-----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, OwqUz2iEv36h1lxCdKoHMH46unCf121hfKKH0aaXEW3jv5Qby+SU6DRkC7lKZ1fG +B25NqhHI3yeUrok0BnKLg== 0001021408-01-510903.txt : 20020412 0001021408-01-510903.hdr.sgml : 20020412 ACCESSION NUMBER: 0001021408-01-510903 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20010831 FILED AS OF DATE: 20011129 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEGO FINANCIAL CORP CENTRAL INDEX KEY: 0000736035 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE DEALERS (FOR THEIR OWN ACCOUNT) [6532] IRS NUMBER: 135629885 STATE OF INCORPORATION: NY FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08645 FILM NUMBER: 1802747 BUSINESS ADDRESS: STREET 1: 4310 PARADISE RD CITY: LAS VEGAS STATE: NV ZIP: 89109 BUSINESS PHONE: 7027373700 MAIL ADDRESS: STREET 1: 4310 PARADISE RD CITY: LAS VEGAS STATE: NV ZIP: 89109 10-K 1 d10k.txt 08/31/2001 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 - -------------------------------------------------------------------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended August 31, 2001 --------------- OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission file number 1-8645 MEGO FINANCIAL CORP. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) New York 13-5629885 - --------------------------------- -------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) identification no.) 4310 Paradise Road, Las Vegas, NV 89109 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code 702-737-3700 ------------------------------ Securities registered pursuant to Section 12(b) of the Act: None --------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value - -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] As of November 16, 2001, 3,500,557 shares of the registrant's common stock were outstanding. The aggregate market value of common stock held by non-affiliates of the registrant as of November 16, 2001 was approximately $7,511,223 based on a closing price of $3.99 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 ================================================================================ MEGO FINANCIAL CORP. ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PART I PAGE Item 1. Business............................................. 1 Item 2. Properties........................................... 11 Item 3. Legal Proceedings.................................... 11 Item 4. Submission of Matters to a Vote of Security Holders.. 12 PART II Item 5. Market for the Registrant's Common Equity and Related Security Holder Matters...................... 12 Item 6. Selected Consolidated Financial Data................. 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 15 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................... 25 Item 8. Financial Statements and Supplementary Data.......... 26 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure............... 26 PART III Item 10. Directors and Executive Officers of the Company...... 27 Item 11. Executive Compensation............................... 29 Item 12. Security Ownership of Certain Beneficial Owners and Management....................................... 33 Item 13. Certain Relationships and Related Transactions....... 34 PART IV Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.................................. 35 Signatures........................................... 47 i PART I Item 1. Business General Mego Financial Corp. (Mego Financial) is a premier developer and operator of timeshare properties and a provider of consumer financing to purchasers of its timeshare intervals and land parcels through its wholly-owned subsidiary, Preferred Equities Corporation (PEC) established in 1970. PEC also manages timeshare properties and receives management fees as well as fees based on sales of timeshare interests. By providing financing to virtually all of its customers, PEC also originates consumer receivables that it hypothecates, sells and services. Unless the context requires otherwise, the "Company" refers to Mego Financial and its consolidated subsidiaries. The terms "fiscal 2001", "fiscal 2000", and "fiscal 1999" refer to the fiscal years ended August 31, 2001, 2000 and 1999, respectively. The Company was incorporated under the laws of the state of New York in 1954 under the name Mego Corp. and, in 1992, changed its name to Mego Financial Corp. In January 1988, the Company sold a controlling interest in the Company consisting of approximately 43% of the then outstanding common stock after the sale, to affiliates of the Assignors (as hereinafter defined). See "Item 13. Certain Relationships and Related Transactions" and Note 1 of Notes to Consolidated Financial Statements. In February 1988, the Company acquired PEC, pursuant to an assignment by the Assignors (Comay Corp., GRI, RRE Corp., and H&H Financial Inc.) of their contract right to purchase PEC. The Company's executive offices are located at 4310 Paradise Road, Las Vegas, Nevada, and its telephone number is (702) 737-3700. Recent Events On October 2, 2001, CNUC entered into an agreement with Utilities Inc. providing for the acquisition by Utilities Inc. of all of the assets of CNUC for $5,500,000 (Asset Sale). Utilities Inc. has deposited $500,000 of the purchase price to assure its performance of the agreement. The transaction is subject to the approval of the Nevada Public Utilities Commission, which approval is expected on or before April 15, 2002. CNUC has assigned a portion of the proceeds from the Asset Sale to secure the Note mentioned below. The proceeds from the Asset Sale will be used for working capital and to reduce debt. The Asset Sale is not expected to have a significant impact on the Company's fiscal 2002 results of operations. On October 15, 2001, the Company and LC Acquisition