sales, for each of the fiscal quarters averaged: quarters ended November 30-25%, quarters ended February 28-20.3%, quarters ended May 31-28.9%, and quarters ended August 31-25.9%. The majority of the Company's customers are tourists. The Company's major marketing area, Las Vegas, Nevada, reaches peaks of tourist activity at periods different from the Company's other major marketing areas, Reno, Nevada, Southern California, Atlantic City, New Jersey, Denver and Park and Huerfano Counties, Colorado, which are more active in summer than in winter. The Company's other major marketing area, Honolulu, Hawaii, is not subject to seasonality as are the two new resorts opening in fiscal 1997 in Florida. The Company is not dependent upon a limited number of customers whose loss would have a materially adverse effect on the Company. Home improvement loan volume tracks the seasonality of home improvement contract work. Volume tends to build during the spring and early summer months, particularly with regard to pool installations. A decline is typically experienced in late summer and early fall until temperatures begin to drop. This change in seasons precipitates the need for new siding, window and insulation contracts. Peak volume is experienced in November and early December and declines dramatically from the holiday season through the winter months. Debt consolidation and home equity loan volume are not impacted by seasonal climate changes and, with the exclusion of the holiday season, tend to be stable throughout the year. RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board (the FASB) has issued Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS 121). SFAS 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS 121 is effective for fiscal years beginning after December 15, 1995. The Company does not anticipate any material effect upon adoption on the results of operations or financial condition. In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," (SFAS 123), which establishes financial accounting and reporting standards for stock-based employee compensation plans. This 50 51 statement also applies to transactions in which an entity issues its equity instruments to acquire goods or services from nonemployees. Those transactions must be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. SFAS 123 is effective for fiscal years beginning December 15, 1995. The Company intends to provide the pro forma and other additional disclosure about stock-based employee compensation plans in its 1997 financial statements as required by SFAS 123. SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 125) was issued by FASB in June 1996. SFAS 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. This statement also provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. It requires that liabilities and derivatives incurred or obtained by transferors as part of a transfer of financial assets be initially measured at fair value. SFAS 125 also requires that servicing assets be measured by allocating the carrying amount between the assets sold and retained interests based on their relative fair values at the date of transfer. Additionally, this statement requires that the servicing assets and liabilities be subsequently measured by (a) amortization in proportion to and over the period of estimated net servicing income and (b) assessment for asset impairment or increased obligation based on the fair values. The statement will require that the Company's existing and future excess servicing receivables be measured at fair market value and be reclassified as interest only strip securities and accounted for in accordance with SFAS 115. As required by the statement, the Company will adopt the new requirements effective January 1, 1997. It is not anticipated that upon implementation, the statement will have any material impact on the financial statements of the Company, as the book value of the Company's excess servicing rights and mortgage related securities approximates fair value. Upon adoption of SFAS 125, the Company's subsidiary, PEC, will begin recognizing servicing rights and notes receivable held for sale, similar to the method currently used by MMC on mortgage servicing rights under SFAS 122. This will have the impact of increasing the gain on sale of notes at the time of sale and reducing future servicing fee income on PEC generated receivables sold after January 1, 1997. CAUTIONARY STATEMENT RELATING TO FORWARD-LOOKING STATEMENTS The foregoing Management's Discussion and Analysis of Financial Condition and Results of Operations contains various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent the Company's expectations and beliefs concerning future events, including the sufficiency of the Company's cash flow for the Company's future liquidity and capital resource needs. The Company cautions that these statements are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements, including, without limitation, the following: decline in demand for home improvement and debt consolidation loans; decline in demand for timeshare interests; the effect of general economic conditions generally and specifically changes in interest rates; the effect of competition; the Company's dependence on the availability of financing; the Company's ability to sell its loans and receivables; and the regulation of the Company by federal, state and local regulatory authorities. Actual events or results may differ as a result of these and other factors. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements and supplementary data of the Company and its subsidiaries are included herewith:
PAGE ---- Independent Auditors' Report F-2 Consolidated Statements of Financial Condition - August 31, 1996 and 1995 F-3 Consolidated Statements of Operations for the years ended August 31, 1996, 1995, and 1994 F-4 - F-5 Consolidated Statements of Stockholders' Equity for the years ended August 31, 1996, 1995, and 1994 F-6 Consolidated Statements of Cash Flows for the years ended August 31, 1996, 1995, and 1994 F-7 - F-8 Notes to Consolidated Financial Statements for the years ended August 31, 1996, 1995, and 1994 F-9 - F-29 Independent Auditors' Report on Financial Statement Schedules S-1 Valuation and Qualifying Accounts for the year ended August 31, 1996 S-2 Valuation and Qualifying Accounts for the year ended August 31, 1995 S-3 Valuation and Qualifying Accounts for the year ended August 31, 1994 S-4 All other schedules are omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 51 52 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES The following table sets forth certain information with respect to the directors, executive officers and key employees of the Company.
NAME AGE POSITION - --------------------------------- ------- ----------------------------------------------- Robert Nederlander 63 Chairman of the Board, Chief Executive Officer and Director Jerome J. Cohen 68 President and Director Don A. Mayerson 69 Executive Vice President, General Counsel and Secretary Herbert B. Hirsch 60 Senior Vice President, Chief Financial Officer, Treasurer and Director Eugene I. Schuster 59 Vice President and Director Jon A. Joseph, Jr. 49 Vice President and Associate General Counsel Paul K. Sadler 38 Vice President, Management Information Systems David A. Cleveland 39 Vice President and Chief Accounting Officer John E. McConnaughy, Jr. 67 Director Wilbur L. Ross, Jr. 58 Director Jeff S. Moore 38 President and Chief Operating Officer of MMC James L. Belter 53 Executive Vice President and Chief Financial of MMC Frederick H. Conte 44 Executive Vice President and Chief Operating Officer of PEC Stuart Harelik 56 Senior Vice President Marketing and Sales of PEC
Robert Nederlander has been the Chairman of the Board and Chief Executive Officer of the Company since January 1988, when affiliates of the Assignors including Mr. Cohen acquired approximately 43% of the outstanding Common stock of the Company (Share Acquisition). See "Certain Relationships and Related Transactions." Mr. Nederlander is the Chairman of the Executive Committee and a member of the Audit Committee. Since July 1995, Mr. Nederlander has served on the Board of Directors of HFS, which, together with its subsidiary, entered into an agreement in April 1995 with the Company pursuant to which the Company is licensed to use the "Ramada" name in its timeshare operations. Mr. Nederlander has been Chairman of the Board of Riddell Sports Inc. since April 1988 and was Riddell Sports Inc.'s Chief Executive Officer from April 1988 through March 1993. From February 1992 until June 1992, Mr. Nederlander was also Riddell Sports Inc.'s interim President and Chief Operating Officer. Since November 1981, Mr. Nederlander has been President and a Director of the Nederlander Organization, Inc., owner and operator of one the world's largest chains of legitimate theaters. He served as the Managing General Partner of the New York Yankees from August 1990 until December 1991, and has been a limited partner since 1973. Since October 1985, Mr. Nederlander has been President of Nederlander Television and Film Productions, Inc.; Vice Chairman of the Board from February 1988 to early 1993 of Vacation Spa Resorts, Inc., an affiliate of Mego Financial; and Chairman of the Board of Allis-Chalmers Corp. from May 1989 to 1993, and Vice Chairman from 1993 to October 1996. He remains a director. Mr. Nederlander was elected to the Board of Directors of Mego Mortgage Corporation in September 1996. In October 1996, Mr. Nederlander became a director of News Communications Inc., a publisher of community oriented free circulation newspapers. Mr. Nederlander was a senior partner in the law firm of Nederlander, Dodge and Rollins in Detroit, Michigan, from 1960 to 1989. Mr. Nederlander does not currently serve on a full time basis in his capacities with the Company. Jerome J. Cohen has been the President and a Director of the Company since the Share Acquisition. Mr. Cohen serves as a member of the Executive Committee and is Chairman of the Board and Chief Executive Officer of MMC, and is President and Chief Executive Officer of PEC. Since April 1992, Mr. Cohen has been a Director of Atlantic Gulf Communities Inc., formerly known as General Development Corporation, a publicly held company engaged in land development, land sales and utility operations in Florida and Tennessee. 52 53 Don A. Mayerson has been the Secretary of the Company since the Share Acquisition and the Executive Vice President and General Counsel of the Company since April 1988. Herbert B. Hirsch has been the Senior Vice President, Chief Financial Officer, Treasurer and a Director of the Company since the Share Acquisition. Mr. Hirsch serves as a member of the Executive Committee. Eugene I. Schuster has been a Vice President and a Director of the Company since the Share Acquisition. Mr. Schuster is a member of the Stock Option Committee. Since July 1983, Mr. Schuster has been the President and Chief Executive Officer and a director of Quest Bio Technology, Inc., a publicly held biotechnology research and development firm. Since September 1985, Mr. Schuster has been a director of Wavemat, Inc., a publicly held company engaged in the manufacture and sale of microwave equipment for advanced materials processing. Since January 1988 and May 1988, respectively, Mr. Schuster has been the Chief Executive Officer and Chairman, of Cellex BioSciences, a publicly held manufacturer of automated cell culture systems. Mr. Schuster is a director and executive officer of a number of privately held venture capital, business development and biotechnology companies. Mr. Schuster does not currently serve on a full time basis in his capacities with the Company. David A. Cleveland became Chief Accounting Officer of the Company in September 1996. Mr. Cleveland served as Senior Vice President and Controller of PriMerit Bank from June 1990 to July 1996. Prior to that, he was Chief Financial Officer of Pacific Coast Savings and Loan Association. Mr. Cleveland is a Certified Public Accountant. 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 also served as Chairman of the Board and Chief Executive Officer of GEO International Corporation (GEO), a privately held nondestructive testing, screen printing and oil field services company, from 1981 until October 1992. GEO filed for protection under Chapter 11 of the U.S. Bankruptcy Code in October 1993. Mr. McConnaughy has served as a member of the Board of Directors of Riddell Sports, Inc. since 1988. Wilbur L. Ross, Jr. has been a Director of the Company since 1984. Mr. Ross serves as a member of the Audit, Stock Option and Executive Incentive Compensation Committees. Mr. Ross has been a Senior Managing Director of Rothschild, Inc., an investment banking firm, since August 1976. Mr. Ross was a director of GEO from 1987 to January 1992. Mr. Ross serves as a director of Syms Corporation, a publicly held corporation. KEY EMPLOYEES Jeff S. Moore has been a director of MMC since June 1992, at which time he was elected its Executive Vice President. He was elected as Chief Operating Officer of MMC in December 1993 and as President in April 1995. Mr. Moore was the founder and served as President, Chief Executive Officer and a director of Empire Funding Corp., a nationwide Title I Lender, from August 1985 until March 1992, at which time he sold his interest in the company. James L. Belter has been Executive Vice President of MMC since April 1995 and Chief Financial Officer since September 1996. Prior to joining MMC, from May 1989 to September 1993, Mr. Belter served as the President, Chief Operating Officer and a director of Del-Val Capital Corporation, a commercial finance company. From April 1985 to April 1989, Mr. Belter served as Executive Vice President of Security Capital Credit Corporation, a commercial finance company, where he was responsible for the formation of the company's installment receivable lending division. From November 1976 to April 1985, Mr. Belter served as a corporate Vice President of Barclays Business Credit, Inc. where he managed a unit specializing in financing portfolios of consumer contracts including residential second mortgages, home improvement contracts, timeshare and land sales. Frederick H. Conte has been with PEC since 1978, and its Executive Vice President and Chief Operating Officer since February 1988. Stuart Harelik has been the Senior Vice President of Marketing and Sales of PEC since March 1989. Jon A. Joseph has been a Vice President and Associate General Counsel of the Company since July 1995. Mr. Joseph was Executive Vice President of Valley Bank of Nevada from 1984 to 1991. In 1991, 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. 53 54 Paul K. Sadler has been with PEC as manager of Management Information Services since 1985 and was elected Vice President of the Company in June 1995. 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 receive an annual fee of $40,000. Directors are also reimbursed for their expenses incurred in attending meetings of the Board of Directors and its committees. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than ten percent of the Company's outstanding common stock, to file with the Securities and Exchange Commission (SEC) initial reports of ownership and reports of changes in ownership of common stock. Such persons are required by SEC regulation to furnish the Company with copies of all such reports they file. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports are required, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten percent beneficial owners have been satisfied. 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 five other most highly compensated executive officers whose annual salary and bonus during the fiscal years presented exceeded $100,000 (Named Executive Officers). The Company did not grant any stock options to the Named Executive Officers during the fiscal year ended August 31, 1996.
SUMMARY COMPENSATION TABLE LONG-TERM ANNUAL COMPENSATION COMPENSATION ------------------------------------------- AWARDS ------------ NUMBER OF FISCAL OTHER ANNUAL OPTIONS ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(A) COMPENSATION GRANTED (B) COMPENSATION (C) - ------------------------------ ---- --------- -------- ------------ ----------- ---------------- Robert Nederlander 1994 $100,000 $ - $ - 35,000 $1,500 Chairman of the Board and 1995 126,925 - - - 1,500 Chief Executive Officer 1996 150,000 2,885 3,789 - 2,293 Jerome J. Cohen 1994 $300,000 $ 5,769 $ 1,437 35,000 $2,225 President 1995 300,000 120,369 3,227 - 2,250 1996 300,000 216,666 6,279 - 2,250 Don A. Mayerson 1994 $200,000 $ 3,846 $ - 35,000 $2,226 Executive Vice President, 1995 200,000 49,686 - - 2,250 General Counsel and 1996 200,000 86,680 5,305 - 2,250 Secretary Herbert B. Hirsch 1994 $200,000 $ 3,846 $ - 35,000 $2,226 Senior Vice President, Chief 1995 200,000 49,686 - - 2,250 Financial Officer and 1996 200,000 86,680 1,512 - 2,250 Treasurer Stuart Harelik 1994 $125,000 $344,830 $ - 25,000 $2,302 Senior Vice President 1995 125,000 438,064 - - 2,250 Marketing and Sales of PEC 1996 125,000 411,766 - - 2,250 Jeffrey S. Moore 1994 $126,771 $ - $ 5,400 25,000 $ - President and Chief Operating 1995 200,003 - 13,963 - - Officer of MMC 1996 200,003 86,084 13,625 - -
_____________________________ 54 55 (A) Mr. Harelik receives a contingent bonus based on a percentage of the sales made in excess of specified sales levels as set forth in his contract of employment which expires August 31, 2000. In 1994, Messrs. Cohen, Mayerson and Hirsch received bonuses equal to one week's salary at year end in accordance with the Company's Christmas bonus formula. In addition to those bonuses, on April 13, 1996, pursuant to contractual arrangements, incentive compensation attributable to the year ended August 31, 1995 was paid to Messrs. Cohen, Mayerson and Hirsch and is included in the above table as 1995 compensation. Incentive compensation attributable for the year ended August 31, 1996, but not yet paid, is included in the above table as 1996 compensation. (B) The Company adopted the Stock Option Plan on November 17, 1993, and options were granted to certain executive officers on December 22, 1993 and subsequently to other employees, subject to shareholder approval of the Stock Option Plan. The Stock Option Plan was approved by the shareholders on February 9, 1994. One-fifth of each grant to the named executive officers became exercisable on December 22, 1994 and an additional one-fifth became exercisable on December 22, 1995. See "Aggregated Fiscal Year-End Option Table" and "Stock Option Plan." (C) Represents the Company's matching contributions of 25% of the employee's contribution to the Company's 401(k) Plan on behalf of the employee. The following table sets forth certain information concerning unexercised stock options held by the Named Executive Officers as of August 31, 1996. No stock options were exercised by the Named Executive Officers during the fiscal year ended August 31, 1996. AGGREGATED FISCAL YEAR-END OPTION TABLE
VALUE OF UNEXERCISED IN-THE-MONEY NUMBER OF UNEXERCISED OPTIONS HELD AT OPTIONS HELD AT AUGUST 31, 1996 AUGUST 31, 1996 (1) ------------------------------------ ----------------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- Robert Nederlander 14,000 21,000 $ 40,250 $ 60,375 Jerome J. Cohen 14,000 21,000 43,750 65,625 Don A. Mayerson 14,000 21,000 43,750 65,625 Herbert B. Hirsch 14,000 21,000 43,750 65,625 Stuart Harelik 10,000 15,000 31,250 46,875 Jeff S. Moore 10,000 15,000 31,250 46,875
- ------------------------- (1) The closing sales price of the Company's common stock as reported as Nasdaq National Market on August 31, 1996 was $5.625. EMPLOYMENT AGREEMENTS The Company has entered into an employment agreement with Jerome J. Cohen which expires on January 31, 2000. The agreement provides for an annual base salary of $300,000 plus 2.5% of Incentive Income as defined in the Company's Incentive Plan (See "Executive Incentive Compensation Plan"). Mr. Cohen's employment agreement does not provide for an early termination bonus or other additional compensation based on performance. MMC has entered into an employment agreement with Jeffrey S. Moore which expires on December 31, 1998 and which provides for an annual base salary of $200,000. In addition, Mr. Moore is to receive an incentive bonus each calendar year equal to 1.5% of MMC's after tax income, provided that certain scheduled sales goals are met, as well as deferred compensation of 1% of the gain on sale from sales of loans during such year, payable in 48 equal installments. In the event payments of the incentive bonus and deferred compensation due in any year exceed $500,000, then the excess over $500,000 is only payable with the approval of MMC's Board of Directors. PEC has entered into an employment contract with Stuart Harelik which expires on August 31, 2000 and provides for an annual base salary of $125,000. In addition, Mr. Harelik is to receive a contingent bonus each year equal to the sum of 1.25% of Net Sales (as defined) in excess of $20 million up to $50 million plus .75% of Net Sales in excess of $50 million. 55 56 STOCK OPTION PLAN Under the Company's Stock Option Plan, 525,000 shares of Common Stock were reserved for issuance upon exercise of options. The Stock Option Plan is designed to serve as an incentive for retaining qualified and competent employees. The Stock Option Committee of the Company's Board of Directors, administers and interprets the Stock Option Plan and is authorized, in its discretion, to grant options thereunder to all eligible employees of the Company (currently 1,062 individuals), including officers of the Company. The Stock Option Plan provides for the granting of both "incentive stock options" (as defined in Section 422A of the Internal Revenue Code) and nonstatutory stock options. Options can be granted under the Stock Option Plan on such terms and at such prices as determined by the Board, or a committee thereof, except that the per share exercise price of options may not be less than 80% of the fair market value of the common stock on the date of grant, and, in the case of an incentive stock option, the per share exercise price may not be less than 100% of such fair market value. In the case of incentive stock options granted to a 10% shareholder, the per share exercise price may not be less than 110% of the fair market value and the expiration is five years from grant date. The aggregate fair market value of the shares covered by incentive stock options granted under the Stock Option Plan that become exercisable by a grantee for the first time in any calendar year is subject to a $100,000 limit. Options granted under the Stock Option Plan are exercisable after the period or periods specified in the option agreement. Options granted under the Stock Option Plan are not exercisable after the expiration of ten years from the date of grant and are not transferable other than by will or by the laws of descent and distribution. Under MMC's Stock Option Plan, which was effective upon the consummation of MMC's public stock offering, 925,000 shares of MMC's Common Stock were reserved for issuance upon exercise of stock options. The options, even if vested, may not be exercised without the written approval of Mego Financial Corp. Such shares will be accompanied by stock appreciation rights which will become exercisable as determined by the Board, or a committee thereof, only if Mego Financial Corp. does not give approval to the exercise of the options. This MMC plan was designed as a means to retain and motivate key employees and directors. MMC's Board of Directors, or a committee thereof, administers and interprets this MMC plan and is authorized to grant options thereunder to all eligible employees and directors of MMC, except that no incentive stock options (as defined in Section 422 of the Internal Revenue code) may be granted to a director who is not also an employee of MMC, Mego Financial Corp. or a subsidiary of MMC. This plan provides for the granting of both incentive stock options and unqualified stock options. Options will be granted on such terms and at such prices as determined by MMC's Board of Directors, or a committee thereof, except that the per share exercise price of incentive stock options cannot be less than the fair market value of the common stock on the date of grant. Each option is exercisable after the period or periods specified in the related option agreement, but no option may be exercisable after the expiration of ten years from the date of grant. Options granted to an individual who owns (or is deemed to own) at least 10% of the total combined voting power of all classes of stock of MMC or the Company must have an exercise price of at least 110% of the fair market value of the common stock on the date of grant and a term of no more than five years. MMC is authorized to make or guarantee loans to optionees to enable them to exercise their options. Such loans must (I) provide for recourse to the optionee, (ii) bear interest at a rate no less than the prime rate of interest, and (iii) be secured by the shares of common stock purchased. The Board of Directors of MMC has the authority to amend or terminate this plan, provided that no such action may impair the rights of the holder of any outstanding option without the written consent of such holder, and provided further that certain amendments are subject to stockholder approval. Unless terminated sooner, this MMC plan, will continue in effect until all options granted thereunder have expired or been exercised, provided that no options may be granted ten years after commencement of the MMC plan. 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, Mayerson, Hirsch and Schuster) to its President, Jerome J. Cohen. The compensation paid to Messrs. Nederlander, Cohen, Mayerson, Hirsch and Schuster is determined by the Board of Directors. The directors who are also executive officers of the Company do not participate in deliberations of the Board of Directors of the Company concerning their own compensation. In fiscal 1995, Mr. Nederlander's annual salary was increased to $150,000, and Mr. Schuster's annual salary was increased to $60,000. 56 57 EXECUTIVE INCENTIVE COMPENSATION PLAN On June 22, 1994, effective for the year ending August 31, 1995, the Board of Directors of the Company approved 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 may be made by an Incentive Compensation Committee of the Board of Directors of the Company, which committee shall be composed of not less than two members. The Incentive Plan provides that the Board of Directors may amend, suspend or terminate the Incentive Plan at any time. Incentive Compensation for any fiscal year is defined as an amount equal to 7.5% of incentive income (Incentive Income) for such year. Incentive Income for any fiscal year is defined as the amount reported as income before taxes in the consolidated financial statements of the Company for such year. The maximum amount of all awards of Incentive Compensation for any fiscal year shall not exceed (a) 7.5% of Incentive Income for such year, reduced by (b) the amount of Incentive Income which must be paid by the Company to employees pursuant to any contractual obligation of the Company, increased by (c) any unawarded Incentive Compensation carried forward from a prior fiscal year. On June 22, 1994, the Board of Directors also approved an employment agreement with Mr. Jerome J. Cohen, President of the Company, and agreements with Messrs. Don A. Mayerson and Herbert B. Hirsch, executive officers of the Company, pursuant to which Messrs. Cohen, Mayerson and Hirsch are entitled to receive 2.5%, 1% and 1% respectively, of Incentive Income of the Company, as defined in the Incentive Plan, for the five year period commencing with fiscal 1995, which amounts would directly reduce the amounts available for awards under 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 pays the premiums for certain "second to die" life insurance policies on the lives of Robert Nederlander, Jerome J. Cohen, Don A. Mayerson and Herbert B. Hirsch, executive officers of the Company (Messrs. Nederlander, Cohen and Hirsch are also directors of the Company), and their respective spouses, for a period not to exceed five years, at an annual aggregate premium outlay of $400,000. Each policy is in the name of a trust established for family beneficiaries selected by such officers. On August 3, 1995, the Company approved a life insurance policy for Mr. Schuster at an annual cost of $100,000 for a period of five years. Pursuant to the plan, and with respect to each policy, after ten years, or earlier upon the deaths of the respective insured parties, or certain other eventualities, the Company will receive the amount of premiums paid on the policy. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of November 8, 1996, information with respect to the beneficial ownership of the common stock by (i) each person known by the Company to be the beneficial owner of more than 5% of the outstanding shares of common stock, (ii) each director of the Company, (iii) each of the Named Executive Officers, and (iv) all directors and executive officers of the Company as a group. Unless otherwise noted, the Company believes that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP ----------------------------------------- NAME AND ADDRESS OF BENEFICIAL OWNER (1) SHARES PERCENT - ----------------------------------------- ---------------- ---------------------- Robert Nederlander(2) . . . . . . . . . . . . . . . . . . 2,133,697 11.6% Common Eugene I. Schuster and Growth Realty Inc. (GRI)(3) . . . 1,933,634 10.5% Common Jerome J. Cohen(4) . . . . . . . . . . . . . . . . . . . 1,127,823 6.1% Common Herbert B. Hirsch(5) . . . . . . . . . . . . . . . . . . 1,699,623 9.2% Common Don A. Mayerson(6) . . . . . . . . . . . . . . . . . . . 824,414 4.5% Common John E. McConnaughy, Jr.(7) . . . . . . . . . . . . . . . 616,503 3.3% Common Wilbur L. Ross, Jr.(8) . . . . . . . . . . . . . . . . . 152,500 * Common Jeff S. Moore (9) . . . . . . . . . . . . . . . . . . . 17,000 * Common Stuart Harelik (10) . . . . . . . . . . . . . . . . . . 15,700 * Common All Officer and Directors as a Group (9 persons)(11) . . 8,520,894 46.2% Common - -------------------
* Less than 1%. 57 58 (1) A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from November 27, 1996 upon the exercise of options and warrants. Each beneficial owner's percentage ownership is determined by assuming that options and warrants that are held by such person (but not those held by any other person) and that are exercisable within 60 days from the date of this Form 10-K filing. (2) 810 Seventh Avenue, 21st Floor, New York, New York 10019. Includes 21,000 shares issuable under an option granted pursuant to the Stock Option Plan, to the extent exercisable within the next 60 days and 250,000 shares issuable upon the exercise of warrants held by an affiliate of Mr. Nederlander. See "Certain Relationships and Related Transactions." (3) 321 Fisher Building, Detroit, Michigan 48202. These shares are held of record by GRI, a wholly owned subsidiary of Venture Funding, Ltd. of which Mr. Schuster is a principal shareholder, Director and Chief Executive Officer. Includes 250,000 shares issuable upon the exercise of warrants held by an affiliate of Mr. Schuster. See "Certain Relationships and Related Transactions." (4) 1125 N.E. 125th Street, Suite 206, North Miami, Florida 33161. Includes 21,000 shares issuable under an option granted pursuant to the Stock Option Plan, to the extent exercisable within the next 60 days and 200,000 shares issuable upon the exercise of warrants held by Mr. Cohen. Excludes 103,503 shares owned by Mr. Cohen's spouse, 500,000 shares owned by a trust for the benefit of his children over which Mr. Cohen does not have any investment or voting power, as to which he disclaims beneficial ownership. (5) 230 East Flamingo Road, Las Vegas, Nevada 89109. Includes 21,000 shares issuable under an option granted pursuant to the Stock Option Plan, to the extent exercisable within the next 60 days and 200,000 shares issuable upon the exercise of warrants held by Mr. Hirsch. Excludes 10,000 shares held by Mr. Hirsch as custodian for a minor child as to which he disclaims beneficial ownership, and 21,666 shares held by a family trust, as to which he disclaims beneficial ownership. (6) 1125 N.E. 125th Street, Suite 206, North Miami, Florida 33161. Includes 21,000 shares issuable under an option granted pursuant to the Stock Option Plan, to the extent exercisable within the next 60 days and 100,000 shares issuable upon the exercise of warrants held by Mr. Mayerson. Excludes 56,667 shares owned by Mr. Mayerson's spouse, as to which he disclaims beneficial ownership. (7) 1011 High Ridge Road, Stamford, Connecticut 06905. Excludes 3,000 shares owned by a member of Mr. McConnaughy's family, as to which he disclaims beneficial ownership. (8) 1251 Avenue of the Americas, 51st Floor, New York, New York 10020. Excludes 15,000 shares owned by a member of Mr. Ross' family and 250,000 shares owned by Rothschild, Inc., of which Mr. Ross is a Managing Director, over which Mr. Ross does not have any investment or voting power, and as to which he disclaims beneficial ownership. (9) 1000 Parkwood Circle, Atlanta, Georgia 30339. Includes 15,000 shares issuable under an option granted pursuant to the Stock Option Plan, to the extent exercisable within the next 60 days. (10) 4310 Paradise Road, Las Vegas, Nevada 89109. Includes 15,000 shares issuable under an option granted pursuant to the Stock Option Plan, to the extent exercisable within the next 60 days. (11) See Notes (2)-(10). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Purchase of Preferred Equities Corporation. Pursuant to a Stock Purchase and Redemption Agreement dated October 6, 1987 and amended October 25, 1987, Comay Corp., an affiliate of Messrs. Cohen and Mayerson (Comay), GRI, an affiliate of Mr. Schuster, RRE Corp., an affiliate of Mr. Nederlander (together with its assignee, RER Corp., another affiliate of Mr. Nederlander, RER), and H&H Financial Inc., an affiliate of Mr. Hirsch (H&H), obtained the rights (PEC Purchase Rights) to acquire PEC, a privately-held Nevada corporation engaged in retail land sales, resort time-sharing and other real estate related activities. (Comay, GRI, RER and H&H are collectively referred to as the Assignors). 58 59 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 subsidiaries as of the end of a fiscal quarter that could be used to make a dividend or other payment to the Company without violating the most restrictive loan agreement to which PEC is a party or by which PEC is bound. At January 31, 1995, at which point the accrual of payments ceased, the Company owed the Assignors an aggregate of $13.3 million pursuant to the Assignment and Assumption Agreement. Pursuant to an amendment (the Amendment) to the Assignment and Assumption Agreement, dated March 2, 1995, the Assignors agreed to defer payment of the $10 million of Subordinated Debt and to subordinate the payment of such amount to them to the Company's repayment of certain borrowings and the repayment of certain obligations of subsidiaries of the Company, the repayment of which obligations were guaranteed by the Company. Pursuant to the Amendment, the Company is required to pay interest semi- annually on the Subordinated Debt at a rate of 10% per year between September 1, 1995 and March 1, 1997, and make seven equal semi-annual payments of $1.4 million plus interest commencing March 1, 1997. In addition to the Subordinated Debt, at May 31, 1995, $3.3 million was payable to the Assignors, which amount bears interest at the rate of 10% per year, payable semi-annually pursuant to the provisions of the Assignment and Assumption Agreement (Unsubordinated Amount). During fiscal 1996, the Company paid an aggregate of $1.2 million to the Assignors, all of which represented interest. The Unsubordinated Amount is payable no later than March 1, 1997. All amounts owed to the Assignors are secured by a pledge of all the stock of PEC. In consideration of the payment deferral and subordination described above, warrants (Warrants) for 1,000,000 shares of common stock at an exercise price of $4.25 per share (the closing market price per share on March 2, 1995) were granted to the Assignors. The Warrants contain restrictions on transfer and are exercisable between March 2, 1996 and March 1, 2000. The amount of options exercisable at August 31, 1996 were 155,000 plus an additional 74,000 that will become exercisable within 60 days after the Form 10-K filing date. In April 1995, PEC entered into an arrangement with HFS, of which Mr. Nederlander became a director in July 1995. See "Business- Preferred Equities Corporation-Timeshare Properties and Sales." 59 60 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) See Item 8 above for a list of financial statements and financial statement schedules included as part of this Annual Report on Form 10-K. (b) No reports on Form 8-K were filed during the last quarter of fiscal 1996. (c) Exhibits. EXHIBIT NUMBER DESCRIPTION -------------- ----------- 2.1(1) Disclosure Statement dated October 3, 1983, together with Schedules A through G and Debtors' Plan, filed as Exhibit (2) to Mego International (a predecessor of the Company) Form 10-K for the year ended February 28, 1983, and incorporated herein by reference. 2.2(8) Articles of Merger of Vacation Spa Resorts, Inc. with and into Preferred Equities Corporation dated March 10, 1993, Agreement and Plan of Merger dated as of July 24, 1992, among Preferred Equities Corporation and Vacation Spa Resorts, Inc., Amendment to Agreement and Plan of Merger dated July 14, 1992, and Amendment to Agreement and Plan of Merger dated December 7, 1992. 3.1(a)(1) Certificate of Incorporation of the Company, as amended, filed as Exhibit 3.1 to the Company's Form 10-K for the fiscal year ended August 31, 1987 and incorporated herein by reference. 3.1(b)(5) Certificate of Amendment of the Certificate of Incorporation of the Company, dated June 19, 1992. 3.1(c)(8) Certificate of Amendment of the Certificate of Incorporation of the Company, dated August 26, 1993. 3.2(1) By-laws of the Company, as amended. 3.3(10) Mego Mortgage Corporation Amended and Restated Certificate of Incorporation of Mego Mortgage Corporation. 3.4(10) Mego Mortgage Corporation By-laws of Mego Mortgage Corporation, as amended. 4.1(10) Mego Mortgage Corporation Specimen Common Stock Certificate. 10.4(a)(1) Stock Purchase Agreement dated October 25, 1987 by and among the Company, and Robert Nederlander, Jerome J. Cohen, Don A. Mayerson, Herbert Hirsch and Growth Realty Inc. ("GRI") (collectively, the "Purchasers") filed as Exhibit A to a Schedule 13D dated October 25, 1987, filed by Jerome J. Cohen, et al., and incorporated herein by reference. 10.4(b)(1) Letter dated January 7, 1988 from the Purchasers of the Company, updating representations made by the Company, in the Stock Purchase Agreement (Exhibit 10.5(a)) filed as Exhibit 10.2 to a Current Report on Form 8-K of the Company, dated January 7, 1988, and incorporated herein by reference. 10.5(a)(1) Assignment Agreement dated October 25, 1987 by and among Comay Corp. ("Comay"), GRI, RER Corp. ("RER") (as successor in interest to RRE Corp.) and H&H Financial, Inc. ("H&H") (collectively the "Assignors") and the Company, with respect to shares of Common Stock of Preferred Equities Corporation ("PEC"), filed as Exhibit B to a Schedule 13D dated October 25, 1987 filed by Jerome J. Cohen, et al., and incorporated herein by reference. 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. 60 61 EXHIBIT NUMBER DESCRIPTION -------------- ----------- 10.9(1) Purchase Agreement dated June 30, 1988 by and among Preferred Equities Corporation ("PEC"), Southern Colorado Properties, Inc., Colorado Land and Grazing Company and The Oxford Finance Companies, Inc. filed as Exhibit 10.1 to a Quarterly Report of the Company on Form 10-Q for the quarter ended May 31, 1988 and incorporated herein by reference. 10.10(2) Amendment to Exhibit 10.5(b), dated July 29, 1988. 10.11(3) Amended and Restated Loan and Security Agreement between Greyhound Real Estate Finance Company and Vacation Spa Resorts, Inc., dated May 10, 1989 and Amended and Restated Promissory Note and Guarantee and Subordination Agreement. 10.12(3) Amendment No. 2 to Loan and Security Agreement between Greyhound Real Estate Finance Company and Vacation Spa Resorts, Inc., dated April 16, 1990 and Amendment No. 2 to Promissory Note and Guarantee and Subordination Agreement. 10.13(3) Purchase Agreement dated 24th day of September, 1990 by and among Brigantine Inn, Ltd., Brigantine Preferred Properties, Inc. and Preferred Equities Corporation. 10.14(3) Purchase Agreement dated 24th day of September, 1990 by and among Brigantine Villas, L.P., Brigantine Preferred Properties, Inc., and Preferred Equities Corporation. 10.15(4) Amendment No. 3 to Loan and Security Agreement between Greyhound Real Estate Finance Company and Preferred Equities Corporation, dated May 31, 1991 and Amendment No. 2 to Promissory Note. 10.16(4) Amendment No. 3 to Loan and Security Agreement between Greyhound Real Estate Finance Company and Vacation Spa Resorts, Inc., dated May 31, 1991 and Amendment No. 2 to Promissory Note. 10.17(4) Loan and Security Agreement between Dorfinco Corporation and Preferred Equities Corporation, dated July 31, 1991 and related Promissory Note dated August 9, 1991. 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. 61 62 EXHIBIT NUMBER DESCRIPTION -------------- ----------- 10.33(7) Second Amendment to Loan and Security Agreement dated June 30, 1993, between Dorfinco Corp. and Preferred Equities Corporation, and First Amendment to Promissory Note. 10.34(7) Agreement for Sale of Notes Receivable arising from Timeshares sales dated August 3, 1993, by and between Brigantine Properties, Inc. as Seller, and The Oxford Finance Companies as Buyer. 10.35(7) Purchase and Sale Agreement dated August 30, 1993, between Preferred Equities Corporation as Developer, and Marine Midland Bank, N.A., and Wellington Financial Corp. 10.36(7) Purchase Agreement dated August 31, 1993, between Mego Financial Corp. as Seller, and Legg Mason Special Investment Trust as Buyer, for the purchase of 300,000 shares of the Company's Preferred Stock. 10.37(8) Amended and Restated Loan Agreement between Bank of America Nevada and Preferred Equities Corporation, dated September 10, 1993. 10.38(8) Agreement for Line of Credit and Commercial Promissory Note between Mego Mortgage Corporation and First National Bank of Boston, dated January 4, 1994. 10.39(8) Amendment No. 7 to Amended and Restated Loan and Security Agreement between Greyhound Real Estate Finance Company and Preferred Equities Corporation, dated January 24, 1994. 10.40(8) Agreement between Mego Mortgage Corporation and Hamilton Consulting, Inc., dated January 31, 1994. 10.41(8) Loan Purchase and Sale Agreement dated March 22, 1994, between Mego Mortgage Corporation as Buyer, and Southwest Beneficial Finance, Inc. as Seller. 10.42(8) Amendment No. 8 to Amended and Restated Loan and Security Agreement between Greyhound Real Estate Finance Company and Preferred Equities Corporation, dated April 15, 1994. 10.43(8) Purchase and Servicing Agreement dated as of June 1, 1994, between Preferred Equities Corporation as Seller and Servicer, and NBD Bank, N.A. as Purchaser. 10.44(8) Purchase and Servicing Agreement dated as of July 6, 1994, between Preferred Equities Corporation as Seller, and First National Bank of Boston as Purchaser. 10.45(8) Amendment No. 9 to Amended and Restated Loan and Security Agreement between Greyhound Real Estate Finance Company and Preferred Equities Corporation, dated August 31, 1994, and Amendment No. 4 to Amended and Restated Promissory Note dated August 31, 1994, Amendment No. 6 to Loan and Security Agreement between Greyhound Real Estate Finance Company and Preferred Equities Corporation dated August 31, 1994, and Amendment No. 4 to Promissory Note dated August 31, 1994, between Preferred Equities Corporation as successor-in-interest to Vacation Spa Resorts, Inc., and Greyhound Financial Corporation. 10.46(8) Master Loan Purchase and Servicing Agreement dated as of August 26, 1994, between Mego Mortgage Corporation as Seller, and First National Bank of Boston, as Purchaser. 10.47(9) Third Amendment to Loan and Security Agreement and Assumption Agreement dated August 23, 1994, by and between Preferred Equities Corporation, Colorado Land and Grazing Corp. and Dorfinco Corporation. 10.48(9) General Loan and Security Agreement dated October 5, 1994, between Steamboat Suites, Inc. and Textron Financial Corporation. 10.49(9) Purchase and Servicing Agreement, Second Closing, dated November 29, 1994, between Preferred Equities Corporation and NBD Bank, N.A. 10.50(9) Form of Agreement with respect to the Company's "Split-Dollar" Life Insurance Plan, including Form of Assignment of Limited Interest in Life Insurance as Collateral Security. 10.51(9) Construction Loan Agreement dated January 20, 1995, by and between Preferred Equities Corporation and NBD Bank. 10.52(9) Amendment No. 10 to Amended and Restated Loan and Security Agreement dated January 26, 1995, by and between Greyhound Financial Corporation and Preferred Equities Corporation. 10.53(9) Loan Agreement re: Calvada Golf Course dated January 31, 1995, by and among The First National Bank of Boston and Preferred Equities Corporation. 10.54(9) Second Amendment to Assignment and Assumption Agreement dated March 2, 1995, by and between RER Corp., Comay Corp., Growth Realty, Inc. and H&H Financial, Inc. and Mego Financial Corp. 10.55(9) First Amendment to General Loan and Security Agreement dated February 27, 1995, between Steamboat Suites, Inc. and Textron Financial Corporation. 10.56(9) Master Loan Purchase and Servicing Agreement dated April 1, 1995, by and between Greenwich Capital Financial Products, Inc. and Mego Mortgage Corporation. 10.57(9) Licensing Agreement dated April 18, 1995, by and among Hospitality Franchise Systems, Inc., Ramada Franchise Systems, Inc. and Preferred Equities Corporation. 10.58(9) Purchase and Servicing Agreement, Third Closing, dated May 24, 1995, between NBD Bank, N.A. and Preferred Equities Corporation. 10.59(9) Participation and Servicing Agreement dated May 25, 1995, by and between Atlantic Bank, N.A. and Mego Mortgage Corporation. 10.60(9) Purchase and Servicing Agreement, dated as of August 31, 1995, between Preferred Equities Corporation, Colorado Land and Grazing Corp. and First National Bank of Boston. 62 63 EXHIBIT NUMBER DESCRIPTION -------------- ----------- 10.61(9) Warehousing Credit and Security Agreement, dated as of August 11, 1995, between Mego Mortgage Corporation and First National Bank of Boston. 10.62(10) Mego Mortgage Corporation Stock Option Plan 10.63(10) Form of Tax Allocation and Indemnity Agreement entered into between Mego Mortgage Corporation and the Company. 10.64(10) Loan Program Sub-Servicing Agreement between the Mego Mortgage Corporation and Preferred Equities Corporation dated as of September 1, 1996. 10.65(10) Servicing Agreement by and among Mego Mortgage FHA Title I Loan Trust 1996-1, First Trust of New York, National Association, as Trustee, Norwest Bank Minnesota, N.A. as Master Servicer and the Registrant, as Servicer dated as of March 21, 1996. 10.66(10) Loan Purchase Agreement between Financial Asset Securities Corp., as Purchaser, and the Mego Mortgage Corporation, as Seller, dated as of March 21, 1996. 10.67(11) Indemnification Agreement among MBIA Insurance Corporation, as Insurer, Mego Mortgage Corporation, as Seller and Greenwich Capital Markets, Inc. as Underwriter, dated as of March 29, 1996. 10.68(10) Pooling and Servicing Agreement, dated as of March 21, 1996, among Mego Mortgage Corporation, Financial Asset Securities Corp., as Depositor, First Trust of New York, National Association, as Trustee and Contract of Insurance Holder and Norwest Bank Minnesota, N.A., as Master Servicer. 10.69(11) Insurance Agreement among MBIA Insurance Corporation, as Insurer, Norwest Bank Minnesota, N.A., as Master Servicer, Mego Mortgage Corporation, as Seller, Servicer and Claims Administrator, Financial Asset Securities Corp., as Depositor, Greenwich Capital Financial Products, Inc., and First Trust of New York, National Association, as as Trustee and Contract of Insurance Holder, dated as of March 21, 1996. 10.70(11) Credit Agreement dated as of June 28, 1996 between Mego Mortgage Corporation and First National Bank of Boston as Agent. 10.71(10) Loan Purchase Agreement dated as of August 1, 1996 between Financial Asset Securities Corp., as Purchaser, and Mego Mortgage Corporation, as Seller. 10.72(10) Pooling and Servicing Agreement dated as of August 1, 1996 between Financial Asset Securities Corp., as Purchaser, and Mego Mortgage Corporation, as Seller. 10.73(11) Amendment No. 1 to Warehousing Credit and Security Agreement dated as of August 9, 1996 between Mego Mortgage Corporation and First National Bank of Boston. 10.74(10) Office Lease by and between MassMutual and Mego Mortgage Corporation dated April 1996. 10.75(11) Amendment to Master Loan Purchase and Servicing Agreement between Greenwich Capital Financial Products, Inc., and Mego Mortgage Corporation dated February 1, 1996. 10.76(11) Amendment No. 2 to Master Loan Purchase and Servicing Agreement between Greenwich Capital Financial Products, Inc., and Mego Mortgage Corporation dated July 1, 1996. 10.77(10) Services and Consulting Agreement between Mego Mortgage Corporation and Preferred Equities Corporation dated as of September 1, 1996. 10.78(11) Employment Agreement between Mego Mortgage Corporation and Jeffrey S. Moore dated January 1, 1994. 10.79(11) Form of Indenture entered into between Mego Mortgage Corporation and the Indenture Trustee. 10.80(10) Master Repurchase Agreement dated as of September 4, 1996 between Mego Mortgage Corporation and Greenwich Capital Markets, Inc. 10.81(10) Letter agreement dated October 1, 1996 between Mego Mortgage Corporation and Greenwich Capital Markets, Inc. 10.82(10) Amended and Restated Master Loan Purchase and Servicing Agreement dated as of October 1, 1996 among Mego Mortgage Corporation, Mego Financial Corp. and Greenwich Capital Markets, Inc. 10.83(10) Form of Agreement entered into between Mego Mortgage Corporation and Mego Financial Corp. 10.84(10) Commitment letter between Mego Mortgage Corporation and Greenwich Capital Markets, Inc. dated September 17, 1996. 10.85 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 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 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. 63 64 EXHIBIT NUMBER DESCRIPTION -------------- ----------- 10.88 Request for Receivables Purchase dated November 16, 1995, by and between Preferred Equities Corporation as Seller and NBD Bank as Purchaser. 10.89 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 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 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 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 Acquisition and Construction Loan Agreement dated March 29, 1996, by and between Heller Financial, Inc. and Preferred Equities Corporation and three (3) related Promissory Notes; Acquisition Promissory Note, Revolving Renovation Promissory Note, and Receivables Promissory Note. 10.94 Construction Loan Agreement dated April 30, 1996, by and between Preferred Equities Corporation and NBD Bank and related Promissory Note. 10.95 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 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 Request for Receivables Purchase dated July 30, 1996, by and between Preferred Equities Corporation as Seller and NBD Bank as Purchaser. 10.98 Preferred Stock redemption agreement by and between Mego Financial Corp. and Legg Mason Special Investment Trust, Inc. 10.99 Amendment to Common Stock Purchase Warrant issued by Mego Financial Corp. to Legg Mason Investment Trust, Inc. 21.1 Subsidiaries of the Company 27.1 Financial Data Schedule (For SEC Use Only) - ------------------------------------ (1) Filed as part of the Company's Form 10-K for fiscal year ended August 31, 1988 and incorporated herein by reference. (2) Filed as part of the Company's Form 10-K for fiscal year ended August 31, 1989 and incorporated herein by reference. (3) Filed as part of the Company's Form 10-K for fiscal year ended August 31, 1990 and incorporated herein by reference. (4) Filed as part of the Company's Form 10-K for fiscal year ended August 31, 1991 and incorporated herein by reference. (5) Filed as part of the Company's Registration Statement on Form S-4 originally filed August 31, 1992 and incorporated herein by reference. (6) Filed as part of the Company's Form 10-K for fiscal year ended August 31, 1992 and incorporated herein by reference. (7) Filed as part of the Company's Form 10-K for fiscal year ended August 31, 1993 and incorporated herein by reference. (8) Filed as part of the Company's Form 10-K for fiscal year ended August 31, 1994 and incorporated herein by reference. (9) Filed as part of the Company's Form 10-K for fiscal year ended August 31, 1995 and incorporated herein by reference. (10) Filed as part of the Registration Statement on Form S-1 filed by Mego Mortgage Corporation, as amended (File No. 333-12443), and incorporated herein by reference. (11) Filed as part of the Registration Statement on Form S-1 filed by Mego Mortgage Corporation, as amended (File No. 333-13421), and incorporated herein by reference. 64 65 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, 1996 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 November 27, 1996 --------------------------------- Executive Officer and Director Robert Nederlander /S/ JEROME J. COHEN President and Director November 27, 1996 --------------------------------- Jerome J. Cohen /S/ HERBERT B. HIRSCH Senior Vice President, Chief November 27, 1996 --------------------------------- Financial Officer, Treasurer and Herbert B. Hirsch Director /S/ EUGENE I. SCHUSTER Vice President and Director November 27, 1996 --------------------------------- Eugene I. Schuster /S/ DAVID A. CLEVELAND Vice President and Chief Accounting November 27, 1996 --------------------------------- Officer David A. Cleveland /S/ WILBUR L. ROSS, JR. Director November 27, 1996 --------------------------------- Wilbur L. Ross, Jr. /S/ JOHN E. MCCONNAUGHY, JR. Director November 27, 1996 --------------------------------- John E. McConnaughy, Jr.
65 66 MEGO FINANCIAL CORP. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Independent Auditors' Report F-2 Financial Statements: Consolidated Statements of Financial Condition - August 31, 1996 and 1995 F-3 Consolidated Statements of Operations - Years Ended August 31, 1996, 1995 and 1994 F-4 Consolidated Statements of Stockholders' Equity - Years Ended August 31, 1996, 1995 and 1994 F-6 Consolidated Statements of Cash Flows - Years Ended August 31, 1996, 1995 and 1994 F-7 Notes to Consolidated Financial Statements F-9 F-1 67 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Mego Financial Corp. and Subsidiaries Las Vegas, Nevada We have audited the accompanying statements of financial condition of Mego Financial Corp. and its subsidiaries (the "Company") as of August 31, 1996 and 1995, and the related consolidated financial statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended August 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Mego Financial Corp. and subsidiaries at August 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 1996 in conformity with generally accepted accounting principles. As discussed in Note 4 to the consolidated financial statements, in 1995 the Company adopted Statement of Financial Accounting Standards No. 122, Accounting for Mortgage Servicing Rights effecive September 1, 1994. DELOITTE & TOUCHE LLP Las Vegas, Nevada October 25, 1996, except for Note 24 as to which the date is November 22, 1996 F-2 68 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (thousands of dollars, except per share amounts) August 31,
1996 1995 ----------- ----------- ASSETS Cash and cash equivalents $3,185 $7,338 Restricted cash 6,657 6,467 Notes receivable, net of allowances for cancellations, valuation discounts, and credit losses of $16,794 and $16,866 at August 31, 1996 and 1995, respectively 40,485 31,054 Mortgage related securities, at fair value 22,944 0 Excess servicing rights 14,268 16,565 Mortgage servicing rights 3,827 1,076 Timeshare interests held for sale 36,890 19,820 Land and improvements inventory 3,721 5,542 Other investments 1,972 1,531 Property and equipment, net of accumulated depreciation of $13,550 and $11,848 at August 31, 1996 and 1995, respectively 20,262 12,681 Deferred selling costs 2,901 3,332 Other assets 8,485 7,351 ----------- ----------- TOTAL ASSETS $165,597 $112,757 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Notes and contracts payable $84,449 $44,715 Accounts payable and accrued liabilities 19,662 13,998 Payable to assignors 2,579 2,579 Future estimated contingency for notes receivable sold with recourse 9,332 8,030 Deposits 2,971 3,619 Negative goodwill 82 131 Deferred income taxes 10,980 8,103 ----------- ----------- Total liabilities before subordinated debt and redeemable preferred stock 130,055 81,175 ----------- ----------- Subordinated debt 9,691 9,352 ----------- ----------- Redeemable preferred stock, Series A, 12% cumulative preferred stock, $.01 par value, $10 redemption value, 0 and 300,000 shares issued and outstanding at August 31, 1996 and 1995, respectively 0 3,000 ----------- ----------- Stockholders' equity: Preferred stock, $.01 par value (authorized -- 5,000,000 shares) Common stock, $.01 par value (authorized -- 50,000,000 shares; issued and outstanding -- 18,433,121 and 18,087,556 at August 31, 1996 and 1995, respectively) 184 180 Additional paid-in capital 6,504 4,498 Retained earnings 19,163 14,552 ----------- ----------- Total stockholders' equity 25,851 19,230 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $165,597 $112,757 =========== ===========
See notes to consolidated financial statements. F-3 69 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (thousands of dollars, except per share amounts) For the years ended August 31,
1996 1995 1994 --------- --------- --------- REVENUES Timeshare interest sales, net $27,778 $20,682 $19,521 Land sales, net 17,968 20,812 13,534 Housing sales 0 205 515 Gain on sale of notes receivable 19,110 13,819 1,454 Net unrealized gain on mortgage related securities 2,697 0 0 Interest income 8,698 8,179 8,368 Financial income 3,892 1,149 0 Amortization of negative goodwill 49 216 472 Incidental operations 2,995 3,620 2,007 Other 1,527 890 954 --------- --------- --------- Total revenues 84,714 69,572 46,825 --------- --------- --------- COSTS AND EXPENSES Direct cost of: Timeshare interest sales 3,998 2,977 2,684 Land sales 1,844 2,164 1,435 Housing sales 0 265 531 Incidental operations 2,257 2,343 2,342 Commissions and selling 30,351 23,690 18,949 Depreciation and amortization 1,920 1,534 1,208 Provision for credit losses 1,510 864 96 Interest expense 8,597 6,961 4,836 General and administrative 26,219 17,335 11,231 Payments to assignors 0 7,252 8,526 --------- --------- --------- Total costs and expenses 76,696 65,385 51,838 --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES 8,018 4,187 (5,013) INCOME TAXES 3,167 3,293 761 --------- --------- --------- INCOME (LOSS) FROM CONTINUING OPERATIONS 4,851 894 (5,774) GAIN ON DISCONTINUED OPERATIONS, NET OF INCOME TAXES OF $450 0 873 0 --------- --------- --------- NET INCOME (LOSS) 4,851 1,767 (5,774) CUMULATIVE PREFERRED STOCK DIVIDENDS 240 360 360 --------- --------- --------- NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $4,611 $1,407 ($6,134) ========= ========= =========
See notes to consolidated financial statements. F-4 70 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Continued) (thousands of dollars, except per share amounts) For the years ended August 31,
1996 1995 1994 ------------ ------------ ------------ EARNINGS (LOSS) PER COMMON SHARE: Primary: Income (loss) from continuing operations $0.24 $0.03 ($0.34) Income from discontinued operations 0 0.05 0 ------------ ------------ ------------ Net income (loss) $0.24 $0.08 ($0.34) ============ ============ ============ Weighted average number of common shares and common share equivalents outstanding 19,087,387 18,087,153 17,820,170 ============ ============ ============ Fully Diluted: Income from continuing operations $0.24 $0.02 Income from discontinued operations 0 0.05 ------------ ------------ Net income $0.24 $0.07 ============ ============ Weighted average number of common shares and common share equivalents outstanding 19,087,387 18,939,201 ============ ============
See notes to consolidated financial statements. F-5 71 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (thousands of dollars, except per share amounts)
Common Stock -------------- $.01 par value Additional -------------- paid-in Retained Shares Amount capital earnings Total ------------ ------------ ------------ ------------ ------------ Balance at September 1, 1993 17,631,169 $178 $2,612 $19,219 $22,009 Issuance of common stock 475,000 3 647 -- 650 Redemption of common stock (19,419) (1) (61) -- (62) Dividends on preferred stock -- -- -- (300) (300) Net loss -- -- -- (5,774) (5,774) ------------ ------------ ------------ ------------ ------------ Balance at August 31, 1994 18,086,750 180 3,198 13,145 16,523 Issuance of 1,000,000 common stock warrants in connection with subordinated debt valued at $1.30 per share -- -- 1,300 -- 1,300 Issuance of common stock in connection with exercise of stock options 806 -- -- -- -- Dividends on preferred stock -- -- -- (360) (360) Net income -- -- -- 1,767 1,767 ------------ ------------ ------------ ------------ ------------ Balance at August 31, 1995 18,087,556 180 4,498 14,552 19,230 Issuance of common stock in connection with exercise of stock options 2,218 1 9 -- 10 Issuance of common stock in connection with redemption of preferred stock 343,347 3 1,997 -- 2,000 Dividends on preferred stock -- -- -- (240) (240) Net income -- -- -- 4,851 4,851 ------------ ------------ ------------ ------------ ------------ Balance at August 31, 1996 18,433,121 $184 $6,504 $19,163 $25,851 ============ ============ ============ ============ ============
See notes to consolidated financial statements. F-6 72 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (thousands of dollars) For the years ended August 31,
1996 1995 1994 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $4,851 $1,767 ($5,774) ------------ ------------ ------------ Adjustments to reconcile net income (loss) to net cash used in operating activities: Amortization of negative goodwill (49) (216) (472) Charges to allowance for cancellation and credit losses (6,918) (6,611) (7,909) Provisions for cancellation and credit losses 11,288 10,359 7,775 Provisions for uncollectible owners' association advances 12 1,050 365 Cost of sales 5,842 5,406 4,650 Depreciation and amortization expense 1,920 1,534 1,208 Gain on sale of notes receivables (1,116) (1,586) (875) Gain on discontinued operations -- (1,323) -- Increase (decrease) in future estimated contingency for notes receivable sold with recourse 3,080 4,943 2,340 Additions to excess servicing rights (21,242) (15,336) (1,611) Amortization of excess servicing rights 2,758 917 367 Repayments of mortgage related securities 92 -- -- Accretion of residual interest on mortgage related securities (243) -- -- Net unrealized gain on mortgage related securities (2,697) -- -- Additions to mortgage servicing rights (3,306) (1,176) -- Amortization of mortgage servicing rights 555 100 -- Deferred income taxes 2,877 2,689 761 Amortization of future estimated contingency for notes receivable sold with recourse (1,812) (1,423) (1,696) Repayments on notes receivable, net 24,680 17,965 24,614 Proceeds from sale of notes receivable 152,601 119,055 31,097 Purchase of land and timeshare interests (21,091) (13,951) (5,339) Changes in operating assets and liabilities: Increase in restricted cash (190) (5,715) (252) Increase in notes receivable, net (190,902) (133,147) (43,949) Decrease (increase) in other assets 327 (795) (544) Decrease (increase) in deferred selling costs 431 (277) (1,003) Increase in accounts payable and accrued liabilities 5,664 6,036 1,722 Increase (decrease) in deposits (648) 1,399 802 Increase in payable to assignors -- 6,100 3,927 Decrease in excess of liabilities over assets of discontinued operations -- (2,899) -- ------------ ------------ ------------ Total adjustments (38,087) (6,902) 15,978 ------------ ------------ ------------ Net cash provided by (used in) operating activities (33,236) (5,135) 10,204 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (9,327) (3,797) (2,573) Proceeds from sale of property and equipment 19 3 150 Additions to other investments (1,381) (262) (3,903) Decreases in other investments 940 350 4,111 ------------ ------------ ------------ Net cash used in investing activities (9,749) (3,706) (2,215) ------------ ------------ ------------
See notes to consolidated financial statements. F-7 73 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (thousands of dollars) For the years ended August 31,
1996 1995 1994 ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings 201,243 122,334 41,040 Reduction of debt (161,510) (117,429) (45,958) Preferred stock dividends (240) (360) (300) Redemption of preferred stock (1,000) -- -- Redemption of common stock -- -- (62) Payments on subordinated debt (1,000) -- -- Increase in subordinated debt 1,339 652 -- ------------ ------------ ------------ Net cash provided by (used in) financing activities 38,832 5,197 (5,280) ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,153) (3,644) 2,709 CASH AND CASH EQUIVALENTS -- BEGINNING OF YEAR 7,338 10,982 8,273 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS -- END OF YEAR $3,185 $7,338 $10,982 ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: Cash paid during the year for: Interest, net of amounts capitalized $9,136 $5,567 $4,698 ============ ============ ============ Income taxes $25 $3 $-- ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: The Company issued 475,000 shares of its common stock to an unrelated entity for services rendered to Mego Mortgage $-- $-- $650 ============ ============ ============ Issuance of subordinated debt to assignors $-- $10,000 $-- ============ ============ ============ In connection with the issuance of subordinated debt the Company issued 1,000,000 common stock warrants to the assignors $-- $1,300 $-- ============ ============ ============ In connection with the securitization of loans and creation of mortgage related securities, the Company retained interest only securities and residual interest securities $20,096 $-- $-- ============ ============ ============ Redemption of preferred stock through issuance of common stock $2,000 $-- $-- ============ ============ ============
See notes to consolidated financial statements. F-8 74 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 1996, 1995, AND 1994 1. NATURE OF OPERATIONS Mego Financial Corp. (Mego) is a specialty financial services company that, through its subsidiaries, Mego Mortgage Corporation (MMC) and Preferred Equities Corporation (PEC), is engaged primarily in originating, selling and servicing consumer receivables generated through home improvement loans and timeshare and land sales. Mego Financial Corp. and its subsidiaries are herein collectively referred to as the Company. MMC originates Title I home improvement loans (Title I Loans) insured by the Federal Housing Administration (FHA) of the Department of Housing and Urban Development (HUD) through a network of loan correspondents and home improvement contractors. In May 1996, MMC commenced the origination of conventional home improvement and home equity loans through its network of loan correspondents. PEC markets and finances timeshare interests in select resort areas, as well as land. By providing financing to virtually all of its customers, PEC also originates consumer receivables that it sells and services. Timeshare and land sales have historically accounted for most of the Company's revenues and profits; however, since March 1994, when MMC commenced operations, originating, selling and servicing home improvement loans have accounted for an increasing portion of revenues and profits. Mego 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 acquired PEC, pursuant to an assignment by the Assignors, as defined below, of their contract right to purchase PEC. See Note 2 for further discussion. To facilitate its sales of timeshare interests, the Company has entered into several trust agreements. The trustees administer the collection of the related notes receivable. The Company has assigned title to certain of its resort properties and its interest in certain notes receivable to the trustees. 2. ACQUISITION OF PREFERRED EQUITIES CORPORATION The acquisition of PEC on February 1, 1988, was effected pursuant to an Assignment Agreement, dated October 25, 1987, between Mego 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 and the Assignors (collectively, such agreements constitute the Assignment). The acquisition of PEC was accomplished by PEC's issuing 2 shares of its common stock to the Company for a purchase price of approximately $50,000. Immediately prior to that time, the previously outstanding shares held by others were surrendered and redeemed by PEC at a cost to PEC of approximately $10,463,000 plus fees and expenses, leaving Mego with all of the outstanding shares of PEC. The right to purchase shares from PEC was obtained by Mego pursuant to the Assignment, which assigned to the Company 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 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 the Company 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 ending on January 31, 1995. The additional payments are collateralized by a pledge of PEC stock to the Assignors. On March 2, 1995, Mego entered into the Second Amendment to Assignment and Assumption Agreement (Amendment) whereby the Assignors agreed to defer payment of $10,000,000 of the amount payable to Assignors and to subordinate such amounts in right of payment applied to debt for money borrowed by Mego or obligations of subsidiaries guaranteed by Mego. Warrants for 1,000,000 shares of Mego common stock, at an exercise price of $4.25 per share (the closing market price per share on March 2, 1995) were granted to the Assignors in consideration of the payment deferral and subordination. The warrants contain restrictions on transfer and are exercisable until March 1, 2000. The Amendment calls for interest to be paid semi-annually at the rate of 10% per annum starting September 1, 1995, and 7 equal semi annual payments of $1,429,000 plus interest, commencing March 1, 1997. The payments are collateralized by a pledge of PEC stock. See Notes 16 and 22 for further discussion. F-9 75 3. EXCESS OF BOOK VALUE OF NET ASSETS ACQUIRED OVER ACQUISITION COST On February 1, 1988, the underlying book value of the net assets of PEC exceeded Mego's acquisition cost by the amount of $42,315,000. Management allocated the excess book value to assets existing at the acquisition date (primarily notes receivable which mature over approximately seven to ten years), as a revaluation adjustment. As collections are made on the receivables (either through installment payments or upon sale of receivables), a portion of the revaluation adjustment is recorded to income as amortization. For the fiscal years ended August 31, 1996, 1995, and 1994, such amortization amounted to $0, $166,000, and $422,000, respectively. The Company previously determined that $20,000,000 of the revaluation adjustment should not be amortized. Payments to assignors have aggregated $47,401,000 through January 31, 1995 at which time the accrual of payments to Assignors ceased. Amounts in excess of $20,000,000 have been expensed and $0, $7,252,000 and $8,526,000 have been included in costs and expenses for the 12 months ended August 31, 1996, 1995 and 1994, respectively. See Notes 2 and 22 for further discussion. 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation--The accompanying consolidated financial statements include the accounts of Mego and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. See Note 1 for further discussion. Parent Company Only Basis--At August 31, 1996 and 1995, Mego, on a "parent company only" basis, reflected total assets of $58,708,000 and $51,529,000, respectively, which are comprised principally of its equity investment in subsidiaries of $46,082,000 and $41,280,00, respectively and liabilities of $23,166,000 and $22,947,000, respectively, excluding subordinated debt.. At August 31, 1996, liabilities were comprised principally of deferred income taxes of $11,669,000, payable to Assignors of $2,579,000, and payable to PEC of $7,445,000, excluding subordinated debt. At August 31, 1995, liabilities excluding subordinated debt were comprised principally of deferred income taxes of $8,103,000, payable to Assignors of $2,579,000, and payable to PEC of $7,741,000. At August 31, 1996 and 1995, subordinated debt of $9,691,000 and $9,352,000, respectively, was outstanding. At August 31, 1996 and 1995, Mego had outstanding redeemable preferred stock with an aggregate redemption price of $0 and $3,000,000, respectively. See Notes 2, 16, and 17 for further discussion. Cash Equivalents--Cash equivalents consist primarily of certificates of deposit, repurchase agreements and commercial paper with original maturities of ninety 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--Substantially all of the notes receivable are held for sale and are carried at the lower of cost or market on an aggregate basis by type of receivable. The cost basis is the outstanding principal balance of the notes reduced by the allowances for cancellation and credit losses and by the net deferred origination fees and certain direct origination costs that are recognized upon sale. Allowances for Cancellation and Credit Losses--Provisions for cancellation and credit losses relating to notes receivable are 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 a provision for cancellations and credit loss at the time revenue is recognized, based upon periodic analysis of the portfolio, collateral values, estimated FHA insurance recoveries, historical credit loss experience, borrowers' ability to repay, and current economic factors. The allowance for cancellations and credit losses represents the Company's estimate of its probable future credit losses to be incurred over the lives of the notes. The allowance for cancellations and credit losses is reduced by actual cancellations and losses 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 future estimated cancellation and credit losses as notes receivable are sold. Recourse to the Company on sales of notes receivable is governed by the agreements between the purchasers and the Company. No allowance for credit losses on loans sold with recourse is established on loans sold through securitizations, as the Company has no recourse obligation under those securitization agreements. Estimated credit losses on loans sold through securitizations are considered in the Company's valuation of its residual interest securities. 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 F-10 76 and level of the portfolio, current economic conditions which may affect the purchasers' ability to pay, the changes in collateral values and overall portfolio quality. Changes in the allowance as a result of such reviews are reflected in the provision for cancellation and credit losses. Mortgage Related Securities--In 1996, the Company securitized a majority of loans originated by MMC into the form of a REMIC. A REMIC is a trust issuing multi-class securities with certain tax advantages to investors and which derives its cash flow from a pool of underlying mortgages. Certain of the senior classes of the REMIC are sold, and an interest only strip and a subordinated residual class are retained by the Company. The subordinated residual class is in the form of residual certificates and are classified as residual interest securities. The documents governing the Company's securitizations require the Company to establish initial overcollateralization or build overcollateralization levels through retention of distributions by the REMIC trust otherwise payable to the Company as the residual interest holder. This overcollateralization causes the aggregate principal amount of the loans in the related pool and/or cash reserves to exceed the aggregate principal balance of the outstanding investor certificates. Such excess amounts serve as credit enhancement for the related REMIC trust. To the extent that borrowers default on the payment of principal or interest on the loans, losses will reduce the overcollateralization and cash flows otherwise payable to the residual interest security holder to the extent that funds are available. If payment defaults exceed the amount of overcollateralization, as applicable, the insurance policy maintained by the related REMIC trust will pay any further losses experienced by holders of the senior interests in the related REMIC trust. The Company does not have any recourse obligations for credit losses in the REMIC trust. The residual interests are amortized to operations over the contractual lives of the loans, considering future estimated prepayments utilizing an amortization method which approximates the level yield method. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115) on September 1, 1995. There was no cumulative financial statement impact as a result of adopting SFAS 115. In accordance with the provisions of SFAS 115, the Company classifies residual interest securities and interest only securities as trading securities which are recorded at fair value with any unrealized gains or losses recorded in the results of operations in the period of the change in fair value. Valuations at origination and at each reporting period are based on discounted cash flow analyses. The cash flows are estimated as the excess of the weighted average coupon on each pool of loans securitized over the sum of the pass-through interest rate, servicing fees, a trustee fee, an insurance fee and an estimate of annual future credit losses, net of FHA insurance recoveries, related to the loans securitized, over the life of the loans. These cash flows are projected over the life of the loans using prepayment, default, and loss assumptions that the Company believes market participants would use for similar financial instruments and are discounted using an interest rate that the Company believes a purchaser unrelated to the seller of such a financial instrument would require. The Company utilized prepayment assumptions of 14%, estimated loss factor assumptions of 1%, and weighted average discount rates of 12%. The valuation includes consideration of characteristics of the loans including loan type and size, interest rate, origination date, and term. The Company also uses other available information such as externally prepared reports on prepayment rates and industry default rates of the type of loan portfolio under review. To the Company's knowledge, there is no active market for the sale of these mortgage related securities. The range of values attributable to the factors used in determining fair value is broad. Although the Company believes that it has made reasonable estimates of the fair value of the mortgage related securities, the rate of prepayments and default rates utilized are estimates, and actual experience may vary. Mortgage Servicing Rights--At August 31, 1995, effective September 1, 1994, the Company adopted the provisions of SFAS No. 122 "Accounting for Mortgage Servicing Rights, an amendment of SFAS No. 65" (SFAS 122) which requires that a mortgage banking enterprise recognize as separate assets the rights to service mortgage loans for others however those servicing rights are acquired. The effect of adopting SFAS 122 on the Company's financial statements was to increase income before income taxes by $1,076,000 for the year ended August 31, 1995. The fair value of capitalized mortgage servicing rights is estimated by calculating the present value of expected net cash flows from mortgage servicing using assumptions the Company believes market participants would use in their estimates of future servicing income and expense, including assumptions about prepayment, default and interest rates. Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income. The estimate of fair value was based on a 125 basis points per annum servicing fee reduced by estimated costs of servicing using a discount rate of 12% for the year ended August 31, 1996, and a 100 basis points per annum servicing fee reduced by estimated costs of servicing using a discount rate of 12% for the year ended August 31, 1995. At August 31, 1996 and August 31, 1995, the book value of mortgage servicing rights approximated fair value. The Company periodically reviews mortgage servicing rights to determine impairment. This review is performed on a disaggregated basis, based upon date of origination. F-11 77 Impairment is recognized in a valuation allowance for each pool in the period of the impairment. The Company has developed its assumptions based on experience with its own portfolio, available market data and ongoing consultation with its investment bankers. 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. Timeshare inventory that is to be recovered from future cancellations of sales is provided for as estimated inventory to be recovered from future cancellations and is recorded at its estimated cost. Land and Improvements Inventory--Land and improvements inventory include carrying costs capitalized during the development period and costs of improvements incurred to date and are stated at cost, not in excess of market value. Land and improvements inventory that is to be recovered from future cancellations of sales is provided for as estimated inventory to be recovered from future cancellations and is recorded at its estimated cost. 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. The Company is subject to regulation by the Public Service 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 amortization expense. CIAC is included in accounts payable and accrued liabilities in the amounts of $4,494,000 and $3,750,000 at August 31, 1996 and 1995, respectively. The Company excludes from the CIAC liability, a sum equal to the income tax expense related to the receipt of CIAC funds. Future Estimated Contingency 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 future estimated contingency for notes receivable sold with recourse represents the Company'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 $135,200,000 and $119,055,000 and $31,097,000 for the years ended August 31, 1996, 1995 and 1994, respectively. A liability for future estimated contingency for notes receivable sold with recourse was established at the time of each sale based upon the Company's analysis of all probable losses resulting from the Company's recourse obligations under each agreement of sale. For notes receivable sold after September 30, 1992, the liability was determined in accordance with Emerging Issues Task Force (EITF) Issue No. 92-2, on a "discounted to present value" basis using an interest rate equivalent to the risk-free market rate for securities with a duration similar to that estimated for the underlying notes receivable. For notes receivable sold prior to September 30, 1992, the liability remains on a non-discounted basis. Income Taxes--The Company utilizes the provisions of SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires the Company to adhere to an asset/liability approach for financial accounting and reporting for income taxes. Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the bases of the balance sheet for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when they are recovered or settled. Deferred taxes also are recognized for operating losses that are available to offset future taxable income and tax credits that are available to offset future income taxes. Revenue and Profit Recognition--Timeshare Interests and Land Sales --Sales of timeshare interests and land are recognized and included in revenues after certain "down payment" and other "continuing investment" criteria are met. Land sale revenues are recognized using the deposit method in accordance with the provisions of SFAS No. 66 "Accounting for Sales of Real Estate." The agreement for sale generally provides for a down payment and a note secured by a deed of trust or mortgage payable to the Company in monthly installments, including interest, over a period of up to ten years. Revenue is recognized after the requisite rescission period has expired and at such time as the purchaser has paid at least 10% of the sales price for sales of timeshare interests and 20% of the sales price for land sales. Land sales usually meet these requirements within eight to ten months from closing, and sales of timeshare interests usually meet these requirements at the time of sale. The sales price, less a provision for F-12 78 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, 1996, $131,975 of recognized sales remain subject to such cancellation. If a purchaser defaults under the terms of the contract, after all rescission and inspection periods have expired, all payments are generally retained by the Company. If the underlying note receivable is at a "below market" interest rate, a valuation discount is applied to the note receivable balance and amortized over its term so that the effective yield is 8% - 12% depending on the year of sale. Notes receivable with payment delinquencies of 90 days or more have been considered in determining the allowance for cancellation. Cancellations occur when the note receivable is determined to be uncollectible and related collateral, if any, has been recovered. Cancellation of a note receivable in the year the revenue is recognized is accounted for as a reversal of the revenue. Cancellation of a note receivable subsequent to the year the revenue was recognized is charged to the allowance for cancellation. Revenue Recognition--Gain on Sales of Notes Receivable -- Gain on sale of notes receivable includes the gain on sale of mortgage related securities and the gain on sale of notes receivable. In accordance with EITF Issue No. 88-11, the gain on sale of mortgage related securities is determined by an allocation of the cost of the securities based on the relative fair value of the securities sold and the securities retained. In sales of loans through securitization transactions, the Company generally retains interest only strip securities and residual interest securities.The fair value of the interest only strip securities and residual interest securities is the present value of the estimated cash flow to be received after considering the effects of estimated prepayments and credit losses. The interest only strip securities and residual interest securities are included in mortgage related securities in the Consolidated Statements of Financial Condition. 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 value of expected net cash flows from the sale of notes receivable are recorded at the time of sale as excess servicing rights. Excess servicing rights are amortized as a charge to income, as payments are received on the retained interest differential over the estimated life of the underlying notes receivable. Excess servicing rights are recorded at the lower of unamortized cost or estimated fair value. The expected cash flows used to determine the excess servicing rights asset have been reduced for potential losses net of potential FHA insurance recoveries, under recourse provisions of the sales agreements. The future estimated contingency for notes receivable sold with recourse represents the Company's estimate of losses to be incurred in connection with the recourse provisions of the sales agreements and is shown separately as a liability in the Company's Consolidated Statements of Financial Condition. In discounting cash flows related to notes receivable sales, the Company defers servicing income at an annual rate of 1% - 1.25%, 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 in financial income. The cash flows were discounted to present value using discount rates which averaged between 12% and15% in both fiscal 1996 and fiscal 1995. The Company has developed its assumptions based on experience with its own portfolio, available market data and ongoing consultation with its investment bankers. In determining expected cash flows, management considers economic conditions at the date of sale. In subsequent periods, these estimates may be revised as necessary using the original discount rate, and any losses arising from prepayment and loss experience will be recognized as realized. F-13 79 Interest Income--Interest income is recorded as earned. Interest income represents the interest earned on notes receivable, mortgage related securities, and short term investments. In accordance with EITF Issue No. 89-4, the Company computes an effective yield based on the carrying amount of each mortgage related security and its estimated future cash flow. This yield is then used to accrue interest income on the mortgage related security. During the period that a Title I Loan is 30 days through 270 days delinquent, the Company accrues interest at the HUD guaranteed rate of 7% in lieu of the contractual rate of the loan. When a Title I Loan becomes over 270 days contractually delinquent, it is placed on non-accrual status and interest is recognized only as cash is received. Interest income on other notes receivable greater than 90 days delinquent is generally recognized on a cash basis. 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 excess servicing rights and mortgage servicing rights are amortized systematically to reduce income to an amount representing normal servicing income and the present value discount. Late charges and other miscellaneous income are recognized when collected. Costs to service notes receivable are recorded as expense when incurred. Timeshare Owners' Associations-- The Company incurs a portion of operating expenses of the timeshare owners' associations based on ownership of the unsold timeshare interests at each of the respective timeshare properties. These costs are referred to as Association Assessments and are included in the Consolidated Statements of Operations in general and administrative expense. See Note 22 for further discussion. Loan Origination Costs and Fees--Loan origination costs and fees, including non-refundable loan origination fees and incremental direct costs associated with loan originations are deferred and amortized over the lives of the loans. Unamortized loan origination costs are recorded as expense or income upon the sale of the related loans. Organizational Costs of MMC -- Organizational costs associated with the commencement of originating, purchasing, selling and servicing of Title I Loans by MMC are being amortized over a five year period by MMC which commenced on March 1, 1994. Such amortization is included in depreciation and amortization expense on the Consolidated Statements of Operations. Accumulated amortization related to organizational costs was $482,000 and $289,000 at August 31, 1996 and 1995, respectively. Earnings (loss) per common share-- Earnings (loss) per common share are based on the net income (loss) applicable to common stock for each period divided by the weighted average number of common shares and common share equivalents outstanding during the period. Earnings per common share assuming full dilution are computed by dividing net income applicable to common stock by the weighted average number of common shares plus common share equivalents using the treasury stock method. In loss periods, anti- dilutive common share equivalents are excluded. Recently Issued Accounting Standards--The Financial Accounting Standards Board (the FASB) has issued Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS 121). SFAS 121 requires that long- lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS 121 is effective for fiscal years beginning after December 15, 1995. The Company does not anticipate any material effect upon adoption on results of operation or financial condition. (C) In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," (SFAS 123), which establishes financial accounting and reporting standards for stock-based employee compensation plans. This statement also applies to transactions in which an entity issues its equity instruments to acquire goods or services from nonemployees. Those transactions must be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. SFAS 123 is effective for fiscal years beginning after December 15, 1995. The Company intends to provide the pro forma and other additional disclosure about stock-based employee compensation plans in its fiscal 1997 financial statements as required by SFAS 123. SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 125) was issued by FASB in June 1996. SFAS 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. This statement also provides F-14 80 consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. It requires that liabilities and derivatives incurred or obtained by transferors as part of a transfer of financial assets be initially measured at fair value. SFAS 125 also requires that servicing assets be measured by allocating the carrying amount between the assets sold and retained interests based on their relative fair values at the date of transfer. Additionally, this statement requires that the servicing assets and liabilities be subsequently measured by (a) amortization in proportion to and over the period of estimated net servicing income and (b) assessment for asset impairment or increased obligation based on the fair values. The statement will require that the Company's existing and future excess servicing receivables be measured at fair market value and be reclassified as interest only strip securities and accounted for in accordance with SFAS 115. As required by the statement, the Company will adopt the new requirements effective January 1, 1997. It is not anticipated that upon implementation, the statement will have any material impact on the financial statements of the Company, as the book value of the Company's excess servicing rights and mortgage related securities approximates fair value. Upon adoption of SFAS 125, the Company's subsidiary, PEC, will begin recognizing servicing rights and notes receivable held for sale, similar to the method currently used by MMC with respect to mortgage servicing rights under SFAS 122. This will have the impact of increasing the gain on sale of notes at the time of sale and reducing future servicing fee income from PEC generated receivables sold after January 1, 1997. Reclassification- Certain reclassifications have been made to conform prior years with the current year presentation. Use of Estimates--The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 5. FAIR VALUES OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosure about Fair Value of Financial Instruments" (SFAS 107), requires disclosure of estimated fair value information for financial instruments, whether or not recognized in the Statements of Financial Condition. Fair values are based upon estimates using present value or other valuation techniques in cases where quoted market prices are not available. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. Estimated fair values, carrying values and various methods and assumptions used in valuing the Company's financial instruments at August 31, 1996 are set forth below (thousands of dollars):
ESTIMATED CARRYING FAIR VALUE VALUE ------------ ------------ Financial Assets: Cash and cash equivalents (a) $ 3,185 $ 3,185 Notes receivable, net (b) 40,485 41,973 Mortgage related securities (c) 22,944 22,944 Excess servicing rights (c) 14,268 14,268 Mortgage servicing rights (c) 3,827 3,827 Financial Liabilities: Notes and contracts payable (d) 84,449 84,449 Deposits (e) 2,971 2,971
(a) Carrying value was used as the estimate of fair value. (b) Since it is the Company's business to sell loans it originates, the fair value was estimated by using outstanding commitments from investors adjusted for non-qualified loans and the collateral securing such loans. F-15 81 (c) The fair value was estimated by discounting future cash flows of the instruments using discount rates, default, loss and prepayment assumptions based upon available market data, opinions from investment bankers and portfolio experience. (d) Notes payable generally are adjustable rate, indexed to the prime rate, or to the 90 day London Interbank Offering Rate (LIBOR); therefore, carrying value approximates fair value. Contracts payable represent capitalized equipment leases with a weighted average interest rate of 9.9%, which approximates fair value. (e) Deposits represent down payments received from customers prior to the recognition of a sale under GAAP. The carrying value approximates the estimated fair value for these deposits. At August 31, 1996, the Company had $59,597,000 in outstanding commitments to originate and purchase loans and no other off- balance sheet financial instruments. A fair value of the commitments was estimated at $6,800,000 by calculating a theoretical gain or loss on the sale of a funded loan adjusted for an estimate of loan commitments not expected to fund, considering the difference between investor yield requirements and the committed loan rates. The estimated fair value is not necessarily representative of the actual gain to be recorded on such loan sales in the future. The fair value estimates made at August 31, 1996 were based upon pertinent market data and relevant information on the financial instruments at that time. These estimates do not reflect any premium or discount that could result from the sale of the entire portion of the financial instruments. Because no market exists for a substantial portion of the financial instruments, fair value estimates may be based upon judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based upon existing on-and-off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For instance, the Company has certain fee-generating business lines (e.g., its loan servicing operations) that were not considered in these estimates since these activities are not financial instruments. In addition, the tax implications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. 6. CONCENTRATIONS OF RISK Availability of Funding Sources--The Company funds substantially all of the notes receivable, timeshare inventory and land inventory which it originates or purchases with borrowings through its financing facilities and internally generated funds. These borrowings are in turn repaid with the proceeds received by the Company from such notes receivable through loan sales, repayments, or securitizations. Any failure to renew or obtain adequate financing under its financing facilities, or other borrowings, or any substantial reduction in the size of or pricing in the markets for the Company's notes receivable, could have a material adverse effect on the Company's operations. To the extent that the Company is not successful in maintaining or replacing existing financings, it would have to curtail its operations or sell assets, thereby having a material adverse effect on the Company's results of operations and financial condition. Dependence on Securitizations--In 1996, the Company pooled and sold through securitizations an increasing percentage of the loans that it originated. The Company derives a significant portion of its income by recognizing gains on sale of loans through securitizations which are due in part to the fair value, recorded at the time of sale, of residual interests and interest only securities retained. Adverse changes in the securitization market could impair the Company's ability to sell loans through securitizations on a favorable or timely basis. Any such impairment could have a material adverse effect upon the Company's results of operations and financial condition. The Company has relied on credit enhancement and overcollateralization to achieve the "AAA/Aaa" rating for the senior interests in its securitizations. The credit enhancement has generally been in the form of an insurance policy issued by an insurance company insuring the timely repayment of senior interests in each of the REMIC trusts. There can be no assurance that the Company will be able to obtain credit enhancement in any form from the current insurer or any other provider of credit enhancement on acceptable terms or that future securitizations will be similarly rated. A downgrading of the insurer's credit rating or its withdrawal of credit enhancement could have a material adverse effect on the Company's results of operations and financial condition. F-16 82 Geographic Concentrations-- The Company services notes receivable in all 50 states, the District of Columbia and Canada. At August 31, 1996, 33% of the dollar value of notes receivable serviced had been originated in California, and 9% in Florida. No other state accounted for more than 10% of the servicing portfolio. The risk inherent in such concentrations is dependent upon regional and general economic stability which affects property values and the financial stability of the borrowers. 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 and mortgage related securities. The Company is exposed to off-balance sheet credit risk related to loans which the Company has committed to originate and loans sold under recourse provisions. The outstanding balance of loans sold with recourse provisions totaled $134,084,000 and $117,469,000 at August 31, 1996 and 1995, respectively. Off-Balance Sheet Activities--These financial instruments consist of commitments to extend credit to borrowers and commitments to purchase loans from others. As of August 31, 1996 and 1995, the Company had outstanding commitments to extend credit or purchase loans in the amounts of $59,597,000 and $53,447,000, respectively. These commitments do not represent the expected total cash outlay of the Company, as historically only 40% of these commitments result in loan originations or purchases. The prospective borrower or seller is under no obligation as a result of the Company's commitment. The Company's credit and interest rate risk is therefore limited to those commitments which result in note originations and purchases. The commitments are made for a specified fixed rate of interest, therefore the Company is exposed to interest rate risk, to the extent changes in market interest rates change prior to the origination and prior to the sale of the loans. Interest Rate Risk--The Company's profitability is in part determined by the difference, or "spread," between the effective rate of interest received on the loans originated or purchased by the Company and the interest rates payable under its financing facilities to fund the Company's notes receivable and inventory held for sale and the yield required by investors on notes receivable sales and loan securitizations. The spread can be adversely affected after a note is originated or purchased and while it is held during the warehousing period by increases in the interest rate demanded by investors in securitizations or sales. In addition, because the notes originated and purchased by the Company have fixed rates, the Company bears the risk of narrowing spreads because of interest rate increases during the period from the date the notes are originated or purchased until the closing of the sale or securitization of such notes. Additionally, the fair value of mortgage related securities, mortgage servicing rights and excess servicing rights owned by the Company may be adversely affected by changes in the interest rate environment which could affect the discount rate and prepayment assumptions used to value the assets. Any such adverse change in assumptions could have a material adverse effect on the Company's results of operations and financial condition. 7. NOTES RECEIVABLE Notes receivable consist of the following (thousands of dollars):
AUGUST 31, ----------------------------- 1996 1995 ------------ ------------ Related to timeshare sales $24,973 $20,661 Related to land sales 27,601 23,509 Related to Title I and conventional home improvement loans 4,705 3,750 ------- ------- Total 57,279 47,920 ------- ------- Less: Allowances for cancellation and credit losses 16,342 16,523 Valuation discount 452 343 ------- ------- 16,794 16,866 ------- ------- Total $40,485 $31,054 ======= =======
The Company provides financing to the purchasers of its timeshare interests and lands. This financing is generally evidenced by notes secured by deeds of trust as well as non-recourse installment sales contracts. These notes receivable are generally payable over a period of up to 10 years, bear interest at rates ranging from 0% to 16% and require equal monthly installments of principal and interest. F-17 83 The Company has entered into financing arrangements with certain purchasers of timeshare interests and lands whereby no stated interest rate is charged if the aggregate down payment is at least 50% of the purchase price and the balance is payable in 24 or fewer monthly payments. Notes receivable of $5,991,000 and $6,855,000 at August 31, 1996 and 1995, respectively, made under this arrangement are included in the table above. A valuation 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 term of note. The effective interest rate is based upon the economic interest rate environment and similar industry data. The Company is obligated under certain agreements for the sale of notes receivable and certain loan agreements to maintain various minimum net worth requirements. The most restrictive of these agreements requires PEC to maintain a minimum net worth of $25,000,000 and MMC to maintain a minimum tangible net worth requirement of $12,500,000 plus 50% of MMC's cumulative net income since May 1, 1996. (50% of MMC's cumulative net income for the period May 1, 1996 to August 31, 1996 was $1.1 million.) Additionally, MMC is required to maintain a minimum level of profitability of at least $500,000 per rolling 6 month period. At August 31, 1996 and 1995, receivables aggregating $54,247,000 and $41,299,000, 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 15 for further discussion. Allowance for Cancellation and Credit Losses--The Company provides an allowance for cancellation and credit losses, in an amount which in the Company's judgment will be adequate to absorb losses on notes receivable and after FHA insurance recoveries on the loans, that may become uncollectible. The Company's judgment in determining the adequacy of this allowance is based on its continual review of its portfolio which utilizes historical experience and current economic factors. These reviews take into consideration changes in the nature and level of the portfolio, historical rates, collateral values, and current and future economic conditions which may affect the obligors' ability to pay, collateral values and overall portfolio quality. Changes in the allowance for cancellation and credit losses for notes receivable consist of the following (thousands of dollars):
YEAR ENDED AUGUST 31, ---------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Balance at beginning of year $24,553 $21,697 $22,913 Provisions for credit losses and cancellations 11,288 10,359 7,775 Amounts charged to allowance for cancellations (8,712) (7,503) (8,991) Reductions due to reacquisition and securitization (1,455) - - ------- ------- ------- Balance at end of year $25,674 $24,553 $21,697 ======= ======= ======= Allowance for cancellation and credit losses $16,342 $16,523 $18,007 Future estimated contingency for notes receivable sold with recourse 9,332 8,030 3,690 ------- ------- ------- Total $25,674 $24,553 $21,697 ======= ======= =======
During 1996, $113,917,000 of notes receivable sold with recourse were repurchased and securitized as further described in Note 4. Reductions due to reacquisition and securitization represent the allowance for credit losses on notes receivable sold with recourse transferred to the cost basis of the mortgage related securities as a result of these transactions. Number of Notes Receivable Accounts Serviced -- The number of notes receivable accounts serviced at August 31, 1996 and 1995, was approximately 32,602 and 21,901, respectively. At August 31, 1996 and 1995, the amount of notes receivable with payment delinquencies of 90 days or more was approximately $14,561,000 and $5,254,000, respectively on serviced accounts. F-18 84 Loans serviced and originated consist of the following (thousands of dollars):
YEAR ENDED AUGUST 31, ----------------------------- 1996 1995 ------------ ------------ Loans originated: Amount of Title I Loan originations $ 127,785 $ 87,751 Amount of conventional loan originations 11,582 - Notes receivable additions 51,535 45,396 ------------- ------------- Total $ 190,902 $ 133,147 ============= ============= Loans serviced (including notes securitized, notes sold to investors and notes receivable held for sale): Title I Loans $ 202,766 $ 92,286 Conventional loans 11,423 - Timeshare and land 120,709 114,333 ------------- ------------- Total $ 334,898 $ 206,619 ============= =============
8. MORTGAGE RELATED SECURITIES Mortgage related securities consist of interest only strips and residual interest certificates of FHA Title I Loan asset-backed securities collateralized by loans originated, purchased and serviced by the Company. Mortgage related securities are classified as trading securities and are recorded at estimated fair value. Changes in the estimated fair value are recorded in current operations. As of August 31, 1996 mortgage related securities consist of the following (thousands of dollars): Interest only securities $ 4,602 Residual interest securities 18,342 ------- Total $22,944 =======
No mortgage related securities were owned during 1995. Activity in mortgage related securities consist of the following for the year ended August 31, 1996 (thousands of dollars): Balance at beginning of year $ - Additions due to securitizations, at cost 20,096 Net unrealized gain 2,697 Accretion of residual interest 243 Principal reductions (92) ------- Total $22,944 =======
9. EXCESS SERVICING RIGHTS Activity in excess servicing rights consist of the following (thousands of dollars):
YEAR ENDED AUGUST 31, ---------------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Balance at beginning of year $ 16,565 $ 2,146 $ 902 Plus: Additions 21,242 15,336 1,611 Less: Amortization (2,758) (917) (367) Amounts related to loans repurchased, securitized and transferred to mortgage related securities (20,781) - - ----------- ----------- ----------- Balance at end of year $ 14,268 $ 16,565 $ 2,146 =========== =========== ===========
F-19 85 As of August 31, 1996, 1995 and 1994, excess servicing rights consisted of excess cash flows on serviced loans totaling $140,780,000, $133,284,000 and $37,758,000, yielding weighted average interest rates of 12.6%, 12.9% and 12.1%, net of normal servicing and pass- through fees and weighted average pass-through yields to the investor of 8.6%, 8.7% and 9.2%, respectively. These loans were sold under recourse provisions as described in Note 4 of Notes to Consolidated Financial Statements. During 1996, $113,917,000 of loans sold were repurchased and securitized as further described in Note 4. Excess servicing rights related to the loans repurchased and securitized of $20,781,000 were transferred to the cost basis of the mortgage related securities as a result of these transactions. Of the Title I Loans sold in the year ended August 31, 1995, $56,922,000 of such loans were sold to a purchaser, in a series of sales commencing on April 21, 1995, under a continuing sales agreement which provides for the yield to the purchaser to be adjusted monthly to a rate equal to 200 basis points (2%) per annum over the one-month London Interbank Offered Rate (LIBOR). LIBOR was 5.875% per annum at August 31, 1995. The principal balance of loans subject to the LIBOR adjustment was $29,255,000 at August 31, 1996. The effect of an increase or decrease in LIBOR of 100 basis points (1%) applied to those loans would be a decrease or increase, respectively, to the Company's future pre-tax income of approximately $956,000. For timeshare and land loans during fiscal 1996, $12,329,000 of the total loans sold were sold to one purchaser, in a series of sales, providing a yield to the purchaser at fixed rates, ranging from 8.3% - 9.4%. Of the notes receivable sold during fiscal 1995, $17,296,000 of such loans were sold to the same purchaser in a series of sales providing a yield to the purchaser at fixed rates ranging from 8.8% - 10%. 10. MORTGAGE SERVICING RIGHTS Activity in mortgage servicing rights consist of the following (thousands of dollars):
YEAR ENDED AUGUST 31, ---------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Balance at beginning of year $ 1,076 $ - $ - Plus: Additions 3,306 1,176 - Less: Amortization (555) (100) - ------------ ------------ ------------- Balance at end of year $ 3,827 $ 1,076 $ - ============= ============= =============
The Company had no valuation allowance for mortgage servicing rights during 1996, 1995, and 1994, as the cost basis of mortgage servicing rights approximated fair value. The pooling and servicing agreements relating to the securitization transactions contain provisions with respect to the maximum permitted loan delinquency rates and loan default rates, which, if exceeded, would allow the termination of the Company's rights to service the related loans. At September 30, 1996, the default rates on one pooling and servicing agreement exceeded the permitted level. The mortgage servicing rights for this agreement were approximately $1.4 million at August 31, 1996. In the event of such termination, there would be an adverse effect on the valuation of the Company's mortgage servicing rights. 11. INVENTORIES Timeshare interests held for sale consist of the following (thousands of dollars):
AUGUST 31, ---------------------------- 1996 1995 ------------ ------------ Timeshare interests (including capitalized interest of $486 and $190 in 1996 and 1995, respectively) $14,353 $ 9,689 Timeshare interests under construction (including capitalized interest of $389 and $291 in 1996 and 1995, respectively) 19,338 7,687 Inventory of timeshare interests estimated to be recovered from future cancellations 3,199 2,444 ----- ----- Total $36,890 $19,820 ======= =======
F-20 86 At August 31, 1996 and 1995, 7,637 and 6,328 of timeshare interests, respectively, were available for sale. The number of apartment units of 254 and 90 at August 31, 1996 and 1995, respectively, were under construction and awaiting completion of remodeling, renovation, furnishing, conversion and registration, representing 12,954 and 4,590, respectively, of timeshare interests. Land and improvements inventory consist of the following (thousands of dollars):
AUGUST 31, ---------------------------- 1996 1995 ------------ ------------ Land and improvements $ 2,186 $ 3,432 Inventory of land and improvements estimated to be recovered from future cancellations 1,535 2,110 ------------ ------------ Total $ 3,721 5,542 ============ ============
12. OTHER INVESTMENTS Other investments in the following locations, at lower of cost or market, consist of the following (thousands of dollars):
AUGUST 31, ---------------------------- 1996 1995 ------------ ------------ Water rights: Huerfano County, Colorado $ 524 $ 581 Nye County, Nevada 98 95 Land: Nye County, Nevada 863 525 Park County, Colorado 13 9 Clark County, Nevada 51 84 Other 423 237 ------------ ------------ Total $ 1,972 $ 1,531 ============ ============
13. PROPERTY AND EQUIPMENT Property and equipment and related accumulated depreciation, consist of the following (thousands of dollars):
AUGUST 31, ---------------------------- 1996 1995 ------------ ------------ Water and sewer system $13,752 $10,645 Furniture and equipment 6,422 4,843 Buildings 8,451 4,792 Vehicles 2,304 2,173 Recreational facilities and equipment 1,192 1,082 Land 1,342 689 Leasehold improvements 349 305 ------- ------- 33,812 24,529 Less: Accumulated depreciation 13,550 11,848 ------- ------- Total property and equipment, net $20,262 $12,681 ======= =======
F-21 87 14. OTHER ASSETS Other assets consist of the following (thousands of dollars):
AUGUST 31, ---------------------------- 1996 1995 ------------ ------------ Other receivables $2,161 $1,251 Miscellaneous assets 1,784 1,255 Deposits and impounds 560 448 Licenses 1,067 1,167 Other receivables collateralized by trust deeds 222 235 Receivable from owners' associations (Notes 4 and 22) 623 1,188 Organizational costs of MMC 482 675 Prepaid expenses and other 1,586 1,132 ------ ------ Total $8,485 $7,351 ====== ======
15. NOTES AND CONTRACTS PAYABLE The Company's debt including lines of credit consist of the following (thousands of dollars):
AUGUST 31, ---------------------------- 1996 1995 ------------ ------------ Notes collateralized by receivables (a) $41,568 $26,785 Mortgages collateralized by real estate properties (b) 31,078 16,525 Notes collateralized by excess servicing rights and mortgage related securities (c) 10,000 - Installment contracts and other notes payable 1,803 1,405 ------- ------- Total $84,449 $44,715 ======= =======
The details of the notes payable are summarized as follows (thousands of dollars):
AUGUST 31, ---------------------------- 1996 1995 ------------ ----------- (A) NOTES COLLATERALIZED BY RECEIVABLES Borrowings bearing interest at prime plus: 1% to 2.5% in 1996 including "lines of credit" (see below) and 1% to 2.5% in 1995 $41,443 $26,595 Promissory notes payable 125 190 ------- ------- Total notes collateralized by receivables $41,568 $26,785 ======= ======= (B) MORTGAGES COLLATERALIZED BY REAL ESTATE PROPERTIES Mortgages collateralized by the respective underlying assets with various repayment terms and fixed interest rates of 10% to 12.5% in 1996 and 10% in 1995 and variable rates of prime plus: 1.25% to 3% and 90 day LIBOR plus 4.25% in 1996 and prime plus: 2.5% in 1995 $31,078 $16,525 ======= ======= (C) NOTES COLLATERALIZED BY EXCESS SERVICING RIGHTS (NOTE 8) AND MORTGAGE RELATED SECURITIES (NOTES 7 AND 9) $10,000 $ - ======= =======
The prime rate of interest was 8.25% and the 90 day LIBOR was 5.53% at August 31, 1996. F-22 88 Maturities -- Scheduled maturities of the Company's contracts payable, excluding lines of credit are as follows (thousands of dollars):
YEAR ENDED AUGUST 31, ------------------------------------------------------------------------ BALANCE 1997 1998 1999 2000 2001 ------- ---- ---- ---- ---- ---- $1,803 $721 $605 $293 $179 $5
Lines of Credit -- PEC entered into 5 agreements for lines of credit not to exceed $109,500,000 which are collateralized by security interests in timeshare and land receivables and are guaranteed by the Company. At August 31, 1996 and 1995, an aggregate of $65,875,000 and $38,123,000 had been borrowed under such lines of credit. Under the terms of such lines of credit, PEC may borrow up to 75% to 85% of the balances of the pledged timeshare and land receivables. MMC entered into 2 lines of credit agreements with the same lender, not to exceed an aggregate of $30,000,000, one of which is collateralized by security interests in loans held for sale, and the other by excess servicing rights and mortgage related securities. Summarized line of credit information relating to these five lines of credit outstanding at August 31, 1996, consist of the following (thousands of dollars):
BORROWING AMOUNT AT MAXIMUM AUGUST 31, BORROWING REVOLVING MATURITY INTEREST 1996 AMOUNT EXPIRATION DATE (F) DATE RATE ------- ------- ------------------- ----------- ------------- $47,297 $57,000 (a) December 31, 1996 September 22, 2003 Prime +2.25% 7,821 15,000 (b) December 31, 1996 August 1, 2000 Prime +2.5% 4,865 15,000 (c) June 27, 1998 June 27, 2005 LIBOR +4.25% 2,925 15,000 (c) February 6, 1998 August 6, 2005 LIBOR +4.25% 2,967 7,500 (b) December 31, 1996 June 30, 2000 Prime +2.5% 3,265 20,000 (d) August 9, 1997 August 9, 1997 Prime +1.0% 10,000 10,000 (d) (e) December 31, 1997 June 30, 2000 Prime +2.0%
(a)Restrictions include the Company's requirement to maintain a tangible net worth in PEC of at least $25,000,000 during the borrowing term, and thereafter this requirement is permitted to decrease to $15,000,000 depending on the loan balance. (b)Restrictions include the Company's requirement to maintain a tangible net worth in PEC of $25,000,000 during the life of the loan. (c)Restrictions include the Company's requirement to maintain a tangible net worth in PEC of $17,000,000 during the life of the loan. (d)Restrictions include the Company's requirement to maintain MMC's tangible net worth at $12,500,000 plus 50% of MMC's cumulative net income since May 1, 1996. (50% of MMC's cumulative net income for the period May 1, 1996 to August 31, 1996 was $1.1 million). Additionally, MMC is required to maintain a minimum level of profitability of at least $500,000 per rolling 6 month period. (e)Borrowings by MMC under this facility cannot exceed the lesser of (a) 40% of MMC's excess servicing rights and mortgage related securities or (b) six times the aggregate of the excess servicing rights and mortgage related securities payments actually received by the Company over the most recent 3 month period. (f)Revolving expiration date represents the expiration dates of the revolving features of the lines of credit, at which time the credit lines assume fixed maturity. At August 31, 1996 and 1995, contracts payable consisted of $932,000 and $419,000, respectively, in obligations under lease purchase arrangements secured by property and equipment, bearing a weighted average interest rate of 9.48%. F-23 89 16. SUBORDINATED DEBT On March 2, 1995, Mego entered into the Amendment whereby the Assignors agreed to defer payment of $10 million of the amount payable to assignors and to subordinate such amounts in right of payment to debt for money borrowed by Mego or obligations of subsidiaries guaranteed by Mego. Warrants for 1,000,000 shares of Mego Common Stock, at an exercise price of $4.25 per share (the closing market price per share on March 2, 1995) were granted to the Assignors in consideration of the payment deferral and subordination. The warrants contain restrictions on transfer and are exercisable after March 1, 1996 and until March 1, 2000. The Amendment calls for interest to be paid semi-annually at the rate of 10% per annum starting September 1, 1995, and seven equal semi-annual payments of $1,429,000 plus interest, commencing March 1, 1997. The effective interest rate after considering the effect of accreted interest is 14.7%. See Note 2 for further discussion. The following table represents subordinated debt activity since inception (thousands of dollars):
1996 1995 Face amount of debt $10,000 $10,000 Less: Value of warrants issued (1,300) (1,300) ------- ------- Subordinated debt - original value 8,700 8,700 Accreted interest since inception 1,991 652 Less: Interest payments since inception (1,000) - ------ ------ Subordinated debt at August 31 $9,691 $9,352 ====== ======
17. REDEEMABLE PREFERRED STOCK The Company had designated 300,000 shares of its 5,000,000 authorized preferred shares as Series A, 12% Cumulative Preferred Stock, par value, $.01 per share. The remaining 4,700,000 authorized preferred shares have not been designated. As of August 31, 1993, the Company sold 300,000 shares of its Series A, 12% Cumulative Preferred Stock (Preferred Stock), at a price of $10 per share. The Preferred Stock was stated at its par value of $.01 per share, and redemption value of $10 per share. The Company was obligated to redeem 100,000 shares of Preferred Stock on August 31, 1995, at $10 per share. In August 1995, the Company gave notice of redemption of 100,000 shares. On September 1, 1995, after receipt of the certificates, the Company redeemed 100,000 shares of its Preferred Stock. On August 31, 1996, the holder of the Company's 200,000 shares of outstanding 12% cumulative preferred stock with a redemption price of $2,000,000 redeemed their shares for 343,347 shares of the Company's common stock. The number of common shares exchanged was based upon the 10 day average closing stock price of $5.825 for the Company's common stock immediately prior to August 31, 1996. In conjunction with the exchange, the expiration date of the warrants outstanding to purchase 300,000 shares of the Company's common stock at a price of $1.20, issued in conjunction with the preferred stock, and due to expire on August 31, 1996 was extended to August 31, 1997. F-24 90 18. STOCKHOLDERS' EQUITY The Company has a stock option plan, adopted November 1993, for officers and key employees which provides for non-qualified and qualified incentive options. The Stock Option Committee of the Board of Directors determines the option price (not to be less than fair market value for qualified incentive options) at the date of grant. The options generally expire ten years from the date of grant and are exercisable over the period stated in each option at the cumulative rate of 20% per year commencing December 22, 1994, for three years and the remaining 40% after December 22, 1997.