Corp., a California corporation (LC), entered into a short-term financing agreement, modified on November 8, and November 15, 2001, pursuant to which LC agreed to lend to the Company an aggregate of $3,000,000 in two tranches. In connection with this financing arrangement, the Company issued to LC a promissory note (Note) bearing interest at 12% per annum. Payment of the Note is guaranteed by PEC and the guaranty is secured by a pledge of the stock of CNUC and a partial assignment of proceeds from the Asset Sale referred to above. The Note is payable on the date the Asset Sale is consummated or August 31, 2002, whichever is earlier. Preferred Equities Corporation General PEC acquires, develops and converts rental and condominium apartment buildings and hotels for sale as timeshare interests and engages in the retail sale of land. PEC's strategy is to acquire properties in desirable destination resort areas that offer a range of recreational activities and amenities. PEC markets and sells timeshare interests in its resorts in Las Vegas and Reno, Nevada; Honolulu, Hawaii; Brigantine, New Jersey; Steamboat Springs, Colorado; Indian Shores and Orlando, Florida; and sells land in Nevada and Colorado. PEC owns property in Biloxi, Mississippi, which was considered for a possible timeshare resort but is now listed for sale. Major lodging, hospitality and entertainment companies, including The Walt Disney Company, Hilton Hotels Corporation, Marriott Ownership Resorts, Inc. and Hyatt Corporation, among others, have commenced developing and marketing timeshare interests in various resort properties. The Company believes that the entry into the timeshare industry of these large and well-known lodging, hospitality and entertainment companies has contributed to the growth and acceptance of the industry. To enhance its competitive position, in April 1995, PEC entered into a strategic alliance with Ramada Franchise Systems, Inc. (Ramada) and its parent, Hospitality Franchise Systems, Inc., now Cendant Corporation (Cendant), pursuant to which PEC was granted a ten-year (including a renewal option) exclusive license to operate both its existing and future timeshare properties under the name "Ramada Vacation Suites." The American Resort Development Association 1 (ARDA) estimates that over 2 million families in the United States own timeshare interests in resorts worldwide and that sales of timeshare interests in the United States aggregated approximately $4 billion in 2000. Additionally, it is estimated by ARDA that sales volume is increasing at a compounded annual rate of approximately 16% due to the entry of brand-name hospitality firms and well- financed publicly held companies with lower costs of capital and strong growth among seasoned timeshare companies. Timeshare Properties and Sales The timeshare interests offered by PEC in its resorts other than in Hawaii generally consist of undivided fee interests in the land and facilities comprising the property or an undivided fee interest in a particular unit, pursuant to which the owner acquires the perpetual right to weekly occupancy of a residence unit each year. In its resort in Hawaii, PEC offers "right-to-use" interests, pursuant to which the owner has occupancy rights for one week each year until December 31, 2009, the last full year of the underlying land lease for the resort property. During fiscal 2001, 2000 and 1999, PEC had net sales of 3,659, 2,885 and 2,841 timeshare interests, respectively, at prices ranging from $4,250 to $32,990. The Company believes that PEC's alliance with Ramada has enabled it to capitalize on the Ramada reputation, name recognition and customer profile, which closely matches PEC's customer profile. The agreement with Ramada ("Agreement") required PEC to pay an initial access fee of $1 million and monthly recurring fees equal to 1% of PEC's Gross Sales (as defined in the Agreement) through January 1996 and 1.5% of PEC's Gross Sales each month commencing in February 1996, with certain minimums that increase each year. The Agreement was modified in November 2001, so that the Minimum Recurring Fees applicable to calendar 2001 will be reduced by $600,000. The initial term of the Agreement was 5 years. PEC exercised the option to renew the Agreement for an additional term of 5 years which will expire on December 31, 2005. The Company believes it has benefited from the use of the Ramada name, but is unable to quantify the amount of such benefit. PEC also offers a sales program whereby a customer pays a fixed fee on an installment basis to use a timeshare interest during an initial one-year period with an option to purchase the timeshare interest. If the customer exercises the option to purchase the interest, the fixed fee is applied toward the down payment of the timeshare interest purchased. PEC's Ramada Vacation Suites at Las Vegas includes 37 buildings with a ----------------------------------- total of 489 studio, one- and two- bedroom units that have been converted for sale as 24,939 timeshare interests. As of August 31, 2001, 2,236 timeshare interests remained available for sale. The resort is in close proximity to "the Strip" in Las Vegas and features swimming pools and other amenities. PEC has completed an expansion of the resort common areas to include an expanded lobby, convenience store and expanded sales facilities. The Ramada Vacation Suites at Reno consists of a 95-unit hotel that has ------------------------------ been converted for sale as 4,845 timeshare interests. As of August 31, 2001, 887 timeshare interests remained available for sale. The resort has substantially completed major renovations and features an indoor swimming pool, exercise facilities, sauna, jacuzzi and sun deck. The Ramada Vacation Suites at Honolulu is an 80-unit hotel