RESERVED PRICE PER SHARES NUMBER SHARE -------- -------- ------------ At November 17, 1993 525,000 - - Granted to more than 10% stockholder - 35,000 $2.75 Granted to others - 355,000 $2.50 ------- ------- At August 31, 1994 525,000 390,000 $2.50/2.75 Exercised (2,000) (2,000) Forfeited - (8,000) Granted - 85,000 $8.00/8.75 ------- ------- At August 31, 1995 523,000 465,000 Exercised (4,000) (4,000) Forfeited - (6,000) Granted - 25,000 $5.875 ------- ------- At August 31, 1996 519,000 480,000 $2.50/8.75 ======= =======
The number of options exercisable under this plan at August 31, 1996, was 170,000 at a range of $2.50 to $8.75 per share. 19. TIMESHARE INTEREST SALES AND LAND SALES Timeshare interest sales, net-- A summary of the components of timeshare interest sales is as follows (thousands of dollars):
YEAR ENDED AUGUST 31, ------------------------------------------ 1996 1995 1994 ------- ------- ------- Timeshare interest sales $33,178 $26,272 $24,670 Less: Provision for cancellation 5,400 5,590 5,149 ------- ------- ------- Total $27,778 $20,682 $19,521 ======= ======= =======
Land sales, net -- A summary of the components of land sales is as follows (thousands of dollars):
YEAR ENDED AUGUST 31, ----------------------------------------- 1996 1995 1994 --------- ------------ ---------- Land sales $22,346 $24,717 $15,434 Less: Provision for cancellation 4,378 3,905 1,900 ------- ------- ------- Total $17,968 $20,812 $13,534 ======= ======= =======
20. INCOME TAXES The Company files a consolidated federal income tax return with its subsidiaries for its tax year which ends the last day of February. The Company adopted SFAS 109 effective September 1, 1992. There was no cumulative effect of adopting SFAS 109 on the Company's financial statements. The estimated income tax payable as of August 31, 1996, is approximately $1,344,000. The tax provision for 1996 consists of $290,000 current provision and $2,877,000 deferred provision. The tax provision for 1995 consists of $1,054,000 current provision, including the $450,000 of F-25 91 tax associated with discontinued operations, and $2,689,000 deferred provision. The provision for 1994 consisted entirely of deferred provision. Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, (b) temporary differences between the timing of revenue recognition for book purposes and for income tax purposes, and (c) operating loss and tax credit carryforwards. The tax effects of significant items comprising the Company's net deferred tax liability as of August 31, 1996 and 1995 are as follows (thousands of dollars):
AUGUST 31, ------------------------ 1996 1995 ------ ------ Deferred tax liabilities: Difference between book and tax carrying value of assets $ 3,064 $3,508 Timing of revenue recognition 8,348 4,606 ------- ------ 11,412 8,114 ------- ------ Deferred tax assets: Other 432 11 ------- ------ Net deferred tax liability $10,980 $8,103 ======= ======
The provision for 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):
YEAR ENDED AUGUST 31, ------------------------------------------ 1996 1995 1994 ------ ------ ------ Income (loss) before income taxes, including gain on discontinued operations $8,018 $4,187 $(5,013) ====== ====== ======== Tax at the statutory federal rate $2,726 $1,424 $(1,704) Increase (decrease) in taxes resulting from: State income taxes, net of federal income tax benefit 442 264 -- Payments to assignors -- 813 2,218 Realization of purchase price adjustments -- 70 217 Amortization of negative goodwill -- - 17 Contributions in aid of construction 81 929 114 Preferred stock dividends (82) (122) (122) Other -- (85) 21 ------ ------ ---- Total $3,167 $3,293 $761 ====== ====== ====
21. DISCONTINUED OPERATIONS Gain on discontinued operations occurred as a result of an order for judgment against PEC in the matter of the PEC Apartment Subsidiaries in the amount of $3,356,000, which amount was settled for $2,900,000 on May 15, 1995, and paid on June 15, 1995. Excess of liability over assets of discontinued operations (a provision for loss) had been provided in the amount of $4,222,000 resulting in a gain on discontinued operations of $873,000 after deducting $450,000 of taxes to be reflected on the income statement. See Note 23 for further discussion. F-26 92 22. RELATED PARTY TRANSACTIONS Timeshare Owners' Associations--Owners' Associations have been incorporated for the Grand Flamingo, Reno Spa, Brigantine and Steamboat Springs 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 Resort Club, which is a division of PEC (Associations) and received management fees for its services of $2,081,000 and $1,988,000 in 1996 and 1995, respectively. Such fees were recorded as a reduction of general and administrative expense. 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, net of room income, was $983,000 and $56,000 for 1996 and 1995, respectively, and have been recorded as general and administrative expense. This increase was primarily due to the newer resorts recording a full year's operations in fiscal 1996 versus a partial year in fiscal 1995. 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. Since January 1988, the Company has agreed to pay to the Associations the assessments of timeshare interest owners who are delinquent with respect to their assessments, but have paid the Company in full for their timeshare interests. In exchange for these payments, the Associations assign their liens for non-payment of assessments on the respective timeshare interests to the Company. In the event the timeshare interest holder does not satisfy the lien after having an opportunity to do so, the Company acquires the timeshare interest for the amount of the lien and any foreclosure costs. At August 31, 1996 and 1995, $623,000 and $1,188,000, respectively, was due from Owners' Associations. These amounts are included in other assets at August 31, 1996 and 1995. 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 Note 2. During the years ended August 31, 1996, 1995, and 1994, approximately $1,196,000, $2,301,000, and $4,904,000, including interest of $1,196,000, $473,000 and $304,000, respectively, were paid to the Assignors. See Note 16 for further discussion. Transactions with Management-- On September 24, 1990, Brigantine Preferred Properties, Inc. (Properties), a Nevada Corporation that is a wholly-owned subsidiary of the Company, entered into agreements with Brigantine Inn, Ltd., a New Jersey Limited Partnership (Inn), and Brigantine Villas, L.P., a New Jersey Limited Partnership (Villas), herein referred to as the Inn Agreement and the Villas Agreement, respectively, for the acquisition of certain assets (primarily inventory of timeshare interests and related assets) and the assumption of certain liabilities of the Inn and Villas. Inn and Villas were in the business of selling timeshare interests in two adjacent facilities located near Atlantic City, New Jersey. Goodwill of $1,837,000 associated with this transaction has been amortized over a 3 year period ending September 30, 1993. At August 31, 1994, all of the Company's obligations owed to the Inn and Villas had been paid in full. During December 1992, Properties purchased approximately $6,025,000 of timeshare receivables from Inn for a purchase price of approximately $3,524,000. The purchase price was financed through the sale by Properties of approximately $3,720,000 of the acquired receivables to a financial institution. In connection with the sale, the Company guaranteed the repurchase and other obligations of Properties and agreed to maintain a net worth of at least $22,500,000. As collateral for its obligations under the sale agreement, Properties also pledged approximately $750,000 of the acquired timeshare receivables to the purchaser. The amount of the collateral required under the sale agreement reduces by approximately 20% per year. In connection with this transaction, Properties recorded an allowance for cancellation and a future estimated contingency for notes receivable sold with recourse aggregating approximately $2,000,000. PEC provides account servicing for related and non-related entities which consists of providing billing and collection services and receiving funds. The Company also provides the same services for MMC. Deferred servicing revenues arise from sales of receivables with the Company becoming the servicing agent for the purchasers. At August 31, 1996 and 1995, the Company was servicing for these entities and for its own receivables approximately 32,602 and 21,901 accounts, respectively. F-27 93 23. COMMITMENTS AND CONTINGENCIES Future Improvements -- Central Nevada Utilities Company, (CNUC) subsidiary, has issued performance bonds of $13,556,000 outstanding at August 31, 1996, to ensure the completion of water, sewer and other improvements in portions of the Calvada development areas. The cost of the improvements will be offset by the future receipt of betterment fees and connection fees. Leases --The Company leases certain real estate for sales and general and administrative usage. The Company also leases its Hawaii real estate for timeshare usage. Rental expense for fiscal years 1996, 1995, and 1994 was $2,731,000, $2,446,000, and $1,865,000, respectively. Future minimum rental payments under operating leases are set forth below (thousands of dollars):
YEAR ENDING AUGUST 31, ---------------------- 1997 $1,941 1998 1,830 1999 1,331 2000 1,144 2001 1,154 Thereafter 2,639 ----- Total $10,039 =======
Litigation -- In the matter of the PEC Apartment Subsidiaries litigation previously reported upon, an order for judgment of $3,346,000 was rendered against PEC on its limited guaranty, in connection with the defendants' counterclaim. Pursuant to a stipulation between the parties dated as of May 15, 1995, PEC paid the amount of $2,900,000 on June 15, 1995 in full settlement of this matter. Because the reserve recorded in the financial statements of the Company exceeded the amount of the settlement, the Company recognized a gain on discontinued operations of $1,323,000. On July 5, 1995, Pahrump Valley Vineyards, Inc. filed a complaint in the 5th Judicial District Court, Nye County, Nevada, against CNUC, a subsidiary of PEC. The plaintiff claimed compensatory damages in excess of $25,000 in each of 4 counts alleging trespass, nuisance, negligence and breach of contract for the alleged supplying of contaminated water by CNUC to the plaintiff, and also prayed for punitive damages in excess of $25,000. Following discovery, PEC's insurance carrier settled the case by payment of $35,000 to the plaintiffs. Following the Company's November 10, 1995 announcement disclosing certain accounting adjustments, an action was filed on November 13, 1995, in the United States District Court, District of Nevada by Christopher Dunleavy, as a purported class action against the Company, certain of the Company's officers and directors and the Company's independent auditors. The complaint alleges, among other things, that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder in connection with the preparation and issuance of certain of the Company's financial reports issued in 1994 and 1995, including certain financial statements reported on by the Company's independent auditors. The complaint also alleges that one of the director defendants violated the federal securities laws by engaging in "insider trading." The named plaintiff seeks to represent a class consisting of purchasers of the Company's Common Stock between January 14, 1994 and November 9, 1995, and seeks damages in an unspecified amount, costs, attorney's fees and such other relief as the court may deem just and proper. The Company believes that it has substantial defenses to the action, however, the Company presently cannot predict the outcome of this matter. On November 16, 1995, a second action was filed in the United States District Court for the District of Nevada by Alan Peyser as a purported class action against the Company and certain of its officers and directors, which was served on the Company on December 20, 1995. The complaint alleges, among other things, that the defendants violated the federal securities laws by making statements and issuing certain financial reports in 1994 and 1995 that overstated the Company's earnings and business prospects. The named plaintiff seeks to represent a class consisting of purchasers of the Company's common stock between November 28, 1994 and November 9, 1995. The complaint seeks damages in an unspecified amount, cost, attorney's fees and such other relief as the Court may deem just and proper. The Company believes that it has substantial defenses to the action, however, the Company presently cannot predict the outcome of this matter. F-28 94 On or about June 10, 1996, the Dunleavy Action and Peyser Action were consolidated under the caption "In re Mego Financial Corp. Securities Litigation," Master File No. CV-9-95-01082-LD (RLJ), pursuant to a stipulation by the parties. On or about July 26, 1996, Michael Nadler filed a motion in the above matter requesting that he be added as a class representative and that his attorney be added as additional counsel for the class. On or about August 26, 1996, a Motion in Opposition to the motion to add a class representative was filed by the Company and certain other defendants. Neither motion has been heard or decided by the court. In the general course of business the Company, at various times, has been named in other lawsuits. The Company believes that it has meritorious defenses to these lawsuits and that resolution of these matters will not have a material adverse affect on the financial condition or results of operations of the Company. Contingencies--At August 31, 1996, irrevocable letters of credit in the amount of $2,084,000 were issued and outstanding to secure certain obligations of the Company. These letters are collateralized by notes receivable in the amount of $2,497,000. License Agreement--In April 1995, PEC entered into a strategic alliance pursuant to which PEC was granted a ten-year (including a renewal option) exclusive license to operate both its existing and future timeshare properties under the name "Ramada Vacation Suites". PEC has renamed its timeshare resorts. The arrangement provides for the payment by PEC of an initial access fee of $1 million, which has been paid, and monthly recurring fees equal to 1% of PEC's Gross Sales (as defined) each month through January 1996 and 1.5% of PEC's Gross Sales each month commencing in February 1996. The initial term of the arrangement is 5 years and PEC has the option to renew the arrangement for an additional term of 5 years. 24. SUBSEQUENT EVENTS In September 1996, MMC received a commitment from a financial institution providing for the purchase of up to $2 billion of loans over a 5 year period. Upon closing of the final agreement, the Company will issue to the financial institution 4 year warrants to purchase 1,000,000 shares of the Company's common stock at an exercise price of $7.125 per share. The value of the warrants, estimated at $3,000,000 (0.15% of the commitment amount) as of the commitment date, will be recorded as a commitment fee and charged to expense as the commitment is utilized. The financial institution has also agreed to provide MMC a separate one year facility of up to $11,000,000, less any amounts advanced under a separate $3,000,000 repurchase agreement, for the financing of the interest only and residual certificates from future securitizations. In November 1996, MMC issued 2,300,000 shares of its common stock in a public offering at $10.00 per share. As a result of this transaction, the Company's ownership in MMC declined from 100% at August 31, 1996 to 81.1%. The Company continues to have voting control on all matters submitted to shareholders of MMC, including the election of directors and approval of extraordinary corporate transactions. Concurrently with the common stock offering, MMC issued $40 million of 12.5% Senior Subordinated Notes due in 2001 in a public offering. MMC currently intends to use approximately $13.2 million of the aggregate net proceeds received from the offerings to repay amounts due to Mego Financial Corp. and PEC and approximately $17 million to reduce the amounts outstanding under MMC's warehouse and revolving lines of credit which currently bear interest at rates ranging from 1% to 2% over the prime rate and which expire in August 1997 and December 1997, respectively, and to repay $3 million under a repurchase agreement. Funds received by Mego Financial Corp. and PEC will be used in their respective operations. The remaining net proceeds will be used by MMC to provide capital to originate and securitize loans. Pending such use, the net proceeds received by the Company will be invested in high quality, short term interest-bearing investment and deposit accounts. F-29 95 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Mego Financial Corp. and Subsidiaries Las Vegas, Nevada We have audited the consolidated financial statements of Mego Financial Corp. and its subsidiaries (the "Company") as of August 31, 1996 and 1995, and for each of the three years in the period ended August 31, 1996, and have issued our report thereon dated October 25, 1996, included elsewhere in this Form 10-K. Our audits also included the consolidated financial statement schedule of the Company, listed in Item 8 of this Form 10-K. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when, considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Las Vegas, Nevada October 25, 1996 S-1 96 SCHEDULE VIII MEGO FINANCIAL CORP. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (thousands of dollars) For the Year Ended August 31, 1996
Additions ------------------------ Balance at Charged to Charged to Balance at Beginning Costs and Other End of Description of Period Expenses Accounts Deductions Period - --------------------------------------- ----------- ------------ ---------- ---------- ---------- Allowances for cancellations $16,523 $11,288 $-- $(11,469) $16,342 Unamortized valuation discount 343 471 -- (362) 452 Revaluation adjustment -- -- -- -- -- ----------- ------------ ------------ ------------ ------------ $16,866 $11,759 $-- $(11,831) $16,794 =========== ============ ============ ============ ============
- --------------------------- (a) Excess of book value over cost at September 1, 1989. (b) Amortization of excess of book value over cost. S-2 97 SCHEDULE VIII MEGO FINANCIAL CORP. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (thousands of dollars) For the Year Ended August 31, 1995
Additions ------------------------ Balance at Charged to Charged to Balance at Beginning Costs and Other End of Description of Period Expenses Accounts Deductions Period - --------------------------------------- ----------- ------------ ---------- ---------- ---------- Allowances for cancellations and credit losses $18,007 $10,359 $-- $(11,843) $16,523 Unamortized valuation discount 281 103 -- (41) 343 Revaluation adjustment 166 (a) -- -- (166)(b) -- -------- ------- ----- ---------- -------- $18,454 $10,462 $0 $(12,050) $16,866 ======== ======= ===== ========== ========
- -------------------------- (a) Excess of book value over cost at September 1, 1989. (b) Amortization of excess of book value over cost. S-3 98 SCHEDULE VIII MEGO FINANCIAL CORP. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (thousands of dollars) For the Year Ended August 31, 1994
Additions ------------------------ Balance at Charged to Charged to Balance at Beginning Costs and Other End of Description of Period Expenses Accounts Deductions Period - --------------------------------------- ----------- ------------ ---------- ---------- ---------- Allowances for cancellations $19,933 $7,775 $-- $(9,701) $18,007 Unamortized valuation discount 275 292 -- (286) 281 Revaluation adjustment 588 (a) -- -- (422)(b) 166 ----------- ------------ ------------ ------------ ------------ $20,796 $8,067 $-- $(10,409) $18,454 =========== ============ ============ ============ ============
- ---------------------------- (a) Excess of book value over cost at September 1, 1989. (b) Amortization of excess of book value over cost. S-4 EX-10.85 2 AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT 1 EXHIBIT 10.85 AMENDMENT NO. 11 TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS AMENDMENT NO. 11 TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is entered into as of this 22nd day of September, 1995, by and between FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender"), and PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Borrower"). R E C I T A L S A. Greyhound Real Estate Finance Company, an Arizona corporation ("GREFCO") and Borrower entered into an Amended and Restated Loan and Security Agreement dated as of May 10, 1989 (the "Restated Loan Agreement") that evidences a loan from GREFCO to Borrower (the "Modified Loan") that is secured by, among other things, Receivables Collateral. B. The Modified Loan and Restated Loan Agreement was amended by an Amendment Number One to Amended and Restated Loan and Security Agreement dated June 14, 1989 (the "First Amendment"), by an Amendment No. 2 to Amended and Restated Loan and Security Agreement dated April 16, 1990 (the "Second Amendment"), by an Amendment No. 3 to Amended and Restated Loan and Security Agreement dated May 31, 1991 (the "Third Amendment"), by an Amendment No. 4 to Amended and Restated Loan and Security Agreement dated January 13, 1992 (the "Fourth Amendment"), by an Amendment No. 5 to Amended and Restated Loan and Security Agreement dated February 23, 1993 (the "Fifth Amendment"); by an Amendment No. 6 to Amended and Restated Loan and Security Agreement dated June 28, 1993 (the "Sixth Amendment"), by an Amendment No. 7 to Amended and Restated Loan and Security Agreement dated January 24, 1994 (the "Seventh Amendment"), by an Amendment No. 8 to Amended and Restated Loan and Security Agreement dated as of April 15, 1994 (the "Eighth Amendment"), by an Amendment No. 9 to Amended and Restated Loan and Security Agreement dated as of August 31, 1994 (the "Ninth Amendment"), and by an Amendment No. 10 to Amended and Restated Loan and Security Agreement dated as of January 26, 1995 (the "Tenth Amendment"). The Restated Loan Agreement, the First Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment, the Fifth Amendment, the Sixth Amendment, the Seventh Amendment, the Eighth Amendment, the Ninth Amendment, the Tenth Amendment and this Eleventh Amendment and all other documents evidencing or executed in connection with the Loan are referred to hereinafter as the "Loan Documents." The Restated Loan Agreement, as amended by the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, Sixth Amendment, Seventh Amendment, Eighth Amendment, Ninth Amendment and Tenth Amendment, is referred to hereinafter as the "Loan Agreement." The Loan contemplated by the Loan Agreement, as amended by this Eleventh Amendment, is referred to hereinafter as the "Loan." All 2 capitalized terms used in this Eleventh Amendment will have the meanings assigned to such terms in the Loan Agreement unless those terms are otherwise defined herein. C. GREFCO was a wholly-owned subsidiary of Greyhound Financial Corporation ("GFC"). Pursuant to a plan of liquidation, GREFCO was liquidated into GFC. Further, pursuant to such plan of liquidation, GREFCO assigned the Note and all of GREFCO's rights under the Loan Agreement and other Documents to GFC. Effective as of February 1, 1995, GFC changed its name to FINOVA Capital Corporation. D. Borrower has requested and Lender has agreed to fund (pursuant to the terms and conditions of this Eleventh Amendment), as part of the Loan, Advances to finance the acquisition, renovation, development and construction of two (2) timeshare resort facilities in Indian Shores, Florida, one of which will consist of thirty-two (32) timeshare units and known as "Aloha Bay Phase I," more particularly described in Exhibit A attached hereto ("Aloha Bay Phase I"), and one of which will consist of sixteen (16) timeshare units and known as "Aloha Bay Phase II," more particularly described in Exhibit B attached hereto ("Aloha Bay Phase II"). E. Borrower has also requested and Lender has agreed, in accordance with and subject to the conditions contained in the Loan Agreement, as modified by this Eleventh Amendment, to make Advances of the Loan, from time to time, against Instruments or Contracts arising from Aloha Bay Phase I and Aloha Bay Phase II. NOW, THEREFORE, in consideration of these recitals, the covenants contained in this Eleventh Amendment, and for other good and valuable consideration, the receipt and sufficiency of which consideration is hereby acknowledged, Lender and Borrower agree as follows: 1. LOAN AGREEMENT. Provided the conditions precedent described in Paragraph 10 of this Eleventh Amendment are met to the satisfaction of Lender, which satisfaction will be evidenced by Lender's execution of this Eleventh Amendment unless otherwise provided herein, the Loan Agreement is hereby further modified as follows: 1.1 The Loan Agreement is hereby amended by adding to Article I the following definitions: "Aloha Bay Phase I": shall have the meaning set forth in the Recitals of this Eleventh Amendment. "Aloha Bay Phase II": shall have the meaning set forth in the Recitals of this Eleventh Amendment. -2- 3 "Aloha Bay Phase I Acquisition Advance": shall have the meaning set forth in Paragraph 2 of this Eleventh Amendment. "Aloha Bay Phase II Acquisition Advance": shall have the meaning set forth in Paragraph 4 of this Eleventh Amendment. "Aloha Bay Phase I Loan Fee": shall mean the loan fee payable by Borrower to Lender equal to one-half percent (.5%) of each of the Advances made by Lender to Borrower under the Loan in connection with Aloha Bay Phase I, which shall be due and payable in full by Borrower on the date that each such Advance is funded. "Aloha Bay Phase II Loan Fee": shall mean the loan fee payable in connection with Advances made by Lender to Borrower with respect to Aloha Bay Phase II, which shall be in an amount equal to one-half percent (.5%) of each such Advance and due and payable in full by Borrower on the date that each such Advance with respect to Aloha Bay Phase II is funded. "Aloha Bay Phase I Incentive Fee": shall mean the incentive fee provided for in Paragraph 9.4.1 of this Eleventh Amendment. "Aloha Bay Phase II Incentive Fee": shall mean the incentive fee provided for in Paragraph 9.4.2 of this Eleventh Amendment. "Aloha Bay Phase I Maturity Date": shall mean the maturity date applicable to all Advances under the Loan with respect to Aloha Bay Phase I, which shall be the first to occur of the following dates: (a) the date which shall occur twenty-four (24) months after the date of the final Advance with respect to Aloha Bay Phase I, or (b) May 31, 1998. "Aloha Bay Phase II Maturity Date": shall mean the maturity date applicable to all Advances under the Loan with respect to Aloha Bay Phase II, which shall be the first to occur of the following dates: (a) the date which shall occur twenty-four (24) months after the date of the final Advance with respect to Aloha Bay Phase II, or (b) December 31, 1998. "Aloha Bay Phase I Mortgage": shall have the meaning set forth in Paragraph 8 of this Eleventh Amendment. "Aloha Bay Phase II Mortgage": shall have the meaning set forth in Paragraph 8 of this Eleventh Amendment. -3- 4 "Aloha Bay Phase I Note": shall have the meaning set forth in Paragraph 6 of this Eleventh Amendment. "Aloha Bay Phase II Note": shall have the meaning set forth in Paragraph 7 of this Eleventh Amendment. "Aloha Bay Phase I Release Fees": shall have the meaning set forth in Paragraph 9.1 of this Eleventh Amendment. "Aloha Bay Phase II Release Fees": shall have the meaning set forth in Paragraph 9.2 of this Eleventh Amendment. "Eleventh Amendment": shall mean this Amendment No. 11 to Amended and Restated Loan and Security Agreement. 1.2 The definitions of the following terms in Article I of the Loan Agreement, including, to the extent applicable, the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, Sixth Amendment, Seventh Amendment, Eighth Amendment, Ninth Amendment and Tenth Amendment, are hereby amended and restated in their entirety to read as follows: "Borrowing Term": shall mean the period of time during which Lender is committed to make advances under the Loan Agreement as amended by the Eleventh Amendment, which commitment shall terminate (a) as to Aloha Bay Phase I, on the first to occur of that date which is six (6) months after the Aloha Bay Phase I Acquisition Advance or May 31, 1996, and (b) as to Aloha Bay Phase II, on December 31, 1996. "Documents": shall mean the Note, the First Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment, the Fifth Amendment, the Sixth Amendment, the Seventh Amendment, the Eighth Amendment, the Ninth Amendment, the Tenth Amendment, the Eleventh Amendment, the 2.5 MM Note, the Suites Phase II Note, the Ida Building One Note, the Ida Building Two Note, the Aloha Bay Phase I Note, the Aloha Bay Phase II Note, the Guarantee, the Deed of Trust, the Headquarters Deed of Trust, the Ida Building One Deed of Trust, the Ida Building Two Deed of Trust, the Aloha Bay Phase I Mortgage, the Aloha Bay Phase II Mortgage, the Assignments, the Contracts, the Instruments, the Agency Agreement, the Oversight Agreement, this Agreement, and all other documents and instruments executed in connection with the Loan, together with any and all renewals, extensions, amendments, restatements or replacements thereof, whether now or hereafter existing. -4- 5 "Project": shall mean each of Aloha Bay Phase I (as defined in the Eleventh Amendment), Aloha Bay Phase II (as defined in the Eleventh Amendment), Ida Building One (as defined in the Tenth Amendment), Ida Building Two (as defined in the Tenth Amendment), South Park Ranches (as defined in the Ninth Amendment), Suites Phase II (as defined in the Eighth Amendment), Fountains (as defined in the Sixth Amendment), Winnick (as defined in the Sixth Amendment), Suites Phase I (as defined in the Fourth Amendment) and those certain real estate developments which are owned by the Borrower or the Trustee, located in Nye County and Clark County in the State of Nevada, and Huerfano County in the State of Colorado, which are more particularly described in Exhibit "P-1" to the First Amendment. "Unit": shall mean a real property fee or right-to-use interest in all or a portion of the Project which permits the purchaser or owner thereof the right to occupy a dwelling unit therein for a one-week interval of time during the calendar year, or in which such purchaser or owner has an interest as a tenant-in-common in such dwelling unit and related undivided interest in common elements appurtenant thereto, together with the right to use such unit for a one-week period of time during any calendar year. 1.3 The introductory subparagraph of Paragraph 3.1 of the Loan Agreement is hereby amended and restated in its entirety to read as follows: "3.1(a) As security for Borrower's payment and Performance of all Obligations owed to Lender under the Documents (including, without limitation, the 2.5 MM Note, the Suites Phase II Note, the Ida Building One Note, the Ida Building Two Note, the Aloha Bay Phase I Note and the Aloha Bay Phase II Note (subject to the limitations set forth in the Aloha Bay Phase I Mortgage and the Aloha Bay Phase II Mortgage with respect to Aloha Bay Phase I and Aloha Bay Phase II)), Borrower hereby grants, transfers and assigns to Lender a Security Interest in and to all of Borrower's right, title and interest in and to all of the following:" 1.4 The introductory subparagraph of Paragraph 3.1(b) of the Loan Agreement (which was added to the Loan Agreement pursuant to the Fourth Amendment) is hereby amended and restated in its entirety to read as follows: "(b) As further security for Borrower's payment and Performance of all Obligations owed to Lender under the Documents (including, without limitation, the 2.5 MM Note, the Suites Phase II Note, the Ida Building One Note, the Ida Building Two Note, the Aloha Bay Phase I Note and the Aloha Bay Phase II Note (subject to the limitations set forth in the Aloha Bay Phase I Mortgage and the Aloha Bay Phase II Mortgage with respect to Aloha Bay Phase I and Aloha Bay Phase II)), Borrower hereby grants, transfers and assigns to Lender a Security Interest in and to all of Borrower's right, title and interest in and to all of the following:" -5- 6 1.5 Paragraph 7.2 of the Loan Agreement is hereby amended by adding the phrase "(exclusive of the aggregate outstanding principal balance of the 2.5 MM Note, the Suites Phase II Note, the Ida Building One Note, the Ida Building Two Note, the Aloha Bay Phase I Note and the Aloha Bay Phase II Note)" immediately following the word "Loan" at both places where the term "Loan" appears in the first sentence thereof. 1.6 Paragraph 9.1(a) of the Loan Agreement is hereby amended and restated in its entirety to read as follows: "(a) Lender fails to receive from Borrower when due and payable (i) any amount that Borrower is obligated to pay on the Note, (ii) any amount that Borrower is obligated to pay on the 2.5 MM Note, (iii) any amount that Borrower is obligated to pay on the Suites Phase II Note, (iv) any amount that Borrower is obligated to pay on the Ida Building One Note, (v) any amount that Borrower is obligated to pay on the Ida Building Two Note, (vi) any amount that Borrower is obligated to pay on the Aloha Bay Phase I Note, (vii) any amount that Borrower is obligated to pay on the Aloha Bay Phase II Note, or (viii) any other payment due under the Documents; and such failure shall continue for five (5) days after notice thereof to Borrower, except for the payment of the final installment due under each of the Note, the 2.5 MM Note, the Suites Phase II Note, the Ida Building One Note, the Ida Building Two Note, the Aloha Bay Phase I Note and the Aloha Bay Phase II Note, for which no grace period is allowed;" Paragraph 9.1 of the Loan Agreement is hereby amended by adding the following provision as paragraph 9.1(m): "(m) Borrower is in default of that Franchise Agreement between Borrower and Hospitality Franchise Systems, Inc., dated as of April 18, 1995, to the extent such default has a material and adverse effect on the Project." 2. ALOHA BAY PHASE I ACQUISITION ADVANCE. As an Advance against the Maximum Loan Amount, Lender shall make a loan (the "Aloha Bay Phase I Acquisition Advance") to Borrower in an amount equal to the lesser of (a) $2,430,000, or (b) 90% of the bona fide out-of- pocket costs and expenses incurred by Borrower through the date of such Advance in acquiring Aloha Bay Phase I, as established by evidence satisfactory to Lender (exclusive of any overhead of or profits to Borrower or any of the Control Group). The following terms and conditions shall apply to the Aloha Bay Phase I Acquisition Advance: 2.1 At such time as all conditions with respect to the Aloha Bay Phase I Acquisition Advance in this Eleventh Amendment have been satisfied in Lender's discretion, Lender shall disburse the Aloha Bay Phase I Acquisition Advance to Borrower in a single Advance on a date mutually agreeable to the parties hereto. Lender shall have no -6- 7 obligation to disburse any portion of the Aloha Bay Phase I Acquisition Advance after September 29, 1995. 2.2 Borrower shall use the proceeds of the Aloha Bay Phase I Acquisition Advance to pay for a portion of Borrower's costs in purchasing Aloha Bay Phase I. 2.3 Borrower shall pay to Lender the Aloha Bay Phase I Loan Fee applicable to the Aloha Bay Phase I Acquisition Advance simultaneously with such Advance. 2.4 The Aloha Bay Phase I Acquisition Advance shall not be included in the Mortgage Loan Facility or deemed to be an Advance under the Mortgage Loan Facility. 3. ALOHA BAY PHASE I RENOVATION ADVANCES. As an Advance against the Maximum Loan Amount, Lender shall make a loan (the "Aloha Bay Phase I Renovation Advances") to Borrower, subject to the conditions precedent stated in Paragraph 10 below, in amounts not to exceed the lesser of (a) $3,600,000, less the amount of the Aloha Bay Phase I Acquisition Advance, or (b) 90% of the bona fide out-of-pocket costs and expenses incurred by Borrower through the date of such Advance in renovating the Aloha Bay Phase I, as established by evidence satisfactory to Lender (exclusive of any overhead of or profits to Borrower or any of the Control Group (for the purposes of the foregoing, the term "overhead" shall not be deemed to include reasonable and customary salaries paid to employees of Borrower performing renovations with respect to Aloha Bay Phase I)). Borrower shall use the proceeds of any Aloha Bay Phase I Renovation Advances to reimburse Borrower for Borrower's costs incurred in renovating and refurbishing Aloha Bay Phase I. Lender shall have no obligation to fund any Aloha Bay Phase I Renovation Advances until such time as all conditions with respect thereto in this Eleventh Amendment have been satisfied in Lender's discretion, and Lender shall have no obligation to make any further Aloha Bay Phase I Renovation Advances after the first to occur of the following dates: (i) six (6) months after the Aloha Bay Phase I Acquisition Advance or (ii) May 31, 1996. The Aloha Bay Phase I Renovation Advances shall not be included in the Mortgage Loan Facility or be deemed to be Advances under the Mortgage Loan Facility. 4. ALOHA BAY PHASE II ACQUISITION ADVANCE. As an Advance against the Maximum Loan Amount, Lender shall make a loan (the "Aloha Bay Phase II Acquisition Advance") to Borrower in an amount equal to the lesser of (a) $450,000 or (b) 90% of the total bona fide out- of-pocket costs and expenses to Borrower in acquiring Aloha Bay Phase II, as established by evidence satisfactory to Lender (exclusive of any overhead of or profits to Borrower or any of the Control Group). The following terms and conditions shall apply to the Aloha Bay Phase II Acquisition Advance: -7- 8 4.1 At such time as all conditions with respect to the Aloha Bay Phase II Acquisition Advance in Paragraph 10(q) of this Eleventh Amendment have been satisfied in Lender's discretion, Lender shall disburse the Aloha Bay Phase II Acquisition Advance to Borrower in a single advance on a date mutually agreeable to the parties hereto. Lender shall have no obligation to disburse any portion of the Aloha Bay Phase II Acquisition Advance prior to the first (1st) day of the fourth (4th) calendar month after the Aloha Bay Phase I Acquisition Advance is made to Borrower pursuant to Paragraph 2 above, nor after December 31, 1996. 4.2 Borrower shall use the proceeds of the Aloha Bay Phase II Acquisition Advance to pay for a portion of its costs in purchasing the land for Aloha Bay Phase II. 4.3 Borrower shall pay the Aloha Bay Phase II Loan Fee applicable to the Aloha Bay Phase II Acquisition Advance simultaneously with the making of such Advance. 4.4 The Aloha Bay Phase II Acquisition Advance shall not be included in the Mortgage Loan Facility or be deemed to be an Advance under the Mortgage Loan Facility. 5. ALOHA BAY PHASE II CONSTRUCTION ADVANCES. As an Advance against the Maximum Loan Amount, in addition to the Aloha Bay Phase I Acquisition Advance, the Aloha Bay Phase I Renovation Advances and the Aloha Bay Phase II Acquisition Advance, Lender shall make a loan (the "Aloha Bay Phase II Construction Advances") to Borrower, subject to the satisfaction of the conditions precedent stated in Paragraph 10(q) and 10(r) below, in amounts not to exceed the lesser of (a) $1,350,000, less the amount of the Aloha Bay Phase II Acquisition Advance, (b) 90% of Borrower's bona fide out-of-pocket costs and expenses incurred through the date of each such Advance in construction, furnishing. fixturizing and equipping the Aloha Bay Phase II, as established by evidence satisfactory to Lender (exclusive of any overhead of or profits to Borrower or any of the Control Group (for the purposes of the foregoing, the term "overhead" shall not be deemed to include reasonable and customary salaries paid to employees of Borrower performing construction activities with respect to Aloha Bay Phase II)), or (c) a dollar amount which would cause the aggregate of the Aloha Bay Phase I Acquisition Advance, all Aloha Bay Phase I Renovation Advances, the Aloha Bay Phase II Acquisition Advance, and all Aloha Bay Phase II Construction Advances to exceed $5,000,000.00. Borrower shall use the proceeds of any Aloha Bay Phase II Construction Advances to pay or reimburse Borrower for Borrower's costs incurred in constructing the Aloha Bay Phase II. Notwithstanding anything contained herein to the contrary, Lender shall have no obligation to make any Aloha Bay Phase II Construction Advances after December 31, 1996. The Aloha Bay Phase II Construction Advances shall not be included in the Mortgage Loan Facility or be deemed to be Advances under the Mortgage Loan Facility. -8- 9 6. ALOHA BAY PHASE I NOTE. 6.1 The Aloha Bay Phase I Acquisition Advance and Aloha Bay Phase I Renovation Advances made with respect to Aloha Bay Phase I shall be evidenced by a single Promissory Note (the "Aloha Bay Phase I Note") of Borrower, in a form acceptable to Lender, executed and delivered to Lender simultaneously with the execution of this Eleventh Amendment, in the amount of up to $3,600,000, payable to Lender upon the terms and conditions contained herein and therein. Lender and Borrower hereby agree that, notwithstanding any provision to the contrary in the Loan Agreement, the terms and conditions of the Aloha Bay Phase I Note and this Paragraph 6 shall apply with respect to repayment of the Aloha Bay Phase I Note. To the extent that Borrower's indebtedness to Lender arising from the Aloha Bay Phase I Note is evidenced by both the Note (as distinguished from the Aloha Bay Phase I Note) and the Aloha Bay Phase I Note, receipts by Lender in payment or satisfaction of such indebtedness (including receipt by Lender of Aloha Bay Phase I Release Fees as provided in Paragraph 9.1 hereof) shall be credited against sums due under both the Note and the Aloha Bay Phase I Note and/or any judgment entered thereon. 6.2 Notwithstanding the provisions of Paragraph 7.3.1 of the Loan Agreement, Borrower shall have no right to prepay the Aloha Bay Phase I Note, other than through the application of Aloha Bay Phase I Release Fees against the principal balance thereof, as provided in Paragraph 6.3 hereof. 6.3 The principal balance of the Aloha Bay Phase I Note shall be repaid as follows: At such time as Borrower conveys a Unit in Aloha Bay Phase I to a Purchaser, Borrower shall make a principal reduction payment to Lender under the Aloha Bay Phase I Note in an amount equal to the Aloha Bay Phase I Release Fee. Notwithstanding anything herein to the contrary, if not sooner paid, the entire remaining balance of the Aloha Bay Phase I Note, together with all accrued and unpaid interest and all other sums due and owing therein, shall be due and payable in full on the earlier of (a) the date which occurs twenty-four (24) months following the date that Lender makes the last Aloha Bay Phase I Renovation Advance (or in the event there is no such day in the 24th month, on the last day of such month), or (b) May 31, 1998. Aloha Bay Phase I Release Fees paid to Lender in connection with the release of Units from the Security Interests shall be applied toward the next principal installment to become due under the Aloha Bay Phase I Note. 7. ALOHA BAY PHASE II NOTE. 7.1 The Aloha Bay Phase II Acquisition Advance and Aloha Bay Phase II Construction Advances made with respect to Aloha Bay Phase II shall be evidenced by a single Promissory Note (the "Aloha Bay Phase II Note") of Borrower, in a form -9- 10 acceptable to Lender, executed and delivered to Lender simultaneously with the Aloha Bay Phase II Acquisition Advance, in the amount of up to $1,350,000, payable to Lender upon the terms and conditions contained herein and therein. Lender and Borrower hereby agree that, notwithstanding any provision to the contrary in the Loan Agreement, the terms and conditions of the Aloha Bay Phase II Note and this Paragraph 7 shall apply with respect to repayment of the Aloha Bay Phase II Note. To the extent that Borrower's indebtedness to Lender arising from the Aloha Bay Phase II Note is evidenced by both the Note (as distinguished from the Aloha Bay Phase II Note) and the Aloha Bay Phase II Note, receipts by Lender in payment or satisfaction of such indebtedness (including receipt by Lender of Aloha Bay Phase II Release Fees as provided in Paragraph 9.2 hereof) shall be credited against sums due under both the Note and the Aloha Bay Phase II Note and/or any judgment entered thereon. 7.2 Notwithstanding the provisions of Paragraph 7.3.1 of the Loan Agreement, Borrower shall have no right to prepay the Aloha Bay Phase II Note, other than through the application of Aloha Bay Phase II Release Fees against the principal balance thereof, as provided in Paragraph 7.3 hereof. 7.3 The principal balance of the Aloha Bay Phase II Note shall be repaid as follows: At such time as Borrower conveys a Unit in Aloha Bay Phase II to a Purchaser, Borrower shall make a principal reduction payment to Lender under the Aloha Bay Phase II Note in an amount equal to the Aloha Bay Phase II Release Fee. Notwithstanding anything herein to the contrary, if not sooner paid, the entire remaining balance of the Aloha Bay Phase II Note, together with all accrued and unpaid interest and all other sums due and owing therein, shall be due and payable in full on the earlier of (a) the date which occurs twenty-four (24) months following the date that Lender makes the last Aloha Bay Phase II Construction Advance (or in the event there is no such day in the 24th month, on the last day of such month), or (b) December 31, 1998. Aloha Bay Phase II Release Fees paid to Lender in connection with the release of Units from the Security Interests shall be applied toward the next principal installment to become due under the Aloha Bay Phase II Note. 8. SECURITY. As provided in Paragraphs 3.1(a) and (b) of the Loan Agreement, the payment and Performance of the Aloha Bay Phase I Note and the Aloha Bay Phase II Note shall be secured by the Security Interests granted to Lender pursuant to the Loan Agreement, as amended by this Eleventh Amendment. Furthermore, pursuant to a separate Mortgage, Assignment of Rents and Proceeds and Security Agreement with respect to Aloha Bay Phase I , in a form acceptable to Lender (referred to herein as the "Aloha Bay Phase I Mortgage"), and a separate Mortgage, Assignment of Rents and Proceeds and Security Agreement with respect to Aloha Bay Phase II (the "Aloha Bay Phase II Mortgage"), the payment and Performance of the Aloha Bay Phase I Note and Aloha Bay Phase II Note, respectively, and, subject to the limitations set forth in the Aloha Bay Phase I Mortgage and the Aloha Bay Phase II Mortgage, all other obligations owed to Lender under -10- 11 the Documents shall be secured by a first priority lien on and security interest in Aloha Bay Phase I and Aloha Bay Phase II; all buildings and other improvements now or hereafter erected thereon; all fixtures, equipment and other personal property now or hereafter located on or attached or affixed in any manner to Aloha Bay Phase I and Aloha Bay Phase II; all leases, income, rents, royalties, revenues, issues, profits or proceeds from Aloha Bay Phase I and Aloha Bay Phase II; and other items of collateral in connection therewith, all as more fully set forth in the Aloha Bay Phase I Mortgage and Aloha Bay Phase II Mortgage. 9. RELEASES. 9.1 Lender hereby agrees that it will release from the effect of the Security Interests granted herein and in the Aloha Bay Phase I Mortgage, and from the effect of any UCC Financing Statement, Units in Aloha Bay Phase I which are sold by Borrower upon (a) the payment to Lender of a release fee (the "Aloha Bay Phase I Release Fee") equal to $2,900 per Unit, (b) the payment of an Incentive Fee (as provided in Paragraph 9.4 below) in the amount of $20 per Unit until such time as Borrower has repaid the Aloha Bay Phase I Note in full, and thereafter in the amount of $2,900 per Unit until such time as Borrower has paid to Lender a total Incentive Fee as to Aloha Bay Phase I of $32,640, all as provided in Paragraph 9.4.1 below, and (c) the satisfaction of the Release Conditions (as defined in Paragraph 9.3 below). Payments of interest due under the Aloha Bay Phase I Note shall not be credited against any Aloha Bay Phase I Release Fees. 9.2 Lender hereby agrees that it will release from the effect of the Security Interests granted herein and in the Aloha Bay Phase II Mortgage, and from the effect of any UCC Financing Statement, Units in Aloha Bay Phase II which are sold by Borrower upon (a) the payment to Lender of a release fee (the "Aloha Bay Phase II Release Fee") equal to $2,205 per Unit, (b) the payment of an Incentive Fee (as provided in Paragraph 9.4 below) in the amount of $20 per Unit until such time as Borrower has repaid the Aloha Bay Phase II Note in full, and thereafter in the amount of $2,205 per Unit until such time as Borrower has paid to Lender a total Incentive Fee as to Aloha Bay Phase II of $16,320, all as provided in Paragraph 9.4.2 hereof, and (c) the satisfaction of the Release Conditions. Payments of interest due under the Aloha Bay Phase II Note shall not be credited against any Aloha Bay Phase II Release Fees. 9.3 The Release Conditions are as follows: (i) No Event of Default shall have occurred or be continuing and no event shall then exist, which with notice, passage of time or both would constitute an Event of Default; (ii) The Unit to be released must have been sold by Borrower in the ordinary course of Borrower's business in a bona fide arms-length transaction; -11- 12 (iii) The Purchaser of the Unit shall not be affiliated with Borrower or with any of the Control Group; (iv) Lender shall have received a written request for such release in which Borrower certifies as to compliance with items (i) through (iii) above, and further certifies that all other requirements for such release have been satisfied; (v) Borrower has paid all of Lender's out-of-pocket expenses incurred in connection with such release and has submitted to Lender all necessary documents for the same. For the purposes hereof, a person or entity shall be deemed affiliated with Borrower or the Control Group if it is a shareholder, officer, director, agent, employee, salesman, broker or creditor of Borrower or the Control Group, or relative of Borrower or the Control Group or of any of the foregoing, or any other person or entity related to or affiliated with Borrower or the Control Group, including, without limitation, the Guarantor and any independent contractors. No partial release of a Unit shall impair or affect Lender's remaining Security Interests or any term or provision of the Loan Agreement. 9.4 As additional consideration to Lender, Borrower shall pay to Lender an incentive fee (the "Incentive Fee") as follows: 9.4.1 Borrower shall pay to Lender an Incentive Fee equal to $32,640 with respect to the Units sold in Aloha Bay Phase I or released from the Aloha Bay Phase I Mortgage. The Incentive Fee as to Aloha Bay Phase I shall be paid in installments of $20 per Unit sold or released in Aloha Bay Phase I until such time as the Borrower has repaid the Aloha Bay Phase I Note in full. Thereafter, the Incentive Fee shall be paid in installments of $2,900 per Unit sold or released in Aloha Bay Phase I until the entire Incentive Fee as to Aloha Bay Phase I is paid in full. Payments of the Incentive Fee, in installments of $20 per Unit, shall be made together with Aloha Bay Phase I Release Fees described in Paragraph 9.1 above, until the Aloha Bay Phase I Note is repaid in full; thereafter, payments of the Incentive Fee as to Aloha Bay Phase I, in installments of $2,900 per Unit, shall be made at the earlier of the conveyance to a Purchaser of each sold Unit in Aloha Bay Phase I or the release of such Unit from the Aloha Bay Phase I Mortgage. The Incentive Fee described herein shall be in addition to the principal and interest payments due under the Aloha Bay Phase I Note. The Incentive Fee may be prepaid in whole or in part at any time. The Incentive Fee payable pursuant to this subparagraph is the same Incentive Fee payable under Paragraph 6.1 of the Aloha Bay Phase I Mortgage. 9.4.2 Borrower shall pay to Lender an Incentive Fee equal to $16,320 with respect to the Units sold in Aloha Bay Phase II or released from the Aloha Bay Phase II Mortgage. The Incentive Fee as to Aloha Bay Phase II shall be -12- 13 paid in installments of $20 per Unit sold or released in Aloha Bay Phase II until such time as the Aloha Bay Phase II Note is paid in full. Thereafter, the Incentive Fee shall be paid in installments of $2,205 per Unit sold or released in Aloha Bay Phase II until the entire Incentive Fee as to Aloha Bay Phase II is paid in full. Payments of the Incentive Fee, in installments of $20 per Unit, shall be made together with Aloha Bay Phase II Release Fees described in Paragraph 9.2 above, until the Aloha Bay Phase II Note is repaid in full; thereafter, payments of the Incentive Fee as to Aloha Bay Phase II, in installments of $2,205 per Unit, shall be made at the earlier of the conveyance to a Purchaser of each sold Unit in Aloha Bay Phase II or the release of such Unit from the Aloha Bay Phase II Mortgage. The Incentive Fee described herein shall be in addition to the principal and interest payments due under the Aloha Bay Phase II Note. The Incentive Fee may be prepaid in whole or in part at any time. The Incentive Fee payable pursuant to this subparagraph is the same Incentive Fee payable under Paragraph 6.1 of the Aloha Bay Phase II Mortgage. 9.5 Upon the release of a Unit from the Aloha Bay Phase I Mortgage or the Aloha Bay Phase II Mortgage, as the case may be, such release shall also constitute a release from the lien of the Aloha Bay Phase I Mortgage or the Aloha Bay Phase II Mortgage, respectively, and from the lien of Lender's Security Interest, of any Purchaser Notes or Purchaser Mortgages subsequently arising from the sale of such Unit; provided, however, that notwithstanding the foregoing, such Purchaser Notes and Purchaser Mortgages shall continue to be subject to Lender's Security Interest to the extent that such Purchaser Notes or Purchaser Mortgages constitute Receivables Collateral. 9.6 At such time as the principal, interest and all other sums payable under the Aloha Bay Phase I Note have been paid in full, together with the entire Incentive Fee as to Aloha Bay Phase I, Lender shall, upon the request of Borrower, release and terminate the Aloha Bay Phase I Mortgage and the accompanying UCC Financing Statement and any related security interests, provided that there does not then exist an Event of Default or any act or event which with notice, passage of time or both would constitute an Event of Default. All instruments effecting such release and termination shall be prepared by Borrower and submitted to Lender unless Lender otherwise specifies in its sole discretion. Such instruments shall be in a form and substance reasonably satisfactory to Lender. 9.7 At such time as the principal, interest and all other sums payable under the Aloha Bay Phase II Note have been paid in full, together with the entire Incentive Fee as to Aloha Bay Phase II, Lender shall, upon the request of Borrower, release and terminate the Aloha Bay Phase II Mortgage and the accompanying UCC Financing Statement and any related security interests, provided that there does not then exist an Event of Default or any act or event which with notice, passage of time or both would constitute an Event of Default. All instruments effecting such release and termination shall be prepared by Borrower and submitted to Lender unless Lender otherwise specifies in its sole discretion. Such instruments shall be in a form and substance reasonably satisfactory to Lender. -13- 14 10. CONDITIONS PRECEDENT. Lender's obligation to make the Aloha Bay Phase I Acquisition Advance, the Aloha Bay Phase II Acquisition Advance, the Aloha Bay Phase I Renovation Advances and the Aloha Bay Phase II Construction Advances are subject to the following conditions precedent, all of which must be satisfied at or prior to the funding of the Aloha Bay Phase I Acquisition Advance, except with respect to the conditions precedent set forth in Paragraph 10(q) below, which conditions must be satisfied at or prior to the funding of the Aloha Bay Phase II Acquisition Advance and except with respect to the conditions precedent set forth in Paragraph 10(r) below, which conditions must be satisfied at or prior to the funding of any Aloha Bay Phase II Construction Advances. (a) Borrower shall have delivered to Lender the following executed documents, all in form satisfactory to Lender: (i) The Aloha Bay Phase I Note; (ii) Environmental Certificate with Representations, Covenants and Warranties, with respect to the Aloha Bay Phase I, in form acceptable to Lender; (iii) The Aloha Bay Phase I Mortgage; (iv) An opinion from Borrower's counsel, which counsel must be acceptable to Lender, with respect to such matters as Lender shall require. (v) This Eleventh Amendment; (vi) From the Guarantor of the Loan, a "Consent of Guarantor," in a form acceptable to Lender; (vii) A corporate resolution of Borrower; (viii) A corporate resolution of Guarantor; (ix) UCC Financing Statements for filing and/or recording with respect to Aloha Bay Phase I; (x) Such other documents or instruments required by Lender to fully perfect the liens and security interests of Lender described or contemplated herein; (xi) Such other items as Lender may require. -14- 15 (b) RESERVED. (c) Borrower shall have delivered to Lender a current Phase I environmental assessment for Aloha Bay Phase I, performed by an environmental consultant acceptable to Lender, indicating that Aloha Bay Phase I does not contain and is not affected by existing or potential environmental contamination. If Lender is not satisfied with the results of the Phase I environmental assessment or if Lender becomes aware of any environmental issues impacting Aloha Bay Phase I, Lender shall have the right to require a site audit and regulatory compliance evaluation of Aloha Bay Phase I, which shall be prepared by an environmental engineer acceptable to Lender retained at the cost of Borrower and Lender's obligations hereunder shall be subject to Lender's approval of such audit and evaluation. (d) Borrower shall have delivered to Lender a current ALTA survey of Aloha Bay Phase I, certified to Lender by a licensed engineer or surveyor acceptable to Lender, showing, inter alia, the dimensions of the Aloha Bay Phase I, access thereto, streets and street lines, easements, location of all improvements and all other physical details thereof. In addition, Borrower shall have delivered to Lender a current title report with respect to Aloha Bay Phase I from a title insurance company acceptable to Lender and Lender shall have approved the condition of title thereto as shown therein. (e) Lender shall have inspected Aloha Bay Phase I and shall be satisfied as to the condition thereof. (f) Borrower shall have obtained and delivered to Lender, at Borrower's expense, an ALTA extended coverage mortgagee's title insurance policy or policies acceptable to Lender, with such endorsements as Lender may require, issued by a title insurance company satisfactory to Lender, in the amount of $3,632,640 insuring that the Aloha Bay Phase I Mortgage is a first and prior lien on the Aloha Bay Phase I, subject only to title exceptions approved by Lender. (g) Borrower shall have delivered to Lender evidence satisfactory to Lender that Aloha Bay Phase I is not located within a special flood hazard area or evidence satisfactory to Lender that Aloha Bay Phase I is insured, upon such terms and in such amounts as shall be satisfactory to Lender, against risks of physical damage caused by flooding. (h) Borrower shall have obtained such public liability, casualty and other insurance policies covering Aloha Bay Phase I as Lender may require, written by insurers and in amounts and forms satisfactory to Lender. -15- 16 (i) Lender shall have reviewed and approved credit references of Borrower and Guarantor. (j) Lender shall have determined that the operations of Borrower do not violate in any material respect any applicable laws, ordinances, rules and regulations of governmental authorities or agencies. (k) Unless waived in writing by Lender, Lender shall have reviewed and approved a current UCC, tax lien, judgment and litigation search on Borrower and Guarantor. (l) Borrower shall have paid all closing costs, title company charges, recording fees and taxes, appraisal fees and expenses, survey fees, travel expenses, architect/engineer inspection fees and expenses, fees and expenses of Lender's counsel, and all other costs and expenses incurred by Lender in connection with the preparation, closing and disbursement of each of the Advances made with respect to Aloha Bay Phase I pursuant to this Eleventh Amendment. (m) Borrower shall have paid the Aloha Bay Phase I Loan Fee in the amount required to be paid with respect to each of the Advances made by Lender pursuant hereto with respect to Aloha Bay Phase I. (n) Borrower shall have delivered to Lender a fully-executed copy of the purchase agreements or option agreements, and all amendments thereto, in connection with Borrower's acquisition of the Aloha Bay Phase I and option to acquire Aloha Bay Phase II. (o) Lender shall have reviewed and approved Borrower's budget for the renovation and refurbishment of Aloha Bay Phase I. (p) Borrower shall have delivered to Lender, and Lender shall have approved and be satisfied with, evidence of Borrower's required equity interest in Aloha Bay Phase I. (q) Prior to the funding of the Aloha Bay Phase II Acquisition Advance, and any Aloha Bay Phase II Construction Advances, Borrower shall have delivered to Lender the following executed documents, in form satisfactory to Lender, (the forms of any such documents agreed to by the parties in connection with the Aloha Bay Phase I Acquisition Advance and Aloha Bay Phase I Renovation Advances shall be deemed to be satisfactory hereunder) together with all other materials described below and otherwise satisfied to Lender's satisfaction the following additional conditions precedent: -16- 17 (1) The Aloha Bay Phase II Note; (2) Environmental Certificate with Representations, Covenants and Warranties with respect to Aloha Bay Phase II in form acceptable to Lender; (3) Aloha Bay Phase II Mortgage; (4) An opinion from Borrower's counsel, which counsel must be acceptable to Lender, with respect to such matters as Lender shall require; (5) UCC Financing Statements for filing and/or recording with respect to Aloha Bay Phase II; (6) A current Phase I Environmental Assessment for Aloha Bay Phase II, performed by an environmental consultant acceptable to Lender, indicating that Aloha Bay Phase II does not contain and is not affected by existing or potential environmental contamination. If Lender is not satisfied with the results of the Phase I Environmental Assessment, or if Lender becomes aware of any environmental issues impacting Aloha Bay Phase II, Lender shall have the right to require a site audit and regulatory compliance evaluation of Aloha Bay Phase II, which shall be prepared by an environmental engineer acceptable to Lender retained at the cost of Borrower and Lender's obligations hereunder with respect to Aloha Bay Phase II shall be subject to Lender's approval of such audit and evaluation; (7) Borrower shall have delivered to Lender a current ALTA survey of Aloha Bay Phase II, certified to Lender by a licensed engineer or surveyor acceptable to Lender, showing, inter alia, the dimensions of Aloha Bay Phase II, access thereto, streets and street lines, easements, location of all improvements and all other physical details thereof. In addition, Borrower shall have delivered to Lender a current title report with respect to Aloha Bay Phase II from a title insurance company acceptable to Lender and Lender shall have approved the condition of title thereto as shown therein. (8) Lender shall have inspected Aloha Bay Phase II and shall be satisfied as to the condition thereof; (9) Borrower shall have obtained and delivered to Lender, at Borrower's expense, an ALTA extended coverage mortgagee's title insurance policy or policies acceptable to Lender, with such endorsements as Lender may require, issued by a title insurance company satisfactory to Lender, in the -17- 18 amount of $1,366,320 insuring that the Aloha Bay Phase II Mortgage is a first and prior lien on Aloha Bay Phase II, subject only to title exceptions approved by Lender (provided, that any title exceptions which were approved by Lender in connection with the recordation of the Aloha Bay Phase I Mortgage, shall be deemed to be approved); (10) Borrower shall have delivered to Lender evidence satisfactory to Lender that Aloha Bay Phase II is not located within a special flood hazard area or evidence satisfactory to Lender that Aloha Bay Phase II is insured, upon such terms and in such amounts as shall be satisfactory to Lender, against risks of physical damage caused by flooding; (11) Borrower shall have obtained such public liability, casualty and other insurance policies covering Aloha Bay Phase II as Lender may require, written by insurers and in amounts and form satisfactory to Lender; (12) Borrower shall have paid all closing costs, title company charges, recording fees and taxes, appraisal fees and expenses, survey fees, travel expenses, architect/engineer inspection fees and expenses, fees and expenses of Lender's counsel, and all other costs and expenses incurred by Lender in connection with the preparation, closing and disbursement of each of the Advances made with respect to Aloha Bay Phase II pursuant to this Eleventh Amendment; (13) Borrower shall have paid the Aloha Bay Phase II Loan Fee in the amount required to be paid with respect to each of the Advances made with respect to Aloha Bay Phase II pursuant hereto; (14) Borrower shall have delivered to Lender an executed notice of Borrower's exercise of the option to acquire Aloha Bay Phase II; (15) Borrower shall have delivered to Lender, and Lender shall have approved and be satisfied with, evidence of Borrower's required equity interest in Aloha Bay Phase II; (16) Borrower shall have satisfied the Aloha Bay Phase I Post-Closing Condition as described in Paragraph 12 of this Eleventh Amendment; (17) Lender shall have received, reviewed and approved Borrower's budget for the construction of Aloha Bay Phase II; -18- 19 (18) Copies of all plans and specifications for the construction of Aloha Bay Phase II, together with evidence that the same have been approved by all applicable federal, state and local authorities; (19) Evidence that Aloha Bay Phase II is properly zoned for the improvements to be constructed and their intended use as a time-share resort and such zoning is final and not subject to challenge; (20) Borrower shall not have commenced construction of any improvements on Aloha Bay Phase II nor performed site clearance work or any other pre-construction activity which would give rise to any mechanic's liens with respect to Aloha Bay Phase II; (r) Prior to the funding of any Aloha Bay Phase II Construction Advances, Borrower shall have delivered to Lender the following, all of which shall be satisfactory to Lender: (1) Final itemized breakdown of the cost to (A) construct the improvements for Aloha Bay Phase II, and (B) acquire furniture, fixtures and equipment to be contained within Aloha Bay Phase II; (2) Borrower shall deliver to Lender an update of the ALTA survey of Aloha Bay Phase II indicating the location of the foundations for the building improvements to be constructed thereon and, after completion of all building improvements, shall deliver to Lender an as-built ALTA survey of Aloha Bay Phase II. (3) Such insurance as required by Lender with respect to Aloha Bay Phase II, written by insurers in amounts and forms satisfactory to Lender, which insurance shall be obtained at the sole cost of Borrower; (4) Copies of all building and other necessary or appropriate permits issued by each federal, state and local authority having jurisdiction over the Property and its intended uses in permitting construction of the improvements thereon in accordance with the plans and specifications therefor; (5) Not later than ten (10) days prior to the first Aloha Bay Phase II Construction Advance, copies of all agreements between Borrower and any contractors (together with copies of all contracts between the general contractor and all subcontractors), architects, engineers, managers or supervisors related to the construction, maintenance, repair, leasing, management and operation of the Aloha Bay Phase II, together with written agreements by such persons or entities that they will perform for Lender the services contracted to Borrower, notwithstanding the occurrence of any event -19- 20 of default and any foreclosure of the Aloha Bay Phase II Mortgage (provided that such persons or entities continue to receive payments under their respective contracts and provided that Borrower is not required to deliver any such agreements with respect to any subcontract unless specifically requested by Lender in writing), and the consent of such persons or entities to the collateral assignment by Borrower to Lender of their respective contracts; (6) A job progress schedule showing the planned timing, progress of construction and completion date for the improvements to be constructed, together with a projected monthly funding schedule with respect to the construction of Aloha Bay Phase II. Such job progress schedule, and funding schedules shall be supported by firm contracts or purchase orders, must contain in detail all "soft" costs, and all costs for furniture, fixtures and equipment. The construction budget shall include an adequate interest reserve satisfactory to Lender in its sole discretion, together with a contingency reserve for unexpected and unanticipated costs, and shall not include any fees or other amount payable to Borrower or its Affiliates; (7) The certification by Borrower, the Borrower's supervisory architect, the contractor and an independent architect of Lender's selection (provided that Borrower's obligation to pay for Lender's independent architect's inspections shall not exceed $3,000.00), that: (A) all work (including work, the cost of which was paid from sources other than the Loan) performed is in substantial accordance with the plans and specifications therefor; (B) all governmental licenses and permits required for such improvement as then completed have been obtained and will be exhibited to the Lender upon request; (C) the improvements (including improvements, the cost of which was paid from sources other than the Loan) as then completed do not violate and, if further completed in accordance with the plans and specifications therefor, will not violate any law, ordinance, rule or regulation or covenant, condition or restriction affecting Aloha Bay Phase II; (D) the remaining undisbursed proceeds of the Aloha Bay Phase II Construction Advances are sufficient to pay for the completion of Aloha Bay Phase II; (E) the information set forth in Borrower's request for an Aloha Bay Phase II Construction Advance is true and accurate in all material respects; (F) the Aloha Bay Phase II Construction Advance is in an amount not in excess of the value of the work and materials for which such Advance is requested; (8) Paid invoices and lien waivers relating to the construction of the improvements for all work through the date of the previous request for an Advance by Borrower; -20- 21 (9) Evidence that any inspection required by any state, city or other governmental authority has been completed with results satisfactory to that authority; (10) Simultaneously with each Aloha Bay Phase II Construction Advance, an endorsement to Lender's title insurance policy insuring that no intervening matters have affected the priority of the Aloha Bay Phase II Mortgage since its recordation (which endorsement shall be supplied to Lender immediately prior to the contemplated Advance). (11) Such other items as Lender may require. 11. RECEIVABLES ADVANCES; LENDER'S ASSURANCES. In addition to the conditions set forth for the effectiveness of this Eleventh Amendment as set forth in Paragraph 10 above, Lender's obligation to make Advances of the Loan, from time to time, against Instruments or Contracts arising from the sale of Units in the Aloha Bay Phase I or the Aloha Bay Phase II is subject to and conditioned upon such Instruments or Contracts qualifying as Eligible Receivables and is furthermore subject to and conditioned upon the satisfaction of all other conditions precedent to the making of the Advance, as set forth in the Loan Agreement. In connection therewith, but without limiting the generality of the foregoing, Lender's obligation to make Advances of the Loan against Instruments or Contracts arising from the sale of Units in the Aloha Bay Phase I and the Aloha Bay Phase II is subject to Lender's receipt and approval of copies of the registrations/consents to sell/public offering statements/prospectuses and/or approvals thereof required to be issued by or used in all jurisdictions in which such Units will be offered for sale. In the event that, as part of Borrower's operation of Aloha Bay Phase I and Aloha Bay Phase II (after construction of same) as timeshare resorts, Borrower records a declaration of condominium or similar documentation with respect to the Aloha Bay Phase I and/or Aloha Bay Phase II (which declaration or other documentation shall be subject to Lender's review and approval in its sole and absolute discretion), Lender shall provide such assurances as may be required under Florida law or regulation or as otherwise required by any governmental agencies applicable to Borrower's sale of Units in any state in which Borrower does business, which assurances shall include, if necessary, modifying the Aloha Bay Phase I Mortgage and Aloha Bay Phase II Mortgage, that (a) any insurance proceeds (as defined in the Aloha Bay Phase I Mortgage or Aloha Bay Phase II Mortgage, as applicable) payable as a result of any damage or destruction to Aloha Bay Phase I or Aloha Bay Phase II, as applicable, will be made available for purposes of repair and restoration of Aloha Bay Phase I or Aloha Bay Phase II, as applicable, subject to such conditions and restrictions which may be required by Lender (which conditions and restrictions may include without limitation, the requirement that, to the extent permitted by law, Lender hold such insurance proceeds and control the disbursement thereof as repairs are actually made), and (b) in the event that Lender foreclosures its lien under the Aloha Bay Phase I Mortgage or Aloha Bay Phase II Mortgage, as applicable, Lender will not disturb the rights of any purchasers of any Units therein. -21- 22 12. ALOHA BAY PHASE I POST-CLOSING CONDITIONS. Borrower hereby agrees that, as additional conditions to Lender's obligation to fund the Aloha Bay Phase II Acquisition Advance and any Aloha Bay Phase II Construction Advances, and as conditions subsequent to Lender's obligations under this Eleventh Amendment, Borrower shall, within one hundred twenty (120) days after the date of this Eleventh Amendment, (a) cause all construction debris currently located on Aloha Bay Phase I and identified in that Updated Phase I Assessment Report prepared by FGS, Inc., dated July 25, 1994, as including, but not limited to, wood, wood pallet, pipes and empty 55-gallon drums (the "Construction Debris"), to be completely removed from Aloha Bay Phase I in accordance with all applicable governmental laws, rules, regulations and requirements, and provide written evidence of the removal of the Construction Debris to Lender not later than one hundred twenty (120) days after the date of this Eleventh Amendment, which written confirmation shall be made by FGS, Inc., and (b) provide a letter addressed to Lender, from Borrower's Nevada counsel (which counsel is acceptable to Lender), which letter provides such assurances as may be reasonbly requested by Lender, that the litigation matter referred to in Item No. 10 of Schedule 1 of Exhibit "C" attached hereto should have no material adverse effect on Borrower's business and financial condition due to the relationship between the defendant in such matter and Borrower. 13. COMMISSIONS. Lender shall not be obligated to pay any loan commission and/or brokerage fee in connection with the Advances of the Loan made pursuant to this Eleventh Amendment. Borrower shall pay any and all such commissions and fees, if any, and hereby agrees to indemnify, defend and hold harmless Lender from any claim for any such commissions or fees. Lender represents and warrants to Borrower that Lender has no knowledge of broker involvement in the transactions contemplated by this Eleventh Amendment. 14. INDEBTEDNESS ACKNOWLEDGED. Borrower acknowledges that the indebtedness evidenced by the Documents is just and owing and agrees to pay the indebtedness in accordance with the terms of the Documents. Borrower further acknowledges and represents that no event has occurred and no condition presently exists that would constitute a default or event of default by Lender under the Loan Agreement or any of the other Documents, with or without notice or lapse of time. 15. VALIDITY OF DOCUMENTS. Borrower hereby ratifies, reaffirms, acknowledges and agrees that the Loan Agreement and the other Documents represent valid, enforceable and collectable obligations of Borrower, and that Borrower presently has no existing claims, defenses (personal or otherwise) or rights of setoff whatsoever with respect to the Obligations of Borrower under the Loan Agreement or any of the other Documents. Borrower furthermore agrees that it has no defense, counterclaim, offset, cross-complaint, claim or demand of any nature whatsoever which can be asserted as a basis to seek affirmative relief or damages from Lender or GREFCO. -22- 23 16. REAFFIRMATION OF WARRANTIES. Except to the extent, if any, that the information in Exhibit 8.3(a) to the Loan Agreement has been supplemented by Exhibit "C" attached hereto, Borrower hereby reaffirms to Lender each of the representations, warranties, covenants and agreements of Borrower as set forth in each of the Documents with the same force and effect as if each were separately stated herein and made as of the date hereof. 17. RATIFICATION OF TERMS AND CONDITIONS. All terms, conditions and provisions of the Loan Agreement, including the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, Sixth Amendment, Seventh Amendment, Eighth Amendment, Ninth Amendment and Tenth Amendment, and of each of the other Documents shall continue in full force and effect and shall remain unaffected and unchanged except as specifically amended hereby. In the event of any conflict between the terms and conditions of this Eleventh Amendment and any of the other Documents, the provisions of this Eleventh Amendment shall control. 18. OTHER WRITINGS. Lender and Borrower will execute such other writings as may be necessary to confirm or carry out the intentions of Lender and Borrower evidenced by this Eleventh Amendment. 19. EFFECTIVENESS OF AMENDMENT. This Eleventh Amendment shall not be effective until the same is executed and accepted by Lender in the State of Arizona. IN WITNESS WHEREOF, this instrument is executed as of the day and year first above written. PREFERRED EQUITIES CORPORATION, FINOVA CAPITAL CORPORATION, a Nevada corporation a Delaware corporation By: By: ----------------------------------- -------------------------------- Donald R. Middleton, Vice President Title: ---------------------------- STATE OF ARIZONA ) ) ss County of Maricopa ) BEFORE ME, the undersigned authority, a Notary Public in and for the County and State aforesaid, on this day personally appeared DONALD R. MIDDLETON, known to me to be the Vice President of PREFERRED EQUITIES CORPORATION, a Nevada corporation, who acknowledged to me that the same was the free act and deed of such corporation and that he, being authorized by proper authority to do so, executed the -23- 24 same on behalf of such corporation for the purposes and consideration therein expressed, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF OFFICE this ______ day of ______________, 1995. ----------------------------------- Notary Public My commission expires: ____________________ STATE OF ARIZONA ) ) ss County of Maricopa ) BEFORE ME, the undersigned authority, a Notary Public in and for the County and State aforesaid, on this day personally appeared _____________________________________________________________, known to me to be the _____________________________ of FINOVA CAPITAL CORPORATION, a Delaware corporation, who acknowledged to me that the same was the free act and deed of such corporation and that s/he, being authorized by proper authority to do so, executed the same on behalf of such corporation for the purposes and consideration therein expressed, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF OFFICE this ______ day of ______________, 1995. ----------------------------------- Notary Public My commission expires: ____________________ -24- 25 [ALOHA BAY PHASE I] PROMISSORY NOTE U.S. $3,600,000.00 September 22, 1995 Phoenix, Arizona FOR VALUE RECEIVED, the undersigned PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Maker"), promises to pay to FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender"), or order, at such place as the holder of this Note ("Holder") may from time to time designate in writing, in lawful money of the United States of America, the principal sum of THREE MILLION SIX HUNDRED THOUSAND AND NO/100 DOLLARS (U.S. $3,600,000.00), or so much thereof as has been disbursed and not repaid, together with interest on the unpaid principal balance from time to time outstanding from the date hereof until paid, as more fully provided for below. Interest due under this Note shall (a) accrue daily on the basis of the actual number of days in the computation period, (b) be calculated on the basis of a year consisting of 360 days, and (c) be payable monthly in arrears on the later of (i) ten (10) days after Lender mails an invoice or statement therefor to Maker or (ii) the due date set forth in said invoice or statement. Interest shall accrue initially at an annual interest rate ("Initial Interest Rate") equal to Prime (as hereinafter defined) in effect on the date of the initial advance of the loan evidenced by this Note ("Initial Prime") plus 2-1/4% per annum, subject to adjustment on each Interest Rate Change Date (as hereinafter defined), but in no event to exceed the maximum contract rate permitted under the Applicable Usury Law (as hereinafter defined). The interest rate shall change on each Interest Rate Change Date by adding to or subtracting from the Initial Interest Rate, as the case may be, the change, if any, between Initial Prime and Prime in effect on the applicable Interest Rate Change Date. As used in this Note, the following capitalized terms have the meaning set forth opposite them below: "Prime" shall mean the rate of interest publicly announced, from time to time, by Citibank, N.A., New York, New York ("Citibank"), as the corporate base rate of interest charged by Citibank to its most creditworthy commercial borrowers notwithstanding the fact that some borrowers of Citibank may borrow from Citibank at rates of less than such announced Prime rate; and "Interest Rate Change Date" means (a) the first business day of Citibank, N.A., in New York, New York, during the calendar month following the date of the initial advance of the loan evidenced by this Note and (b) the first business day of Citibank, N.A., during each successive month thereafter. 26 The principal sum of this Note shall be repaid in the manner set forth in the Loan Agreement (as defined below), the applicable provisions of which are incorporated herein by reference as if fully set forth herein. Payments of principal and/or interest shall, at the option of Holder, earn interest after they are due at a rate ("Overdue Rate") equal to (a) 2% per annum above the rate otherwise payable hereunder or (b) the maximum contract rate permitted under the Applicable Usury Law, whichever of (a) or (b) is lesser. Furthermore, in the event of the occurrence of an Event of Default (as the term "Event of Default" is defined in the Loan Agreement) the unpaid principal balance of this Note shall, at the option of Holder, accrue interest at the Overdue Rate. This Note is executed pursuant to that certain Amendment No. 11 to Amended and Restated Loan and Security Agreement of even date herewith between Maker and Lender (such Amended and Restated Loan and Security Agreement, as amended, the "Loan Agreement"). All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement, the applicable provisions of which are incorporated herein by reference. All payments made under this Note shall be applied first against amounts due hereunder or under the Loan Agreement, other than principal and interest; second, against interest then due under this Note; and third, against the principal of this Note. In the event any installment of principal and/or interest required to be made in connection with the indebtedness evidenced hereby is not paid when due and, except in the case of the final installment, for which no grace period is allowed, such default continues for five days after notice thereof to Maker or an Event of Default occurs, Holder may, at its option, without notice or demand, declare immediately due and payable the entire unpaid principal balance hereof, all accrued and unpaid interest thereon, and all other charges owing in connection with the loan evidenced hereby. The contracted for rate of interest of the loan contemplated hereby, without limitation, shall consist of the following: (i) the interest rate, calculated and applied to the principal balance of this Note in accordance with the provisions of this Note; (ii) Overdue Rate, calculated and applied to the amounts due under this Note in accordance with the provisions hereof; (iii) Aloha Bay Phase I Commitment Fee; (iv) any incentive fees payable under the Loan Agreement; and (v) all Additional Sums (as hereinafter defined), if any. Maker agrees to pay an effective contracted for rate of interest which is the sum of the above-referenced elements. -2- 27 All fees, charges, goods, things in action or any other sums or things of value (other than amounts described in the immediately previous paragraph), paid or payable by Maker (collectively, the "Additional Sums"), whether pursuant to this Note, the Loan Agreement, the other Documents or any other documents or instruments in any way pertaining to this lending transaction, or otherwise with respect to this lending transaction, that under any applicable law may be deemed to be interest with respect to this lending transaction, for the purpose of any applicable law that may limit the maximum amount of interest to be charged with respect to this lending transaction, shall be payable by Maker as, and shall be deemed to be, additional interest, and for such purposes only, the agreed upon and "contracted for rate of interest" of this lending transaction shall be deemed to be increased by the rate of interest resulting from the Additional Sums. This Note is not prepayable in whole or in part other than as a result of the application to the unpaid principal balance hereof of Aloha Bay Phase I Release Fees arising from the release of Units from the Security Interests. In the event that Holder institutes legal proceedings to enforce this Note and Holder is the prevailing party in such proceeding, Maker agrees to pay Holder, in addition to any indebtedness due and unpaid, all costs and expenses of such proceedings, including, without limitation, attorneys' fees. Holder shall not by any act or omission or commission be deemed to waive any of its rights or remedies hereunder unless such waiver be in writing and signed by an authorized officer of Holder and then only to the extent specifically set forth therein; a waiver on one occasion shall not be construed as continuing or as a bar to or waiver of such right or remedy on any other occasion. All remedies conferred upon Holder by this Note or any other instrument or agreement connected herewith or related hereto shall be cumulative and none is exclusive and such remedies may be exercised concurrently or consecutively at Holder's option. Every person or entity at any time liable for the payment of the indebtedness evidenced hereby waives: presentment for payment, protest and demand; notice of protest, demand, dishonor and nonpayment of this Note; and trial by jury in any litigation arising out of, relating to or connected with this Note or any instrument given as security herefor. Every such person or entity further consents that Holder may renew or extend the time of payment of any part or the whole of the indebtedness at any time and from time to time at the request of any other person or entity liable therefor. Any such renewals or extensions may be made without notice to any person or entity liable for the payment of the indebtedness evidenced hereby. This Note is given and accepted as evidence of indebtedness only and not in payment or satisfaction of any indebtedness or obligation. -3- 28 Time is of the essence with respect to all of Maker's obligations and agreements under this Note. This Note and all of the provisions, conditions, promises and covenants hereof shall be binding in accordance with the terms hereof upon Maker, its successors and assigns, provided nothing herein shall be deemed consent to any assignment restricted or prohibited by the terms of the Loan Agreement. If more than one person or other entity has executed this Note as Maker, the obligations of such persons and entities shall be joint and several. This Note has been executed and delivered in Phoenix, Arizona, and the obligations of Maker hereunder shall be performed in Phoenix, Arizona. THIS NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ARIZONA AND, TO THE EXTENT THEY PREEMPT THE LAWS OF SUCH STATE, THE LAWS OF THE UNITED STATES. Maker (a) hereby irrevocably submits itself to the process, jurisdiction and venue of the courts of the State of Arizona, Maricopa County, and to the process, jurisdiction and venue of the United States District Court for Arizona, for the purposes of suit, action or other proceedings arising out of or relating to this Note or the subject matter hereof brought by Holder and (b) without limiting the generality of the foregoing, hereby waives and agrees not to assert by way of motion, defense or otherwise in any such suit, action or proceeding any claim that Maker is not personally subject to the jurisdiction of the above-named courts, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. It is the intent of the parties to comply with the usury law ("Applicable Usury Law") applicable pursuant to the terms of the preceding paragraph or such other usury law which is applicable if the law chosen by the parties is not. Accordingly, it is agreed that notwithstanding any provisions to the contrary in this Note, or in any of the documents securing payment hereof or otherwise relating hereto, in no event shall this Note or such documents require the payment or permit the collection of interest in excess of the maximum contract rate permitted by the Applicable Usury Law. In the event (a) any such excess of interest otherwise would be contracted for, charged or received from Maker or otherwise in connection with the loan evidenced hereby, or (b) the maturity of the indebtedness evidenced by this Note is accelerated in whole or in part, or (c) all or part of the principal or interest of this Note shall be prepaid, so that under any of such circumstance the amount of interest contracted for, shared or received in connection with the loan evidenced hereby, would exceed the maximum contract rate permitted by the Applicable Usury Law, then in any such event (1) the provisions of this paragraph shall govern and control, (2) neither Maker nor any other person or entity now or hereafter liable for the payment hereof will be obligated to pay the amount of such interest to the extent that -4- 29 it is in excess of the maximum contract rate permitted by the Applicable Usury Law, (3) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal amount hereof or refunded to Maker, at Holder's option, and (4) the effective rate of interest will be automatically reduced to the maximum amount of interest permitted by the Applicable Usury Law. It is further agreed, without limiting the generality of the foregoing, that to the extent permitted by the Applicable Usury Law: (x) all calculations of interest which are made for the purpose of determining whether such rate would exceed the maximum contract rate permitted by the Applicable Usury Law shall be made by amortizing, prorating, allocating and spreading during the period of the full stated term of the loan evidenced hereby, all interest at any time contracted for, charged or received from Maker or otherwise in connection with such loan; and (y) in the event that the effective rate of interest on the loan should at any time exceed the maximum contract rate allowed under the Applicable Usury Law, such excess interest that would otherwise have been collected had there been no ceiling imposed by the Applicable Usury Law shall be paid to Holder from time to time, if and when the effective interest rate on the loan otherwise falls below the maximum amount permitted by the Applicable Usury Law, to the extent that interest paid to the date of calculation does not exceed the maximum contract rate permitted by the Applicable Usury Law, until the entire amount of interest which would have otherwise been collected had there been no ceiling imposed by the Applicable Usury Law has been paid in full. Maker further agrees that should the maximum contract rate permitted by the Applicable Usury Law be increased at any time hereafter because of a change in the law, then to the extent not prohibited by the Applicable Usury Law, such increases shall apply to all indebtedness evidenced hereby regardless of when incurred; but, again to the extent not prohibited by the Applicable Usury Law, should the maximum contract rate permitted by the Applicable Usury Law be decreased because of a change in the law, such decreases shall not apply to the indebtedness evidenced hereby regardless of when incurred. In the event of any conflict or inconsistency between the provisions of this Note and the provisions of the Loan Agreement, the provisions of the Loan Agreement shall control. PREFERRED EQUITIES CORPORATION, a Nevada corporation "Maker" By:_______________________________________________ Donald R. Middleton, Vice President Address: 4310 Paradise Road Las Vegas, Nevada 89109 -5- 30 Attn: President -6- EX-10.86 3 AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT 1 EXHIBIT 10.86 AMENDMENT NO. 12 TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS AMENDMENT NO. 12 TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is entered into as of the 29th day of September, 1995, by and between FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender"), and PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Borrower"). R E C I T A L S A. Greyhound Real Estate Finance Company, an Arizona corporation ("GREFCO") and Borrower entered into an Amended and Restated Loan and Security Agreement dated as of May 10, 1989 (the "Restated Loan Agreement") that evidences a loan from GREFCO to Borrower (the "Modified Loan") that is secured by, among other things, Receivables Collateral. B. The Modified Loan and Restated Loan Agreement was amended by an Amendment Number One to Amended and Restated Loan and Security Agreement dated June 14, 1989 (the "First Amendment"), by an Amendment No. 2 to Amended and Restated Loan and Security Agreement dated April 16, 1990 (the "Second Amendment"), by an Amendment No. 3 to Amended and Restated Loan and Security Agreement dated May 31, 1991 (the "Third Amendment"), by an Amendment No. 4 to Amended and Restated Loan and Security Agreement dated January 13, 1992 (the "Fourth Amendment"), by an Amendment No. 5 to Amended and Restated Loan and Security Agreement dated February 23, 1993 (the "Fifth Amendment"); by an Amendment No. 6 to Amended and Restated Loan and Security Agreement dated June 28, 1993 (the "Sixth Amendment"), by an Amendment No. 7 to Amended and Restated Loan and Security Agreement dated January 24, 1994 (the "Seventh Amendment"), by an Amendment No. 8 to Amended and Restated Loan and Security Agreement dated as of April 15, 1994 (the "Eighth Amendment"), by an Amendment No. 9 to Amended and Restated Loan and Security Agreement dated as of August 31, 1994 (the "Ninth Amendment"), by an Amendment No. 10 to Amended and Restated Loan and Security Agreement dated as of January 26, 1995 (the "Tenth Amendment"), and by an Amendment No. 11 to Amended and Restated Loan and Security Agreement dated as of September 22, 1995 (the "Eleventh Amendment"). The Restated Loan Agreement, the First Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment, the Fifth Amendment, the Sixth Amendment, the Seventh Amendment, the Eighth Amendment, the Ninth Amendment, the Tenth Amendment, the Eleventh Amendment and this Twelfth Amendment and all other documents evidencing or executed in connection with the Loan are referred to hereinafter as the "Loan Documents." The Restated Loan Agreement, as amended by the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, Sixth Amendment, Seventh Amendment, Eighth Amendment, Ninth Amendment, Tenth Amendment and Eleventh 2 Amendment, is referred to hereinafter as the "Loan Agreement." The Loan contemplated by the Loan Agreement, as amended by this Twelfth Amendment, is referred to hereinafter as the "Loan." All capitalized terms used in this Twelfth Amendment will have the meanings assigned to such terms in the Loan Agreement unless those terms are otherwise defined herein. C. GREFCO was a wholly-owned subsidiary of Greyhound Financial Corporation ("GFC"). Pursuant to a plan of liquidation, GREFCO was liquidated into GFC. Further, pursuant to such plan of liquidation, GREFCO assigned the Note and all of GREFCO's rights under the Loan Agreement and other Documents to GFC. Effective as of February 1, 1995, GFC changed its name to FINOVA Capital Corporation. D. Borrower has requested and Lender has agreed to fund (pursuant to the terms and conditions of this Twelfth Amendment), as part of the Loan, an Advance against the Maximum Loan Amount, to refinance a portion of the loan made by Lender with respect to the Headquarters, as evidenced by the 2.5 MM Note, and for purposes of providing Borrower with additional working capital. NOW, THEREFORE, in consideration of these recitals, the covenants contained in this Twelfth Amendment, and for other good and valuable consideration, the receipt and sufficiency of which consideration is hereby acknowledged, Lender and Borrower agree as follows: 1. LOAN AGREEMENT. Provided the conditions precedent described in Paragraph 5 of this Twelfth Amendment are met to the satisfaction of Lender, which satisfaction will be evidenced by Lender's execution of this Twelfth Amendment unless otherwise provided herein, the Loan Agreement is hereby further modified as follows: 1.1 The Loan Agreement is hereby amended by adding to Article I the following definitions: "Headquarters Readvance": shall have the meaning set forth in Paragraph 2 of this Twelfth Amendment. "Headquarters Readvance Loan Fee": shall mean the loan fee payable by Borrower to Lender equal to one percent (1%) of the amount of the Headquarters Readvance which shall be due and payable on the date the Headquarters Readvance is funded. "Twelfth Amendment": shall mean this Amendment No. 12 to Amended and Restated Loan and Security Agreement. -2- 3 1.2 The definitions of the following terms in Article I of the Loan Agreement, including, to the extent applicable, the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, Sixth Amendment, Seventh Amendment, Eighth Amendment, Ninth Amendment, Tenth Amendment and Eleventh Amendment, are hereby amended and restated in their entirety to read as follows: "2.5 MM Note": shall mean the 2.5 MM Note, as modified and amended pursuant to the Amended and Restated 2.5 MM Note described in Paragraph 3 of the Twelfth Amendment. "Headquarters Deed of Trust": shall mean the Headquarters Deed of Trust, as modified and amended pursuant to that First Modification of Deed of Trust [Headquarters] dated as of August 31, 1994 and recorded in Book 941021, Instrument No. 00641, Official Records of Clark County, Nevada, and by that Second Modification to Deed of Trust [Headquarters] described in Paragraph 4 of the Twelfth Amendment. 2. HEADQUARTERS READVANCE. As an Advance against the Maximum Loan Amount, Lender shall make a loan (the "Headquarters Readvance") to Borrower in an amount equal to the lesser of (a) $1,000,000, or (b) the difference between $2,500,000 and the outstanding principal balance of the 2.5 MM Note as of the date of the Twelfth Amendment. The following terms and conditions shall apply to the Headquarters Readvance: 2.1 At such time as all conditions with respect to the Headquarters Readvance in this Twelfth Amendment have been satisfied in Lender's discretion, Lender shall disburse the Headquarters Readvance to Borrower in a single Advance on a date mutually agreeable to the parties hereto. Lender shall have no obligation to disburse any portion of the Headquarters Readvance after September 29, 1995. 2.2 Borrower shall use the proceeds of the Headquarters Readvance for working capital purposes. 2.3 Borrower shall pay to Lender the Headquarters Readvance Loan Fee simultaneously with such advance. 2.4 The Headquarters Readvance shall not be included in the Mortgage Loan Facility or be deemed to be an Advance under the Mortgage Loan Facility. 3. AMENDED AND RESTATED 2.5 MM NOTE. 3.1 The outstanding principal balance of the 2.5 MM Note as of the date of the Twelfth Amendment, together with the Headquarters Readvance shall be -3- 4 evidenced by an amended and restated promissory note, which shall amend and modify the 2.5 MM Note (the "Amended and Restated 2.5 MM Note"), and shall be in the form attached hereto as Exhibit "A", executed and delivered to Lender simultaneously with the execution of this Twelfth Amendment. Lender and Borrower hereby agree that, notwithstanding any provision to the contrary in the Loan Agreement, the terms and conditions of the Amended and Restated 2.5 MM Note and this Paragraph 3 shall apply with respect to repayment of the Amended and Restated 2.5 MM Note. To the extent that Borrower's indebtedness to Lender arising from the Amended and Restated 2.5 MM Note is evidenced by both the Note (as distinguished from the Amended and Restated 2.5 MM Note) and the Amended and Restated 2.5 MM Note, receipts by Lender in payment or satisfaction of such indebtedness shall be credited against sums due under both the Note and the Amended and Restated 2.5 MM Note and/or any judgment entered thereon. Within thirty (30) days after the Headquarters Readvance is made, Lender shall return the original 2.5 MM Note dated as of June 28, 1993 to Borrower, marked "Superceded by Amended and Restated Promissory Note dated as of September 29, 1995." 3.2 Notwithstanding the provisions of Paragraph 7.3.1 of the Loan Agreement, Borrower shall have no right to prepay the Amended and Restated 2.5 MM Note, other than as provided in the Amended and Restated 2.5 MM Note. 3.3 Notwithstanding anything herein to the contrary, if not sooner paid, the entire outstanding balance of the Amended and Restated 2.5 MM Note, together with all accrued and unpaid interest and all other sums due and owing therein, shall be due and payable in full on the fifth (5th) anniversary of the date of the Headquarters Readvance. 4. SECURITY. As provided in Paragraphs 3.1(a) and (b) of the Loan Agreement, the payment and performance of the Amended and Restated 2.5 MM Note shall continue to be secured by the Security Interests granted to Lender pursuant to the Loan Agreement, as amended by this Twelfth Amendment. In addition, the Headquarters Deed of Trust, as modified by the First Modification of Deed of Trust [Headquarters], shall be further modified and amended pursuant to a Second Modification of Deed of Trust [Headquarters], in the form attached hereto as Exhibit "B", which shall cause the Headquarters Deed of Trust to continue to secure repayment of the 2.5 MM Note, as restated and amended by the Amended and Restated 2.5 MM Note, and all other obligations owed to Lender under the Documents. 