consisting of 3 ---------------------------------- buildings that have been converted for sale as 4,160 timeshare interests. As of August 31, 2001, 733 timeshare interests remained available for sale. The resort is within walking distance of a public beach and features a swimming pool and jacuzzi. PEC has a leasehold interest in the buildings, equipment and furnishings which expires in December 2009. The annual rental payments total approximately $192,000. The Ramada Vacation Suites at Steamboat Springs consists of 60 one- and ------------------------------------------- two-bedroom units, which have been converted for sale as 3,060 timeshare interests. As of August 31, 2001, 797 timeshare interests remained available for sale. PEC acquired this condominium resort in 1994 and completed the conversion in 1995. PEC has constructed a 5,500-square foot amenity building at this resort that features a spa and sauna. The Ramada Vacation Suites - Hilltop at Steamboat Springs is a converted ----------------------------------------------------- hotel building with indoor swimming pool, restaurant, cocktail lounge and meeting room facilities. The complex contains 56 one- and two-bedroom units to be sold as 2,856 timeshare interests. As of August 31, 2001, 1,519 timeshare interests remained available for sale. The resort is located in Steamboat Springs, Colorado, in close proximity to ski slopes and other attractions. 2 The Ramada Vacation Suites at Orlando consists of an 8-building, 120 unit --------------------------------- complex that has been converted into 6,120 timeshare interests. As of August 31, 2001, 380 timeshare interests remained available for sale. Three additional buildings, containing 42 units to be sold as 2,184 timeshare interests, are under construction in phases, and will be available for sale in fiscal 2002. In addition, the Company acquired the remaining 8 buildings of the related property and is currently operating it as a hotel, Ramada Inn All Suites. The Company plans to convert as needed over the next several years the hotel property into 109 units to be sold as 5,688 timeshare interests. The resort features a pool and is located near the major tourist attractions. The Ramada Vacation Suites at Indian Shores consists of a 2-building --------------------------------------- complex, which has been converted into a total of 32 one- and two-bedroom units to be sold as 1,632 timeshare interests. As of August 31, 2001, 52 timeshare interests remained available for sale. The resort is located on the intercoastal waterway in close proximity to St. Petersburg and Clearwater, Florida. The Ramada Vacation Suites on Brigantine Beach consists of a 91-unit hotel ------------------------------------------ and a 17-unit three-story building that have been either converted or constructed for sale as 5,508 timeshare interests. As of August 31, 2001, 792 timeshare interests were available for sale. The resort, located on beach front property in close proximity to Atlantic City, New Jersey, features an enclosed swimming pool, cocktail lounge, bar and restaurant. The following table sets forth certain information regarding the timeshare interests at the Company's resort properties: 3
Steamboat Indian Las Vegas Reno Waikiki Springs Hilltop Orlando Shores Brigantine ----------------------------------------------------------------- ----------------------- Maximum number 24,939 4,845 4,160 3,060 2,856 6,120 (1) 1,632 5,508 (2) Net number sold through August 31, 2001 22,703 3,958 3,427 2,263 1,337 5,740 1,580 4,716 Number available for sale at August 31, 2001 2,236 887 733 797 1,519 380 52 792 Percent sold through August 31, 2001 91% 82% 82% 74% 47% 94% 97% 86% Number sold during the year ended August 31, 2001 2,452 616 308 231 756 1,956 84 193 Number reacquired during the year ended August 31, 2001 through: Contract cancellations 348 99 244 29 28 172 18 30 Exchanges (3) 769 99 184 186 193 255 65 68 Acquired for unpaid maintenance fees 48 56 36 - - - - 10 ----------------------------------------------------------------- ----------------------- Total number reacquired during the year 1,165 254 464 215 221 427 83 108 ----------------------------------------------------------------- ----------------------- Net number sold (reacquired) during the year ended August 31, 2001 1,287 362 (156) 16 535 1,529 1 85 Additional pending as of August 31, 2001 - - - - - 2,184 - - Sales prices of timeshare interests available at August 31,2001 Low $ 9,990 $4,990 $4,250 $ 8,990 $ 8,990 $ 9,990 $ 9,990 $ 4,250 High $22,990 $8,990 $6,450 $26,990 $32,990 $14,990 $17,990 $22,550 Average $12,101 $5,792 $4,515 $16,208 $15,374 $14,537 $12,471 $ 7,869 Total ----------- Maximum number 53,120 Net number sold through August 31, 2001 45,724 Number available for sale at August 31, 2001 7,396 Percent sold through August 31, 2001 86% Number sold during the year ended August 31, 2001 6,596 Number reacquired during the year ended August 31, 2001 through: Contract cancellations 968 Exchanges (3) 1,819 Acquired for unpaid maintenance fees 150 ----------- Total number reacquired during the year 2,937 ----------- Net number sold (reacquired) during the year ended August 31, 2001 3,659 Additional pending as of August 31, 2001 2,184 Sales prices of timeshare interests available at August 31,2001 Low $ 4,250 High $32,990 Average $11,382