5. CONDITIONS PRECEDENT. Lender's obligation to make the Headquarters Readvance is subject to the following conditions precedent, all of which must be satisfied at or prior to the funding of the Headquarters Readvance. (a) Borrower shall have delivered to Lender the following executed documents, all in form satisfactory to Lender: -4- 5 (i) The Amended and Restated 2.5 MM Note, in the form attached hereto as Exhibit "A"; (ii) An updated Environmental Certificate with Representations, Covenants and Warranties, with respect to the Headquarters, in form acceptable to Lender; (iii) The Second Modification to Deed of Trust [Headquarters] in the form attached hereto as Exhibit "B"; (iv) An opinion from Borrower's counsel, which counsel must be acceptable to Lender, with respect to such matters as Lender shall require. (v) This Twelfth Amendment; (vi) From the Guarantor of the Loan, a "Consent of Guarantor," in a form acceptable to Lender; (vii) A corporate resolution of Borrower; (viii) A corporate resolution of Guarantor; (ix) Such other documents or instruments required by Lender to fully perfect the liens and security interests of Lender described or contemplated herein; (x) Such other items as Lender may require. (b) RESERVED. (c) Borrower shall have delivered to Lender a letter from the environmental consultant who performed the Phase I environmental assessment for Headquarters previously delivered to Lender indicating that such consultant has reviewed current records of all applicable federal, state and local environmental regulatory agencies and that the Headquarters is not included on any such list or subject to pending investigation by any such agency. (e) Borrower shall have obtained and delivered to Lender, at Borrower's expense, a datedown endorsement to the existing ALTA extended coverage mortgagee's title insurance policy issued in favor of Lender by Lawyers Title Insurance Company, or a new ALTA extended coverage mortgagee's title insurance policy issued by a title insurance company acceptable to Lender, with such -5- 6 additional endorsements as Lender may require, insuring that the Headquarters Deed of Trust continues to be a first and prior lien on the Headquarters, subject only to such additional title exceptions as may be approved by Lender. (e) Unless waived by Lender in writing, Lender shall have reviewed and approved credit references of Borrower and Guarantor. The foregoing condition shall be deemed to have been waived by Lender upon Lender's funding of the Headquarters Readvance. (f) Unless waived in writing by Lender, Lender shall have reviewed and approved a current UCC, tax lien, judgment and litigation search on Borrower and Guarantor. The foregoing condition shall be deemed to have been waived by Lender upon Lender's funding of the Headquarters Readvance. (g) Borrower shall have paid, or shall have assumed the obligation or otherwise provided for the payment of all closing costs, title company charges, recording fees and taxes, appraisal fees and expenses, survey fees, travel expenses, architect/engineer inspection fees and expenses, fees and expenses of Lender's counsel, and all other costs and expenses incurred by Lender in connection with the preparation, closing and disbursement of the Headquarters Readvance pursuant to this Twelfth Amendment. (h) Borrower shall have paid the Headquarters Readvance Loan Fee in the amount required to be paid with respect to the Headquarters Readvance made by Lender pursuant hereto. 6. COMMISSIONS. Lender shall not be obligated to pay any loan commission and/or brokerage fee in connection with the Advances of the Loan made pursuant to this Twelfth Amendment. Borrower shall pay any and all such commissions and fees, if any, and hereby agrees to indemnify, defend and hold harmless Lender from any claim for any such commissions or fees. Lender represents and warrants to Borrower that Lender has no knowledge of broker involvement in the transactions contemplated by this Twelfth Amendment. 7. INDEBTEDNESS ACKNOWLEDGED. Borrower acknowledges that the indebtedness evidenced by the Documents is just and owing and agrees to pay the indebtedness in accordance with the terms of the Documents. Borrower further acknowledges and represents that no event has occurred and no condition presently exists that would constitute a default or event of default by Borrower under the Loan Agreement or any of the other Documents, with or without notice or lapse of time. 8. VALIDITY OF DOCUMENTS. Borrower hereby ratifies, reaffirms, acknowledges and agrees that the Loan Agreement and the other Documents represent valid, -6- 7 enforceable and collectable obligations of Borrower, and that Borrower presently has no existing claims, defenses (personal or otherwise) or rights of setoff whatsoever with respect to the Obligations of Borrower under the Loan Agreement or any of the other Documents. Borrower furthermore agrees that it has no defense, counterclaim, offset, cross-complaint, claim or demand of any nature whatsoever which can be asserted as a basis to seek affirmative relief or damages from Lender or GREFCO. 9. REAFFIRMATION OF WARRANTIES. Except to the extent, if any, that the information in Exhibit 8.3(a) to the Loan Agreement has been supplemented by Exhibit "C" attached hereto, Borrower hereby reaffirms to Lender each of the representations, warranties, covenants and agreements of Borrower as set forth in each of the Documents with the same force and effect as if each were separately stated herein and made as of the date hereof. 10. RATIFICATION OF TERMS AND CONDITIONS. All terms, conditions and provisions of the Loan Agreement, including the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, Sixth Amendment, Seventh Amendment, Eighth Amendment, Ninth Amendment, Tenth Amendment and Eleventh Amendment, and of each of the other Documents shall continue in full force and effect and shall remain unaffected and unchanged except as specifically amended hereby. In the event of any conflict between the terms and conditions of this Twelfth Amendment and any of the other Documents, the provisions of this Twelfth Amendment shall control. 11. OTHER WRITINGS. Lender and Borrower will execute such other writings as may be necessary to confirm or carry out the intentions of Lender and Borrower evidenced by this Twelfth Amendment. 12. EFFECTIVENESS OF AMENDMENT. This Twelfth Amendment shall not be effective until the same is executed and accepted by Lender in the State of Arizona. IN WITNESS WHEREOF, this instrument is executed as of the day and year first above written. PREFERRED EQUITIES CORPORATION, FINOVA CAPITAL CORPORATION, a Nevada corporation a Delaware corporation By: By: ----------------------------------- ---------------------------------- Donald R. Middleton, Vice President Title: --------------------------- -7- 8 STATE OF ARIZONA ) ) ss COUNTY OF MARICOPA ) BEFORE ME, the undersigned authority, a Notary Public in and for the County and State aforesaid, on this day personally appeared DONALD R. MIDDLETON, known to me to be the Vice President of PREFERRED EQUITIES CORPORATION, a Nevada corporation, who acknowledged to me that the same was the free act and deed of such corporation and that he, being authorized by proper authority to do so, executed the same on behalf of such corporation for the purposes and consideration therein expressed, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF OFFICE this ______ day of ______________, 1995. --------------------------------- Notary Public My commission expires: ____________________ STATE OF ARIZONA ) ) ss COUNTY OF MARICOPA ) BEFORE ME, the undersigned authority, a Notary Public in and for the County and State aforesaid, on this day personally appeared _____________________________________________________________, known to me to be the _____________________________ of FINOVA CAPITAL CORPORATION, a Delaware corporation, who acknowledged to me that the same was the free act and deed of such corporation and that s/he, being authorized by proper authority to do so, executed the same on behalf of such corporation for the purposes and consideration therein expressed, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF OFFICE this ______ day of ______________, 1995. --------------------------------- Notary Public My commission expires: ____________________ -8- 9 [HEADQUARTERS] AMENDED AND RESTATED PROMISSORY NOTE U.S. $2,500,000.00 As of September 29, 1995 Phoenix, Arizona FOR VALUE RECEIVED, the undersigned PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Maker"), promises to pay to FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender"), or order, at such place as the holder of this Amended and Restated Note ("Holder") may from time to time designate in writing, in lawful money of the United States of America, the principal sum of TWO MILLION FIVE HUNDRED THOUSAND UNITED STATES DOLLARS (U.S. $2,500,000), or so much thereof as has been disbursed and not repaid, together with interest on the unpaid principal balance from time to time outstanding from the date hereof until paid, as more fully provided for below. Interest due under this Amended and Restated Note (the "Note") shall (a) accrue daily on the basis of the actual number of days in the computation period and (b) be calculated on the basis of a year consisting of 360 days. Interest shall accrue initially at an annual interest rate ("Initial Interest Rate") equal to Prime (as hereinafter defined) in effect on the date of this Note ("Initial Prime") plus 2-1/4% per annum, subject to adjustment on each Interest Rate Change Date (as hereinafter defined), but in no event to exceed the maximum contract rate permitted under the Applicable Usury Law (as hereinafter defined). The interest rate shall change on each Interest Rate Change Date by adding to or subtracting from the Initial Interest Rate, as the case may be, the change, if any, between Initial Prime and Prime in effect on the applicable Interest Rate Change Date. As used in this Note, the following capitalized terms have the meaning set forth opposite them below: "Prime" shall mean the rate of interest publicly announced, from time to time, by Citibank, N.A., New York, New York ("Citibank"), as the corporate base rate of interest charged by Citibank to its most creditworthy commercial borrowers notwithstanding the fact that some borrowers of Citibank may borrow from Citibank at rates of less than such announced Prime rate; and "Interest Rate Change Date" means (a) the first business day of Citibank, N.A., in New York, New York, during the calendar month following the date of this Note and (b) the first business day of Citibank, N.A., during each successive month thereafter. 10 This Note shall be repaid in immediately available funds in sixty (60) monthly installments of principal and interest calculated in the manner set forth below. The first monthly installment shall be due and payable on November 1, 1995 and subsequent monthly installments shall be due and payable on the first Business Day of each and every month thereafter. The first fifty-nine (59) installments shall be in an amount equal to interest (in arrears) and a monthly principal payment which shall equal the principal payment obtained when the beginning principal balance of this Note is amortized over a sixty (60) month principal amortization schedule using the Initial Interest Rate. Any remaining principal and all other sums due and owing pursuant hereto plus accrued and unpaid interest shall be due and payable on October 1, 2000 (the "Maturity Date"). Payments of principal and/or interest shall, at the option of Holder, earn interest after they are due at a rate ("Overdue Rate") equal to (a) 2% per annum above the rate otherwise payable hereunder or (b) the maximum contract rate permitted under the Applicable Usury Law, whichever of (a) or (b) is lesser. Furthermore, in the event of the occurrence of an Event of Default (as the term "Event of Default" is defined in the Loan Agreement) the unpaid principal balance of this Note shall, at the option of Holder, accrue interest at the Overdue Rate. This Note is executed pursuant to that certain Amendment No. 12 to Amended and Restated Loan and Security Agreement of even date herewith between Maker and Lender (such Amended and Restated Loan and Security Agreement, as amended, the "Loan Agreement"). All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement, the applicable provisions of which are incorporated herein by reference. All payments made under this Note shall be applied first against amounts due hereunder or under the Loan Agreement, other than principal and interest; second, against interest then due under this Note; and third, against the principal of this Note. In the event any installment of principal and/or interest required to be made in connection with the indebtedness evidenced hereby is not paid when due and, except in the case of the final installment, for which no grace period is allowed, such default continues for five days after notice thereof to Maker or an Event of Default occurs, Holder may, at its option, without notice or demand, declare immediately due and payable the entire unpaid principal balance hereof, all accrued and unpaid interest thereon, and all other charges owing in connection with the loan evidenced hereby. The contracted for rate of interest of the loan contemplated hereby, without limitation, shall consist of the following: (i) the interest rate, calculated and applied to the principal balance of this Note in accordance with the provisions of this -2- 11 Note; (ii) Overdue Rate, calculated and applied to the amounts due under this Note in accordance with the provisions hereof; (iii) Headquarters Readvance Loan Fee; and (iv) all Additional Sums (as hereinafter defined), if any. Maker agrees to pay an effective contracted for rate of interest which is the sum of the above referenced elements. All fees, charges, goods, things in action or any other sums or things of value (other than amounts described in the immediately previous paragraph), paid or payable by Maker (collectively, the "Additional Sums"), whether pursuant to this Note, the Loan Agreement, the other Documents or any other documents or instruments in any way pertaining to this lending transaction, or otherwise with respect to this lending transaction, that under any applicable law may be deemed to be interest with respect to this lending transaction, for the purpose of any applicable law that may limit the maximum amount of interest to be charged with respect to this lending transaction, shall be payable by Maker as, and shall be deemed to be, additional interest, and for such purposes only, the agreed upon and "contracted for rate of interest" of this lending transaction shall be deemed to be increased by the rate of interest resulting from the Additional Sums. This Note is prepayable in whole but not in part at any time subject to the following conditions: (a) Not less than thirty (30) days prior to the date on which Maker desires to make such prepayment, Maker shall deliver to Holder written notice of Maker's intention to prepay, which notice shall be irrevocable and shall state the prepayment date; and (b) Maker pays to Holder, concurrently with such prepayment (i) a prepayment premium (the "Prepayment Premium") equal to (A) three percent (3%) of the amount prepaid if such prepayment is made on or before June 30, 1996, (B) two percent (2%) of the amount prepaid if such prepayment is made after June 30, 1996 and on or before June 30, 1997 and (C) one percent (1%) of the amount prepaid if such prepayment is made after June 30, 1997 and on or before June 30, 1998 and (ii) accrued and unpaid interest through the date of such prepayment on the principal balance being prepaid (it being agreed and understood that no Prepayment Premium shall be payable if this Note is prepaid at any time after June 30, 1998). The foregoing notwithstanding, in the event a prepayment of this Note occurs as a result of an acceleration by Holder of the balance due pursuant to its right to declare an acceleration hereof under the terms of the Loan Agreement, the Prepayment Premium shall equal five percent (5%) of the principal being prepaid, notwithstanding the date upon which such acceleration occurs. -3- 12 In the event that Holder institutes legal proceedings to enforce this Note and Holder is the prevailing party in such proceedings, Maker agrees to pay Holder, in addition to any indebtedness due and unpaid, all costs and expenses of such proceedings, including, without limitation, attorneys' fees. Holder shall not by any act or omission or commission be deemed to waive any of its rights or remedies hereunder unless such waiver be in writing and signed by an authorized officer of Holder and then only to the extent specifically set forth therein; a waiver on one occasion shall not be construed as continuing or as a bar to or waiver of such right or remedy on any other occasion. All remedies conferred upon Holder by this Note or any other instrument or agreement connected herewith or related hereto shall be cumulative and none is exclusive and such remedies may be exercised concurrently or consecutively at Holder's option. Every person or entity at any time liable for the payment of the indebtedness evidenced hereby waives: presentment for payment, protest and demand; notice of protest, demand, dishonor and nonpayment of this Note; and trial by jury in any litigation arising out of, relating to or connected with this Note or any instrument given as security herefor. Every such person or entity further consents that Holder may renew or extend the time of payment of any part or the whole of the indebtedness at any time and from time to time at the request of any other person or entity liable therefor. Any such renewals or extensions may be made without notice to any person or entity liable for the payment of the indebtedness evidenced hereby. This Note is given and accepted as evidence of indebtedness only and not in payment or satisfaction of any indebtedness or obligation. Time is of the essence with respect to all of Maker's obligations and agreements under this Note. This Note and all of the provisions, conditions, promises and covenants hereof shall be binding in accordance with the terms hereof upon Maker, its successors and assigns, provided nothing herein shall be deemed consent to any assignment restricted or prohibited by the terms of the Loan Agreement. If more than one person or other entity has executed this Note as Maker, the obligations of such persons and entities shall be joint and several. This Note has been executed and delivered in Phoenix, Arizona, and the obligations of Maker hereunder shall be performed in Phoenix, Arizona. THIS NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ARIZONA AND, TO THE EXTENT THEY PREEMPT THE LAWS OF SUCH STATE, THE LAWS OF THE UNITED STATES. Maker (a) hereby irrevocably submits itself to the process, jurisdiction and venue of the courts of the State of -4- 13 Arizona, Maricopa County, and to the process, jurisdiction and venue of the United States District Court for Arizona, for the purposes of suit, action or other proceedings arising out of or relating to this Note or the subject matter hereof brought by Holder and (b) without limiting the generality of the foregoing, hereby waives and agrees not to assert by way of motion, defense or otherwise in any such suit, action or proceeding any claim that Maker is not personally subject to the jurisdiction of the above-named courts, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. It is the intent of the parties to comply with the usury law ("Applicable Usury Law") applicable pursuant to the terms of the preceding paragraph or such other usury law which is applicable if the law chosen by the parties is not. Accordingly, it is agreed that notwithstanding any provisions to the contrary in this Note, or in any of the documents securing payment hereof or otherwise relating hereto, in no event shall this Note or such documents require the payment or permit the collection of interest in excess of the maximum contract rate permitted by the Applicable Usury Law. In the event (a) any such excess of interest otherwise would be contracted for, charged or received from Maker or otherwise in connection with the loan evidenced hereby, or (b) the maturity of the indebtedness evidenced by this Note is accelerated in whole or in part, or (c) all or part of the principal or interest of this Note shall be prepaid, so that under any of such circumstance the amount of interest contracted for, shared or received in connection with the loan evidenced hereby, would exceed the maximum contract rate permitted by the Applicable Usury Law, then in any such event (1) the provisions of this paragraph shall govern and control, (2) neither Maker nor any other person or entity now or hereafter liable for the payment hereof will be obligated to pay the amount of such interest to the extent that it is in excess of the maximum contract rate permitted by the Applicable Usury Law, (3) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal amount hereof or refunded to Maker, at Holder's option, and (4) the effective rate of interest will be automatically reduced to the maximum amount of interest permitted by the Applicable Usury Law. It is further agreed, without limiting the generality of the foregoing, that to the extent permitted by the Applicable Usury Law: (x) all calculations of interest which are made for the purpose of determining whether such rate would exceed the maximum contract rate permitted by the Applicable Usury Law shall be made by amortizing, prorating, allocating and spreading during the period of the full stated term of the loan evidenced hereby, all interest at any time contracted for, charged or received from Maker or otherwise in connection with such loan; and (y) in the event that the effective rate of interest on the loan should at any time exceed the maximum contract rate allowed under the Applicable Usury Law, such excess interest that would otherwise have been collected had there been no ceiling imposed by the Applicable Usury Law shall be paid to Holder from time to time, if and when the effective interest rate on the loan otherwise falls below the maximum amount permitted by the Applicable Usury Law, -5- 14 to the extent that interest paid to the date of calculation does not exceed the maximum contract rate permitted by the Applicable Usury Law, until the entire amount of interest which would have otherwise been collected had there been no ceiling imposed by the Applicable Usury Law has been paid in full. Maker further agrees that should the maximum contract rate permitted by the Applicable Usury Law be increased at any time hereafter because of a change in the law, then to the extent not prohibited by the Applicable Usury Law, such increases shall apply to all indebtedness evidenced hereby regardless of when incurred; but, again to the extent not prohibited by the Applicable Usury Law, should the maximum contract rate permitted by the Applicable Usury Law be decreased because of a change in the law, such decreases shall not apply to the indebtedness evidenced hereby regardless of when incurred. In the event of any conflict or inconsistency between the provisions of this Note and the provisions of the Loan Agreement, the provisions of the Loan Agreement shall control. This Note is an amendment and restatement of that certain Promissory Note, dated as of June 28, 1993, by Maker to the order of Lender. This Note shall not constitute a waiver of any existing default or breach of a covenant and shall have no retroactive effect; provided, however, that any and all written waivers given heretofore are hereby extended to the date hereof. PREFERRED EQUITIES CORPORATION, a Nevada corporation "Maker" By: ----------------------------------- Donald R. Middleton, Vice President Federal Taxpayer Identification Number: 88-0106662 Address: 4310 Paradise Road Las Vegas, Nevada 89109 Attn: President -6- EX-10.87 4 LOAN AND SECURITY AGREEMENT AND ASSUMPTION AGRMNT 1 EXHIBIT 10.87 FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT THIS AGREEMENT, made as of 30th day of September, 1995, by and between PREFERRED EQUITIES CORPORATION, a Nevada Corporation, having an address of 4310 Paradise Road, Las Vegas, Nevada 89109 (hereinafter referred to as "Preferred"); and COLORADO LAND AND GRAZING CORP., a Colorado Corporation, having an address of 4310 Paradise Road, Las Vegas, Nevada 89109 (hereinafter referred to as "CLGC")(Preferred and CLGC are hereinafter collectively referred to as the "Borrower" and any documents required to be executed by (or prepared for) the Borrower pursuant to this Agreement shall be executed by (or prepared for) each Borrower); and MEGO FINANCIAL CORPORATION, a New York corporation having an address of 4310 Paradise Road, Las Vegas, Nevada 89109 (hereinafter referred to as "Guarantor"); and DORFINCO CORPORATION, a Delaware Corporation, having an address of 40 Westminster Street, P.O. Box 6687, Providence, Rhode Island 02940-6687 (hereinafter referred to as "Lender") WITNESSETH: WHEREAS, On August 9, 1991, Preferred executed in favor of Lender a note evidencing a revolving line of credit loan (the "Loan") in the maximum principal sum of Five Million Dollars ($5,000,000.00) which note was amended by a First Amendment to Promissory Note dated June 30, 1993, which amendment, inter alia, increased the maximum amount of the Loan to Seven Million Five Hundred Thousand Dollars ($7,500,000.00) and by a Second Amendment to Promissory Note dated August 23, 1994 and by a Third Amendment to Promissory Note of even date herewith("Note Amendment")(Said note, as amended, being hereinafter referred to as the "Note"); and WHEREAS, the above described Note evidences sums advanced or to be advanced pursuant to a Loan and Security Agreement dated July 31, 1991, which agreement was amended by a First Amendment dated January 8, 1992, and by Second Amendment to Loan and Security Agreement dated June 30, 1993 and by a Third Amendment to Loan and Security Agreement and Assumption Agreement dated August 23, 1994 which amendment inter alia, added CLGC as a Borrower (the Loan and Security Agreement, as amended, being hereinafter referred to as the "Loan Agreement"); and WHEREAS, Preferred, through CLGC, its wholly owned subsidiary, is currently marketing residential lots (the "SPR Lots") in a subdivision known as South Park Ranches, located in Park County, Colorado (the "SPR Subdivision"); and 2 WHEREAS, Preferred and CLGC have requested that Lender modify the terms of the Loan, upon the terms and provisions hereinafter set forth, in order to extend the Term and the Revolving Credit Period as well as certain other provisions. NOW THEREFORE, in consideration of the foregoing recitals, and in further consideration of the mutual covenants contained herein, and intending to be legally bound hereby, the parties hereto mutually agree as follows: I. AMENDMENTS 1. Notwithstanding any provision contained in Paragraph 1.1(e) of the Loan Agreement, or elsewhere in the Loan Agreement or in any other Loan Document, the parties hereto mutually agree that total unrepaid advances against Eligible Notes Receivable generated from fee simple sales of SPR Lots shall at no time exceed Five Million Dollars ($5,000,000.00) in the aggregate. 2. The parties hereto mutually agree that Paragraph 1.1(u) of the Loan Agreement is hereby deleted in its entirety, and in lieu thereof the following provision is inserted: "1.1 (u) FINAL MATURITY DATE. June 30, 2000." 3. The parties hereto mutually agree that Paragraph 1.1 (ss) of the Loan Agreement is hereby deleted in its entirety, and in lieu thereof, the following provision is inserted: "1.1 (ss) REVOLVING CREDIT PERIOD. The period from the Closing Date to September 30, 1996." 4. The parties hereto mutually agree that Paragraph 1.1 (vv) of the Loan Agreement is hereby deleted in its entirety, and in lieu thereof the following provision is inserted: "1.1 (vv) TERM. The period commencing on the Closing Date and continuing until June 30, 2000. The Term includes both the Revolving Credit Period and the period during which no Advances are permitted." 5. The parties hereto mutually agree that Paragraph 2.2 of the Loan Agreement is hereby deleted in its entirety, and in lieu thereof the following provision is inserted: "2.2 NON-REVOLVING PERIOD. Notwithstanding anything contained herein to the contrary, no Advances of the Loan will be made after September 30, 1996." 2 3 6. Notwithstanding Section 2.5 of the Loan Agreement, the parties hereto mutually agree that Borrower shall be allowed to prepay the Loan by an amount not to exceed Five Million Dollars ($5,000,000.00). Any such prepayment must be made not later than October 31, 1995 and must be accompanied by a pre-payment fee equal to one percent (1.0%) of the Loan amount prepaid. II. REAFFIRMATIONS 1. Nothing contained herein shall be construed in any manner so as to affect the validity or prior time lien of any security interest held by Lender, its successors and assigns, in any Collateral described in the Loan Agreement. Borrower acknowledges and agrees that the Note, Loan Agreement, Custodial Agreement, Lockbox Agreement, Assignment, Environmental Indemnification Agreement and all other Loan Documents (as modified herein) shall remain in full force and effect, unimpaired by this Agreement and that they are valid, binding and enforceable documents, duly executed and delivered by Borrower, and that Borrower has no offsets or defenses to the enforcement of the terms and provisions contained therein. 2. Borrower, and as applicable, the Guarantor, hereby reaffirm, restate and incorporate by this reference all of their respective representations, warranties and covenants as updated hereunder made in the Loan Agreement (including as amended hereby), as if the same were made as of this date and with reference to the Loan Agreement as amended hereby. In addition, Borrower (and, as applicable, the Guarantor) represents and warrants as follows: a. This Fourth Amendment (and the Note Amendment) has been duly authorized by Borrower and is the legal, valid and binding obligation of Borrower, enforceable against it in accordance with its terms subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar laws affecting creditor's rights and remedies generally and to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law); and, as applicable with respect to the Guarantor, this Fourth Amendment is the legal, valid and binding obligation of the Guarantor, enforceable against it in accordance with its terms subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar laws affecting creditors' rights and remedies generally and to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). b. The execution, delivery and performance of this Fourth Amendment and the documents, instruments and materials to be delivered in connection herewith and the transactions contemplated hereby do not and will not result in any breach of, or constitute a default under, or result in the creation of any lien, charge or encumbrance upon the Collateral or the Subdivisions pursuant to, any provision of law, or any 3 4 indenture, agreement or instrument to which Borrower or the Guarantor is a party or by which the Borrower or the Guarantor may be bound or affected except for liens in favor of Lender and the Deeds of Trust. c. There are no Defaults or Events of Default pursuant to the Loan Documents; Lender has fully performed its obligations under the Loan Documents which Lender is required to perform as of the date hereof, and neither Borrower nor the Guarantor has any defense, set-offs, claims, counterclaims or recoupments against Lender or with respect to the Loan. 3. Borrower and the Guarantor hereby reaffirm their respective obligations, agreements and undertakings as set forth in the Loan Documents, and acknowledge that the Indebtedness, or with respect to the Guarantor, the guaranteed Obligations defined in the Guaranty, are the valid, legally binding and enforceable obligations of Borrower, and the Guarantor, respectively. III. CLOSING CONDITIONS AND ADDITIONAL TERMS 1. The obligation of Lender to enter into this Fourth Amendment and, in addition to all of the other conditions precedent set forth in the Loan Agreement or the other Loan Documents, to fund any further Advance pursuant to the terms hereof, shall be subject to the satisfaction of each of the following conditions precedent by no later than the Expiration Date defined in the Fourth Amendment Commitment Letter. a. Simultaneously with the execution hereof, Borrower shall pay to Lender any unpaid portion of the commitment fee referred to in Paragraph IV of the Commitment Letter from Lender to Preferred issued July 28, 1995 and accepted by Preferred on July 31, 1995 ("Fourth Amendment Commitment Letter"). b. Borrower shall pay Lender Two Thousand Five Hundred Dollars ($2,500) toward attorney's fees and costs incurred by Lender in connection with the preparation of this Fourth Amendment and related documentation in accordance with the provisions of Paragraph VI of the Fourth Amendment Commitment Letter. c. Lender shall have received from Borrower the original executed Note Amendment, and a fully executed original or executed counterpart originals of this Fourth Amendment. d. Lender shall have received from Lionel Sawyer & Collins, counsel for the Borrower and Mego Financial Corp., a New York corporation ("Guarantor"), or other counsel reasonably acceptable to Lender, closing opinions in form and substance reasonably acceptable to Lender, dated as of the Fourth Amendment Closing Date. e. Except for information contained in certificates provided pursuant to Article III(1)(h) hereof, the representations and warranties contained in the Loan 4 5 Agreement and in this Fourth Amendment, and in the certifications and closing documents delivered in connection herewith, shall be true and correct in all material respects, and all covenants and agreements to have been complied with performed by Borrower (or Guarantor), shall have been fully complied with and performed to the satisfaction of Lender. f. Neither Borrower nor Guarantor shall have taken any action or permitted any condition to exist which would have been prohibited by any provision of the Fourth Amendment Commitment Letter or the Loan Documents. g. No Default or Event of Default shall exist immediately prior to the closing hereof, or after giving effect to such closing, or immediately after the making of any Advance requested in connection with such closing. h. Lender shall have received a certificate or certificates in form and substance satisfactory to it, dated as of the Fourth Amendment closing date and signed by the president or other authorized officer of the Borrower, certifying that the conditions specified in this Fourth Amendment have been fulfilled, and "bringing down" the representations and warranties contained in the Loan Agreement. i. Borrower shall deliver to Lender, and Lender shall have approved, by no later than the Fourth Amendment closing date: i. A certificate of current good standing for the Borrower, together with copies of any amendments to the certificate of incorporation or bylaws of the Borrower, certified to be true, correct and complete by the Borrower, its secretary or assistant secretary, or the Nevada or Colorado Secretary of State, as applicable; ii. Evidence satisfactory to Lender that all taxes and assessments, including without limitation, those specified in Section 4.1 (q) of the Loan Agreement, owed by or for which Borrower is responsible for collection have been paid or will be paid prior to delinquency; iii. A certificate of secretary or assistant secretary of Borrower certifying the adoption by the Board of Directors thereof of a resolution authorizing specified officers of Borrower to enter and execute this Fourth Amendment, the Note Amendment and all other documents, certificates and instruments to be executed and delivered in connection with the Fourth Amendment closing, and to consummate the transactions contemplated hereunder; iv. A certificate of the secretary or assistant secretary of the Borrower certifying the incumbency of, and verifying the authenticity of the signatures of, the officers of Borrower authorized to sign this Fourth Amendment, the Note Amendment and the other documents, instruments and materials to be executed and delivered in connection herewith; 5 6 v. A certificate of the secretary or assistant secretary of Guarantor certifying the adoption by the Board of Directors thereof of a resolution authorizing specified officers of the Guarantor to enter and execute this Fourth Amendment and all other documents, certificates and instruments to be executed and delivered in connection with the Fourth Amendment closing, and to consummate the transactions contemplated hereunder; vi. A certificate of the secretary or assistant secretary of the Guarantor certifying the incumbency of, and verifying the authenticity of signatures of, the officers of the Guarantor authorized to sign this Fourth Amendment and the other documents, instruments and materials to be executed and delivered in connection herewith; vii. To the extent any of the same have not previously been delivered to Lender, true, correct and complete copies of any amendments since the Closing Date, to any of the Lot Sale Documents (as defined in Section 4.1 [o] of the Loan Agreement), together with such copies of any Lot Sale Documents, or required governmental permits or licenses obtained, subsequent to the Closing Date and not previously delivered to Lender; and viii. Such updated litigation and UCC searches as Lender may require. j. All actions taken in connection with the execution or delivery of this Fourth Amendment, all documents, certificates, instruments and materials relating hereto, shall be reasonably satisfactory to Lender and its counsel. Lender and its counsel shall have received copies of such documents and papers as Lender or such counsel may reasonably request in connection herewith all in form and substance satisfactory to Lender and its counsel. k. Borrower shall have paid all fees and expenses required to be paid prior to or at the closing pursuant to this Fourth Amendment. IV. GUARANTOR'S OBLIGATIONS 1. The Guarantor: a. has reviewed the Fourth Amendment Commitment Letter and this Fourth Amendment with counsel of it's choice, and accepts and consents to the terms of this Fourth Amendment and the transactions provided for herein; b. acknowledges and agrees that it receives material benefit and valuable consideration as a result of the transactions provided for herein or contemplated hereunder; 6 7 c. ratifies and reaffirms the Guaranty, and all of the terms provisions, agreements, conditions and undertakings contained in the Guaranty or any of the Loan Documents (as applicable to the Guarantor), all of which remain unmodified except as modified herein and in full force and effect; d. acknowledges and confirms its continuing obligations under the Guaranty and agrees to be bound by the terms thereof, and that it has been since July 31, 1991 and remains liable with respect to the guaranteed Obligations as defined and provided in the Guaranty; e. acknowledges and agrees that the guaranteed Obligations encompass and apply to all Advances, including Advances from and after the Fourth Amendment closing date, and to all Obligations, including Obligations arising pursuant to this Fourth Amendment; f. is fully aware of the financial and other conditions of the Borrower and the SPR Subdivision, and is executing and delivering this Fourth Amendment based solely upon its own independent investigation and not upon any representation or statement of Lender; g. except for information contained in certificates provided pursuant to IV(1)(i) hereof reaffirms, restates and incorporates by this reference all of the representations, warranties and covenants made in the Guaranty as if the same were made as of this date; h. acknowledges that its agreements, consents and acknowledgments contained herein, and the provisions of the Guaranty (which are reaffirmed by Guarantor), are a material inducement to Lender to enter into this Fourth Amendment, and that, but for the Guaranty, and the Guarantor's agreements as set forth herein, Lender would decline to enter into this Fourth Amendment; and i. shall deliver to Lender a certificate or certificates in form and substance satisfactory to it, dated as of the Fourth Amendment Closing Date and signed by the president or other authorized officer of the Guarantor, certifying that the conditions specified in this Fourth Amendment have been fulfilled, and "bringing down" the representations and warranties contained in the Guaranty. V. MISCELLANEOUS a. This Fourth Amendment is entered into for the benefit of the parties hereto, and is binding on the respective heirs, successors or assigns; provided that Borrower may not transfer or assign any of its rights or obligations under this Fourth Amendment without the prior written consent of Lender. Guarantor is a party to this 7 8 Fourth Amendment solely for the purposes of affirming its obligations in accordance with Article IV hereof. b. This Fourth Amendment may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Fourth Amendment shall become effective upon Lender's receipt of one or more counterparts hereof timely executed by Borrower, the Guarantor and Lender. This Fourth Amendment may not be amended or modified, and no term or provision hereof may be waived, except by written instrument signed by the parties hereto. c. Section headings have been inserted in this Fourth Amendment as a matter of convenience of reference only; such headings are not part of this Fourth Amendment and shall not be used in the interpretation of this Fourth Amendment. d. TO THE FULLEST EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, EACH OF BORROWER, THE GUARANTOR AND LENDER HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY AND IRREVOCABLY WAIVE ANY AND ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND OR CLARIFY ANY RIGHT, POWER, REMEDY OR DEFENSE ARISING OUT OF OR RELATED TO THIS FOURTH AMENDMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREIN OR THEREIN, WHETHER SOUNDING IN TORT OR CONTRACT OF OTHERWISE, OR WITH RESPECT TO ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY; AND EACH AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A JUDGE AND NOT BEFORE A JURY. EACH OF BORROWER, THE GUARANTOR AND LENDER FURTHER WAIVES ANY RIGHT TO SEEK TO CONSOLIDATE ANY SUCH LITIGATION IN WHICH A JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER LITIGATION IN WHICH A JURY TRIAL CANNOT OR HAS NOT BEEN WAIVED UNLESS SUCH FAILURE TO CONSOLIDATE WOULD RESULT IN INABILITY TO ENFORCE A CLAIM. FURTHER, BORROWER AND THE GUARANTOR HEREBY CERTIFY THAT NO REPRESENTATIVE OR AGENT OF LENDER, NOR LENDER'S COUNSEL, HAS REPRESENTED EXPRESSLY OR OTHERWISE, THAT LENDER WOULD NOT, IN THE EVENT OF SUCH LITIGATION, SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION. BORROWER AND THE GUARANTOR ACKNOWLEDGE THAT THE PROVISIONS OF THIS SECTION ARE A MATERIAL INDUCEMENT TO LENDER'S ACCEPTANCE OF THIS FOURTH AMENDMENT AND THE OTHER LOAN DOCUMENTS. e. This Agreement and all other Loan Documents shall be governed by the laws of the State of Nevada in all respects, including matters of construction, performance and enforcement, except to the extent that the procedural laws of the State of 8 9 Colorado govern the enforcement of any remedy against Collateral or property located in the State of Colorado, and excluding principles governing conflicts of laws. f. Capitalized terms used herein which are not otherwise defined shall have the meaning ascribed in the Note and/or the Loan Agreement. g. Whenever possible, the terms of this Agreement and the terms of all prior amendments shall be read together, but to the extent of any irreconcilable conflict, the terms of this Fourth Amendment shall govern. IN WITNESS WHEREOF, and intending to be legally bound hereby, the parties hereto have set their hands and seals the day and year first above written. ATTEST: BORROWER: PREFERRED EQUITIES CORPORATION _____________________________ By:_________________________________ COLORADO LAND AND GRAZING CORP. _____________________________ By:_________________________________ GUARANTOR: MEGO FINANCIAL CORP. _____________________________ By:_________________________________ LENDER: DORFINCO CORPORATION _____________________________ By:_________________________________ The address of the within named Lender is: 40 Westminster Street P.O. Box 6687 Providence, Rhode Island 02940-6687 _____________________________ on behalf of Lender 9 10 CORPORATE ACKNOWLEDGMENT ------------------------ STATE OF ____________: COUNTY OF __________: ON THIS, the ___ day of ___________, 1995 before me, a Notary Public in and for the State and County aforesaid, the undersigned officer, personally appeared _________________, who acknowledged himself to be the _____________________ of PREFERRED EQUITIES CORPORATION, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself/herself as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. ___________________________________ Notary Public My commission expires: CORPORATE ACKNOWLEDGMENT ------------------------ STATE OF ____________: COUNTY OF __________: ON THIS, the ___ day of ___________, 1995 before me, a Notary Public in and for the State and County aforesaid, the undersigned officer, personally appeared _________________, who acknowledged himself to be the _____________________ of COLORADO LAND AND GRAZING CORP., being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself/herself as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. ___________________________________ Notary Public My commission expires: 10 11 CORPORATE ACKNOWLEDGMENT ------------------------ STATE OF ____________: COUNTY OF __________: ON THIS, the ___ day of ___________, 1995 before me, a Notary Public in and for the State and County aforesaid, the undersigned officer, personally appeared _________________, who acknowledged himself to be the _____________________ of MEGO FINANCIAL CORPORATION, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself/herself as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. ___________________________________ Notary Public My commission expires: CORPORATE ACKNOWLEDGMENT ------------------------ STATE OF ____________: COUNTY OF __________: ON THIS, the ___ day of ___________, 1995 before me, a Notary Public in and for the State and County aforesaid, the undersigned officer, personally appeared _________________, who acknowledged himself to be the _____________________ of DORFINCO CORPORATION, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself/herself as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. ___________________________________ Notary Public My commission expires: PG001 11 12 THIRD AMENDMENT TO PROMISSORY NOTE ---------------------------------- THIS THIRD AMENDMENT TO PROMISSORY NOTE, made as September 30, 1995, by and between PREFERRED EQUITIES CORPORATION, a Nevada Corporation, having an address of 4310 Paradise Road, Las Vegas, Nevada 89109 (hereinafter referred to as "Preferred"), and COLORADO LAND AND GRAZING CORP., a Colorado Corporation, having an address of 4310 Paradise Road, Las Vegas, Nevada 89109 (hereinafter referred to as "CLGC"), and DORFINCO CORPORATION, a Delaware Corporation, having an address of 40 Westminster Street, P.O. Box 6687, Providence, Rhode Island 02940- 6687(hereinafter referred to as "Lender"). WITNESSETH: WHEREAS, On August 9, 1991, Preferred executed in favor of Lender a note evidencing a revolving line of credit loan (the "Loan") in the maximum principal sum of Five Million Dollars ($5,000,000.00) which note was amended by a First Amendment to Promissory Note dated June 30, 1993, which amendment, inter alia, increased the maximum amount of the Loan to Seven Million Five Hundred Thousand Dollars ($7,500,000.00) which note was further amended by a Second Amendment to Promissory Note dated August 23, 1994 (Said note, as amended, being hereinafter referred to as the "Note"); and WHEREAS, the above described Note evidences sums advanced or to be advanced pursuant to a Loan and Security Agreement dated July 31, 1991, which Agreement was amended by a First Amendment dated January 8, 1992, and by Second Amendment to Loan and Security Agreement dated June 30, 1993, and by a Third Amendment to Loan and Security Agreement and Assumption Agreement (the "Third Amendment") dated August 23, 1994, which amendment, inter alia, added CLGC as a Borrower and by a Fourth Amendment to Loan and Security Agreement of even date herewith (the "Fourth Amendment") (the Loan and Security Agreement, as amended, being hereinafter referred to as the "Loan Agreement"); and WHEREAS, Preferred and CLGC have requested that Lender modify the terms of the Loan, upon the terms and provisions hereinafter set forth, in order to extend the Term and the Revolving Credit Period as well as other certain provisions; and NOW THEREFORE, in consideration of the foregoing recitals, and in further consideration of the mutual covenants contained herein, and intending to be legally bound hereby, the parties hereto mutually agree as follows: 13 1. The foregoing recitals are hereby incorporated herein by reference thereto. 2. The parties hereto mutually agree that Paragraph 3(a) of the Note is hereby deleted in its entirety, and in lieu thereof the following provision is inserted: "(a) Monthly Interest Payments. Commencing on September 1, 1991 and continuing on the first (1st) day of each and every month thereafter through and including June 1, 2000, all interest accrued at the Basic Interest Rate shall be due and payable monthly in arrears." 3. The parties hereto mutually agree that paragraph 3(c) of the Note is hereby deleted in its entirety, and in lieu thereof the following provision is inserted: "(c) Repayment on Maturity. On June 30, 2000, (THE "FINAL MATURITY DATE"), or on such earlier date as the Note becomes due and payable, whether by acceleration or otherwise, the entire outstanding principal balance hereof, together with accrued but unpaid interest thereon and all other sums owing to Holder hereunder or under the Loan Documents, shall be due and payable in full." 4. Notwithstanding Section 8(a) of the Note the parties may prepay an amount up to Five Million Dollars ($5,000,000.00) accompanied by a prepayment premium equal to 1% of the amount prepaid in accordance with the provisions of the Loan Agreement. 5. Nothing contained herein shall be construed in any manner so as to affect the validity or prior time lien of any security interest held by Lender, its successors and assigns, in any Collateral described in the Loan Agreement. Borrower acknowledges and agrees that the Note is a valid, binding and enforceable document, duly executed and delivered by Borrower, and that Borrower has no offsets or defenses to the enforcement of the terms and provisions contained therein. 6. Simultaneously with the execution hereof, Lender shall make a notation on the original Note indicating the existence of this Third Amendment. 7. The execution of this Third Amendment shall serve as additional evidence of the obligation of Borrower (as that term was modified by the Third Amendment to include CLGC) to repay the sum of Seven Million Five Hundred Thousand Dollars ($7,500,000.00) to Lender in accordance with the terms, covenants, provisions and conditions contained in the Note, as modified herein, which terms, covenants, provisions and conditions are incorporated herein by reference thereto. 8. Except as specifically set forth herein, all terms and provisions set forth in the Note shall remain in full force and effect, unimpaired by this Third Amendment. 2 14 9. This Third Amendment shall be governed by the laws of the State of Nevada in all respects, including matters of construction, performance and enforcement, excluding principles governing conflicts of laws. 10. Capitalized terms used herein which are not otherwise defined shall have the meaning ascribed in the Note and/or the Loan Agreement. 11. Wherever possible, the terms of this Agreement and the terms of all prior amendments shall be read together, but to the extent of any irreconcilable conflict, the terms of the Agreement shall govern. IN WITNESS WHEREOF, and intending to be legally bound hereby, the parties hereto have set their hands and seals the day and year first above written. ATTEST: BORROWER: PREFERRED EQUITIES CORPORATION By: - ---------------------------------- -------------------------------- Title: Title: --------------------------- ----------------------------- COLORADO LAND AND GRAZING CORP. By: - ---------------------------------- -------------------------------- Title: Title: --------------------------- ----------------------------- DORFINCO CORPORATION By: - ---------------------------------- -------------------------------- Title: ------------------------------ pg0003 3 15 CORPORATE ACKNOWLEDGMENT STATE OF _________________________ ) ) SS: COUNTY OF _________________ ) ON THIS, the ____________ day of _________________, 1995 before me, a Notary Public in and for the Sate and county aforesaid, the undersigned officer, personally appeared ___________________, who acknowledged himself to be the _______________________________________, of PREFERRED EQUITIES CORPORATION, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself/herself as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. ____________________________________ Notary Public MY COMMISSION EXPIRES: 4 16 CORPORATE ACKNOWLEDGMENT STATE OF _________________________ ) ) SS: COUNTY OF _________________ ) ON THIS, the ____________ day of _________________, 1995 before me, a Notary Public in and for the Sate and county aforesaid, the undersigned officer, personally appeared ___________________, who acknowledged himself to be the _______________________________________, of COLORADO LAND AND GRAZING CORP., being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself/herself as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. ________________________________ Notary Public MY COMMISSION EXPIRES: 5 17 CORPORATE ACKNOWLEDGMENT STATE OF _________________________ ) ) SS: COUNTY OF _________________ ) ON THIS, the ____________ day of _________________, 1995 before me, a Notary Public in and for the Sate and county aforesaid, the undersigned officer, personally appeared ___________________, who acknowledged himself to be the _______________________________________, of DORFINCO CORPORATION, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself/herself as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. _________________________________ Notary Public MY COMMISSION EXPIRES: pg0003 6 EX-10.88 5 REQUEST FOR RECEIVABLES 1 EXHIBIT 10.88 REQUEST FOR RECEIVABLE PURCHASE ------------------------------- November _____, 1995 NBD Bank 611 Woodward Avenue Detroit, Michigan 48226 Attention: Financial Services Division Preferred Equities Corporation, a Nevada corporation (the "Seller"), hereby requests, pursuant to Section 2.02(a) of the Purchase and Servicing Agreement, dated as of June 1, 1994 (the "Purchase Agreement"), between the Seller and NBD Bank, N.A., which has been succeeded by NBD Bank, a Michigan banking corporation (the "Purchaser"), that the Purchaser purchase those Receivables described on Schedule A hereto (the "Proposed Pool") on November ______, 1995 (the "Payment Date"). Capitalized terms used but not defined herein shall have the respective meanings assigned to them in the Purchase Agreement. In support of this request, the Seller hereby represents and warrants to the Purchaser that: 1. Except as specified in paragraph 9 below, the representations and warranties contained in Section 2.03 and 6.01 of the Purchase Agreement and in paragraph 5 of the Guaranty Agreement are true and correct on and as of the date hereof, and will be true and correct on the date such purchase is made (both before and after the Payment Date), as if such representations and warranties were made on and as of such dates. 2. No Event of Transfer, and no event or condition which might become such an Event of Transfer with notice or with lapse of time, or both, exists or shall have occurred and be continuing on the Payment Date (whether before or after the consummation of the transactions contemplated hereby are consummated). 3. The aggregate Principal Balance of such Receivables included in the Proposed Pool on October 31, 1995 (the "Cutoff Date") is $4,829,809.43 comprised of $2,295,677.96 for the Timeshare Receivables (comprised of $295,161.80 in respect of Agreements for Deed and $2,000,516.16 in respect of Deed of Trust Agreements) and $2,534,131.47 for the Land Receivables, as more specifically detailed in Schedule A hereto. 2 4. As of the Cutoff Date, each Receivable included in the Proposed Pool has a remaining term to maturity of not greater than 80 months in the case of Timeshare Receivables and 108 months in the case of Land Receivables; and no such Receivable has a Principal Balance as of the Cutoff Date that is less than $2,500.00 or more than $12,364.05 in the case of Timeshare Receivables or less than $4,000.00 or more than $63,464.14 in the case of Land Receivables included in the Proposed Pool (Section 2.03(i)). 5. As of the Cutoff Date, with respect to the Proposed Pool, the aggregate original purchase price agreed to be paid by the Obligors is not less than $3,500,896.83 in the case of the Timeshare Receivables and not less than $4,189,685.00 in the case of the Land Receivables included in the Proposed Pool (Section 2.03(i)). 6. As of the Cutoff Date, the actual weighted average remaining life of the Receivables included in the Proposed Pool, determined on the basis of scheduled maturity dates, is 67 months in the case of the Timeshare Receivables, 97 months in the case of the Land Receivables and 83 months for all Receivables (Section 2.03(ii)). 7. As of the Cutoff Date, the weighted average APR of the Receivables included in the Proposed Pool is not less than 12.91% in the case of the Timeshare Receivables, 10.82% in the case of the Land Receivables, and 11.82% for all Receivables (Section 2.03(iii)). 8. The Timeshare Receivables identified in Schedule A hereto, if any, identified under the headings Grand Flamingo Towers and Grand Flamingo Villas, are all of the Timeshare Receivables included in the Proposed Pool which arise from sales of Financed Property in the Grand Flamingo Towers and Grand Flamingo Villas and which constitute Agreements for Deed (Section 2.03(iv)(b)). 9. Exceptions, if any, to the representations and warranties of the Seller contained in Section 2.03(iv)(a), (c), (e), (h) and (j) and Section 2.03(xiv) are: none. 10. For purposes of Section 5.03 of the Purchase Agreement, the per annum yield for the Proposed Pool shall be _______ percent (___%) per annum. PREFERRED EQUITIES CORPORATION By: ________________________________ Its: _______________________________ 3 As contemplated by the definition of Original Pool Balance, the Seller represents and warrants that the Original Pool Balance for such Receivables included in the Proposed Pool shall be $4,829,809.43 comprised of $2,295,677.96 for the Timeshare Receivables included in such Pool (comprised of $295,161.80 in respect of Agreements for Deed and $2,000,516.16 in respect of Deed of Trust Agreements) and $2,534,131.47 for the Land Receivables included in such Pool, representing the aggregate Principal Balance of such Receivables as of the close of business on the Cutoff Date for such Pool, which Original Pool Balance shall be the purchase price to be paid by the Purchaser for such Pool. Acceptance of the proceeds of such purchase by the Seller shall be deemed to be a further representation and warranty that the representations and warranties made herein are true and correct at the time such proceeds are disbursed. PREFERRED EQUITIES CORPORATION By: ________________________________ Its: ________________________________ 9 EX-10.89 6 GENERAL LOAN AND SECURITY AGREEMENT 1 EXHIBIT 10.89 SECOND AMENDMENT TO GENERAL LOAN AND SECURITY AGREEMENT THIS Second Amendment to General Loan and Security Agreement (the "Amendment"), made as of 30th day of November, 1995, by and between STEAMBOAT SUITES, INC., a Colorado Corporation, having an address of 1485 Pine Grove Road, Steamboat Suites, Colorado 80477 (hereinafter referred to as "Debtor"); and TEXTRON FINANCIAL CORPORATION, a Delaware Corporation, having an address of 40 Westminster Street, P.O. Box 6687, Providence, Rhode Island 02940-6687 (hereinafter referred to as "Lender") RECITALS This Amendment modifies and amends that certain General Loan and Security Agreement dated as of October 5, 1994 as modified by First Amendment to General Loan and Security Agreement dated as of February 27, 1995 (collectively the "Existing GLSA", the Existing GLSA, as amended hereby and as further amended from time to time is referred to herein as the "Agreement") Debtor has requested that Lender modify certain terms of the Loan upon the terms and provisions hereinafter set forth in order to increase the maximum Receivables Borrowing Base and certain eligibility requirements for Eligible Notes Receivable. NOW THEREFORE, in consideration of the foregoing recitals, and in further consideration of the mutual covenants contained herein, and intending to be legally bound hereby, the parties hereto mutually agree as follows: I. INTERPRETATION OF AMENDMENT A. Terms Defined Capitalized terms used in this Amendment and not defined herein shall have the respective meanings specified in the Existing GLSA, as amended hereby. As used in this Amendment, the following terms have the respective meanings specified below: Agreement - as defined in the Recitals hereto. Amendment or this Amendment - as defined in the Recitals hereto. B. Directly or Indirectly Where any provision in the Amendment refers to an action taken by any Person or which such Person is prohibited from taking, such provisions shall be applicable whether such action is taken directly or indirectly by such Person. C. Headings Section headings have been inserted in this Amendment as a matter of convenience of reference only; such section headings are not part of this Amendment and shall not be used in the interpretation of this Amendment. 2 II. AMENDMENTS A. Definitions. 1. The definitions set forth below are hereby added to Section 1.1 of the Existing GLSA so as to preserve the alphabetical ordering of the definitions set forth therein: "Second GLSA Amendment Effective Date - means November 30, 1995." "Second GLSA Amendment means that certain amendment of this Agreement to provide for the revised "receivable facility" as contemplated therein." 2. The parties hereto mutually agree that the definition of "ELIGIBLE NOTE RECEIVABLE" under Section 1.1 of the Agreement shall be modified to delete Subsection (c) in its entirety, and in lieu thereof the following provision is inserted: "(c) the unpaid balance of such Pledged Note Receivable shall be due and payable not later than 84 months from the date thereof, provided that, if any Pledged Note Receivable has a remaining term of more than 84 months but less than or equal to 120 months and would otherwise qualify as an Eligible Note Receivable, such Pledged Note Receivable shall be deemed to be an Eligible Note Receivable for so long as the aggregate outstanding principal balances of all Eligible Notes Receivable having remaining terms of more than 84 months but less than or equal to 120 months (determined immediately after giving effect to such Pledged Note Receivable having become an Eligible Note Receivable) shall not exceed 50% of the aggregate principal balance of all Eligible Notes Receivable outstanding at the time of such determination; to the extent that, at any time, the aforesaid 50% test shall be violated, a quantity of Pledged Notes Receivable then having terms of more than 84 months but less than or equal to 120 months and then being treated as Eligible Notes Receivable shall be treated as no longer being Eligible Notes Receivable to the extent necessary to cause the aforesaid 50% test to then be satisfied;" 3. The parties hereto mutually agree that definition of "Receivable Borrowing Base" is hereby deleted in its entirety, and in lieu thereof, the following provision is inserted: "RECEIVABLES BORROWING BASE - means, at any time, the lesser of (a) $15,000,000 minus (i) the principal amount of the Inventory Loan outstanding at such time, minus (ii) the principal amount outstanding at such time of the $7,500,000 loan facility extended to Preferred Equities by Dorfinco, and (b) the sum, without duplication, of (i) 70% of the aggregate of the unpaid principal balances of all Eligible Notes Receivable outstanding at such time plus (ii) 80% of the aggregate of the unpaid principal balances of all Eligible Notes Receivable in respect of which at least one scheduled monthly installment payment shall have been made." 4. The parties hereto mutually agree that the definition of "Receivables Note" is hereby deleted in its entirety, and in lieu thereof the following provision is inserted: 2 3 "RECEIVABLES NOTE - means that certain promissory note effective as of October 6, 1994, amended and restated substantially in the form of Exhibit B-1 to this Agreement and the Second GLSA Amendment. Receivable Advances up to $7,500,000 were not made in respect of such promissory note until the First GLSA Amendment became effective and Receivable Advances with respect to the Receivables Borrowing Base, as amended by this Amendment shall be made in respect of such amended and restated promissory note upon the Second GLSA Amendment Effective Date." III. REAFFIRMATIONS 1. Nothing contained herein shall be construed in any manner so as to affect the validity or prior time lien of any security interest held by Lender, its successors and assigns, in any Collateral described in the Agreement except that the Inventory Deed of Trust shall be limited to a security interest of up to $7,500,000 for the Inventory Note and Receivables Note. Debtor acknowledges and agrees that the Notes, Agreement, Inventory Deed of Trust, Assignment of Pledged Notes Receivables, Pledged Note Receivables Deeds of Trust and Pledged Contracts, Guaranty Agreement, Subordination Agreements, Agency Agreement and all other Security Documents (as modified herein) shall remain in full force and effect, unimpaired by this Amendment and that they are valid, binding and enforceable documents, duly executed and delivered by Debtor, and that Debtor has no offsets or defenses to the enforcement of the terms and provisions contained therein. 2. Except as provided in Schedule 1 hereto, Debtor, and as applicable, the Guarantors, hereby reaffirm, restate and incorporate by this reference all of their respective representations, warranties and covenants as updated hereunder made in the Agreement (including, as amended hereby), as if the same were made as of this date and with reference to the Agreement as amended hereby. In addition, Debtor (and, as applicable, the Guarantors) represents and warrants as follows: a. This Amendment (and the Receivables Note as amended and restated) has been duly authorized by Debtor and is the legal, valid and binding obligation of Debtor, enforceable against it in accordance with its terms subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar laws affecting creditor's rights and remedies generally and to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law); and, as applicable with respect to the Guarantors, this Amendment is the legal, valid and binding obligation of the Guarantors, enforceable against them in accordance with its terms subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar laws affecting creditor's rights and remedies generally and to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). b. The execution, delivery and performance of this Amendment and the documents, instruments and materials to be delivered in connection herewith and the transactions contemplated hereby do not and will not result in any breach of, or constitute a default under, or result in the creation of any lien, charge or encumbrance upon the Collateral, any provision of law, or any indenture, agreement or instrument to which Debtor or any Guarantor is a party or by which the Debtor or Guarantors may be bound or affected except for liens in favor of Lender and the Pledged Notes Receivable Deeds of Trust. 3 4 c. There are no Defaults or Events of Default pursuant to the Security Documents; Lender has fully performed its obligations under the Security Documents which Lender is required to perform as of the date hereof, and neither Debtor nor the Guarantors have any defense, set-offs, claims, counterclaims or recoupments against Lender or with respect to the Loan. 3. Debtor and the Guarantor hereby reaffirm their respective obligations, agreements and undertakings as set forth in the Security Documents, and acknowledge that the Obligations, or with respect to the Guarantors, the guaranteed Indebtedness defined in the Guaranty and as amended herein, are the valid, legally binding and enforceable obligations of Debtor, and the Guarantors, respectively. IV. CLOSING CONDITIONS AND ADDITIONAL TERMS 1. The obligation of Lender to enter into this Amendment and, in addition to all of the other conditions precedent set forth in the Agreement or the other Loan Documents, to fund any further Advance pursuant to the terms hereof, shall be subject to the satisfaction of each of the following conditions precedent by no later than February 29, 1996. a. Debtor shall pay Lender Two Thousand Five Hundred Dollars ($2,500) as payment in full for attorney's fees and costs incurred by Lender in connection with the preparation of this Amendment and related documentation. b. Lender shall have received from Debtor the original executed Receivables Note as amended and restated, and a fully executed original or executed counterpart originals of this Amendment. Upon receipt of such Receivables Note, as amended and restated, the Receivables Note dated October 6, 1994 shall be marked superceded and returned to Debtor. c. Lender shall have received from John Holloway, Esq., counsel for the Debtor and counsel for Guarantors, or other counsel reasonably acceptable to Lender, closing opinions in form and substance reasonably acceptable to Lender, dated as of the Amendment closing date. d. Except for information contained in certificates provided pursuant to Article IV(1)(g) and (h) hereof or any schedule to this Amendment, the representations and warranties contained in the Agreement and in this Amendment, and in the certifications and closing documents delivered in connection herewith, shall be true and correct in all material respects, and all covenants and agreements to have been complied with and performed by Debtor (or Guarantor), shall have been fully complied with and performed to the satisfaction of Lender. e. Neither Debtor nor Guarantors shall have taken any action or permitted any condition to exist which would have been prohibited by any provision of the Security Documents. f. No Default or Event of Default shall exist immediately prior to the closing hereof, or after giving effect to such closing, or immediately after the making of any Advance requested in connection with such closing. 4 5 g. Lender shall have received a certificate or certificates in form and substance satisfactory to it, dated as of the Amendment closing date and signed by the president or other authorized officer of the Debtor, certifying that the conditions specified in this Amendment have been fulfilled, and "bringing down" the representations and warranties contained in the Agreement. h. Debtor shall deliver to Lender, and Lender shall have approved, by no later than the Amendment closing date: i. A certificate of current good standing for Debtor, together with copies of any amendments to the certificate of incorporation or bylaws of Debtor since February 27, 1995, certified to be true, correct and complete by the Debtor, its secretary or assistant secretary, or the Colorado Secretary of State; ii. Evidence satisfactory to Lender that all taxes and assessments, including without limitation, those specified in Section 7.1 (a) of the Agreement, owed by or for which Debtor is responsible for collection have been paid or will be paid prior to delinquency; iii. A certificate of the secretary or assistant secretary of Debtor certifying the adoption by the Board of Directors thereof of a resolution authorizing specified officers of Debtor to enter into and execute this Amendment, the Receivables Note and all other documents, certificates and instruments to be executed and delivered in connection with the Amendment closing, and to consummate the transactions contemplated hereunder; iv. A certificate of the secretary or assistant secretary of Debtor certifying the incumbency of, and verifying the authenticity of the signatures of, the officers of Debtor authorized to sign this Amendment, the Receivables Note and the other documents, instruments and materials to be executed and delivered in connection herewith; v. A certificate of the secretary or assistant secretary of each Guarantor certifying the adoption by the Board of Directors thereof of a resolution authorizing specified officers of the Guarantor to enter into and execute this Amendment and all other documents, certificates and instruments to be executed and delivered in connection with the Amendment closing, and to consummate the transactions contemplated hereunder; and vi. A certificate of the secretary or assistant secretary of each Guarantor certifying the incumbency of, and verifying the authenticity of signatures of, the officers of each Guarantor authorized to sign this Amendment and the other documents, instruments and materials to be executed and delivered in connection herewith; i. All actions taken in connection with the execution or delivery of this Amendment, and all documents, certificates, instruments and materials relating hereto, shall be reasonably satisfactory to Lender and its counsel. Lender and its counsel shall have received 5 6 copies of such documents and papers as Lender or such counsel may reasonably request in connection herewith all in form and substance satisfactory to Lender and its counsel. j. Debtor shall have paid all fees and expenses required to be paid prior to or at the closing pursuant to this Amendment. V. GUARANTORS' OBLIGATIONS 1. Each Guarantor: a. has reviewed this Amendment with counsel of it's choice, and accepts and consents to the terms of this Amendment and the transactions provided for herein; b. acknowledges and agrees that it receives material benefit and valuable consideration as a result of the transactions provided for herein or contemplated hereunder; c. ratifies and reaffirms the terms of its Guaranty Agreement, and all of the terms provisions, agreements, conditions and undertakings contained in the Guaranty Agreement or any of the Security Documents (as applicable to the Guarantor), all of which remain unmodified, except as modified herein and in full force and effect; d. acknowledges and confirms (i) its continuing obligations under the Guaranty Agreement and agrees to be bound by the terms thereof, and (ii) that it has been since October 5, 1994 and remains liable with respect to the guaranteed Indebtedness as defined and provided in its Guaranty Agreement; e. acknowledges and agrees that the guaranteed Indebtedness encompasses and apply to all Advances, including Advances from and after the Amendment closing date, and to all Indebtedness, including Indebtedness arising pursuant to this Amendment; f. is fully aware of the financial and other conditions of the Debtor and is executing and delivering this Amendment based solely upon its own independent investigation and not upon any representation or statement of Lender; g. except for information contained in certificates provided pursuant to V(1)(i) hereof reaffirms, restates and incorporates by this reference all of the representations, warranties and covenants made in its Guaranty Agreement as if the same were made as of this date; h. acknowledges that its agreements, consents and acknowledgments contained herein, and the provisions of its Guaranty Agreement (which are reaffirmed by Guarantor), are a material inducement to Lender to enter into this Amendment, and that, but for the Guaranty Agreement, and the Guarantor's agreements as set forth herein, Lender would decline to enter into this Amendment; and i. shall deliver to Lender a certificate or certificates in form and substance satisfactory to it, dated as of the Amendment closing date and signed by the president or other authorized officer of the Guarantor, certifying that the conditions specified in this Amendment 6 7 have been fulfilled, and "bringing down" the representations and warranties contained in the Guaranty Agreement. VI. MISCELLANEOUS a. This Amendment is entered into for the benefit of the parties hereto, and is binding on the respective heirs, successors or assigns; provided that Debtor may not transfer or assign any of its rights or obligations under this Amendment without the prior written consent of Lender. Guarantors are a party to this Amendment solely for the purposes of affirming their respective obligations in accordance with Article V hereof. b. This Amendment may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Amendment shall become effective upon Lender's receipt of one or more counterparts hereof timely executed by Debtor and the Guarantors. This Amendment may not be amended or modified, and no term or provision hereof may be waived, except by written instrument signed by all of the parties hereto. c. Section headings have been inserted in this Amendment as a matter of convenience of reference only; such headings are not part of this Amendment and shall not be used in the interpretation of this Amendment. d. TO THE FULLEST EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, EACH OF DEBTOR, THE GUARANTORS AND LENDER HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY AND IRREVOCABLY WAIVE ANY AND ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND OR CLARIFY ANY RIGHT, POWER, REMEDY OR DEFENSE ARISING OUT OF OR RELATED TO THIS AMENDMENT, THE OTHER SECURITY DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREIN OR THEREIN, WHETHER SOUNDING IN TORT OR CONTRACT OF OTHERWISE, OR WITH RESPECT TO ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY; AND EACH AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A JUDGE AND NOT BEFORE A JURY. EACH OF DEBTOR, THE GUARANTORS AND LENDER FURTHER WAIVES ANY RIGHT TO SEEK TO CONSOLIDATE ANY SUCH LITIGATION IN WHICH A JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER LITIGATION IN WHICH A JURY TRIAL CANNOT OR HAS NOT BEEN WAIVED UNLESS SUCH FAILURE TO CONSOLIDATE WOULD RESULT IN INABILITY TO ENFORCE A CLAIM. FURTHER, DEBTOR AND THE GUARANTORS HEREBY CERTIFY THAT NO REPRESENTATIVE OR AGENT OF LENDER, NOR LENDER'S COUNSEL, HAS REPRESENTED EXPRESSLY OR OTHERWISE, THAT LENDER WOULD NOT, IN THE EVENT OF SUCH LITIGATION, SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION. DEBTOR AND THE GUARANTORS ACKNOWLEDGE THAT THE PROVISIONS OF THIS SECTION ARE A MATERIAL INDUCEMENT TO LENDER'S ACCEPTANCE OF THIS AMENDMENT AND THE OTHER SECURITY DOCUMENTS. 7 8 e. This Amendment and all other Security Documents shall be governed by the laws of the State of Colorado in all respects, including matters of construction, performance and enforcement. f. Whenever possible, the terms of this Amendment and the terms of the Agreement and all prior amendments shall be read together, but to the extent of any irreconcilable conflict, the terms of this Amendment shall govern. IN WITNESS WHEREOF, and intending to be legally bound hereby, the parties hereto have set their hands and seals the day and year first above written. ATTEST: DEBTOR: STEAMBOAT SUITES, INC. _____________________________ By:_________________________________ LENDER: TEXTRON FINANCIAL CORPORATION By: - ----------------------------- --------------------------------- ------------------------------------ on behalf of Lender ACKNOWLEDGED AND AGREED: GUARANTOR: PREFERRED EQUITIES CORPORATION _____________________________ By:_________________________________ GUARANTOR: MEGO FINANCIAL CORP. _____________________________ By:_________________________________ The address of the within named Lender is: 40 Westminster Street P.O. Box 6687 Providence, Rhode Island 02940-6687 MHC0801 8 9 CORPORATE ACKNOWLEDGMENT ------------------------ STATE OF ____________: COUNTY OF __________: ON THIS, the ___ day of ___________, 1996 before me, a Notary Public in and for the State and County aforesaid, the undersigned officer, personally appeared _________________, who acknowledged himself to be the _____________________ of STEAMBOAT SUITES, INC., being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself/herself as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. _____________________________ Notary Public My commission expires: CORPORATE ACKNOWLEDGMENT ------------------------ STATE OF ____________: COUNTY OF __________: ON THIS, the ___ day of ___________, 1996 before me, a Notary Public in and for the State and County aforesaid, the undersigned officer, personally appeared _________________, who acknowledged himself to be the _____________________ of PREFERRED EQUITIES CORPORATION, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself/herself as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. _____________________________ Notary Public My commission expires: 9 10 CORPORATE ACKNOWLEDGMENT ------------------------ STATE OF ____________: COUNTY OF __________: ON THIS, the ___ day of ___________, 1996 before me, a Notary Public in and for the State and County aforesaid, the undersigned officer, personally appeared _________________, who acknowledged himself to be the _____________________ of MEGO FINANCIAL CORPORATION, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself/herself as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. ______________________________ Notary Public My commission expires: CORPORATE ACKNOWLEDGMENT ------------------------ STATE OF ____________: COUNTY OF __________: ON THIS, the ___ day of ___________, 1996 before me, a Notary Public in and for the State and County aforesaid, the undersigned officer, personally appeared _________________, who acknowledged himself to be the _____________________ of TEXTRON FINANCIAL CORPORATION, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself/herself as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. ______________________________ Notary Public My commission expires: 10 11 EXHIBIT B-1 RESTATED AND AMENDED RECEIVABLES PROMISSORY NOTE $15,000,000 November 30, 1995 Effective as of October 6, 1994 Steamboat Springs, Colorado FOR VALUE RECEIVED and pursuant to the terms of this Restated and Amended Receivables Promissory Note (this "NOTE"), the undersigned, STEAMBOAT SUITES, INC., a Colorado corporation (the "DEBTOR"), promises to pay to the order of TEXTRON FINANCIAL CORPORATION, a Delaware corporation (the "LENDER") (the Lender and all subsequent holders of this Note being hereinafter referred to as the "HOLDER"), at 40 Westminster Street, Providence, Rhode Island 02903, Attention: Processing Center Manager, or at such other place as the Holder hereof may designate in writing, the principal sum of up to FIFTEEN MILLION DOLLARS ($15,000,000), or so much thereof as shall be outstanding hereunder from time to time as a result of advances or principal by the Lender to the Debtor pursuant to that certain General Loan and Security Agreement between the Debtor and the Lender, dated as of October 5, 1994(as amended by First Amendment to General Loan and Security Agreement dates as of February 27, 1995 ("FIRST AMENDMENT") and Second Amendment to General Loan and Security Agreement dated as of November 30, 1995 ("SECOND AMENDMENT") and as further amended from time to time, (collectively the "AGREEMENT"), in respect of Receivables Advances (as such term is defined in the Agreement), together with interest on the unpaid principal amount from time to time outstanding under this Note at the rate or rates of interest provided therefor in the Agreement. The aforesaid principal amount and interest thereon shall be due and payable on the dates and in the manner as provided in the Agreement in respect of the Receivables Loan (as such term is defined in the Agreement). All principal, interest and any other amounts due under this Note shall be payable in lawful money of United States of America at the place or places above stated. The Debtor may prepay the principal sum outstanding from time to time hereunder as provided in the Agreement. To the extent provided in the Agreement, this Note is secured by a security interest in the Collateral (as such term is defined in the Agreement) which shall include, without limitation, the Inventory Deed of Trust (as such term is defined in the Agreement), and is jointly and severally guaranteed by the Guarantor (as such term is defined in the Agreement). 12 This Note is the restated and amended Receivables Note described in the Second Amendment and has been issued pursuant to the Agreement. This Note is executed and delivered as of November 30, 1995 but is effective as of October 6, 1994 and shall amend, restate and renew (without constituting a revocation, cancellation or extinguishment of) the Note executed by Debtor on the Closing Date (as defined in the Agreement). All of the terms, covenants and conditions of the Agreement (including all Exhibits and Schedules thereto) and all other instruments evidencing or securing the indebtedness hereunder are hereby made a part of this Note and are deemed incorporated herein in full. In the event of an Event of Default (as such term is defined in the Agreement), the Holder may, at its option and in accordance with the terms of the Agreement and the other Security Document (as defined in the Agreement), in addition to any other remedies to which it may be entitled, declare the total unpaid principal balance of the indebtedness evidenced hereby, together with all accrued but unpaid interest thereon, and all other sums owing hereunder, under the Agreement or under any other Security Document, immediately due and payable. The Debtor and the Holder intend to comply at all times with applicable usury laws. All agreements between the Debtor and the Holder, whether now existing or hereafter arising and whether written or oral, are hereby limited so that in no contingency, whether by reason of demand or acceleration of the maturity of this Note or otherwise, shall the interest contracted for charged, received, paid or agreed to be paid to the Holder hereunder exceed the maximum allowable rate permissible under applicable law, or in the asbence of a maximum allowable rate under applicable law, then, 45% per annum (the "Maximum Rate"). The Holder may, in determining the Maximum Rate in effect from time to time, take advantage of any law, rule or regulation in effect from time to time available to the Holder which exempts the Holder from any limit upon the rate of interest it may charge or grants to the Holder the right to charge a higher rate of interest than that otherwise permitted by applicable law. If, from any circumstance whatsoever, interest would otherwise be payable to the Holder in excess of the Maximum Rate, the interest payable to the Holder shall be reduced to the Maximum Rate; and if from any circumstances Holder shall ever receive anything of value deemed interest by applicable law in excess of the Maximum Rate, an amount equal to any excessive interest shall be applied to the reduction of the principal of the Receivables Loan and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal of the Receivables Loan, such excess shall be refunded to the Debtor. All interest paid or agreed to be paid to the Holder shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full period until payment in full of the principal so that the interest on the Receivables Loan for such full period shall not exceed the Maximum Rate. Debtor agrees that in determining whether or not any interest payment under the Security 13 Documents exceeds the Maximum Rate, any non-principal payment (except payments specifically described in the Security Documents as "interest") including without limitation, prepayment fees and late charges, shall to the maximum extent not prohibited by law, be an expense, fee or premium rather than interest. The Holder hereby expressly disclaims any intent to contract for, charge or receive interest in an amount which exceeds the Maximum Rate. The provisions of this Note are hereby modified to the extent necessary to conform with the limitations and provisions of this paragraph. Time is of the essence for the performance and observance of each agreement and obligation of the Debtor under this Note and under the Security Documents. This Note also evidences Debtor's obligation to repay with interest all additional moneys advanced or expended from time to time by the Holder to or for the account of the Debtor or otherwise to be added to the principal balance hereof as provided in any of the Security Documents, whether or not the principal amount hereof shall thereby exceed the principal amount above stated. The Debtor and all sureties, endorsers, guarantors and all other parties now or hereafter liable for the payment of this Note, in whole or in part, hereby severally waive presentment for payment, demand and protest and notice of protest, acceleration, or dishonor and non-payment of this Note, and expressly consent to any extension of time of payment hereof or of any installment hereof, to the release of any party liable for this obligation, to the release, change or modification of any of the Collateral, and any such extension, modification or release may be made without notice to any of said parties and without in any way affecting or discharging this liability. No single or partial exercise of any power hereunder, under the Agreement or under any other Security Document shall preclude other or further exercise thereof or the exercise of any other power. The Holder shall at all times have the right to proceed against any portions of the Collateral in such order and in such manner as the Holder may deem appropriate, without waiving any rights with respect to any other security. No delay or omission on the part of the Holder in exercising any right or remedy hereunder or the acceptance of one or more installments from any person after a default hereunder, under the Agreement or under any other Security Document shall operate as a waiver of such right or remedy in connection with any future default. In the event any one or more of the provisions contained in this Note shall for any reason be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Note, but this Note shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 14 The Holder is hereby authorized by the Debtor to record in the manual or data processing records of the Holder, or on the grid schedule annexed to this Note, the date and amount of each Receivables Advance extended to the Debtor by the Lender hereunder and the date and amount of each repayment of principal and each payment of interest on account of the Receivable Loan. In the absence of manifest error, such records and schedule shall be conclusive as to the outstanding principal amount of all Receivables Advances and the payment of interest accrued hereunder; provided, however, that the failure of the Holder to make any such record entry with respect to any Receivables Advance or any payment in respect of the Receivables Loan shall not limit or otherwise affect the obligations of the Debtor under this Note or the other Security Documents. THIS NOTE AND ALL TRANSACTIONS HEREUNDER OR EVIDENCED HEREIN SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF COLORADO. The Debtor has caused this Note to be signed in its corporate name by its duly authorized officer on the date first above written. STEAMBOAT SUITES, INC. By: ________________________________ Name: Title: [CORPORATE SEAL] MHC0810 EX-10.90 7 AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT 1 EXHIBIT 10.90 AMENDMENT NO. 13 TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS AMENDMENT NO. 13 TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is entered into as of this 13th day of December, 1995, by and between FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender"), and PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Borrower"). R E C I T A L S A. Greyhound Real Estate Finance Company, an Arizona corporation ("GREFCO") and Borrower entered into an Amended and Restated Loan and Security Agreement dated as of May 10, 1989 (the "Restated Loan Agreement") that evidences a loan from GREFCO to Borrower (the "Modified Loan") that is secured by, among other things, Receivables Collateral. B. The Modified Loan and Restated Loan Agreement were amended by an Amendment Number One to Amended and Restated Loan and Security Agreement dated June 14, 1989 (the "First Amendment"), by an Amendment No. 2 to Amended and Restated Loan and Security Agreement dated April 16, 1990 (the "Second Amendment"), by an Amendment No. 3 to Amended and Restated Loan and Security Agreement dated May 31, 1991 (the "Third Amendment"), by an Amendment No. 4 to Amended and Restated Loan and Security Agreement dated January 13, 1992 (the "Fourth Amendment"), by an Amendment No. 5 to Amended and Restated Loan and Security Agreement dated February 23, 1993 (the "Fifth Amendment"); by an Amendment No. 6 to Amended and Restated Loan and Security Agreement dated June 28, 1993 (the "Sixth Amendment"), by an Amendment No. 7 to Amended and Restated Loan and Security Agreement dated January 24, 1994 (the "Seventh Amendment"), by an Amendment No. 8 to Amended and Restated Loan and Security Agreement dated as of April 15, 1994 (the "Eighth Amendment"), by an Amendment No. 9 to Amended and Restated Loan and Security Agreement dated as of August 31, 1994 (the "Ninth Amendment"), by an Amendment No. 10 to Amended and Restated Loan and Security Agreement dated as of January 26, 1995 ("Tenth Amendment"), by an Amendment No. 11 to Amended and Restated Loan and Security Agreement dated as of September 22, 1995 (the "Eleventh Amendment"), and by an Amendment No. 12 to Amended and Restated Loan and Security Agreement dated as of September 29, 1995 (the "Twelfth Amendment"). The Restated Loan Agreement, the First Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment, the Fifth Amendment, the Sixth Amendment, the Seventh Amendment, the Eighth Amendment, the Ninth Amendment, the Tenth Amendment, the Eleventh Amendment, the Twelfth Amendment and this Thirteenth Amendment and all other documents evidencing or executed in connection with the Loan are referred to hereinafter as the "Loan Documents." The Restated Loan Agreement, as amended by the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, Sixth Amendment, Seventh Amendment, Eighth Amendment, Ninth Amendment, Tenth Amendment, Eleventh Amendment and Twelfth Amendment is referred to hereinafter as the "Loan Agreement." The Loan contemplated by the Loan Agreement, as amended by this Thirteenth Amendment, is referred to hereinafter as the "Loan." All capitalized terms used in this Thirteenth Amendment will have the 2 meanings assigned to such terms in the Loan Agreement unless those terms are otherwise defined herein. C. GREFCO was a wholly-owned subsidiary of Greyhound Financial Corporation ("GFC"). Pursuant to a plan of liquidation, GREFCO was liquidated into GFC. Further, pursuant to such plan of liquidation, GREFCO assigned the Note and all of GREFCO's rights under the Loan Agreement and other Documents to GFC. Effective as of February 1, 1995, GFC changed its name to FINOVA Capital Corporation. D. Borrower has requested and Lender has agreed to further modify the Loan in accordance with the terms of, and subject to the conditions contained in, this Thirteenth Amendment. E. Borrower has requested and Lender has agreed (in accordance with and subject to the terms of this Thirteenth Amendment), as part of the Loan under the Loan Agreement, to increase the amount of the Mortgage Loan Facility portion of the Loan used by Borrower to finance the acquisition and refurbishment of timeshare resorts from $6,500,000 to $12,000,000. F. Borrower has also requested and Lender has agreed to fund (pursuant to the terms and conditions of this Thirteenth Amendment) additional Advances under the Mortgage Loan Facility to finance the acquisition and renovation of two (2) additional timeshare resort facilities located at: (i) 171 Winnick Avenue, Las Vegas, Nevada, consisting of 22 timeshare units, more particularly described in Exhibit "A" attached hereto (the "Winnick Building Addition"), and (ii) 190-196 Ida Avenue, Las Vegas, Nevada, consisting of 24 timeshare units, more particularly described in Exhibit "B" attached hereto (the "Ida Building Addition"). G. Borrower has also requested and Lender has agreed, in accordance with and subject to the terms and conditions contained in the Loan Agreement, as modified by this Thirteenth Amendment, to finance the cost of the expansion and renovation of the lobby in that timeshare resort facility owned by Borrower and known as "The Towers," which is more particularly described in Exhibit "C" attached hereto (the "Towers"). Such Advances shall be made under the Mortgage Loan Facility. H. Borrower has also requested and Lender has agreed, in accordance with and subject to the conditions contained in the Loan Agreement, as modified by this Thirteenth Amendment, to make Advances of the Loan, from time to time, against Instruments or Contracts arising from the Winnick Building Addition and the Ida Building Addition. NOW, THEREFORE, in consideration of these recitals, the covenants contained in this Thirteenth Amendment, and for other good and valuable consideration, the receipt and sufficiency of which consideration is hereby acknowledged, Lender and Borrower agree as follows: 1. LOAN AGREEMENT. Provided the conditions precedent described - 2 - 3 in Paragraph 12 of this Thirteenth Amendment are met to the satisfaction of Lender, which satisfaction will be evidenced by Lender's execution of this Thirteenth Amendment unless otherwise provided herein, the Loan Agreement is hereby further modified as follows: 1.1 The Loan Agreement is hereby amended by adding to Article I the following definitions: "Ida Building Addition": shall have the meaning set forth in the Recitals of the Thirteenth Amendment. "Ida Building Addition Acquisition Advance": shall have the meaning set forth in Paragraph 4 of the Thirteenth Amendment. "Ida Building Addition Deed of Trust": shall have the meaning set forth in Paragraph 10 of the Thirteenth Amendment. "Ida Building Addition Incentive Fee": shall mean the Incentive Fee provided for in Paragraph 11.4.2 of the Thirteenth Amendment. "Ida Building Addition Note": shall have the meaning set forth in Paragraph 8.1 of the Thirteenth Amendment. "Ida Building Addition Release Fee": shall have the meaning set forth in Paragraph 11.2 of the Thirteenth Amendment. "Ida Building Addition Renovation Advances": shall have the meaning set forth in Paragraph 5 of the Thirteenth Amendment. "Thirteenth Amendment": shall mean this Amendment No. 13 to Amended and Restated Loan and Security Agreement. "Towers Advances": shall have the meaning set forth in Paragraph 6 of the Thirteenth Amendment. "Towers Note": shall have the meaning set forth in Paragraph 9 of the Thirteenth Amendment. "Towers Note Principal Reduction Fee": shall have the meaning set forth in Paragraph 9.3 of the Thirteenth Amendment. "Towers Lobby Expansion": shall have the meaning set forth in Paragraph 6 of the Thirteenth Amendment. "Winnick Building Addition": shall have the meaning set forth in the Recitals of the Thirteenth Amendment. "Winnick Building Addition Acquisition Advance": shall have the meaning set forth in Paragraph 2 of the Thirteenth Amendment. - 3 - 4 "Winnick Building Addition Deed of Trust": shall have the meaning set forth in Paragraph 10 of the Thirteenth Amendment. "Winnick Building Addition Incentive Fee": shall mean the Incentive Fee provided for in Paragraph 11.4.1 of the Thirteenth Amendment. "Winnick Building Addition Note": shall have the meaning set forth in Paragraph 7.1 of the Thirteenth Amendment. "Winnick Building Addition Renovation Advances": shall have the meaning set forth in Paragraph 3 of the Thirteenth Amendment. "Winnick Building Addition Release Fee": shall have the meaning set forth in Paragraph 11.1 of the Thirteenth Amendment. 1.2 The definitions of the following terms in Article I of the Loan Agreement, including, to the extent applicable, the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, Sixth Amendment, Seventh Amendment, Eighth Amendment, Ninth Amendment, Tenth Amendment, Eleventh Amendment and Twelfth Amendment are hereby amended and restated in their entirety to read as follows: "Documents": shall mean the Note, the First Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment, the Fifth Amendment, the Sixth Amendment, the Seventh Amendment, the Eighth Amendment, the Ninth Amendment, the Tenth Amendment, the Eleventh Amendment, the Twelfth Amendment, the Thirteenth Amendment, the 2.5 MM Note, the Suites Phase II Note, the Ida Building One Note, the Ida Building Two Note, the Aloha Bay Phase I Note, the Aloha Bay Phase II Note, the Winnick Building Addition Note, the Ida Building Addition Note, the Towers Note, the Guarantee, the Deed of Trust, the Headquarters Deed of Trust, the Ida Building One Deed of Trust, the Ida Building Two Deed of Trust, the Aloha Bay Phase I Mortgage, the Aloha Bay Phase II Mortgage, the Winnick Building Addition Deed of Trust, the Ida Building Addition Deed of Trust, the Assignments, the Contracts, the Instruments, the Agency Agreement, the Oversight Agreement, this Agreement, and all other documents and instruments executed in connection with the Loan, together with any and all renewals, extensions, amendments, restatements or replacements thereof, whether now or hereafter existing. "Mortgage Loan Facility": shall mean that portion of the Loan not to exceed $12,000,000 under which Advances may be made to Borrower on a revolving basis in order to finance Borrower's acquisition and refurbishment of time-share resorts. The Advances made under the Mortgage Loan Facility include the First Suites Phase II Loan Advance, the Second Suites Phase II Loan Advance, the Ida Building One Acquisition Advance, the Ida Building Two Acquisition Advance, the Winnick Building Addition Acquisition Advance, the Winnick Building Addition Renovation Advances, the Ida Building Addition Acquisition Advance, the Ida Building Addition Renovation Advances, the Towers Advances and any other Advances made by Lender to Borrower after the date of the Thirteenth Amendment to finance Borrower's acquisition and - 4 - 5 refurbishment of time-share resorts, exclusive of the following Advances which are not included within the Mortgage Loan Facility: the Receivables Over-Advances as provided for in the Tenth Amendment, the Aloha Bay Phase I Acquisition Advance, Aloha Bay Phase I Renovation Advances, the Aloha Bay Phase II Acquisition Advance, Aloha Bay Phase II Construction Advances, and the Advances evidenced by the 2.5 MM Note. "Project": shall mean each of the Winnick Building Addition (as defined in the Thirteenth Amendment), Ida Building Addition (as defined in the Thirteenth Amendment), Aloha Bay Phase I (as defined in the Eleventh Amendment), Aloha Bay Phase II (as defined in the Eleventh Amendment), Ida Building One (as defined in the Tenth Amendment), Ida Building Two (as defined in the Tenth Amendment), South Park Ranches (as defined in the Ninth Amendment), Suites Phase II (as defined in the Eighth Amendment), Fountains (as defined in the Sixth Amendment), Winnick (as defined in the Sixth Amendment), Suites Phase I (as defined in the Fourth Amendment) and those certain real estate developments which are owned by the Borrower or the Trustee, located in Nye County and Clark County in the State of Nevada, and Huerfano County in the State of Colorado, which are more particularly described in Exhibit "P-1" to the First Amendment. "Ida Building One Deed of Trust": shall mean the Ida Building One Deed of Trust, as modified and amended pursuant to that First Modification of Deed of Trust [Ida Building One] recorded November 22, 1995 in Book 951122 as Instrument No. 01278, Official Records of Clark County, Nevada, and by that Second Modification of Deed of Trust [Ida Building One] described in Paragraph 9.3 of the Thirteenth Amendment. "Ida Building Two Deed of Trust": shall mean the Ida Building Two Deed of Trust, as modified and amended pursuant to that First Modification of Deed of Trust [Ida Building Two] described in Paragraph 9.3 of the Thirteenth Amendment. 