(1) This does not include the 2,184 shown as pending, which are under construction in phases. It also does not include the 5,688 previously discussed, which are currently being operated as a hotel and will be converted to timeshare interests as needed. (2) 4,823 timeshare interests were sold prior to the acquisition by the Company. (3) These exchanges are primarily related to customers exchanging and/or upgrading their current property to larger, higher-priced units. PEC's revenue from net sales of timeshare interests was $54.0 million, $49.1 million and $41.3 million, representing 53.8%, 54.2% and 55.4% of total revenues for fiscal 2001, 2000 and 1999, respectively. RCI Exchange Network Timeshare interest ownership is significantly enhanced by the availability of resort exchange networks. These networks allow owners to exchange their occupancy right in their home resort for an occupancy right in another resort. Several companies, including Resorts Condominiums International (RCI), a wholly- owned subsidiary of Cendant, provide timeshare interest exchange networks. PEC's resorts participate in the RCI network. 4 According to RCI, it has a total of more than 3,600 participating resort facilities located worldwide. PEC and the Owner's Association (as defined hereinafter) of each of PEC's timeshare resorts have entered into an agreement with RCI pursuant to which purchasers of timeshare interests in PEC's resorts may apply for membership in the RCI exchange network. The cost of the RCI membership fee, which is at the option and expense of the timeshare interest owner, is $63 for the first year and $74 for each annual renewal. The initial five-year terms of the Owner's Association agreements with RCI are automatically renewable for additional five-year terms, unless either party gives the other party not less than 180 days written notice prior to the expiration of the then current term. Either party may terminate the agreement upon a breach of the agreement by the other party. Owners' Associations and Property Management PEC's resort properties require ongoing management services. Independent not-for-profit corporations known as Owners' Associations have been established to administer each of PEC's resorts other than the resort in Honolulu. PEC's resort in Honolulu is administered by the White Sands Resort Club, a division of PEC (together with the Owners' Associations, collectively the "Associations"). Owners of timeshare interests in each resort are responsible for the payment of annual assessment fees, which are intended to fund all of the operating expenses at the resort facilities and accumulate reserves for replacement of furnishings, fixtures and equipment, and building maintenance, to their respective Association. Annual assessment fees for 2001 ranged from $275 to $486. In prior years, PEC has advanced monies to cover deficits for Associations located outside the State of Florida. There is no certainty PEC will continue this practice. In Florida, if Association expenses exceed annual assessment fees, PEC is obligated to pay the deficit. In fiscal 2001, PEC financed a budget shortfall of $132,000 and $645,000, respectively, for the Owners' Associations at Indian Shores and Orlando. During calendar year 2000, the Associations had a deficiency of $1,036,000 in Association fees received compared to expenses paid. If the owner of a timeshare interest defaults in the payment of the annual assessment fee, the Association may impose a lien on the related timeshare interest. PEC, at its option, may pay the Associations the lien amount of timeshare interest owners who are delinquent, but have paid PEC in full for their timeshare interest. In exchange for the payment by PEC of such amounts, the Associations assign their liens for non-payment on the respective timeshare interests to PEC. In the event the timeshare interest holder does not satisfy the lien after having an opportunity to do so, PEC typically acquires the timeshare interest for the amount of the lien and any related foreclosure costs. PEC has entered into management agreements with the Associations pursuant to which PEC receives annual management and administrative fees in exchange for providing or arranging for various property management services including reservations, bookkeeping, staffing, budgeting, maintenance and housekeeping services. During fiscal 2001, 2000 and 1999, PEC received fees of $2.9 million, $2.7 million and $2.5 million, respectively. The management agreements are typically for initial terms ranging from three to five years and automatically renew for successive additional one-year terms unless canceled by an Association. PEC's intent and goal is to manage these properties until all timeshare interests are sold and the receivables generated from such sales have been paid. Due to cancellations, exchanges and upgrades, none of the resorts are likely to realize a 100% sellout for an extended period of time. The Company believes that continued management of these properties preserves the integrity and operating efficiencies of the resorts. Land Sales PEC is currently engaged in the retail sale of land in Nevada and Colorado for residential, commercial, industrial and recreational use. PEC may sell land in other states if an opportunity arises. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Real Estate Risk". Residential lots generally range in size from one-quarter acre to five acres with some larger, while commercial and industrial lots also vary in size. PEC's residential lots generally range in price from $17,000 to $39,000 while commercial and industrial lots generally range in price from $45,000 to $94,000. PEC sold (reacquired) 784, 766 and 613 residential lots, net, and (3), 2 and 14 commercial and industrial lots during fiscal 2001, 2000 and 1999, respectively. PEC is required from time to time to cancel the purchase of lots and parcels as a result of payment defaults or customer cancellations. Nevada ------ A substantial portion of PEC's land sales have historically occurred in subdivisions in the Pahrump Valley, Nevada, located approximately 60 miles west of Las Vegas. PEC has little inventory remaining in this location. 5 The following table illustrates certain statistics regarding the Pahrump Valley subdivisions: Number of acres acquired since 1969 18,777 Number of lots platted 29,849 Net number of lots sold through August 31, 2001 29,746 Percent of lots sold through August 31, 2001 (unsold less than .5%) 100% Number of platted lots available for sale at August 31, 2001 103 For the Year Ended August 31, 2001: ----------------------------------- Number of parcels and lots sold 618 Number of parcels and lots canceled (173) Number of parcels and lots repurchased (84) Number of parcels and lots exchanged (325) -------- Number of parcels and lots sold, net of cancellations and exchanges 36 ========
Central Nevada Utilities Company (CNUC), a wholly-owned subsidiary of PEC, provides sewer and water service within CNUC's certificated service area. As of August 31, 2001, CNUC had 3,457 customers. In the past 5 years, connections have grown at an average annual rate of 15.3% and 13.3%, respectively, for residential water and sewer. CNUC has entered into an agreement to sell all of its assets, subject to regulatory approval. Colorado -------- PEC also sells larger unimproved tracts of land in Colorado. PEC owns unimproved land in Huerfano County, Colorado, which is being sold for recreational use in parcels of at least 35 acres, at prices ranging from $13,000 to $18,000, depending on location and size. These parcels are sold without any planned improvements and without water rights, which rights have been reserved by PEC, except for an owner's right to drill a domestic well. Substantially all of the parcels have been sold, with 30 parcels remaining in inventory as of August 31, 2001. In September 1993, PEC acquired improved and unimproved land in Park County, Colorado, known as South Park Ranch, which is being sold for recreational use as 1,870 separate parcels typically ranging in size from 5 to 9 acres and a few larger parcels at prices beginning at $17,000. Substantially all of the parcels had been sold, with 6 parcels remaining in inventory as of August 31, 2001. These parcels are sold without any planned improvements, except for roads which are already in place and a recreational facility that includes a basketball court, baseball field and picnic facilities. In February 1998, PEC acquired a tract of land in Park County, Colorado near the town of Hartsel, known as Hartsel Springs Ranch. In July 2001, PEC acquired additional parcels. This property is being sold as 2,434 separate parcels with an average price and size of $26,200 and five acres, respectively. As of August 31, 2001, 266 parcels remained unsold. These parcels are sold without any planned improvements, except for roads which are already in place. The following table illustrates certain statistics regarding the parcels and lots in Huerfano and Park Counties, Colorado: 6 Number of acres acquired since 1969 64,434 Number of lots platted 5,428 Net number of lots sold through August 31, 2001 5,126 Percent of lots sold through August 31, 2001 94% Number of platted lots available for sale at August 31, 2001 302 For the Year Ended August 31, 2001: ----------------------------------- Number of parcels and lots sold 2,031 Number of parcels and lots canceled (405) Number of parcels and lots exchanged (881) -------- Number of parcels and lots sold, net of cancellations and exchanges 745 ========
For fiscal 2001, 2000 and 1999, respectively, PEC's revenue from net land sales was $21.7 million, $19.6 million and $16.0 million, representing 21.6%, 21.7% and 21.4% of total revenues. Sales of Non-Core Assets The Company owns and has listed for sale certain commercial parcels that are not necessary for its normal business activities. 22 of these parcels are located in the Pahrump Valley. The Company also owns water rights in Huerfano County that are listed for sale and a 4.25 acre parcel in Biloxi, Mississippi that is listed for sale. Since the Company began listing its non-core assets for sale in fiscal 1999, excluding the sale of its two office buildings, the Company has sold in book value approximately $5 million in non-core assets. Sales have included two golf courses, a sports complex and seven other parcels located in the Pahrump Valley. In fiscal 2001, the Company sold its two office buildings located at 4310 Paradise Road and 1500 E. Tropicana in Las Vegas, for a total consideration of $8,300,000. The Company has leased back the building at 1500 E. Tropicana for a period of ten years with two 5-year renewal options, and the building at 4310 Paradise Road for a period of 5 1/2 years with a 4 1/2 year renewal option. The majority of the sales proceeds were used to reduce debt. The Company will continue to actively market the non-core assets; however, there is no certainty as to when additional sales will occur. Trust Arrangements Title to certain of PEC's resort properties and land parcels in Huerfano County, Colorado is held in trust by trustees to meet regulatory requirements that were applicable at the time of the commencement of sales. In connection with sales of timeshare interests pursuant to "right-to-use" or installment sales contracts, title to certain of PEC's resort properties in the states of Nevada and Hawaii are held in trust by trustees to meet requirements of certain state regulatory authorities. Prior to 1988, PEC sold timeshare interests in certain of its resorts in the state of Nevada pursuant to "right-to-use" contracts and continues in other resorts to sell under installment sales contracts under which the purchaser does not receive a deed until the purchase price is paid in full. In addition, PEC offers "right-to-use" interests in its resort in Hawaii, as this resort is owned in leasehold. In connection with the registration of the sale of such "right to use" timeshare interests, the Department of Real Estate of the State of