1.3 The term "Borrowing Term," as defined in Article I of the Loan Agreement, is hereby amended by including therein the periods of time during which Lender is committed to make Advances under the Loan Agreement, as amended by the Thirteenth Amendment, with respect to the properties described in this Paragraph 1.3, which commitment shall terminate (a) as to the Winnick Building Addition, on October 31, 1996; (b) as to the Ida Building Addition, on October 31, 1996; and (c) as to the Towers Lobby Expansion, on October 31, 1996. 1.4 The introductory subparagraph of Paragraph 3.1 of the Loan Agreement is hereby amended and restated in its entirety to read as follows: "3.1(a) As security for Borrower's payment and Performance of all Obligations owed to Lender under the Documents (including, without limitation, the 2.5 MM Note, the Suites Phase II Note, the Ida Building One Note, the Ida Building Two Note, the Aloha Bay Phase I Note (subject to the limitations set forth in the Aloha Bay Phase I Mortgage with respect to Aloha Bay Phase I), the Aloha Bay Phase II Note (subject to the limitations set forth in - 5 - 6 the Aloha Bay Phase II Mortgage with respect to Aloha Bay Phase II), the Winnick Building Addition Note, the Ida Building Addition Note, and the Towers Note, Borrower hereby grants, transfers and assigns to Lender a Security Interest in and to all of Borrower's right, title and interest in and to all of the following:" 1.5 The introductory subparagraph of Paragraph 3.1(b) of the Loan Agreement (which was added to the Loan Agreement pursuant to the Fourth Amendment) is hereby amended and restated in its entirety to read as follows: "(b) As further security for Borrower's payment and Performance of all Obligations owed to Lender under the Documents (including, without limitation, the 2.5 MM Note, the Suites Phase II Note, the Ida Building One Note, the Ida Building Two Note, the Aloha Bay Phase I Note (subject to the limitations set forth in the Aloha Bay Phase I Mortgage with respect to Aloha Bay Phase I), the Aloha Bay Phase II Note (subject to the limitations set forth in the Aloha Bay Phase II Mortgage with respect to Aloha Bay Phase II), the Winnick Building Addition Note, the Ida Building Addition Note, and the Towers Note, Borrower hereby grants, transfers and assigns to Lender a Security Interest in and to all of Borrower's right, title and interest in and to all of the following:" 1.6 Paragraph 7.2 of the Loan Agreement is hereby amended by adding the phrase "(exclusive of the aggregate outstanding principal balance of the 2.5 MM Note, the Suites Phase II Note, the Ida Building One Note, the Ida Building Two Note, the Aloha Bay Phase I Note, the Aloha Bay Phase II Note, the Winnick Addition Note, the Ida Building Addition Note, and the Towers Note)" immediately following the word "Loan" at both places where the term "Loan" appears in the first sentence thereof. 1.7 Paragraph 9.1(a) of the Loan Agreement is hereby amended and restated in its entirety to read as follows: "(a) Lender fails to receive from Borrower when due and payable (i) any amount that Borrower is obligated to pay on the Note, (ii) any amount that Borrower is obligated to pay on the 2.5 MM Note, (iii) any amount that Borrower is obligated to pay on the Suites Phase II Note, (iv) any amount that Borrower is obligated to pay on the Ida Building One Note, (v) any amount that Borrower is obligated to pay on the Ida Building Two Note, (vi) any amount that Borrower is obligated to pay on the Aloha Bay Phase I Note, (vii) any amount that Borrower is obligated to pay on the Aloha Bay Phase II Note, (viii) any amount that Borrower is obligated to pay on the Winnick Building Addition Note, (ix) any amount that Borrower is obligated to pay on the Ida Building Addition Note, (x) any amount that Borrower is obligated to pay on the Towers Note, or (xi) any other payment due under the Documents; and such failure shall continue for five (5) days after notice thereof to Borrower, except for the payment of the final installment due under each of the Note, the 2.5 MM Note, the Suites Phase II Note, the Ida Building One Note, the Ida Building Two Note, the Aloha Bay Phase I Note, the Aloha Bay Phase II Note, the Winnick Building Addition Note, the Ida Building Addition Note, or the Towers Note, for which - 6 - 7 no grace period is allowed;" 2. WINNICK BUILDING ADDITION ACQUISITION ADVANCE. As an Advance against the Maximum Loan Amount and the Mortgage Loan Facility, Lender shall make a loan (the "Winnick Building Addition Acquisition Advance") to Borrower in an amount equal to the lesser of (a) $1,350,000, or (b) 90% of the bona fide costs and expenses incurred or to be incurred by Borrower in acquiring the Winnick Building Addition, as established by evidence satisfactory to Lender (exclusive of any overhead of or profits to Borrower or any of the Control Group). The following terms and conditions shall apply to the Winnick Building Addition Acquisition Advance: 2.1 At such time as all conditions with respect to the Winnick Building Addition Acquisition Advance in this Thirteenth Amendment have been satisfied in Lender's discretion, Lender shall disburse the Winnick Building Addition Acquisition Advance to Borrower in a single Advance on a date mutually agreeable to the parties hereto; provided , however, that Lender shall have no obligation to disburse any portion of the Winnick Building Addition Acquisition Advance after January 21, 1996. 2.2 Borrower shall use the proceeds of the Winnick Building Addition Acquisition Advance to pay for a portion of Borrower's costs in purchasing the Winnick Building Addition. 2.3 Borrower shall pay to Lender the Mortgage Loan Commitment Fee applicable to the Winnick Building Addition Acquisition Advance simultaneously with such Advance. 3. WINNICK BUILDING ADDITION RENOVATION ADVANCES. As an Advance against the Maximum Loan Amount and the Mortgage Loan Facility, Lender shall make a loan (the "Winnick Building Addition Renovation Advances") to Borrower, in a total amount not to exceed the lesser of (a) $750,000 or (b) 90% of the total bona fide out-of-pocket costs and expenses incurred by Borrower through the date of such Advance in renovating the Winnick Building Addition, as established by evidence satisfactory to Lender (exclusive of any overhead of or profits to Borrower or any of the Control Group (for the purposes of the foregoing, the term "overhead" shall not be deemed to include reasonable and customary salaries paid to employees of Borrower performing renovations with respect to the Winnick Building Addition)). Borrower shall use the proceeds of any Winnick Building Addition Renovation Advances to reimburse Borrower for Borrower's costs incurred in renovating and refurbishing the Winnick Building Addition. Lender shall have no obligation to fund any Winnick Building Addition Renovation Advances until such time as all conditions with respect thereto in this Thirteenth Amendment have been satisfied in Lender's discretion, and Lender shall have no obligation to make any further Winnick Building Addition Renovation Advances after October 31, 1996. 4. IDA BUILDING ADDITION ACQUISITION ADVANCE. As an Advance against the Maximum Loan Amount and the Mortgage Loan Facility, Lender shall make a loan (the "Ida Building Addition Acquisition Advance") to Borrower in an amount equal to the lesser of (a) $825,000, or (b) 90% of the total bona fide out-of-pocket costs - 7 - 8 and expenses to Borrower in acquiring the Ida Building Addition, as established by evidence satisfactory to Lender (exclusive of any overhead of or profits to Borrower or any of the Control Group). The following terms and conditions shall apply to the Ida Building Addition Acquisition Advance: 4.1 At such time as all conditions with respect to the Ida Building Addition Acquisition Advance in this Thirteenth Amendment have been satisfied in Lender's discretion, Lender shall disburse the Ida Building Addition Acquisition Advance to Borrower in a single advance on a date mutually agreeable to the parties hereto; provided, however, that Lender shall have no obligation to disburse any portion of the Ida Building Addition Acquisition Advance after December 21, 1995. 4.2 Borrower shall use the proceeds of the Ida Building Addition Acquisition Advance to pay for a portion of its costs in purchasing the Ida Building Addition. 4.3 Borrower shall pay the Mortgage Loan Commitment Fee applicable to the Ida Building Addition Acquisition Advance simultaneously with the making of such Advance. 5. IDA BUILDING ADDITION RENOVATION ADVANCES. As an Advance against the Maximum Loan Amount and the Mortgage Loan Facility, Lender shall make a loan (the "Ida Building Addition Renovation Advances") to Borrower in a total amount equal to the lesser of (a) $675,000, or (b) 90% of the total bona fide out-of-pocket costs and expenses incurred by Borrower through the date of such Advance in renovating the Ida Building Addition, as established by evidence satisfactory to Lender (exclusive of any overhead of or profits to Borrower or any of the Control Group (for the purposes of the foregoing, the term "overhead" shall not be deemed to include reasonable and customary salaries paid to employees of Borrower performing renovations with respect to the Ida Building Addition)). Borrower shall use the proceeds of any Ida Building Addition Renovation Advances to reimburse Borrower for Borrower's costs incurred in renovating and refurbishing the Ida Building Addition. Lender shall have no obligation to fund any Ida Building Addition Renovation Advances until such time as all conditions with respect thereto in this Thirteenth Amendment have been satisfied in Lender's discretion, and Lender shall have no obligation to make any further Ida Building Addition Renovation Advances after October 31, 1996. 6. TOWERS ADVANCES. As an Advance against the Maximum Loan Amount and the Mortgage Loan Facility, Lender shall make a loan (the "Towers Advances") to Borrower in a total amount not to exceed the lesser of: (a) $700,000, or (b) 90% of the bona fide out-of- pocket costs and expenses incurred by Borrower through the date of such Advance in expanding, renovating and refurbishing the main lobby area within the Towers (the "Towers Lobby Expansion"), as established by evidence satisfactory to Lender (exclusive of any overhead of or profits to Borrower or any of the Control Group (for the purposes of the foregoing, the term "overhead" shall not be deemed to include reasonable and customary salaries paid to employees of Borrower performing renovations in connection with the Towers Lobby Expansion)). Borrower shall use the proceeds of any Towers Advances to reimburse Borrower for Borrower's costs incurred in performing the Towers Lobby Expansion. Lender shall - 8 - 9 have no obligation to fund any Towers Advances until such time as all conditions with respect thereto in this Thirteenth Amendment have been satisfied in Lender's discretion, and Lender shall have no obligation to make any further Towers Advances after October 31, 1996. 7. WINNICK BUILDING ADDITION NOTE. 7.1 The Winnick Building Addition Acquisition Advance and Winnick Building Addition Renovation Advances made with respect to the Winnick Building Addition shall be evidenced by a single Promissory Note (the "Winnick Building Addition Note") of Borrower, in a form acceptable to Lender, executed and delivered to Lender simultaneously with Borrower's request for the Winnick Building Addition Acquisition Advance, in the amount of up to $2,100,000, payable to Lender upon the terms and conditions contained herein and therein. Lender and Borrower hereby agree that, notwithstanding any provision to the contrary in the Loan Agreement, the terms and conditions of the Winnick Building Addition Note and this Paragraph 7 shall apply with respect to repayment of the Winnick Building Addition Note. To the extent that Borrower's indebtedness to Lender arising from the Winnick Building Addition Note is evidenced by both the Note (as distinguished from the Winnick Building Addition Note) and the Winnick Building Addition Note, receipts by Lender in payment or satisfaction of such indebtedness (including receipt by Lender of Winnick Building Addition Release Fees as provided in Paragraph 11.1 hereof) shall be credited against sums due under both the Note and the Winnick Building Addition Note and/or any judgment entered thereon. 7.2 Notwithstanding the provisions of Paragraph 7.3.1 of the Loan Agreement, Borrower shall have the right to prepay the Winnick Building Addition Note only in the event and upon the condition that Borrower (a) pays all sums due and payable to Lender in connection with the Winnick Building Addition Note, (b) has given Lender at least thirty (30) days prior written notice of the prepayment, and (c) pays to Lender at the time of prepayment a prepayment premium equal to one percent (1%) of the then unpaid principal balance of the Winnick Building Addition Note, together with any unpaid portion of the Winnick Building Addition Incentive Fee as described in Paragraph 11.4.1 below. Except as provided in the foregoing, Borrower shall have no right to prepay the Winnick Building Addition Note, other than through the application of Winnick Building Addition Release Fees against the principal balance thereof, as provided in Paragraph 7.3 hereof. 7.3 The principal balance of the Winnick Building Addition Note shall be repaid as follows: At such time as Borrower conveys a Unit in the Winnick Building Addition to a Purchaser, Borrower shall make a principal reduction payment to Lender under the Winnick Building Addition Note in an amount equal to the Winnick Building Addition Release Fee. Notwithstanding anything herein to the contrary, if not sooner paid, the entire remaining balance of the Winnick Building Addition Note, together with all accrued and unpaid interest and all other sums due and owing thereon, shall be due and payable in full on the date which occurs twenty-four (24) months following the date that Lender makes the last Winnick Building Renovation Advance (or in the event there is no such day in the 24th month, on the last day of such month). Winnick Building Addition Release Fees paid to Lender in connection with the release of Units from the Security Interests shall be applied toward the next principal - 9 - 10 installment to become due under the Winnick Building Addition Note. 8. IDA BUILDING ADDITION NOTE. 8.1 The Ida Building Addition Acquisition Advance and Ida Building Addition Renovation Advances made with respect to Ida Building Addition shall be evidenced by a single Promissory Note (the "Ida Building Addition Note") of Borrower, in a form acceptable to Lender, executed and delivered to Lender simultaneously with Borrower's request for the Ida Building Addition Acquisition Advance, in the amount of up to $1,500,000, payable to Lender upon the terms and conditions contained herein and therein. Lender and Borrower hereby agree that, notwithstanding any provision to the contrary in the Loan Agreement, the terms and conditions of the Ida Building Addition Note and this Paragraph 8 shall apply with respect to repayment of the Ida Building Addition Note. To the extent that Borrower's indebtedness to Lender arising from the Ida Building Addition Note is evidenced by both the Note (as distinguished from the Ida Building Addition Note) and the Ida Building Addition Note, receipts by Lender in payment or satisfaction of such indebtedness (including receipt by Lender of Ida Building Addition Release Fees as provided in Paragraph 11.2 hereof) shall be credited against sums due under both the Note and the Ida Building Addition Note and/or any judgment entered thereon. 8.2 Notwithstanding the provisions of Paragraph 7.3.1 of the Loan Agreement, Borrower shall have the right to prepay the Ida Building Addition Note only in the event and upon the condition that Borrower (a) pays all sums due and payable to Lender in connection with the Ida Building Addition Note, (b) has given Lender at least thirty (30) days prior written notice of the prepayment, and (c) pays to Lender at the time of prepayment a prepayment premium equal to one percent (1%) of the then unpaid principal balance of the Ida Building Addition Note, together with any unpaid portion of the Ida Building Addition Incentive Fee as described in Paragraph 11.4.2 below. Except as provided in the foregoing, Borrower shall have no right to prepay the Ida Building Addition Note, other than through the application of Ida Building Addition Release Fees against the principal balance thereof, as provided in Paragraph 8.3 hereof. 8.3 The principal balance of the Ida Building Addition Note shall be repaid as follows: At such time as Borrower conveys a Unit in the Ida Building Addition to a Purchaser, Borrower shall make a principal reduction payment to Lender under the Ida Building Addition Note in an amount equal to the Ida Building Addition Release Fee. Notwithstanding anything herein to the contrary, if not sooner paid, the entire remaining balance of the Ida Building Addition Note, together with all accrued and unpaid interest and all other sums due and owing thereon, shall be due and payable in full on ) the date which occurs twenty-four (24) months following the date that Lender makes the last Ida Building Addition Renovation Advance (or in the event there is no such day in the 24th month, on the last day of such month). Ida Building Addition Release Fees paid to Lender in connection with the release of Units from the Security Interests shall be applied toward the next principal installment to become due under the Ida Building Addition Note. 9. TOWERS NOTE. - 10 - 11 9.1 The Towers Advances made with respect to the Towers Lobby Expansion shall be evidenced by a single promissory note (the "Towers Note") of Borrower, in a form acceptable to Lender, executed and delivered to Lender simultaneously with the execution of this Thirteenth Amendment, in the amount of up to $700,000, payable to Lender upon the terms and conditions contained herein and therein. Lender and Borrower hereby agree that, notwithstanding any provision to the contrary in the Loan Agreement, the terms and conditions of the Towers Note and this Paragraph 9 shall apply with respect to repayment of the Towers Note. To the extent that Borrower's indebtedness to Lender arising from the Towers Note is evidenced by both the Note (as distinguished from the Towers Note) and the Towers Note, receipts by Lender in payment or satisfaction of such indebtedness (including receipt by Lender of Towers Note Principal Reduction Fees as provided in Paragraph 9.3 hereof) shall be credited against sums due under both the Note and the Towers Note and/or any judgment entered thereon. 9.2 Notwithstanding the provisions of Paragraph 7.3.1 of the Loan Agreement, Borrower shall have the right to prepay the Towers Note only in the event and upon the condition that Borrower (a) pays all sums due and payable to Lender in connection with the Towers Note, (b) has provided Lender with at least thirty (30) days prior written notice of the prepayment, and (c) pays to Lender at the time of prepayment a prepayment premium equal to one percent (1%) of the then unpaid principal balance of the Towers Note. Except as provided in the foregoing, Borrower shall have no right to prepay the Towers Note, other than through the application of Towers Note Principal Reduction Fees against the principal balance thereof, as provided in Paragraph 9.3 hereof. 9.3 The principal balance of the Towers Note shall be repaid as follows: At such time as Borrower conveys a Unit in Suites Phase II, Ida Building One, Ida Building Two, the Winnick Building Addition, or the Ida Building Addition, to a Purchaser at any time after (a) thirty (30) days after the last Towers Advance is made to Borrower, or (b) November 30, 1996, whichever occurs first, Borrower shall make a principal reduction payment to Lender under the Towers Note in an amount equal to $200 (the "Towers Note Principal Reduction Fee"). The Towers Note Principal Reduction Fee shall be paid to Lender simultaneously with the payment of the Suites Phase II Release Fee, Ida Building One Release Fee, Ida Building Two Release Fee, Winnick Building Addition Release Fee or the Ida Building Addition Release Fee, as the case may be, until the Towers Note is paid in full, whereupon the Towers Note Principal Reduction Fee shall no longer be required to be paid in connection with the foregoing described release fees. Simultaneously with the execution of this Thirteenth Amendment, Borrower shall execute and deliver to Lender appropriate modifications to the Ida Building One Deed of Trust (the "Second Modification of Deed of Trust [Ida Building One]") and the Ida Building Two Deed of Trust (the "First Modification of Deed of Trust [Ida Building Two]") which shall incorporate the provisions of this Paragraph 9.3 relating to the payment of the Towers Note Principal Reduction Fee together with the release fees payable by Borrower under such deeds of trust as prerequisites to the release of Units in Ida Building One and Ida Building Two, respectively. Notwithstanding anything herein to the contrary, if not sooner paid, the entire remaining balance of the Towers Note, together with all accrued and unpaid interest and all other sums due and owing therein, shall be due and payable in full on the earlier of (a) the date which occurs twenty-five (25) months following the date that - 11 - 12 Lender makes the last Towers Advance (or in the event there is no such day in the 25th month, on the last day of such month), or (b) November 30, 1998. Towers Note Principal Reduction Fees paid to Lender in connection with the release of Units from the Security Interests shall be applied toward the next principal installment to become due under the Towers Note. 10. SECURITY. As provided in Paragraphs 3.1(a) and (b) of the Loan Agreement, the payment and Performance of the Winnick Building Addition Note, the Ida Building Addition Note and the Towers Note shall be secured by the Security Interests granted to Lender pursuant to the Loan Agreement, as amended. Furthermore, pursuant to a separate Deed of Trust, Assignment of Rents and Proceeds and Security Agreement with respect to the Winnick Building Addition, in a form acceptable to Lender (referred to herein as the "Winnick Building Addition Deed of Trust"), and a separate Deed of Trust, Assignment of Rents and Proceeds and Security Agreement with respect to Ida Building Addition (the "Ida Building Addition Deed of Trust"), the payment and Performance of the Winnick Building Addition Note and Ida Building Addition Note, respectively, and all other obligations owed to Lender under the Documents shall be secured by a first priority lien on and security interest in the Winnick Building Addition and Ida Building Addition; all buildings and other improvements now or hereafter erected thereon; all fixtures, equipment and other personal property now or hereafter located on or attached or affixed in any manner to the Winnick Building Addition and Ida Building Addition; all leases, income, rents, royalties, revenues, issues, profits or proceeds from Winnick Building Addition and Ida Building Addition; and other items of collateral in connection therewith, all as more fully set forth in the Winnick Building Addition Deed of Trust and Ida Building Addition Deed of Trust. 11. RELEASES. 11.1 Lender hereby agrees that it will release from the effect of the Security Interests granted herein and in the Winnick Building Addition Deed of Trust, and from the effect of any UCC Financing Statement, Units in the Winnick Building Addition which are sold by Borrower upon (a) the payment to Lender of a release fee (the "Winnick Building Addition Release Fee") equal to $2,500 per Unit, (b) the payment of an Incentive Fee (as provided in Paragraph 11.4.1 below) in the amount of $20 per Unit until such time as Borrower has repaid the Winnick Building Addition Note in full, and thereafter in the amount of $2,500 per Unit until such time as Borrower has paid to Lender a total Incentive Fee as to Winnick Building Addition of $22,440, all as provided in Paragraph 11.4.1 below, (c) if applicable, the payment to Lender of the Towers Note Principal Reduction Fee in the amount of $200.00, and (d) the satisfaction of the Release Conditions (as defined in Paragraph 11.3 below). Payments of interest due under the Winnick Building Addition Note shall not be credited against any Winnick Building Addition Release Fees. 11.2 Lender hereby agrees that it will release from the effect of the Security Interests granted herein and in the Ida Building Addition Deed of Trust, and from the effect of any UCC Financing Statement, Units in the Ida Building Addition which are sold by Borrower upon (a) the payment to Lender of a release fee (the "Ida Building Addition Release Fee") equal to $1,650 per Unit, (b) the payment of an Incentive Fee (as provided in Paragraph 11.4.2 below) in the amount of $20 per Unit - 12 - 13 until such time as Borrower has repaid the Ida Building Addition Note in full, and thereafter in the amount of $1,650 per Unit until such time as Borrower has paid to Lender a total Incentive Fee as to Ida Building Addition of $24,480, all as provided in Paragraph 11.4.2 hereof, (c) if applicable, the payment to Lender of the Towers Note Principal Reduction Fee in the amount of $200.00, and (d) the satisfaction of the Release Conditions. Payments of interest due under the Ida Building Addition Note shall not be credited against any Ida Building Addition Release Fees. 11.3 The Release Conditions are as follows: (i) No Event of Default shall have occurred or be continuing and no event shall then exist, which with notice, passage of time or both would constitute an Event of Default; (ii) The Unit to be released must have been sold by Borrower in the ordinary course of Borrower's business in a bona fide arms-length transaction; (iii) The Purchaser of the Unit shall not be affiliated with Borrower or with any of the Control Group; (iv) Lender shall have received a written request for such release in which Borrower certifies as to compliance with items (i) through (iii) above, and further certifies that all other requirements for such release have been satisfied; (v) Borrower has paid all of Lender's out-of-pocket expenses incurred in connection with such release and has submitted to Lender all necessary documents for the same. For the purposes hereof, a person or entity shall be deemed affiliated with Borrower or the Control Group if it is a shareholder, officer, director, agent, employee, salesman, broker or creditor of Borrower or the Control Group, or relative of Borrower or the Control Group or of any of the foregoing, or any other person or entity related to or affiliated with Borrower or the Control Group, including, without limitation, the Guarantor and any independent contractors. No partial release of a Unit shall impair or affect Lender's remaining Security Interests or any term or provision of the Loan Agreement. 11.4 As additional consideration to Lender, Borrower shall pay to Lender an incentive fee (the "Incentive Fee") as follows: 11.4.1 Borrower shall pay to Lender an Incentive Fee equal to $22,440 with respect to the Units sold in the Winnick Building Addition or released from the Winnick Building Addition Deed of Trust. The Incentive Fee as to the Winnick Building Addition shall be paid in installments of $20 per Unit sold or released in Winnick Building Addition until such time as the Borrower has repaid the Winnick Building Addition Note in full. Thereafter, the Incentive Fee shall be paid in installments of $2,500 per Unit sold or released in the Winnick Building Addition until the entire Incentive Fee as to Winnick Building - 13 - 14 Addition is paid in full. Payments of the Incentive Fee, in installments of $20 per Unit, shall be made together with Winnick Building Addition Release Fees described in Paragraph 11.1 above, until the Winnick Building Addition Note is repaid in full; thereafter, payments of the Incentive Fee as to the Winnick Building Addition, in installments of $2,500 per Unit, shall be made at the earlier of the conveyance to a Purchaser of each sold Unit in the Winnick Building Addition or the release of such Unit from the Winnick Building Addition Deed of Trust. The Incentive Fee described herein shall be in addition to the principal and interest payments due under the Winnick Building Addition Note. The Incentive Fee may be prepaid in whole or in part at any time. The Incentive Fee payable pursuant to this subparagraph is the same Incentive Fee payable under Paragraph 6.1 of the Winnick Building Addition Deed of Trust. 11.4.2 Borrower shall pay to Lender an Incentive Fee equal to $24,480 with respect to the Units sold in the Ida Building Addition or released from the Ida Building Addition Deed of Trust. The Incentive Fee as to the Ida Building Addition shall be paid in installments of $20 per Unit sold or released in the Ida Building Addition until such time as the Ida Building Addition Note is paid in full. Thereafter, the Incentive Fee shall be paid in installments of $1,650 per Unit sold or released in the Ida Building Addition until the entire Incentive Fee as to the Ida Building Addition is paid in full. Payments of the Incentive Fee, in installments of $20 per Unit, shall be made together with Ida Building Addition Release Fees described in Paragraph 11.2 above, until the Ida Building Addition Note is repaid in full; thereafter, payments of the Incentive Fee as to the Ida Building Addition, in installments of $1,650 per Unit, shall be made at the earlier of the conveyance to a Purchaser of each sold Unit in the Ida Building Addition or the release of such Unit from the Ida Building Addition Deed of Trust. The Incentive Fee described herein shall be in addition to the principal and interest payments due under the Ida Building Addition Note. The Incentive Fee may be prepaid in whole or in part at any time. The Incentive Fee payable pursuant to this subparagraph is the same Incentive Fee payable under Paragraph 6.1 of the Ida Building Addition Deed of Trust. 11.5 Upon the release of a Unit from the Winnick Building Addition Deed of Trust or the Ida Building Addition Deed of Trust, as the case may be, such release shall also constitute a release from the lien of the Winnick Building Addition One Deed of Trust or the Ida Building Addition Deed of Trust, respectively, and from the lien of Lender's Security Interest, of any Purchaser Notes or Purchaser Mortgages subsequently arising from the sale of such Unit; provided, however, that notwithstanding the foregoing, such Purchaser Notes and Purchaser Mortgages shall continue to be subject to Lender's Security Interest to the extent that such Purchaser Notes or Purchaser Mortgages constitute Receivables Collateral. 11.6 At such time as the principal, interest and all other sums payable under the Winnick Building Addition Note have been paid in full, together with the entire Incentive Fee as to the Winnick Building Addition, Lender shall, upon the request of Borrower, release and terminate the Winnick Building Addition Deed of Trust and the accompanying UCC Financing Statement and any related security interests, provided that there does not then exist an Event of Default or any act or event which with notice, the passage of time or both would constitute an Event of Default. - 14 - 15 All instruments effecting such release and termination shall be prepared by Borrower and submitted to Lender unless Lender otherwise specifies in its sole discretion. Such instruments shall be in a form and substance reasonably satisfactory to Lender. 11.7 At such time as the principal, interest and all other sums payable under the Ida Building Addition Note have been paid in full, together with the entire Incentive Fee as to the Ida Building Addition, Lender shall, upon the request of Borrower, release and terminate the Ida Building Addition Deed of Trust and the accompanying UCC Financing Statement and any related security interests, provided that there does not then exist an Event of Default or any act or event which with notice, the passage of time or both would constitute an Event of Default. All instruments effecting such release and termination shall be prepared by Borrower and submitted to Lender unless Lender otherwise specifies in its sole discretion. Such instruments shall be in a form and substance reasonably satisfactory to Lender. 12. CONDITIONS PRECEDENT. 12.1 Lender's obligation to make any of the Advances described in this Thirteenth Amendment is subject to the following conditions precedent, all of which must be satisfied at or prior to the funding of the first of any of such Advances: (a) Borrower shall have delivered to Lender the following executed documents, all in form satisfactory to Lender: (i) This Thirteenth Amendment; (ii) An opinion from Borrower's counsel, which counsel must be acceptable to Lender, with respect to such matters as Lender shall require; (iii) From the Guarantor of the Loan, a "Consent of Guarantor," in a form acceptable to Lender; (iv) A corporate resolution of Borrower; (v) A corporate resolution of Guarantor; (vi) The Second Modification to Deed of Trust [Ida Building One]; (vii) The First Modification to Deed of Trust [Ida Building Two]; (viii) Such other documents or instruments required by Lender to fully perfect the liens and security interests of Lender described or contemplated herein; (ix) Such other items as Lender may require. - 15 - 16 (b) Borrower shall have obtained and delivered to Lender, at Borrower's expense, a date-down endorsement to the existing ALTA extended coverage mortgagee's title insurance policy issued in favor of Lender by Lawyers' Title Insurance Company with respect to the Ida Building One Deed of Trust, and issued in favor of Lender by Chicago Title Insurance Company with respect to the Ida Building Two Deed of Trust, respectively insuring that the Ida Building One Deed of Trust continues to be a first and prior lien on the Ida Building One, subject only to such additional title exceptions as may be approved by Lender, notwithstanding the effect of the recordation of the Second Modification to Deed of Trust [Ida Building One], and that the Ida Building Two Deed of Trust continues to be a first and prior lien on the Ida Building Two, subject only to such additional title exceptions as may be approved by Lender, notwithstanding the effect of the recordation of the First Modification of Deed of Trust [Ida Building Two]. (c) Lender shall have reviewed and approved credit references of Borrower. (d) Lender shall have determined that the operations of Borrower do not violate in any material respect any applicable laws, ordinances, rules and regulations of governmental authorities or agencies. (e) Unless waived in writing by Lender, Lender shall have reviewed and approved a current UCC, tax lien, judgment and litigation search on Borrower. The foregoing condition shall be deemed to have been waived upon Lender's execution of this Thirteenth Amendment. (f) Borrower shall have paid all closing costs, title company charges, recording fees and taxes, appraisal fees and expenses, survey fees, travel expenses, architect/engineer inspection fees and expenses, fees and expenses of Lender's counsel, and all other costs and expenses incurred by Lender in connection with the preparation, closing and disbursement of the Advances made pursuant to this Thirteenth Amendment. (g) Borrower shall have delivered to Lender a fully-executed copy of the purchase agreements, and all amendments thereto, in connection with Borrower's acquisition of the Winnick Building Addition and Ida Building Addition. (h) Lender shall have reviewed and approved Borrower's budget for renovation and refurbishment of the Winnick Building Addition and Ida Building Addition, and Borrower's budget with respect to the Towers Lobby Expansion. (i) Borrower shall have delivered to Lender, and Lender shall have approved and be satisfied with, evidence of Borrower's equity interest in each of the Winnick Building Addition and Ida Building Addition. 12.2 Lender's obligation to make the Winnick Building Addition Acquisition Advance or any Winnick Building Addition Renovation Advances - 16 - 17 is subject to the following conditions precedent, all of which must be satisfied at or prior to the funding of the Winnick Building Addition Acquisition Advance: (a) Borrower shall have satisfied all of the conditions precedent set forth in Paragraph 12.1 above; (b) Borrower shall have delivered to Lender the following executed documents, all in form satisfactory to Lender: (i) Winnick Building Addition Note; (ii) Environmental Certificate with Representations, Covenants and Warranties with respect to the Winnick Building Addition; (iii) Winnick Building Addition Deed of Trust; (iv) UCC Financing Statements for filing and/or recording with respect to the Winnick Building Addition; (v) Such other documents or instruments required by Lender to fully perfect the liens and security interests of Lender described or contemplated herein with respect to the Winnick Building Addition. (c) Borrower shall have delivered to Lender a current Phase I Environmental Assessment for the Winnick Building Addition performed by an environmental consultant acceptable to Lender, indicating that the Winnick Building Addition does not contain and is not affected by existing or potential environmental contamination. If Lender is not satisfied with the results of the Phase I Environmental Assessment or if Lender becomes aware of any environmental issues impacting the Winnick Building Addition, Lender shall have the right to require a site audit and regulatory compliance evaluation of the Winnick Building Addition, which shall be prepared by an environmental engineer acceptable to Lender and retained at the cost of Borrower, and Lender's obligations hereunder shall be subject to Lender's approval of such audit and evaluation. (d) Borrower shall have delivered to Lender a current ALTA survey of the Winnick Building Addition, certified to Lender by a licensed engineer or surveyor acceptable to Lender, showing, inter alia, the dimensions of the Winnick Building Addition, access thereto, streets and street lines, easements, location of all improvements and all other physical details thereof. In addition, Borrower shall have delivered to Lender a current title report with respect to the Winnick Building Addition from a title insurance company acceptable to Lender and Lender shall have approved the condition of title thereto as shown therein. (e) Lender shall have inspected the Winnick Building Addition and shall be satisfied as to the condition thereof. - 17 - 18 (f) Borrower shall have obtained and delivered to Lender, at Borrower's expense, an ALTA extended coverage mortgagee's title insurance policy or policies acceptable to Lender, with such endorsements as Lender may require, issued by a title insurance company satisfactory to Lender, which shall be in the amount of $2,122,440, and insuring that the Winnick Building Addition Deed of Trust is a first and prior lien on the Winnick Building Addition, subject only to title exceptions approved by Lender. (g) Borrower shall have delivered to Lender evidence satisfactory to Lender that the Winnick Building Addition is not located within a special flood hazard area or evidence satisfactory to Lender that the Winnick Building Addition is insured, upon such terms and in such amounts as shall be satisfactory to Lender, against risks of physical damage caused by flooding. (h) Borrower shall have obtained such public liability, casualty and other insurance policies covering the Winnick Building Addition as Lender may require, written by insurers in amounts and forms satisfactory to Lender. (i) Borrower shall have paid the applicable Mortgage Loan Commitment Fee in the amount required to be paid (i) with respect to the Winnick Building Addition Acquisition Advance, at the time the Winnick Building Addition Acquisition Advance is made by Lender, and (ii) with respect to the Winnick Building Addition Renovation Advances, at the time each such Winnick Building Addition Renovation Advance is made by Lender pursuant hereto. 12.3 Lender's obligation to make the Ida Building Addition Acquisition Advance or any Ida Building Addition Renovation Advances is subject to the following conditions precedent, all of which must be satisfied at or prior to the funding of the Ida Building Addition Acquisition Advance: (a) Borrower shall have satisfied all of the conditions precedent set forth in Paragraph 12.1 above. (b) Borrower shall have delivered to Lender the following executed documents, all in form satisfactory to Lender: (i) Ida Building Addition Note; (ii) Environmental Certificate with Representations, Covenants and Warranties with respect to the Ida Building Addition; (iii) Ida Building Addition Deed of Trust; (iv) UCC Financing Statements for filing and/or recording with respect to the Ida Building Addition; - 18 - 19 (v) Such other documents or instruments required by Lender to fully perfect the liens and security interests of Lender described or contemplated herein with respect to the Ida Building Addition. (c) Borrower shall have delivered to Lender a current Phase I Environmental Assessment for the Ida Building Addition performed by an environmental consultant acceptable to Lender, indicating that the Ida Building Addition does not contain and is not affected by existing or potential environmental contamination. If Lender is not satisfied with the results of the Phase I Environmental Assessment or if Lender becomes aware of any environmental issues impacting the Ida Building Addition, Lender shall have the right to require a site audit of the Ida Building Addition, which shall be prepared by an environmental engineer acceptable to Lender and retained at the cost of Borrower, and Lender's obligations hereunder shall be subject to Lender's approval of such audit. In addition, Borrower shall have delivered to Lender a regulatory compliance evaluation of the Ida Building Addition acceptable to Lender; provided, however, that if Borrower has not delivered such regulatory compliance evaluation by the date Borrower requests the Ida Building Addition Acquisition Advance, then the delivery of such evaluation shall no longer be a condition precedent to the Ida Building Addition Acquisition Advance, but shall become a condition subsequent which must be satisfied within forty-five (45) days after the date of this Thirteenth Amendment. (d) Borrower shall have delivered to Lender a current ALTA survey of the Ida Building Addition, certified to Lender by a licensed engineer or surveyor acceptable to Lender, showing, inter alia, the dimensions of the Ida Building Addition, access thereto, streets and street lines, easements, location of all improvements and all other physical details thereof. In addition, Borrower shall have delivered to Lender a current title report with respect to the Ida Building Addition from a title insurance company acceptable to Lender and Lender shall have approved the condition of title thereto as shown therein. (e) Lender shall have inspected the Ida Building Addition and shall be satisfied as to the condition thereof. (f) Borrower shall have obtained and delivered to Lender, at Borrower's expense, an ALTA extended coverage mortgagee's title insurance policy or policies acceptable to Lender, with such endorsements as Lender may require, issued by a title insurance company satisfactory to Lender, which shall be in the amount of $1,524,480, and insuring that the Ida Building Addition Deed of Trust is a first and prior lien on the Ida Building Addition, subject only to title exceptions approved by Lender. (g) Borrower shall have delivered to Lender evidence satisfactory to Lender that the Ida Building Addition is not located within a special flood hazard area or evidence satisfactory to Lender that the Ida Building Addition is insured, upon such terms and in such amounts as shall be satisfactory to Lender, against risks of physical damage caused by flooding. - 19 - 20 (h) Borrower shall have obtained such public liability, casualty and other insurance policies covering the Ida Building Addition as Lender may require, written by insurers in amounts and forms satisfactory to Lender. (i) Borrower shall have paid the applicable Mortgage Loan Commitment Fee in the amount required to be paid (i) with respect to the Ida Building Addition Acquisition Advance, at the time the Ida Building Addition Acquisition Advance is made by Lender, and (ii) with respect to Ida Building Addition Renovation Advances, at the time each such Ida Building Addition Renovation Advance is made by Lender pursuant hereto. 12.4 Lender's obligation to make any Towers Advances is subject to the following conditions precedent, all of which must be satisfied at or prior to the funding of the initial Towers Advance: (a) Borrower shall have satisfied all of the conditions precedent described in Paragraph 12.1 above. (b) Borrower shall have executed and delivered to Lender the Towers Note in a form acceptable to Lender. 13. RECEIVABLES ADVANCES. In addition to the conditions set forth for the effectiveness of this Thirteenth Amendment as set forth in Paragraph 12 above, Lender's obligation to make Advances of the Loan, from time to time, against Instruments or Contracts arising from the sale of Units in the Winnick Building Addition or the Ida Building Addition is subject to and conditioned upon such Instruments or Contracts qualifying as Eligible Receivables and is furthermore subject to and conditioned upon the satisfaction of all other conditions precedent to the making of the Advance, as set forth in the Loan Agreement. In connection therewith, but without limiting the generality of the foregoing, Lender's obligation to make Advances of the Loan against Instruments or Contracts arising from the sale of Units in the Winnick Building Addition and the Ida Building Addition is subject to Lender's receipt and approval of copies of the registrations/consents to sell/public offering statements/prospectuses and/or approvals thereof required to be issued by or used in all jurisdictions in which such Units will be offered for sale. 14. COMMISSIONS. Lender shall not be obligated to pay any loan commission and/or brokerage fee in connection with the Advances of the Loan made pursuant to this Thirteenth Amendment. Borrower shall pay any and all such commissions and fees, if any, and hereby agrees to indemnify, defend and hold harmless Lender from any claim for any such commissions or fees. Lender represents and warrants to Borrower that Lender has no knowledge of broker involvement in the transactions contemplated by this Thirteenth Amendment. 15. INDEBTEDNESS ACKNOWLEDGED. Borrower acknowledges that the indebtedness evidenced by the Documents is just and owing and agrees to pay the indebtedness in accordance with the terms of the Documents. Borrower further acknowledges and represents that no event has occurred and no condition presently exists that would constitute a default or event of default by Lender under the Loan - 20 - 21 Agreement or any of the other Documents, with or without notice or lapse of time. 16. VALIDITY OF DOCUMENTS. Borrower hereby ratifies, reaffirms, acknowledges and agrees that the Loan Agreement and the other Documents represent valid, enforceable and collectable obligations of Borrower, and that Borrower presently has no existing claims, defenses (personal or otherwise) or rights of setoff whatsoever with respect to the Obligations of Borrower under the Loan Agreement or any of the other Documents. Borrower furthermore agrees that it has no defense, counterclaim, offset, cross-complaint, claim or demand of any nature whatsoever which can be asserted as a basis to seek affirmative relief or damages from Lender or GREFCO. 17. REAFFIRMATION OF WARRANTIES. Except to the extent, if any, that the information in Exhibit 8.3(a) to the Loan Agreement has been supplemented by Exhibit "D" attached hereto, Borrower hereby reaffirms to Lender each of the representations, warranties, covenants and agreements of Borrower as set forth in each of the Documents with the same force and effect as if each were separately stated herein and made as of the date hereof. 18. RATIFICATION OF TERMS AND CONDITIONS. All terms, conditions and provisions of the Loan Agreement, including the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, Sixth Amendment, Seventh Amendment, Eighth Amendment, Ninth Amendment, Tenth Amendment, Eleventh Amendment and Twelfth Amendment and of each of the other Documents shall continue in full force and effect and shall remain unaffected and unchanged except as specifically amended hereby. In the event of any conflict between the terms and conditions of this Thirteenth Amendment and any of the other Documents, the provisions of this Thirteenth Amendment shall control. 19. OTHER WRITINGS. Lender and Borrower will execute such other writings as may be necessary to confirm or carry out the intentions of Lender and Borrower evidenced by this Thirteenth Amendment. 20. EFFECTIVENESS OF AMENDMENT. This Thirteenth Amendment shall not be effective until the same is executed and accepted by Lender in the State of Arizona. IN WITNESS WHEREOF, this instrument is executed as of the day and year first above written. PREFERRED EQUITIES CORPORATION, FINOVA CAPITAL CORPORATION, a a Nevada corporation Delaware corporation By:__________________________ By:________________________________ Donald R. Middleton, Vice President Title:_____________________________ - 21 - 22 STATE OF ARIZONA ) ) ss County of Maricopa ) BEFORE ME, the undersigned authority, a Notary Public in and for the County and State aforesaid, on this day personally appeared DONALD R. MIDDLETON, known to me to be the Vice President of PREFERRED EQUITIES CORPORATION, a Nevada corporation, who acknowledged to me that the same was the free act and deed of such corporation and that he, being authorized by proper authority to do so, executed the same on behalf of such corporation for the purposes and consideration therein expressed, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF OFFICE this ______ day of ______________, 1995. _________ Notary Public My commission expires: ______________________________ STATE OF ARIZONA ) ) ss County of Maricopa ) BEFORE ME, the undersigned authority, a Notary Public in and for the County and State aforesaid, on this day personally appeared _____________________________________________________________, known to me to be the _____________________________ of FINOVA CAPITAL CORPORATION, a Delaware corporation, who acknowledged to me that the same was the free act and deed of such corporation and that s/he, being authorized by proper authority to do so, executed the same on behalf of such corporation for the purposes and consideration therein expressed, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF OFFICE this ______ day of ______________, 1995. _________ Notary Public My commission expires: ______________________ - 22 - 23 [TOWERS LOBBY] PROMISSORY NOTE U.S. $700,000.00 December 13, 1995 Phoenix, Arizona FOR VALUE RECEIVED, the undersigned PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Maker"), promises to pay to FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender"), or order, at such place as the holder of this Note ("Holder") may from time to time designate in writing, in lawful money of the United States of America, the principal sum of up to SEVEN HUNDRED THOUSAND AND NO/100 DOLLARS (U.S. $700,000.00), or so much thereof as has been disbursed and not repaid, together with interest on the unpaid principal balance from time to time outstanding from the date hereof until paid, as more fully provided for below. Interest due under this Note shall (a) accrue daily on the basis of the actual number of days in the computation period, (b) be calculated on the basis of a year consisting of 360 days, and (c) be payable monthly in arrears on the later of (i) ten (10) days after Lender mails an invoice or statement therefor to Maker or (ii) the due date set forth in said invoice or statement. Interest shall accrue initially at an annual interest rate ("Initial Interest Rate") equal to Prime (as hereinafter defined) in effect on the date of the initial advance of the loan evidenced by this Note ("Initial Prime") plus 2-1/4% per annum, subject to adjustment on each Interest Rate Change Date (as hereinafter defined), but in no event to exceed the maximum contract rate permitted under the Applicable Usury Law (as hereinafter defined). The interest rate shall change on each Interest Rate Change Date by adding to or subtracting from the Initial Interest Rate, as the case may be, the change, if any, between Initial Prime and Prime in effect on the applicable Interest Rate Change Date. As used in this Note, the following capitalized terms have the meaning set forth opposite them below: "Prime" shall mean the rate of interest publicly announced, from time to time, by Citibank, N.A., New York, New York ("Citibank"), as the corporate base rate of interest charged by Citibank to its most creditworthy commercial borrowers notwithstanding the fact that some borrowers of Citibank may borrow from Citibank at rates of less than such announced Prime rate; and "Interest Rate Change Date" means (a) the first business day of Citibank, N.A., in New York, New York, during the calendar month following the date of the initial advance of the loan evidenced by this Note and (b) the first business day of Citibank, N.A., during each successive month thereafter. The principal sum of this Note shall be repaid in the manner set forth in the Loan Agreement (as defined below), the applicable provisions of which are incorporated herein by reference as if fully set forth herein. ________________ Payments of principal and/or interest shall, at the option of Holder, earn interest after they are due at a rate ("Overdue Rate") equal to (a) 2% per annum above the rate otherwise payable hereunder or (b) the maximum contract rate permitted under the Applicable Usury Law, whichever of (a) or (b) is lesser. Furthermore, in the event of the occurrence of an Event of Default (as the term "Event of Default" is defined in the Loan Agreement) the unpaid principal balance of this Note shall, at the option of Holder, accrue interest at the Overdue Rate. 24 This Note is executed pursuant to that certain Amendment No. 13 to Amended and Restated Loan and Security Agreement of even date herewith between Maker and Lender (such Amended and Restated Loan and Security Agreement, as amended, the "Loan Agreement"). All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement, the applicable provisions of which are incorporated herein by reference. All payments made under this Note shall be applied first against amounts due hereunder or under the Loan Agreement, other than principal and interest; second, against interest then due under this Note; and third, against the principal of this Note. In the event any installment of principal and/or interest required to be made in connection with the indebtedness evidenced hereby is not paid when due and, except in the case of the final installment, for which no grace period is allowed, such default continues for five days after notice thereof to Maker or an Event of Default occurs, Holder may, at its option, without notice or demand, declare immediately due and payable the entire unpaid principal balance hereof, all accrued and unpaid interest thereon, and all other charges owing in connection with the loan evidenced hereby. The contracted for rate of interest of the loan contemplated hereby, without limitation, shall consist of the following: (i) the interest rate, calculated and applied to the principal balance of this Note in accordance with the provisions of this Note; (ii) Overdue Rate, calculated and applied to the amounts due under this Note in accordance with the provisions hereof; (iii) Mortgage Loan Commitment Fee as to the Towers Advances; and (iv) all Additional Sums (as hereinafter defined), if any. Maker agrees to pay an effective contracted for rate of interest which is the sum of the above referenced elements. All fees, charges, goods, things in action or any other sums or things of value (other than amounts described in the immediately previous paragraph), paid or payable by Maker (collectively, the "Additional Sums"), whether pursuant to this Note, the Loan Agreement, the other Documents or any other documents or instruments in any way pertaining to this lending transaction, or otherwise with respect to this lending transaction, that under any applicable law may be deemed to be interest with respect to this lending transaction, for the purpose of any applicable law that may limit the maximum amount of interest to be charged with respect to this lending transaction, shall be payable by Maker as, and shall be deemed to be, additional interest, and for such purposes only, the agreed upon and "contracted for rate of interest" of this lending transaction shall be deemed to be increased by the rate of interest resulting from the Additional Sums. This Note is not prepayable in whole or in part, except as specifically provided in the Loan Agreement. In the event that Holder institutes legal proceedings to enforce this Note and Holder is the prevailing party in such proceeding, Maker agrees to pay Holder, in addition to any indebtedness due and unpaid, all costs and expenses of such proceedings, including, without limitation, attorneys' fees. Holder shall not by any act or omission or commission be deemed to waive any -2- 25 of its rights or remedies hereunder unless such waiver be in writing and signed by an authorized officer of Holder and then only to the extent specifically set forth therein; a waiver on one occasion shall not be construed as continuing or as a bar to or waiver of such right or remedy on any other occasion. All remedies conferred upon Holder by this Note or any other instrument or agreement connected herewith or related hereto shall be cumulative and none is exclusive and such remedies may be exercised concurrently or consecutively at Holder's option. Every person or entity at any time liable for the payment of the indebtedness evidenced hereby waives: presentment for payment, protest and demand; notice of protest, demand, dishonor and nonpayment of this Note; and trial by jury in any litigation arising out of, relating to or connected with this Note or any instrument given as security herefor. Every such person or entity further consents that Holder may renew or extend the time of payment of any part or the whole of the indebtedness at any time and from time to time at the request of any other person or entity liable therefor. Any such renewals or extensions may be made without notice to any person or entity liable for the payment of the indebtedness evidenced hereby. This Note is given and accepted as evidence of indebtedness only and not in payment or satisfaction of any indebtedness or obligation. Time is of the essence with respect to all of Maker's obligations and agreements under this Note. This Note and all of the provisions, conditions, promises and covenants hereof shall be binding in accordance with the terms hereof upon Maker, its successors and assigns, provided nothing herein shall be deemed consent to any assignment restricted or prohibited by the terms of the Loan Agreement. If more than one person or other entity has executed this Note as Maker, the obligations of such persons and entities shall be joint and several. This Note has been executed and delivered in Phoenix, Arizona, and the obligations of Maker hereunder shall be performed in Phoenix, Arizona. THIS NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ARIZONA AND, TO THE EXTENT THEY PREEMPT THE LAWS OF SUCH STATE, THE LAWS OF THE UNITED STATES. Maker (a) hereby irrevocably submits itself to the process, jurisdiction and venue of the courts of the State of Arizona, Maricopa County, and to the process, jurisdiction and venue of the United States District Court for Arizona, for the purposes of suit, action or other proceedings arising out of or relating to this Note or the subject matter hereof brought by Holder and (b) without limiting the generality of the foregoing, hereby waives and agrees not to assert by way of motion, defense or otherwise in any such suit, action or proceeding any claim that Maker is not personally subject to the jurisdiction of the above-named courts, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. It is the intent of the parties to comply with the usury law ("Applicable Usury Law") applicable pursuant to the terms of the preceding paragraph or such other usury law which is applicable if the law chosen by the parties is not. Accordingly, it is agreed that notwithstanding any provisions to the contrary in this Note, or in any of the documents securing payment hereof or otherwise relating hereto, in no event shall this Note or such documents require the payment or permit the collection of interest in excess of the maximum contract rate permitted by the Applicable Usury Law. In the event (a) any such excess of interest otherwise -3- 26 would be contracted for, charged or received from Maker or otherwise in connection with the loan evidenced hereby, or (b) the maturity of the indebtedness evidenced by this Note is accelerated in whole or in part, or (c) all or part of the principal or interest of this Note shall be prepaid, so that under any of such circumstance the amount of interest contracted for, shared or received in connection with the loan evidenced hereby, would exceed the maximum contract rate permitted by the Applicable Usury Law, then in any such event (1) the provisions of this paragraph shall govern and control, (2) neither Maker nor any other person or entity now or hereafter liable for the payment hereof will be obligated to pay the amount of such interest to the extent that it is in excess of the maximum contract rate permitted by the Applicable Usury Law, (3) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal amount hereof or refunded to Maker, at Holder's option, and (4) the effective rate of interest will be automatically reduced to the maximum amount of interest permitted by the Applicable Usury Law. It is further agreed, without limiting the generality of the foregoing, that to the extent permitted by the Applicable Usury Law: (x) all calculations of interest which are made for the purpose of determining whether such rate would exceed the maximum contract rate permitted by the Applicable Usury Law shall be made by amortizing, prorating, allocating and spreading during the period of the full stated term of the loan evidenced hereby, all interest at any time contracted for, charged or received from Maker or otherwise in connection with such loan; and (y) in the event that the effective rate of interest on the loan should at any time exceed the maximum contract rate allowed under the Applicable Usury Law, such excess interest that would otherwise have been collected had there been no ceiling imposed by the Applicable Usury Law shall be paid to Holder from time to time, if and when the effective interest rate on the loan otherwise falls below the maximum amount permitted by the Applicable Usury Law, to the extent that interest paid to the date of calculation does not exceed the maximum contract rate permitted by the Applicable Usury Law, until the entire amount of interest which would have otherwise been collected had there been no ceiling imposed by the Applicable Usury Law has been paid in full. Maker further agrees that should the maximum contract rate permitted by the Applicable Usury Law be increased at any time hereafter because of a change in the law, then to the extent not prohibited by the Applicable Usury Law, such increases shall apply to all indebtedness evidenced hereby regardless of when incurred; but, again to the extent not prohibited by the Applicable Usury Law, should the maximum contract rate permitted by the Applicable Usury Law be decreased because of a change in the law, such decreases shall not apply to the indebtedness evidenced hereby regardless of when incurred. In the event of any conflict or inconsistency between the provisions of this Note and the provisions of the Loan Agreement, the provisions of the Loan Agreement shall control. PREFERRED EQUITIES CORPORATION, a Nevada corporation "Maker" By:_____ Donald R. Middleton, Vice President Federal Taxpayer Identification Number: 88-0106662 -4- 27 Address: 4310 Paradise Road Las Vegas, Nevada 89109 Attn: President -5- 28 [IDA ADDITION] PROMISSORY NOTE U.S. $1,500,000.00 December 13, 1995 Phoenix, Arizona FOR VALUE RECEIVED, the undersigned PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Maker"), promises to pay to FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender"), or order, at such place as the holder of this Note ("Holder") may from time to time designate in writing, in lawful money of the United States of America, the principal sum of up to ONE MILLION FIVE HUNDRED THOUSAND AND NO/100 DOLLARS (U.S. $1,500,000.00), or so much thereof as has been disbursed and not repaid, together with interest on the unpaid principal balance from time to time outstanding from the date hereof until paid, as more fully provided for below. Interest due under this Note shall (a) accrue daily on the basis of the actual number off days in the computation period, (b) be calculated on the basis of a year consisting of 360 days, and (c) be payable monthly in arrears on the later of (i) ten (10) days after Lender mails an invoice or statement therefor to Maker or (ii) the due date set forth in said invoice or statement. Interest shall accrue initially at an annual interest rate ("Initial Interest Rate") equal to Prime (as hereinafter defined) in effect on the date of the initial advance of the loan evidenced by this Note ("Initial Prime") plus 2-1/4% per annum, subject to adjustment on each Interest Rate Change Date (as hereinafter defined), but in no event to exceed the maximum contract rate permitted under the Applicable Usury Law (as hereinafter defined). The interest rate shall change on each Interest Rate Change Date by adding to or subtracting from the Initial Interest Rate, as the case may be, the change, if any, between Initial Prime and Prime in effect on the applicable Interest Rate Change Date. As used in this Note, the following capitalized terms have the meaning set forth opposite them below: "Prime" shall mean the rate of interest publicly announced, from time to time, by Citibank, N.A., New York, New York ("Citibank"), as the corporate base rate of interest charged by Citibank to its most creditworthy commercial borrowers notwithstanding the fact that some borrowers of Citibank may borrow from Citibank at rates of less than such announced Prime rate; and "Interest Rate Change Date" means (a) the first business day of Citibank, N.A., in New York, New York, during the calendar month following the date of the initial advance of the loan evidenced by this Note and (b) the first business day of Citibank, N.A., during each successive month thereafter. The principal sum of this Note shall be repaid in the manner set forth in the Loan Agreement (as defined below), the applicable provisions of which are incorporated herein by reference as if fully set forth herein. Payments of principal and/or interest shall, at the option of Holder, earn interest after they are due at a rate ("Overdue Rate") equal to (a) 2% per annum above the rate otherwise payable hereunder or (b) the maximum contract rate permitted under the Applicable Usury Law, whichever of (a) or (b) is lesser. Furthermore, in the event of the occurrence of an Event of Default (as the term "Event of Default" is defined in the Loan Agreement) the unpaid principal balance of this Note shall, at the option of Holder, accrue interest at the Overdue Rate. 29 This Note is executed pursuant to that certain Amendment No. 13 to Amended and Restated Loan and Security Agreement of even date herewith between Maker and Lender (such Amended and Restated Loan and Security Agreement, as amended, the "Loan Agreement"). All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement, the applicable provisions of which are incorporated herein by reference. All payments made under this Note shall be applied first against amounts due hereunder or under the Loan Agreement, other than principal and interest; second, against interest then due under this Note; and third, against the principal of this Note. In the event any installment of principal and/or interest required to be made in connection with the indebtedness evidenced hereby is not paid when due and, except in the case of the final installment, for which no grace period is allowed, such default continues for five days after notice thereof to Maker or an Event of Default occurs, Holder may, at its option, without notice or demand, declare immediately due and payable the entire unpaid principal balance hereof, all accrued and unpaid interest thereon, and all other charges owing in connection with the loan evidenced hereby. The contracted for rate of interest of the loan contemplated hereby, without limitation, shall consist of the following: (i) the interest rate, calculated and applied to the principal balance of this Note in accordance with the provisions of this Note; (ii) Overdue Rate, calculated and applied to the amounts due under this Note in accordance with the provisions hereof; (iii) Mortgage Loan Commitment Fee as to the Ida Building Addition Acquisition Advance and all Ida Building Addition Renovation Advances, as defined in the Loan Agreement; (iv) the Ida Building Addition Incentive Fee (as defined in the Loan Agreement); and (v) all Additional Sums (as hereinafter defined), if any. Maker agrees to pay an effective contracted for rate of interest which is the sum of the above referenced elements. All fees, charges, goods, things in action or any other sums or things of value (other than amounts described in the immediately previous paragraph), paid or payable by Maker (collectively, the "Additional Sums"), whether pursuant to this Note, the Loan Agreement, the other Documents or any other documents or instruments in any way pertaining to this lending transaction, or otherwise with respect to this lending transaction, that under any applicable law may be deemed to be interest with respect to this lending transaction, for the purpose of any applicable law that may limit the maximum amount of interest to be charged with respect to this lending transaction, shall be payable by Maker as, and shall be deemed to be, additional interest, and for such purposes only, the agreed upon and "contracted for rate of interest" of this lending transaction shall be deemed to be increased by the rate of interest resulting from the Additional Sums. This Note is not prepayable in whole or in part, except as specifically provided in the Loan Agreement. In the event that Holder institutes legal proceedings to enforce this Note and Holder is the prevailing party in such proceeding, Maker agrees to pay Holder, in addition to any indebtedness due and unpaid, all costs and expenses of such proceedings, including, without limitation, attorneys' fees. -2- 30 Holder shall not by any act or omission or commission be deemed to waive any of its rights or remedies hereunder unless such waiver be in writing and signed by an authorized officer of Holder and then only to the extent specifically set forth therein; a waiver on one occasion shall not be construed as continuing or as a bar to or waiver of such right or remedy on any other occasion. All remedies conferred upon Holder by this Note or any other instrument or agreement connected herewith or related hereto shall be cumulative and none is exclusive and such remedies may be exercised concurrently or consecutively at Holder's option. Every person or entity at any time liable for the payment of the indebtedness evidenced hereby waives: presentment for payment, protest and demand; notice of protest, demand, dishonor and nonpayment of this Note; and trial by jury in any litigation arising out of, relating to or connected with this Note or any instrument given as security herefor. Every such person or entity further consents that Holder may renew or extend the time of payment of any part or the whole of the indebtedness at any time and from time to time at the request of any other person or entity liable therefor. Any such renewals or extensions may be made without notice to any person or entity liable for the payment of the indebtedness evidenced hereby. This Note is given and accepted as evidence of indebtedness only and not in payment or satisfaction of any indebtedness or obligation. Time is of the essence with respect to all of Maker's obligations and agreements under this Note. This Note and all of the provisions, conditions, promises and covenants hereof shall be binding in accordance with the terms hereof upon Maker, its successors and assigns, provided nothing herein shall be deemed consent to any assignment restricted or prohibited by the terms of the Loan Agreement. If more than one person or other entity has executed this Note as Maker, the obligations of such persons and entities shall be joint and several. This Note has been executed and delivered in Phoenix, Arizona, and the obligations of Maker hereunder shall be performed in Phoenix, Arizona. THIS NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ARIZONA AND, TO THE EXTENT THEY PREEMPT THE LAWS OF SUCH STATE, THE LAWS OF THE UNITED STATES. Maker (a) hereby irrevocably submits itself to the process, jurisdiction and venue of the courts of the State of Arizona, Maricopa County, and to the process, jurisdiction and venue of the United States District Court for Arizona, for the purposes of suit, action or other proceedings arising out of or relating to this Note or the subject matter hereof brought by Holder and (b) without limiting the generality of the foregoing, hereby waives and agrees not to assert by way of motion, defense or otherwise in any such suit, action or proceeding any claim that Maker is not personally subject to the jurisdiction of the above-named courts, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. It is the intent of the parties to comply with the usury law ("Applicable Usury Law") applicable pursuant to the terms of the preceding paragraph or such other usury law which is applicable if the law chosen by the parties is not. Accordingly, it is agreed that notwithstanding any provisions to the contrary in this Note, or in any of the documents securing payment hereof or otherwise relating hereto, in no event shall this Note or such documents -3- 31 require the payment or permit the collection of interest in excess of the maximum contract rate permitted by the Applicable Usury Law. In the event (a) any such excess of interest otherwise would be contracted for, charged or received from Maker or otherwise in connection with the loan evidenced hereby, or (b) the maturity of the indebtedness evidenced by this Note is accelerated in whole or in part, or (c) all or part of the principal or interest of this Note shall be prepaid, so that under any of such circumstance the amount of interest contracted for, shared or received in connection with the loan evidenced hereby, would exceed the maximum contract rate permitted by the Applicable Usury Law, then in any such event (1) the provisions of this paragraph shall govern and control, (2) neither Maker nor any other person or entity now or hereafter liable for the payment hereof will be obligated to pay the amount of such interest to the extent that it is in excess of the maximum contract rate permitted by the Applicable Usury Law, (3) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal amount hereof or refunded to Maker, at Holder's option, and (4) the effective rate of interest will be automatically reduced to the maximum amount of interest permitted by the Applicable Usury Law. It is further agreed, without limiting the generality of the foregoing, that to the extent permitted by the Applicable Usury Law: (x) all calculations of interest which are made for the purpose of determining whether such rate would exceed the maximum contract rate permitted by the Applicable Usury Law shall be made by amortizing, prorating, allocating and spreading during the period of the full stated term of the loan evidenced hereby, all interest at any time contracted for, charged or received from Maker or otherwise in connection with such loan; and (y) in the event that the effective rate of interest on the loan should at any time exceed the maximum contract rate allowed under the Applicable Usury Law, such excess interest that would otherwise have been collected had there been no ceiling imposed by the Applicable Usury Law shall be paid to Holder from time to time, if and when the effective interest rate on the loan otherwise falls below the maximum amount permitted by the Applicable Usury Law, to the extent that interest paid to the date of calculation does not exceed the maximum contract rate permitted by the Applicable Usury Law, until the entire amount of interest which would have otherwise been collected had there been no ceiling imposed by the Applicable Usury Law has been paid in full. Maker further agrees that should the maximum contract rate permitted by the Applicable Usury Law be increased at any time hereafter because of a change in the law, then to the extent not prohibited by the Applicable Usury Law, such increases shall apply to all indebtedness evidenced hereby regardless of when incurred; but, again to the extent not prohibited by the Applicable Usury Law, should the maximum contract rate permitted by the Applicable Usury Law be decreased because of a change in the law, such decreases shall not apply to the indebtedness evidenced hereby regardless of when incurred. In the event of any conflict or inconsistency between the provisions of this Note and the provisions of the Loan Agreement, the provisions of the Loan Agreement shall control. PREFERRED EQUITIES CORPORATION, a Nevada corporation "Maker" By:_____ Donald R. Middleton, Vice President Federal Taxpayer Identification -4- 32 Number: 88-0106662 Address: 4310 Paradise Road Las Vegas, Nevada 89109 Attn: President -5- 33 [WINNICK ADDITION] PROMISSORY NOTE U.S. $2,100,000.00 December 13, 1995 Phoenix, Arizona FOR VALUE RECEIVED, the undersigned PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Maker"), promises to pay to FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender"), or order, at such place as the holder of this Note ("Holder") may from time to time designate in writing, in lawful money of the United States of America, the principal sum of up to TWO MILLION ONE HUNDRED THOUSAND AND NO/100 DOLLARS (U.S. $2,100,000.00), or so much thereof as has been disbursed and not repaid, together with interest on the unpaid principal balance from time to time outstanding from the date hereof until paid, as more fully provided for below. Interest due under this Note shall (a) accrue daily on the basis of the actual number of days in the computation period, (b) be calculated on the basis of a year consisting of 360 days, and (c) be payable monthly in arrears on the later of (i) ten (10) days after Lender mails an invoice or statement therefor to Maker or (ii) the due date set forth in said invoice or statement. Interest shall accrue initially at an annual interest rate ("Initial Interest Rate") equal to Prime (as hereinafter defined) in effect on the date of the initial advance of the loan evidenced by this Note ("Initial Prime") plus 2-1/4% per annum, subject to adjustment on each Interest Rate Change Date (as hereinafter defined), but in no event to exceed the maximum contract rate permitted under the Applicable Usury Law (as hereinafter defined). The interest rate shall change on each Interest Rate Change Date by adding to or subtracting from the Initial Interest Rate, as the case may be, the change, if any, between Initial Prime and Prime in effect on the applicable Interest Rate Change Date. As used in this Note, the following capitalized terms have the meaning set forth opposite them below: "Prime" shall mean the rate of interest publicly announced, from time to time, by Citibank, N.A., New York, New York ("Citibank"), as the corporate base rate of interest charged by Citibank to its most creditworthy commercial borrowers notwithstanding the fact that some borrowers of Citibank may borrow from Citibank at rates of less than such announced Prime rate; and "Interest Rate Change Date" means (a) the first business day of Citibank, N.A., in New York, New York, during the calendar month following the date of the initial advance of the loan evidenced by this Note and (b) the first business day of Citibank, N.A., during each successive month thereafter. The principal sum of this Note shall be repaid in the manner set forth in the Loan Agreement (as defined below), the applicable provisions of which are incorporated herein by reference as if fully set forth herein. Payments of principal and/or interest shall, at the option of Holder, earn interest after they are due at a rate ("Overdue Rate") equal to (a) 2% per annum above the rate otherwise payable hereunder or (b) the maximum contract rate permitted under the Applicable Usury Law, whichever of (a) or (b) is lesser. Furthermore, in the event of the occurrence of an Event of Default (as the term "Event of Default" is defined in the Loan Agreement) the unpaid principal balance of this Note shall, at the option of Holder, accrue interest at the Overdue Rate. 34 This Note is executed pursuant to that certain Amendment No. 13 to Amended and Restated Loan and Security Agreement of even date herewith between Maker and Lender (such Amended and Restated Loan and Security Agreement, as amended, the "Loan Agreement"). All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement, the applicable provisions of which are incorporated herein by reference. All payments made under this Note shall be applied first against amounts due hereunder or under the Loan Agreement, other than principal and interest; second, against interest then due under this Note; and third, against the principal of this Note. In the event any installment of principal and/or interest required to be made in connection with the indebtedness evidenced hereby is not paid when due and, except in the case of the final installment, for which no grace period is allowed, such default continues for five days after notice thereof to Maker or an Event of Default occurs, Holder may, at its option, without notice or demand, declare immediately due and payable the entire unpaid principal balance hereof, all accrued and unpaid interest thereon, and all other charges owing in connection with the loan evidenced hereby. The contracted for rate of interest of the loan contemplated hereby, without limitation, shall consist of the following: (i) the interest rate, calculated and applied to the principal balance of this Note in accordance with the provisions of this Note; (ii) Overdue Rate, calculated and applied to the amounts due under this Note in accordance with the provisions hereof; (iii) Mortgage Loan Commitment Fee as to the Winnick Building Addition Acquisition Advance and all Winnick Building Addition Renovation Advances, as defined in the Loan Agreement; (iv) the Winnick Building Addition Incentive Fee (as defined in the Loan Agreement); and (v) all Additional Sums (as hereinafter defined), if any. Maker agrees to pay an effective contracted for rate of interest which is the sum of the above referenced elements. All fees, charges, goods, things in action or any other sums or things of value (other than amounts described in the immediately previous paragraph), paid or payable by Maker (collectively, the "Additional Sums"), whether pursuant to this Note, the Loan Agreement, the other Documents or any other documents or instruments in any way pertaining to this lending transaction, or otherwise with respect to this lending transaction, that under any applicable law may be deemed to be interest with respect to this lending transaction, for the purpose of any applicable law that may limit the maximum amount of interest to be charged with respect to this lending transaction, shall be payable by Maker as, and shall be deemed to be, additional interest, and for such purposes only, the agreed upon and "contracted for rate of interest" of this lending transaction shall be deemed to be increased by the rate of interest resulting from the Additional Sums. This Note is not prepayable in whole or in part, except as specifically provided in the Loan Agreement. In the event that Holder institutes legal proceedings to enforce this Note and Holder is the prevailing party in such proceeding, Maker agrees to pay Holder, in addition to any indebtedness due and unpaid, all costs and expenses of such proceedings, including, without limitation, attorneys' fees. -2- 35 Holder shall not by any act or omission or commission be deemed to waive any of its rights or remedies hereunder unless such waiver be in writing and signed by an authorized officer of Holder and then only to the extent specifically set forth therein; a waiver on one occasion shall not be construed as continuing or as a bar to or waiver of such right or remedy on any other occasion. All remedies conferred upon Holder by this Note or any other instrument or agreement connected herewith or related hereto shall be cumulative and none is exclusive and such remedies may be exercised concurrently or consecutively at Holder's option. Every person or entity at any time liable for the payment of the indebtedness evidenced hereby waives: presentment for payment, protest and demand; notice of protest, demand, dishonor and nonpayment of this Note; and trial by jury in any litigation arising out of, relating to or connected with this Note or any instrument given as security herefor. Every such person or entity further consents that Holder may renew or extend the time of payment of any part or the whole of the indebtedness at any time and from time to time at the request of any other person or entity liable therefor. Any such renewals or extensions may be made without notice to any person or entity liable for the payment of the indebtedness evidenced hereby. This Note is given and accepted as evidence of indebtedness only and not in payment or satisfaction of any indebtedness or obligation. Time is of the essence with respect to all of Maker's obligations and agreements under this Note. This Note and all of the provisions, conditions, promises and covenants hereof shall be binding in accordance with the terms hereof upon Maker, its successors and assigns, provided nothing herein shall be deemed consent to any assignment restricted or prohibited by the terms of the Loan Agreement. If more than one person or other entity has executed this Note as Maker, the obligations of such persons and entities shall be joint and several. This Note has been executed and delivered in Phoenix, Arizona, and the obligations of Maker hereunder shall be performed in Phoenix, Arizona. THIS NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ARIZONA AND, TO THE EXTENT THEY PREEMPT THE LAWS OF SUCH STATE, THE LAWS OF THE UNITED STATES. Maker (a) hereby irrevocably submits itself to the process, jurisdiction and venue of the courts of the State of Arizona, Maricopa County, and to the process, jurisdiction and venue of the United States District Court for Arizona, for the purposes of suit, action or other proceedings arising out of or relating to this Note or the subject matter hereof brought by Holder and (b) without limiting the generality of the foregoing, hereby waives and agrees not to assert by way of motion, defense or otherwise in any such suit, action or proceeding any claim that Maker is not personally subject to the jurisdiction of the above-named courts, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. It is the intent of the parties to comply with the usury law ("Applicable Usury Law") applicable pursuant to the terms of the preceding paragraph or such other usury law which is applicable if the law chosen by the parties is not. Accordingly, it is agreed that notwithstanding any provisions to the contrary in this Note, or in any of the documents securing payment hereof or otherwise relating hereto, in no event shall this Note or such documents -3- 36 require the payment or permit the collection of interest in excess of the maximum contract rate permitted by the Applicable Usury Law. In the event (a) any such excess of interest otherwise would be contracted for, charged or received from Maker or otherwise in connection with the loan evidenced hereby, or (b) the maturity of the indebtedness evidenced by this Note is accelerated in whole or in part, or (c) all or part of the principal or interest of this Note shall be prepaid, so that under any of such circumstance the amount of interest contracted for, shared or received in connection with the loan evidenced hereby, would exceed the maximum contract rate permitted by the Applicable Usury Law, then in any such event (1) the provisions of this paragraph shall govern and control, (2) neither Maker nor any other person or entity now or hereafter liable for the payment hereof will be obligated to pay the amount of such interest to the extent that it is in excess of the maximum contract rate permitted by the Applicable Usury Law, (3) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal amount hereof or refunded to Maker, at Holder's option, and (4) the effective rate of interest will be automatically reduced to the maximum amount of interest permitted by the Applicable Usury Law. It is further agreed, without limiting the generality of the foregoing, that to the extent permitted by the Applicable Usury Law: (x) all calculations of interest which are made for the purpose of determining whether such rate would exceed the maximum contract rate permitted by the Applicable Usury Law shall be made by amortizing, prorating, allocating and spreading during the period of the full stated term of the loan evidenced hereby, all interest at any time contracted for, charged or received from Maker or otherwise in connection with such loan; and (y) in the event that the effective rate of interest on the loan should at any time exceed the maximum contract rate allowed under the Applicable Usury Law, such excess interest that would otherwise have been collected had there been no ceiling imposed by the Applicable Usury Law shall be paid to Holder from time to time, if and when the effective interest rate on the loan otherwise falls below the maximum amount permitted by the Applicable Usury Law, to the extent that interest paid to the date of calculation does not exceed the maximum contract rate permitted by the Applicable Usury Law, until the entire amount of interest which would have otherwise been collected had there been no ceiling imposed by the Applicable Usury Law has been paid in full. Maker further agrees that should the maximum contract rate permitted by the Applicable Usury Law be increased at any time hereafter because of a change in the law, then to the extent not prohibited by the Applicable Usury Law, such increases shall apply to all indebtedness evidenced hereby regardless of when incurred; but, again to the extent not prohibited by the Applicable Usury Law, should the maximum contract rate permitted by the Applicable Usury Law be decreased because of a change in the law, such decreases shall not apply to the indebtedness evidenced hereby regardless of when incurred. In the event of any conflict or inconsistency between the provisions of this Note and the provisions of the Loan Agreement, the provisions of the Loan Agreement shall control. PREFERRED EQUITIES CORPORATION, a Nevada corporation "Maker" By:____ Donald R. Middleton, Vice President Federal Taxpayer Identification -4- 37 Number: 88-0106662 Address: 4310 Paradise Road Las Vegas, Nevada 89109 Attn: President -5- EX-10.91 8 PURCHASE AND SALE AGREEMENT 1 EXHIBIT 10.91 PURCHASE AND SALE AGREEMENT THIS AGREEMENT ("Agreement") is made and entered into on this ____ day of December, 1995, by and between OVERLOOK LODGE LIMITED LIABILITY COMPANY, a Colorado limited liability company ("Seller"), and PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Purchaser"). In consideration of the mutual covenants and promises herein set forth, the parties agree as follows: 1. PURCHASE AND SALE. Seller agrees to sell to Purchaser and Purchaser agrees to purchase from Seller that certain parcel of real property (the "Land") commonly known as Overlook Lodge located at 1000 Highpoint Drive, Steamboat Springs, Routt County, Colorado, as more particularly described on Exhibit "A" attached to this Agreement, together with all of Seller's right, title and interest in and to all of the following property and rights: (a) All improvements located on the Land, including buildings, structures and other facilities (the "Improvements"). The Land and the Improvements are hereinafter collectively referred to as the "Realty"; (b) All fixtures, equipment, furniture and items of personal property used in the operation, repair and maintenance of the Realty, and situated on the Realty (the "Personalty"); (c) All trademarks, tradenames including but not limited to "Overlook Lodge", licenses, leases, permits, franchise agreements, authorizations and approvals, if any, pertaining to ownership and/or operation of the Realty which are separable and transferable, including but not limited to the Contracts, Insurance Policies, Licenses, Plans and Studies, as defined in Section 6. hereof; and (d) All strips and gores of land lying adjacent to the Realty (but which are not otherwise part of the Property, as hereafter defined), together with all easements, privileges, rights-of-way, riparian and 1 2 other water rights, and appurtenances pertaining to or accruing to the benefit of the Realty that are owned or controlled by Seller, if any. The Realty and all of the other property and rights described in this Section 1. and Section 6. to the extent Contracts acceptable to Purchaser are assigned to Purchaser pursuant to 14(f) hereof are hereinafter collectively called the "Property". 2. PURCHASE PRICE. The purchase price to be paid by Purchaser to Seller for the Property is Three Million Two Hundred Fifty Thousand and No/100 ($3,250,000.00) Dollars (the "Purchase Price"). 3. TERMS OF PAYMENT. The Purchase Price shall be paid to Seller as follows: (a) $25,000 deposit as part down payment (hereinafter referred to, together with any additional down payments and any interest earned thereon, as the "Earnest Money"), delivered to the Escrow Agent, (defined in Section 4.), on November 21, 1995; (b) An additional $75,000 in Earnest Money, payable to the Escrow Agent upon execution of this Agreement; and (c) The balance of the Purchase Price will be payable in cash to Seller at Closing (defined in Section 4.). 4. CLOSING DATE. The sale of the Property from Seller to Purchaser will be closed (the "Closing") through an escrow (the "Escrow"), in accordance with customary escrow closings for Routt County, Colorado, established with Eagle County Title Corporation, 953 South Frontage Road West, Suite 100, Vail, Colorado 81657, Attn: Norman Larkins ("Escrow Agent"). The Escrow Agent shall deposit the Earnest Money in an interest-bearing account with a federally insured Colorado commercial bank (the "Earnest Money Deposit") until the expiration of the Inspection Period at which time the Escrow Agent shall either (i) 2 3 deliver the Earnest Money to Seller if Purchaser does not terminate this Agreement or (ii) return the Earnest Money to Purchaser if Purchaser elects to terminate this Agreement pursuant to Section 7. If Purchaser elects not to terminate this Agreement on or before the expiration of the Inspection Period, then prior to such delivery of the Earnest Money Deposit to Seller, the Escrow Agent shall record in the Routt County Colorado real property records, pursuant to an escrow instruction executed contemporaneously herewith, a memorandum of this Agreement against the Land (the "Lien"), and thereafter, other than for non-performance by Seller, the Earnest Money Deposit shall be considered non-refundable, so long as Seller continues to be in compliance with all of its obligations under this Agreement. Purchaser shall provide Seller and Escrow Agent with written notice of the date of Closing (the "Closing Date") not later than thirty (30) calendar days prior to the Closing Date. If Purchaser does not terminate the Agreement and the Earnest Money is delivered to Seller, the Earnest Money will be credited against the Purchase Price at Closing. The Earnest Money to be credited against the Purchase Price will be increased by a per diem accrual of imputed interest on the Earnest Money calculated from the date of disbursement to Seller to and including the Closing Date, by dividing the annual rate of interest paid by the depository holding the Earnest Money Deposit on the date of disbursement to Seller by 360, times the number of days from the Earnest Money delivery date to Seller to and including the Closing Date. 3 4 The Closing Date shall occur on or before April 30, 1996 unless extended as provided herein; however, in no event shall the Closing occur prior to April 15, 1996 or later than September 30, 1996 (the "Outside Closing Date"). 4A. EXTENDED CLOSING DATE. Purchaser shall have five (5) options to extend the Closing Date from the last business day of the month commencing April 30, 1996 (each hereinafter referred to respectively as a "Monthly Extension") to the last day of the next following month; however, in no event shall the closing occur later than the Outside Closing Date. Each Monthly Extension shall be exercised by delivery to the Seller of $25,000.00 paid by check, on or before the last day of the month for the ensuing monthly extension. Monthly Extension payments shall not be credited against the Purchase Price and shall be a payment made directly to Seller in consideration for the extension of the Closing Date. In the event the Closing occurs after April 30, 1996, on a Closing Date other than the last day of a given month, then the Monthly Extension payment for said month will be prorated as of the Closing Date. 5. TITLE. Within ten (10) days following execution of this Agreement by both parties, Seller, at Seller's expense, shall deliver to Purchaser a commitment (the "Commitment") for an owner's ALTA Form B Marketability title insurance policy from Chicago Title Insurance Company (the "Title Policy"). The Commitment is to be ordered through Commonwealth Land Title Company of Dallas, 717 North Harwood Street, Suite 2610, Maxus Energy Tower, Dallas, TX 75201, Attn: Tim Hardin ("Title Company") who shall utilize Escrow Agent for the abstract/title work, in favor of Purchaser in the amount of the Purchase Price. The Commitment shall be endorsed and updated at Seller's expense within ten (10) days before Closing. The Title Policy will be delivered to Purchaser at Seller's expense at Closing. The Commitment, any endorsement or update thereof, and the Title Policy shall show Seller to be vested with good, marketable and 4 5 insurable fee simple title to the Realty, free and clear of all liens, encumbrances and other matters, except only the following (the "Permitted Exceptions"): (a) Ad valorem real estate taxes for the year of Closing, provided same are not then due and payable, and subsequent years; (b) All applicable zoning ordinances and regulations, none of which shall prohibit or otherwise interfere with all uses presently being made of the Property and/or Purchaser's intended use of the Property as an interval ownership (timeshare) resort (the "Intended Use"); (c) Those matters acceptable to Purchaser as determined and shown on Exhibit "B", to be attached prior to the expiration of the Inspection Period; and (d) Restrictions or matters appearing on the plat or otherwise common to the subdivision of which the Property might be a part, none of which shall prohibit or otherwise interfere with all uses presently being made of the Property and/or Purchaser's Intended Use of the Property. Title shall be deemed good, marketable and insurable only if the Commitment allows for issuance of the Title Policy effective as of Closing Date at minimum promulgated risk rate premiums, without any guarantees and without any exceptions, standard or otherwise, other than the Permitted Exceptions. Purchaser shall have until the expiration of thirty (30) days (the "Title Review Period") from receipt of the Commitment and hard copies of all items noted as exceptions therein, within which to examine same. Purchaser, at its expense, shall order a survey (the "Survey") immediately upon execution of this Agreement and Purchaser shall have until the expiration of thirty (30) days (the "Survey Review Period") from receipt of the Survey to examine same; however, in no event shall the Title Review Period or the Survey Review Period extend beyond the Inspection Period. If Purchaser finds title or the data shown on the Survey to be defective, Purchaser 5 6 shall, no later than the expiration of the Title Review Period or Survey Review Period, notify Seller in writing specifying any such defect(s) (the "Defects") (which Defects shall also include any UCC-1 Financing Statements filed against any of the Personalty with the Colorado Secretary of State); provided that if Purchaser fails to give Seller written notice of Defects before the expiration of the Title Review Period or the Survey Review Period, then any such Defects shown in the Commitment or Survey shall be described on Exhibit "B" and shall be deemed to be waived as title objections to Closing. Purchaser may raise as additional objections, however, any matters first shown by the endorsement of the Commitment. If Purchaser has given Seller timely written notice of Defects and the Defects cause title to the Property to be other than as represented in this Agreement, Seller shall use its best efforts to cause such Defects to be cured by the Closing Date, but shall be under no obligation to pay any sum of money to obtain a cure, except for the removal by payment, bonding, or otherwise of any lien against the Property capable of removal by the payment of money or bonding. In the event that Seller is unable or not obligated hereunder to cure a Defect, Seller shall give Purchaser written notice of any such Defect(s) and Purchaser, within ten (10) days of receipt of such written notice shall have the option of either: (i) waiving such Defect(s); or (ii) cancelling this Agreement, in which event the Escrow Agent shall return the Earnest Money Deposit to Purchaser. In the event that Seller does not eliminate any Defects not waived by Purchaser pursuant to the preceding sentence as of the Closing Date, Purchaser shall have the option of either: (i) 6 7 Closing and accepting the title "as is," and deducting from the Purchase Price the amount of any lien or encumbrance which can be satisfied by the payment of money; or (ii) cancelling this Agreement in which event the Escrow Agent shall return the Earnest Money Deposit to Purchaser, whereupon both parties shall be released from all further obligations under this Agreement, except only for those obligations which are intended to survive Closing and/or any earlier termination of this Agreement, unless such Defects were caused by Seller's willful act or willful omission subsequent to the execution hereof, in which event Seller shall remain liable to Purchaser for damages caused thereby. Seller shall execute appropriate documents as required for "gap coverage" by the title insurer. 6. DELIVERIES. Within ten (10) days following execution of this Agreement by both parties (and thereafter, as applicable), Seller shall deliver to Purchaser true, correct and complete copies of: (b) All contracts, franchise agreements, pre-paid reservation deposits or other reservation agreements, leases, tenancies, arrangements, licenses, concessions, easements, service arrangements, employment contracts or agreements, brokerage agreements, and any and all other contracts or agreements, either recorded or unrecorded, written or oral, affecting the Property or any portion thereof, or the use thereof (the "Contracts"), a true, correct and complete list of which Contracts shall be attached hereto as Exhibit "C", and all new Contracts hereafter entered into by Seller as, and solely to the extent, permitted hereby; (c) All insurance policies presently in effect relating to the Property or any portion thereof or the use thereof, including but not limited to fire and extended coverage, liability insurance, workmen's compensation insurance and flood insurance (the "Insurance Policies"); 7 8 (d) All certificates of occupancy, access permits, liquor licenses, food and beverage licenses, permits, licenses, authorizations or approvals (other than those which are no longer in effect) issued by any governmental body or agency having jurisdiction over the Property, related to the ownership and/or operation of the Property (the "Licenses"); (e) The bill or bills issued for the years 1993, 1994 and 1995 when available for real estate and personal property taxes and any subsequently issued notices pertaining to real estate or personal property taxes or assessments applicable to the Property; (f) All engineering and architectural plans and as-built plans, specifications, and drawings relating to the Property (the "Plans") and all engineering and environmental studies or audits relating to the Property ("Studies"), which are within the control or possession of Seller. Furthermore, following execution of this Agreement by both parties (and thereafter, as applicable) Seller shall make available to Purchaser during normal business hours at the offices of Seller on the Realty, all documents, books and records, and other relevant information relating to the ownership and operation of the Property, including but not limited to: (aa) The bill or bills issued in the years 1993, 1994, and 1995 to date for utility usage at the Property; and (bb) Operating and financial statements for the Property, including but not limited to, profit and loss statements, balance sheets, and payroll records for the years 1993, 1994 and 1995 year to date. 7. CONDITIONS PRECEDENT. The obligation of Purchaser to proceed to Closing shall be subject to the following conditions precedent to Closing: (a) Purchaser shall have until March 1, 1996 (the "Inspection Period") to examine the Contracts, the Insurance Policies, the Licenses, the Plans and the Studies to decide whether they are satisfactory to Purchaser and to make such physical, zoning, land use, environmental, and other examinations, inspections and investigations of the Property or the use or operation thereof which Purchaser, in Purchaser's sole discretion, may determine to make. In the event Purchaser is not satisfied with any of the foregoing, determined in Purchaser's sole and absolute discretion for any or no reason, Purchaser may cancel this transaction as hereinafter provided. (b) Purchaser shall have until the expiration of the 8 9 Inspection Period to make a physical inspection(s) of the Property by architects, engineers, and/or environmental specialists, and/or other agents, and/or employees of Purchaser's choice, for the purpose of determining the condition and suitability of the Property. In the event that, based upon such inspection, Purchaser is not satisfied with the condition of the Property, determined in Purchaser's sole discretion for any or no reason, Purchaser may cancel this transaction as hereinafter provided. (c) As of the Closing, there shall be no leases, contracts, arrangements or any other agreements of any nature whatsoever, whether oral or written, other than the Contracts that are acceptable to Purchaser, affecting the Property, that cannot be cancelled by Purchaser upon not more than thirty (30) days' notice and without payment of premium or charge therefor. (d) As of the Closing, there shall be no advance reservations for post-Closing guest room occupancy and all guest rooms at the Property shall be free and clear of any and all occupants. (e) As of the Closing, all of Seller's employees employed at the Property shall be re-assigned or terminated, and no such employees shall have any claim whatsoever against Purchaser and/or the Property for back wages, withholding taxes or any other matter. (f) At all times during the term of this Agreement and as of Closing, all of the representations and warranties by Seller contained in this Agreement shall be true and correct in all material respects. In the event any of the foregoing conditions precedent are not fulfilled as of the Closing Date (or earlier date as specified in subsection (a) and (b) above where written notice of cancellation must be given on or before expiration of the Inspection Period), then Purchaser shall have the option of either: (i) waiving the condition and closing "as is", without reduction in the Purchase Price or claim against Seller therefor, or (ii) cancelling this Agreement by written notice to Seller given by not later than the Closing Date, in which event the Seller shall return the Earnest Money Deposit to Purchaser, 9 10 whereupon both parties shall be released from all further obligations under this Agreement, except those obligations which are specifically stated to survive termination or Closing of this transaction. 8. SELLER'S REPRESENTATIONS. As a specific inducement for Purchaser to enter into this Agreement, Seller represents and warrants to Purchaser and agrees with Purchaser as follows: (a) Seller has not entered into any pre-paid or other reservation agreements, leases, tenancies, occupancy agreements, contracts, arrangements, licenses, concessions, easements, or other agreements, including, without limitation, service arrangements and employment agreements, either recorded or unrecorded, written or oral, affecting the Property, or any portion thereof or the use thereof, other than the Contracts and the Insurance Policies. Each of the Contracts: (i) is in good standing and not in default or would be in default subject to the giving of notice or passage of time or both, (ii) fully assignable to Purchaser without any change in the terms and provisions thereof, and (iii) except as expressly provided to the contrary on Exhibit "C", may be cancelled by Purchaser upon not more than thirty (30) days notice without payment of premium or penalty therefor. No tenant occupying space under a lease or any other agreement (i) has prepaid any rent or any other sums, (ii) is holding over contrary to the wishes of Seller, (iii) is entitled to the construction of any tenant improvements or common area improvements, (iv) has any right to set off against any amount of rent due or to become due, and (v) has no understanding or agreement with Seller regarding occupancy or any other usage of the Property except as expressly shown on Exhibit "C". Seller shall not modify any of the Contracts, or the Insurance Policies nor shall Seller cancel or permit the cancellation of any of the Insurance Policies, and Seller shall not enter into any new Contract or other agreement affecting the Property, or any portion thereof or the use thereof, other than for month to month tenancies cancelable at will and Property room reservations for occupancy to the Closing Date, without the prior written consent of Purchaser. (b) To the best of Seller's knowledge, Seller has received no written notice of: (i) any pending improvement liens to be made by any governmental authority with respect to the Property; (ii) any violations of building codes and/or zoning ordinances or other governmental regulations with respect to the Property; (iii) any 10 11 pending or threatened lawsuits with respect to the Property; (iv) any pending or threatened condemnation proceedings with respect to the Property; or (v) any defects or inadequacies in the Property which would adversely affect the insurability of the Property or increase the cost thereof. (c) To the best of Seller's knowledge, Seller has received no written notice of any fact or condition which would result in the termination or impairment of access to the Property or the discontinuation of necessary sewer, water, electric, gas, telephone or other utilities or services to the Property. (d) To the best of Seller's knowledge, all of the structural elements, mechanical systems, utility systems and roofs of the Property, and all of the Personalty included in this transaction, are in good working order as of the Closing Date and as of the Closing Date are not in need of repair or replacement, ordinary wear and tear and routine maintenance excepted. This Seller representation and warranty shall terminate at Closing. (e) During the period between the date of this Agreement and Closing, Seller shall continue to operate and manage the Property in a prudent, businesslike and responsible manner consistent with its operation and management prior to the date of this Agreement, except for the restrictions herein on advance reservations, and keep same clear of accumulations of trash, debris or overgrowth of vegetation. Seller shall: (i) continue to maintain all of the present services to the Property, (ii) make all repairs and replacements in the ordinary course of business to the Property, (iii) not remove any of the Personalty from the Property except in replacement of same, and (iv) maintain the Insurance Policies in full force and effect. In addition, Seller shall make all payments due prior to Closing in connection with the Property, including all utility payments and payments on any other obligations affecting the Property. Any alterations, installations, decorations, repairs (other than emergencies) and other work to be performed by Seller prior to Closing, must be first approved by Purchaser. (f) Except only for those Defects which are to be satisfied and released at Closing, Seller is vested with good, marketable and insurable fee simple title to the Realty subject only to the Lien, if and when recorded and the Permitted Exceptions as provided herein; and Seller is vested with good and marketable title to all of the Personalty free of all financing and other liens or encumbrances (except only for those which are to be satisfied and released at Closing). 11 12 (g) Seller shall comply prior to Closing with all laws, rules, regulations, and ordinances of all governmental authorities having jurisdiction over the Property. Seller shall be responsible for and shall promptly pay all amounts owed for labor, materials supplied, services rendered and/or any other bills or amounts related to Seller and Seller's ownership and/or operation of the Property prior to Closing. Prior to Closing Seller shall cooperate with Purchaser in obtaining, or filing to obtain, any and all licenses and governmental approvals deemed necessary by Purchaser for Purchaser's Intended Use of the Property, including executing any and all applications as may be required or necessary. (h) Prior to Closing, no portion of the Property nor any interest therein, beneficial or otherwise, shall, except for any existing debt that is to be repaid at Closing, be alienated, encumbered (other than by the Lien, if and when recorded), conveyed or otherwise transferred. In addition, Seller shall not initiate any negotiations for the potential sale of the Property with any third party during the term hereof. (i) Seller is a limited liability company duly formed and validly existing under the laws of the State of Colorado. The execution, delivery and performance of this Agreement by Seller have been duly authorized and no consent of any other person or entity to such execution, delivery and performance is required to render this document a valid and binding instrument enforceable against Seller in accordance with its terms. Neither the execution of this Agreement or the consummation of the transactions contemplated hereby will: (i) result in a breach of, or default under, any agreement to which Seller is a party or by which the Property is bound, or (ii) violate any restrictions to which Seller is subject. (j) Seller is not a "foreign person" within the meaning of the United States tax laws and to which reference is made in Internal Revenue Code Section 1445(b)(2). (k) To the best of Seller's knowledge, without any independent investigation or inquiry, but excluding the review of a Phase I Environmental Assessment which may be supplied to Seller by and through Purchaser, there has not been and there is not now: (i) any Hazardous Substance (as hereinafter defined) present on the Realty, (ii) any present or past generation, recycling, reuse, sale, storage, handling, transport and/or disposal of any Hazardous Substance on the Realty, or (iii) any failure to comply with any applicable local, state or federal environmental laws, regulations, 12 13 ordinances or administrative or judicial orders relating to the generation, recycling, reuse, sale, storage, handling, transport and/or disposal of any Hazardous Substance. Seller has not received any notice from any governmental authority regarding the presence of any Hazardous Substance, any present or past generation, recycling, reuse, sale, storage, handling, transport and/or disposal of any Hazardous Substance or any failure to comply with any applicable local, state or federal environmental laws, regulations, ordinances or administrative or judicial orders relating to the generation, recycling, reuse, sale, storage, handling, transport and/or disposal of any Hazardous Substance. As used herein, the term "Hazardous Substance" means any substance or material defined or designated as a hazardous or toxic waste material or substance, or other similar term by any federal, state or local environmental statute, regulation or ordinance presently or hereinafter in effect, as such statute, regulation or ordinance may be amended from time to time. (l) Except as is disclosed on Exhibit "C", there will be no pre-paid reservation deposit agreements allowing for guest room occupancy later than April 15, 1996, leases or other occupancy agreements, either written or oral, which affect the Property and Seller will have exclusive possession of the Property as of the Closing Date. All representations and warranties made herein by Seller shall be continuing and shall be true and correct on and as of the Closing Date with the same force and effect as if made at that time, and all of such representations and warranties shall survive the Closing (except as to Section 8 (d) above which shall terminate at Closing, and except to the extent the party relying on such representation or warranty has knowledge or notice of a defect prior to the Closing but nevertheless elects to consummate the Closing); provided, however, that all representations and warranties (other than those expressed in the Closing Documents as defined in Section 14), to the extent not the basis of litigation instituted within six (6) months after the Closing (time being of the essence), shall automatically expire and be of no further force or effect. PURCHASER ACKNOWLEDGES AND AGREES THAT, EXCEPT AS SET FORTH IN SECTION 8 HEREOF AND THE SPECIAL WARRANTY DEED, THE BILL OF SALE AND OTHER CLOSING DOCUMENTS TO BE DELIVERED BY SELLER AT THE CLOSING, SELLER HAS NOT MADE, AND SELLER HEREBY SPECIFICALLY DISCLAIMS, ANY WARRANTY, GUARANTY OR REPRESENTATIONS, ORAL OR WRITTEN, PAST, PRESENT OR FUTURE, OF, AS TO, OR CONCERNING (i) THE NATURE AND CONDITION OF THE PROPERTY, 13 14 INCLUDING, WITHOUT LIMITATION, THE WATER, SOIL AND GEOLOGY, AND THE SUITABILITY THEREOF AND OF THE PROPERTY FOR ANY AND ALL ACTIVITIES AND USES WHICH PURCHASER MAY ELECT TO CONDUCT THEREON AND (ii) THE COMPLIANCE OF THE PROPERTY OR ITS OPERATION WITH ANY LAWS, ORDINANCES OR REGULATIONS OF ANY GOVERNMENT OR OTHER BODY. PURCHASER ACKNOWLEDGES THAT HAVING BEEN GIVEN THE OPPORTUNITY TO INSPECT THE PROPERTY, PURCHASER IS RELYING SOLELY ON ITS OWN INVESTIGATION OF THE PROPERTY AND NOT ON ANY INFORMATION PROVIDED OR TO BE PROVIDED BY SELLER EXCEPT TO THE EXTENT SET FORTH IN THIS AGREEMENT OR IN DOCUMENTS OR INFORMATION DELIVERED BY SELLER TO PURCHASER PURSUANT TO THIS AGREEMENT. EXCEPT AS OTHERWISE SET FORTH IN THIS AGREEMENT, PURCHASER FURTHER ACKNOWLEDGES THAT ANY INFORMATION PROVIDED AND TO BE PROVIDED WITH RESPECT TO THE PROPERTY WAS OBTAINED FROM A VARIETY OF SOURCES AND SELLER (i) HAS NOT MADE ANY INDEPENDENT INVESTIGATION OR VERIFICATION OF SUCH INFORMATION AND (ii) MAKES NO REPRESENTATIONS OR WARRANTIES AS TO THE ACCURACY OR COMPLETENESS OF SUCH INFORMATION EXCEPT TO THE EXTENT SET FORTH IN THIS AGREEMENT OR IN DOCUMENTS OR INFORMATION DELIVERED BY SELLER TO PURCHASER PURSUANT TO THIS AGREEMENT. SUBJECT TO SECTION 8 HEREOF, PURCHASER AGREES TO ACCEPT THE PROPERTY, AND ACKNOWLEDGES THAT THE SALE OF THE PROPERTY AS PROVIDED FOR HEREIN IS MADE BY SELLER, ON AN "AS IS, WHERE IS, AND WITH ALL FAULTS" BASIS. PURCHASER EXPRESSLY ACKNOWLEDGES THAT, EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES CONTAINED IN SECTION 8 HEREOF AND ANY WARRANTY OF TITLE CONTAINED IN THE SPECIAL WARRANTY DEED, BILL OF SALE OR OTHER CLOSING DOCUMENTS TO BE DELIVERED BY SELLER TO PURCHASER AT CLOSING, SELLER MAKES NO WARRANTY OR REPRESENTATION OF ANY KIND, ORAL OR WRITTEN, EXPRESS OR IMPLIED, OR ARISING BY OPERATION OF LAW, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTY OF CONDITION, HABITABILITY, MERCHANTABILITY OR FITNESS FOR A PARTICULAR USE OR PURPOSE, WITH RESPECT TO THE PROPERTY. FURTHER, EXCEPT AS SET FORTH IN SECTION 8 HEREOF, SELLER MAKES NO REPRESENTATION OR WARRANTY WITH RESPECT TO THE PRESENCE ON OR BENEATH THE PROPERTY (OR ANY PARCEL IN PROXIMITY THERETO) OF HAZARDOUS SUBSTANCES OR MATERIALS WHICH ARE CATEGORIZED AS HAZARDOUS OR TOXIC UNDER ANY LOCAL, STATE OR FEDERAL LAW, STATUTE, ORDINANCE, RULE OR REGULATION PERTAINING TO ENVIRONMENTAL OR SUBSTANCE REGULATION, CONTAMINATION, CLEANUP OR DISCLOSURE AND SHALL HAVE NO LIABILITY TO PURCHASER THEREFORE. BY ACCEPTANCE OF THIS AGREEMENT AND THE SPECIAL WARRANTY DEED TO BE DELIVERED BY SELLER AT THE CLOSING, PURCHASER ACKNOWLEDGES THAT PURCHASER'S OPPORTUNITY FOR 14 15 INSPECTION AND INVESTIGATION OF THE PROPERTY (AND OTHER PARCELS IN PROXIMITY THERETO) WILL BE ADEQUATE TO ENABLE PURCHASER TO MAKE PURCHASER'S OWN DETERMINATION WITH RESPECT TO THE PRESENCE ON OR BENEATH THE PROPERTY (AND OTHER PARCELS IN PROXIMITY THERETO) OF SUCH HAZARDOUS SUBSTANCES OR MATERIALS, AND EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, PURCHASER ACCEPTS THE RISK OF THE PRESENCE OF ANY SUCH SUBSTANCES OR MATERIALS. NOTHING CONTAINED HEREIN IS INTENDED TO (i) RELIEVE SELLER FROM ANY LIABILITY IT MAY HAVE TO PURCHASER OR TO THIRD PARTIES WITH RESPECT TO ENVIRONMENTAL MATTERS ARISING UNDER LOCAL, STATE, OR FEDERAL ENVIRONMENTAL LAW, STATUTE, RULE OR REGULATION OR (ii) IMPOSE UPON PURCHASER ANY IMPLIED INDEMNITY TO SELLER WITH RESPECT TO SUCH ENVIRONMENTAL MATTERS. IF DESIRED BY SELLER, THE LANGUAGE CONTAINED IN THIS SECTION OF THE AGREEMENT SHALL BE INCORPORATED INTO ANY AND ALL DOCUMENTS EXECUTED IN CONNECTION WITH THE CLOSING OF THE SALE OF THE PROPERTY TO PURCHASER. 9. REPRESENTATIONS OF PURCHASER. As a specific inducement for Seller to enter into this Agreement, Purchaser, to the best of its knowledge and belief, represents that the execution, delivery and performance of this Agreement by Purchaser, subject to review and approval of the Board of Directors, or Executive Committee thereof, of Purchaser, which review and approval will be completed by the end of the Inspection Period, shall be the legal, valid and binding agreement of the Purchaser. 10. DEFAULT PROVISIONS. In the event of the failure or refusal of the Purchaser to close this transaction on or before the Closing Date as same may be extended pursuant to the terms hereof, without fault on Seller's part and without failure of title or any conditions precedent to Purchaser's obligations hereunder, Seller shall receive or retain the Earnest Money Deposit as agreed upon liquidated damages for said breach and as Seller's sole and exclusive remedy for default of Purchaser, whereupon the parties shall be relieved of all further 15 16 obligations hereunder, except those obligations which are specifically stated herein to survive the termination or Closing of this transaction. In the event of a default by Seller under this Agreement, Purchaser at its option shall have the right to: (i) receive the return of the Earnest Money Deposit from Seller whereupon the parties shall be released from all further obligations under this Agreement, except those obligations which are specifically stated herein to survive the termination or Closing of this transaction, unless the default was caused by the willful act, willful omission, or the material misrepresentation of Seller in which event Seller shall continue to be liable for damages caused thereby, anything to the contrary notwithstanding, or, alternatively, (ii) seek specific performance of the Seller's obligations hereunder and/or any other equitable remedies, without thereby waiving damages. Notwithstanding the foregoing, in the event of a default by either party of any obligation which specifically survives Closing, then the non-defaulting party shall be entitled to seek any legal redress permitted by law or equity. The provisions hereof shall survive Closing. 11. PRORATIONS. Real estate and personal property taxes, Insurance Policies (if assignable and assumed by Purchaser), rents (whether or not actually collected), interest, costs and revenues, Monthly Extension payment, if any, and all other proratable items shall be prorated as of the Closing Date. Seller shall be responsible for the payment of all utility bills and shall receive credit for any prepaid utility deposits as of 16 17 the Closing Date. Seller shall pay all sales and/or use tax due on revenues received and purchases made at or prior to the Closing Date and shall comply with all statutory provisions necessary for Purchaser to avoid transferee liability for same. In the event the taxes for the year of Closing are unknown, the tax proration will be based upon the taxes for the prior year, and at the request of either party, the taxes for the year of Closing shall be reprorated and adjusted when the tax bill for such year is received and the actual amount of taxes is known. The provisions of this section shall survive the Closing. 12. IMPROVEMENT LIENS. Certified, confirmed or ratified liens for governmental improvements as of the Closing Date, if any, shall be paid in full by Seller, and pending liens for governmental improvements as of the Closing Date shall be assumed by the Purchaser, provided that where the improvement has been substantially completed as of the Closing Date, such pending lien shall be considered certified. 13. CLOSING COSTS. The parties shall bear the following costs: (a) The Purchaser shall be responsible for payment of the following: (i) the cost of examining the Commitment and updating and/or obtaining the Survey, (ii) any and all costs and expenses of architectural, engineering and other inspection and feasibility studies and reports incident to Purchaser's inspections, and (iii) clerk's recordation fees for recording the special warranty deed. (b) The Seller shall be responsible for payment of the following: (i) any costs associated with issuance of the Commitment (including the premium for the Title Policy); and (ii) any transfer taxes in connection with the delivery of the deed and bill of sale including documentary stamp tax and surtax, and (iii) recording costs on documents necessary to clear title. (c) Each party shall pay its own legal fees except as 17 18 provided in Section 22(c) below. (d) The parties shall equally share the cost of Escrow. 14. CLOSING. The Closing shall be held at the offices of the Escrow Agent. At Closing, Seller shall execute and deliver to Purchaser through Escrow the following Closing Documents: (a) a good and sufficient special warranty deed subject only to the Permitted Exceptions; (b) an appropriate mechanic's lien affidavit, sufficient in form and content for any title insurance company to delete the standard exceptions for mechanic's liens, and, to the extent of work performed in the ninety (90) days prior to Closing, appropriate releases and indemnities to allow Purchaser to obtain title insurance coverage over any unfiled liens; (c) an affidavit of exclusive possession; (d) an appropriate bill of sale with special warranty of title for the Personalty; (e) a non-foreign affidavit and/or certificate pursuant to Section 8(j) above; (f) appropriate assignments and originals of all Contracts acceptable to Purchaser pursuant to Section 7(c) hereof including leases, deposits, Licenses, easements, and rights-of-way; (g) assignments and originals of any of the Insurance Policies, contract rights, guarantees and warranties, intangible rights and other property and rights included in this transaction that Purchaser elects to take by assignment; (h) appropriate evidence of Seller's formation, existence and authority to sell and convey the Property; (i) an appropriate "gap" affidavit and/or indemnity as required by the title insurer; (j) The Title Policy; (k) estoppel certificates and attornment agreements acceptable to Purchaser for all leases acceptable to Purchaser that are not cancelable upon the giving of thirty (30) days notice or less; (l) proof, satisfactory to Purchaser, of payment of all 18 19 employee wages and associated payroll taxes; and (m) such other items as may be required by Escrow Agent to consummate the Closing. At Closing, Purchaser shall deliver through Escrow to the Seller: (a) The balance of the Purchase Price in cash; and (b) Such other documents as may be required by Escrow Agent to consummate the Closing. At Closing, Seller and Purchaser shall each execute counterpart Closing statements and such other documents as are reasonably necessary to consummate this transaction. 15. NO BROKERAGE COMMISSION OR FINDER'S FEE. Except for Seller's separate agreement with Colorado Group Realty, Inc. (the "Broker") and Broker's separate agreement with any other broker or finder with respect to the splitting of any of Broker's fee, each party hereto represents to the other that it has not authorized any broker or finder to act on its behalf in connection with the sale and purchase hereunder and that it has not dealt with any broker or finder purporting to act on behalf of any other party, other than for any sums owed Broker by Seller which are the sole and specific responsibility of Seller, and each party hereto agrees to indemnify and hold harmless the other party from and against any and all claims, losses, damages, costs or expenses of any agreement, arrangement, or understanding alleged to have been made by such party or on its behalf with any broker or finder in connection with this Agreement or the transaction contemplated hereby. 16. ASSIGNABILITY. Purchaser shall be entitled to assign its rights hereunder to any affiliate of Purchaser, provided that 19 20 upon any such assignment the assignee assumes all obligations of Purchaser hereunder, and Purchaser shall not be released from its obligations hereunder. 17. INSPECTIONS. With respect to the inspections contemplated under Sections 6 and 7 of this Agreement, Seller agrees to allow Purchaser and Purchaser's agents complete access to the Property to conduct engineering, environmental and other studies or tests on the Property, provided, however, that (i) the cost and expenses of Purchaser's investigations and tests shall be borne solely by Purchaser, (ii) prior to the expiration of the Inspection Period, Purchaser shall restore the Property to the condition which existed prior to Purchaser's entry thereon and investigation thereof, (iii) in the event the Closing does not occur and Seller is not in breach of this Agreement, Purchaser shall deliver to Seller copies of all tests, reports and inspections owned by Purchaser and conducted by Purchaser with respect to the Property, and (iv) Purchaser shall not permit any mechanic's or materialmen's liens to attach to the Property by reason of the performance of any work or the purchase of any materials by Purchaser or any other party in connection with any studies or tests conducted pursuant to this section. The foregoing covenants and agreements of Purchaser shall survive any termination of this Agreement. All information furnished by Seller to Purchaser in accordance with this Agreement or obtained by Purchaser in the course of its investigations shall be treated as confidential information by Purchaser and prior to Closing, Purchaser will use its best efforts to prevent its agents and employees from divulging such information except to parties 20 21 reasonably necessary to analyze and investigate such information including, but not limited to, Purchaser's attorneys and representatives and prospective lenders. Purchaser shall indemnify, defend, and hold Seller harmless from and against any claims, liabilities, causes of action, damages, losses and expenses(including reasonable attorneys' fees) incident to, resulting from or in any way arising out of any tests or inspections conducted by Purchaser on the Property. The language contained in this section shall survive Closing and any termination of this Agreement. 18. ESCROW AGENT. The Escrow Agent and Title Company shall not be liable for any actions taken in good faith, but only for its gross or willful negligence. Purchaser and Seller hereby agree to indemnify and hold the Escrow Agent and Title Company harmless from and against any loss, liability, claim or damage whatsoever (including reasonable attorney's fees and court costs at trial and all appellate levels) the Escrow Agent and Title Company may incur or be exposed to in its capacity as escrow agent hereunder except for that caused by Escrow Agent's or Title Company's gross negligence or willful misconduct. If there be any dispute as to disposition of any proceeds held by the Escrow Agent pursuant to the terms of this Agreement, the Escrow Agent is hereby authorized to interplead said amount or the entire proceeds with any court of competent jurisdiction and thereby be released from all obligations hereunder. So long as the Earnest Money Deposit is deposited with a federally insured Colorado commercial bank, the Escrow Agent shall not be liable for any failure of the Earnest Money Deposit depository. 21 22 19. NOTICES. Any notices required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given if delivered by hand, sent by recognized overnight courier (such as Federal Express), sent by facsimile transmission or mailed by certified or registered mail, return receipt requested, in a postage prepaid envelope, and addressed as follows: If to the Purchaser: Preferred Equities Corporation 4310 Paradise Road Las Vegas, NV 89109 Attn: Fred Conte, Executive Vice President Fax No. (702) 369-4398 With a copy to: Preferred Equities Corporation 4310 Paradise Road Las Vegas, Nevada 89109 Attn: Jon A. Joseph, Esq. Fax No. (702) 369-4398 and a copy to: John P. Holloway, Jr., Esq. 330 South Lincoln, #222 P.O. Box 770908 Steamboat Springs, CO 80477 Fax No. (970) 879-5621 If to the Seller: Overlook Lodge Limited Liability Co. c/o EFO Holdings, Inc. 1111 West Mockingbird Lane,#1400 Dallas, TX 75247 Attn: Kathryn R. Esping, Manager Fax No. (214) 905-2307 With a copy to: Mr. Jim Cook Colorado Group Realty, Inc. 2145 Resort Drive, Suite 205 P.O. Box 880045 Steamboat Springs, CO 80488 Fax No. (970) 870-2803 With a copy to: Robert L. Abbott, Esq. Stutzman & Bromberg, P.C. 2323 Bryan Street, Ste. 2200 Dallas, TX 75201 Fax No. (214) 969-4999 If to Escrow Agent: Eagle County Title Corporation 953 South Frontage Road West, #100 Vail, CO 81657 Attn: Norman Larkins Fax No. (970) 476-6426 22 23 Notices personally delivered or sent by overnight courier shall be deemed given on the date of delivery, notices transmitted by facsimile shall be deemed given on the date sent provided that the transmitting machine confirms transmission in writing (or otherwise, upon actual receipt by the other party) and notices mailed in accordance with the foregoing shall be deemed given three (3) days after deposit in the U.S. mails. Signatures on documents transmitted via facsimile shall be binding as if an original signature. A copy of all notices shall be provided to the Escrow Agent. 20. RISK OF LOSS. Seller shall continue to bear the risk of loss up to and including the Closing Date. The Property shall be conveyed to Purchaser in the same condition as on the date of this Agreement, ordinary wear and tear excepted. Seller shall not remove anything from the Property between now and Closing except for replacements in the ordinary course of business. In the event that the Property or any material portion thereof is taken by eminent domain prior to Closing, Purchaser shall have the option of either: (i) cancelling this Agreement and receiving a refund of the Earnest Money Deposit whereupon both parties shall be relieved of all further obligations under this Agreement, except those obligations which are specifically stated herein to survive the termination or Closing of this transaction, or (ii) Purchaser may proceed with Closing in which case Purchaser shall be entitled to all condemnation awards and settlements. In the event that the Improvements and/or Personalty are damaged or destroyed by fire or other casualty prior to Closing, Seller shall have the option to repair and 23 24 restore the Property to the same condition as before the fire or casualty and the Closing Date shall be deferred for up to sixty (60) days to permit such repair and restoration. If Seller elects not to repair and restore or if Seller is unable to repair and restore within such sixty (60) day period, then Purchaser shall have the option of either: (i) cancelling this Agreement and receiving a refund of the Earnest Money Deposit, whereupon both parties shall be released from all further obligations under this Agreement, except those obligations which are specifically stated herein to survive the termination or Closing of this transaction, or (ii) proceeding with Closing in which case Purchaser shall be entitled to all insurance proceeds and to a credit equal to the insurance deductibles. 21. INDEMNITY. Seller shall indemnify and hold Purchaser harmless from any and all liability, including costs and attorneys' fees (at trial and all appellate levels) for: (a) Any sales tax due on any rentals or sales prior to the Closing; (b) Any charges under contracts for services to the Property existing now or at any time prior to Closing; (c) Any security deposits of tenants received by Seller prior to Closing; (d) Any personal property taxes remaining unpaid for calendar years prior to the year of Closing; (e) Any claims made against Purchaser or the Property by Seller's employee(s) employed at the Property; (f) Any claims made against Purchaser by persons who claim to have pre-paid lodging expenses in association with post-Closing reservations; (g) Any claims made against Purchaser or the Property by persons or governmental agencies who claim monies due, for periods prior to Closing, for wages or other payments for employee(s) benefits and any and all payroll taxes, including but not limited to, federal, state, local and other tax withholdings and federal 24 25 and state unemployment taxes; and (h) Any material misrepresentations made by Seller, except for the representation under Section 8(d) which shall be accurate at Closing, but which shall not survive Closing. Purchaser shall indemnify and hold Seller harmless from any and all liability, including cost and attorneys' fees (at trial and all appellate levels) and claims which might be made against the Seller relating to the ownership and operation of the Property after the Closing. The provisions of this section shall survive the Closing, except the provisions in section 21 (h) above which shall terminate 180 days from the Date of Closing. 22. MISCELLANEOUS. (a) This Agreement shall be construed and governed in accordance with the laws of the State of Colorado. All of the parties to this Agreement have been represented by competent counsel and have participated fully in the negotiation and preparation hereof; and, accordingly, this Agreement shall not be more strictly construed against any one of the parties hereto. (b) In the event any term or provision of this Agreement be determined by appropriate judicial authority to be illegal or otherwise invalid, such provision shall be given its nearest legal meaning or be construed as deleted as such authority determines, and the remainder of this Agreement shall be construed to be in full force and effect. (c) In the event of any litigation between the parties under this Agreement, the prevailing party shall be entitled to reasonable attorney's fees and court costs at all trial and appellate levels. The provisions of this subsection shall survive the Closing coextensively with other surviving provisions of this Agreement. (d) Time is of the essence of this Agreement. If any date upon which, or by which, action required under this Agreement is a Saturday, Sunday or legal holiday recognized by the Federal government and/or the State of Colorado, then the date for such action shall be extended to the first day that is after such date and is not a Saturday, Sunday or legal holiday recognized 25 26 by the Federal government and/or the State of Colorado. (e) In construing this Agreement, the singular shall be held to include the plural, the plural shall include the singular, the use of any gender shall include every other and all genders, and captions and section headings shall be disregarded. (f) All of the exhibits attached to this Agreement are incorporated in, and made a part of, this Agreement. 23. ENTIRE AGREEMENT. This Agreement and the Exhibits attached hereto constitute the entire agreement between the parties and there are no other agreements, representations or warranties other than as set forth herein. This Agreement may not be changed, altered or modified except by an instrument in writing signed by the party against whom enforcement of such change would be sought. This Agreement shall be binding upon the parties hereto and their respective successors and assigns. EXECUTED as of the date first above written in several counterparts, each of which shall be deemed an original, but all constituting only one agreement. SELLER: OVERLOOK LODGE LIMITED LIABILITY COMPANY, A Colorado limited liability company By:____________________________________ Name:__________________________________ Title:_________________________________ Witnessed by: 26 27 _____________________________ PURCHASER: PREFERRED EQUITIES CORPORATION, a Nevada corporation By: ________________________ Name: Frederick H. Conte Title: Executive Vice President Witnessed by: _____________________________ Exhibit "A" Title Description 27 28 Exhibit "B" Permitted Exceptions 28 29 Exhibit "C" Contracts 29 EX-10.92 9 PURCHASE AND SALE AGREEMENT 1 EXHIBIT 10.92 SECOND AMENDMENT TO PURCHASE AND SALE AGREEMENT AMENDMENT dated as of February 8, 1996, to Purchase and Sale Agreement dated as of August 30, 1993, as previously amended by an Amendment to Purchase and Sale Agreement dated as of May 10, 1994 (the "Agreement"), between PREFERRED EQUITIES CORPORATION ("Developer"), MARINE MIDLAND BANK ("Marine") and WELLINGTON FINANCIAL CORP. ("Wellington"). Terms defined in the Agreement have their defined meanings when used in this Amendment. 1. The Recital of the Agreement is amended to read as follows: Recital Developer, Marine and Wellington wish to enter into an agreement under which Developer will offer to sell to Marine notes (individually, "Note", and collectively, "Notes"), and mortgages or deeds of trust (individually, "Mortgage", and collectively, "Mortgages") securing the Notes evidencing the sale and financing of timeshare interests in Reno Spa Resort Club, Reno, Nevada; Grand Flamingo Resort Club, Las Vegas, Nevada (which includes Grand Flamingo Towers, Grand Flamingo Villas, Grand Flamingo Terraces, Grand Flamingo Suites, Grand Flamingo Winnick and Grand Flamingo Fountains); and The Suites at Steamboat, Steamboat Springs, Colorado ("Project"), and the Marine will purchase from Developer the Notes and Mortgages of those purchasers of timeshare interest ("Obligors") who are acceptable to it. 2. It is understood that Notes and Mortgages representing the financing of the sale of timeshare interests in The Suites at Steamboat will be endorsed and assigned first by Steamboat Suites, Inc. to Developer and then by Developer to Marine. All such endorsements and assignments shall be with recourse. PREFERRED EQUITIES CORPORATION By ______________________________________ MARINE MIDLAND BANK By ______________________________________ Alton H. Lyles, Vice President WELLINGTON FINANCIAL CORP. By ______________________________________ Irwin R. LePow, President EX-10.93 10 ACQUISITION AND CONSTRUCTION LOAN AGREEMENT 1 EXHIBIT 10.93 ACQUISITION AND CONSTRUCTION LOAN AGREEMENT BETWEEN HELLER FINANCIAL, INC., AS LENDER AND PREFERRED EQUITIES CORPORATION, AS BORROWER DRAFT MARCH 27, 1996 2 TABLE OF CONTENTS ARTICLE 1 - DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Acquisition Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Acquisition Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.3 Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.4 Affidavit of Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.5 Application for Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.6 Approved Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.7 Approved Construction Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.8 Approved Timeshare Document Filing Schedule . . . . . . . . . . . . . . . . . . . . . . . 2 1.9 Architect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.11 Association . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.12 Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.13 Borrower's Deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.14 Completion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.15 Construction Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.16 Contractor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.17 Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.18 Debtor Relief Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.19 Declaration of CCRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.20 Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.21 Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.22 Financial Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1.23 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1.24 GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1.25 Governmental Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1.26 Governmental Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1.27 Guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1.28 Guarantor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1.29 Improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1.30 Improvements Completion Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1.31 Inspecting Architects/Engineers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1.32 Insurance Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1.33 Interval Incentive Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1.34 Interval Receivables Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1.35 Interval Release Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1.36 Interval Unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1.37 Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1.38 Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1.39 Loan Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1.40 Loan Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1.41 Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1.43 Permitted Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1.44 Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
-i- 3 1.45 Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1.46 Renovation Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1.47 Renovation Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1.48 Resort Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1.49 Survey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1.50 Title Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1.51 Title Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE 2 - ADVANCES OF THE LOAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2.1 Commitment of Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2.2 Maximum Renovation Loan Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2.3 Interest on the Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2.4 Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2.5 Conditions Precedent to Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2.6 Final Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 2.7 Changes in Plans and Specifications, Approved Budget or Approved Construction Schedule . . . . . . . . . . 15 2.8 No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 2.9 Conditions Precedent for the Benefit of Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE 3 - REPRESENTATIONS AND WARRANTIES OF BORROWER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.1 Borrower Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.2 Guarantor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.3 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.4 Suits, Actions, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.5 Valid and Binding Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.6 Title to the Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.7 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.8 System Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.9 Submittals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.10 Utility Availability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.11 Governmental Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.12 Property Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.13 Flood Hazards/Wetlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.14 Contracts with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.15 Inducement to Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE 4 - COVENANTS AND AGREEMENTS BORROWER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4.1 Mandatory Principal Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4.2 Compliance With Governmental Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4.3 Construction of the Improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4.4 Correction of Defects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4.5 Storage of Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4.6 Inspection of the Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4.7 Notices by Governmental Authority, Casualty, Condemnation . . . . . . . . . . . . . . . . . . . . . . . . 21
-ii- 4 4.8 Application of Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.9 Borrower's Deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.10 Direct Disbursement and Application by Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.11 Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.12 Additional Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 4.13 Inspection of Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 4.14 No Liability of Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 4.15 No Conditional Sale Contracts, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 4.16 Defense of Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 4.17 Prohibition on Transfer of Property or Assignment of Borrower's Interest . . . . . . . . . . . . . . . . . 25 4.18 Payment of Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 4.19 Restrictions and Annexation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 4.20 Current Financial Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 4.21 Tax Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 4.22 Notice of Litigation, Claims, and Financial Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 4.23 No Occupancy Contrary to Builder's Risk Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 4.24 Hold Harmless . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 4.25 Cross Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 4.26 Modifications to Resort Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 4.27 Subordinated Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 ARTICLE 5 - RIGHTS AND REMEDIES OF LENDER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 5.1 Rights of Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 5.2 Acceleration and Other Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 5.3 Cessation of Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 5.4 Funds of Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 5.5 No Waiver or Exhaustion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 5.6 Marshalling Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 ARTICLE 6 - GENERIC TERMS AND CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 6.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 6.2 Entire Agreement and Modifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 6.3 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 6.4 Election of Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 6.5 Form and Substance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 6.6 Limitation on Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 6.7 No Third Party Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 6.8 Borrower in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 6.9 Number and Gender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 6.10 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 6.11 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 6.12 Venue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 6.13 Jury Trial Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 6.14 Attorney's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 6.15 Escrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
-iii- 5 6.16 Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 6.17 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
EXHIBIT: A Application for Advance B Approved Budget C Easement Area D Approved Construction Schedule E Approved Timeshare Document Filing Schedule F Permitted Exceptions G Property Description H Litigation Disclosure I Approved Transaction J Subordinated Obligations -iv- 6 ACQUISITION AND CONSTRUCTION LOAN AGREEMENT THIS LOAN AGREEMENT, dated _________________, 1996, is made by and between HELLER FINANCIAL, INC., a Delaware corporation ("Lender"), whose address is 11th Floor - Real Estate Financial Services, 500 West Monroe, Chicago, Illinois 60661, and PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Borrower"), whose address is 4310 Paradise Road, Las Vegas, Nevada 89109, in respect of an acquisition and construction loan as set forth herein. ARTICLE 1 - DEFINITIONS For purposes of this Loan Agreement, the following terms shall have the respective meanings assigned to them. 1.1 Acquisition Commitment. The term "Acquisition Commitment" shall mean the lesser of Four Million Eight Hundred Sixty Five Thousand Dollars and No/100 ($4,865,000.00) or 90% of Borrower's cost to acquire the Property pursuant to that certain Purchase and Sale Agreement dated August 6, 1995 between Borrower, as purchaser, and The Villas at Monterey Limited Partnership, 209 Tango Limited Partnership and First Wilkow Venture, as seller, as amended ("Sale Agreement"). 1.2 Acquisition Note. The term "Acquisition Note" shall mean the Promissory Note from Borrower to Lender evidencing the Acquisition Commitment dated of even date herewith, which is in the original principal amount of Four Million Eight Hundred Sixty Five Thousand Dollars and No/100 ($4,865,000.00). 1.3 Advance. The term "Advance" shall mean a disbursement by Lender of any of the proceeds of the Loan and/or the Borrower's Deposit pursuant to the Renovation Commitment and each such Advance shall be for reimbursement to Borrower of amounts paid by Borrower through the date of such Advance in accordance with the Approved Budget. 1.4 Affidavit of Borrower. The term "Affidavit of Borrower" shall mean a sworn affidavit of Borrower (and such other parties as Lender may require) to the effect that all statements, invoices, bills, and other expenses incident to the acquisition of the Property and the construction of the Improvements incurred to a specified date, whether or not specified in the Approved Budget, have been paid in full, except for amounts retained pursuant to the Construction Contract. 1.5 Application for Advance. The term "Application for Advance" shall mean a written application on an AIA or other forms as set forth in Exhibit "A" attached hereto, by Borrower (and such other parties as Lender may require) to Lender specifying by name, current address, and amount all independent third parties to whom Borrower is obligated for labor, materials, or services supplied for the construction of the Improvements and 7 all other expenses incident to the Loan, the Property, and the construction of the Improvements and specifying those budgeted items which have been performed by Borrower's employees, requesting an Advance for reimbursement for the payment of such items, containing an Affidavit of Borrower, accompanied by such schedules, affidavits, releases, waivers, statements, invoices, bills, and other documents as Lender and Title Company may reasonably request provided such affidavits, releases and waivers shall only be required for independent third parties as specified in the Application for Advance. 1.6 Approved Budget. The term "Approved Budget" shall mean the Budget attached as Exhibit "B" for the renovation of 102 two-bedroom condominium units to be used for timeshare purposes and construction of a 3,000 square foot sales and amenity building (the "Amenity Building") on the Property and the construction of the Gate House to be located on the easement area described in Exhibit "C." The term Approved Budget shall also include any decreases or increases as permitted hereunder in accordance with Section 2.7. 1.7 Approved Construction Schedule. The term "Approved Construction Schedule" shall mean the schedule and order of renovation and construction of the Improvements set forth in Exhibit "D" and any modifications thereto permitted in accordance with Section 2.7. 1.8 Approved Timeshare Document Filing Schedule. The term "Approved Timeshare Document Filing Schedule" shall mean the schedule attached as Exhibit "E" for filing and approval of the Timeshare Public Offering Statement for the Resort Property with and by all Governmental Authorities for the sale of Interval Units and the operation of the Resort Property. 1.9 Architect. The term "Architect" shall mean Fugleberg Koch Architects, the architect for design of the Amenity Building. 1.10 Architectural Contract. The term "Architectural Contract" shall mean all written agreements between Borrower and Architect for architectural services pertaining to construction of the Amenity Building. 1.11 Association. The term "Association" shall mean the association to be created pursuant to the Declaration of CCRs. 1.12 Borrower. The term "Borrower" shall mean Preferred Equities Corporation, a Nevada corporation, and its successors and assigns, provided that Borrower shall be subject to all restrictions on assignment and transfer of the Property or any -2- 8 part thereof or interest thereon that are contained in this Loan Agreement and the Loan Instruments. 1.13 Borrower's Deposit. The term "Borrower's Deposit" shall mean such cash sums as Lender may deem necessary pursuant to Section 4.7 for completion of repair or reconstruction of casualty or condemnation loss or Section 2.7 for budget increases or changes to the Plans. 1.14 Completion. The term "Completion" shall mean the substantial completion of the Improvements in accordance with the Approved Budget, the Approved Construction Schedule, the Construction Contract, the Architectural Contract for the Amenity Building and the Plans, as evidenced by (i) a certificate of occupancy (or its equivalent), if applicable, permitting legal occupancy thereof issued by the local Governmental Authorities with jurisdiction over construction of the Improvements, (ii) a certificate of the contractor in form and substance satisfactory to Lender regarding completion of the Amenity Building, and (iii) a certificate of the Inspecting Architects/Engineers in form and substance satisfactory to Lender. 1.15 Construction Contract. The term "Construction Contract" shall mean all construction contracts executed by Borrower for the construction of the Improvements, including, without limitation, contracts between Borrower and Contractor. 1.16 Contractor. The term "Contractor" shall mean the general contractor to be retained by Borrower for the construction of the Amenity Building. At least sixty (60) days prior to commencement of construction of the Amenity Building, Borrower shall submit to Lender for approval the Plans for the Amenity Building, and the fully executed Assignment of Construction Contract substantially in the form attached as Exhibit "1.16" or such other form as Lender may reasonably accept. 1.17 Costs. The term "Costs" shall mean all reasonable expenditures and expenses which may be paid or incurred by or on behalf of Lender including repair costs, payments to remove or protect against liens, attorneys' fees for pre-trial, trial and appellate matters (including fees of Lender's inside counsel), receivers' fees, appraisers' fees, engineers' fees, accountants' fees, independent consultants' fees (including environmental consultants), all costs and expenses incurred in connection with any of the foregoing, Lender's out-of-pocket costs and expenses related to any audit or inspection of the Property, outlays for documentary and expert evidence, stenographers' charges, stamp taxes, intangible taxes, publication costs, and costs (which may be estimates as to items to be expended after entry of an order or judgment) for procuring all such abstracts of title, title and -3- 9 UCC searches, and examination, title insurance policies, and similar data and assurances with respect to title as Lender may deem reasonably necessary either to prosecute any action or to evidence to bidders at any foreclosure sale of the Property the true condition of the title to, or the value of, the Property. 1.18 Debtor Relief Laws. The term "Debtor Relief Laws" shall mean any applicable liquidation, conservatorship, bankruptcy, moratorium, rearrangement, insolvency, reorganization, or similar laws affecting the rights or remedies of creditors generally, as in effect from time to time. 1.19 Declaration of CCRs. The term "Declaration of CCRs" shall mean collectively the Declaration of Covenants, Conditions and Restrictions for Ramada Vacation Suites at Tango Bay, and any supplements, amendment, or modifications thereto to be created and recorded in the public records of Orange County, Florida governing the Property. 1.20 Default. The term "Default" shall mean any event which, with the giving of notice or the passage of time or both, would become an Event of Default. 1.21 Event of Default. The term "Event of Default" shall mean the occurrence of any one of the following: (a) Any indebtedness evidenced, governed or secured by any of the Loan Instruments is not paid within five (5) days of the date when due, whether by acceleration or otherwise. (b) Borrower's failure to maintain any of the Insurance Policies or any transfer of or lien or encumbrance imposed upon the Property or any part thereof or interest therein in violation of Sections 4.17 or 4.18 below or any other restriction on transfer or liens set forth in the Loan Instruments. (c) Any covenant in this Agreement, other than matters governed by Sections 1.21(a) and (b) hereof, is not fully and timely performed, and Borrower does not cure such failure to perform for a period of thirty (30) days after written notice thereof from Lender to Borrower (provided, however, that if any such failure concerning a non-monetary covenant or condition is reasonably susceptible of cure but not within said thirty (30) day period, then no Event of Default shall be deemed to exist hereunder so long as Borrower commences such cure within said thirty (30) day period and diligently and in good faith pursues such cure to completion within ninety (90) days of said written notice from Lender to Borrower). -4- 10 (d) Any Default or Event of Default or any failure of Borrower to abide by the terms of or fulfill its obligations under the other Loan Instruments, after the passage of any applicable cure period set forth therein. (e) Any statement, representation or warranty in the Loan Instruments, any Financial Statements or any other writing delivered to Lender in connection with the Loan is false, misleading or erroneous in any material respect. (f) Once construction has begun, the cessation of the construction of the Improvements for more than thirty (30) days without the written consent of Lender, unless such cessation is caused by strike, riot, shortage of materials or acts of God, provided that an Event of Default shall exist if such cessation continues for more than sixty (60) days for any reason. (g) Failure of the construction of the Improvements or any materials for which an Advance has been requested to substantially comply with the Plans, the Approved Budget, the Approved Construction Schedule, or any Governmental Requirements which noncompliance is not cured to Lender's satisfaction within thirty (30) days after written notice from Lender to Borrower. (h) Completion of the Improvements or any element thereof has not occurred on the applicable Improvements Completion Date as set forth in the Approved Construction Schedule subject to strike, riot, shortage of materials, acts of God or other matters beyond the control of Borrower; provided, however, that an Event of Default shall exist if Completion is delayed for more than sixty (60) days for any reason beyond the Final Completion Date. (i) The Borrower or Guarantor: (1) does not pay its debts as they become due or admits in writing its inability to pay its debts or makes a general assignment for the benefit of creditors; or (2) commences any case, proceeding or other action seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any Debtor Relief Laws; or (3) in any involuntary case, proceeding or other action commenced against it which seeks to have an order for relief entered against it, as debtor, or seeks reorganization, arrangement, liquidation, dissolution or composition of it or its debts under any Debtor Relief Laws, (i) fails to obtain a dismissal of such case, proceeding or other action within sixty -5- 11 (60) days of its commencement, or (ii) converts the case from one chapter of the Federal Bankruptcy Code to another chapter, or (iii) is the subject of an order for relief; or (4) conceals, removes, or permits to be concealed or removed any part of its property, with intent to hinder, delay or defraud its creditors or any of them, or makes or suffers a transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or makes any transfer of its property to or for the benefit of a creditor at a time when other creditors similarly situated have not been paid; or suffers or permits, while insolvent, any creditor to obtain a lien upon any of its property through legal proceedings which is not vacated within sixty (60) days from the date thereof; or (5) has a trustee, receiver, custodian or other similar official appointed for, or take possession of, all or any part of the Property or any other of its property or has any court take jurisdiction of any other of its property which continues for a period of sixty (60) days (except where a shorter period is specified in the immediately following subparagraph (6)); or (6) fails to have discharged within a period of thirty (30) days any attachment, sequestration, or similar writ levied upon any property of such owner; or (7) fails to pay within thirty (30) days of issuance or entry any final money judgment, after appeal, and subject to Section 4.18 any tax, lien, or attachment in the amount of Fifty Thousand Dollars and No/100 ($50,000.00) or greater. (j) Title to all or any part of the Property (other than (i) obsolete or worn personal property replaced by adequate substitutes of equal or greater value than the replaced items when new or (ii) personal property no longer necessary for the operation of the Property, provided removal of such personal property does not materially affect the value or operation of the Property) shall become vested in any party other than the Borrower, whether by operation of law or otherwise, except for the conveyance of Interval Units in the ordinary course of business and in accordance with this Loan Agreement and the other Loan Instruments. (k) Borrower records or permits to be recorded against the Property a Notice of Limitation limiting future advances which may be made under the Mortgage. (l) Any default by Borrower under the documents -6- 12 and instruments evidencing and securing the Interval Receivables Loan after the passage of any applicable grace or cure period. (m) Failure by Borrower to meet the requirements of the Approved Timeshare Document Filing Schedule. (n) Failure of the Borrower to maintain the minimum Net Worth. (o) Failure of Borrower to draw the first Advance under the Interval Receivables Loan on or before the earlier of January 1, 1997 or sixty (60) days after final approval of the POS; provided such date shall be extended on a day-for-day basis by any delay caused by Lender's review of the POS beyond the times specified in Exhibit "E." 1.22 Financial Reports. The term "Financial Reports" shall mean (a) with respect to Borrower, a balance sheet of assets and liabilities (including all material contingent liabilities) and related statements of income and cash flow, during the term of the Loan monthly statements of the operation of the Property (including monthly sales report, monthly operating statements and monthly statements of delinquency of receipts and payments) as of the last day of each month, (b) with respect to Guarantor, a balance sheet of assets and liabilities (including all material contingent liabilities) and related statements of income and cash flow, and (c) quarterly unaudited financial statements of Borrower and Guarantor consisting of a current balance sheet of assets and liabilities and related statements of income and cash flow to be delivered to Lender within sixty (60) days after the end of each fiscal quarter, and (d) annual audited financial statements of Borrower and Guarantor and unaudited financial statements of the Association (for so long as Borrower controls the Association) to be delivered to Lender within one hundred twenty (120) days after the end of each applicable fiscal year. 1.23 Financial Statements. The term "Financial Statements" shall mean all financial statements, reports, summaries and other financial information delivered by Borrower to Lender as of the date of this Agreement in connection with Lender's underwriting of the Loan and the Property. 1.24 GAAP. The term "GAAP" shall mean generally accepted accounting principles, applied on a consistent basis, set forth in Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board which are applicable in the circumstances as of the date in question; and the requisite that such principles be applied on a consistent basis means that the accounting principles in a current period are -7- 13 comparable in all material respects to those applied in a preceding period, with any exceptions thereto noted. 1.25 Governmental Authority. The term "Governmental Authority" shall mean the United States of America, the State of Florida, the County of Orange, and any other governmental authorities having jurisdiction over Borrower, Guarantor, the Property or the sale of Interval Units. 1.26 Governmental Requirements. The term "Governmental Requirements" shall mean all Federal, State and local rules, regulations, ordinances, laws and statutes which affect the Property or Borrower's right to sell Interval Units. 1.27 Guarantee. The term "Guarantee" shall mean the Payment and Completion Guaranty executed by Guarantor to the Lender. 1.28 Guarantor. The term "Guarantor" shall mean Mego Financial Corp., a New York corporation. 1.29 Improvements. The term "Improvements" shall mean the 102 condominium units to be sold as Interval Units, the Amenity Building, the parking area and pool area, and the Gate House as described in the Plans, the Approved Budget and the Approved Construction Schedule. References in this Loan Agreement to construction of Improvements means construction or renovation of the Improvements, as applicable. 1.30 Improvements Completion Date. The term "Improvements Completion Date" shall mean the deadline for Completion of each element of the Improvements as set forth on the Approved Construction Schedule. 1.31 Inspecting Architects/Engineers. The term "Inspecting Architects/Engineers" shall mean such employees, representatives and agents of Lender or third parties, who will, from time to time, conduct inspections of the Property, review Borrower's compliance with this Loan Agreement and offer other services related thereto. 1.32 Insurance Policies. The term "Insurance Policies" shall mean: (a) All-risk builder's risk insurance during the construction of the Amenity Building, in an amount equal to 100% of the replacement cost of the Amenity Building, providing all-risk coverage on the Amenity Building and materials stored on the Property and elsewhere, and including the perils of collapse, water damage and, if requested by Lender, flood, earthquake, -8- 14 business interruption and other risks; (b) All-risk insurance on the Property until the Loan is paid in full, as determined by Lender, in the amount of at least 100% of the replacement cost of such Improvements or in such amounts as Lender may reasonably require, providing all-risk coverage on the Improvements, and, if requested by Lender, to include the perils of flood, earthquake, business interruption and other risks; (c) Comprehensive General Liability Insurance for owners and contractors, including blanket contractual liability, products and completed operations, personal injury (including employees), independent contractors and explosion, hazards for not less than Two Million Dollars and No/100 ($2,000,000.00) arising out of any one occurrence or in any increased amount reasonably required by Lender; (d) Workers' Compensation Insurance for contractors for statutory limits; and (e) Such other insurance, including but not limited to business interruption insurance, as Lender may reasonably require. All Insurance Policies shall be issued on forms and by companies reasonably satisfactory to Lender and shall be delivered to Lender or in the alternative, certificates of such insurance shall be delivered to Lender if such insurance is obtained through blanket policies of Borrower. All-risk Insurance Policies shall have loss made payable to Lender as mortgagee together with the standard mortgage clause in a form satisfactory to Lender. Comprehensive General Liability, Comprehensive Automobile Liability and Workers' Compensation coverages shall have a provision giving Lender thirty (30) days, prior notice of cancellation or material change of the coverage. 1.33 Interval Incentive Fee. The term "Interval Incentive Fee" shall mean a mandatory payment to Lender during the term of the Loan of Twenty Dollars and No/100 ($20.00) per Interval Unit to be paid on condition of the release of an Interval Unit. 1.34 Interval Receivables Loan. The term "Interval Receivables Loan" shall mean the financing arrangements entered into between Borrower and Lender whereby Lender is providing Borrower with financing for certain receivables of Borrower generated from Borrower's sale of Interval Units, which is evidenced by an Interval Receivables Loan and Security Agreement of even date herewith (the "Receivables Loan Agreement") and -9- 15 certain other loan documents. 1.35 Interval Release Payment. The term "Interval Release Payment" shall mean mandatory payments of (i) One Thousand Two Hundred Eighty Dollars and No/100 ($1,280.00) 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, and (ii) Seven Hundred Twenty Dollars and No/100 ($720.00) 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, both to be paid upon the sale of each Interval Unit. 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. 1.36 Interval Unit. The term "Interval Unit" shall have the same meaning as the term "Interval" in the Receivables Loan Agreement. 1.37 Lender. The term "Lender" shall mean Heller Financial, Inc., a Delaware corporation, and its successors and assignees of the Loan. 1.38 Loan. 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 Four Million Eight Hundred Sixty Five Thousand Dollars and No/100 ($4,865,000.00) 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 Three Million Dollars and No/100 ($3,000,000.00) over the term of the Loan and shall not exceed the amount of One Million Five Hundred Thousand Dollars and No/100 ($1,500,000.00) outstanding at any one time. 1.39 Loan Commitment. The term "Loan Commitment" shall mean a maximum of Seven Million, Eight Hundred Sixty Five Thousand Dollars and No/100 ($7,865,000.00) (of which no more than $6,365,000.00 may be outstanding at any one time), 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. 1.40 Loan Instruments. The term "Loan Instruments" -10- 16 shall mean this Loan Agreement, the Mortgage, the Acquisition Note, the Renovation Note, the Guarantee, the financing statements, and such other instruments evidencing, securing, perfecting or pertaining to the Loan as shall, from time to time, be executed and delivered by Borrower, Guarantor, or any other party to Lender pursuant to this Loan Agreement, including, without limitation, each Affidavit of Borrower, each Application for Advance, and the Approved Budget. 1.41 Mortgage. The term "Mortgage" shall mean the Mortgage, Assignment of Rents and Security Agreement from Borrower to Lender dated of even date herewith securing the payment of the Acquisition Note and Renovation Note, and the payment and performance of all obligations specified in the Mortgage and the Loan Instruments, and evidencing a valid and enforceable lien on the Property. 1.42 Net Worth. The term "Net Worth" shall mean the amount of Seventeen Million Dollars and No/100 ($17,000,000.00) as determined in accordance with GAAP without taking into consideration any sums due Borrower from Guarantor. 1.43 Permitted Exceptions. The term "Permitted Exceptions" shall mean those exceptions to and encumbrances on title to the Property which Lender has approved at the date of this Loan Agreement and which are described on Exhibit "F" hereto. 1.44 Plans. The term "Plans" shall mean the final working drawings and specifications for the construction of the Amenity Building, which have been prepared by the Architect and approved by Lender and as may be modified pursuant to Section 2.7. 1.45 Property. The term "Property" shall mean the land described in Exhibit "G" attached hereto and incorporated herein by reference, together with the easement rights described in that certain Easement Agreement to be recorded with the Mortgage in the Public Records of Orange County, Florida, to property described on Exhibit "C" and where the context requires shall also mean the Improvements and all other property constituting the "Property," as described in the Mortgage. 1.46 Renovation Commitment. The term "Renovation Commitment" shall mean Three Million Dollars ($3,000,000), which is the maximum amount of Advances Lender is obligated to make under this Loan Agreement for construction and renovation; provided, however, at no time shall the principal balance outstanding under the Renovation Note exceed $1,500,000.00. 1.47 Renovation Note. The term "Renovation Note" shall mean the Revolving Renovation Promissory Note of even date -11- 17 herewith from Borrower to Lender evidencing the Renovation Commitment in the original principal amount of One Million Five Hundred Thousand Dollars and No/100 ($1,500,000.00). 1.48 Resort Property. The term "Resort Property" shall mean "Ramada Vacation Suites at Tango Bay," a timeshare condominium to be developed by Borrower as a timeshare project on the Property. 1.49 Survey. The term "Survey" shall mean a current survey of the Property meeting the standards of the American Land Title Association and certified by the surveyor to Lender in form and substance satisfactory to Lender, and if applicable, a recorded plat or map of the Property, as required by Lender, which such plat or map shall be approved and accepted by all Governmental Authorities having jurisdiction of the Property. 1.50 Title Company. The term "Title Company" shall mean First American Title Insurance Company. 1.51 Title Insurance. The term "Title Insurance" shall mean a title insurance policy in the amount of Six Million Three Hundred Sixty-five Thousand Dollars and No/100 ($6,365,000.00) insuring that the Mortgage constitutes a valid first priority lien covering the Property subject only to the Permitted Exceptions, issued by the Title Company to Lender. ARTICLE 2 - ADVANCES OF THE LOAN 2.1 Commitment of Lender. Concurrently with the recording of the Mortgage, Lender shall advance the amount of the Acquisition Commitment to Borrower. Subject to the conditions hereof, and provided that there exists no Default and no Event of Default, and further provided that the outstanding balance of the Renovation Commitment shall not exceed the maximum amount set forth in Section 2.2 below, Lender will make Advances to Borrower in the aggregate maximum amount of the Renovation Commitment in accordance with this Loan Agreement. Lender shall be obligated to make such Advances only in the maximum amount of the Renovation Commitment. In addition, Lender shall not be obligated to make an Advance if at any time the combined outstanding balance of the Acquisition Note, the Renovation Note and the promissory note given by Borrower to Lender pursuant to the Interval Receivables Loan would exceed Fifteen Million Dollars and No/100 ($15,000,000.00) in the aggregate if such Advance were made by Lender. The term of the Acquisition Loan and the Renovation Loan shall be for thirty-six (36) months from the date hereof. The Advances under the Renovation Commitment shall be drawn by Borrower within twenty-four (24) months of the date hereof. -12- 18 2.2 Maximum Renovation Loan Balance. Notwithstanding anything to the contrary contained in this Loan Agreement or the Loan Instruments, the outstanding principal balance of the Renovation Note (including all Advances) shall never exceed One Million Five Hundred Thousand Dollars and No/100 ($1,500,000.00). 2.3 Interest on the Loan. Interest on the Loan, at the rate or rates specified in the Acquisition and Renovation Notes, shall be computed on the unpaid principal balance which exists from time to time and shall be computed with respect to each Advance only from the date of such Advance. Such interest on the Loan shall be paid by Borrower to Lender on a monthly basis as provided in the applicable note. As a courtesy, Lender's practice is to send out monthly billing statements on or about the twentieth (20th) day of the month prior to the month in which such payment is due; however, the failure of Lender to send out such a billing statement shall not relieve Borrower of its obligation to pay interest in accordance with the applicable notes. 2.4 Advances. Advances pursuant to the Renovation Commitment shall be made by Lender as specified in the Approved Budget, upon compliance by Borrower with this Loan Agreement. From time to time, Borrower shall submit an Application for an Advance to Lender requesting an Advance for the reimbursement of payment of costs of labor, materials, and services supplied for the construction of the Improvements or for the payment of other costs and expenses incident to the Loan, or the construction of the Improvements, as specified in the Approved Budget. Borrower shall not submit Applications for an Advance more than two times per month nor more frequently than once per week, and each Application for Advance shall be for an amount not less than One Hundred Thousand Dollars and No/100 ($100,000.00). Advances shall be limited to the amounts shown in corresponding line items in the Approved Budget and shall not exceed the aggregate of (a) the costs of labor, materials, and services incorporated in to the Improvements in a manner acceptable to Lender, plus (b) the purchase price of all uninstalled materials to be utilized in the construction of the Improvements and to be stored on the Property, less (c) all prior Advances for payment of costs of labor, materials, and services for the construction of the Improvements. Each Advance shall be issued by Lender within ten (10) days of Lender's receipt of Borrower's Application for Advance, provided Borrower is in compliance with conditions to such Advance set forth herein. In addition to the conditions set forth below, Lender's obligation to make Advances shall be subject to the receipt by Lender, on a monthly basis, of reports from Lender's Inspecting Architects/Engineers certifying that the Improvements are on schedule under the Approved Completion Schedule(s) and are in compliance with the Approved Budget and the Plans, as applicable. -13- 19 2.5 Conditions Precedent to Advances. As a condition precedent to each Advance hereunder, Borrower shall satisfy or deliver evidence of the following requirements: (a) an Application for Advance; (b) execute and deliver to, procure for and deposit with, and pay to Lender and, if appropriate, record in the proper records with all filing and recording fees paid, the Loan Instruments and such other documents, instruments, and certificates as Lender or Title Company may require; (c) An Affidavit of Borrower; (c) There shall then exist no Default or Event of Default; (d) The representations and warranties made in this Loan Agreement shall be true and correct in all material respects on and as of the date of each Advance, with the same effect as if made on that date. Borrower shall inform Lender of any changes or revisions to the representations and warranties set forth herein by disclosing such facts in the Affidavit of Borrower. If any such changes or revisions are determined by Lender in its sole discretion to be materially adverse, Lender may refuse to make the requested Advance. (e) Borrower will procure and deliver to Lender (i) releases or waivers of mechanics' liens from any independent third parties providing labor, materials or supplies for construction or renovation of the Improvements, and (ii) copies of checks, paid bills or invoices and purchase orders for all items in excess of One Thousand Dollars and No/100 ($1,000.00) showing payment to all such third parties who have furnished materials or services or performed labor of any kind in connection with the construction of any of the Improvements covered by the Application for Advance; (f) The Title Insurance shall be endorsed and extended to the date of such Advance to cover each Advance with no additional title exception objectionable to Lender; (g) General ledger detail reports with respect to such Application for Advance; and (h) Copies of all building and other construction or development permits and approvals issued through the date of such Advance. -14- 20 (i) With respect to any Improvements which have been completed as required under the Approved Construction Schedule, evidence that all Governmental Requirements have been satisfied, including, but not limited to, delivery of certificates of occupancy (or its equivalent) permitting the Improvements to be legally occupied. (j) Prior to the first Advance for construction of the Amenity Building, a fully executed copy of the Assignment of Construction Contract and a Payment and Completion Bond for construction of the Amenity Building. 2.6 Final Advance. As a condition precedent to the final Advance, in addition to all other requirements herein, completion of all Improvements shall have occurred and Borrower must satisfy the following requirements and, if required by Lender, deliver to Lender evidence of such satisfaction: (a) A completion certificate from the Inspecting Architects/Engineers; (b) Evidence that all Governmental Requirements have been satisfied, including but not limited to, delivery to Lender of a certificate of occupancy (or its equivalent) if issued by local Governmental Authorities, permitting the Improvements to be legally occupied; (c) Evidence that no mechanic's or materialman's lien or other encumbrance has been filed and remains in effect against the Property; (d) Final lien releases or waivers by the Architect, Contractor, and all subcontractors, materialmen, and other independent third parties who have supplied labor, materials, or services for the construction of the Improvements, or who otherwise might be entitled to claim a contractual, statutory, or constitutional lien against the Property, subject to retainage; (e) Evidence in a form reasonably satisfactory to the Lender that all Improvements are in compliance with the accessibility requirements of the federal Fair Housing Act and the Florida and federal Americans with Disabilities Act. (f) a survey of the Amenity Building showing no encroachment off the Resort Property or on any easement; and (g) The Title Insurance shall be endorsed and extended to the date of the final Advance with no additional exception objectionable to Lender. -15- 21 2.7 Changes in Plans and Specifications, Approved Budget or Approved Construction Schedule. Without the prior written approval of Lender there shall be no change in the Plans or the Approved Budget which would (i) either increase or decrease the cost of the Improvements individually more than Twenty Five Thousand Dollars ($25,000.00), (ii) together with costs associated with prior changes in the Plans or the Approved Budget result in an increase in the total costs of changes in the Plans in the Approved Budget over Fifty Thousand Dollars ($50,000.00), (iii) affect the structural components of the Improvements; or (iv) cause the estimated time to complete the Improvements to extend beyond the Improvements Completion Date as set forth in the Approved Construction Schedule and neither the Plans nor the Approved Budget shall be modified in any way which would detract from the value of the Improvements. Requested changes shall be submitted to Lender for approval on a form acceptable to Lender accompanied by a copy of the plans and specifications or a revised budget applicable to the changes. Such changes must, prior to being effective, be duly approved by Lender and all other persons required by Lender. Lender shall review and approve or disapprove any such change request within ten (10) days of receipt of such written request from Borrower. Lender is under no duty to inform Borrower of the quality or suitability of the Plans or any amendment or alteration thereto. As a condition to any such approval, Lender may require, in its sole discretion, confirmation satisfactory to Lender of the cost increase, if any, which would result from performance of the work contemplated under such change, and if it appears that performance of such work shall result in such an increase, Lender may, in its sole discretion, condition its approval upon a Borrower's Deposit of the amount of such increase or other evidence satisfactory to Lender in its discretion that Borrower has the funds necessary to provide for such cost increase. Without the prior written approval of the Lender, there shall be no change in the Approved Construction Schedule which change would extend the final Improvements Completion Date or any interim Improvements Completion Date by more than thirty (30) days. Lender shall review and approve or disapprove any such requested change within ten (10) days of Lender's receipt of such written request from Borrower. Except as restricted herein, Borrower may make changes to the Plans or the Approved Budget or Approved Construction Schedule upon written notice to Lender of such change. 2.8 No Waiver. No Advance shall constitute a waiver of any condition precedent to the obligation of Lender to make any further Advance or preclude Lender from thereafter declaring the failure of Borrower to satisfy such condition precedent to be an Event of Default. -16- 22 2.9 Conditions Precedent for the Benefit of Lender. All conditions precedent to the obligation of Lender to make any Advance are imposed hereby solely for the benefit of Lender, and no other party may require satisfaction of any such condition precedent or be entitled to assume that Lender will refuse to make any Advance in the absence of strict compliance with such conditions precedent. All requirements of this Loan Agreement agreed to by Borrower and for the benefit of Lender may be waived by Lender, in whole or in part, at any time. ARTICLE 3 - REPRESENTATIONS AND WARRANTIES OF BORROWER Borrower hereby represents; and warrants as follows: 3.1 Borrower Existence. Borrower is a corporation duly formed, validly existing and in good standing under the laws of the State of Nevada and qualified to do business in the State of Florida with its principal place of business at its address set forth above. 3.2 Guarantor. Guarantor is a corporation duly formed, validly existing and in good standing under the laws of the State of New York with its principal place of business at 4310 Paradise Road, Las Vegas, Nevada 89109. 3.3 Financial Statements. The Financial Statements are true, correct, and complete in all material respects as of the dates specified therein and the balance sheets, profit and loss statements and statements of cash flow fairly present the financial condition of Borrower and, if required, of Guarantor as of the dates specified. No material adverse change has occurred in the financial condition of Borrower or Guarantor since the dates of the Financial Statements. 3.4 Suits, Actions, Etc. Other than as disclosed on Exhibit "H" hereto, there are no actions, suits, or proceedings pending or, to the knowledge of Borrower, threatened, in any court or before or by any Governmental Authority against or affecting Borrower, Guarantor, or the Property, which, if adversely determined, would have a material adverse effect on the Property or impair the ability of Borrower or Guarantor to complete its obligation under the Loan Instruments or which involve the validity, enforceability, or priority of any of the Loan Instruments, at law or in equity. The consummation of the transactions contemplated hereby, and the performance of any of the terms and conditions hereof and of the other Loan Instruments, will not result in a breach of, or constitute a default in Borrower's or Guarantor's organizational documents or in any mortgage, deed of trust, lease, promissory note, loan agreement, -17- 23 credit agreement, partnership agreement, or other agreement to which Borrower or Guarantor is a party or by which Borrower or Guarantor may be bound or affected. To the best of their knowledge, neither Borrower nor Guarantor is in default of any order of any court or any requirement of any Governmental Authority. 3.5 Valid and Binding Obligation. All of the Loan Instruments, and all other documents referred to herein to which Borrower or Guarantor is a party, upon execution and delivery will constitute valid and binding obligations of Borrower and Guarantor, enforceable in accordance with their terms except as limited by Debtor Relief Laws. 3.6 Title to the Property. Borrower holds full legal and equitable title to the Property, subject only to the Permitted Exceptions. 3.7 Disclosure. There is no fact of which Borrower is aware that Borrower has not disclosed to Lender in writing that could materially adversely affect the property, business or financial condition of Borrower, Guarantor or the Property. Borrower has furnished Lender with a true and complete copy of all documents relating to construction of the Improvements. 3.8 System Compliance. The storm and sanitary sewer system, water system, all mechanical systems of the Property and other parts of the Improvements do (or when constructed will) comply with all applicable environmental, pollution control and ecological laws, ordinances, rules and regulations, and all Governmental Authorities having jurisdiction of the Property have issued or to the best of Borrower's knowledge will issue all necessary permits, licenses or other authorizations for the construction of the Improvements (specifically including the named systems). 3.9 Submittals. The Loan Instruments and all Financial Statements, Plans, budgets, schedules, opinions, certificates, confirmations, contractor's statements, applications, rent rolls, affidavits, agreements, Construction Contract, Architectural Contract and other materials submitted to the Lender in connection with or in furtherance of the Loan Instruments by or on behalf of the Borrower or Guarantor fully and fairly state in all material respects the matters with which they purport to deal, and neither misstate any material fact, nor, separately or in the aggregate, fail to state any material fact necessary to make the statements made not misleading; provided, however, that such representation and warranty is made to the best of Borrower's knowledge with respect to such materials submitted to Lender which were prepared by parties other than Borrower or -18- 24 its employees. 3.10 Utility Availability. All utility and municipal services required for the construction, occupancy and operation of the Improvements, including, but not limited to, water supply, storm and sanitary sewer systems, electric and telephone facilities, are available for use and tap-on at the boundaries of the Property and will be available in sufficient amounts for the normal and intended use of the Improvements, and written permission has been or will be obtained from the applicable utility companies or municipalities to connect the Improvements into each of said services. 3.11 Governmental Requirements. The Property and the Improvements are and at all times during the Loan will be constructed, operated and sold in compliance with all zoning requirements, building codes, subdivision improvement agreements, licensing requirements, all covenants, conditions and restrictions of record, and all other Governmental Requirements and there are no Governmental Requirements prohibiting the use and operation of the Property for timeshare purposes. The zoning and subdivision approval of the Property and the right and ability to construct, use or operate the Improvements are not in any way dependent on or related to any real estate other than the Property. To Borrower's knowledge, there are no, nor are there any alleged or asserted, violations of Governmental Requirements, law, regulations, ordinances, codes, permits, licenses, declarations, covenants, conditions, or restrictions of record, or other agreements relating to the Property or the Improvements or any part thereof. Borrower has obtained or is not aware of reasons why it cannot obtain all necessary permits, licenses, consents and approvals to develop and operate the Property as a time-share project. 3.12 Property Access. The Property has adequate access through fully improved private or dedicated roads. 3.13 Flood Hazards/Wetlands. The Property is in flood zone "C" as defined in the Flood Disaster Protection Act of 1973, as amended, and the Property is not located within a wetlands as defined by any Governmental Authority. 3.14 Contracts with Affiliates. Except for the relationships and transactions (the "Approved Transactions") disclosed to Lender in writing and set forth on Exhibit "I", Borrower owns no stock or interest in any other person or entity and has no affiliates which have any involvement or interest in the Property in any way. All Approved Transactions were negotiated in good faith, are arms-length transactions and all terms, covenants and conditions which govern the Approved Transactions are at market rate. The representation and warranty -19- 25 made in this Section 3.14 shall remain true throughout the term of the Loan provided, however, Borrower may have the right to acquire and create new subsidiaries. 3.15 Inducement to Lender. The representations and warranties in this Article and the covenants and agreements of Borrower set forth in Article 4 below and contained in the Loan Instruments are made by Borrower as an inducement to Lender to make the Loan and Borrower understands that Lender is relying on such representations, warranties, covenants and agreements which shall be true and correct at all times while the Loan is outstanding and shall survive any (a) bankruptcy proceedings involving Borrower, Guarantor or the Property, or (b) foreclosure of the Mortgage, or (c) conveyance of title to the Property to the Lender in lieu of foreclosure of the Mortgage. Acceptance of each Advance constitutes reaffirmation, as of the date of such acceptance, of the representations, warranties, covenants and agreements of Borrower in the Loan Instruments except as disclosed in the Affidavit of Borrower (if accepted by Lender), on which Lender shall rely in making such Advance. ARTICLE 4 - COVENANTS AND AGREEMENTS BORROWER Borrower hereby covenants and agrees as follows: 4.1 Mandatory Principal Payments. Borrower shall pay Lender the Interval Release Payment for each Interval Unit at the time each Interval Unit is sold, which payments shall be applied under the Loan as set forth herein and in the other Loan Instruments. Borrower shall pay Lender the Interval Incentive Fee at the time each Interval Unit is sold. Commencing with the first month after the first Improvements Completion Date, no later than the tenth (10th) day of each month, Borrower shall deliver to Lender a sales report for the Resort Property showing all sales of Interval Units during the immediately prior month, which sales report shall be certified by Borrower as accurate and shall be consistent with the payments made by Borrower to Lender in accordance with this Section 4.1. On or before the fifteenth (15th) day and the last day of each month, Lender shall provide Borrower with partial releases from the lien of the Mortgage for each Interval Unit for which Lender has been paid the applicable Interval Release Payment and the applicable Interval Incentive Fee at least five (5) days prior to such date. 4.2 Compliance With Governmental Requirements. Borrower shall timely comply with all Governmental Requirements applicable to the Borrower, the Improvements and the Resort Property. Borrower assumes full responsibility for the compliance of the Plans, the Property and the Improvements with all -20- 26 Governmental Requirements and with sound building and engineering practices, and, notwithstanding any approvals by Lender, Lender shall have no obligation or responsibility whatsoever for the Plans or any other matter incident to the Property or the construction of the Improvements. Immediately upon Borrower's receipt of any notice from a Governmental Authority of noncompliance with any Governmental Requirements, Borrower shall provide Lender with written notice thereof. 4.3 Construction of the Improvements. Borrower shall commence construction of the Improvements on or before the Commencement Date and the construction of the Improvements shall be prosecuted with diligence and continuity, in a good and workmanlike manner, and in accordance with sound building and engineering practices, all applicable Governmental Requirements, the Plans, the Approved Budget, the Approved Construction Schedule, and all covenants, conditions and restrictions. Borrower shall not permit cessation of work for a period in excess of those periods specified in Section 1.22(f) of this Loan Agreement and shall complete construction of the Improvements on or before the applicable Improvements Completion Date, free and clear of all liens other than the Permitted Exceptions and the Loan Instruments (except those as to which Borrower has furnished a bond or other security acceptable to Lender and otherwise complied with the requirements of Section 4.18 below). 4.4 Correction of Defects. Borrower shall correct or cause to be corrected (a) any defect in the Improvements, (b) any material departure in the construction of the Improvements from the Plans, Governmental Requirements, covenants, conditions and restrictions, if applicable, or (c) any encroachment by any part of the Improvements, or any structure located on the Property, on any easement, property line, or restricted area, or any encroachment by any such structure on any building line. 4.5 Storage of Materials. Borrower shall cause all materials supplied for, or intended to be utilized in, the construction of the Improvements, but not affixed to or incorporated into the Improvements or the Property, to be stored on the Property, with adequate safeguards, as reasonably required by Lender, to prevent loss, theft, damage, or commingling with other materials or projects. 4.6 Inspection of the Property. Borrower shall permit Lender, and its agents and representatives, to enter upon the Property and any location where materials intended to be utilized in the construction of the Improvements are stored, for the purpose of inspection of the Property and such materials at all reasonable times. -21- 27 4.7 Notices by Governmental Authority, Casualty, Condemnation. Borrower shall timely comply with and promptly furnish to Lender true and complete copies of any notice or claim by any Governmental Authority pertaining to the Property. Borrower shall promptly notify Lender of any fire or other casualty or any notice of taking or eminent domain action or proceeding affecting the Property, or the threat of any such action or proceeding of which Borrower becomes aware. Provided no Event of Default then exists and Borrower certifies as to same, the net insurance proceeds shall be paid to Lender but shall be made available by Lender for the restoration or repair of the Property if (i) in Lender's reasonable judgment: (a) restoration or repair and the continued operation of the Resort Property is economically feasible, and (b) the value of Lender's security is not reduced; (ii) the cost of restoration or repair does not exceed the net insurance proceeds or Borrower or the Association shall provide a Borrower's Deposit or other evidence satisfactory to Lender in its sole discretion that Borrower or the Association can pay all costs of restoration in excess of such net insurance proceeds; (iii) the loss does not occur in the six (6) month period preceding the Maturity Date as defined in the Acquisition Note and the Renovation Note; (iv) Borrower has sufficient business interruption insurance to provide alternative accommodations for all owners or users of Interval Units at the Project affected by such casualty loss; and (v) Lender's Inspecting Architect/Engineers certify that the restoration of the Property can be completed at least ninety (90) days prior to the Maturity Date. Borrower or the Association shall pay all amounts, in addition to the net insurance proceeds, necessary to pay in full the cost of the restoration or repair. Notwithstanding the foregoing, it shall be a condition precedent to any disbursement of insurance proceeds held by Lender hereunder that Lender shall have approved (x) all plans and specifications for any proposed repair or restoration; (y) the construction schedule; and (z) the architect's and general contractor's contracts for restoration. Lender may establish other conditions it deems reasonably necessary to assure the work is fully completed in a good and workmanlike manner free of all liens or claims by reason thereof, and in compliance with all applicable laws, rules and regulations. At Lender's option, the net insurance proceeds shall be disbursed pursuant to a construction escrow acceptable to Lender. If an Event of Default then exists, or any of the conditions set forth in this subsection have not been met or satisfied, the net insurance proceeds (after deduction of Lender's reasonable costs and expenses, if any, in collecting same) shall be applied to the Loan in such order and manner as Lender may elect, whether or not due and payable, with -22- 28 any excess paid to Borrower. The proceeds of any award, payment or claim for damages, direct or consequential, in connection with any condemnation or other taking of any Interval Unit or any portion of the Property, or for conveyances in lieu of condemnation, are hereby assigned to and shall be paid to Lender. Lender is authorized (but is under no obligation) to collect any such proceeds. The proceeds of any such award shall be made available by Lender for repair or restorations of the Property in the same manner and upon the same conditions as those set forth above for net insurance proceeds. Anything to the contrary herein notwithstanding, for so long as any part of the Property is subject to the Declaration of CCRs, any and all insurance proceeds arising from any damage or destruction to the Property and any and all awards and payments with respect to condemnation or conveyances in lieu thereof received by Lender shall be delivered and paid out by Lender to the insurance trustee under the Declaration of CCRs, to be distributed and used in accordance with the provisions of the Declaration of CCRs. 4.8 Application of Advances. Borrower shall apply all Advances for reimbursement of costs and expenses specified in the Approved Budget, and for no other purpose. 4.9 Borrower's Deposit. In accordance with Sections 2.7 and 4.7 above, Lender may require a Borrower's Deposit to be made which Lender shall place in an interest bearing account and disburse in accordance with Sections 2.7 or 4.7 as applicable. 