Nevada and the Department of Commerce and Consumer Affairs of the State of Hawaii require title to be held in trust. Customer Financing PEC provides financing to virtually all the purchasers of its timeshare interests and retail lots who make a down payment equal to at least 10% of the purchase price. The financing is generally evidenced by non-recourse installment sale contracts as well as notes secured by deeds of trust. Currently, the term of the financing generally ranges from two to twelve years, with principal and interest payable in equal monthly payments. Interest rates are fixed and generally range from 12.5% to 15.5% per year based on prevailing market rates and the amount of the down payment made relative to the sales price. PEC has a sales program whereby a 5% interest rate is charged on those sales where the aggregate down payment is at least 50% of the purchase price and the balance is payable in 36 or fewer monthly payments. At August 31, 2001, PEC serviced approximately 22,000 customer receivables related to sales of timeshare 7 interests and land, which receivables had an aggregate outstanding principal balance of $172.5 million, a weighted-average maturity of approximately 7 years and a weighted-average interest rate of 13.2 %. PEC has lines of credit with institutional lenders for the financing of timeshare interest and land receivables of up to an aggregate of $152.0 million. These lines of credit bear interest at variable rates tied to the prime rate and 90-day London Interbank Offering Rate (LIBOR) and are secured by timeshare and land receivables and inventory. At August 31, 2001, an aggregate of $112.9 million was outstanding under such lines of credit and $39.1 million was available for borrowing. PEC periodically sells its timeshare and land receivables to various third party purchasers and uses a portion of the sales proceeds to reduce the outstanding balances of its lines of credit, thereby increasing the borrowing availability under such lines by the amount of prepayment. Such sales have generally resulted in yields to the purchaser less than the weighted-average yield on the sold receivables. The estimated value of this spread is shown on PEC's books as retained interest in receivables sold. Receivables' sales agreements generally provide for: (i) PEC to continue servicing the sold receivables; (ii) PEC to repurchase or replace accounts that have become more than 90 days contractually delinquent; (iii) the maintenance of cash reserve accounts for losses; (iv) certain minimum net worth requirements; and, (v) covenants that generally require PEC to use its best efforts to, among other things, remain the manager of the related resorts, cause the Associations to maintain appropriate insurance and to pay applicable real estate taxes. Performance by PEC on the lines of credit and sales of receivables is guaranteed by the Company. The aggregate principal balance of retained interests in receivables sold by PEC were $15.5 million, $19.6 million and $0 in fiscal 2001, 2000 and 1999, respectively. At August 31, 2001, total sold notes receivable was $52.2 million. PEC was contingently liable to replace or repurchase delinquent receivables related to such sold notes receivable. Delinquencies greater than 60 days have increased in fiscal 2001 to 5.3% from 4.9% in fiscal 2000. PEC charges off or fully reserves all receivables that are more than 90 days delinquent and charges off the receivable when the Company determines that collection is no longer probable. The following table sets forth information with respect to receivables owned and sold that were 60 or more days delinquent as of the dates indicated (thousands of dollars):
August 31 ---------------------------------------------- 2001 2000 1999 -------- -------- -------- 60-day delinquent $ 9,938 $ 8,494 $ 9,153 Total receivables $188,882 $172,907 $151,709 60-day delinquency percentage 5.3% 4.9% 6.0%
The 60-day delinquent amounts include any account that is contractually 60 days delinquent, including those accounts whereby customers are still making payments but have not cured their delinquency status. PEC provides an allowance for cancellations at the time it recognizes revenues from sales of timeshare interests and land. PEC believes, based on its experience and its analysis of economic conditions, that the allowance is adequate to absorb losses on receivables that become uncollectible. Upon the sale of the receivables, the allowance related to those receivables is reduced and the reserve for notes receivable sold with recourse is appropriately increased. Marketing and Sales PEC markets and sells timeshare interests and land through on-site and off- site sales offices. PEC's sales staff receives commissions based on net sales volume. PEC maintains fully-staffed on-site sales offices at its timeshare properties in Las Vegas and Steamboat Springs, Colorado as well as the Las Vegas headquarters, and at its land projects in Nevada and Colorado. Small on-site sales offices staffed with one to two sales associates are maintained in Reno, Nevada; Hawaii; Indian Shores and Orlando, Florida; and Brigantine, New Jersey. PEC also maintains off-site sales offices in West Covina, California; Dallas and Houston, Texas; and Denver, Colorado. PEC's marketing efforts are targeted primarily at tourists and potential tourists meeting its customer profile. Currently, approximately 43.7% of sales are made through the Las Vegas sales offices. As part of its marketing strategy, PEC maintains an internal timeshare interest exchange program. This program enables owners of PEC's timeshare interests to exchange their occupancy right in their home resort for an occupancy right 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. 