4.10 Direct Disbursement and Application by Lender. Upon an Event of Default hereunder, Lender shall have the right, but not the obligation, to disburse and directly apply the proceeds of any Advance or the unadvanced balance of the Loan to the satisfaction of any of Borrower's obligations hereunder or under any of the other Loan Instruments. Any Advance by Lender for such purpose, except Borrower's Deposit, shall be part of the Loan and shall be secured by the Loan Instruments. Borrower hereby authorizes Lender to hold, use, disburse, and apply the Loan and the Borrower's Deposit, if any, for payment of costs of construction of the Improvements, reasonable expenses incident to the Loan and the Property, and the payment or performance of any obligation of Borrower hereunder or under any of the other Loan Instruments. Borrower hereby assigns and pledges the proceeds of the Loan and the Borrower's Deposit to Lender for such purposes. Upon an Event of Default, Lender may advance and incur such Costs as Lender reasonably deems necessary for the completion of construction of the Improvements and to preserve the Property, and -23- 29 any other security for the Loan, and such Costs, even though in excess of the amount of the Loan, shall be secured by the Loan Instruments and payable to Lender. 4.11 Costs and Expenses. Borrower shall pay when due all costs and expenses required by this Loan Agreement, including, without limitation, (a) all taxes and assessments applicable to the Property, (b) all fees for filing or recording the Loan Instruments, (c) all fees and commissions lawfully due to brokers, salesmen, and agents in connection with the Loan or the Property, (Lender hereby warrants to Borrower that it has not engaged any brokers, salesmen or agents in connection with the Loan) (d) all reasonable fees and expenses, including the cost of the Survey, (e) all premiums for the Insurance Policies, and (f) all other costs and expenses payable to third parties incurred by Borrower in connection with the consummation of the transactions contemplated by this Loan Agreement. 4.12 Additional Documents. Borrower shall execute and deliver to Lender, from time to time as requested by Lender, such other documents as shall reasonably be necessary to provide the rights and remedies to Lender granted or provided for by the Loan Instruments. 4.13 Inspection of Books and Records. Borrower shall permit Lender at all reasonable times, upon five (5) days advance written notice to Borrower, to examine and copy the books and records of Borrower pertaining to the Loan and the Property, and all sales and marketing records, contracts, statements, invoices, bills, and claims for labor, materials, and services supplied for the construction of the Improvements; provided, however, all such books, records and information contained therein shall be treated as strictly confidential and shall not be disclosed to any third party (other than Lender's accountants, attorneys and consultants in connection with the Loan, and as may be required by law) without written consent of Borrower. 4.14 No Liability of Lender. Except in the case of Lender's gross negligence or wilful misconduct, Lender shall have no liability, obligation, or responsibility whatsoever with respect to the construction of the Improvements except to advance the Loan and the Borrower's Deposit pursuant to this Loan Agreement. Lender shall not be obligated to inspect the Property or the construction of the Improvements, nor be liable or responsible for any defect in the Property or the Improvements by reason of inspecting same, nor be liable for the performance or default of Borrower, Architect, the Inspecting Architects/Engineers, Contractor, or any other party, or for any failure to construct, complete, protect, or insure the Improvements, or for the payment of costs of labor, materials, or -24- 30 services supplied for the construction of the Improvements, or for the performance of any obligation of Borrower whatsoever. Nothing including without limitation any Advance or acceptance of any document or instrument, shall be construed as a representation or warranty, express or implied, to any party by Lender. 4.15 No Conditional Sale Contracts, Etc. No materials, equipment, or fixtures shall be supplied, purchased, or installed for the construction of the Improvements pursuant to security agreements, conditional sale contracts, lease agreements, or other arrangements or understandings whereby a security interest or title is retained by any party or the right is reserved or accrues to any party to remove or repossess any materials, equipment, or fixtures intended to be utilized in the construction or operation of the Improvements. 4.16 Defense of Actions. Lender may (but shall not be obligated to) commence, appear, in, or defend any action or proceeding purporting to affect the Loan, the Property, or the respective rights and obligations of Lender and Borrower pursuant to this Loan Agreement. Lender may (but shall not be obligated to) pay all reasonable necessary expenses, including reasonable attorneys' fees and expenses incurred in connection with such proceedings or action, which Borrower agrees to repay to Lender on demand; provided, however, in any action directly between Borrower and Lender, the provisions of Section 6.14 shall apply. 4.17 Prohibition on Transfer of Property or Assignment of Borrower's Interest. Borrower shall not (a) create any new ownership interest in Borrower, or (b) except for the (1) sale of Interval Units in arms length transactions, (2) the lien of the Loan Instruments, (3) the transfer of personal property permitted herein, or (4) the Permitted Exceptions, transfer, lease or mortgage (i) all or any part of the Property, or any interest therein, or (ii) any ownership interest in Borrower (including any interest in the profits, losses or cash distributions in any way relating to the Property) except this shall not serve to prohibit the sale or hypothecation by Borrower of notes and mortgages generated by Borrower in connection with the sale of Interval Units subject to Lender's rights under the Exclusive Financing Agreement between the parties of even date herewith. In addition, if at least two of the following, Fred Conte, Jerome Cohen, Herb Hirsch or Don Mayerson fail to remain a principal officer of Borrower with authority to make all material business decisions, then Lender may at Lender's option, declare all of the indebtedness evidenced by the Acquisition Note and/or the Renovation Note to be immediately due and payable, and Lender may invoke any remedies permitted by the Loan Instruments. Intestate transfers or transfers by devise shall not constitute a transfer for the purposes of the foregoing provisions. -25- 31 4.18 Payment of Charges. Borrower shall promptly pay or cause to be paid when due all costs and expenses incurred in connection with the Property and the construction of the Improvements, and Borrower shall keep the Property free and clear of any lien, tax, judgment, charge, or claim (the "Charges") other than the encumbrances of the Mortgage, the Permitted Exceptions, and other liens approved in writing by Lender. Notwithstanding anything to the contrary contained in this Loan Agreement, Borrower (a) may, discharge in accordance with applicable law any such Charge or contest the validity or amount of any claim of any contractor, consultant, architect, or other person providing labor, materials, or services with respect to the Property, (b) may contest any tax or special assessments levied by any Governmental Authority, and (c) may contest the enforcement of or compliance with any Governmental Requirements, and such contest on the part of Borrower shall not be an Event of Default hereunder and shall not release Lender from its obligations to make Advances hereunder; provided, however, that during the pendency of any such contest Borrower shall, if requested by Lender, furnish to Lender and Title Company an indemnity bond from a corporate surety satisfactory to Lender and Title Company in an amount equal to one hundred fifty percent (150%) of the amount being contested or other security reasonably acceptable to them, and provided further that Borrower shall pay any amount adjudged by a court of competent jurisdiction (including appellate courts) to be due, with all costs, interest, and penalties thereon, before such judgment becomes a lien on the Property and provided further Borrower is able to fulfill all of Borrower's obligations under this Loan Agreement during the pendency of any such contest. 4.19 Restrictions and Annexation. Other than the Permitted Exceptions, Borrower shall not impose any restrictive covenants, easements or other encumbrances upon the Property, execute or file any subdivision plat affecting the Property, or consent to the annexation of the Property to any city without the prior written consent of Lender, which shall not be unreasonably withheld. 4.20 Current Financial Reports. Borrower shall (1) on or before sixty (60) days after the end of each applicable fiscal quarter, deliver to Lender quarterly Financial Reports of Borrower, certified by Borrower to be a fair and accurate summary of the information set forth therein, (2) on or before one hundred twenty (120) days after the end of each applicable fiscal year, deliver to Lender then current Financial Reports of Borrower, Guarantor and the Association (so long as Borrower is in control thereof), which, except for those of the Association, shall be audited by a certified public accountant and prepared in accordance with GAAP, and (3) from time to time, as Lender may -26- 32 reasonably request, deliver to Lender additional financial reports of Borrower, Guarantor and the Association. 4.21 Tax Receipts. Borrower shall furnish Lender with receipts or tax statements marked "Paid" to evidence the payment of all taxes levied on the Property prior to the date such taxes become delinquent. 4.22 Notice of Litigation, Claims, and Financial Change. Borrower shall promptly inform Lender of (a) any litigation against Borrower or Guarantor or affecting the Property, which, if determined adversely, might have a material adverse effect upon the financial condition of Borrower or Guarantor or upon the Property, or might cause an Event of Default, (b) any claim or controversy which might become the subject of such litigation, and (c) any material adverse change in the financial condition of Borrower or Guarantor. 4.23 No Occupancy Contrary to Builder's Risk Policy. The Improvements or any element thereof shall not be occupied until Borrower has obtained and furnished to Lender (a) a certificate of occupancy (or its equivalent), if applicable, issued by the local Governmental Authorities with jurisdiction over construction of the Improvements, and (b) replacement coverage in the form of an all-risk insurance policy upon the completed Improvements or element thereof, which policy will not be impaired by the occupancy of the Improvements and is reasonably satisfactory to Lender. 4.24 Hold Harmless. Except for Lender's acts or omissions which constitute gross negligence or willful misconduct, Borrower shall defend, at its own cost and expense, and hold Lender harmless from, any proceeding or claim in any way relating to the Property or the Loan Instruments. Subject to the provisions of Section 6.14, all Costs incurred by Lender in protecting its interests hereunder, including all court costs and reasonable attorney's fees and expenses, shall be borne by Borrower. The provisions of this Section shall survive the payment in full of the Loan and all other indebtedness secured by the Mortgage and the release of the Mortgage as to events occurring and causes of action arising before such payment and release. 4.25 Cross Default. The Mortgage shall also provide that any Event of Default under the documents evidencing and securing the Interval Receivables Loan shall be an Event of Default under the Mortgage and the other Loan Instruments. The documents and instruments evidencing and securing the Interval Receivables Loan shall also secure the Acquisition Note and the Renovation Note. Any Event of Default hereunder or under the -27- 33 other Loan Instruments shall be an Event of Default under the Receivables Loan Agreement. 4.26 Modifications to Resort Documents. Borrower shall not without Lender's prior written consent, which consent shall not be unreasonably withheld, amend, modify or supplement the Declaration of CCRs or any of the other documents relating to the creation or operation of the timeshare project on the Resort Property ("Resort Documents") unless such amendment, modification or supplement is required either to cause additional Interval Units to be annexed into the timeshare regime or by law, whereupon Borrower shall implement same and give prompt written notice thereof to Lender. Lender shall, in writing, reject or approve such written request to modify, amend or supplement the Resort Documents within thirty (30) days of receipt of such request from Borrower. 4.27 Subordinated Obligations. Borrower hereby represents and warrants to Lender that those matters described on Exhibit "J" hereto constitute all Borrower's debts, liabilities and obligations to any Affiliates of Borrower except for salaries and other compensation due officers and directors as of February 29, 1996. Upon an Event of Default, Borrower will not, directly or indirectly, (a) permit any payment to be made in respect of any indebtedness, liabilities or obligations direct or contingent, to any Affiliates (excluding trade payables incurred in the ordinary course of business), which payments shall be and are hereby made subordinate to the payment of principle of, and interest on, the Acquisition Note, the Renovation Note, or any indebtedness secured under the Interval Receivables Loan or (b) permit the amendment, rescission or other modification of any of Borrower's subordinated obligations in such a manner as to affect adversely the lien priority of the Lender in any property, real or personal, pledged to secure any of the foregoing Loan Instruments. For purposes of this provision the term "Affiliate" shall mean an individual, trust, estate, partnership, limited liability company, corporation or any other incorporated or unincorporated organization ("Person") that (i) directly or indirectly, through one or more intermediaries, controls or is controlled by or is under common control with Borrower, Guarantor or (ii) any officer, director, or partner of Borrower or Guarantor or any relative of any of the foregoing. The term "Control" shall mean possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person whether through ownership of voting securities, by contract or otherwise. ARTICLE 5 - RIGHTS AND REMEDIES OF LENDER 5.1 Rights of Lender. Upon the occurrence of an Event of Default, Lender shall have the right, in addition to any other -28- 34 right or remedy of Lender as set forth in the Loan Instruments, but not the obligation, in its own name or in the name of Borrower, to enter into possession of the Property; to perform all work necessary to complete the construction of the Improvements substantially in accordance with the Plans, Governmental Requirements, and the requirements of any lessee, if applicable; and to employ watchmen and other safeguards to protect the Property. Borrower hereby appoints Lender as the attorney-in-fact of Borrower, with full power of substitution, and in the name of Borrower, if Lender elects to do so, upon the occurrence of an Event of Default, to (a) use such sums as are reasonably necessary, including any proceeds of the Loan and the Borrower's Deposit, if any, make such changes or corrections in the Plans, the construction of the Improvements, the Approved Budget, the Approved Construction Schedule, and employ such architects, engineers, and contractors as may be reasonably required for the purpose of completing the construction of the Improvements substantially in accordance with the Plans and Governmental Requirements, (b) execute all applications and certificates in the name of Borrower which may be required for completion of construction of the Improvements, (c) endorse the name of Borrower on any checks or drafts representing proceeds of the Insurance Policies, or other checks or instruments payable to Borrower with respect to the Property, (d) do every act with respect to the construction of the Improvements which Borrower may do, and (e) prosecute or defend any action or proceeding incident to the Property. The power of attorney granted hereby is a power coupled with an interest and is irrevocable. Lender shall have no obligation to undertake any of the foregoing actions, and, if Lender should do so, it shall have no liability to Borrower for the sufficiency or adequacy of any such actions taken by Lender. 5.2 Acceleration and Other Remedies. Upon the occurrence of an Event of Default, Lender may, at its option, declare the Loan immediately due and payable, and Lender may exercise any or all of its remedies set forth in the Loan Instruments. 5.3 Cessation of Advances. Upon the occurrence of an Event of Default, the obligation of Lender to disburse the Loan and the Borrower's Deposit and all other obligations of Lender hereunder shall, at Lender's option, immediately terminate. 5.4 Funds of Lender. Any funds of Lender used for any purpose referred to in this Article 5 shall constitute Advances secured by the Loan Instruments and shall bear interest at the rate specified in the Renovation Note to be applicable after default hereunder. 5.5 No Waiver or Exhaustion. No waiver by Lender of -29- 35 any of its rights or remedies hereunder, in the other Loan Instruments, or otherwise, shall be considered a waiver of any other or subsequent right or remedy of Lender; no delay or omission in the exercise or enforcement by Lender of any rights or remedies shall ever be construed as a waiver of any right or remedy of Lender; and no exercise or enforcement, of any such rights or remedies shall ever be held to exhaust any right or remedy of Lender. 5.6 Marshalling Waiver. Borrower waives any and all rights to require the marshalling of assets in connection with the exercise of any of the remedies hereunder. ARTICLE 6 - GENERIC TERMS AND CONDITIONS 6.1 Notices. Any notice or other communication required or permitted to be given shall be in writing addressed to the respective party as set forth below and may be personally served, telecopied or sent by overnight courier or U.S. mail and shall be deemed given: (a) if served in person, when served; (b) if telecopied, on the date of transmission if before 3:00 p.m. (Chicago time) on a business day otherwise, on the next business day; provided that a confirmation of the receipt of any such telecopy is obtained and retained by the sending party and that a hard copy of such notice is also sent pursuant to (c) or (d) below; (c) if by overnight courier, on the first business day after delivery to the courier; or (d) if by U.S, Mail, certified or registered mail, return receipt requested on the fourth (4th) day after deposit in the mail postage prepaid. For purposes of this Agreement, the term "business day" shall mean a day on which banks are open for business in both Illinois and Nevada. Notices to Borrower: PREFERRED EQUITIES CORPORATION 4310 Paradise Road Las Vegas, Nevada 89109 Attn: Frederick H. Conte Telecopy: 702/369-8775 With a copy to: PREFERRED EQUITIES CORPORATION 4310 Paradise Road Las Vegas, Nevada 89109 Attn: Jon Joseph Telecopy: 702/369-8775 -30- 36 Notices to Lender: HELLER FINANCIAL, INC. Sales Finance Division Attn: Portfolio Manager, R.E. Loan No. 95-227 500 West Monroe St., 15th Floor Chicago, Illinois 60661 Telecopy: (312) 441-7924 With a copy to: HELLER FINANCIAL, INC. Real Estate Financial Services Attn: Group General Counsel R.E. Loan No. 95-227 500 West Monroe St. 15th Floor Chicago, Illinois 60661 Telecopy: (312) 441-7872 6.2 Entire Agreement and Modifications. The Loan Instruments constitute the entire understanding and agreement between the undersigned with respect to the transactions arising in connection with the Loan and supersede all prior written or oral understandings and agreements between the undersigned in connection therewith. No provision of this Loan Agreement or the other Loan Instruments may be modified, waived, terminated, supplemented, changed or amended except by a written instrument executed by both parties hereto. 6.3 Severability. In case any of the provisions of this Loan Agreement shall for any reason be held to be invalid, illegal, or unenforceable, such invalidity, illegality, or unenforceability shall not affect any other provision hereof, and this Loan Agreement shall be construed as if such invalid, illegal, or unenforceable provision had never been contained herein. 6.4 Election of Remedies. Lender shall have all of the rights and remedies granted in the Loan Instruments and available at law or in equity, and these same rights and remedies shall be cumulative and may be pursued separately, successively, or concurrently against Borrower, Guarantor, or any property encumbered by the Loan Instruments, at the sole discretion of Lender. The exercise or failure to exercise any of the same shall not constitute a waiver or release thereof or of any other right or remedy, and the same shall be nonexclusive. 6.5 Form and Substance. All documents, certificates, insurance policies, evidence, and other items required under this Loan Agreement to be executed and/or delivered to Lender shall be in form and substance reasonably satisfactory to Lender. 6.6 Limitation on Interest. In no event whatsoever -31- 37 shall the amount of interest paid or agreed to be paid to Lender pursuant to this Loan Agreement, the Acquisition Note or Renovation Note or any of the Loan Instruments exceed the highest lawful rate of interest permissible under applicable law. If, from any circumstances whatsoever, fulfillment of any provision of this Loan Agreement, the Acquisition Note, the Renovation Note and the other Loan Instruments shall involve exceeding the lawful rate of interest which a court of competent jurisdiction may deem applicable hereto ("Excess Interest"), then ipso facto, the obligation to be fulfilled shall be reduced to the highest lawful rate of interest permissible under such law and if, for any reason whatsoever, Lender shall receive, as interest, an amount which would be deemed unlawful under such applicable law, such interest shall be applied to the outstanding principal balance of the Loan (whether or not due and payable), and not to the payment of interest, or shall be refunded to Borrower if such Loan has been paid in full. Neither Borrower nor Guarantor or any endorser shall have any action against Lender for any damages whatsoever arising out of the payment or collection of any such Excess Interest. 6.7 No Third Party Beneficiary. This Loan Agreement is for the sole benefit of Lender and Borrower and is not for the benefit of any third party. 6.8 Borrower in Control. In no event shall Lender's rights and interests under the Loan Instruments be construed to give Lender the right to, or be deemed to indicate that Lender is in control of the business, management or properties of Borrower or has power over the daily management functions and operating decisions made by Borrower. 6.9 Number and Gender. Whenever used herein, the singular number shall include the plural and the plural the singular, and the use of any gender shall be applicable to all genders. The duties, covenants, obligations and warranties of Borrower in this Loan Agreement shall be joint and several obligations of Borrower and of each Borrower if more than one. 6.10 Captions. The captions, headings, and arrangements used in this Loan Agreement are for convenience only and do not in any way affect, limit, amplify, or modify the terms and provisions hereof. 6.11 Applicable Law. This Loan Agreement and the Loan Instruments shall be governed by and construed in accordance with the laws of the State of Illinois and the laws of the United States applicable to transactions within such state, except that the provisions of the laws of the State of Florida shall be applicable to the creation, perfection and enforcement of the lien -32- 38 created by the Mortgage. 6.12 Venue. BORROWER AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING DIRECTLY, INDIRECTLY OR OTHERWISE IN CONNECTION WITH, OUT OF, RELATED TO OR FROM THIS LOAN AGREEMENT OR THE OTHER LOAN INSTRUMENTS SHALL BE LITIGATED, AT LENDER'S SOLE DISCRETION AND ELECTION, ONLY IN COURTS HAVING A SITUS WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS. BORROWER HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN SAID COUNTY AND STATE. BORROWER HEREBY IRREVOCABLY APPOINTS AND DESIGNATES C T CORPORATION SYSTEM, WHOSE ADDRESS IS BORROWER, C/O C T CORPORATION SYSTEM, 208 S. LASALLE STREET, CHICAGO, ILLINOIS 60604, AS ITS DULY AUTHORIZED AGENT FOR SERVICE OF LEGAL PROCESS AND AGREES THAT SERVICE OF SUCH PROCESS UPON SUCH PARTY SHALL CONSTITUTE PERSONAL SERVICE OF PROCESS UPON SUCH PARTY PROVIDED A COPY OF SUCH SERVICE OF PROCESS IS ALSO WITHIN THREE (3) DAYS THEREAFTER TRANSMITTED TO BORROWER IN ACCORDANCE WITH SECTION 6.1 HEREOF EXCEPT IN THE CASE OF SERVICE OF PROCESS FOR ACTIONS WHEREIN THE BORROWER'S RESPONSE IS DUE IN LESS THAN TWENTY (20) DAYS, A COPY OF SUCH PROCESS WILL BE SENT TO BORROWER ON THE SAME DAY AS SERVICE ON C T CORPORATION SYSTEM. IN THE EVENT SERVICE IS UNDELIVERABLE BECAUSE SUCH AGENT MOVES OR CEASES TO DO BUSINESS IN CHICAGO, ILLINOIS, BORROWER SHALL, WITHIN TEN (10) DAYS AFTER LENDER'S REQUEST, APPOINT A SUBSTITUTE AGENT (IN CHICAGO, ILLINOIS) ON ITS BEHALF AND WITHIN SUCH PERIOD NOTIFY LENDER OF SUCH APPOINTMENT. IF SUCH SUBSTITUTE AGENT IS NOT TIMELY APPOINTED, LENDER SHALL, IN ITS SOLE DISCRETION, HAVE THE RIGHT TO DESIGNATE A SUBSTITUTE AGENT UPON FIVE (5) DAYS NOTICE TO BORROWER. BORROWER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO TRANSFER OR CHANGE THE VENUE OF ANY LITIGATION BROUGHT AGAINST IT BY LENDER ON THE LOAN INSTRUMENTS IN ACCORDANCE WITH THIS PARAGRAPH. 6.13 Jury Trial Waiver. BORROWER AND LENDER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS LOAN AGREEMENT AND THE OTHER LOAN INSTRUMENTS AND THE BUSINESS RELATIONSHIP THAT IS BEING ESTABLISHED. THIS WAIVER IS KNOWINGLY, INTENTIONALLY AND VOLUNTARILY MADE BY BORROWER AND LENDER, AND BORROWER ACKNOWLEDGES THAT NEITHER LENDER NOR ANY PERSON ACTING ON BEHALF OF LENDER HAS MADE ANY REPRESENTATIONS OF FACT TO INCLUDE THIS WAIVER OF TRIAL BY JURY OR HAS TAKEN ANY ACTIONS WHICH IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. BORROWER AND LENDER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH OF THEM HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS LOAN AGREEMENT AND THE OTHER LOAN INSTRUMENTS AND THAT EACH OF THEM WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. BORROWER AND LENDER FURTHER ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED (OR HAVE HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS LOAN AGREEMENT AND THE OTHER LOAN INSTRUMENTS AND IN THE MAKING (IF -33- 39 THIS WAIVER BY INDEPENDENT LEGAL COUNSEL. 6.14 Attorney's Fees. In any action hereunder between the parties hereto, the prevailing party shall be entitled to reasonable attorneys' fees including those for pretrial, trial and appellate proceedings. 6.15 Escrow. It is understood that certain local requirements mandate that Borrower escrow all sales proceeds received from consumers for the sale of Interval Units at the Property during the pendency of construction of the Improvements and until closing of the purchase of an Interval Unit. The parties agree that an escrow agent ("Escrow Agent") shall hold the sales proceeds during the pendency of construction and release them as may be allowed by local law having jurisdiction over the Property. The parties further agree that the Escrow Agent must be jointly approved by both Lender and Borrower, and that Seminole Title Company, is approved as the Escrow Agent. 6.16 Commitment Fee. Borrower has agreed to pay Lender a commitment fee in the amount of One Hundred Fifty Thousand Dollars and No/100 ($150,000.00) in connection with the Loan and the Interval Receivables Loan which Borrower agrees is fully earned and payable. Borrower has previously paid Lender the amount of Twenty Thousand Dollars and No/100 ($20,000.00) representing a portion of the Lender's commitment fee. At the execution and delivery of this Loan Agreement, Borrower shall pay Lender the sum of One Hundred Thirty Thousand Dollars and No/100 ($130,000.00) representing the balance of the commitment fee for the Loan and the Interval Receivables Loan. 6.17 Counterparts. This Agreement may be signed in multiple counterparts which taken together shall constitute the entire agreement between the parties. IN WITNESS WHEREOF, the parties set their hands the date above first written. BORROWER: LENDER: PREFERRED EQUITIES CORPORATION, HELLER FINANCIAL, INC., a a Nevada Corporation Delaware corporation By: ___________________________ By: ___________________________ Its: __________________________ Title: _________________________ -34- 40 APPROVED BY: GUARANTOR: MEGO FINANCIAL CORP., a New York corporation By: __________________________ Its: _________________________ _________________________________ -35- 41 EXHIBIT A APPLICATION FOR ADVANCE -36- 42 EXHIBIT B APPROVED BUDGET -37- 43 EXHIBIT C EASEMENT AREA -38- 44 EXHIBIT D APPROVED CONSTRUCTION SCHEDULE 1. Commence Construction on Phase I on or before sixty (60) days after the date of this Agreement (the "Commencement Date"). 2. Phase I--42 Units in Buildings _____, to be completed on or before 134 days after the Commencement Date (the "Phase I Completion Date"). 3. Phase II--30 Units in Buildings ______ to be completed on or before 134 days after the Phase I Completion Date (the "Phase II Completion Date"). 4. Phase III--30 Units in Buildings ______, the Amenity Building, the Gate House, the pool and parking areas, to be completed on or before 134 days after the Phase II Completion Date (the "Final Completion Date"). -39- 45 EXHIBIT E APPROVED TIMESHARE DOCUMENT FILING SCHEDULE 1. Completed drafts of the Public Offering Statement for Ramada Vacation Suites at Tango Bay including the Declaration of CCRs and the timeshare sales and finance documents but excluding the other exhibits (the "POS") delivered to Lender for review and approval on or before sixty days after the date of this Agreement. 2. Lender to approve or provide comments thereto within fifteen (15) days of receipt of the POS. 3. Borrower to provide redrafts of the POS including all available exhibits thereto, to Lender for final review within fifteen (15) days of receipt of Lender's comments. 4. Lender shall have fifteen (15) days for final review of the POS from receipt of the redrafted POS and during such fifteen (15) day period Borrower shall deliver to Lender all exhibits necessary for filing the POS with the Florida Division of Land Sales, Condominiums and Mobile Homes, Bureau of Timeshare. 5. Borrower upon receipt of final approval of the POS from Lender shall file the POS with the Florida Division of Land Sales, Condominiums, and Mobile Homes, Bureau of Timeshare. 6. Borrower shall obtain final approval of the POS no later than December 1, 1996 subject to delays, if any, caused by Lender's review of the POS. All time frames hereunder shall be extended by the number of days caused by any such delay in Lender's review. -40- 46 EXHIBIT F PERMITTED EXCEPTIONS 1. Any taxes not yet due and payable. -41- 47 EXHIBIT G PROPERTY DESCRIPTION -42- 48 EXHIBIT H LITIGATION DISCLOSURE -43- 49 EXHIBIT I APPROVED TRANSACTION NONE -44- 50 EXHIBIT J SUBORDINATED OBLIGATIONS -45- 51 Loan No. 95-227 RECEIVABLES PROMISSORY NOTE $15,000,000.00, __________, 1996 1. PROMISE TO PAY. FOR VALUE RECEIVED, PREFERRED EQUITIES CORPORATION, a Nevada corporation ("MAKER") whose address is 4310 Paradise Road, Las Vegas, Nevada 89109, promises to pay to the order of HELLER FINANCIAL, INC., a Delaware corporation, and its successors and assigns ("HOLDER"), in lawful money of the United States of America and in immediately available funds, the aggregate unpaid principal amount of all Advances made by Holder to Maker (the "LOAN") pursuant to that certain Interval Receivables Loan and Security Agreement, dated the date hereof, between Holder and Maker, as amended, modified or supplemented from time to time in accordance with its terms (the "Receivables Loan Agreement"). This is a revolving Note, the principal amount of which may increase or decrease from time to time during the term hereof. This Note shall evidence Advances made under the Receivables Loan Agreement, notwithstanding that the total aggregate of principal advances and repayments exceed the original maximum principal amount hereof, and notwithstanding that the principal balance may be zero at any time. Payments shall be made to Holder at 500 West Monroe Street, 15th Floor, Chicago, Illinois 60661 (or such other address as Holder may hereafter designate in writing to Maker). The repayment of the Loan evidenced by this Note is secured by the Receivables Loan Agreement pursuant to which Maker has assigned, pledged and granted a security interest to Lender in certain receivables related to the sale of Intervals and other collateral described therein. This Note, the Receivables Loan Agreement and any other documents evidencing or securing the Loan or executed in connection therewith, and any modification, renewal or extension of any of the foregoing are collectively called the "Receivables Loan Documents". This Note has been issued pursuant to the Receivables Loan Agreement, and all of the terms, covenants and conditions of the Receivables Loan Agreement (including all Exhibits thereto) and all other instruments evidencing or securing the indebtedness hereunder are hereby made a part of this Note and are deemed incorporated herein in full. Defined terms used herein and not otherwise defined shall have the meanings set forth in the Receivables Loan Agreement. -1- 52 2. PRINCIPAL AND INTEREST So long as no Event of Default exists, interest shall accrue on the principal balance hereof from time to time outstanding and Maker shall pay interest thereon at a rate equal to a floating rate per annum equal to four percent (4.0%) plus the Base Rate (the aggregate rate referred to as the "INTEREST RATE"). "BASE RATE" shall mean the rate published each Business Day in the Wall Street Journal for deposits maturing three (3) months after issuance under the caption "Money Rates, London Interbank Offered Rates (Libor)." The Interest Rate for each calendar month shall be fixed based upon the Base Rate published prior to and in effect on the first (1st) Business Day of such month. Interest shall be calculated on a 360 day year and charged for the actual number of days elapsed. 3. PAYMENT. This Note is subject to mandatory payments as provided in Section 1.4 of the Receivables Loan Agreement. Maker shall pay interest to Lender monthly, in arrears, on the first day of each calendar month, commencing on the first day of the first calendar month following the first Advance pursuant to the Receivables Loan Agreement, on the unpaid principal amount of this Note outstanding during the previous calendar month at a fluctuating interest rate per annum (computed daily on the basis of a year of 360 days and charged for the actual number of days elapsed) equal to the Interest Rate; provided, however, that after the occurrence of an Event of Default under the Receivables Loan Agreement this Note shall bear interest at the Default Rate set forth below. The Loan shall be due and payable on or before June 1, 2005, or any earlier date on which the Loan shall be required to be paid in full, whether by acceleration or otherwise (the "MATURITY DATE"). 4. PREPAYMENT. This Note is (i) subject to mandatory prepayments in whole or in part as provided in Section 1.5(b) of the Receivables Loan Agreement; and (ii) permitted optional prepayments in accordance with Section 1.5(a) of the Receivables Loan Agreement, subject to applicable Prepayment Premiums. -2- 53 Not in limitation of any other mandatory prepayment requirements under the Receivables Loan Agreement, if at any time the outstanding aggregate principal balance under (i) this Note; (ii) that certain promissory note of even date herewith between Holder and Maker in the principal amount of $4,865,000.00 (the "Acquisition Note"); and (iii) that other certain revolving promissory note of even date herewith between Holder and Maker in the maximum principal amount of $1,500,000.00 (the "Renovation Note") exceeds $15,000,000.00, such excess amount shall be due and payable by Maker to Holder within five (5) Business Days after notice from Holder without premium or penalty and such amount shall be applied by Holder to reduce the outstanding principal balance of any of the above-referenced notes in any manner or amount that Holder determines. 5. DEFAULT. A. Events of Default. An "Event of Default" under this Note shall mean the occurrence of any Event of Default under any of the Receivables Loan Documents, after giving effect to any applicable grace or cure period. B. Remedies. So long as an Event of Default remains outstanding: (a) interest shall accrue at a rate equal to the Interest Rate plus four percent (4%) per annum (the "DEFAULT RATE"); (b) Holder may, at its option and without notice (such notice being expressly waived), declare the Loan immediately due and payable; and (c) Holder may pursue all rights and remedies available under the Receivables Loan Agreement or any other Receivables Loan Documents. Holder's rights, remedies and powers, as provided in this Note and the other Receivables Loan Documents, are cumulative and concurrent, and may be pursued singly, successively or together against Maker, any guarantor of the Loan, the security described in the Receivables Loan Documents, and any other security given at any time to secure the payment hereof, all at the sole discretion of Holder. Additionally, Holder may resort to every other right or remedy available at law or in equity without first exhausting the rights and remedies contained herein, all in Holder's sole discretion. Failure of Holder, for any period of time or on more than one occasion, to exercise its option to accelerate the Maturity Date shall not constitute a waiver of the right to exercise the same at any time during the continued existence of any Event of Default or any subsequent Event of Default. If any attorney is engaged: (i) to collect the Loan or any -3- 54 sums due under the Receivables Loan Documents, whether or not legal proceedings are thereafter instituted by Holder; (ii) to represent Holder in any bankruptcy, reorganization, receivership or other proceedings affecting creditors' rights and involving a claim under this Note; (iii) to protect the liens and security interests of the Receivables Loan Agreement or any of the Receivables Loan Documents; (iv) to foreclose on the Collateral; (v) to represent Holder in any other proceedings whatsoever in connection with the Receivables Loan Agreement or any of the Receivables Loan Documents including post judgment proceedings to enforce any judgment related to the Receivables Loan Documents; or (vi) in connection with seeking an out-of-court workout or settlement of any of the foregoing, then Maker shall pay to Holder all reasonable costs, attorneys' fees and expenses in connection therewith, in addition to all other amounts due hereunder. 6. LATE CHARGE. If payments of principal and/or interest, or any other amounts under the other Receivables Loan Documents are not timely made or remain overdue for a period of ten (10) days, Maker, without notice or demand by Holder, promptly shall pay an amount ("Late Charge") equal to four percent (4%) of each delinquent payment. 7. GOVERNING LAW; SEVERABILITY. This Note shall be governed by and construed in accordance with the internal laws of the State of Illinois. The invalidity, illegality or unenforceability of any provision of this Note shall not affect or impair the validity, legality or enforceability of the remainder of this Note, and to this end, the provisions of this Note are declared to be severable. 8. WAIVER. Maker, for itself and all endorsers, guarantors and sureties of this Note, and their heirs, successors, assigns and legal representatives, hereby waives presentment for payment, demand, notice of nonpayment, notice of dishonor, protest of any dishonor, notice of protest and protest of this Note, and all other notices in connection with the delivery, acceptance, performance, default or enforcement of the payment of this Note except as provided in the Receivables Loan Agreement, and agrees that their respective liability shall be unconditional and without regard to the liability of any other party and shall not be in any manner affected by any indulgence, extension of time, renewal, waiver or modification granted or consented to by Holder. Maker, for itself and all endorsers, guarantors and sureties of this Note, and their heirs, legal representatives, successors and assigns, hereby -4- 55 consents to every extension of time, renewal, waiver or modification that may be granted by Holder with respect to the payment or other provisions of this Note, and to the release of any makers, endorsers, guarantors or sureties, and of any collateral given to secure the payment hereof, or any part hereof, with or without substitution, and agrees that additional makers, endorsers, guarantors or sureties may become parties hereto without notice to Maker or to any endorser, guarantor or surety and without affecting the liability of any of them. 9. SECURITY, APPLICATION OF PAYMENTS. This Note is secured by the liens, encumbrances and obligations created hereby and by the other Receivables Loan Documents. Payments will be applied to any fees, expenses or other costs Maker is obligated to pay under this Note or the other Receivables Loan Documents, to interest due on the Loan and to the outstanding principal balance of the Loan, in any order that Holder, at its sole option, may deem appropriate. 10. MISCELLANEOUS. A. Amendments. This Note may not be terminated or amended orally, but only by a termination or amendment in writing signed by Holder and Maker. B. Lawful Rate of Interest. In no event whatsoever shall the amount of interest paid or agreed to be paid to Holder pursuant to this Note or any of the Receivables Loan Documents exceed the highest lawful rate of interest permissible under applicable law. If, from any circumstances whatsoever, fulfillment of any provision of this Note and the other Receivables Loan Documents shall involve exceeding the lawful rate of interest which a court of competent jurisdiction may deem applicable hereto ("Excess Interest"), then ipso facto, the obligation to be fulfilled shall be reduced to the highest lawful rate of interest permissible under such law and if, for any reason whatsoever, Holder shall receive, as interest, an amount which would be deemed unlawful under such applicable law, such interest shall be applied to the principal of the Loan (whether or not due and payable), and not to the payment of interest, or refunded to Maker if the Loan has been paid in full. Neither Maker nor any guarantor or endorser shall have any action against Holder for any damages whatsoever arising out of the payment or collection of any such Excess Interest. C. Captions. -5- 56 The captions of the Paragraphs of this Note are for convenience of reference only and shall not be deemed to modify, explain, enlarge or restrict any of the provisions hereof. D. Notices. Notices shall be given under this Note in conformity with the terms and conditions of the Receivables Loan Agreement. E. Joint and Several. The obligations of Maker under this Note shall be joint and several obligations of Maker and of each Maker, if more than one, and of each Maker's heirs, personal representatives, successors and assigns. F. Time of Essence. Time is of the essence of this Note and the performance of each of the covenants and agreements contained herein. 11. VENUE. MAKER AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING DIRECTLY, INDIRECTLY OR OTHERWISE IN CONNECTION WITH, OUT OF, RELATED TO OR FROM THIS NOTE SHALL BE LITIGATED, AT HOLDER'S SOLE DISCRETION AND ELECTION, ONLY IN COURTS HAVING A SITUS WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS. MAKER HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN SAID COUNTY AND STATE. MAKER HEREBY IRREVOCABLY APPOINTS AND DESIGNATES C T CORPORATION SYSTEM, WHOSE ADDRESS IS MAKER, C/O C T CORPORATION SYSTEM, 208 S. LASALLE STREET, CHICAGO, ILLINOIS 60604, AS ITS DULY AUTHORIZED AGENT FOR SERVICE OF LEGAL PROCESS AND AGREES THAT SERVICE OF SUCH PROCESS UPON SUCH PARTY SHALL CONSTITUTE PERSONAL SERVICE OF PROCESS UPON MAKER PROVIDED A COPY OF SUCH SERVICE OF PROCESS IS ALSO SENT WITHIN THREE (3) DAYS THEREAFTER TO MAKER EXCEPT IN THE CASE OF SERVICE OF PROCESS FOR ACTIONS WHEREIN THE MAKER'S RESPONSE IS DUE IN LESS THAN TWENTY (20) DAYS, A COPY OF SUCH PROCESS WILL BE SENT TO MAKER ON THE SAME DAY AS SERVICE ON C T CORPORATION SYSTEM. IN THE EVENT SERVICE IS UNDELIVERABLE BECAUSE SUCH AGENT MOVES OR CEASES TO DO BUSINESS IN CHICAGO, ILLINOIS, MAKER SHALL, WITHIN TEN (10) DAYS AFTER HOLDER'S REQUEST, APPOINT A SUBSTITUTE AGENT (IN CHICAGO, ILLINOIS) ON ITS BEHALF AND WITHIN SUCH PERIOD NOTIFY HOLDER OF SUCH APPOINTMENT. IF SUCH SUBSTITUTE AGENT IS NOT TIMELY APPOINTED, HOLDER SHALL, IN ITS SOLE DISCRETION, HAVE THE RIGHT TO DESIGNATE A SUBSTITUTE AGENT UPON FIVE (5) DAYS NOTICE TO MAKER. -6- 57 MAKER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO TRANSFER OR CHANGE THE VENUE OF ANY LITIGATION BROUGHT AGAINST IT BY HOLDER ON THE RECEIVABLES LOAN DOCUMENTS IN ACCORDANCE WITH THIS PARAGRAPH. 12. SALE OF LOAN. Holder, at any time and without the consent of Maker, may grant participations in or sell, transfer, assign and convey all or any portion of its right, title and interest in and to the Loan, this Note, the Receivables Loan Agreement and the other Receivables Loan Documents, any guaranties given in connection with the Loan and any collateral given to secure the Loan. In the event Holder sells, transfers, conveys or assigns all of Holder's right, title and interest in this Note or the Loan, Holder shall give notice thereof to Maker and Holder shall thereupon be released from liability and obligations of the Lender hereunder and under all other transferred Loan Documents from and after the date of such transfer provided such transferee agrees to be bound by the obligations of Lender thereunder and provided such transferee is of equal or greater financial capacity than Holder. Notice to Maker shall not be required for any partial sale, transfer, assignment or conveyance of this Note. 13. JURY TRIAL WAIVER. MAKER, AND HOLDER BY ITS ACCEPTANCE OF THIS NOTE, HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS NOTE AND THE BUSINESS RELATIONSHIP THAT IS BEING ESTABLISHED. THIS WAIVER IS KNOWINGLY, INTENTIONALLY AND VOLUNTARILY MADE BY MAKER AND BY HOLDER, AND MAKER ACKNOWLEDGES THAT NEITHER HOLDER NOR ANY PERSON ACTING ON BEHALF OF HOLDER HAS MADE ANY REPRESENTATIONS OF FACT TO INCLUDE THIS WAIVER OF TRIAL BY JURY OR HAS TAKEN ANY ACTIONS WHICH IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. MAKER AND HOLDER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT MAKER AND HOLDER HAVE ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS NOTE AND THAT EACH OF THEM WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. MAKER AND HOLDER FURTHER ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED (OR HAVE HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS NOTE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL. IN WITNESS WHEREOF, Maker has executed this Note or has caused the same to be executed by its duly authorized representatives as of the date set first forth above. MAKER: Preferred Equities Corporation, a Nevada corporation -7- 58 By:________________________________ Print Name:________________________ As Its:____________________________ -8- 59 STATE OF NEVADA ) ) SS. COUNTY OF _________________) I hereby certify that on this _________ day of March, 1996, before me, an officer duly authorized in the State aforesaid and in the County aforesaid to take acknowledgements, personally appeared _______________________, as __________________________ of Preferred Equities Corporation, to me known to be the person who executed the attached Receivables Promissory Note dated March _________, 1996 in the principal amount of $15,000,000, in the State and County aforesaid, on behalf of the corporation, and acknowledged before me that he/she executed the same. Notary :__________________________________ Print Name:_______________________________ [NOTARIAL SEAL] Notary Public, State of Nevada My Commission Expires:____________________ Commission Number:________________________ -9- 60 Loan No. 95-227 REVOLVING RENOVATION PROMISSORY NOTE $1,500,000.00 _______, 1996 1. Promise to Pay. FOR VALUE RECEIVED, PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Maker") whose address is 4310 Paradise Road, Las Vegas, Nevada 89109, promises to pay to the order of HELLER FINANCIAL, INC., a Delaware corporation, and its successors and assigns ("Holder") the sum of One Million Five Hundred Thousand and No/100 Dollars ($1,500,000.00), together with all other amounts added thereto pursuant to this Note (the "Loan") (or so much thereof as may from time to time be outstanding), together with interest thereon as hereinafter set forth, payable in lawful money of the United States of America. Payments shall be made to Holder at 500 West Monroe Street, 15th Floor, Chicago, Illinois 60661 (or such other address as Holder may hereafter designate in writing to Maker). The repayment of the Loan evidenced by this Note is secured by among other things (i) that certain Mortgage, Assignment of Rents and Security Agreement of even date herewith (the " Mortgage") encumbering, among other things, the property commonly described as Ramada Vacation Suites at Tango Bay located in Orange County, Florida (the "Property"), and (ii) that certain Interval Receivables Loan and Security Agreement of even date herewith (the "Receivables Security Agreement") pursuant to which Maker has assigned, pledged and granted a security interest to Lender in certain receivables related to the sale of Interval Units and other Collateral described therein. This Note, the Acquisition Promissory Note (the "Acquisition Note"), the Mortgage, the Acquisition and Construction Loan Agreement (the "Loan Agreement") all of even date herewith and any other documents evidencing or securing the Loan or executed in connection therewith, and any modification, renewal or extension of any of the foregoing are collectively called the "Loan Documents". This Note has been issued pursuant to the Loan Agreement, and all of the terms, covenants and conditions of the Loan Agreement (including all Exhibits thereto) and all other instruments evidencing or securing the indebtedness hereunder are hereby made a part of this Note and are deemed incorporated herein in full. Defined terms used herein and not otherwise defined shall have the meanings set forth in the Loan Agreement. 2. Principal and Interest. So long as no Event of Default exists, interest shall accrue on the principal balance hereof from time to time outstanding, and Maker shall pay interest thereon at a floating rate of interest 61 per annum equal to four and one-quarter percent (4.25%) plus the Base Rate (the aggregate rate referred to as the "Interest Rate"). "Base Rate" shall mean the rate published each business day in the Wall Street Journal for deposits maturing three (3) months after issuance under the caption "Money Rates, London Interbank Offered Rates (Libor)". The Interest Rate for each calendar month shall be fixed based upon the Base Rate published prior to and in effect on the first (1st) business day of such month. Interest shall be calculated based on a 360 day year and charged for the actual number of days elapsed. Maker shall be entitled to Advances (as defined in the Loan Agreement) under this Note in the maximum aggregate amount of $3,000,000.00 during the first twenty-four (24) months of the term of this Note; provided, however, at no time shall the outstanding principal balance under this Note exceed $1,500,000.00. If, at any time, the outstanding balance hereunder exceeds $1,500,000.00, Maker shall pay such excess amount to Holder within five (5) business days after notice from Holder. 3. Payment. Commencing on May 1, 1996, Maker shall pay interest computed at the Interest Rate monthly in arrears on the first day of each month. Concurrently with Maker's sale of any Interval Unit (as defined in the Loan Agreement), Maker shall pay to Holder the Interval Release Payment and Interval Incentive Fee (each as defined in the Loan Agreement) with respect to such Interval Unit. The amount of $720.00 of each Interval Release Payment shall be applied first to accrued but unpaid interest which is past due hereunder, if any, and then to the outstanding principal balance of this Note. The balance of the Interval Release Payment shall be applied as set forth in the Acquisition Note. The Interval Incentive Fee due hereunder shall be the same as the Interval Incentive Fee due under the Acquisition Note and Maker shall pay only one such fee per Interval Unit sold. The outstanding principal balance of this Note together with all accrued interest shall be due and payable on or before March 29, 1999, or any earlier date on which the Loan shall be required to be paid in full, whether by acceleration or otherwise (the "Maturity Date"). 4. Prepayment; Interval Incentive Fees. Maker may prepay this Note in full or in part upon not less than three (3) days prior written notice to Holder provided that -2- 62 at the time of such prepayment Maker pays Holder an Interval Incentive Fee multiplied by the number of Interval Release Payments which would be necessary to pay off the outstanding principal balance of this Note at the time of such prepayment. Only one such Interval Incentive Fee shall be payable by Maker under this Note and the Acquisition Note. In the event of prepayment of this Note only, Maker shall be credited with the number of Interval Incentive Fees paid hereunder in connection with such prepayment against the number of Interval Incentive Fees due under the Acquisition Note. Not in limitation of any other mandatory prepayment requirements under the Loan Agreement, if, at any time, the outstanding aggregate principal balance under (i) this Note; (ii) the Acquisition Note; and (iii) that certain other revolving promissory note of even date herewith between Holder and Maker in the maximum principal amount of $15,000,000.00 (the "Receivables Note") exceeds the aggregate amount of $15,000,000.00, such excess amount shall be due and payable by Maker to Holder within five (5) business days after notice from Holder without premium or penalty and such amount shall be applied by Holder to reduce the outstanding principal of any of the referenced notes in any manner or amount as that Holder determines. 5. Default. 5.1 Events of Default. Events of Default hereunder shall be those set forth in the Loan Agreement. 5.2 Remedies. So long as an Event of Default remains outstanding: (a) interest shall accrue at a rate equal to the Interest Rate plus four percent (4%) per annum (the "Default Rate"); (b) Holder may, at its option and without notice (such notice being expressly waived), declare the Loan immediately due and payable; and (c) Holder may pursue all rights and remedies available under the Mortgage or any other Loan Documents. Holder's rights, remedies and powers, as provided in this Note and the other Loan Documents, are cumulative and concurrent, and may be pursued singly, successively or together against Maker, any guarantor of the Loan, the security described in the Loan Documents, and any other security given at any time to secure the payment hereof, all at the sole discretion of Holder. Additionally, Holder may pursue every other right or remedy available at law or in equity without first exhausting the rights and remedies contained herein, all in Holder's sole discretion. Failure of Holder, for any period of -3- 63 time or on more than one occasion, to exercise its option to accelerate the Maturity Date shall not constitute a waiver of the right to exercise the same at any time during the continued existence of any Event of Default or any subsequent Event of Default. If any attorney is engaged: (i) to collect the Loan or any sums due under the Loan Documents, whether or not legal proceedings are thereafter instituted by Holder; (ii) to represent Holder in any bankruptcy, reorganization, receivership or other proceedings affecting creditors' rights and involving a claim under this Note; (iii) to protect the liens of the Mortgage or any of the Loan Documents; (iv) to foreclose the Mortgage or enforce any security interests under the Loan Documents; (v) to represent Holder in any other proceedings whatsoever in connection with the Mortgage or any of the Loan Documents including post judgment proceedings to enforce any judgment related to the Loan Documents; or (vi) in connection with seeking an out-of-court workout or settlement of any of the foregoing, then Maker shall pay to Holder all reasonable costs, attorneys' fees and expenses in connection therewith, in addition to all other amounts due hereunder. 6. Late Charge. If payments of principal and/or interest, or any other amounts under the other Loan Documents are not timely made or remain overdue for a period of five (5) days, Maker, without notice or demand by Holder, promptly shall pay an amount ("Late Charge") equal to four percent (4%) of each delinquent payment. 7. Governing Law: Severability. This Note shall be governed by and construed in accordance with the internal laws of the State of Illinois. The invalidity, illegality or unenforceability of any provision of this Note shall not affect or impair the validity, legality or enforceability of the remainder of this Note, and to this end, the provisions of this Note are declared to be severable. 8. Waiver. Maker, for itself and all endorsers, guarantors and sureties of this Note, and their heirs, successors, assigns, and legal representatives, hereby waives presentment for payment, demand, notice of nonpayment, notice of dishonor, protest of any dishonor, notice of protest and protest of this Note except as provided in the Loan Agreement, and all other notices in connection with the delivery, acceptance, performance, default or enforcement of the payment of this Note, and agrees that their respective liability -4- 64 shall be unconditional and without regard to the liability of any other party and shall not be in any manner affected by any indulgence, extension of time, renewal, waiver or modification granted or consented to by Holder. Maker, for itself and all endorsers, guarantors and sureties of this Note, and their heirs, legal representatives, successors and assigns, hereby consents to every extension of time, renewal, waiver or modification that may be granted by Holder regarding obligations of guarantors, endorsers or sureties with respect to the payment of other provisions of this Note, and to the release of any makers, endorsers, guarantors or sureties, and of any collateral given to secure the payment hereof, or any part hereof, with or without substitution, and agrees that additional makers, endorsers, guarantors or sureties may become parties hereto without notice to Maker or to any endorser, guarantor or surety and without affecting the liability of any of them. 9. Security, Application of Payments. This Note is secured by the liens, encumbrances and obligations created hereby and by the other Loan Documents and the terms and provisions of the other Loan Documents are hereby incorporated herein. Payment will be applied, at Holder's option, first to any fees, expenses or other costs Maker is obligated to pay under this Note or the other Loan Documents, second to interest due on the Loan and third to the outstanding principal balance of the Loan. 10. Miscellaneous. 10.1 Amendments. This Note may not be terminated or amended orally, but only by a termination or amendment in writing signed by Holder and Maker. 10.2 Lawful Rate of Interest. In no event whatsoever shall the amount of interest paid or agreed to be paid to Holder pursuant to this Note or any of the Loan Documents exceed the highest lawful rate of interest permissible under applicable law. If, from any circumstances whatsoever, fulfillment of any provision of this Note and the other Loan Documents shall involve exceeding the lawful rate of interest which a court of competent jurisdiction may deem applicable hereto ("Excess Interest"), then ipso facto, the obligation to be fulfilled shall be reduced to the highest lawful rate of interest permissible under such law and if, for any reason whatsoever, Holder shall receive, as interest, an amount which -5- 65 would be deemed unlawful under such applicable law, such interest shall be applied to the principal of the Loan (whether or not due and payable), and not to the payment of interest, or refunded to Maker if such Loan has been paid in full. Neither Maker nor any guarantor or endorser shall have any action against Holder for any damages whatsoever arising out of the payment or collection of any such Excess Interest. 10.3 Captions. The captions of the Paragraphs of this Note are for convenience of reference only and shall not be deemed to modify, explain, enlarge or restrict any of the provisions hereof. 10.4 Notices. Notices shall be given under this Note in conformity with the terms and conditions of the Loan Agreement. 10.5 Joint and Several. The obligations of Maker under this Note shall be joint and several obligations of Maker and of each Maker, if more than one, and of each Maker's heirs, personal representatives, successors and assigns. 10.6 Time of Essence. Time is of the essence of this Note and the performance of each of the covenants and agreements contained herein. 11. Sale of Loan. Holder, at any time and without the consent of Maker, may grant participations in or sell, transfer, assign and convey all or any portion of its right, title and interest in and to the Loan, this Note, the Mortgage, the Loan Agreement and the other Loan Documents, any guaranties given in connection with the Loan and any collateral given to secure the Loan. In the event Holder sells, transfers, conveys or assigns all of Holder's right, title and interest in this Note or the Loan, Holder shall give notice thereof to Maker and Holder shall thereupon be released from liability and obligations of the Lender hereunder and under all other transferred Loan Documents from and after the date of such transfer provided such transferee agrees to be bound by the obligations of Lender thereunder and provided such transferee is of equal or greater financial capacity than Holder. -6- 66 12. Venue. MAKER AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING DIRECTLY, INDIRECTLY OR OTHERWISE IN CONNECTION WITH, OUT OF, RELATED TO OR FROM THIS NOTE SHALL BE LITIGATED, AT HOLDER'S SOLE DISCRETION AND ELECTION, ONLY IN COURTS HAVING A SITUS WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS. MAKER HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN SAID COUNTY AND STATE. MAKER HEREBY IRREVOCABLY APPOINTS AND DESIGNATES C T CORPORATION SYSTEM, WHOSE ADDRESS IS MAKER, C/O C T CORPORATION SYSTEM, 208 S. LASALLE STREET, CHICAGO, ILLINOIS 60604, AS ITS DULY AUTHORIZED AGENT FOR SERVICE OF LEGAL PROCESS AND AGREES THAT SERVICE OF SUCH PROCESS UPON SUCH PARTY SHALL CONSTITUTE PERSONAL SERVICE OF PROCESS UPON MAKER PROVIDED A COPY OF SUCH SERVICE OF PROCESS IS ALSO SENT WITHIN THREE (3) DAYS THEREAFTER TO MAKER IN ACCORDANCE WITH THE NOTICE PROVISIONS OF THE LOAN AGREEMENT PROVIDED, HOWEVER, IN THE CASE OF SERVICE OF PROCESS FOR ACTIONS WHEREIN MAKER'S RESPONSE IS DUE IN LESS THAN TWENTY (20) DAYS, A COPY OF SUCH PROCESS WILL BE SENT TO MAKER ON THE SAME DAY AS SERVICE ON C T CORPORATION SYSTEM. IN THE EVENT SERVICE IS UNDELIVERABLE BECAUSE SUCH AGENT MOVES OR CEASES TO DO BUSINESS IN CHICAGO, ILLINOIS, MAKER SHALL, WITHIN TEN (10) DAYS AFTER HOLDER'S REQUEST, APPOINT A SUBSTITUTE AGENT (IN CHICAGO, ILLINOIS) ON ITS BEHALF AND WITHIN SUCH PERIOD NOTIFY HOLDER OF SUCH APPOINTMENT. IF SUCH SUBSTITUTE AGENT IS NOT TIMELY APPOINTED, HOLDER SHALL, IN ITS SOLE DISCRETION, HAVE THE RIGHT TO DESIGNATE A SUBSTITUTE AGENT UPON FIVE (5) DAYS NOTICE TO MAKER. MAKER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO TRANSFER OR CHANGE THE VENUE OF ANY LITIGATION BROUGHT AGAINST IT BY HOLDER ON THE LOAN DOCUMENTS IN ACCORDANCE WITH THIS PARAGRAPH. 13. Jury Trial Waiver. MAKER, AND HOLDER BY ITS ACCEPTANCE OF THIS NOTE, HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS NOTE AND THE BUSINESS RELATIONSHIP THAT IS BEING ESTABLISHED. THIS WAIVER IS KNOWINGLY, INTENTIONALLY AND VOLUNTARILY MADE BY MAKER AND BY HOLDER, AND MAKER ACKNOWLEDGES THAT NEITHER HOLDER NOR ANY PERSON ACTING ON BEHALF OF HOLDER HAS MADE ANY REPRESENTATIONS OF FACT TO INCLUDE THIS WAIVER OF TRIAL BY JURY OR HAS TAKEN ANY ACTIONS WHICH IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. MAKER AND HOLDER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT MAKER AND HOLDER HAVE ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS NOTE AND THAT EACH OF THEM WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. MAKER AND HOLDER FURTHER ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED (OR HAVE HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS NOTE AND IN -7- 67 THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL. -8- 68 IN WITNESS WHEREOF, Maker has executed this Note or has caused the same to be executed by its duly authorized representatives as of the date set first forth above. MAKER: PREFERRED EQUITIES CORPORATION, a Nevada corporation By: ____________________________________ Its: ___________________________________ -9- 69 Loan No. 95-227 ACQUISITION PROMISSORY NOTE $4,865,000.00 _______________, 1996 1. Promise to Pay. FOR VALUE RECEIVED, PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Maker") whose address is 4310 Paradise Road, Las Vegas, Nevada 89109, promises to pay to the order of HELLER FINANCIAL, INC., a Delaware corporation, and its successors and assigns ("Holder") the sum of Four Million Eight Hundred Sixty Five Thousand Dollars and No/100 ($4,865,000.00), together with all other amounts added thereto pursuant to this Note (the "Loan") (or so much thereof as may from time to time be outstanding), together with interest thereon as hereinafter set forth, payable in lawful money of the United States of America. Payments shall be made to Holder at 500 West Monroe Street, 15th Floor, Chicago, Illinois 60661 (or such other address as Holder may hereafter designate in writing to Maker). The repayment of the Loan evidenced by this Note is secured by among other things (i) that certain Mortgage, Assignment of Rents and Security Agreement of even date herewith (the " Mortgage") encumbering, among other things, the property commonly described as Ramada Vacation Suites at Tango Bay located in Orange County, Florida (the "Property"), and (ii) that certain Interval Receivables Loan and Security Agreement of even date herewith (the "Receivables Security Agreement") pursuant to which Maker has assigned, pledged and granted a security interest to Lender in certain receivables related to the sale of Interval Units and other Collateral described therein. This Note, the Revolving Renovation Promissory Note (the "Renovation Note"), the Mortgage, the Acquisition and Construction Loan Agreement (the "Loan Agreement") all of even date herewith and any other documents evidencing or securing the Loan or executed in connection therewith, and any modification, renewal or extension of any of the foregoing are collectively called the "Loan Documents". This Note has been issued pursuant to the Loan Agreement, and all of the terms, covenants and conditions of the Loan Agreement (including all Exhibits thereto) and all other instruments evidencing or securing the indebtedness hereunder are hereby made a part of this Note and are deemed incorporated herein in full. Defined terms used herein and not otherwise defined shall have the meanings set forth in the Loan Agreement. 2. Principal and Interest. So long as no Event of Default exists, interest shall accrue 70 on the principal balance hereof from time to time outstanding, and Maker shall pay interest thereon, at a floating rate of interest per annum equal to four and one-quarter percent (4.25%) plus the Base Rate (the aggregate rate referred to as the "Interest Rate"). "Base Rate" shall mean the rate published each business day in the Wall Street Journal for deposits maturing three (3) months after issuance under the caption "Money Rates, London Interbank Offered Rates (Libor)". The Interest Rate for each calendar month shall be fixed based upon the Base Rate published prior to and in effect on the first (1st) business day of such month. Interest shall be calculated based on a 360 day year and charged for the actual number of days elapsed. 3. Payment. Commencing on May 1, 1996, Maker shall pay interest computed at the Interest Rate monthly in arrears on the first day of each month during the term of this Note. Concurrently with Maker's sale of any Interval Unit (as defined in the Loan Agreement), Maker shall pay to Holder the Interval Release Payment and Interval Incentive Fee (as defined in the Loan Agreement) with respect to such Interval Unit. The amount of One Thousand Two Hundred Eighty Dollars and No/100 ($1,280.00) of each such Interval Release Payment shall be applied first to accrued but unpaid interest which is past due hereunder, if any, and then to the outstanding principal balance of this Note. The Interval Incentive Fee due hereunder shall be the same as the Interval Incentive Fee due under the Renovation Note and Maker shall pay only one such fee per Interval Unit sold. The balance of the Interval Release Payment shall be applied as set forth in the Renovation Note. The Interval Incentive Fee due hereunder shall be the same as the Interval Incentive Fee due under the Renovation Note and Maker shall pay only one such fee per Interval Unit sold. The outstanding principal balance of the Note together with all accrued interest shall be due and payable on or before March 29, 1999, or any earlier date on which the Loan shall be required to be paid in full, whether by acceleration or otherwise (the "Maturity Date"). 4. Prepayment; Interval Incentive Fees. Maker may prepay this Note in full or in part upon not less than three (3) days prior written notice to Holder provided that at the time of such prepayment Maker pays Holder an Interval Incentive Fee multiplied by the number of Interval Release Payments which would be necessary to pay off the outstanding -2- 71 principal balance of this Note at the time of such prepayment. Only one such Interval Incentive Fee shall be payable by Maker under this Note and the Renovation Note. In the event of prepayment of this Note only, Maker shall be credited with the number of Interval Incentive Fees paid hereunder in connection with such prepayment against the number of Interval Incentive Fees due under the Renovation Note. Not in limitation of any other mandatory prepayment requirements under the Loan Agreement, if, at any time, the outstanding aggregate principal balance under (i) this Note; (ii) the Renovation Note; and (iii) that certain revolving promissory note of even date herewith between Holder and Maker in the maximum principal amount of $15,000,000.00 (the "Receivables Note") exceeds the aggregate amount of $15,000,000.00, such excess amount shall be due and payable by Maker to Holder within five (5) business days after notice from Holder without premium or penalty and services amount shall be applied by Holder to reduce the outstanding principal of any of the referenced notes in any manner or amount that Holder determines. 5. Default. 5.1 Events of Default. Events of Default hereunder shall be those set forth in the Loan Agreement. 5.2 Remedies. So long as an Event of Default remains outstanding: (a) interest shall accrue at a rate equal to the Interest Rate plus four percent (4%) per annum (the "Default Rate"); (b) Holder may, at its option and without notice (such notice being expressly waived), declare the Loan immediately due and payable; and (c) Holder may pursue all rights and remedies available under the Mortgage or any other Loan Documents. Holder's rights, remedies and powers, as provided in this Note and the other Loan Documents, are cumulative and concurrent, and may be pursued singly, successively or together against Maker, any guarantor of the Loan, the security described in the Loan Documents, and any other security given at any time to secure the payment hereof, all at the sole discretion of Holder. Additionally, Holder may pursue every other right or remedy available at law or in equity without first exhausting the rights and remedies contained herein, all in Holder's sole discretion. Failure of Holder, for any period of time or on more than one occasion, to exercise its option to accelerate the Maturity Date shall not constitute a waiver of the right to exercise the same at any time during the continued -3- 72 existence of any Event of Default or any subsequent Event of Default. If any attorney is engaged: (i) to collect the Loan or any sums due under the Loan Documents, whether or not legal proceedings are thereafter instituted by Holder; (ii) to represent Holder in any bankruptcy, reorganization, receivership or other proceedings affecting creditors' rights and involving a claim under this Note; (iii) to protect the liens of the Mortgage or any of the Loan Documents; (iv) to foreclose the Mortgage or enforce any security interests under the Loan Documents; (v) to represent Holder in any other proceedings whatsoever in connection with the Mortgage or any of the Loan Documents including post judgment proceedings to enforce any judgment related to the Loan Documents; or (vi) in connection with seeking an out-of-court workout or settlement of any of the foregoing, then Maker shall pay to Holder all reasonable costs, attorneys' fees and expenses in connection therewith, in addition to all other amounts due hereunder. 6. Late Charge. If payments of principal and/or interest, or any other amounts under the other Loan Documents are not timely made or remain overdue for a period of five (5) days, Maker, without notice or demand by Holder, promptly shall pay an amount ("Late Charge") equal to four percent (4%) of each delinquent payment. 7. Governing Law: Severability. This Note shall be governed by and construed in accordance with the internal laws of the State of Illinois. The invalidity illegality or unenforceability of any provision of this Note shall not affect or impair the validity, legality or enforceability of the remainder of this Note, and to this end, the provisions of this Note are declared to be severable. 8. Waiver. Maker, for itself and all endorsers, guarantors and sureties of this Note, and their heirs, successors, assigns, and legal representatives, hereby waives presentment for payment, demand, notice of nonpayment, notice of dishonor, protest of any dishonor, notice of protest and protest of this Note, and all other notices in connection with the delivery, acceptance, performance, default or enforcement of the payment of this Note except as provided in the Loan Agreement, and agrees that their respective liability shall be unconditional and without regard to the liability of any other party and shall not be in any manner affected by any indulgence, extension of time, renewal, waiver or modification -4- 73 granted or consented to by Holder. Maker, for itself and all endorsers, guarantors and sureties of this Note, and their heirs, legal representatives, successors and assigns, hereby consents to every extension of time, renewal, waiver or modification that may be granted by Holder regarding obligations of guarantors, endorsers or sureties with respect to the payment of other provisions of this Note, and to the release of any makers, endorsers, guarantors or sureties, and of any collateral given to secure the payment hereof, or any part hereof, with or without substitution, and agrees that additional makers, endorsers, guarantors or sureties may become parties hereto without notice to Maker or to any endorser, guarantor or surety and without affecting the liability of any of them. 9. Security, Application of Payments. This Note is secured by the liens, encumbrances and obligations created hereby and by the other Loan Documents and the terms and provisions of the other Loan Documents are hereby incorporated herein. Payment will be applied, at Holder's option, first to any fees, expenses or other costs Maker is obligated to pay under this Note or the other Loan Documents, second to interest due on the Loan and third to the outstanding principal balance of the Loan. 10. Miscellaneous. 10.1 Amendments. This Note may not be terminated or amended orally, but only by a termination or amendment in writing signed by Holder and Maker. 10.2 Lawful Rate of Interest. In no event whatsoever shall the amount of interest paid or agreed to be paid to Holder pursuant to this Note or any of the Loan Documents exceed the highest lawful rate of interest permissible under applicable law. If, from any circumstances whatsoever, fulfillment of any provision of this Note and the other Loan Documents shall involve exceeding the lawful rate of interest which a court of competent jurisdiction may deem applicable hereto ("Excess Interest"), then ipso facto, the obligation to be fulfilled shall be reduced to the highest lawful rate of interest permissible under such law and if, for any reason whatsoever, Holder shall receive, as interest, an amount which would be deemed unlawful under such applicable law, such interest shall be applied to the principal of the Loan (whether or not due and payable), and not to the payment of interest, or refunded to -5- 74 Maker if such Loan has been paid in full. Neither Maker nor any guarantor or endorser shall have any action against Holder for any damages whatsoever arising out of the payment or collection of any such Excess Interest. 10.3 Captions. The captions of the Paragraphs of this Note are for convenience of reference only and shall not be deemed to modify, explain, enlarge or restrict any of the provisions hereof. 10.4 Notices. Notices shall be given under this Note in conformity with the terms and conditions of the Loan Agreement. 10.5 Joint and Several. The obligations of Maker under this Note shall be joint and several obligations of Maker and of each Maker, if more than one, and of each Maker's heirs, personal representatives, successors and assigns. 10.6 Time of Essence. Time is of the essence of this Note and the performance of each of the covenants and agreements contained herein. 11. Sale of Loan. Holder, at any time and without the consent of Maker, may grant participations in or sell, transfer, assign and convey all or any portion of its right, title and interest in and to the Loan, this Note, the Mortgage, the Loan Agreement and the other Loan Documents, any guaranties given in connection with the Loan and any collateral given to secure the Loan. In the event Holder sells, transfers, conveys or assigns all of Holder's right, title and interest in this Note or the Loan, Holder shall give notice thereof to Maker and Holder shall thereupon be released from liability and obligations of the Lender hereunder and under all other transferred Loan Documents from and after the date of such transfer provided such transferee agrees to be bound by the obligations of Lender thereunder and provided such transferee is of equal or greater financial capacity than Holder. 12. Venue. MAKER AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING DIRECTLY, INDIRECTLY OR OTHERWISE IN CONNECTION WITH, OUT OF, -6- 75 RELATED TO OR FROM THIS NOTE SHALL BE LITIGATED, AT HOLDER'S SOLE DISCRETION AND ELECTION, ONLY IN COURTS HAVING A SITUS WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS. MAKER HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN SAID COUNTY AND STATE. MAKER HEREBY IRREVOCABLY APPOINTS AND DESIGNATES C T CORPORATION SYSTEM, WHOSE ADDRESS IS MAKER, C/O C T CORPORATION SYSTEM, 208 S. LASALLE STREET, CHICAGO, ILLINOIS 60604, AS ITS DULY AUTHORIZED AGENT FOR SERVICE OF LEGAL PROCESS AND AGREES THAT SERVICE OF SUCH PROCESS UPON SUCH PARTY SHALL CONSTITUTE PERSONAL SERVICE OF PROCESS UPON MAKER PROVIDED A COPY OF SUCH SERVICE OF PROCESS IS ALSO SENT WITHIN THREE (3) DAYS THEREAFTER TO MAKER IN ACCORDANCE WITH THE NOTICE PROVISIONS OF THE LOAN AGREEMENT PROVIDED, HOWEVER, IN THE CASE OF SERVICE OF PROCESS FOR ACTIONS WHEREIN MAKER'S RESPONSE IS DUE IN LESS THAN TWENTY (20) DAYS, A COPY OF SUCH PROCESS WILL BE SENT TO MAKER ON THE SAME DAY AS SERVICE ON C T CORPORATION SYSTEM. IN THE EVENT SERVICE IS UNDELIVERABLE BECAUSE SUCH AGENT MOVES OR CEASES TO DO BUSINESS IN CHICAGO, ILLINOIS, MAKER SHALL, WITHIN TEN (10) DAYS AFTER HOLDER'S REQUEST, APPOINT A SUBSTITUTE AGENT (IN CHICAGO, ILLINOIS) ON ITS BEHALF AND WITHIN SUCH PERIOD NOTIFY HOLDER OF SUCH APPOINTMENT. IF SUCH SUBSTITUTE AGENT IS NOT TIMELY APPOINTED, HOLDER SHALL, IN ITS SOLE DISCRETION, HAVE THE RIGHT TO DESIGNATE A SUBSTITUTE AGENT UPON FIVE (5) DAYS NOTICE TO MAKER. MAKER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO TRANSFER OR CHANGE THE VENUE OF ANY LITIGATION BROUGHT AGAINST IT BY HOLDER ON THE LOAN DOCUMENTS IN ACCORDANCE WITH THIS PARAGRAPH. 13. Jury Trial Waiver. MAKER, AND HOLDER BY ITS ACCEPTANCE OF THIS NOTE, HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS NOTE AND THE BUSINESS RELATIONSHIP THAT IS BEING ESTABLISHED. THIS WAIVER IS KNOWINGLY, INTENTIONALLY AND VOLUNTARILY MADE BY MAKER AND BY HOLDER, AND MAKER ACKNOWLEDGES THAT NEITHER HOLDER NOR ANY PERSON ACTING ON BEHALF OF HOLDER HAS MADE ANY REPRESENTATIONS OF FACT TO INCLUDE THIS WAIVER OF TRIAL BY JURY OR HAS TAKEN ANY ACTIONS WHICH IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. MAKER AND HOLDER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT MAKER AND HOLDER HAVE ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS NOTE AND THAT EACH OF THEM WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. MAKER AND HOLDER FURTHER ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED (OR HAVE HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS NOTE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL. -7- 76 IN WITNESS WHEREOF, Maker has executed this Note or has caused the same to be executed by its duly authorized representatives as of the date set first forth above. MAKER: PREFERRED EQUITIES CORPORATION, a Nevada corporation By: ____________________________________ Its: ___________________________________ -8- EX-10.94 11 CONSTRUCTION AND LOAN AGREEMENT 1 EXHIBIT 10.94 CONSTRUCTION LOAN AGREEMENT This Construction Loan Agreement is made as of the 30th day of April, 1996 (the "Effective Date"), by and between Preferred Equities Corporation, a Nevada corporation ("Borrower") and NBD Bank, a Michigan banking corporation ("Lender"). WITNESSETH: A. Borrower is the owner of certain real estate located in Nye County, Nevada and legally described on Exhibit A attached hereto (the "Land"). B. Borrower proposes to construct certain infrastructure improvements including water lines, sewer lines and roadways (the "Improvements") for the benefit of the Land as well as additional land owned by Borrower and others. C. Borrower has applied to Lender for a loan in the maximum amount of One Million Four Hundred Forty Thousand Dollars ($1,440,000) (the "Loan") to finance construction of the Improvements. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto agree as follows: ARTICLE 1. DEFINITIONS 1.1 The following terms as used herein shall have the following meanings: Budget: The budget for the Construction described in Section 7.1 hereof. Change Order: Any amendments or modifications to the Plans and Specifications, the General Contracts, or the contracts with the Engineer in excess of $50,000 in any one instance. Completion Date: The date upon which the Improvements have been completed in accordance with the terms of this Agreement. Construction: The construction of the Improvements pursuant to the Plans and Specifications. Construction Schedule: The Construction Schedule described in the General Contracts. Default Rate: The default rate of interest specified in the Note. Engineer: Crosby Mead Benton & Associates. Environmental Law(s): Any law, regulation, rule, policy, ordinance or similar requirement which governs or protects the environment, enacted from time to time by the United States, any state, or any county, city or agency or subdivision of the United States or any state. General Contracts: The construction contracts for the Construction between Borrower and General Contractors and/or a construction contract consistent with the proposal attached hereto 2 as Exhibit C. General Contractors: With respect to the roadway improvements, Wulfenstein Construction and, with respect to the water and sewer improvements, Floyd's Construction Inc. Guarantor: Mego Financial Corp., a New York corporation, who shall guarantee payment and completion of the construction as hereunder required. Hazardous Material: Any material or substance: (1) which is or becomes defined as a hazardous substance, pollutant, or contaminant, pursuant to the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA") (42 USC {9601 et seq.) as amended and regulations promulgated under it; (2) containing gasoline, oil, diesel fuel or other petroleum products; (3) which is or becomes defined as hazardous waste pursuant to the Resource Conservation and Recovery Act ("RCRA") (42 USC {6901 et seq.) as amended and regulations promulgated under it; (4) containing polychlorinated biphenyls (PCBs); (5) containing asbestos; (6) which is radioactive; (7) the presence of which requires investigation or remediation under any Environmental Law; (8) which is or becomes defined or identified as a hazardous waste, hazardous substance, hazardous or toxic chemical, pollutant, contaminant, or biologically hazardous material under any Environmental Law. Lender's Consulting Engineer: The Engineer provided that the Engineer delivers to Lender a written agreement acknowledging that the Engineer is being retained by the Borrower for the benefit of the Lender to review construction of the Improvements and provide related services for the benefit of the Lender in addition to services for which the Engineer has been or may be retained for the benefit of the Borrower and that notwithstanding the retaining of the Engineer in this dual capacity, the Lender does not waive any right or claim of action which may arise or to which Lender may be entitled as a result of the Engineer's failure to perform any services for which it has been retained on behalf of Lender. Loan Documents: The Loan Documents as defined in Section 3.2 below. Loan Fee: $14,400 to be paid by Borrower to Lender as of the Effective Date. Loan Maturity Date: The date which shall be twenty-four (24) months from the Effective Date. Loan Opening: The first disbursement of Loan proceeds. Loan Opening Date: The date of Loan Opening. Loan Policy of Title Insurance. American Land Title Association Loan Policy, revised as to the most recent date and showing Lender as the insured party, all as more fully described in Section 5.1(b) below. Permitted Exceptions: Those matters listed in Exhibit B hereto to which the interest of Borrower in the Land may be subject at the Loan Opening Date and thereafter and any such other title exceptions or objections, if any, as the Lender, or its counsel, may approve in writing. Plans and Specifications: Plans and specifications for the construction of the Improvements as referred to in Section 6.1(b) of this Agreement and identified on Exhibit D, as such plans and specifications may be amended from time to time in accordance with this Agreement. Right-of-Way: The land comprising the publicly dedicated right-of-way within which the Improvements shall be constructed. 3 Scheduled Completion Date: April 30, 1997. Title Insurer: United Title of Nevada or such other title insurance company licensed in Nevada, as may be approved by Lender. ARTICLE 2. REPRESENTATIONS AND WARRANTIES 2.1 Representations and Warranties of Borrower. To induce Lender to execute this Agreement and perform the obligations of Lender hereunder, Borrower hereby represents and warrants to Lender as follows: (a) That on the Loan Opening Date and thereafter, Borrower will have good and marketable fee simple title to the Land, subject only to the Permitted Exceptions; (b) That no litigation or proceedings are pending, or to the best of Borrower's knowledge are threatened, against Borrower or the Guarantor (i) which will affect the validity or priority of the lien of the Deed of Trust, or (ii) which will materially affect the ability of Borrower or the Guarantor to perform their respective obligations pursuant to and as contemplated by the terms and provisions of this Agreement and the Loan Documents (as defined hereinafter); (c) That the matters of fact upon which the opinion of counsel as recited in Section 5.1(e) hereof are based and, to the best of the Borrower's knowledge, the matters to which the Engineer shall certify in the Engineer's certificate as recited in Section 5.1(h) hereof are true; (d) That the execution, delivery and performance of this Agreement and the Loan Documents have not constituted (and will not, upon the giving of notice or lapse of time or both, constitute) a breach or default under any other agreement to which Borrower, or to the best of its knowledge, the Guarantor is a party or may be bound or affected, or a violation of any law or court order which may affect the Improvements or the Land any part thereof, any interest therein, or the use thereof; (e) That as of the date hereof (i) no condemnation of any portion of the Land, (ii) no condemnation or relocation of any roadways abutting the Land, and (iii) no denial of access to the Land from any point of access to the Land, has commenced or, to the best of Borrower's knowledge, is contemplated by any governmental authority; (f) That the Budget is true and correct and that the amounts set forth in the Budget present a full and complete representation of all costs, expenses and fees which Borrower expects to pay or anticipates becoming obligated to pay to complete the Construction by the Scheduled Completion Date; (g) Except as restated by subsequent financial statements delivered to Lender, that all financial statements and information furnished to Lender by Borrower or the Guarantor are true, correct and complete in all material respects as of the respective dates thereof and all other information previously furnished by Borrower or Guarantor to Lender in connection with the Loan are true, complete and correct in all material respects as of the respective dates thereof and all financial statements and information furnished to Lender include all material facts necessary to make the statements and information not misleading; (h) That no material adverse change in the financial condition of Borrower or 4 the Guarantor has occurred since the last date of submission to Lender of financial statements and written representations of financial condition; (i) That neither the Construction of the Improvements or the proposed use of the Land will violate (i) any statutes, laws, regulations, rules, ordinances or orders of any kind whatsoever (including without limitation zoning, building and fire codes, laws, ordinances, regulations or approvals and Environmental Laws), or (ii) any building permits, restrictions of record, or any agreement affecting the Improvements or the Land or any part thereof. Neither the zoning laws nor any other laws governing the right to construct the Improvements requires use of any real estate other than the Right-of-Way within which the Improvements shall be constructed. Without limiting the generality of the foregoing, all consents, licenses and permits and all other governmental authorizations or approvals required to commence the Construction of the Improvements and to sell the platted lots comprising the Land have been obtained or will be obtained prior to the Loan Opening Date and that all laws, rules and regulations of the State of Nevada or any subdivision thereof relating to the Construction of the Improvements and the sale of the lots have been and will be complied with; (j) That all other consents and approvals from any persons or entities which are necessary or required for the Construction have been obtained by Borrower or will be obtained prior to the Loan Opening Date (or prior to such time as such consents or approvals are required); (k) That, upon completion of the Construction of the Improvements, the Land will have adequate water and sanitary sewerage facilities, and means of vehicular access between the Land and public highways; that to the best of the Borrower's knowledge, none of the foregoing will be delayed or impeded by virtue of any requirements under any applicable Environmental Laws; (l) That neither the Borrower nor, to the best of the Borrower's knowledge, any previous owner of the Land or the Right-of-Way nor any third party has ever caused or permitted any Hazardous Material to be placed, held, located, generated, stored or disposed of on, under or at the Land or the Right-of-Way, or any part thereof, and the Land or the Right-of-Way has never been used (whether by the Borrower or to the best knowledge of the Borrower by any other person) as a dump site or storage site (whether permanent or temporary) for any Hazardous Material; (m) That when completed in accordance with the Plans and Specifications, the Improvements will be constructed within the Right-of-Way and will not encroach upon any other land; (n) That each lot comprising the Land is taxed separately and without regard to any other property which is not included in the real property subject to the Deed of Trust and for all purposes each lot comprising the Land may be mortgaged, conveyed and otherwise dealt with as an independent parcel; (o) That Borrower is not nor will be held, directly or indirectly, by a "foreign corporation", "foreign partnership", foreign trust", "foreign estate", "foreign person", or "affiliate" of a "foreign person" within the meaning of Sections 1445 and 7701 of the Internal Revenue Code and the regulations promulgated thereunder; (p) That a substantial portion of the materials necessary for the completion of Construction of the Improvements have been purchased or will be purchased prior to the Loan Opening Date; and (q) That all statements set forth in the Recitals are true and correct. 2.2 Survival of Representations and Warranties. Borrower agrees that all of its 5 representations and warranties set forth in Section 2.1 hereof and elsewhere in this Agreement will be true at the Loan Opening Date and at all times thereafter. Each request for disbursement hereunder shall constitute a reaffirmation of such representations and warranties, subject to modifications disclosed in the information delivered pursuant to Section 10.1(k) provided that further disbursements of the Loan proceeds shall be subject to Lender's approval, in its sole discretion, of such modifications. ARTICLE 3. TERMS OF LOAN AND DOCUMENTS 3.1 Agreement to Borrow and Lend. Subject to all of the terms, provisions and conditions set forth in this Agreement, Lender agrees to make and Borrower agrees to accept the Loan. 3.2 Loan Documents. Borrower agrees that it will, on or before the Loan Opening Date, execute and deliver or cause to be delivered to Lender the following documents and instruments (hereinafter collectively called the "Loan Documents") in form and substance acceptable to Lender: (a) A note ("Note") from Borrower payable to the order of Lender in the original principal amount of One Million Four Hundred Forty Thousand Dollars ($1,440,000); (b) A valid deed of trust ("Deed of Trust") on the Land, securing without limitation the Note, subject only to the Permitted Exceptions; (c) Collateral assignments to Lender of all of Borrower's right, title and interest in and to (i) the General Contracts, all other contracts and agreements executed by Borrower in connection with the Construction, (ii) all assignable building permits, governmental permits, licenses and authorizations issued from time to time in connection with the Construction, (iii) the Plans and Specifications, and (iv) Borrower's agreements with the Engineer retained by Borrower in connection with the Construction; (d) Guaranty Agreement (the "Guaranty") by the Guarantor dated the date hereof; (e) An affirmation of the representations and covenants set forth in the Environmental Certificate dated June 14, 1994 ("Environmental Certificate") from Borrower to Lender regarding Borrower's compliance with Environmental Laws; and (f) Such other documents from Borrower, Guarantor or third parties as may be required by this Agreement or as Lender may reasonably require. 3.3 Interest Rate. The Loan will bear interest at the rate set forth in the Note. Interest on the Loan shall be computed on the principal sum of each Loan disbursement from time to time on a basis of a 360-day year, and shall be charged for the actual number of days within the period for which interest is being charged. Upon default or delinquency in the making of payments when due, the interest rate under the Loan shall be at the Default Rate. 3.4 Term of the Loan. The unpaid principal balance, all accrued and unpaid interest and all other sums due and payable hereunder, under the Note or other Loan Documents, if not sooner paid, shall be paid in full on the Loan Maturity Date. 3.5 Prepayments. Borrower shall have the right to make prepayments of the Loan in 6 whole or in part as permitted by and in accordance with the terms of the Note. ARTICLE 4. LOAN EXPENSE AND ADVANCES; SECURITY OF MORTGAGE FOR SAME 4.1 Loan Expense. Borrower agrees to pay all expenses of the Loan, including all recording charges, title insurance charges, costs of surveys, fees of Lender's Consulting Engineer, reasonable fees and expenses of Lender's attorneys (other than fees and expenses incurred in connection with the initial documentation and negotiation of the Loan Documents which shall be paid by Lender), and all costs and expenses incurred by Lender in connection with the determination of whether or not Borrower has performed the obligations undertaken by Borrower hereunder or has satisfied any conditions precedent to the obligations of Lender hereunder. All such expenses, charges, costs and fees shall be the Borrower's obligation regardless of whether the Loan is disbursed in whole or in part unless such failure to disburse is due to Lender's wrongful failure to disburse hereunder. 4.2 Lender's Loan Fee. Borrower agrees, as consideration for the execution of this Agreement by Lender and the forward commitment of Lender, to pay on the Effective Date the Loan Fee. 4.3 Time of Payment of Fees. Borrower shall pay all fees and expenses incurred by Lender and required to be paid by Borrower under this Agreement at the Effective Date, the Loan Opening Date and at such subsequent times as Lender may determine. 4.4 Expenses and Advances Secured by Loan Documents. Any and all advances or payments made by Lender under this Agreement from time to time, and any amounts expended by Lender pursuant to Section 15.1(a) hereof or for Lender's Consulting Engineer's fees and attorneys' fees and expenses, and all other Loan expenses shall, as and when advanced or incurred by Lender, constitute additional indebtedness evidenced by the Note and secured by the Deed of Trust and the other Loan Documents to the same extent and effect as if the terms and provisions of this Agreement were set forth therein, whether or not the aggregate of such indebtedness shall exceed the aggregate face amount of the Note. ARTICLE 5. NON-CONSTRUCTION REQUIREMENTS PRECEDENT TO THE OPENING OF THE LOAN 5.1 Conditions Precedent. Borrower agrees that Borrower will perform and satisfy all of the following conditions precedent prior to its initial request for a Loan, and Borrower agrees that Lender's obligation to make the first disbursement of the Loan and thereafter to make further disbursements of the proceeds thereof, is conditioned upon Borrower's performance or satisfaction of all such conditions precedent: (a) No Event of Default by Borrower or Guarantor shall have occurred under this Agreement or any of the Loan Documents and Borrower and Guarantor shall have timely complied with and performed all of Borrower's covenants, agreements and obligations under this Agreement which by their terms are required to have been complied with and performed by Borrower. 7 (b) Borrower shall have furnished to Lender a title insurance commitment ("Commitment") for an ALTA Loan Policy of Title Insurance in the full aggregate amount of the Loan, issued by the Title Insurer, establishing that the Title Insurer is prepared to insure the Deed of Trust as a valid and subsisting first lien on the Land and all appurtenant easements as reasonably required by Lender, to the extent of advances of the Loan, subject only to (i) the Permitted Exceptions, and (ii) customary objections and exceptions relating to the issuance of a Loan Policy of Title Insurance which, by their nature, cannot be eliminated until completion of Construction. The Commitment shall (1) contain a mechanic's lien endorsement in form acceptable to Lender's counsel; (2) specifically insure the Lender that (y) no restrictions of record affecting the Land have been violated, and (z) the Land has access to publicly dedicated streets, and (3) contain such other endorsements as Lender may require. Borrower agrees to deliver to the Title Insurer such other papers, instructions and documents as the Title Insurer may require for the issuance of the Commitment and the issuance of date-down endorsements and interim certifications relating to the Construction payouts provided in Article 9 hereof and in accordance with all requirements of this Agreement. (c) Borrower shall have furnished Lender copies of the recorded plats of the Land, made by a Nevada registered or certified land surveyor, showing the outline of the Land and, if requested by Lender, evidence satisfactory to Lender that no improvements have been constructed on the Land. (d) Borrower shall have furnished to Lender certificates of insurance for policies for which the premiums have been fully prepaid (which, in the case of insurance on the Improvements, during the time of Construction shall be in builder's risk form and which shall include all insurance required to be carried by Borrower, as "owner", under the provisions of all construction contracts let by Borrower) which shall be with companies and in form and amounts and with coverage satisfactory to Lender. Such insurance shall include the following: (i) Casualty insurance insuring the Improvements, including all materials in storage and while in transit during the construction period, against loss or damage by fire or other casualty, with extended coverage and with coverage for such other hazards (including "collapse" and coverage in so-called "all risk" form); (ii) Comprehensive general liability insurance (including contractual liability) for the Land naming Lender as an additional insured with liability insurance limits of $3,000,000 combined single limit for personal injury and property damage, with $20,000,000 "umbrella" coverage; and (iii) Professional liability insurance covering the Engineer. Borrower shall have furnished evidence satisfactory to Lender that no part of the Land is located in an area designated by the Secretary of Housing and Urban Development as having special flood hazards. Borrower also shall have furnished evidence satisfactory to Lender that the General Contractors have obtained workers' compensation insurance in compliance with all applicable federal, state and local laws. The insurance required hereunder may be provided under blanket insurance policies. All policies required under this Section 5.1(d) and all other insurance required under this Agreement shall provide that the insurance evidenced thereby shall not be canceled or modified without at least 30 days prior written notice from the insurance carrier to Lender. Further, Borrower shall deliver renewal certificates of all insurance required under this Section 5.1(d) and 8 all other insurance required under this Agreement together with written evidence of full payment of the annual premiums therefor at least 30 days prior to the expiration of the existing insurance. (e) Borrower shall have furnished to Lender an opinion from counsel for Borrower and the Guarantor in the form satisfactory to Lender and its counsel. (f) Borrower shall have furnished Lender evidence satisfactory to Lender, including certified resolutions of the board of directors of the Borrower, that the individual executing this Agreement and the other Loan Documents on behalf of the Borrower has been duly authorized by all appropriate corporate action to execute and deliver this Agreement and the Loan Documents on behalf of the Borrower. (g) Borrower shall have furnished to Lender certified copies of the articles of incorporation and a good standing certificate for Borrower and the articles of incorporation and a good standing certificate for the Guarantor. (h) Lender shall have received a certification from the Lender's Consulting Engineer to be delivered to Lender pursuant to Section 6.1(b) hereof. (i) Borrower shall have furnished to Lender a report or certification from an environmental consultant satisfactory to Lender stating there has been no accumulation, storage or disposal of Hazardous Material on, under or about the Land and the Right-of-Way which violates Environmental Laws. (j) Borrower shall have complied with the applicable requirements of Articles 6 and 9 of this Agreement. ARTICLE 6. CONSTRUCTION PAYOUT REQUIREMENTS PRECEDENT TO THE LOAN OPENING 6.1 Required Construction Documents. Borrower shall cause the following to be furnished to Lender in sufficient time for review by Lender prior to the Loan Opening Date, all in form and substance satisfactory to Lender: (a) Executed copies of all of Borrower's existing contracts with engineers, including its contracts with the Engineer and copies of the General Contracts. (b) Plans and Specifications (in duplicate) for the Construction, together with a certificate of the Engineer in favor of Lender which shall be in the form attached as Exhibit E. (c) Such documents as Lender may reasonably require (i) in connection with applications for disbursements of Loan proceeds; (ii) to establish the identity and power and authority of any person or persons who may be authorized by Borrower to execute such documents; (iii) to establish that all permits, licenses and approvals (including any and all environmental protection permits) required for the Construction of the Improvements have been obtained by Borrower; and (iv) to establish that the Improvements, once constructed, will comply with all applicable zoning, building and fire codes, laws, regulations and ordinances. ARTICLE 7. 9 BUDGET AND SUFFICIENCY OF LOAN TO COMPLETE CONSTRUCTION 7.1 Budget. A copy of the final Budget is attached hereto as Exhibit F. 7.2 Loan in Balance. Anything in this Agreement contained to the contrary notwithstanding, it is expressly understood and agreed that the Loan shall at all times be "in balance." The Loan shall be deemed to be "in balance" only at such time and from time to time, as Lender may determine, in its sole but reasonable discretion, that the then undisbursed portion of the Loan equals or exceeds the amount necessary to pay for all work done and not theretofore paid for or to be done in connection with the completion of the Construction of the Improvements in accordance with the Plans and Specifications. Borrower agrees that if for any reason the amount of undisbursed proceeds of the Loan shall at any time be or become insufficient for the purposes described in this Section 7.2 regardless of how such condition may have been brought about, Borrower or Guarantor shall, within five (5) days after written request by the Lender, deposit the deficiency with the Lender, provide an alternative source of funds acceptable to Lender in its discretion, or otherwise cure such condition to the satisfaction of Lender in its discretion. ARTICLE 8. LENDER'S OBLIGATION TO DISBURSE PROCEEDS OF THE LOAN 8.1 Construction Loan Opening. Upon Borrower's compliance with and satisfaction of all conditions precedent to the Loan Opening, Lender shall open the Loan hereunder. 8.2 Conditions to Disbursement After Loan Opening. After the Loan Opening, Borrower shall be entitled to receive successive disbursements of proceeds of the Loan in accordance with Article 9 of this Agreement (other than the final disbursements described in Article 12 hereof) within three (3) business days after each successive compliance with all applicable conditions precedent thereto, and provided that (a) prior to each such disbursement no Event of Default shall have occurred under this Agreement or any of the Loan Documents, and (b) the Loan is "in balance" as required by Section 7.2 hereof, and (c) Borrower shall have furnished or caused to be furnished to Lender an endorsement to the Loan Policy of Title Insurance covering the date of disbursement and showing the Deed of Trust as a first, prior and paramount lien on the Land subject only to the Permitted Exceptions. Such disbursements shall be made no more frequently than twice in each calendar month. In addition, upon the occurrence and continuance of an Event of Default hereunder, such disbursements may be made directly to the person or persons entitled to such disbursement. ARTICLE 9. CONSTRUCTION PAYOUT REQUIREMENTS WITH RESPECT TO ALL DISBURSEMENTS OF THE LOAN 9.1 Applicability of Sections. The provisions contained in this Article 9 shall apply to the Loan Opening and to all disbursements of Loan proceeds made thereafter. 9.2 Documents to be Furnished for Each Disbursement. As a condition precedent to each disbursement of the Loan proceeds, Borrower shall furnish or cause to be furnished to Lender 10 the following documents covering each disbursement, in form and substance satisfactory to Lender: (a) Lender's form of Project Construction Statement properly executed by Borrower and Lender's Consulting Engineer in form substantially similar to the form attached as Exhibit E; (b) Sworn statements for contractors and subcontractors, covering all work for which disbursement is to be made to a date specified therein, and covering all work otherwise paid for or to be paid for in connection with the Construction; (c) Copies of any Change Orders, whether proposed or executed, which have not been previously furnished to Lender; (d) Copies of all construction contracts having a total contract amount in excess of $50,000 which have been executed since the last disbursement; (e) Such other documentation which may be necessary to enable the Title Insurer to issue a so-called date-down endorsement to the Loan Policy of Title Insurance; and (f) If any material dispute arises between or among Borrower, General Contractors, or any other contractors, subcontractors and/or material supplier, or if any Change Order is being negotiated by Borrower, upon written request, a written summary of the nature of such dispute, or the status of such negotiations, as the case may be. 9.3 Payments Directly to Contractors and Subcontractors. Upon the occurrence of an Event of Default hereunder, Lender may in its sole discretion make payments for the cost of the Construction directly to the General Contractors, any subcontractors or material supplier. 9.4 Lender's Right to Employ Lender's Consulting Engineer. Lender shall have the right to employ Lender's Consulting Engineer to review the Plans and Specifications and all other matters related to the Construction, and to inspect all Construction and the progress of the same. All fees and expenses of Lender's Consulting Engineer shall be borne by Borrower as a loan expense. ARTICLE 10. BORROWER'S AGREEMENTS 10.1 Borrower further covenants and agrees: (a) Opening of Loan. That all conditions precedent to the Loan Opening shall be complied with on or prior to the Loan Opening Date; (b) Construction. That (i) the Construction will commence on or before the Loan Opening Date, (ii) the Construction will continue with diligence and continuity and substantially in accordance with the Construction Schedule, (iii) the Construction will be completed in a good and workmanlike manner with materials of high quality, free of defects and liens, all substantially in accordance with the Plans and Specifications (or with any changes thereto that may be approved in writing by Lender) and all governmental and quasi-governmental requirements, including all requirements and conditions set forth in all permits, licenses and other governmental approvals which have been obtained or are required to be obtained for the Construction of the Improvements, (iv) the construction of the Improvements will be fully completed not later than the Scheduled Completion Date. 11 (c) Changes in Plans and Specifications. That no changes will be made in the Plans and Specifications which result in expenditures in excess of $50,000 without the written approval of Lender, except as permitted under subparagraph (d) below. (d) Change Orders. That no Change Orders shall be allowed with respect to the Improvements to any contractor without Lender's prior written consent; provided that (i) Lender agrees to make its determination as soon as possible and in any event within two (2) business days of receipt of the Change Order, (ii) Lender agrees not to withhold its approval of any Change Order which does not increase the Budget or for which Borrower pays the increased cost of such item or items directly, and (iii) Borrower shall give Lender, if requested by Lender, a summary of the status of any negotiations relating to any Change Order. (e) Inspection by Lender. That Borrower will cooperate (and will cause the General Contractors to cooperate) with Lender in arranging for inspections of the progress of the Construction by Lender's Consulting Engineer and other representatives of the Lender, from time to time. (f) Renewal of Insurance. To pay timely all premiums on all insurance policies required under this Agreement from time to time; and when and as additional insurance is required from time to time during the term of the Loan and when and as any policies of insurance may expire, furnish to Lender, premiums prepaid, additional and renewal insurance policies in companies, coverage and amounts reasonably satisfactory to Lender, all in accordance with Sections 5.1(d) above. Notwithstanding this Section 10.1(f), upon the occurrence of an Event of Default under this Agreement or any of the Loan Documents, Lender shall have the right (but not the obligation) to place and maintain insurance required to be placed and maintained by Borrower hereunder and treat the amounts expended therefor as additional disbursements of Loan proceeds. (g) Payment of Taxes. To pay all special assessments which may have been placed in collection and all real estate taxes and assessments of every kind upon the Land before the same become delinquent; provided, however, that Borrower shall have the right to pay such tax under protest or to otherwise contest any such tax or assessment but only if (x) such contest has the effect of preventing the collection of such taxes so contested and also prevent the sale or forfeiture of the Land or the Improvements or any part thereof or any interest therein, (y) Borrower has notified Lender of its intent to contest such taxes and (z) Borrower has deposited security in form and amount reasonably satisfactory to Lender in its sole judgment, and increases the amount of such security so deposited promptly after Lender's request therefor. (h) Proceedings to Enjoin or Prevent Construction. That if any proceedings are filed seeking to enjoin or otherwise prevent or declare unlawful the Construction of the Improvements or any portion thereof, Borrower shall at its sole expense (i) cause such proceedings to be vigorously contested in good faith and (ii) in the event of an adverse ruling or decision, prosecute all allowable appeals therefrom. (i) Lender's Attorneys' Fees for Enforcement of Agreement. That in case of any Event of Default under this Agreement or any of the Loan Documents, Borrower (in addition to Lender's attorneys' fees and expenses to be paid by Borrower under Section 4.1 of this Agreement) shall pay all of Lender's reasonable attorneys' fees and expenses in connection with the enforcement of this Agreement and the Loan Documents and such fees and expenses shall constitute additional indebtedness of Borrower to Lender, payable on demand and secured by the Deed of Trust and other Loan Documents. (j) Lender's Action for its Own Protection Only. That the authority herein conferred upon Lender, and any action taken by Lender to inspect the Improvements, to procure 12 waivers or sworn statements, to approve contracts, subcontracts and purchase orders, to approve Plans and Specifications, will be exercised and taken by Lender and Lender's Consulting Engineer for their own protection only and may not be relied upon by Borrower for any purposes whatsoever; and neither Lender nor Lender's Consulting Engineer shall be deemed to have assumed any responsibility to Borrower with respect to any such action herein authorized or taken by Lender or Lender's Consulting Engineer or with respect to the Improvements, the proper construction performance of contracts, subcontracts or purchase orders by any contractors, subcontractors or material suppliers, or prevention of mechanics' liens from being claimed or asserted against any of the Improvements. Any review, investigation or inspection conducted by Lender, Lender's Consulting Engineer, any engineering or environmental consultants retained by Lender or any agent or representative of Lender in order to verify independently Borrower's satisfaction of any conditions precedent to Loan disbursements under this Agreement, Borrower's performance of any of the covenants, agreements and obligations of Borrower under this Agreement or the validity of any representations and warranties made by Borrower hereunder (regardless of whether or not the party conducting such review, investigation or inspection should have discovered that any of such conditions precedent were not satisfied or that any such covenants, agreements or obligations were not performed or that any such representations or warranties were not true), shall not affect (or constitute a waiver by Lender of) (i) any of Borrower's representations and warranties under this Agreement or Lender's reliance thereon or (ii) Lender's reliance upon any certifications of Borrower or the General Contractors required under this Agreement or any other facts, information or reports furnished Lender by Borrower hereunder. (k) Furnishing Information. That Borrower shall deliver or cause to be delivered to Lender annual financial statements (audited by an independent certified public accountant of recognized national standing) for Borrower as soon as available and in no event later than one hundred twenty (120) days after the close of each fiscal year. The Borrower shall also deliver or cause to be delivered to Lender the annual financial statements (audited by an independent certified public accountant of recognized national standing) of the Guarantor as soon as available and in no event later than one hundred twenty (120) days after the close of each fiscal year, which annual statements shall be certified as true and correct by an authorized representative of the party to whom such statement relates. Additionally, Borrower will: (i) deliver or cause to be delivered to Lender unaudited quarterly financial statements for Borrower and Guarantor certified by an authorized representative of the party to whom such statements relate; (ii) deliver to Lender monthly sales reports regarding the sold and unsold lots comprising the Land; (iii) promptly supply Lender with such information concerning its respective affairs relating to the Construction of the Improvements as Lender may reasonably request from time to time hereafter; (iv) promptly supply or cause to be supplied to Lender such other information regarding the conditions or operations, financial or otherwise, of the Borrower and the Guarantor as Lender may reasonably request from time to time hereafter; (v) promptly notify Lender of any 13 condition or event which constitutes (or which upon the giving of notice or lapse of time or both would constitute) a breach or event of default of any term, condition, warranty, representation or provision of this Agreement or of any of the Loan Documents; (vi) promptly notify Lender of any "material adverse financial change" in the respective financial conditions of the Borrower or the Guarantor; (vii) promptly notify Lender of any "material adverse financial change" in connection with the Construction of the Improvements; and (viii) at any time during regular business hours and upon reasonable notice, permit Lender or any of its agents or representatives to have access to and examine all of its books and records regarding the Construction of the Improvements and the financial condition of the Borrower and the Guarantor. (l) Furnishing Reports. At Lender's request, Borrower shall provide the Lender with copies of all inspections, reports, test results and other information received by Borrower from time to time from its employees, agents, representatives, architects, engineers, General Contractors and any other parties involved in the Construction of the Improvements, which in any way relate to the Improvements or the Construction, or any part thereof. (m) Furnishing Notices. At Lender's request, Borrower shall provide Lender with copies of all material notices pertaining to the Improvements or any part thereof received by Borrower (or its agents or representatives) from any federal, state or local governmental official, body, board or department or from any insurance company providing insurance on any of the Improvements, within ten (10) business days after such notice is received. (n) Correction of Defects. That within fifteen (15) days after notice, Borrower will proceed with diligence to correct all defects in the Improvements and any material departure from the Plans and Specifications (if not previously approved by Lender or permitted under this Agreement), or any other requirement of this Agreement. The disbursement of any Loan proceeds shall not constitute a waiver of Lender's right to require compliance with this covenant with respect to any such defect or departure from the Plans and Specifications or any other requirements of this Agreement. Any dispute as to the need to correct defects or departures from the Plans and Specifications shall be determined by the Lender's Consulting Engineer. (o) Hold Disbursements in Trust. That Borrower shall receive and hold in trust for the sole benefit of Lender (but not for the benefit of any other person, including, but not limited to, the General Contractors or any subcontractors) all advances made hereunder directly to Borrower, for the purpose of paying costs of Construction in accordance with the Budget. Borrower shall use the proceeds of the Loan solely for the payment of costs as specified in the Budget. Borrower will pay all other costs, expenses and fees relating to the Construction of the Improvements. (p) Indemnification. That Borrower shall indemnify Lender and hold Lender harmless from and against all claims, injury, damage, loss and liability of any and every kind to any persons or property by reason of or resulting from (i) the Construction, (ii) any and all other work 14 contemplated herein; or (iii) any other action or inaction by, or matter which is the responsibility of, Borrower. (q) Hazardous Materials. Borrower shall comply with the terms of the Environmental Certificate previously delivered to Lender. ARTICLE 11. CASUALTIES 11.1 Lender's Election to Apply Insurance Proceeds on Indebtedness. In the event of any loss or damage to any portion of the Improvements due to fire or other casualty, Borrower shall have the right to settle insurance claims of $50,000 or less, without Lender's consent, and shall have the right to settle insurance claims in excess of $50,000 with the Lender's prior written consent. Subject to Section 11.2 hereof, Lender shall have the right (but not the obligation) to collect, retain and apply to the indebtedness of Borrower under this Agreement all insurance proceeds (after deduction of all expenses of collection and settlement, including attorneys' and adjusters' fees and expenses). 11.2 Borrower's Obligation to Rebuild and Use of Proceeds Therefor. All insurance proceeds shall be applied against the indebtedness of Borrower to Lender hereunder, with excess proceeds, if any, being paid by Lender to Borrower; provided, however, if (a) no Event of Default exists hereunder at the time the insurance proceeds are to be disbursed and (b) Borrower complies with all conditions set forth below, Borrower shall be entitled to use the proceeds of settlement of claims to rebuild the Improvements. The insurance proceeds, after deduction of all expenses of collection and settlement, including attorneys' and adjusters' fees and expenses, shall be released to Borrower provided that Borrower shall: (i) Expeditiously repair and restore all damage to the portion of the Improvements in question resulting from such fire or other casualty so that the Improvements will be completed in accordance with the Plans and Specifications; and (ii) If the proceeds of insurance and the undisbursed available Loan proceeds are, in Lender's sole judgment, insufficient to maintain the Loan in balance in accordance with the provisions of Section 7.2 of this Agreement, then Borrower shall promptly deposit with Lender the amount of such deficiency or otherwise provide to Lender's satisfaction a source of funds to make up such deficiency. All proceeds of insurance and funds held by Lender shall first be fully disbursed before the disbursement of any further proceeds of the Loan. Any request by Borrower for a disbursement by Lender of insurance proceeds and funds deposited by Borrower pursuant to Section 11.2(ii) above shall be treated by Lender as if such request were for an advance of the Loan hereunder, and the disbursement thereof shall be conditioned upon Borrower's compliance with and satisfaction of the same conditions precedent as would be applicable under this Agreement for an advance of the Loan. ARTICLE 12. FINAL DISBURSEMENT OF PROCEEDS OF LOAN 12.1 Conditions Precedent to Final Disbursement. Lender shall make the final disbursement for completion provided that all of the following conditions have been complied with 15 and satisfied on or before Scheduled Completion Date: (a) The Improvements have been completed in accordance with the Plans and Specifications; (b) Borrower has furnished Lender with copies of all final waivers of lien and sworn statements from contractors, subcontractors and material suppliers; (c) Borrower has furnished Lender with satisfactory evidence of the dedication of the Improvements to, and the acceptance of the Improvements by, Central Nevada Utilities Company; (d) Borrower has furnished to Lender certificates from Borrower and the General Contractors, each currently dated, certifying that (i) no notices of any claimed violations of ordinances arising from the Construction of the Improvements which have not been cured were served upon the party making such certification and (ii) the party making such certification is not aware of any circumstances which could give rise to the issuance of any such notice of claimed violation; (e) Borrower has furnished to Lender a certificate from the Engineer covering the completion date of the Improvements and stating that (i) the Improvements have been completed in accordance with the Plans and Specifications and (ii) the Improvements as so completed comply with all applicable laws and ordinances; and (f) All other requirements of this Agreement for disbursement of Loan proceeds have been complied with and satisfied. ARTICLE 13. ASSIGNMENTS AND TRANSFERS 13.1 Lender's Right to Assign. Lender, provided it remains obligated to service the Loan hereunder and to assure Borrower that the Loan is made available to Borrower pursuant to the terms hereof, shall have the right to assign, transfer, sell, negotiate, pledge or otherwise hypothecate this Agreement or any of its rights and security hereunder, including the Note, Deed of Trust, and any other Loan Documents. Borrower hereby agrees that all of the rights and remedies of Lender in connection with the interest so assigned shall be enforceable against Borrower by such assignee with the same force and effect and to the same extent as the same would have been enforceable by Lender but for such assignment. 13.2 Prohibition of Assignments and Transfers by Borrower. Borrower shall not, without the prior written consent of Lender, assign or attempt to assign its rights under this Agreement. Except as provided hereinafter, Borrower will not, without the prior written consent of Lender, suffer or permit the Improvements or any part thereof or any interest therein to be assigned, sold, pledged, encumbered, transferred, hypothecated or otherwise disposed of until the provisions of this Agreement have been fully complied with and the Loan and all other sums evidenced by the Note and/or secured by the Deed of Trust and other Loan Documents, have been repaid in full. Notwithstanding the foregoing, Borrower may transfer its interest in the Improvements after completion of the Construction of the Improvements to Central Nevada Utilities Company prior to payment of all sums due Lender under the Note. 13.3 Successors and Assigns. Subject to the foregoing restrictions on transfer and assignment contained in this Article 13, this Agreement shall inure to the benefit of and shall be 16 binding on the parties hereto and their respective successors and assigns. ARTICLE 14. EVENTS OF DEFAULT 14.1 Events of Default. The occurrence of any one or more of the following shall constitute an "Event of Default," as such term is used herein: (a) If Borrower fails to pay when due any payment of principal or interest or both of the Loan which failure continues for a period of three (3) days after notice thereof; (b) If Borrower fails to perform any of its covenants, agreements and obligations under this Agreement or any of the Loan Documents other than as set forth in subparagraph (a) above, which failure continues for a period of fifteen (15) days after notice thereof; (c) If at any time Lender or Lender's Consulting Engineer disapproves of any material Construction work and Borrower fails to cause the same to be corrected to the reasonable satisfaction of Lender and Lender's Consulting Engineer within the time period set forth in Section 10.1(n) hereof; (d) If there occurs any delay in the Construction or discontinuance of Construction for a period of thirty (30) days other than delays resulting from labor disputes, fire, unusual delays in transportation of materials, adverse weather conditions which could not be reasonably anticipated, unavoidable casualties, or any other causes beyond Borrower's control (other than lack of funds) which do not extend Construction beyond the Completion Date; (e) If there occurs any default under the Note, Deed of Trust or any of the other Loan Documents, and such default is not cured within the applicable notice or cure period, if any; (f) If at any time or times hereafter any representation or warranty (including the representations and warranties of Borrower set forth in Article 2 of this Agreement), statement, report or certificate now or hereafter made by Borrower, the Guarantor or the Engineer is not true and correct in any material respect; (g) If Borrower fails, within ten (10) days after Lender's written request therefor, to pay Lender any amount by which the principal indebtedness under this Agreement may, at any time, exceed the face amount of the Note; (h) If all or substantially all of the assets of Borrower or the Guarantor are attached, seized, or are levied upon, or come into the possession of any receiver, trustee, custodian or assignee for the benefit of creditors, and the same is not vacated, stayed, dismissed, set aside or otherwise remedied within sixty (60) days after the occurrence thereof; (i) If Borrower or the Guarantor is enjoined, restrained or in any way prevented by any court order from constructing the Improvements, or if a notice of lien, levy or jeopardy assessment is filed of record with respect to all or any part of the property of Borrower or the Guarantor or by any governmental department, office or agency, or if any proceeding is filed or commenced seeking to enjoin, restrain or in any way prevent the foregoing parties from conducting all or a substantial part of its business affairs and failure to vacate, stay, dismiss, set aside or remedy the same within sixty (60) days after the occurrence thereof; (j) If any petition is filed by or against the Borrower or the Guarantor under the 17 federal Bankruptcy Act or any similar state or federal law, whether now or hereafter existing (and, in the case of involuntary proceedings, failure to cause the same to be vacated, stayed or set aside within sixty (60) days after filing); (k) If there is any "material adverse financial change" in Borrower or the Guarantor; for purposes hereof, an entity shall be deemed to have experienced a "material adverse financial change" if in Lender's reasonable judgment, an adverse financial change has occurred which could prevent timely completion of the Construction or timely repayment of the Loan or could prevent the Guarantors from meeting its obligations under the Guaranty; (l) If the Guarantor fails to observe or perform any of its obligations or covenants under the Guaranty and such failure continues beyond applicable grace periods, if any; (m) If there is any condition which continues to exist following applicable cure periods and would for any reason prevent Borrower from complying with the terms, provisions and conditions of this Agreement and all of the Loan Documents; or (n) If any assignment, pledge, encumbrance, transfer, hypothecation or other disposition of the Improvements or any portion thereof or interest therein is made in violation of Section 13.2 above. ARTICLE 15. LENDER'S REMEDIES UPON ANY EVENT OF DEFAULT 15.1 Remedies Conferred Upon Lender. Upon the occurrence of any Event of Default, Lender shall, in addition to all remedies conferred upon Lender by law or in equity and by the terms of the Note, Deed of Trust and the other Loan Documents, have the right but not the obligation to pursue any one or more of the following remedies concurrently or successively, it being the intent hereof that all such remedies shall be cumulative and that no such remedy shall be to the exclusion of any other: (a) Complete the Construction, and take any other action whatever which, in Lender's sole judgment, is necessary to fulfill the covenants, agreements and obligations of Borrower under this Agreement and the Loan Documents, including the right to (x) avail itself of and procure performance of existing contracts and subcontracts, including the General Contracts, and (y) let any contracts with the same contractors and subcontractors or others and to employ watchmen to protect the Improvements from injury. Without restricting the generality of the foregoing, and for the purpose aforesaid, Borrower hereby appoints and constitutes Lender its lawful attorney in fact with full power of substitution in the Improvements, and agrees that Lender shall be entitled to (i) complete the Construction, (ii) use unadvanced funds remaining in the Loan or which may be reserved, escrowed or set aside for any purpose whatever at any time, to complete the Construction, (iii) advance funds, in excess of the face amount of the Note, to complete the Construction, (iv) make changes in the Plans and Specifications which shall be necessary to or desirable to complete the Construction in substantially the manner contemplated by the Plans and Specifications, (v) retain or employ such new general contractors, subcontractors, architects, engineers, environmental consultants and inspectors as may be required for said purposes, (vi) execute all applications and certificates which may be required by any of the Loan Documents, (vii) prosecute and defend all actions or proceedings connected with or relating to the Improvements, and (vii) do any and every act which the Borrower might do in its own behalf; it being understood and agreed that the foregoing power of attorney shall be a power coupled with an interest and cannot be revoked; (b) Withhold further disbursement of the proceeds of the Loan; and 18 (c) Declare the Note to be immediately due and payable. 15.2 Non-Waiver of Remedies. No waiver of any breach or default hereunder shall constitute or be construed as a waiver by Lender of any subsequent breach or default or of any breach or default of any other provision of this Agreement. ARTICLE 16. GENERAL PROVISIONS 16.1 Captions. The captions and headings of various Articles and Sections of this Agreement and exhibits pertaining hereto are for convenience only and are not to be considered as defining or limiting in any way, the scope or intent of the provisions hereof. 16.2 Notices. Any notice, demand request or other communication which any party hereto may be required or may desire to give hereunder shall be in writing and shall be deemed to have been properly given if hand delivered or if mailed by United States registered or certified mail, postage prepaid, return receipt requested, or by a nationally recognized overnight courier, addressed as follows: If to the Borrower: Preferred Equities Corporation 4310 Paradise Road Las Vegas, Nevada 89109 Attn: Frederick H. Conte with a copy to: Preferred Equities Corporation 4310 Paradise Road Las Vegas, Nevada 89109 Attn: Jerome J. Cohen President with a copy to Guarantor: Mego Financial Corp. 4310 Paradise Road Las Vegas, Nevada 89109 Attn: Jerome J. Cohen President If to Lender: NBD Bank 611 Woodward Avenue Detroit, Michigan 48226 Attn: Richard J. Johnsen Financial Services Division, 3rd Floor 19 or at such other address as the party to be served with notice may have furnished in writing to the party seeking or desiring to serve notice as a place for the service of notice. 16.3 Modification, Waiver. No modification, waiver, amendment, discharge or change of this Agreement shall be valid unless the same is in writing and signed by the party against which the enforcement of such modification, waiver, amendment, discharge or change is sought. 16.4 Governing Law. This Agreement shall be construed, interpreted and governed by the laws of the State of Michigan. 16.5 Acquiescence Not to Constitute Waiver of Lender's Requirements. To the extent that Lender may have acquiesced in any noncompliance with any conditions precedent to the Loan Opening, or to any subsequent disbursement of Loan proceeds, such acquiescence shall not be deemed to constitute a waiver by Lender of such requirements with respect to any future disbursements of Loan proceeds. 16.6 Disclaimer by Lender. Lender shall not be liable to any contractors, subcontractors, supplier, laborer, architect, engineer, environmental consultant, tenant or other party for services performed or materials supplied in connection with the Construction. Lender shall not be liable for any debts or claims accruing in favor of any such parties against Borrower or others or against the Improvements. Borrower is not and shall not be an agent of the Lender for any purposes. Lender, by making the Loan or any action taken pursuant to any of the Loan Documents, shall not be deemed a partner or a joint venturer with Borrower. Lender shall not be deemed to be in privity of contracts with any contractors or provider of services to the Improvements, nor shall any payment of funds directly to contractors or subcontractors or provider of services be deemed to create any third party beneficiary status or recognition of same by the Lender. 16.7 Right of Lender to Make Advances to Cure Borrower's Defaults. If Borrower shall fail to perform in a timely fashion any of Borrower's covenants, agreements or obligations contained in this Agreement or the Loan Documents, Lender may (but shall not be required to) perform any of such covenants, agreements and obligations, and any amounts expended by Lender in so doing, and any amounts expended by Lender pursuant to Section 15.1(a) hereof, shall constitute additional indebtedness evidenced and secured by the Note, the Deed of Trust and the other Loan Documents. 16.8 Time Is of the Essence. Time is hereby declared to be of the essence of this Agreement and of every part hereof. 16.9 Partial Invalidity. In the event any provision of this Loan Agreement shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof. 16.10 Waiver of Jury Trial. THE BORROWER HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT OR RELATING THERETO OR ARISING FROM ANY RELATIONSHIP WHICH IS THE SUBJECT OF THIS AGREEMENT AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. Borrower and Lender have executed this Agreement as of the date first above written. Borrower: 20 PREFERRED EQUITIES CORPORATION, a Nevada corporation By: Its: NBD BANK, a Michigan banking corporation By: Its: 21 COLLATERAL ASSIGNMENT OF PROJECT DOCUMENTS THIS COLLATERAL ASSIGNMENT OF PROJECT DOCUMENTS dated as of April 30, 1996, by Preferred Equities Corporation, a Nevada corporation ("Assignor") and NBD Bank, a Michigan banking corporation ("Assignee"). WITNESSETH: WHEREAS, Assignee has extended credit to the Assignor pursuant to a certain Construction Loan Agreement of even date herewith (the "Loan Agreement") and the Assignor has executed and delivered to Assignee a note of even date herewith payable to Assignee in the original principal amount of $1,440,000 (the "Note"), payment of which is secured without limitation by a certain Deed of Trust, Assignment of Rents, Security Agreement, and Financing Statement (the "Deed of Trust") from Assignor for the benefit of Assignee of even date herewith covering the real estate described in the Deed of Trust (the "Mortgaged Premises"); and WHEREAS, the Assignee, in addition to the collateral provided in the Deed of Trust, has required the execution and delivery of this Assignment. NOW, THEREFORE, in consideration of the recitals set forth above and incorporated herein, and for other good and valuable consideration, Assignor agrees as follows: I. Assignor hereby grants, transfers and assigns to Assignee all the right, title and interest of Assignor in and to the following documents now or hereafter executed by Assignor: (i) that certain Construction Agreement between Assignor and Floyd's Construction, Inc. consistent with a proposal dated as of ____________, 1996 with respect to water and sewer improvements and that certain letter agreement between Assignor and Wulfenstein Construction dated September 14, 1995 with respect to roadway improvements (collectively, the "General Contracts"); (ii) all guarantees, warranties and other undertakings covering the quality or performance of the work or the quality of the materials required by the General Contracts; (iii) all building permits, governmental permits, licenses and authorizations, now or hereafter used in connection with the construction of the Improvements as defined in the Loan Agreement, to the extent assignable; (iv) the plans and specifications prepared by Crosby Mead Benton & Associates and identified on Exhibit A attached hereto; and (v) all other contracts, agreements and other documents now or hereafter executed or issued in connection with the performance of the work or the supply of the materials required for the construction of the Improvements. The items referred to in paragraphs (i) through (v) above are sometimes hereinafter collectively referred to as the "Project Documents." The parties to the Project Documents other than Assignor are hereinafter collectively called the "Parties." This Assignment is given for the purpose of securing the payment of all sums, including without limitation, the payment of principal and interest due under the Note, now or at any time due Assignee under the the Loan Documents (as defined in the Loan Agreement) and any extensions, modifications, amendments and renewals thereof, and the performance and discharge of the 22 obligations, covenants, conditions and agreements of Assignor contained herein and of the Borrower contained in the Loan Documents. II. Assignor agrees: A. To abide faithfully by, perform and discharge each and every obligation, covenant, condition and agreement of the Project Documents to be performed by Assignor and to enforce performance by each of the Parties of each and every obligation, covenant, condition and agreement to be performed by the Parties. B. That the occurrence of any of the following shall constitute an Event of Default hereunder: (1) A default by Assignor in the observance or performance of any obligation, covenant, condition or agreement herein which continues for a period of thirty (30) days; or (2) Any representation or warranty made by Assignor herein which is not true and correct in any material respect as of the date hereof; or (3) A default by the Borrower under any of the Loan Documents, which shall not be cured within the grace or notice period, if any, provided for therein. C. That any Event of Default hereunder, as provided above, shall be deemed to be a default under the Deed of Trust and the Loan Documents. Upon the occurrence of any Event of Default hereunder, Assignee shall have the right (but not the obligation), without notice to or demand on Assignor: (1) to declare all sums evidenced or secured by the Loan Documents and hereby immediately due and payable, (2) to exercise any and all rights and remedies provided under the Loan Documents or hereunder as well as such remedies as may be available at law or in equity, and (3) to correct any such default in such manner and to such extent as Assignee may deem necessary to protect the security hereof, including specifically, without limitation, the right (but not the obligation) to appear in and defend any action or proceeding purporting to affect the security hereof or the rights or powers of Assignee; and also the right (but not the obligation) to perform and discharge each and every obligation, covenant, condition and agreement of Assignor under the Project Documents, and, in exercising any such powers, to pay necessary costs and expenses, employ counsel and incur and pay reasonable attorneys' fees and expenses. Assignee shall not be obligated to perform or discharge, nor does it hereby undertake to perform or discharge, any obligation, duty or liability under any of the Project Documents, or by reason of this Assignment. D. At any time after the occurrence of an Event of Default, Assignee may, at its option, without notice, and without regard to the adequacy of security for the indebtedness hereby secured, either in person or by agent, with or without bringing any action or proceeding, or by a receiver to be appointed by a court at any time hereafter, enforce for its own benefit the Project Documents, or any of them. The exercise of any rights under this Assignment shall not be deemed to cure or waive any default under the Loan Documents executed in connection therewith, or waive, modify or affect any notice of default under the Loan Documents executed in connection therewith, or invalidate any act done pursuant to such notice. E. That each of the Parties upon written notice from Assignee of the occurrence of an Event of Default, shall be and is hereby authorized by Assignor to perform each of their respective contracts for the benefit of Assignee in accordance with the terms and conditions thereof without any obligation to determine whether such an Event of Default has in fact occurred. F. That in the exercise of the powers herein granted to Assignee, no liability shall 23 be asserted or enforced against Assignee, all such liability being hereby expressly waived and released by Assignor. Assignor hereby agrees to indemnify and hold Assignee free and harmless from and against any and all liability, expense, cost, loss or damage which Assignee may incur by reason of any act or omission of Assignor under any of the Project Documents. Should Assignee incur any liability, expense, cost, loss or damage (1) under the Project Documents for which it is to be indemnified by Assignor as aforesaid, or (2) by reason of the exercise of Assignee's rights hereunder (including but not limited to, the exercise of the rights granted to Assignee under Section II.C hereof), the amount thereof, including reasonable costs, expenses and attorneys' fees and expenses, shall be secured hereby and by the Loan Documents (whether or not such amount, when aggregated with other sums secured by the Loan Documents, exceeds the face amount of the Note) and shall (a) be due and payable immediately upon demand by Assignee, and (b) bear interest at the default rate set forth in the Note. G. That this Assignment shall be assignable by Assignee to any assignee of Assignee and all representations, warranties, covenants, powers and rights herein contained shall be binding upon, and shall inure to the benefit of, Assignor and Assignee and their respective legal representatives, successors and assigns. III. Assignor further hereby covenants and represents to Assignee that (i) Assignor has not previously assigned, sold, pledged, transferred, mortgaged, hypothecated or otherwise encumbered the Project Documents or any of them, or its right, title and interest therein, (ii) Assignor shall not assign, sell, pledge, transfer, mortgage, hypothecate or otherwise encumber its interests in the Project Documents or any of them except in connection with a permitted transfer set forth in the Deed of Trust, (iii) Assignor has not performed any act which might prevent Assignor from performing its undertakings hereunder or which might prevent Assignee from operating under or enforcing any of the terms and conditions hereof or which would limit Assignee in such operation or enforcement, (iv) Assignor is not in default under the Project Documents or any of them, and to the best knowledge of Assignor, none of the Parties to the respective Project Documents is in default thereunder except as disclosed in writing to Assignee, and (v) upon execution of any of the Project Documents, Assignor will deliver a copy of such Project Documents to Assignee and will require such of the Parties thereto as Assignee may designate to execute and deliver to Assignee a consent to this Assignment. IV. Any notice, demand, request or other communication which any party hereto may be required or may desire to give hereunder shall be in writing and shall be deemed to have been properly given if hand delivered or if mailed by United States registered or certified mail, postage prepaid, return receipt requested, or by a nationally recognized overnight courier, addressed as follows: If to the Assignor: Preferred Equities Corporation 4310 Paradise Road Las Vegas, Nevada 89109 Attn: Frederick H. Conte with a copy to: Preferred Equities Corporation 4310 Paradise Road Las Vegas, Nevada 89109 Attn: Jerome J. Cohen President 24 with a copy to: Mego Financial Corp. 4310 Paradise Road Las Vegas, Nevada 89109 Attn: Jerome J. Cohen President If to Assignee: NBD Bank 611 Woodward Avenue Detroit, Michigan 48226 Attn: Richard J. Johnsen Financial Services Division, 3rd Floor or at such other address as the party to be served with notice may have furnished in writing to the party seeking or desiring to serve notice as a place for the service of notice. V. This Assignment is made for collateral purposes only and the duties and obligations of Assignor under this Assignment shall terminate when all sums due Assignee under the Loan Documents are paid in full and all obligations, covenants, conditions and agreements of Assignor contained in the Loan Documents executed in connection therewith are performed and discharged. VI. This Assignment shall be governed by the laws of the State of Michigan. VII. It is expressly intended, understood and agreed that this Assignment is made and entered into for the sole protection and benefit of Assignor and Assignee, and their respective successors and assigns. VIII. Nothing contained herein or in the Deed of Trust or any of the Loan Documents shall in any manner be construed as making the parties hereto partners, joint venturers or any other relationship other than assignor and assignee. Nothing contained herein shall be deemed to create any third party beneficiary rights in any party. IX. Assignor and Assignee intend and believe that each provision in this Assignment comports with all applicable local, state or federal laws and judicial decisions. However, if any provision or provisions, or if any portion of any provision or provisions, in this Assignment is found by a court of law to be in violation of any applicable local, state or federal ordinance, statute, law, administrative or judicial decision or public policy, and if such court should declare such portion, provision or provisions of this Assignment to be illegal, invalid, unlawful, void or unenforceable as written, then it is the intent both of Assignor and Assignee that such portion, provision or provisions shall be given force to the fullest possible extent that they are legal, valid and enforceable, that the remainder of this Assignment shall be construed as if such illegal, invalid, unlawful, void or unenforceable portion, provision or provisions were not contained therein and that the rights, obligations and interests of Assignor and Assignee under the remainder of this Assignment shall continue in full force and effect. WITNESS the due execution of this Assignment as of the date first above written. 25 PREFERRED EQUITIES CORPORATION, a Nevada corporation By: Its: 26 Drawn out of state Mail to: Colleen M. Shevnock Dickinson, Wright, Moon, Van Dusen & Freeman 500 Woodward Avenue, Suite 4000 Detroit, Michigan 48226 DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT, AND FINANCING STATEMENT THIS DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT, AND FINANCING STATEMENT (the "Deed of Trust") dated as of April 30, 1996 from PREFERRED EQUITIES CORPORATION, a Nevada corporation, (the "Borrower"), to UNITED TITLE OF NEVADA, a Nevada corporation, as trustee (in such capacity, the "Trustee") for the benefit of NBD BANK, a Michigan banking corporation, and its successors and assigns (collectively, the "Bank"); W I T N E S S E T H: WHEREAS, the Borrower has entered into a Construction Loan Agreement, dated as of April 30, 1996 (the "Loan Agreement") with the Bank pursuant to which the Bank may make a construction loan (the "Loan") to the Borrower to finance the construction of certain infrastructure improvements for the benefit of the Mortgaged Premises (as defined hereinafter); WHEREAS, as a condition to the effectiveness of the obligations of the Bank under the Loan Agreement, the Borrower is obligated, among other things, to grant a lien on the Mortgaged Premises; NOW, THEREFORE, to secure (a) the payment of the principal sum of ONE MILLION FOUR HUNDRED FORTY THOUSAND DOLLARS ($1,440,000.00) together with interest thereon, in accordance with the terms of a promissory note dated April 30, 1996 issued by the Borrower pursuant to the Loan Agreement (the "Note"), (b) the performance of the covenants herein contained and any monies expended by the Bank in connection therewith, and (c) the payment of all obligations and performance of all covenants of the Borrower under the Loan Agreement and any other documents, agreements or instruments between the Borrower and the Bank given in connection therewith (all of the aforesaid indebtedness, obligations and liabilities of the Borrower being herein called the "Mortgage Indebtedness" and all of the documents, agreements and instruments between the Borrower and the Bank evidencing or securing the repayment of, or otherwise pertaining to, the Mortgage Indebtedness being herein collectively called the "Operative Documents"), the Borrower does hereby irrevocably grant and convey unto the Trustee, and its successors and assigns, in trust with the power of sale, for the benefit of the Bank and its successors and assigns, the land, premises and property situated in the Township of Pahrump, County of Nye, and State of Nevada, more specifically described in Exhibit A hereto (the "Mortgaged Premises"); TOGETHER with all buildings and improvements now or hereafter situated upon the Mortgaged Premises or any part thereof; TOGETHER with all additions, modifications and improvements now or hereafter erected thereon, all rights, appurtenances, easements, rights of way, licenses, privileges, remainders and reversions appertaining thereto and all apparatus, building materials, equipment and articles of personal property now or hereafter attached thereto as fixtures, and replacements thereof from time to time, including, but not limited to, all heating, refrigerating, air conditioning, gas, plumbing and 27 electric apparatus and equipment, all boilers, engines, motors, power equipment, piping and plumbing fixtures, pumps, tanks, lighting equipment and systems, fire prevention and sprinkling equipment and systems, and other things now or hereafter thereon or therein, and the proceeds, including without limitation insurance proceeds, of any of the foregoing, and all rents, issues and profits from the Mortgaged Premises (the "Rents") and the buildings and improvements and facilities thereon under present or future leases, or otherwise, which are hereby specifically assigned, transferred and set over unto the Bank, and all right, title and interest of the Borrower, if any, in and to the land lying in the bed of any street, road, avenue, alley or walkway, opened or proposed or vacated, or any strip or gore, in front of or adjoining the Mortgaged Premises, and any and all awards or payments, including interest thereon, and the right to receive the same, which may be made with respect to the Mortgaged Premises as a result of (a) the exercise of the right of eminent domain, (b) the alteration of the grade of any street, (c) any loss of or damage to any building or other improvement on the Mortgaged Premises (d) any other injury to or decrease in the value of the Mortgaged Premises or (e) any refund due on account of the payment of real estate taxes, assessments or other charges levied against or imposed upon the Mortgaged Premises to the extent of all amounts which may be secured by this Deed of Trust at the date of receipt of any such award or payment by the Bank, and of the reasonable counsel fees, costs and disbursements incurred by the Bank in connection with the collection of such award or payment, (the foregoing, including the Mortgaged Premises, being hereinafter collectively referred to as the "Property"); TO HAVE AND TO HOLD the Property, with all the rights, privileges and appurtenances thereunto belonging or appertaining to the Trustee, his heirs, successors and assigns, in fee simple forever, upon the trusts and for the uses and purposes hereinafter set out; AND THE BORROWER hereby warrants and represents to the Trustee and its successors and assigns and the Bank and its successors and assigns, that the Borrower is seized of the Property in fee simple and has the right to convey the same in fee simple; that the Mortgaged Premises is marketable and free and clear of all liens or encumbrances (other than Permitted Encumbrances as hereinafter defined) and that the Borrower will warrant and defend the title to the Property against the claims of all persons whomsoever; provided, however, that THIS CONVEYANCE IS MADE UPON THIS SPECIAL TRUST, that if the Borrower shall pay all of the principal of, premium, if any, and interest on the Note and all other sums payable hereunder and under the Loan Agreement, and if the Borrower shall comply with all the covenants, terms and conditions of this Deed of Trust and the Loan Agreement, then this conveyance shall be of no further force and effect and shall be cancelled of record at the cost of the Borrower. As used herein "Permitted Encumbrances" means all matters set forth on Exhibit B hereto. This Deed of Trust constitutes a "security agreement" as that term is defined in the Uniform Commercial Code as enacted in the State of Nevada (the "U.C.C.") with respect to, among other things, any personal property or fixtures located on the Mortgaged Premises which comprise part of the Property and the Rents and any part thereof, and creates and Borrower hereby grants to the Bank a continuing first and prior security interest for the Bank's benefit in such fixtures, personal property and the Rents to secure the Mortgage Indebtedness. In that regard, Borrower grants to the Bank all of the rights and remedies of a secured party under the U.C.C. A financing statement or statements shall from time to time be executed by the Bank and the Borrower or by the Borrower alone and filed in the manner required to perfect said security interest under the U.C.C. As to the collateral which are or are to become fixtures relating to the Property and improvements thereon, the parties intend that as to these goods, this Deed of Trust shall be effective as a financing statement filed as a fixture filing from the date of its filing for record in the real estate records of the county in which the Property is located. For such purposes, the name and address of the Bank as Secured Party and Borrower as Debtor are as listed in Section 14(a). Information 28 concerning the collateral can be obtained from the Borrower and the Bank at the addresses set forth therein. This Deed of Trust is given to secure present and future obligations under the Loan Agreement in the amount of $1,440,000 and a number of performance obligations under the Loan Agreement and the Deed of Trust. Section 1. Maintenance and Modification of the Property. The Trustee shall not be under any obligation to operate, maintain or repair the Property. The Borrower shall not commit or permit to be committed any waste on the Property and shall keep and maintain the Property in good repair and fully insured as required by the Loan Agreement and will promptly comply with all laws, ordinances, orders, rules, regulations and requirements of any governmental body applicable to the Property. The Bank may at any time, after reasonable notice to the Borrower and subject to the reasonable security and safety requirements of the Borrower, enter or cause entry to be made upon the Property and inspect the Property, and if the Bank finds that the Borrower is in violation of any of the foregoing provisions, the Bank may, if such violation is not corrected within 30 days after written notice thereof by the Bank to the Borrower, enter upon the Property and take such actions as may be necessary to correct such violation and pay such sums of money as the Bank in its sole discretion shall determine to be necessary therefor; provided, however, that if the Borrower shall fail to make any repair, restoration or replacement which, if begun and continued with due diligence, can be completed but not within a period of 30 days, then such period shall be extended as shall be necessary to enable the Borrower to complete such repair, restoration or replacement through the exercise of due diligence. The Borrower shall not permit or suffer others to commit a nuisance in or about the Property or itself commit a nuisance in connection with its use or occupancy of the Property. Section 2. Charges, Liens and Encumbrances. The Borrower shall pay, before the same become delinquent or subject to interest or penalties, all charges, liens and encumbrances, except Permitted Encumbrances, which now are or may hereafter become a lien upon the Mortgaged Premises or any part thereof, including but not limited to all ground rents, taxes, assessments, insurance premiums and utility rates, and in default thereof the Bank may pay, upon 10 days notice to the Borrower, any such charges or encumbrances for the account of the Borrower, and any such additional sums of money as the Bank may deem to be necessary for the satisfaction thereof, and the Bank shall be the sole judge of the legality or validity thereof and of the amounts necessary to be paid in satisfaction thereof. Borrower shall have the right to contest, in good faith, the proposed assessment of ad valorem taxes or special assessments by governmental authorities having jurisdiction over the Mortgaged Premises and any other charges, liens and encumbrances filed against the Mortgaged Premises; provided, however, Borrower shall give written notice thereof to the Bank and the Bank may, in its sole discretion, require Borrower to post a bond or other collateral satisfactory to the Bank in connection with any such action by Borrower. Section 3. Liens. The Borrower will not voluntarily create or permit to be created against the Property any lien, encumbrance, or charge inferior, equal or superior to the lien of this Deed of Trust, except as otherwise permitted by this Deed of Trust and the Loan Agreement. The Borrower will comply with the terms set forth in the Loan Agreement relating to liens and encumbrances and except as provided therein will satisfy or discharge any such liens or encumbrances as may be filed or asserted against the Property within the time and in the manner provided in the Loan Agreement as the case may be. Section 4. Grant and Release of Easements. If no Event of Default (as hereinafter defined) shall have occurred, the Borrower may at any time or times grant easements, licenses, rights of way and other rights or privileges in the nature of easements and may release existing interests, easements, licenses, rights of way and other such rights or privileges, with respect to any part of the 29 Property, with or without consideration, and the Bank agrees that it shall execute and deliver and will cause, request or direct the Trustee to execute and deliver any instrument necessary or appropriate to grant or release any such interest, easement, license, right of way or other right or privilege but only upon receipt of (i) a copy of the instrument of grant or release, (ii) a written application signed by a representative of the Borrower. Section 5. Events of Default; Remedies of the Trustee Upon Default. (a) If any of the following events shall occur: (i) failure of the Borrower to pay when due the principal of and interest on the Note which failure continues for a period of three (3) days after notice thereof; or (ii) the occurrence of an Event of Default under the Loan Agreement or any other Operative Document; or (iii) default in any of the terms, conditions or covenants contained in this Deed of Trust for a period of thirty (30) days after receipt by the Borrower of written notice specifying such failure and requesting that it be remedied, given to the Borrower by the Bank, unless the Bank shall agree in writing to an extension of time prior to its expiration; or (iv) if the Borrower shall sell, lease, transfer, assign, mortgage or otherwise encumber or dispose of the Property or any part thereof, except pursuant to the terms of the Loan Agreement or the terms hereof; then and in any such event (hereinafter referred to as an "Event of Default") which shall not have been waived, the Mortgage Indebtedness hereunder shall, at the option of the Bank, become at once due and payable, regardless of the maturity date thereof. (b) All rights of action under this Deed of Trust, if permitted by applicable law, may be enforced by the Trustee without the production of this Deed of Trust at any trial or other proceeding relating thereto. The Trustee and the Bank shall have the right to enter upon the Property to such extent and as often as the Trustee or Bank, in its or their sole discretion, deems necessary or desirable in order to prevent or cure any default by the Borrower. Upon the occurrence of an Event of Default which shall not have been waived, the Trustee or Bank may take possession of all or any part of the Property together with the books, papers and accounts of the Borrower pertaining thereto and necessary for operation and hold, operate and manage the same, and from time to time make all needful repairs and those improvements which are required by law as shall be deemed expedient by the Trustee or Bank; and the Trustee or Bank may lease any part of the Property in the name of and for the account of the Borrower, and collect, receive and sequester the rent, revenues, receipts, earnings, income, products and profits therefrom, and out of the same and from any moneys received from any receiver of any part thereof pay, and set up proper reserves for the payment of, all proper costs and expenses of so taking, holding and managing the same, including reasonable compensation to the Trustee or Bank, its agents and counsel, and any charges of the Trustee or Bank hereunder, and any taxes and assessments and other charges prior to the lien of this Deed of Trust which the Trustee or Bank may deem it proper to pay, and all expenses of such repairs and improvements, and apply the remainder of the moneys so received in accordance with the provisions hereof. The Trustee or the Bank will attempt to keep confidential any such confidential books, papers and accounts taken by the Trustee or Bank pursuant to this section. The Trustee or Bank shall have the right, after the occurrence of an Event of Default which shall not have been waived, to the appointment of a receiver to collect the rents and profits from the Property without consideration of the value of the premises or the solvency of any person liable for 30 the payment of the amounts then owing, and all amounts collected by the receiver shall, after expenses of the receivership, be applied to the payment of the indebtedness hereby secured, and the Trustee or Bank, at its option, in lieu of an appointment of a receiver, shall have the right to do the same. If such receiver should be appointed or if there should be a sale of the said premises, as provided below, the Borrower, or any person in possession of the premises thereunder, as tenant or otherwise, shall become a tenant at will of the receiver or of the purchaser and may be removed by a writ of ejectment, summary ejectment or other lawful remedy. (c) Upon the occurrence of an Event of Default which shall not have been waived, the Trustee is hereby authorized and empowered, upon application of the Bank, to expose to sale and to sell all or from time to time any part of the Property at public auction for cash, after first having complied with all applicable requirements of Nevada law with respect to the exercise of powers of sale contained in deeds of trust. (d) The Borrower hereby waives, to the full extent it may lawfully do so, the benefit of all appraisement, valuation, stay, moratorium, exemption from execution, extension and redemption laws and any statute of limitations, now or hereafter in force, and all rights of marshalling in the event of the sale of the Property or any part thereof or any interest therein. Section 6. Application of Proceeds. In the event of any sale of the Mortgaged Premises by foreclosure, through judicial proceedings, by advertisement or otherwise, the Bank shall apply the proceeds of any such sale in the order following to: (i) all expenses incurred for the collection of the Mortgage Indebtedness and the foreclosure of this Deed of Trust, including reasonable attorneys' fees and disbursements, or such attorneys' fees and disbursements as are permitted by law, (ii) all sums expended or incurred by the Trustee or the Bank directly or indirectly in carrying out the terms, covenants and agreements of the Note, this Deed of Trust and the other Operative Documents, together with interest thereon as therein provided, (iii) all accrued and unpaid interest upon the Mortgage Indebtedness, (iv) the unpaid principal amount of the Mortgage Indebtedness, and (v) the surplus, if any there be, unless a court of competent jurisdiction decrees otherwise, to the Borrower. Section 7. General Covenant. The Borrower shall pay the Mortgage Indebtedness and will fully perform all of its covenants, agreements and obligations herein, in the Loan Agreement required to be performed, all at the times and in the manner provided in this Deed of Trust and the Loan Agreement. Section 8. Payment of Costs, Attorneys' Fees and Expenses. The Borrower shall pay any and all costs, reasonable attorneys' fees (without regard to any statutory presumption) and other expenses of whatever kind incurred by the Bank in connection with (a) obtaining possession of the Property, (b) the protection and preservation of the Property pursuant hereto, (c) the collection of any sum or sums secured hereby, (d) any litigation involving the Property, this Deed of Trust, any benefit accruing by virtue of the provisions hereof, or the rights of the Trustee or the Bank, (e) the presentation of any claim under any administrative or other proceedings in which proof of claim is required by law to be filed, (f) any additional examination of the title to the Property which may be reasonably required by the Bank, or (g) taking any steps whatsoever in enforcing this Deed of Trust, claiming any benefit accruing by virtue of the rights of the Trustee or the Bank hereunder. Section 9. Insurance and Taxes. The Borrower will obtain and maintain certain insurance in accordance with the terms of the Loan Agreement and pay all lawful taxes, assessments and charges at any time levied or assessed upon the Property or any part thereof. Section 10. Environmental Matters. The Borrower shall comply with the terms of the Environmental Certificate previously delivered to the Bank. Section 11. No Sale, Etc. of Property. Except as otherwise expressly provided in Section 31 15 hereof or by the terms of the Loan Agreement and the Operative Documents, the Borrower will not sell, lease, transfer, assign, mortgage or otherwise encumber or dispose of the Property or any part thereof. The execution and performance of sales agreements to sell individual platted lots of the Mortgaged Premises in the ordinary course of business and subject to the provisions of Section 15 hereof shall not constitute a breach of the foregoing provisions. Section 12. Advances by Trustee or the Bank. The Trustee or the Bank is authorized, but shall not be obligated, to make for the account of the Borrower any payment which is required to be made pursuant to law or any instrument or agreement secured by a lien prior to the lien created by this Deed of Trust, the nonpayment of which would constitute a default, including but not limited to repayments of principal and payments of interest, taxes and insurance premiums. All sums so advanced shall bear interest at the per annum interest rate provided in the Note or the maximum rate permitted by law, whichever is lower, from the date of the advance to the date of repayment, shall attach to and become a part of the debt secured hereby, and shall become payable at any time on demand therefor. The failure to make payment on demand shall, at the option of the Trustee or the Bank, constitute a default hereunder, giving rise to all of the remedies herein provided for an Event of Default. The Bank or the Trustee (with the written permission of the Bank) may grant any extension, forbearance or other indulgence, may release any part of the Property from the lien hereof and may release any person from liability without affecting the personal liability of any person for payment of indebtedness secured hereby or otherwise affecting the lien hereof. Section 13. The Trustee. The Trustee shall be under no duty to take any action hereunder or to perform any act which would involve him in expense or liability or to institute or defend any suit in respect hereof, unless properly indemnified to his satisfaction. All reasonable expenses, charges, counsel fees and other disbursements incurred by the Trustee in and about the administration and execution of the trusts hereby created, and the performance of his duties and powers hereunder, shall be secured by this Deed of Trust prior to the lien hereunder securing the Mortgage Indebtedness, and shall bear interest at the per annum rate of interest provided in the Note, or the maximum rate permitted by law, whichever is lower. The Bank shall at any time have the irrevocable right to remove the Trustee without notice or cause and to appoint his successor by an instrument in writing, duly acknowledged, in such form as to entitle such written instrument to be recorded in the State of Nevada, and in the event of the resignation of the Trustee, the Bank shall have the right to appoint his successor by such instrument, and any successor trustee so appointed shall be vested with title to the Property, and shall possess all the powers, duties and obligations herein conferred upon the Trustee in the same manner and to the same extent as though he or it were named herein as Trustee. Section 14. Miscellaneous. (a) Notices. All notices, approvals, consents, requests and other communications hereunder shall be in writing and, unless otherwise provided herein, shall be deemed to have been given when delivered or mailed by first class registered or certified mail, postage prepaid, or by a nationally recognized overnight courier, addressed as follows: (a) if to the Borrower, at 4310 Paradise Road, Las Vegas, Nevada 89109, or (b) if to the Bank, at 611 Woodward Avenue, Detroit, Michigan 48226, Attention: Richard J. Johnsen, Financial Services Division, 3rd Floor, or (c) if to the Trustee, at 4100 West Flamingo Road, Suite 1000, Las Vegas, Nevada 89103. The Borrower, the Trustee, or the Bank may, by notice given hereunder, from time to time designate any further or different addresses to which subsequent notices, approvals, consents, request or other communications shall be sent or administrative units or officers to whose attention the same shall be directed. (b) Limitation of Liability of Commissioners, Etc., of the Bank. No covenant, condition, 32 agreement or obligation contained herein shall be deemed to be a covenant, agreement or obligation of a present or future commissioner, officer, employee or agent of the Bank in his individual capacity. No commissioner, officer, employee or agent of the Bank shall incur any personal liability with respect to any other action or failure to act pursuant to this Deed of Trust, provided such commissioner, officer, employee or agent acts in good faith. (c) Successors and Assigns. This Deed of Trust shall be binding upon, inure to the benefit of and be enforceable by the parties hereto and the Bank and the Trustee and their respective successors and assigns. (d) Execution in Counterparts. This Deed of Trust may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. (e) Applicable Law. This Deed of Trust shall be governed by and construed in accordance with the applicable laws of the State of Nevada. (f) Severability. In the event any provision of this Deed of Trust shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof. Section 15. Partial Release. If no Event of Default then exists under this Deed of Trust or any other Operative Documents, upon receipt of the release price of Seven Thousand Five Hundred Dollars ($7,500) per platted lot, the Bank shall release from the lien of this Deed of Trust the lot for which payment was made. From and after the existence of any Event of Default, the Bank shall not be obligated to release any lots from the lien of the Deed of Trust. IN WITNESS WHEREOF, the Borrower has caused this Deed of Trust to be executed in its name and its seal to be affixed hereon and attested by its duly authorized officers, all of the date first above written. ATTEST: PREFERRED EQUITIES CORPORATION, Nevada corporation By: ________________________________ Its: ___________________________ STATE OF NEVADA ) )SS COUNTY OF ________ ) This instrument was acknowledged before me on the ____ day of April, 1996, by __________ as ____________ of PREFERRED EQUITIES CORPORATION, a Nevada corporation. _______________________________ Notary Public ________ County, Nevada My commission expires: ________ 33 34 PROMISSORY NOTE $1,440,000 April 30, 1996 FOR VALUE RECEIVED, the undersigned, PREFERRED EQUITIES CORPORATION, a Nevada corporation (the "Maker"), whose address is 4310 Paradise Road, Las Vegas, Nevada 89109, hereby promises to pay to the order of NBD BANK, a Michigan banking corporation (the "Bank"), at the Bank's main banking office in Detroit, Michigan in lawful currency of the United States of America and in immediately available funds, the principal sum of ONE MILLION FOUR HUNDRED FORTY THOUSAND DOLLARS ($1,440,000) or so much thereof as shall be outstanding pursuant to the terms of a certain Construction Loan Agreement between the Maker and the Bank dated of even date herewith (the "Loan Agreement"), together with interest thereon, computed on the basis of a 360-day year for the actual number of days elapsed, on the unpaid principal balance hereof from time to time outstanding, in like money and funds, for the period from the date hereof until such loan shall be paid in full, at the rate per annum equal to two percent (2.0%) per annum plus the rate per annum announced from time to time by the Bank as its "prime rate" (the "Prime Rate") (which "prime rate" may not be the lowest rate charged by the Bank to any of its customers), and with interest on overdue principal and any other overdue amount payable by the Maker (other than interest) under the Loan Agreement or any instrument now or hereafter evidencing or securing the indebtedness evidenced hereby from the date due (whether at stated maturity, by acceleration or otherwise), until paid at the rate which is four percent (4%) per annum in excess of the Prime Rate. The initial rate of interest on this Note shall be based upon the rate described above in effect on the date hereof; thereafter, such rate shall change on the effective date of any change in the rate described above. Principal and interest shall be paid as follows: Interest only shall be paid on the 31st day of May, 1996 and the last day of each and every month thereafter until the date which shall be twenty-four months from the date hereof (the "Maturity Date"). Principal shall be paid as lots are sold and released by payment of the release price as provided in the Deed of Trust (as defined below). On the Maturity Date, the entire principal balance outstanding hereunder, plus accrued interest thereon, shall be due and payable in full. If default shall be made in the payment of the whole or any part of the several installments of this Note when due, if an Event of Default shall occur under the Loan Agreement or under any of the instruments now or hereafter evidencing or securing the indebtedness evidenced hereby, the holder of this Note may apply payments received on any amounts due hereunder or under the terms of any instrument now or hereafter evidencing or securing the indebtedness as said holder may determine and, if the holder of this Note so elects, notice of election being expressly waived, the principal remaining unpaid with accrued interest shall at once become due and payable. In the event any installment shall be overdue for a period in excess of ten (10) days, a late charge of four ($.04) cents for each One Dollar ($1.00) so overdue may be charged by the holder hereof for the purpose of defraying expenses incident to the handling of the delinquent payment. This Note is secured by a certain Deed of Trust, Assignment of Rents, Security Agreement and Financing Statement of even date herewith (the "Deed of Trust") which is a lien on real estate in Nye County, Nevada (the "mortgaged premises") and shall be construed by the laws of said state. Notwithstanding any provision herein or in any instrument now or hereafter securing this Note, in no event shall the amount of interest paid or agreed to be paid to the holder of this Note exceed an amount computed at the highest rate of interest permissible under applicable law. If, from 35 any circumstances whatsoever, fulfillment of any provision hereof or of the Deed of Trust or any other instrument securing this Note or all or any part of the indebtedness evidenced hereby, at the time performance of such provision shall be due, shall involve exceeding the interest limitation validly prescribed by law which a court of competent jurisdiction may deem applicable hereto, then, ipso facto, the obligation to be fulfilled shall be reduced to an amount computed at the highest rate of interest permissible under such applicable law. The undersigned waives presentment, protest and demand, notice of protest, demand and dishonor and non-payment of this Note and agrees to pay all costs of collection when incurred, including reasonable attorneys' fees, and to perform and comply with each of the covenants, conditions, provisions and agreements of the undersigned contained in every instrument now evidencing or securing said indebtedness. No extension of the time for the payment of this Note or any installment hereof made by agreement with any person now or hereafter liable for the payment of this Note shall operate to release, discharge, modify, change or affect the original liability under this Note, either in whole or in part, of any of the undersigned not a party to such agreement. This Note may be prepaid, in whole or in part, at any time, without penalty. PREFERRED EQUITIES CORPORATION, a Nevada corporation By:_________________________________ Its:___________________________ EX-10.95 12 AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT 1 EXHIBIT 10.95 AMENDMENT NO. 14 TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS AMENDMENT NO. 14 TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (the "Fourteenth Amendment") is entered into as of the _____ day of __________, 1996, by and between FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender"), and PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Borrower"). R E C I T A L S A. Greyhound Real Estate Finance Company, an Arizona corporation ("GREFCO") and Borrower entered into an Amended and Restated Loan and Security Agreement dated as of May 10, 1989 (the "Restated Loan Agreement") that evidences a loan from GREFCO to Borrower (the "Modified Loan") that is secured by, among other things, Receivables Collateral. B. The Modified Loan and Restated Loan Agreement was amended by an Amendment Number One to Amended and Restated Loan and Security Agreement dated June 14, 1989 (the "First Amendment"), by an Amendment No. 2 to Amended and Restated Loan and Security Agreement dated April 16, 1990 (the "Second Amendment"), by an Amendment No. 3 to Amended and Restated Loan and Security Agreement dated May 31, 1991 (the "Third Amendment"), by an Amendment No. 4 to Amended and Restated Loan and Security Agreement dated January 13, 1992 (the "Fourth Amendment"), by an Amendment No. 5 to Amended and Restated Loan and Security Agreement dated February 23, 1993 (the "Fifth Amendment"); by an Amendment No. 6 to Amended and Restated Loan and Security Agreement dated June 28, 1993 (the "Sixth Amendment"), by an Amendment No. 7 to Amended and Restated Loan and Security Agreement dated January 24, 1994 (the "Seventh Amendment"), by an Amendment No. 8 to Amended and Restated Loan and Security Agreement dated as of April 15, 1994 (the "Eighth Amendment"), by an Amendment No. 9 to Amended and Restated Loan and Security Agreement dated as of August 31, 1994 (the "Ninth Amendment"), by an Amendment No. 10 to Amended and Restated Loan and Security Agreement dated as of January 26, 1995 (the "Tenth Amendment"), by an Amendment No. 11 to Amended and Restated Loan and Security Agreement dated as of September 22, 1995 (the "Eleventh Amendment"), by an Amendment No. 12 to Amended and Restated Loan and Security Agreement dated as of September 29, 1995 (the "Twelfth Amendment"), and by an Amendment No. 13 to Amended and Restated Loan and Security Agreement dated as of December 13, 1995 (the "Thirteenth Amendment"). The Restated Loan Agreement, the First Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment, the Fifth Amendment, the Sixth Amendment, the Seventh Amendment, the Eighth Amendment, the Ninth Amendment, the Tenth Amendment, the Eleventh Amendment, the Twelfth Amendment, the Thirteenth Amendment, and this Fourteenth Amendment and all other documents evidencing or executed in connection with the Loan are referred to hereinafter as the "Loan Documents." The Restated Loan Agreement, as amended by the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, Sixth Amendment, Seventh Amendment, Eighth Amendment, Ninth Amendment, Tenth Amendment, Eleventh Amendment, Twelfth Amendment, and Thirteenth Amendment, is referred to hereinafter as the "Loan Agreement." The Loan contemplated by the Loan Agreement, as amended by this Fourteenth Amendment, is referred to hereinafter as the "Loan." All capitalized terms used in this Fourteenth Amendment will have the meanings assigned to such terms in the Loan 2 Agreement unless those terms are otherwise defined herein. C. GREFCO was a wholly-owned subsidiary of Greyhound Financial Corporation ("GFC"). Pursuant to a plan of liquidation, GREFCO was liquidated into GFC. Further, pursuant to such plan of liquidation, GREFCO assigned the Note and all of GREFCO's rights under the Loan Agreement and other Documents to GFC. Effective as of February 1, 1995, GFC changed its name to FINOVA Capital Corporation. D. Borrower has requested and Lender has agreed to fund (pursuant to the terms and conditions of this Fourteenth Amendment), as part of the Loan, an Advance against the Maximum Loan Amount, to refinance a portion of the loan made by Lender with respect to the Headquarters as evidenced by the 2.5 MM Note and for purposes of providing Borrower with funds for the acquisition of and construction of tenant improvements on an existing office building located at 1500 East Tropicana, Las Vegas, Nevada, commonly known as the First Commerce Financial Center (the "FCFC Property"). NOW, THEREFORE, in consideration of these recitals, the covenants contained in this Fourteenth Amendment, and for other good and valuable consideration, the receipt and sufficiency of which consideration is hereby acknowledged, Lender and Borrower agree as follows: 1. LOAN AGREEMENT. Provided the conditions precedent described in Paragraph 5 of this Fourteenth Amendment are met to the satisfaction of Lender, which satisfaction will be evidenced by Lender's execution of this Fourteenth Amendment unless otherwise provided herein, the Loan Agreement is hereby further modified as follows: 1.1 The Loan Agreement is hereby amended by adding to Article I the following definitions: "FCFC Advance": shall have the meaning set forth in Paragraph 2 of the Fourteenth Amendment. "FCFC Facility": shall have the meaning set forth in Paragraph 2 of the Fourteenth Amendment. "FCFC Advance Loan Fee": shall mean the loan fee payable by Borrower to Lender equal to one percent (1%) of the amount of the FCFC Advance, which shall be due and payable on the date the FCFC Advance is funded. "FCFC Deed of Trust": shall have the meaning set forth in Paragraph 4 of the Fourteenth Amendment. "FCFC Property": shall have the meaning set forth in the Recitals of the Fourteenth Amendment. The FCFC Property is legally described in EXHIBIT "A" attached hereto and incorporated herein by this reference. "Fourteenth Amendment": shall mean this Amendment No. 14 to Amended and Restated Loan and Security Agreement. "Office Note": shall mean the Second Amended and Restated Promissory Note [Headquarters and FCFC Property] further described in Paragraph 3 of -2- 3 the Fourteenth Amendment. 1.2 The definition of the following terms in Article I of the Loan Agreement, including, to the extent applicable, the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, Sixth Amendment, Seventh Amendment, Eighth Amendment, Ninth Amendment, Tenth Amendment, Eleventh Amendment, Twelfth Amendment, and Thirteenth Amendment, are hereby amended and restated in their entirety to read as follows: "Documents": shall mean the Note, the First Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment, the Fifth Amendment, the Sixth Amendment, the Seventh Amendment, the Eighth Amendment, the Ninth Amendment, the Tenth Amendment, the Eleventh Amendment, the Twelfth Amendment, the Thirteenth Amendment, the Fourteenth Amendment, the Office Note, the Suites Phase II Note, the Ida Building One Note, the Ida Building Two Note, the Aloha Bay Phase I Note, the Aloha Bay Phase II Note, the Winnick Building Addition Note, the Ida Building Addition Note, the Towers Note, the Guarantee, the Deed of Trust, the Headquarters Deed of Trust, the Ida Building One Deed of Trust, the Ida Building Two Deed of Trust, the Aloha Bay Phase I Mortgage, the Aloha Bay Phase II Mortgage, the Winnick Building Addition Deed of Trust, the Ida Building Addition Deed of Trust, the FCFC Deed of Trust, the Assignments, the Contracts, the Instruments, the Agency Agreement, the Oversight Agreement, this Agreement, and all other documents and instruments executed in connection with the Loan, together with any and all renewals, extensions, amendments, restatements or replacements thereof, whether now or hereafter existing. "2.5 MM Note": shall mean the 2.5 MM Note, as modified and amended pursuant to the Amended and Restated 2.5 MM Note described in the Twelfth Amendment, an as further modified by the Office Note described in Paragraph 3 of the Fourteenth Amendment. "Headquarters Deed of Trust": shall mean the Headquarters Deed of Trust, as modified and amended pursuant to that First Modification of Deed of Trust, Assignment of Rents and Proceeds and Security Agreement [Headquarters] dated as of August 31, 1994 and recorded in Book 941021, Instrument No. 00641, Official Records of Clark County, Nevada, as further modified and amended by that Second Modification to Deed of Trust, Assignment of Rents and Proceeds and Security Agreement [Headquarters] dated as of September 29, 1995 and recorded in Book 950929, Instrument No. 03234, Official Records of Clark County, Nevada, and as further modified and amended pursuant to that Third Modification of Deed of Trust, Assignment of Rents and Proceeds and Security Agreement and Notice of Substitution of Trustee [Headquarters] described in Paragraph 4 of the Fourteenth Amendment. 2. FCFC ADVANCE. As an Advance against the Maximum Loan Amount, Lender shall make a loan (the "FCFC Advance") to Borrower in an amount equal to $4,500,000, which, together with the outstanding principal balance of the 2.5 MM Note as of the date of the Fourteenth Amendment, shall equal the FCFC Facility. The FCFC Facility shall in no event exceed $7,000,000. The following terms and conditions shall apply to the FCFC Advance: 2.1 At such time as all conditions with respect to the FCFC Advance - 3 - 4 in this Fourteenth Amendment have been satisfied in Lender's discretion, Lender shall disburse the FCFC Advance to Borrower in a single Advance on a date mutually agreeable to the parties hereto. Lender shall have no obligation to disburse any portion of the FCFC Advance after June 7, 1996. 2.2 Borrower shall use the proceeds of the FCFC Advance for the acquisition of and construction of tenant and other building improvements in the FCFC Property. 2.3 Borrower has paid to Lender a deposit of $5,000 to be credited against the FCFC Advance Loan Fee. Borrower shall pay to Lender the remainder of the FCFC Advance Loan Fee simultaneously with the FCFC Advance. 2.4 The FCFC Advance shall not be included in the Mortgage Loan Facility or be deemed to be an Advance under the Mortgage Loan Facility 3. OFFICE NOTE. 3.1 The outstanding principal balance of the 2.5 MM Note as of the date of the Fourteenth Amendment, together with the FCFC Advance shall be evidenced by the Office Note, which shall replace the 2.5 MM Note, shall be in the form attached hereto as EXHIBIT "B", and shall be executed and delivered to Lender simultaneously with the execution of this Fourteenth Amendment. Lender and Borrower hereby agree that, notwithstanding any provision to the contrary in the Loan Agreement, the terms and conditions of the Office Note and this Paragraph 3 shall apply with respect to repayment of the Office Note. To the extent that Borrower's indebtedness to Lender arising from the Office Note is evidenced by both the Note (as distinguished from the Office Note) and the Office Note, receipts by Lender in payment or satisfaction of such indebtedness shall be credited against sums due under both the Note and the Office Note and/or any judgment entered thereon. Within thirty (30) days after the FCFC Advance is made, Lender shall return the original Amended and Restated Promissory Note dated as of September 29, 1995 to Borrower, marked "Superceded by Promissory Note dated as of June 5, 1996." 3.2 Notwithstanding the provisions of Paragraph 7.3.1 of the Loan Agreement, Borrower shall have no right to prepay the Office Note, other than as provided in the Office Note. 3.3 Notwithstanding anything herein to the contrary, if not sooner paid, the entire outstanding balance of the Office Note, together with all accrued and unpaid interest and all other sums due and owing therein, shall be due and payable in full on the seventh (7th) anniversary of the date of the FCFC Advance. 3.4 Wherever the terms "2.5 MM Note" and "Amended and Restated 2.5 MM Note" are used in the Documents, such terms shall hereinafter be deemed to refer to the Office Note. 4. SECURITY. As provided in Paragraphs 3.1(a) and (b) of the Loan Agreement, the payment and Performance of the Office Note shall be and shall continue to be secured by the Security Interests granted to Lender pursuant to the Loan Agreement, as amended by this Fourteenth Amendment. Furthermore, pursuant to a separate Deed of Trust, Assignment of Rents and Proceeds and Security Agreement with respect to the FCFC Property, - 4 - 5 in a form acceptable to Lender (referred to herein as the "FCFC Deed of Trust"), the payment and Performance of the Office Note and all other obligations owed to Lender under the Documents shall be secured by a first priority lien on and security interest in the FCFC Property; all buildings and other improvements now or hereafter erected thereon; all fixtures, equipment and other personal property now or hereafter located on or attached or affixed in any manner to the FCFC Property; all leases, income, rents, royalties, revenues, issues, profits or proceeds from the FCFC Property; and other items of collateral in connection therewith, all as more fully set forth in the FCFC Deed of Trust. As additional security, the Headquarters Deed of Trust, as further modified by the Third Modification of Deed of Trust, Assignment of Rents and Proceeds and Security Agreement and Notice of Substitution of Trustee [Headquarters] to be executed and delivered by Borrower at Closing, shall secure repayment of the Office Note and all other Obligations of Borrower to Lender under the Documents. 5. CONDITIONS PRECEDENT. Lender's obligation to make the FCFC Advance is subject to the following conditions precedent, all of which must be satisfied at or prior to the funding of the FCFC Advance. 5.1 Borrower shall have delivered to Lender the following executed documents, all in form satisfactory to Lender: (a) The Office Note, in the form attached hereto as EXHIBIT "B"; (b) An Environmental Certificate with Representations, Covenants and Warranties, with respect to the FCFC Property, in form acceptable to Lender; (c) The FCFC Deed of Trust, in form acceptable to Lender; (d) The Third Modification of Deed of Trust [Headquarters], in form acceptable to Lender; (e) An opinion from Borrower's counsel, which counsel must be acceptable to Lender, with respect to such matters as Lender shall require; (f) This Fourteenth Amendment; (g) From the Guarantor of the Loan, a "Consent of Guarantor," in a form acceptable to Lender; (h) A corporate resolution of Borrower; (i) A corporate resolution of Guarantor; (j) UCC Financing Statements for filing and/or recording with respect to the FCFC Property; - 5 - 6 (k) From each tenant of the FCFC Property, an estoppel agreement, which estoppel agreement shall be in the form attached hereto as EXHIBIT "C" with respect to all tenants except tenants on month-to-month leases, and in the form of EXHIBIT "D" with respect to all month-to-month tenants; (l) From all tenants of the FCFC Property who are not occupying their premises under month-to-month leases, subordination, nondisturbance and attornment agreements in recordable forms acceptable to Lender; (m) Such other documents or instruments required by Lender to fully perfect the liens and security interests of Lender described or contemplated herein; (n) Such other items as Lender may require. 5.2 Borrower shall deliver to Lender, at Borrower's cost, a report, satisfactory to Lender, of a third-party engineer or architect acceptable to Lender setting forth the results of such engineer's or architect's inspection of all of the building improvements located on the FCFC Property. In addition, Lender shall have inspected the FCFC Property and shall be satisfied as to the condition thereof. The foregoing condition shall be deemed to have been satisfied upon Lender's funding of the FCFC Advance. 5.3 Borrower shall have delivered to Lender a current (dated not more than six (6) months prior to the funding of the FCFC Advance) Phase I Environmental Assessment for the FCFC Property performed by an environmental consultant acceptable to Lender, indicating that the FCFC Property does not contain and is not affected by existing or potential environmental contamination. If Lender is not satisfied with the results of the Phase I Environmental Assessment or if Lender becomes aware of any environmental issues impacting the FCFC Property, Lender shall have the right to require a site audit and regulatory compliance evaluation of the FCFC Property, which shall be prepared by an environmental engineer acceptable to Lender and retained at the cost of Borrower, and Lender's obligations hereunder shall be subject to Lender's approval of such audit and evaluation. 5.4 Borrower shall have delivered to Lender a current ALTA survey of the FCFC Property, certified to Lender by a licensed engineer or surveyor acceptable to Lender, showing, inter alia, the dimensions of the FCFC Property, access thereto, streets and street lines, easements, location of all improvements and all other physical details thereof. In addition, Borrower shall have delivered to Lender a current title report with respect to the FCFC Property from a title insurance company acceptable to Lender and Lender shall have approved the condition of title thereto as shown therein. 5.5 Borrower shall have obtained and delivered to Lender, at Borrower's expense, an ALTA extended coverage mortgagee's title insurance policy issued in favor of Lender by a title insurance company acceptable to Lender, with such additional endorsements as Lender may require, in the amount of the Office Note, insuring that the FCFC Deed of Trust and Headquarters Deed of Trust are first and prior liens on the FCFC Property and Headquarters, respectively, subject only to such title exceptions as may be approved by Lender. 5.6 Borrower shall have delivered to Lender evidence satisfactory to Lender that the FCFC Property is not located within a special flood hazard area or evidence satisfactory to Lender that the FCFC Property is insured, upon such terms and in such amounts - 6 - 7 as shall be satisfactory to Lender, against risks of physical damage caused by flooding. 5.7 Borrower shall have obtained such public liability, casualty and other insurance policies covering the FCFC Property as Lender may require, written by insurers in amounts and forms satisfactory to Lender. 5.8 Unless waived by Lender in writing, Lender shall have reviewed and approved credit references of Borrower and Guarantor. The foregoing condition shall be deemed to have been waived by Lender upon Lender's funding of the FCFC Advance. 5.9 There shall have occurred no material adverse change in any real property or in the business or financial condition of the Borrower and Guarantor since the date of the last financial statement submitted to Lender. 5.10 Unless waived in writing by Lender, Lender shall have reviewed and approved a current UCC, tax lien, judgment and litigation search on Borrower and Guarantor. 5.11 Borrower shall have paid, or shall have assumed the obligation or otherwise provided for the payment of all closing costs, title company charges, recording fees and taxes, appraisal fees and expenses, survey fees, travel expenses, architect/engineer inspection fees and expenses, fees and expenses of Lender's counsel, and all other costs and expenses incurred by Lender in connection with the preparation, closing and disbursement of the FCFC Advance pursuant to this Fourteenth Amendment. 5.12 Borrower shall have paid the FCFC Advance Loan Fee in the amount required to be paid with respect to the FCFC Advance made by Lender pursuant hereto. 5.13 Borrower shall have provided Lender with an appraisal of the FCFC Property made by an appraiser certified in the State of Nevada and acceptable to Lender, which appraisal shall (a) have been made within six (6) months prior to the funding of the FCFC Advance, (b) indicate that the FCFC Property has an "as is" market value of not less than $4,400,000, and (c) otherwise be acceptable to Lender. 5.14 Lender shall be satisfied, in its sole discretion, with any and all easement agreements, parking agreements, and common area or common wall agreements by and among Borrower and the owners of real property adjoining the FCFC Property. 5.15 Borrower or Borrower's counsel shall have provided to Lender, for Lender's review, all of the following: (a) A written summary of all pending litigation in which either Borrower or Guarantor is named as defendant. (b) Certified copies of the complaint, answer and all other substantive pleadings filed in any lawsuit brought against Borrower or Guarantor by or on behalf of any shareholder of Guarantor. (c) Copies of any and all insurance policies which may provide coverage against or with respect to the claims made in the lawsuits described in subsection 5.15(b) above. - 7 - 8 (d) Copies of any and all management letters written to Guarantor by its accountants Deloitte & Touche L.L.P. with respect to Guarantor's 1994 and 1995 fiscal years. 5.16 Lender shall be satisfied that Borrower is in compliance with all terms, covenants and conditions of the Loan Agreement and that there exists no Event of Default or event that with the passage of time or the giving of notice or both would constitute an Event of Default under the Loan Agreement. 5.17 Lender shall be satisfied with the current status of those lending agreements between Borrower and Heller Financial Corp. and between Borrower and Textron Financial Corporation, as verbally confirmed by such lenders to Lender. 6. ADDITIONAL CONDITIONS AND COVENANTS. As further consideration for Lender's execution of this Fourteenth Amendment and the FCFC Advance, and in addition to all other covenants and conditions of Borrower which are set forth in the Loan Agreement, as modified by the Fourteenth Amendment, Borrower hereby covenants and agrees as follows: 6.1 Not later than one (1) year following the funding of the FCFC Advance, Borrower shall deliver to Lender evidence satisfactory to Lender that Borrower has expended at least $400,000 for tenant improvements and other building improvements on the FCFC Property, which improvements shall include, without limitation, those repairs and improvements described in EXHIBIT "E" attached hereto and incorporated herein by this reference (the "Improvements"). The amount expended by Borrower in connection with the Improvements may include "soft" costs and reasonable and customary salaries paid to employees of Borrower performing repair and construction activities with respect to the FCFC Property. 6.2 Borrower shall cause the payment of any management fees due to an affiliate of Borrower as fees for the management of the FCFC Property, if any, to be subordinated to all of Borrower's indebtedness to Lender. For the purposes hereof, a person or entity shall be deemed an affiliate of Borrower if it is a shareholder, officer, director or employee of Borrower or a relative of any of the foregoing, or any other person or entity related to or affiliated with Borrower, including, without limitation, the Guarantor and any affiliates of the Guarantor. 6.3 Borrower shall furnish to Lender, not later than sixty (60) days subsequent to the end of each fiscal quarter of Borrower, a rent roll and summary of all leasing activities with respect to the FCFC Property, certified to be correct by Borrower and Borrower's property manager for the FCFC Property, if any. 6.4 Borrower shall deliver to Lender, for Lender's review and approval, prior to the effective date thereof, all leases entered into following the date hereof with respect to the lease of premises in the FCFC Property in excess of 2,500 square feet and with terms longer than month-to-month. In the event that Lender fails to approve or reject such a lease within ten (10) business days following receipt of both a draft of such lease together with financial statements of the prospective tenant, such lease shall be deemed approved. Within sixty (60) days following the execution of a lease with respect to any portion of the FCFC Property, whether or not Lender's approval to such lease is required, Borrower shall provide Lender with an estoppel and attornment agreement executed by the new tenant in favor - 8 - 9 of Lender, in form and content similar to the form attached hereto as EXHIBIT "C" with respect to those tenants who are not leasing space under month-to-month leases, and in the form of EXHIBIT "D" attached hereto with respect to those tenants leasing space under month-to-month leases. 