8 The agreement of sale for a timeshare interest or land may be rescinded within various statutory rescission periods ranging from five to ten days. For land sales made at a location other than the subject property, in addition to the statutory rescission period, the customer may cancel the contract within a specified period, usually five months from the date of purchase, provided that the contract is not in default, the customer has completed a developer-guided inspection of the subject property and thereafter the customer requests the cancellation. Generally, if a customer defaults after all rescission and cancellation periods have expired, all payments are retained by PEC. Seasonality The Company's sales are not significantly affected by seasonality factors. For fiscal 2001, 2000 and 1999, quarterly sales as a percentage of annual sales, for each of the fiscal quarters averaged: Quarter Ended % of Annual Sales ----------------------- ---------------------- November 23.3% February 22.1 May 27.6 August 27.0 ----- 100.0% ===== The quarterly numbers in the preceding table are slightly higher in the third and fourth quarters of the fiscal year as the Company's major sales area in Las Vegas, Nevada, experiences higher tourist activity in these quarters. The Company is not dependent upon any large affinity group of customers whose loss would have a material adverse effect on the Company. Competition The timeshare and real estate industries are highly competitive. Competitors in the timeshare and real estate business include hotels and other timeshare and real estate developers. Certain of the Company's competitors are substantially larger and have more capital and other resources than the Company. PEC's timeshare resorts compete directly with many other such resorts located in Las Vegas, Reno, Honolulu, Atlantic City, Orlando, St. Petersburg/Clearwater, Tampa and Steamboat Springs. In recent years, several major lodging, hospitality and entertainment companies have begun to develop and market timeshare properties. According to ARDA data, in 2001, approximately 31.5% of timeshare resorts were located in the Mountain/Pacific region of the United States, 23.6% in Florida, 12.0% in the Northeast region, 16.5% in the Southeast region and 16.4% in the Central region of the United States. In addition, PEC competes with condominium projects and with traditional hotel accommodations in these areas. Certain of these competing projects and accommodations are larger and more luxurious than PEC's facilities. Government Regulation The Company's timeshare and real estate operations are subject to extensive regulation and licensing requirements by federal, state and local authorities. The following sub-sections summarize the regulations applicable to the Company. Environmental Regulation Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or chemical releases at such property, and may be held liable to a governmental entity or to third parties for property damage, personal injury and investigation and cleanup costs incurred by such parties in connection with the contamination. Such laws typically impose cleanup responsibility and liability without regard to whether the owner knew of or caused the presence of the contaminants, and the liability under such laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The costs of investigation, remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to properly remediate such property, may adversely affect the owner's ability to sell or rent such property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances also may be 9 liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not the facility is owned or operated by such person. In addition, the owner or former owners of a site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site. Timeshare Regulation Nevada Revised Statutes Chapter 119A requires the Company to give each customer a Public Offering Statement that discloses all aspects of the timeshare program, including the terms and conditions of sale, the common facilities, the costs to operate and maintain common facilities, the Company's history and all services and facilities available to the purchasers. Section 514E of the Hawaii Revised Statutes provides for similar information to be provided to all prospective purchasers through the use of the Hawaii Disclosure Statement and Chapter 721 of the Florida Statutes has similar provisions. Section 11000, et seq., of the California Business and Professions Code provides for similar information to be provided to all prospective purchasers through the use of an Out-of-State Timeshare Permit issued by the California Department of Real Estate. Section 45 of the New Jersey Statutes Annotated provides for similar information to be provided to all prospective purchasers through the use of a Public Offering Statement. The Texas Register at 22 Texas Administrative Code, Section 543 provides for similar information to be provided to all prospective purchasers through the use of the Texas Timeshare Disclosure Statement. Title 12, Article 61 of the Colorado Revised Statutes provides for similar information to be provided to all prospective purchasers in their contract of sale or by separate written documents. Nevada and Colorado require a five-day rescission period for all timeshare purchasers. The rescission period required by Hawaii and New Jersey is seven days. The rescission period required by Florida is ten days. The rescission period in California and Texas for out-of-state sales is five days. The Nevada, California, New Jersey, Hawaii, Colorado, Florida and Texas timeshare statutes have stringent restrictions on sales and advertising practices and require the Company to utilize licensed sales personnel. Lending Regulation PEC is subject to various federal lending regulations related to