6.5 On or before July 31, 1996, Borrower shall enter into a further amendment of the Loan Agreement, pursuant to which the Maximum Loan Amount shall be increased to $57,000,000. Borrower shall execute such further documents, including amendments to all deeds of trust and mortgages executed by Borrower in favor of Lender, and satisfy such additional conditions thereto as required by Lender at such time. Any failure by Borrower to satisfy the above covenants and conditions within the time period specified, if any, shall constitute an Event of Default under the Loan Agreement. 7. COMMISSIONS. Lender shall not be obligated to pay any loan commission and/or brokerage fee in connection with the Advances of the Loan made pursuant to this Fourteenth Amendment. Borrower shall pay any and all such commissions and fees, if any, and hereby agrees to indemnify, defend and hold harmless Lender from any claim for any such commissions or fees. Lender represents and warrants to Borrower that Lender has no knowledge of broker involvement in the transactions contemplated by this Fourteenth Amendment. 8. INDEBTEDNESS ACKNOWLEDGED. Borrower acknowledges that the indebtedness evidenced by the Documents is just and owing and agrees to pay the indebtedness in accordance with the terms of the Documents. Borrower further acknowledges and represents that no event has occurred and no condition presently exists that would constitute a default or event of default by Borrower under the Loan Agreement or any of the other Documents, with or without notice or lapse of time. 9. VALIDITY OF DOCUMENTS. Borrower hereby ratifies, reaffirms, acknowledges and agrees that the Loan Agreement and the other Documents represent valid, enforceable and collectable obligations of Borrower, and that Borrower presently has no existing claims, defenses (personal or otherwise) or rights of setoff whatsoever with respect to the Obligations of Borrower under the Loan Agreement or any of the other Documents. Borrower furthermore agrees that it has no defense, counterclaim, offset, cross-complaint, claim or demand of any nature whatsoever which can be asserted as a basis to seek affirmative relief or damages from Lender or GREFCO. 10. REAFFIRMATION OF WARRANTIES. Except to the extent, if any, that the information in Exhibit 8.3(a) to the Loan Agreement has been supplemented by EXHIBIT "F" attached hereto, or waived by Lender in writing, Borrower hereby reaffirms to Lender each of the representations, warranties, covenants and agreements of Borrower as set forth in each of the Documents with the same force and effect as if each were separately stated herein and made as of the date hereof. 11. RATIFICATION OF TERMS AND CONDITIONS. All terms, conditions and provisions of the Loan Agreement, including the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, Sixth Amendment, Seventh Amendment, Eighth Amendment, Ninth Amendment, Tenth Amendment, Eleventh Amendment, Twelfth Amendment, Thirteenth Amendment, and of each of the other Documents shall continue in full force and effect and shall remain unaffected and unchanged except as specifically amended - 9 - 10 hereby. In the event of any conflict between the terms and conditions of this Fourteenth Amendment and any of the other Documents, the provisions of this Fourteenth Amendment shall control. 12. OTHER WRITINGS. Lender and Borrower will execute such other writings as may be necessary to confirm or carry out the intentions of Lender and Borrower evidenced by this Fourteenth Amendment. 13. EFFECTIVENESS OF AMENDMENT. This Fourteenth Amendment shall not be effective until the same is executed and accepted by Lender in the State of Arizona. IN WITNESS WHEREOF, this instrument is executed as of the day and year first above written. PREFERRED EQUITIES CORPORATION, FINOVA CAPITAL CORPORATION, a Nevada corporation a Delaware corporation By:__________________________ By:_____________________________________ Donald R. Middleton, Title:__________________________________ Vice President - 10 - 11 STATE OF ARIZONA ) ) ss COUNTY OF MARICOPA ) BEFORE ME, the undersigned authority, a Notary Public in and for the County and State aforesaid, on this day personally appeared DONALD R. MIDDLETON, known to me to be the Vice President of PREFERRED EQUITIES CORPORATION, a Nevada corporation, who acknowledged to me that the same was the free act and deed of such corporation and that he, being authorized by proper authority to do so, executed the same on behalf of such corporation for the purposes and consideration therein expressed, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF OFFICE this ______ day of ______________, 1996. ______________________________________ Notary Public My commission expires: ____________________ STATE OF ARIZONA ) ) ss COUNTY OF MARICOPA ) BEFORE ME, the undersigned authority, a Notary Public in and for the County and State aforesaid, on this day personally appeared _____________________________________________________________, known to me to be the _____________________________ of FINOVA CAPITAL CORPORATION, a Delaware corporation, who acknowledged to me that the same was the free act and deed of such corporation and that s/he, being authorized by proper authority to do so, executed the same on behalf of such corporation for the purposes and consideration therein expressed, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF OFFICE this ______ day of ______________, 1996. _______________________________________ Notary Public My commission expires: ____________________ - 11 - 12 SECOND AMENDED AND RESTATED PROMISSORY NOTE [HEADQUARTERS AND FCFC PROPERTY] U.S. $6,773,778.74 As of June 5, 1996 Phoenix, Arizona FOR VALUE RECEIVED, the undersigned PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Maker"), promises to pay to FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender"), or order, at such place as the holder of this Second Amended and Restated Promissory Note ("Holder") may from time to time designate in writing, in lawful money of the United States of America, the principal sum of SIX MILLION SEVEN HUNDRED SEVENTY-THREE THOUSAND SEVEN HUNDRED SEVENTY-EIGHT AND 74/100 UNITED STATES DOLLARS (U.S. $6,773,778.74), or so much thereof as has been disbursed and not repaid, together with interest on the unpaid principal balance from time to time outstanding from the date hereof until paid, as more fully provided for below. Interest due under this Second Amended and Restated Promissory Note (the "Note") shall (a) accrue daily on the basis of the actual number of days in the computation period and (b) be calculated on the basis of a year consisting of 360 days. Interest shall accrue initially at an annual interest rate ("Initial Interest Rate") equal to Prime (as hereinafter defined) in effect on the first business day of the month of this Note ("Initial Prime") plus 2-1/4% per annum, subject to adjustment on each Interest Rate Change Date (as hereinafter defined), but in no event to exceed the maximum contract rate permitted under the Applicable Usury Law (as hereinafter defined). The interest rate shall change on each Interest Rate Change Date by adding to or subtracting from the Initial Interest Rate, as the case may be, the change, if any, between Initial Prime and Prime in effect on the applicable Interest Rate Change Date. As used in this Note, the following capitalized terms have the meaning set forth opposite them below: "Prime" shall mean the rate of interest publicly announced, from time to time, by Citibank, N.A., New York, New York ("Citibank"), as the corporate base rate of interest charged by Citibank to its most creditworthy commercial borrowers notwithstanding the fact that some borrowers of Citibank may borrow from Citibank at rates of less than such announced Prime rate; and "Interest Rate Change Date" means (a) the first business day of Citibank, N.A., in New York, New York, during the calendar month following the date of this Note and (b) the first business day of Citibank, N.A., during each successive month thereafter. This Note shall be repaid in immediately available funds in eighty-four (84) monthly installments of principal and interest calculated in the manner set forth below. The first monthly installment shall be due and payable on July 1, 1996 and subsequent monthly installments shall be due and payable on the first business day of each and every month thereafter. The first eighty-three (83) installments shall be in an amount equal to interest (in arrears) and a monthly principal payment which shall equal the principal payment obtained when the beginning principal balance of this Note is amortized over an eighty-four (84) month principal amortization schedule using the Initial Interest Rate. Any remaining principal and all other 13 sums due and owing pursuant hereto plus accrued and unpaid interest shall be due and payable on July 1, 2003 (the "Maturity Date"). Payments of principal and/or interest shall, at the option of Holder, earn interest after they are due at a rate ("Overdue Rate") equal to (a) 2% per annum above the rate otherwise payable hereunder or (b) the maximum contract rate permitted under the Applicable Usury Law, whichever of (a) or (b) is lesser. Furthermore, in the event of the occurrence of an Event of Default (as the term "Event of Default" is defined in the Loan Agreement) the unpaid principal balance of this Note shall, at the option of Holder, accrue interest at the Overdue Rate. This Note is executed pursuant to that certain Amendment No. 14 to Amended and Restated Loan and Security Agreement of even date herewith between Maker and Lender (such Amended and Restated Loan and Security Agreement, as amended, the "Loan Agreement"). All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement, the applicable provisions of which are incorporated herein by reference. All payments made under this Note shall be applied first against amounts due hereunder or under the Loan Agreement, other than principal and interest; second, against interest then due under this Note; and third, against the principal of this Note. In the event any installment of principal and/or interest required to be made in connection with the indebtedness evidenced hereby is not paid when due and, except in the case of the final installment, for which no grace period is allowed, such default continues for five days after notice thereof to Maker or an Event of Default occurs, Holder may, at its option, without notice or demand, declare immediately due and payable the entire unpaid principal balance hereof, all accrued and unpaid interest thereon, and all other charges owing in connection with the loan evidenced hereby. The contracted for rate of interest of the loan contemplated hereby, without limitation, shall consist of the following: (i) the interest rate, calculated and applied to the principal balance of this Note in accordance with the provisions of this Note; (ii) Overdue Rate, calculated and applied to the amounts due under this Note in accordance with the provisions hereof; (iii) Headquarters Readvance Loan Fee and FCFC Advance Loan Fee; and (iv) all Additional Sums (as hereinafter defined), if any. Maker agrees to pay an effective contracted for rate of interest which is the sum of the above referenced elements. All fees, charges, goods, things in action or any other sums or things of value (other than amounts described in the immediately previous paragraph), paid or payable by Maker (collectively, the "Additional Sums"), whether pursuant to this Note, the Loan Agreement, the other Documents or any other documents or instruments in any way pertaining to this lending transaction, or otherwise with respect to this lending transaction, that under any applicable law may be deemed to be interest with respect to this lending transaction, for the purpose of any applicable law that may limit the maximum amount of interest to be charged with respect to this lending transaction, shall be payable by Maker as, and shall be deemed to be, additional interest, and for such purposes only, the agreed upon and "contracted for rate of interest" of this lending transaction shall be deemed to be increased by the rate of interest resulting from the Additional Sums. This Note is prepayable in whole but not in part at any time subject to the -2- 14 following conditions: (a) Not less than thirty (30) days prior to the date on which Maker desires to make such prepayment, Maker shall deliver to Holder written notice of Maker's intention to prepay, which notice shall be irrevocable and shall state the prepayment date; and (b) Maker pays to Holder, concurrently with such prepayment (i) a prepayment premium (the "Prepayment Premium") equal to (A) three percent (3%) of the amount prepaid if such prepayment is made on or before June 30, 1996, (B) two percent (2%) of the amount prepaid if such prepayment is made after June 30, 1996 and on or before June 30, 1997 and (C) one percent (1%) of the amount prepaid if such prepayment is made after June 30, 1997 and on or before June 30, 1998 and (ii) accrued and unpaid interest through the date of such prepayment on the principal balance being prepaid (it being agreed and understood that no Prepayment Premium shall be payable if this Note is prepaid at any time after June 30, 1998). The foregoing notwithstanding, in the event a prepayment of this Note occurs as a result of an acceleration by Holder of the balance due pursuant to its right to declare an acceleration hereof under the terms of the Loan Agreement, the Prepayment Premium shall equal five percent (5%) of the principal being prepaid, notwithstanding the date upon which such acceleration occurs. In the event that Holder institutes legal proceedings to enforce this Note and Holder is the prevailing party in such proceedings, Maker agrees to pay Holder, in addition to any indebtedness due and unpaid, all costs and expenses of such proceedings, including, without limitation, attorneys' fees. Holder shall not by any act or omission or commission be deemed to waive any of its rights or remedies hereunder unless such waiver be in writing and signed by an authorized officer of Holder and then only to the extent specifically set forth therein; a waiver on one occasion shall not be construed as continuing or as a bar to or waiver of such right or remedy on any other occasion. All remedies conferred upon Holder by this Note or any other instrument or agreement connected herewith or related hereto shall be cumulative and none is exclusive and such remedies may be exercised concurrently or consecutively at Holder's option. Every person or entity at any time liable for the payment of the indebtedness evidenced hereby waives: presentment for payment, protest and demand; notice of protest, demand, dishonor and nonpayment of this Note; and trial by jury in any litigation arising out of, relating to or connected with this Note or any instrument given as security herefor. Every such person or entity further consents that Holder may renew or extend the time of payment of any part or the whole of the indebtedness at any time and from time to time at the request of any other person or entity liable therefor. Any such renewals or extensions may be made without notice to any person or entity liable for the payment of the indebtedness evidenced hereby. This Note is given and accepted as evidence of indebtedness only and not in payment or satisfaction of any indebtedness or obligation. Time is of the essence with respect to all of Maker's obligations and agreements under this Note. This Note and all of the provisions, conditions, promises and covenants hereof -3- 15 shall be binding in accordance with the terms hereof upon Maker, its successors and assigns, provided nothing herein shall be deemed consent to any assignment restricted or prohibited by the terms of the Loan Agreement. If more than one person or other entity has executed this Note as Maker, the obligations of such persons and entities shall be joint and several. This Note has been executed and delivered in Phoenix, Arizona, and the obligations of Maker hereunder shall be performed in Phoenix, Arizona. THIS NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ARIZONA AND, TO THE EXTENT THEY PREEMPT THE LAWS OF SUCH STATE, THE LAWS OF THE UNITED STATES. Maker (a) hereby irrevocably submits itself to the process, jurisdiction and venue of the courts of the State of Arizona, Maricopa County, and to the process, jurisdiction and venue of the United States District Court for Arizona, for the purposes of suit, action or other proceedings arising out of or relating to this Note or the subject matter hereof brought by Holder and (b) without limiting the generality of the foregoing, hereby waives and agrees not to assert by way of motion, defense or otherwise in any such suit, action or proceeding any claim that Maker is not personally subject to the jurisdiction of the above-named courts, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. It is the intent of the parties to comply with the usury law ("Applicable Usury Law") applicable pursuant to the terms of the preceding paragraph or such other usury law which is applicable if the law chosen by the parties is not. Accordingly, it is agreed that notwithstanding any provisions to the contrary in this Note, or in any of the documents securing payment hereof or otherwise relating hereto, in no event shall this Note or such documents require the payment or permit the collection of interest in excess of the maximum contract rate permitted by the Applicable Usury Law. In the event (a) any such excess of interest otherwise would be contracted for, charged or received from Maker or otherwise in connection with the loan evidenced hereby, or (b) the maturity of the indebtedness evidenced by this Note is accelerated in whole or in part, or (c) all or part of the principal or interest of this Note shall be prepaid, so that under any of such circumstance the amount of interest contracted for, shared or received in connection with the loan evidenced hereby, would exceed the maximum contract rate permitted by the Applicable Usury Law, then in any such event (1) the provisions of this paragraph shall govern and control, (2) neither Maker nor any other person or entity now or hereafter liable for the payment hereof will be obligated to pay the amount of such interest to the extent that it is in excess of the maximum contract rate permitted by the Applicable Usury Law, (3) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal amount hereof or refunded to Maker, at Holder's option, and (4) the effective rate of interest will be automatically reduced to the maximum amount of interest permitted by the Applicable Usury Law. It is further agreed, without limiting the generality of the foregoing, that to the extent permitted by the Applicable Usury Law: (x) all calculations of interest which are made for the purpose of determining whether such rate would exceed the maximum contract rate permitted by the Applicable Usury Law shall be made by amortizing, prorating, allocating and spreading during the period of the full stated term of the loan evidenced hereby, all interest at any time contracted for, charged or received from Maker or otherwise in connection with such loan; and (y) in the event that the effective rate of interest on the loan should at any time exceed the maximum contract rate allowed under the Applicable Usury Law, such excess interest that would otherwise have been collected had there been no ceiling imposed by the Applicable Usury Law shall be paid to Holder from time to time, if and when the effective interest rate on the loan otherwise falls below the maximum amount permitted by the Applicable Usury Law, to the extent that interest paid to the date of calculation does not exceed the maximum contract rate permitted by the Applicable Usury Law, until the -4- 16 entire amount of interest which would have otherwise been collected had there been no ceiling imposed by the Applicable Usury Law has been paid in full. Maker further agrees that should the maximum contract rate permitted by the Applicable Usury Law be increased at any time hereafter because of a change in the law, then to the extent not prohibited by the Applicable Usury Law, such increases shall apply to all indebtedness evidenced hereby regardless of when incurred; but, again to the extent not prohibited by the Applicable Usury Law, should the maximum contract rate permitted by the Applicable Usury Law be decreased because of a change in the law, such decreases shall not apply to the indebtedness evidenced hereby regardless of when incurred. In the event of any conflict or inconsistency between the provisions of this Note and the provisions of the Loan Agreement, the provisions of the Loan Agreement shall control. This Note is an amendment and restatement of that certain Amended and Restated Promissory Note, dated as of September 29, 1995, by Maker to the order of Lender. This Note shall not constitute a waiver of any existing default or breach of a covenant, if any, and shall have no retroactive effect; provided, however, that any and all written waivers given heretofore are hereby extended to the date hereof. PREFERRED EQUITIES CORPORATION, a Nevada corporation "Maker" By:_______________________________________________ Name:__________________________________________ Its:___________________________________________ Federal Taxpayer Identification Number: 88-0106662 Address: 4310 Paradise Road Las Vegas, Nevada 89109 Attn: President -5- EX-10.96 13 AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT 1 EXHIBIT 10.96 AMENDMENT NO. 15 TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS AMENDMENT NO. 15 TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (the "Fifteenth Amendment") is entered into as of the 16th day of August, 1996, by and between FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender"), and PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Borrower"). R E C I T A L S A. Greyhound Real Estate Finance Company, an Arizona corporation ("GREFCO") and Borrower entered into an Amended and Restated Loan and Security Agreement dated as of May 10, 1989 (the "Restated Loan Agreement") that evidences a loan from GREFCO to Borrower (the "Modified Loan") that is secured by, among other things, Receivables Collateral. B. The Modified Loan and Restated Loan Agreement was amended by an Amendment Number One to Amended and Restated Loan and Security Agreement dated June 14, 1989 (the "First Amendment"), by an Amendment No. 2 to Amended and Restated Loan and Security Agreement dated April 16, 1990 (the "Second Amendment"), by an Amendment No. 3 to Amended and Restated Loan and Security Agreement dated May 31, 1991 (the "Third Amendment"), by an Amendment No. 4 to Amended and Restated Loan and Security Agreement dated January 13, 1992 (the "Fourth Amendment"), by an Amendment No. 5 to Amended and Restated Loan and Security Agreement dated February 23, 1993 (the "Fifth Amendment"), by an Amendment No. 6 to Amended and Restated Loan and Security Agreement dated June 28, 1993 (the "Sixth Amendment"), by an Amendment No. 7 to Amended and Restated Loan and Security Agreement dated January 24, 1994 (the "Seventh Amendment"), by an Amendment No. 8 to Amended and Restated Loan and Security Agreement dated as of April 15, 1994 (the "Eighth Amendment"), by an Amendment No. 9 to Amended and Restated Loan and Security Agreement dated as of August 31, 1994 (the "Ninth Amendment"), by an Amendment No. 10 to Amended and Restated Loan and Security Agreement dated as of January 26, 1995 (the "Tenth Amendment"), by an Amendment No. 11 to Amended and Restated Loan and Security Agreement dated as of September 22, 1995 (the "Eleventh Amendment"), by an Amendment No. 12 to Amended and Restated Loan and Security Agreement dated as of September 29, 1995 (the "Twelfth Amendment"), by an Amendment No. 13 to Amended and Restated Loan and Security Agreement dated as of December 13, 1995 (the "Thirteenth Amendment") and by an Amendment No. 14 to Amended and Restated Loan and Security Agreement dated as of June 5, 1996. The Restated Loan Agreement, the First Amendment, 2 the Second Amendment, the Third Amendment, the Fourth Amendment, the Fifth Amendment, the Sixth Amendment, the Seventh Amendment, the Eighth Amendment, the Ninth Amendment, the Tenth Amendment, the Eleventh Amendment, the Twelfth Amendment, the Thirteenth Amendment, the Fourteenth Amendment and this Fifteenth Amendment and all other documents evidencing or executed in connection with the Loan are referred to hereinafter as the "Loan Documents." The Restated Loan Agreement, as amended by the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, Sixth Amendment, Seventh Amendment, Eighth Amendment, Ninth Amendment, Tenth Amendment, Eleventh Amendment, Twelfth Amendment, Thirteenth Amendment, and the Fourteenth Amendment, is referred to hereinafter as the "Loan Agreement." The loan contemplated by the Loan Agreement, as amended by this Fifteenth Amendment, is referred to hereinafter as the "Loan." All capitalized terms used in this Fifteenth Amendment will have the meanings assigned to such terms in the Loan Agreement unless those terms are otherwise defined herein. C. GREFCO was a wholly-owned subsidiary of Greyhound Financial Corporation ("GFC"). Pursuant to a plan of liquidation, GREFCO was liquidated into GFC. Further, pursuant to such plan of liquidation, GREFCO assigned the Note and all of GREFCO's rights under the Loan Agreement and other Documents to GFC. Effective as of February 1, 1995, GFC changed its name to FINOVA Capital Corporation. D. Borrower has requested and Lender has agreed to further modify the Loan in accordance with the terms of and subject to the conditions contained in this Fifteenth Amendment in order to increase the Maximum Loan Amount. E. Borrower has further requested and Lender has agreed to further modify the Loan in accordance with the terms of and subject to the conditions contained in this Fifteenth Amendment in order to fund additional Tower Advances, as defined in the Thirteenth Amendment, in an amount in excess of that which is set forth in the Thirteenth Amendment. NOW, THEREFORE, in consideration of these recitals, the covenants contained in this Fifteenth Amendment, and for other good and valuable consideration, the receipt and sufficiency of which consideration is hereby acknowledged, Lender and Borrower agree as follows: 1. LOAN AGREEMENT. Provided the conditions precedent described in Paragraph 4 of this Fifteenth Amendment are met to the satisfaction of Lender, which satisfaction will be evidenced by Lender's execution of this Fifteenth Amendment unless otherwise provided herein, the Loan Agreement is hereby further modified as follows: 1.1 The Loan Agreement is hereby amended by adding to Article I the following definitions: - 2 - 3 "Fifteenth Amendment": shall mean this Amendment No. 15 to Amended and Restated Loan and Security Agreement. 1.2 The definition of the following terms in Article I of the Loan Agreement, including, to the extent applicable, the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, Sixth Amendment, Seventh Amendment, Eighth Amendment, Ninth Amendment, Tenth Amendment, Eleventh Amendment, Twelfth Amendment, Thirteenth Amendment, and Fourteenth Amendment are hereby amended and restated in their entirety to read as follows: "Aloha Bay Phase I Mortgage": shall mean the Aloha Bay Phase I Mortgage, together with any and all renewals, extensions, amendments, replacements, restatements, supplements or modifications, whether now or hereafter existing. "Documents": shall mean the Note, the First Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment, the Fifth Amendment, the Sixth Amendment, the Seventh Amendment, the Eighth Amendment, the Ninth Amendment, the Tenth Amendment, the Eleventh Amendment, the Twelfth Amendment, the Thirteenth Amendment, the Fourteenth Amendment, the Fifteenth Amendment, the Office Note, the Suites Phase II Note, the Ida Building One Note, the Ida Building Two Note, the Aloha Bay Phase I Note, the Winnick Building Addition Note, the Ida Building Addition Note, the Towers Note, the Guarantee, the Deed of Trust, the Headquarters Deed of Trust, the Ida Building One Deed of Trust, the Ida Building Two Deed of Trust, the Aloha Bay Phase I Mortgage, the Winnick Building Addition Deed of Trust, the Ida Building Addition Deed of Trust, the FCFC Deed of Trust, the Assignments, the Contracts, the Instruments, the Agency Agreement, the Oversight Agreement, this Agreement, and all other documents and instruments executed in connection with the Loan, together with any and all renewals, extensions, amendments, restatements or replacements thereof, whether now or hereafter existing. "FCFC Deed of Trust": shall mean the FCFC Deed of Trust, together with any and all renewals, extensions, amendments, replacements, restatements, supplements or modifications, whether now or hereafter existing. "Headquarters Deed of Trust": shall mean the Headquarters Deed of Trust, together with any and all renewals, extensions, amendments, replacements, restatements, supplements or modifications, whether now or hereafter existing. "Ida Building Addition Deed of Trust": shall mean the Ida Building Addition Deed of Trust, together with any and all renewals, extensions, amendments, - 3 - 4 replacements, restatements, supplements or modifications, whether now or hereafter existing. "Ida Building One Deed of Trust": shall mean the Ida Building One Deed of Trust, together with any and all renewals, extensions, amendments, replacements, restatements, supplements or modifications, whether now or hereafter existing. "Ida Building Two Deed of Trust": shall mean the Ida Building Two Deed of Trust, together with any and all renewals, extensions, amendments, replacements, restatements, supplements or modifications, whether now or hereafter existing. "Maximum Loan Amount": shall mean Fifty Seven Million United States Dollars (U.S. $57,000,000.00), including the outstanding principal balance of the (i) 2.5 Million Loan Advance; (ii) FCFC Advance; (iii) Receivables Over-Advances; (iv) Aloha Bay Phase I Acquisition Advance; (v) Aloha Bay Phase I Renovation Advances, and (vi) each of the Advances made under the Mortgage Loan Facility. "Note": shall mean the Note, as modified by that Amendment No. 1 to Amended and Restated Promissory Note dated April 16, 1990, as further modified by the Amendment No. 2 to Amended and Restated Promissory Note dated May 31, 1991, as further modified by the Amendment No. 3 to Amended and Restated Promissory Note dated January 13, 1992, as further modified by an Amendment No. 4 to Amended and Restated Promissory Note dated August 31, 1994, and as further amended by an Amendment No. 5 to Amended and Restated Promissory Note described in Paragraph 4 of the Fifteenth Amendment. "Towers Note": shall mean the Towers Note, as modified and amended pursuant to the Amendment No. 1 to Promissory Note (Towers Lobby) described in Paragraph 4 of the Fifteenth Amendment. "Winnick Building Addition Deed of Trust": shall mean the Winnick Building Addition Deed of Trust, together with any and all renewals, extensions, amendments, replacements, restatements, supplements or modifications, whether now or hereafter existing. 1.3 Paragraph 2.1 of the Loan Agreement is hereby amended and restated in its entirety to read as follows: "2.1 Upon Borrower's request, subject to the conditions precedent stated in Article V hereof and the provisions of Paragraph 4 of the - 4 - 5 Tenth Amendment, Lender hereby agrees that the Loan will be disbursed to Borrower, from time to time, in periodic advances, but in no event after the Borrowing Term has expired, in amounts not to exceed those (except as may result from Receivables Over-Advances as provided for in Paragraph 4 of the Tenth Amendment) determined by subtracting (i) the excess of the unpaid principal balance outstanding under the Loan at the time of each Advance over the aggregate outstanding principal balance of the 2.5 Million Loan Advance, of the FCFC Advance, of the Receivables Over-Advances, of the Aloha Bay Phase I Acquisition Advance, of the Aloha Bay Phase I Renovation Advances, and of each of the Advances made under the Mortgage Loan Facility from (ii) the Borrowing Base, determined as of the date thereof after giving effect to all Eligible Receivables then assigned to (and not reassigned by) Lender; provided, however, that the outstanding principal amount of the Loan together with the outstanding principal amount of any and all indebtedness of VSR to Lender shall not exceed at any time the Maximum Loan Amount, and; provided, further, that the combined principal amount of any and all indebtedness of VSR and/or Borrower to Lender which is secured by Receivables Collateral encumbering Units shall not exceed $30,000,000 or be less than $5,000,000 at any time, and the combined principal amount of any and all indebtedness of VSR and/or Borrower to Lender which is secured by Receivables Collateral encumbering Lots shall not exceed $30,000,000 at any time." 2. TOWERS ADVANCES. 2.1 Under the provisions of the Thirteenth Amendment, Lender agreed to make Towers Advances in an amount not to exceed the lesser of (a) $700,000 or (b) 90% of the bona fide out-of-pocket costs and expenses incurred by Borrower through the date of such Advance in connection with the Towers Lobby Expansion, all as more fully set forth in the Thirteenth Amendment. Borrower has requested that Lender make Tower Advances in excess of the limitation on the amount set forth in the Thirteenth Amendment. The parties therefore agree that Tower Advances shall not exceed, in the aggregate, the lesser of (a) $1,286,126 or (b) 90% of the bona fide out-of-pocket costs and expenses incurred by Borrower through the date of such Advance in connection with the Tower Lobby Expansion, all as more fully set forth in the Thirteenth Amendment. The parties hereby acknowledge and agree that the total cumulative amount of Towers Advances, as of the date of this Fifteenth Amendment, equals $700,000. 2.2 Further, pursuant to the Thirteenth Amendment, the principal balance of the Towers Note was to be repaid through the Towers Note Principal Reduction Fee. In consideration of Lender's agreement to increase the maximum - 5 - 6 amount of the Towers Advances, the parties hereby agree that from and after the date hereof, the Towers Note Principal Reduction Fee shall equal $350.00. 3. GENERAL CONDITION PRECEDENT TO MORTGAGE THE LOAN FACILITY. In addition to all other conditions precedent to Lender's obligation to make an advance of the Mortgage Loan Facility, Borrower shall pay to Lender the applicable Mortgage Loan Commitment Fee with respect to such Advance. 4. CONDITIONS PRECEDENT. The modifications described in Paragraph 1 of this Fifteenth Amendment will not become effective until Borrower has delivered to Lender each of the following documents and items, all of which are to be properly completed, executed and otherwise satisfactory in form and substance to Lender, in its sole discretion: 4.1 Borrower shall have delivered to Lender the following executed documents, all in form satisfactory to Lender: (a) This Fifteenth Amendment; (b) The Amendment No. 5 to Amended and Restated to Promissory Note; (c) The Amendment No. 1 to Promissory Note (Towers Lobby); (d) The Fourth Modification of Deed of Trust, Assignment of Rents and Security Agreement; (e) The Fourth Modification of Deed of Trust, Assignment of Rents and Proceeds and Security Agreement [Headquarters]; (f) The Third Modification of Deed of Trust, Assignment of Rents and Proceeds and Security Agreement [Ida Building One]; (g) The Second Modification of Deed of Trust, Assignment of Rents and Proceeds and Security Agreement [Ida Building Two]; (h) The Second Modification of Mortgage, Assignment of Rents and Proceeds and Security Agreement [Aloha Bay Phase I]; (i) The First Modification of Deed of Trust, Assignment of Rents and Proceeds and Security Agreement [Winnick Building Addition]; - 6 - 7 (j) The First Amendment of Deed of Trust, Assignment of Rents and Proceeds and Security Agreement [Ida Building Addition]; (k) The First Amendment of Deed of Trust, Assignment of Rents and Proceeds and Security Agreement [FCFC Property]; (l) An opinion from Borrower's and Guarantor's counsel, which counsel must be acceptable to Lender, with respect to such matters as Lender shall reasonably require; (m) From the Guarantor of the Loan, a "Consent of Guarantor"; (n) A corporate resolution of Borrower; (o) A corporate resolution of Guarantor; (p) Such other documents or instruments required by Lender to fully perfect the liens and security interests of Lender described or contemplated herein; (q) Such other items as Lender may require. 4.2 Borrower shall have obtained and delivered to Lender, at Borrower's expense, a date-down endorsement to the existing ALTA extended coverage mortgagee's title insurance policy issued in favor of Lender by Commonwealth Land Title Insurance Company with respect to the Headquarters Deed of Trust assuring that the Headquarters Deed of Trust continues to be a first and prior lien on the property which is the subject matter thereof subject only to such additional exceptions as may be approved by Lender, notwithstanding the effect of the recordation of the Fourth Modification of Deed of Trust, Assignment of Rents and Proceeds and Security Agreement [Headquarters]. 4.3 Borrower shall have obtained and delivered to Lender, at Borrower's expense, a date-down endorsement to the existing ALTA extended coverage mortgagee's title insurance policy issued in favor of Lender by Chicago Title Insurance Company with respect to the Ida Building One Deed of Trust assuring that the Ida Building One Deed of Trust continues to be a first and prior lien on the property which is the subject matter thereof subject only to such additional exceptions as may be approved by Lender, notwithstanding the effect of the recordation of the Third Modification of Deed of Trust, Assignment of Rents and Proceeds and Security Agreement [Ida Building One]. - 7 - 8 4.4 Borrower shall have obtained and delivered to Lender, at Borrower's expense, a date-down endorsement to the existing ALTA extended coverage mortgagee's title insurance policy issued in favor of Lender by Chicago Title Insurance Company with respect to the Ida Building Two Deed of Trust assuring that the Ida Building Two Deed of Trust continues to be a first and prior lien on the property which is the subject matter thereof subject only to such additional exceptions as may be approved by Lender, notwithstanding the effect of the recordation of the Second Modification of Deed of Trust, Assignment of Rents and Proceeds and Security Agreement [Ida Building Two]. 4.5 Borrower shall have obtained and delivered to Lender, at Borrower's expense, a date-down endorsement to the existing ALTA extended coverage mortgagee's title insurance policy issued in favor of Lender by Commonwealth Land Title Insurance Company with respect to the Aloha Bay Phase I Mortgage assuring that the Aloha Bay Phase I Mortgage continues to be a first and prior lien on the property which is the subject matter thereof subject only to such additional exceptions as may be approved by Lender, notwithstanding the effect of the recordation of the Second Modification of Mortgage, Assignment of Rents and Proceeds and Security Agreement [Aloha Bay Phase I]. 4.6 Borrower shall have obtained and delivered to Lender, at Borrower's expense, a date-down endorsement to the existing ALTA extended coverage mortgagee's title insurance policy issued in favor of Lender by Chicago Title Insurance Company with respect to the Winnick Building Addition Deed of Trust assuring that the Winnick Building Addition Deed of Trust continues to be a first and prior lien on the property which is the subject matter thereof subject only to such additional exceptions as may be approved by Lender, notwithstanding the effect of the recordation of the First Modification of Deed of Trust, Assignment of Rents and Proceeds and Security Agreement [Winnick Building Addition]. 4.7 Borrower shall have obtained and delivered to Lender, at Borrower's expense, a date-down endorsement to the existing ALTA extended coverage mortgagee's title insurance policy issued in favor of Lender by Chicago Title Insurance Company with respect to the Ida Building Addition Deed of Trust assuring that the Ida Building Addition Deed of Trust continues to be a first and prior lien on the property which is the subject matter thereof subject only to such additional exceptions as may be approved by Lender, notwithstanding the effect of the recordation of the First Modification of Deed of Trust, Assignment of Rents and Proceeds and Security Agreement [Ida Building Addition]. 4.8 Borrower shall have obtained and delivered to Lender, at Borrower's expense, a date-down endorsement to the existing ALTA extended coverage mortgagee's title insurance policy issued in favor of Lender by - 8 - 9 Commonwealth Land Title Insurance Company with respect to the FCFC Deed of Trust assuring that the FCFC Deed of Trust continues to be a first and prior lien on the property which is the subject matter thereof subject only to such additional exceptions as may be approved by Lender, notwithstanding the effect of the recordation of the First Modification of Deed of Trust, Assignment of Rents and Proceeds and Security Agreement [FCFC]. 4.9 There shall have occurred no material adverse change in any real property or in the business or financial condition of the Borrower and Guarantor since the date of the last financial statement submitted to Lender. 4.10 Unless waived in writing by Lender, Lender shall have reviewed and approved a current UCC, tax lien, judgment and litigation search on Borrower and Guarantor. 4.11 Borrower shall have paid, or shall have assumed the obligation or otherwise provided for the payment of all closing costs, title company charges, recording fees and taxes, appraisal fees and expenses, survey fees, travel expenses, architect/engineer inspection fees and expenses, fees and expenses of Lender's counsel, and all other costs and expenses incurred by Lender in connection with the preparation and closing of this Fifteenth Amendment. 4.12 Lender shall be satisfied that Borrower is in compliance with all terms, covenants and conditions of the Loan Agreement and that there exists no Event of Default or event that with the passage of time or the giving of notice or both would constitute an Event of Default under the Loan Agreement. 5. COMMISSIONS. Lender shall not be obligated to pay any loan commission and/or brokerage fee in connection with the Advances of the Loan made pursuant to this Fifteenth Amendment. Borrower shall pay any and all such commissions and fees, if any, and hereby agrees to indemnify, defend and hold harmless Lender from any claim for any such commissions or fees. Lender represents and warrants to Borrower that Lender has no knowledge of broker involvement in the transactions contemplated by this Fifteenth Amendment. 6. INDEBTEDNESS ACKNOWLEDGED. Borrower acknowledges that the indebtedness evidenced by the Documents is just and owing and agrees to pay the indebtedness in accordance with the terms of the Documents. Borrower further acknowledges and represents that no event has occurred and no condition presently exists that would constitute a default or event of default by Borrower under the Loan Agreement or any of the other Documents, with or without notice or lapse of time. - 9 - 10 7. VALIDITY OF DOCUMENTS. Borrower hereby ratifies, reaffirms, acknowledges and agrees that the Loan Agreement and the other Documents represent valid, enforceable and collectable obligations of Borrower, and that Borrower presently has no existing claims, defenses (personal or otherwise) or rights of setoff whatsoever with respect to the Obligations of Borrower under the Loan Agreement or any of the other Documents. Borrower furthermore agrees that it has no defense, counterclaim, offset, cross-complaint, claim or demand of any nature whatsoever which can be asserted as a basis to seek affirmative relief or damages from Lender or GREFCO. 8. REAFFIRMATION OF WARRANTIES. Except to the extent, if any, that the information in Exhibit 8.3(a) to the Loan Agreement has been supplemented by Exhibit "A" attached hereto, or waived by Lender in writing, Borrower hereby reaffirms to Lender each of the representations, warranties, covenants and agreements of Borrower as set forth in each of the Documents with the same force and effect as if each were separately stated herein and made as of the date hereof. 9. RATIFICATION OF TERMS AND CONDITIONS. All terms, conditions and provisions of the Loan Agreement, including the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, Sixth Amendment, Seventh Amendment, Eighth Amendment, Ninth Amendment, Tenth Amendment, Eleventh Amendment, Twelfth Amendment, Thirteenth Amendment, Fourteenth Amendment and of each of the other Documents shall continue in full force and effect and shall remain unaffected and unchanged except as specifically amended hereby. In the event of any conflict between the terms and conditions of this Fifteenth Amendment and any of the other Documents, the provisions of this Fifteenth Amendment shall control. 10. OTHER WRITINGS. Lender and Borrower will execute such other writings as may be necessary to confirm or carry out the intentions of Lender and Borrower evidenced by this Fifteenth Amendment. 11. EFFECTIVENESS OF AMENDMENT. This Fifteenth Amendment shall not be effective until the same is executed and accepted by Lender in the State of Arizona. - 10 - 11 IN WITNESS WHEREOF, this instrument is executed as of the day and year first above written. PREFERRED EQUITIES CORPORATION, FINOVA CAPITAL CORPORATION, a Nevada corporation a Delaware corporation By:______________________________ By:_____________________________________ Donald R. Middleton Title:__________________________________ Vice President - 11 - 12 State of Arizona ) ) County of Maricopa ) This instrument was acknowledged before me on August 16, 1996 by Donald R. Middleton as Vice President of PREFERRED EQUITIES CORPORATION, a Nevada corporation. ________________________________________ Notary (My commission expires:________________) State of Arizona ) ) County of Maricopa ) This instrument was acknowledged before me on August 16, 1996 by ________________________ as ______________________ of FINOVA CAPITAL CORPORATION, a Delaware corporation. _______________________________________ Notary (My commission expires:________________) - 12 - 13 EXHIBIT "A" REAFFIRMATION OF WARRANTIES LITIGATION Attached hereto as Schedule 1 is a list of all litigation matters involving Preferred Equities Corporation which supplements and updates information previously delivered to Lender pursuant to Section 8.3 of the Loan Agreement. FINANCIAL CONDITION Reference is made to the audited financial statements of Preferred Equities Corporation for the year ended August 31, 1995 and to the unaudited financial statements of Preferred Equities Corporation for the nine-month period ended May 31, 1996, copies of which have previously been delivered to Lender, for information concerning the current financial condition and results of operations of Preferred Equities Corporation as of those dates. Such statements update and supplement all prior financial statements furnished to Lender. 14 AMENDMENT NO. 7 TO LOAN AND SECURITY AGREEMENT THIS AMENDMENT NO. 7 TO LOAN AND SECURITY AGREEMENT (the "Seventh Amendment") is entered into as of this 16th day of August, 1996 by and between FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender") and PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Borrower"). RECITALS A. Greyhound Real Estate Finance Company, an Arizona corporation ("GREFCO") and Vacation Spa Resorts, Inc., a Tennessee corporation ("VSR") entered into a Loan and Security Agreement dated as of March 30, 1989 (the "Original Loan Agreement") that evidenced a loan from GREFCO to VSR (the "Original Loan") that is secured by, among other things, Receivables Collateral. B. The Original Loan and Original Loan Agreement were amended by an Amendment Number One to Loan and Security Agreement and Promissory Note dated June 14, 1989 (the "First Amendment"), an Amendment No. 2 to Loan and Security Agreement dated April 16, 1990 (the "Second Amendment"), an Amendment No. 3 to Loan and Security Agreement dated May 31, 1991 (the "Third Amendment"), an Amendment No. 4 to Loan and Security Agreement dated February 23, 1993 (the "Fourth Amendment"), an Amendment No. 5 to Loan and Security Agreement dated October 15, 1993 (the "Fifth Amendment") and an Amendment No. 6 to Loan and Security Agreement dated August 31, 1994 (the "Sixth Amendment"). The Original Loan Agreement, First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, Sixth Amendment and this Seventh Amendment and all other documents evidencing or executed in connection with the Loan are referred to hereinafter as the "Documents." The Original Loan Agreement, as amended by the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, and Sixth Amendment is referred to hereinafter as the "Loan Agreement." The Loan contemplated by the Loan Agreement, as amended by this Seventh Amendment, is referred to hereinafter as the "Loan." All capitalized terms in this Seventh Amendment will have the meanings assigned to such terms in the Loan Agreement unless those terms are otherwise defined herein. C. GREFCO was a wholly-owned subsidiary of Greyhound Financial Corporation ("GFC"). Pursuant to a plan of liquidation, GREFCO has been liquidated into GFC. Further pursuant to such plan of liquidation, GREFCO has assigned the Note and all of GREFCO's rights under the Loan Agreement and other 15 Documents to GFC. Effective as of February 1, 1995, GFC changed its name to FINOVA Capital Corporation. D. Pursuant to that Agreement and Plan of Merger dated as of July 24, 1992 by and between Borrower and VSR, and those Articles of Merger of Vacation Spa Resorts, Inc. with and into Preferred Equities Corporation dated as of March 10, 1993, VSR was, effective March 11, 1993, merged into Borrower. As a result of such Merger, Borrower has succeeded to all rights and privileges of VSR and has become responsible and liable for all liabilities and obligations of VSR. E. Pursuant to that certain Assumption Agreement (With Consent and Agreement of Guarantor) dated June 28, 1993 between Lender and Borrower, Borrower acknowledged and agreed that it was irrevocably and unconditionally liable for the repayment of Loan and for the payment, performance and observance of all of the Obligations, covenants, representations and warranties of VSR as set forth in the Documents as if Borrower was an original party to the Documents. F. Borrower has requested and Lender has agreed to further modify the Loan in accordance with the terms of, and subject to the conditions contained in, this Seventh Amendment in order to increase the Maximum Loan Amount. NOW, THEREFORE, in consideration of these recitals, the covenants contained in this Seventh Amendment and for other good and valuable consideration, the receipt and sufficiency of which consideration is hereby acknowledged, Lender and Borrower agree as follows: 1. LOAN AGREEMENT. Provided the conditions precedent described in Paragraph 2 of this Seventh Amendment are met to the satisfaction of Lender, which satisfaction will be evidenced by Lender's execution of this Seventh Amendment unless otherwise provided herein, the Loan Agreement is hereby further modified as follows: 1.1 The Loan Agreement is hereby amended by adding to Article I the following definitions: "Note": shall mean the Note as modified by the Amendment No. 1 of the Loan and Security Agreement and Promissory Note dated June 14, 1989, as further modified by Amendment No. 2 to Promissory Note dated April 16, 1990, as further modified by an Amendment No. 3 to Promissory Note dated May 31, 1991, as further modified by an Amendment No. 4 to Promissory Note dated August 31, 1994, and as further amended by an Amendment No. 5 to Promissory Note described in Paragraph 2 of the Seventh Amendment. -2- 16 "Seventh Amendment": shall mean this Amendment No. 7 to Loan and Security Agreement. 1.2 The definitions of the following terms in Article I of the Loan Agreement, including, to the extent applicable, the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, and Sixth Amendment are hereby deleted or amended and restated in their entirety to read as follows: "Maximum Loan Amount": shall mean Fifty Seven Million United States Dollars (U.S. $57,000,000.00). 2. CONDITIONS TO MODIFICATION. The modifications described in Paragraph 1 of this Seventh Amendment will not be effective until Borrower has delivered to Lender each of the following documents and items, all of which are to be properly completed, executed and otherwise satisfactory in form and substance to Lender, in its sole discretion: (a) This Seventh Amendment; (b) From the Trustee (Reno), a Joinder of Trustee in the form attached; (c) An "Amendment No. 5 to Promissory Note" in a form acceptable to Lender; (d) From the Guarantor of the Loan, a "Consent of Guarantor" in a form acceptable to Lender; (e) A corporate resolution of the Borrower; (f) A corporate resolution of Mego; (g) Such documents as Lender shall request to evidence the valid existence and good standing of Borrower and Guarantor; (h) An opinion from Borrower's and Guarantor's counsel, in form and substance satisfactory to Lender, as to such matters as Lender may reasonably require; and (i) Such other items as Lender may reasonably require. 3. INDEBTEDNESS ACKNOWLEDGED. Borrower acknowledges that the indebtedness evidenced by the Documents is just and owing and agrees to pay the -3- 17 indebtedness in accordance with the terms of the Documents. Borrower further acknowledges and represents that no event has occurred and no condition presently exists that would constitute a default or event of default by Lender under the Loan Agreement or any of the other Documents, with or without notice or lapse of time. 4. VALIDITY OF DOCUMENTS. Borrower hereby ratifies, reaffirms, acknowledges and agrees that the Loan Agreement and the other Documents represent valid, enforceable and collectable obligations of Borrower, and that Borrower presently has no existing claims, defenses (personal or otherwise) or rights of setoff whatsoever with respect to the Obligations of Borrower under the Loan Agreement or any of the other Documents. Borrower furthermore agrees that it has no defense, counterclaim, offset, cross-complaint, claim or demand of any nature whatsoever which can be asserted as a basis to seek affirmative relief or damages from Lender or GREFCO. 5. REAFFIRMATION OF WARRANTIES. Except to the extent, if any, that the information in Exhibit 8.3(a) to the Loan Agreement has been supplemented by Exhibit "A" attached hereto, Borrower hereby reaffirms to Lender each of the representations, warranties, covenants and agreements of Borrower as set forth in each of the Documents with the same force and effect as if each were separately stated herein and made as of the date hereof. 6. RATIFICATION OF TERMS AND CONDITIONS. All terms, conditions and provisions of the Loan Agreement, including the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, and Sixth Amendment and of each of the other Documents shall continue in full force and effect and shall remain unaffected and unchanged except as specifically amended thereby or hereby. In the event of any conflict between the terms and conditions of this Seventh Amendment and any of the other Documents, the provisions of this Seventh Amendment shall control. 7. OTHER WRITINGS. Lender and Borrower will execute such other writings as may be necessary to confirm or carry out the intentions of Lender and Borrower evidenced by this Seventh Amendment. 8. EFFECTIVENESS OF AMENDMENT. This Seventh Amendment shall not be effective until the same is executed and accepted by Lender in the State of Arizona. -4- 18 IN WITNESS WHEREOF, this instrument is executed as of the day and year first above written. PREFERRED EQUITIES CORPORATION, a Nevada corporation By:____________________________________ Donald R. Middleton Vice President FINOVA CAPITAL CORPORATION, a Delaware corporation By:____________________________________ Its:___________________________________ State of Arizona ) ) County of Maricopa ) This instrument was acknowledged before me on August 16, 1996 by Donald R. Middleton as Vice President of PREFERRED EQUITIES CORPORATION, a Nevada corporation. ________________________________________ Notary (My commission expires:_______________) -5- 19 State of Arizona ) ) County of Maricopa ) This instrument was acknowledged before me on August 16, 1996 by ________________________ as ______________________ of FINOVA CAPITAL CORPORATION, a Delaware corporation. _______________________________________ Notary (My commission expires:_______________) -6- 20 JOINDER OF TRUSTEE To: FINOVA CAPITAL CORPORATION The undersigned is the Trustee under that Amended, Restated and Consolidated Trust Agreement - Reno Spa Resort Club, dated March 19, 1990, between Bank of America Nevada, as Trustee, and Preferred Equities Corporation, a Nevada corporation, the successor-in-interest to Vacation Spa Resorts, Inc., a Tennessee corporation, as Trustor and Beneficiary (the "Trust (Reno)"). All initial capitalized terms not otherwise specifically defined herein shall have the meaning set forth in that Loan and Security Agreement dated March 30, 1989, and all amendments thereto, by and between FINOVA Capital Corporation (previously known as Greyhound Financial Corporation and the successor-in-interest to Greyhound Real Estate Finance Company) and Preferred Equities Corporation (as successor-in-interest to Vacation Spa Resorts, Inc.). The undersigned is executing this Joinder for the limited purpose of: (a) Evidencing its agreement that it will not transfer its interest in the Trust (Reno) other than in accordance with the provisions of the Trust (Reno); (b) Disclaiming an interest in any property, property rights or entitlements that do not constitute Trust Assets (as defined in the Trust (Reno)), except to the extent that any beneficiary under the Trust (Reno) may have an interest in such property, property rights or entitlements; and (c) Evidencing its acknowledgment of the assignment and/or encumbrance of the Borrower's beneficial interest in the Trust (Reno) as contemplated by the Loan Agreement (as amended by the Seventh Amendment); provided, however, that nothing contained herein or in the Loan Agreement (as amended by the Seventh Amendment) is intended or shall be construed to impose any personal obligation or liability on the part of the undersigned for payment of any of the obligations or the performance of any duty or responsibility of Borrower under the Loan Agreement. BANK OF AMERICA NEVADA, a Nevada banking corporation, as Trustee under the Amended, Restated and Consolidated Trust Agreement - Reno Spa Resort Club, dated March 19, 1990 By:____________________________________ Title:_________________________________ 21 EXHIBIT "A" REAFFIRMATION OF WARRANTIES LITIGATION Attached hereto as Schedule 1 is a list of all litigation matters involving Preferred Equities Corporation which supplements and updates information previously delivered to Lender pursuant to Section 8.3 of the Loan Agreement. FINANCIAL CONDITION Reference is made to the audited financial statements of Preferred Equities Corporation for the year ended August 31, 1995 and to the unaudited financial statements of Preferred Equities Corporation for the nine-month period ended May 31, 1996, copies of which have previously been delivered to Lender, for information concerning the current financial condition and results of operations of Preferred Equities Corporation as of those dates. Such statements update and supplement all prior financial statements furnished to Lender. 22 AMENDMENT NO. 5 TO AMENDED AND RESTATED PROMISSORY NOTE THIS AMENDMENT NO. 5 TO AMENDED AND RESTATED PROMISSORY NOTE (this "Amendment") entered into as of this 16th day of August, 1996, between PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Maker"), and FINOVA CAPITAL CORPORATION, a Delaware corporation, successor-in-interest to Greyhound Real Estate Finance Company, an Arizona corporation ("Lender"), is made with reference to the following: R E C I T A L S Maker previously executed and delivered to Lender an Amended and Restated Promissory Note dated as of May 10, 1989, in the original principal amount of $14,000,000.00 (the "Note") to evidence the Loan (the "Modified Loan") made pursuant to the terms of that Amended and Restated Loan and Security Agreement of even date therewith between Maker and Lender (the "Restated Loan Agreement"). The Restated Loan Agreement was amended by an Amendment No. One to Amended and Restated Loan and Security Agreement between Lender and Maker dated June 14, 1989 (the "First Amendment"), by an Amendment No. 2 to Amended and Restated Loan and Security Agreement dated April 16, 1990 (the "Second Amendment"), by an Amendment No. 3 to Amended and Restated Loan and Security Agreement dated May 31, 1991 (the "Third Amendment"), by an Amendment No. 4 to Amended and Restated Loan and Security Agreement dated January 13, 1992 (the "Fourth Amendment"), by an Amendment No. 5 to Amended and Restated Loan and Security Agreement dated February 23, 1993 (the "Fifth Amendment"), by an Amendment No. 6 to Amended and Restated Loan and Security Agreement dated June 28, 1993 (the "Sixth Amendment"), by an Amendment No. 7 to Amended and Restated Loan and Security Agreement dated January 24, 1994 (the "Seventh Amendment"), by an Amendment No. 8 to Amended and Restated Loan and Security Agreement dated April 15, 1994 (the "Eighth Amendment"), by an Amendment No. 9 to Amended and Restated Loan and Security Agreement dated as of August 31, 1994 (the "Ninth Amendment"), by an Amendment No. 10 to Amended and Restated Loan and Security Agreement dated as of January 26, 1995 (the "Tenth Amendment"), by an Amendment No. 11 to Amended and Restated Loan and Security Agreement dated as of September 22, 1995 (the "Eleventh Amendment"), by an Amendment No. 12 to Amended and Restated Loan and Security Agreement dated as of September 29, 1995 (the "Twelfth Amendment"), by an Amendment No. 13 to Amended and Restated Loan and Security Agreement dated as of December 13, 1995 (the "Thirteenth Amendment"), and by an Amendment No. 14 to Amended and 23 Restated Loan and Security Agreement dated as of June 5, 1996 (the "Fourteenth Amendment"). The Restated Loan Agreement, as amended by the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, Sixth Amendment, Seventh Amendment, Eighth Amendment, Ninth Amendment, Tenth Amendment, Eleventh Amendment, Twelfth Amendment, Thirteenth Amendment and Fourteenth Amendment, is hereinafter collectively referred to as the "Loan Agreement." The Modified Loan, as amended by the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, Sixth Amendment, Seventh Amendment, Eighth Amendment, Ninth Amendment, Tenth Amendment, Eleventh Amendment, Twelfth Amendment, Thirteenth Amendment and Fourteenth Amendment, is hereinafter collectively referred to as the "Loan." The Note was amended by an Amendment No. 1 to Amended and Restated Promissory Note executed by Maker and Lender dated April 16, 1990 (the "First Note Amendment"), by an Amendment No. 2 to Amended and Restated Promissory Note executed by Maker and Lender dated May 31, 1991 (the "Second Note Amendment"), by an Amendment No. 3 to Amended and Restated Promissory Note dated January 13, 1992 (the "Third Note Amendment"), and by an Amendment No. 4 to Amended and Restated Promissory Note dated August 31, 1994 (the "Fourth Note Amendment"). The Note, as amended by the First Note Amendment, the Second Note Amendment, the Third Note Amendment and the Fourth Note Amendment, is hereinafter referred to as the "Amended Note." Greyhound Real Estate Finance Company ("GREFCO") was a wholly-owned subsidiary of Greyhound Financial Corporation ("GFC"). Pursuant to a Plan of Liquidation, GREFCO was liquidated into GFC. Further, pursuant to such Plan of Liquidation, GREFCO has assigned the Amended Note and all of GREFCO's rights under the Loan Agreement to GFC. Effective as of February 1, 1995, GFC changed its name to FINOVA Capital Corporation. Lender is the owner and holder of the Amended Note. Maker and Lender have, as of even date herewith, entered into an Amendment No. 15 to Amended and Restated Loan and Security Agreement which, among other things, amends the Loan Agreement to permit the maximum principal amount of the Loan to be increased to as much as U.S. $57,000,000.00, subject to the terms and conditions provided therein, and Maker and Lender wish to make conforming changes to the Amended Note. NOW, THEREFORE, in consideration of these Recitals, the covenants contained in this Amendment, and for other good and valuable consideration, the -2- 24 receipt and sufficiency of which consideration are hereby acknowledged, Lender and Maker agree as follows: 1. The Amended Note is hereby amended to be in the amount of "U.S. $57,000,000.00." 2. The first paragraph of the Amended Note is hereby amended in its entirety to read as follows: "FOR VALUE RECEIVED, the undersigned, PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Maker"), promises to pay to FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender"), or order, at New York, New York, or such other placeas the holder of this Note ("Holder") may from time to time designate in writing, in lawful money of the United States of America, the principal sum of FIFTY SEVEN MILLION UNITED STATES DOLLARS ($57,000,000.00), or so much thereof as has been disbursed and not repaid, together with interest on the unpaid principal balance from time to time outstanding from the date hereof until paid, as more fully provided below." 3. Maker hereby ratifies and confirms the Amended Note, as amended hereby, in all respects; and, as amended hereby, the terms thereof shall remain in full force and effect. This Amendment may be attached to and shall form a part of the Amended Note for all purposes. IN WITNESS WHEREOF, this instrument is executed as of the date and year first above written. PREFERRED EQUITIES CORPORATION, a Nevada corporation By_____________________________________ Donald R. Middleton, Vice President "MAKER" FINOVA CAPITAL CORPORATION, a Delaware corporation By_____________________________________ -3- 25 Its____________________________________ "LENDER" State of Arizona ) ) County of Maricopa ) This instrument was acknowledged before me on August 16, 1996 by Donald R. Middleton as Vice President of PREFERRED EQUITIES CORPORATION, a Nevada corporation. _______________________________________ Notary (My commission expires:_______________) State of Arizona ) ) County of Maricopa ) This instrument was acknowledged before me on August 16, 1996 by ________________________ as ______________________ of FINOVA CAPITAL CORPORATION, a Delaware corporation. _______________________________________ Notary (My commission expires:_______________) -4- 26 AMENDMENT NO. 5 TO PROMISSORY NOTE THIS AMENDMENT NO. 5 TO PROMISSORY NOTE ("Amendment") entered into as the 16th day of August, 1996, between PREFERRED EQUITIES CORPORATION, a Nevada corporation, successor-in-interest to Vacation Spa Resorts, Inc., a Tennessee corporation ("Maker"), and FINOVA CAPITAL CORPORATION, a Delaware corporation, successor-in-interest to Greyhound Real Estate Finance Company, an Arizona corporation ("Lender"), is made with reference to the following: R E C I T A L S Maker previously executed and delivered to Lender a Promissory Note dated as of March 30, 1989, in the principal amount of Nine Million and No/100 United States Dollars (U.S. $9,000,000.00) (the "Original Note"), to evidence the loan (the "Original Loan") made pursuant to the terms of that Loan and Security Agreement of even date therewith between Maker and Lender (the "Original Loan Agreement"). The Original Loan Agreement and Original Note were amended by an Amendment No. 1 to Loan and Security Agreement and Promissory Note between Lender and Maker dated June 14, 1989 (the "First Amendment"); by an Amendment No. 2 to Loan and Security Agreement dated April 16, 1990 (the "Second Loan Agreement Amendment") and by an Amendment No. 2 to Promissory Note dated April 16, 1990 (the "Second Note Amendment"); by an Amendment No. 3 to Loan and Security Agreement dated May 31, 1991 (the "Third Loan Agreement Amendment") and an Amendment No. 3 to Promissory Note dated May 31, 1991 (the "Third Note Amendment"); by an Amendment No. 4 to Loan and Security Agreement dated February 23, 1993 (the "Fourth Loan Agreement Amendment"); by an Amendment No. 5 to Loan and Security Agreement dated October 15, 1993 (the "Fifth Loan Agreement Amendment"); by an Amendment No. 6 to Loan and Security Agreement dated August 31, 1994 (the "Sixth Loan Agreement") and an Amendment No. 4 to Promissory Note dated August 31, 1994 (the "Fourth Note Amendment"). The Original Loan Agreement, as amended by the First Amendment, the Second Loan Agreement Amendment, the Third Loan Agreement Amendment, the Fourth Loan Agreement Amendment, the Fifth Loan Agreement Amendment and the Sixth Loan Agreement Amendment is hereinafter referred to as the "Loan Agreement." The Original Loan, as amended by the First Amendment, the Second Loan Agreement Amendment, the Third Loan Agreement Amendment, the Fourth 27 Loan Agreement Amendment, the Fifth Loan Agreement Amendment and the Sixth Loan Agreement Amendment, is hereinafter referred to as the "Loan." The Original Note, as amended by the First Amendment, the Second Note Amendment, the Third Note Amendment and the Fourth Note Amendment, is hereinafter referred to as the "Note." Greyhound Real Estate Finance Company ("GREFCO") was a wholly-owned subsidiary of Greyhound Financial Corporation ("GFC"). Pursuant to a plan of liquidation, GREFCO was liquidated into GFC. Further, pursuant to such plan of liquidation, GREFCO has assigned the Note and all of GREFCO's rights under the Loan Agreement and the Loan to GFC. Effective as of February 1, 1995, GFC changed its name to FINOVA Capital Corporation. Lender is the owner and holder of the Note. Pursuant to that Agreement and Plan of Merger dated as of July 24, 1992, by and between Maker and Vacation Spa Resorts, Inc., a Tennessee corporation ("VSR"), and those Articles of Merger of Vacation Spa Resorts, Inc. with and into Preferred Equities Corporation dated as of March 10, 1993, VSR was, effective March 11, 1993, merged into Maker. As a result of such merger, Maker has succeeded to all rights and privileges of VSR and has become responsible and liable for all liabilities and obligations of VSR. Pursuant to that certain Assumption Agreement (with Consent and Agreement of Guarantor) dated June 28, 1993 between Maker and Lender, Maker acknowledged and agreed that it was irrevocably and unconditionally liable for the repayment of the Loan and for the payment, performance and observance of all of the obligations, covenants, representations and warranties of VSR as set forth in the Loan Agreement and the Note as if Maker was an original party to the Loan Agreement and the Note. Maker and Lender have, as of even date herewith, entered into an Amendment No. 7 to Loan and Security Agreement which, among other things, amends the Loan Agreement to permit the maximum principal amount of the Loan to be increased to as much as Fifty Seven Million United States Dollars (U.S. $57,000,000.00), and Maker and Lender wish to make conforming changes to the Note. NOW, THEREFORE, in consideration of these Recitals, the covenants contained in this Amendment and for other good and valuable consideration, the receipt and sufficiency of which consideration are hereby acknowledged, Lender and Maker agree as follows: 1. The Note is hereby amended to be in the amount of "U.S. $57,000,000.00." -2- 28 2. The first paragraph of the Note is hereby amended in its entirety to read as follows: "FOR VALUE RECEIVED, the undersigned, PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Maker"), promises to pay to FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender"), or order, at New York, New York, or such other place as the holder of this Note ("Holder") may from time to time designate in writing, in lawful money of the United States of America, the principal sum of FIFTY SEVEN MILLION UNITED STATES DOLLARS (U.S. $57,000,000.00), or so much thereof as has been disbursed and not repaid, together with interest on the unpaid principal balance from time to time outstanding from the date hereof until paid, as more fully provided below." 3. Maker hereby ratifies and confirms the Note, as amended hereby, in all respects; and, as amended hereby, the terms thereof shall remain in full force and effect. This Amendment may be attached to and shall form a part of the Note for all purposes. IN WITNESS WHEREOF, this instrument is executed as of the date and year first above written. PREFERRED EQUITIES CORPORATION, a Nevada corporation _______________________________________ Donald R. Middleton Vice President "MAKER" FINOVA CAPITAL CORPORATION, a Delaware corporation By_____________________________________ Its____________________________________ "LENDER" -3- 29 State of Arizona ) ) County of Maricopa ) This instrument was acknowledged before me on August 16, 1996 by Donald R. Middleton as Vice President of PREFERRED EQUITIES CORPORATION, a Nevada corporation. _______________________________________ Notary (My commission expires:_______________) State of Arizona ) ) County of Maricopa ) This instrument was acknowledged before me on August 16, 1996 by ________________________ as ______________________ of FINOVA CAPITAL CORPORATION, a Delaware corporation. _______________________________________ Notary (My commission expires:_______________) -4- 30 AMENDMENT NO. 1 TO PROMISSORY NOTE [TOWERS LOBBY] THIS AMENDMENT NO. 1 TO PROMISSORY NOTE [TOWERS LOBBY] (this "Amendment") entered into as of this 16th day of August, 1996, between PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Maker"), and FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender"), is made with reference to the following: R E C I T A L S Maker previously executed and delivered to Lender a Promissory Note dated December 13, 1995, in the original principal amount of $700,000.00 (the "Towers Note") to evidence the Loan (the "Towers Loan") made pursuant to the terms of that Amendment No. 13 to Amended and Restated Loan and Security Agreement dated December 13, 1995 between Maker and Lender (said Amended and Restated Loan and Security Agreement, as so amended and as thereafter amended, the "Loan Agreement"). Maker and Lender have, as of even date herewith, entered into an Amendment No. 15 to Amended and Restated Loan and Security Agreement which, among other things, amends the Loan Agreement to permit the maximum principal amount of the Towers Loan to be increased to as much as U.S. $1,286,126.00. NOW, THEREFORE, in consideration of these Recitals, the covenants contained in this Amendment, and for other good and valuable consideration, the receipt and sufficiency of which consideration are hereby acknowledged, Lender and Maker agree as follows: 1. The Towers Note is hereby amended to be in the amount of "U.S. $1,286,126.00." 2. The first paragraph of the Towers Note is hereby amended in its entirety to read as follows: "FOR VALUE RECEIVED, the undersigned, PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Maker"), promises to pay to FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender"), or order, at such place as the holder of this Note ("Holder") may from time to time designate in writing, in lawful money of the United States of America, the principal sum of up to ONE MILLION TWO HUNDRED EIGHTY-SIX THOUSAND, ONE HUNDRED TWENTY-SIX UNITED STATES DOLLARS (U.S. $1,286,126.00), or so much thereof as has been 31 disbursed and not repaid, together with interest on the unpaid principal balance from time to time outstanding from the date hereof until paid, as more fully provided below." 3. Maker hereby ratifies and confirms the Towers Note, as amended hereby, in all respects; and, as amended hereby, the terms thereof shall remain in full force and effect. This Amendment may be attached to and shall form a part of the Towers Note for all purposes. IN WITNESS WHEREOF, this instrument is executed as of the date and year first above written. PREFERRED EQUITIES CORPORATION, a Nevada corporation _______________________________________ Donald R. Middleton Vice President "MAKER" FINOVA CAPITAL CORPORATION, a Delaware corporation By_____________________________________ Its____________________________________ "LENDER" -2- 32 State of Arizona ) ) County of Maricopa ) This instrument was acknowledged before me on August 16, 1996 by Donald R. Middleton as Vice President of PREFERRED EQUITIES CORPORATION, a Nevada corporation. _______________________________________ Notary (My commission expires:_______________) State of Arizona ) ) County of Maricopa ) This instrument was acknowledged before me on August 16, 1996 by ________________________ as ______________________ of FINOVA CAPITAL CORPORATION, a Delaware corporation. _______________________________________ Notary (My commission expires:_______________) -3- EX-10.97 14 REQUEST FOR RECEIVABLES 1 EXHIBIT 10.97 REQUEST FOR RECEIVABLE PURCHASE July _____, 1996 NBD Bank 611 Woodward Avenue Detroit, Michigan 48226 Attention: Financial Services Division Preferred Equities Corporation, a Nevada corporation (the "Seller"), hereby requests, pursuant to Section 2.02(a) of the Purchase and Servicing Agreement, dated as of June 1, 1994 (the "Purchase Agreement"), between the Seller and NBD Bank, N.A., which has been succeeded by NBD Bank, a Michigan banking corporation (the "Purchaser"), that the Purchaser purchase those Receivables described on Schedule A hereto (the "Proposed Pool") on July 30, 1996 (the "Payment Date"). Capitalized terms used but not defined herein shall have the respective meanings assigned to them in the Purchase Agreement. In support of this request, the Seller hereby represents and warrants to the Purchaser that: 1. Except as specified in paragraph 9 below, the representations and warranties contained in Section 2.03 and 6.01 of the Purchase Agreement and in paragraph 5 of the Guaranty Agreement are true and correct on and as of the date hereof, and will be true and correct on the date such purchase is made (both before and after the Payment Date), as if such representations and warranties were made on and as of such dates. 2. No Event of Transfer, and no event or condition which might become such an Event of Transfer with notice or with lapse of time, or both, exists or shall have occurred and be continuing on the Payment Date (whether before or after the consummation of the transactions contemplated hereby are consummated). 3. The aggregate Principal Balance of such Receivables included in the Proposed Pool on July 9, 1996 (the "Cutoff Date") is $7,499,221.80 comprised of $3,737,418.51 for the Timeshare Receivables (comprised of $392,988.98 in respect of Agreements for Deed and $3,344,429.53 in respect of Deed of Trust Agreements) and $3,761,803.29 for the Land Receivables, as more specifically detailed in Schedule A hereto. 2 4. As of the Cutoff Date, each Receivable included in the Proposed Pool has a remaining term to maturity of not greater than 117 months in the case of Timeshare Receivables and 117 months in the case of Land Receivables; and no such Receivable has a Principal Balance as of the Cutoff Date that is less than $2,500.00 or more than $15,154.90 in the case of Timeshare Receivables; or less than $2,500.00 or more than $52,257.10 in the case of Land Receivables included in the Proposed Pool (Section 2.03(i)). 5. As of the Cutoff Date, with respect to the Proposed Pool, the aggregate original purchase price agreed to be paid by the Obligors is not less than $5,204,199.45 in the case of the Timeshare Receivables and not less than $5,342,311.50 in the case of the Land Receivables included in the Proposed Pool (Section 2.03(i)). 6. As of the Cutoff Date, the actual weighted average remaining life of the Receivables included in the Proposed Pool, determined on the basis of scheduled maturity dates, is 89 months in the case of the Timeshare Receivables, 107 months in the case of the Land Receivables and 98 months for all Receivables (Section 2.03(ii)). 7. As of the Cutoff Date, the weighted average APR of the Receivables included in the Proposed Pool is not less than 12.92% in the case of the Timeshare Receivables, 11.98% in the case of the Land Receivables, and 12.45% for all Receivables (Section 2.03(iii)). 8. The Timeshare Receivables identified in Schedule A hereto, if any, identified under the headings Grand Flamingo Towers and Grand Flamingo Villas, are all of the Timeshare Receivables included in the Proposed Pool which arise from sales of Financed Property in the Grand Flamingo Towers and Grand Flamingo Villas and which constitute Agreements for Deed (Section 2.03(iv)(b)). 9. Exceptions, if any, to the representations and warranties of the Seller contained in Section 2.03(iv)(a), (c), (e), (h) and (j) and Section 2.03(xiv) are: none. 10. For purposes of Section 5.03 of the Purchase Agreement, the per annum yield for the Proposed Pool shall be _______ percent (___%) per annum. PREFERRED EQUITIES CORPORATION By: ____________________________________ Its: ___________________________________ 3 As contemplated by the definition of Original Pool Balance, the Seller represents and warrants that the Original Pool Balance for such Receivables included in the Proposed Pool shall be $7,499,221.80 comprised of $3,737,418.51 for the Timeshare Receivables included in such Pool (comprised of $392,988.98 in respect of Agreements for Deed and $3,344,429.53 in respect of Deed of Trust Agreements) and $3,761,803.29 for the Land Receivables included in such Pool, representing the aggregate Principal Balance of such Receivables as of the close of business on the Cutoff Date for such Pool, which Original Pool Balance shall be the purchase price to be paid by the Purchaser for such Pool. Acceptance of the proceeds of such purchase by the Seller shall be deemed to be a further representation and warranty that the representations and warranties made herein are true and correct at the time such proceeds are disbursed. PREFERRED EQUITIES CORPORATION By: ____________________________________ Its: ___________________________________ EX-10.98 15 PREFERRED STOCK REDEMPTION AGREEMENT 1 EXHIBIT 10.98 MEGO FINANCIAL CORP. 4310 PARADISE ROAD LAS VEGAS, NEVADA 89109 August 16, 1996 Legg Mason Special Investment Trust, Inc. Legg Mason Tower 111 South Calvert Street Baltimore, Maryland 21203-1476 Re: Series A, 12% Cumulative Preferred Stock Dear Sirs: Legg Mason Special Investment Trust, Inc. (the "Holder") is the holder of 200,000 shares (the "Preferred Shares") of Series A, 12% Cumulative Preferred Stock, par value $.01 per share (the "Series A Preferred Stock"), of Mego Financial Corp., a New York corporation (the "Company"). Pursuant to the terms of the Series A Preferred Stock, the Company is required to redeem all the Preferred Shares on August 31, 1996 (the "Redemption Date") at an aggregate redemption price (the "Redemption Price") of $2,000,000, in cash. The Company and the Holder desire to set forth their agreement regarding the issuance by the Company to the Holder of shares of common stock, par value $.01 per share ("Common Stock"), of the Company in payment of the Redemption Price. In consideration of the mutual covenants and agreements contained herein, the Company and the Holder hereby agree as follows: 1. Payment of Redemption Price. The Holder agrees that the Redemption Price may be paid by the Company by the issuance to the Holder of the number of shares (such shares being referred to herein as the "Common Shares") of Common Stock having a Fair Market Value (as defined below) equal to the Redemption Price, provided that no fractional shares or scrip representing fractional shares shall be issued. In lieu of issuing any fractional share, the Company shall pay to the Holder cash in an amount equal to the Fair Market Value of such fractional share. For purposes hereof, the term "Fair Market Value" shall mean the average of the daily closing sale prices of the Common Stock, as reported on the Nasdaq National Market, during the ten (10) trading days ending on the trading day immediately preceding the Redemption Date. The Company shall deliver to the Holder, following the Redemption Date, a certificate or certificates evidencing the Common Shares 2 registered in the name of the Holder, promptly after surrender by the Holder to the Company of the certificate(s) evidencing the Preferred Shares. 2. Representations of the Holder. The Holder hereby represents and warrants to the Company as follows: (a) The Holder is in receipt of and has carefully read and understands the following items (collectively, the "Offering Material"): i) The Company's Annual Report on Form 10-K for the year ended August 31, 1995; ii) The Company's Annual Report to Shareholders for the year ended August 31, 1995; iii) The Company's Quarterly Reports on Form 10-Q for the quarters ended November 30, 1995, February 29, 1996 and May 31, 1996; iv) The Company's Proxy Statement used in connection with the solicitation of proxies for its Annual Meeting of Shareholders held on June 11, 1996; v) The Company's audited financial statements as of and for the nine month period ended May 31, 1996; and vi) Such other information as it has requested in order to evaluate an investment in the Company. (b) The Holder acknowledges that it has had the opportunity to obtain additional information beyond the Offering Material in order to verify the information contained in the Offering Material and to evaluate the risks of an investment in the Common Shares. (c) The Holder understands (i) that the Common Shares have not been registered for sale under the Securities Act of 1933, as amended (the "Act"), or any applicable state securities or blue sky laws ("Other Securities Laws") and that the Common Shares are being offered and issued to the Holder pursuant to one or more exemptions from the registration requirements of such securities laws; (ii) that in order to satisfy such requirements the Holder must be acquiring the Common Shares for its own account for investment and not with a view to distribution thereof except in accordance with the Act and Other Securities Laws and that the representations and warranties contained in this Section 2 are given with the intention that the Company may rely thereon for purposes of claiming such exemption; and (iii) that the Common Shares cannot be sold or otherwise transferred unless subsequently registered under the Act and Other Securities Laws or unless an exemption from such registration is available. 2 3 (d) The Holder agrees that the Common Shares will not be sold or otherwise transferred unless (i) a registration statement with respect thereto has become effective under the Act; or (ii) there is presented to the Company an opinion of counsel reasonably satisfactory to the Company that registration under the Act and Other Securities Laws is not required; or (iii) pursuant to the provisions of Rule 144 or Rule 144A promulgated under the Act (and in the case of (i) and (iii), there is presented to the Company an opinion of counsel reasonably satisfactory to the Company that the sale or transfer will not subject the Company to any liability under Other Securities Laws). The Holder consents that any transfer agent of the Company may be instructed not to transfer any Common Shares, unless it receives satisfactory evidence of compliance with the foregoing provisions, and that there may be endorsed upon any certificate representing the Common Shares a legend calling attention to the foregoing restrictions on transferability of the Common Shares substantially as follows: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF THE COMPANY'S COUNSEL THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT." (e) The Holder acknowledges that it is a sophisticated investor familiar with the type of risks inherent in the acquisition of securities such as the Common Shares and that, by reason of the knowledge and experience of its representatives and agents in financial and business matters in general, and investments of this type in particular, it is capable of evaluating the merits and risks of an investment by it in the Common Shares. (f) The Holder's financial condition is such that it is under no present need in order to satisfy any existing or contemplated understanding or indebtedness to dispose of any portion of the Common Shares which it is acquiring hereunder. The Holder is able to bear the economic risk of an investment in the Common Shares, including, without limiting the generality of the foregoing, the risk of losing part or all of its investment in the Common Shares and its probable inability to sell or transfer the Common Shares for an indefinite period of time. (g) The Holder is acquiring the Common Shares for its own account for investment and the Common Shares are not being acquired with a view to, or for resale in connection with, any distribution within the meaning of the Act. 3 4 (h) The Holder understands that, because the Common Shares have not been registered under the Act or any Other Securities Laws, the Common Shares therefore must be held indefinitely unless the Common Shares are subsequently registered under the Act and any Other Securities Laws or until an exemption from such registration thereunder is available. (i) The Holder is aware that any sales which may be made in reliance upon Rule 144 promulgated under the Act, may be made only if the Company is in compliance with the reporting and other requirements under Rule 144, and then only in limited amounts, after the required holding periods, and otherwise in accordance with the terms and conditions of Rule 144. (j) The Holder acknowledges that it is an "accredited investor" within the meaning of Rule 501(a) of Regulation D promulgated under the Act. (k) The Holder understands that it has no rights whatsoever to request, and that the Company is under no obligation whatsoever to furnish, a registration of the Common Shares under the Act or any Other Securities Laws, except pursuant to Section 3 and Section 4 of this letter agreement. (l) The Holder acknowledges that the Company has relied on the representations contained herein and that the statutory basis for exemption from the requirements of Section 5 of the Act may not be present if, notwithstanding such representations, the Holder were acquiring the Common Shares for resale or distribution upon the occurrence or non-occurrence of some predetermined event. 3. Registration Rights-Coordinated. The following provisions shall apply during the period beginning on April 15, 1997 and continue until the second anniversary of the Redemption Date: (a) The Company shall give notice to the Holder of the proposed filing of any Registration Statement (other than a Registration Statement on Form S-4 or Form S-8 or successor forms thereto) under the Act for an offering of any securities of the Company, not less than thirty (30) days prior to the filing of such Registration Statement; and (b) Upon the request of the Holder, the Company shall include in any such Registration Statement such information as may be required to permit a public offering of the Common Shares specified in such request; and (c) The Company shall (i) bear the costs, expenses and fees incurred in connection with such registration, excluding any broker fees, selling commissions, and out-of-pockets costs and expenses of the Holder; (ii) use its best efforts to keep any such registration statement effective for a period of six months (and up to an additional three months if requested by the Holder); (iii) supply prospectuses and other documents as the 4 5 Holder may reasonably request; (iv) use its best efforts to register and qualify the Common Shares for sale in such states as the Holder designates; (v) do any and all other acts and things that may be necessary or desirable to enable the Holder to consummate the public sale or other disposition of the Common Shares; and (vi) enter into cross-indemnification arrangements with the Holder with respect to matters arising from such Registration Statement and public offering, except that the maximum amount that may be recovered from the Holder shall be limited to the amount of proceeds received by the Holder from the sale of the Common Shares. Notwithstanding the foregoing, in the event that there is an underwritten offering of the Company's securities offered pursuant to said Registration Statement pursuant to this Section 3, the underwriter shall have the right to refuse to permit any Common Shares, or to limit the amount of Common Shares, to be sold by the Holder to such underwriter as such underwriter may determine in its discretion, and the Holder shall refrain from selling such remainder of its Common Shares covered by such Registration Statement for the period of 45 days following the effective date of such Registration Statement or such other reasonable period requested by such underwriter. 4. Registration Rights - Demand. The following provisions shall apply during the period beginning on April 15, 1997 and continue until the second anniversary of the Redemption Date: (a) Subject to Sections 4(b), (d) and (e), if the Holder shall give notice to the Company to the effect that the Holder desires to register under the Act the Common Shares under such circumstances that a public distribution (within the meaning of the Act) of any such securities will be involved, then the Company, on one and only one occasion, will promptly, but in no event later than 45 days after receipt of such notice, file a Registration Statement pursuant to the Act, to the end that the Common Shares may be publicly distributed under the Act as promptly as practicable thereafter and the Company will use its best efforts to cause such Registration Statement to become and remain effective (including taking such steps as may be reasonably required to obtain the removal of any stop order); provided, that the Holder shall furnish to the Company all appropriate information in connection therewith as the Company may reasonably request in writing; (b) In the event the Company receives from the Holder a request that the Company file a Registration Statement on Form S-3 with respect to the Common Shares and if Form S-3 (or its successor if such Form has been superseded) is then available for such offering by the Holder, then the Company shall, promptly, but in no event later than thirty (30) days after receipt of such notice, file such Registration Statement and use its best efforts to effect such registration as would permit the sale of the securities as specified in the request. Registrations effected pursuant to this Section 4(b) shall not be counted as demands for registration pursuant to Section 4(a). 5 6 (c) The Company shall (i) bear the costs, expenses and fees incurred in connection with such Registration Statement, excluding any broker fees, selling commissions, and out-of-pocket costs and expenses of the Holder; (ii) in the case of a registration statement on Form S-2 or Form S- 3, use its best efforts to keep any such registration statement effective until all the Common Shares covered thereby have been sold or otherwise disposed of; (iii) in the case of a registration statement other than on Form S-2 or Form S-3, use its best efforts to keep any such registration statement effective for a period of six months (and up to an additional three months if requested by the Holder); (iv) supply prospectuses and other documents as the Holder may reasonably request; (v) use its best efforts to register and qualify the Common Shares for sale in such states as the Holder designates; (vi) do any and all other acts and things that may be necessary or desirable to enable the Holder to consummate the public sale or other disposition of the Common Shares; and (vii) enter into cross-indemnification arrangements with the Holder with respect to matters arising from such Registration Statement and public offering, except that the maximum amount that may be recovered from the Holder shall be limited to the amount of proceeds received by the Holder from the sale of the Common Shares. (d) The provisions of this Section 4 shall not apply if prior to or at such time as the Holder shall give notice to the Company pursuant to Section 4(a) or make a request to the Company pursuant to Section 4(b), the Company shall have notified the Holder in writing that the Common Shares are covered by an effective Registration Statement and that the Company will cause such Registration Statement to remain effective until all the Common Shares covered thereby have been sold or otherwise disposed of. The Holder shall furnish to the Company within a reasonable period all appropriate information and indemnification (if appropriate) in connection with any such Registration Statement as the Company may request in writing. (e) The provisions of this Section 4 shall not apply if the Holder or its assignee shall have exercised its rights pursuant to Section 3.04 of the Common Stock Purchase Warrant (the "Warrant"), issued as of September 1, 1993 by the Company to the Holder, as amended by the letter agreement dated the date hereof, to purchase 300,000 shares of Common Stock, to require the Company to file a Registration Statement covering the shares of Common Stock issuable upon exercise of the Warrant and the Holder shall not have requested that the Company include the Common Shares in such Registration Statement. 5. Governing Law. This letter agreement shall be governed by and construed under the laws of the State of New York. 6. Execution in Counterparts. This letter agreement may be executed simultaneously in multiple counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same document. 7. Binding Effect. This letter agreement shall be binding upon and inure to the benefit of the Company and the Holder and their respective successors and permitted 6 7 assigns, provided, that the Holder may not assign its rights hereunder without the prior written consent of the Company. * * * 7 8 If you are in agreement with the foregoing, kindly execute the enclosed copy of this letter in the space provided below and return it to the undersigned, whereupon this letter shall constitute a binding agreement between us. Very truly yours, MEGO FINANCIAL CORP. By: ____________________________________ Jerome J. Cohen President ACCEPTED AND AGREED AS OF THE DATE HEREOF: LEGG MASON SPECIAL INVESTMENT TRUST, INC. By: _______________________________ Name: Title: 8 EX-10.99 16 AMENDMENT TO COMMON STOCK PURCHASE WARRANT 1 EXHIBIT 10.99 MEGO FINANCIAL CORP. 4310 PARADISE ROAD LAS VEGAS, NEVADA 89109 August 16, 1996 Legg Mason Special Investment Trust, Inc. Legg Mason Tower 111 South Calvert Street Baltimore, Maryland 21203-1476 Re: Common Stock Purchase Warrant Dear Sirs: Reference is made to the Common Stock Purchase Warrant (the "Warrant") issued as of September 1, 1993 by Mego Financial Corp., a New York corporation (the "Company"), to Legg Mason Special Investment Trust, Inc. (the "Holder"), to purchase 300,000 shares (the "Warrant Shares") of common stock, par value $.01 per share ("Common Stock"), of the Company. Capitalized terms used and not defined herein shall have the meanings ascribed thereto in the Warrant. The Company and the Holder desire to set forth certain modifications to the terms of the Warrant. In consideration of the mutual covenants and agreements contained herein, the Company and the Holder hereby agree as follows: 1. Extension of Warrant Expiration Date. The Company agrees that the Expiration Date of the Warrant is hereby extended from August 31, 1996 until August 31, 1997. Accordingly, all references in the Warrant to the "Expiration Date" shall mean August 31, 1997. 2. Agreement not to Exercise Registration Rights. (a) The Holder agrees that, prior to April 15, 1997, it shall not exercise its rights pursuant to Section 3.03 of the Warrant to request or require the Company to include the Warrant Shares in any Registration Statement, without the written consent of the Company. (b) The Holder further agrees that, prior to April 15, 1997, it shall not exercise its rights pursuant to Section 3.04 of the Warrant to require the Company to file any Registration Statement covering the Warrant Shares. 2 Legg Mason Special Investment Trust, Inc. Page - 2 - 3. Limitation on Demand Registration Rights. The Holder agrees that the provisions of Section 3.04 of the Warrant shall not apply if the Holder or its assignee shall have exercised its rights pursuant to Section 4 of the separate letter agreement, dated the date hereof, between the Company and the Holder regarding the redemption of the Company's Series A, 12% Cumulative Preferred Stock, to require the Company to file a Registration Statement covering the shares of Common Stock issued to the Holder under such letter agreement and the Holder shall not have requested that the Company include the Warrant Shares in such Registration Statement. 4. Governing Law. This letter agreement shall be governed by and construed under the laws of the State of New York. 5. Execution in Counterparts. This letter agreement may be executed simultaneously in multiple counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same document. 6. Binding Effect. This letter agreement shall be binding upon and inure to the benefit of the Company and Holder and their respective successors and permitted assigns. 7. Warrant Remains in Effect. Except as expressly modified hereby, the Warrant remains in full force and effect. * * * 3 Legg Mason Special Investment Trust, Inc. Page - 3 - If you are in agreement with the foregoing, kindly execute the enclosed copy of this letter in the space provided below and return it to the undersigned, whereupon this letter shall constitute a binding agreement between us. Very truly yours, MEGO FINANCIAL CORP. By: ____________________________________ Jerome J. Cohen President ACCEPTED AND AGREED AS OF THE DATE HEREOF: LEGG MASON SPECIAL INVESTMENT TRUST, INC. By: _______________________________ Name: Title: EX-21.1 17 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.1 Subsidiaries of the Registrant, Mego Financial Corp.
JURISDICTION OF PERCENT NAME OF SUBSIDIARY INCORPORATION OWNED PARENT - ------------------ --------------- --------- -------- Preferred Equities Corporation Nevada 100% Mego Mego Mortgage Corporation Delaware 100% Mego Brigantine Preferred Properties, Inc. ("Properties") Nevada 100% PEC The Brig, Inc. New Jersey 99% Properties Brigantine Inn Marketing, Inc. New Jersey 100% Properties Brigantine Inn Management, Inc. New Jersey 100% Properties Central Nevada Utilities Company Nevada 100% PEC Central Nevada Realty Company Nevada 100% PEC Southern Colorado Properties, Inc. Colorado 100% PEC Colorado Land and Grazing Corp. Colorado 100% PEC Calvada Springs Corporation Nevada 100% PEC Preferred Vacation Resorts, Inc. Nevada 100% PEC First National Equity Corp. Nevada 100% PEC Calvada Homes, Inc. Nevada 100% PEC Preferred Equities Insurance Agency, Inc. Nevada 100% PEC Preferred Colorado Land Co. Colorado 80% PEC Steamboat Suites, Inc. Colorado 100% PEC RVS Marketing, Inc. Texas 100% PEC Overlook Food and Beverage Company Colorado 100% PEC Calvada Properties Corporation Nevada 100% PEC Calvada Subdivisions, Inc. Nevada 100% PEC First Corporation of Nevada Nevada 100% PEC Preferred Management Corp. Nevada 100% PEC Resort Properties Advertising, Inc. Nevada 100% PEC Sunburst Development, Inc. Nevada 100% PEC
EX-27.1 18 FINANCIAL DATA SCHEDULE
5 0000736035 MEGO FINANCIAL CORP. 1,000 U.S. DOLLARS YEAR AUG-31-1996 SEP-01-1995 AUG-31-1996 1 9,842 0 57,279 16,794 40,611 0 33,812 13,550 165,597 0 84,449 0 0 184 25,667 165,597 45,746 84,714 5,842 38,450 38,246 1,510 8,597 8,018 3,167 4,851 0 0 0 4,851 0.24 0.24 CUMULATIVE PREFERRED STOCK DIVIDEND - $240
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