marketing, financing and selling consumer receivables. These federal regulations include: Fair Housing Act, Americans With Disabilities Act, Interstate Land Sales Full Disclosure Act, Truth-In-Lending Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Federal Trade Commission Telemarketing Rule, Federal Communications Commission Telephone Census Protection Act, Federal Trade Commission Act (Unfair or Deceptive Act or Practices) and Fair Debt Collections Practices Act. The Company believes that it has made all required filings with state, city and county authorities and is in material compliance with all applicable federal, state and local regulations. The Company believes that such regulations have not had a material adverse effect on any phase of the Company's operations, including the overall cost of acquiring property. Compliance with or changes in official interpretations of regulations might impose additional compliance costs on the Company that cannot be predicted. Real Estate Regulation The real estate industry is subject to extensive regulation. The Company is subject to compliance with various federal, state and local environmental, zoning and other statutes and regulations regarding the acquisition, subdivision, development and sale of real estate and various aspects of its financing operations. The Interstate Land Sales Full Disclosure Act establishes strict guidelines with respect to the subdivision and sale of land in interstate commerce. The U.S. Department of Housing and Urban Development (HUD) has enforcement powers with respect to this statute. In some instances (e.g., land sales in Huerfano County, Colorado), the Company has been exempt from HUD registration requirements because of the size or number of the subdivided parcels and the limited nature or type of its offerings. The Company must disclose financial information concerning the property, evidence of title, a description of the intended manner of offering, proposed advertising materials and must bear the costs of such registration, which include legal and filing fees. The Company believes that it is in compliance, in all material respects, with all applicable federal, state and local regulations. The Company believes that such regulations have not had a material adverse effect on any phase of its operations. Compliance with future changes in regulations might impose additional compliance costs on the Company that cannot be predicted. 10 Advertising Regulation PEC's marketing and advertising procedures are subject to the Federal Trade Commission Act (Unfair and Deceptive Practices), Federal Trade Commission Telemarketing Rules, Federal Communication Commission Telephone Consumer Protection Act, Fair Housing Act, Equal Credit Opportunity Act and various state consumer protection laws regulating telephone solicitations and the sale of travel and sweepstakes, both in states in which PEC timeshare resorts are located or registered and in states in which it otherwise solicits sales. Employees As of August 31, 2001, PEC had 1,334 employees, of whom 1,115 were full- time employees and 219 were part-time employees. Full-time employees were comprised of the following: 652 sales and marketing officers and personnel, 157 general and administrative personnel, 293 hotel personnel and 13 utility company personnel. None of PEC's employees are represented by a collective bargaining unit. The Company believes that its relations with its employees are satisfactory. Item 2. Properties At August 31, 2001, the Company's unsold inventory consisted of: 103 residential, commercial and industrial lots; 302 recreational land parcels; and, 7,396 timeshare interests. 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 November 2000, the Company entered into a sale/leaseback transaction for this building. The Company signed a master lease for the entire building for an initial term of 5 1/2 years with one 4 1/2 year renewal option. The current monthly rent is $30,450. In October 2000, the Company entered into a sale/leaseback transaction for an office building located at 1500 E. Tropicana, Las Vegas, Nevada. This building has approximately 57,500 square feet of office space, of which the Company occupies approximately 35,800 square feet. Of the remaining space, approximately 9,500 square feet is leased to tenants on a short-term basis and approximately 12,200 square feet is unoccupied. The Company signed a master lease for the entire building for a ten-year term with two five-year renewal options. The current monthly rent is $58,308. The Company leases an executive office at 1125 N. E. 125th Street in North Miami, Florida, comprised of approximately 1,600 square feet, on a month-to- month basis. The Company leases various other facilities on a long-term, short-term or month-to-month basis for off-site marketing and sales offices. The Company has leased sales offices in West Covina, California; Denver, Colorado; Dallas and Houston, Texas; and, marketing locations in close proximity of those offices and its Las Vegas sales offices. Item 3. Legal Proceedings On August 27, 1998, an action was filed in Nevada District Court, County of Clark, No. A 392585, by Robert and Jocelyne Henry, husband and wife individually and on behalf of all others similarly situated against PEC, PEC's wholly-owned subsidiary, Central Nevada Utilities Company (CNUC), and certain other defendants. The plaintiff's complaint asked for class action relief claiming that PEC and CNUC were guilty of collecting certain betterment fees and not providing associated sewer and water lines. The court determined that plaintiffs had not properly pursued their administrative remedies with the Nevada Public Utilities Commission (PUC) and dismissed plaintiffs' complaint, as amended, without prejudice. Notwithstanding plaintiffs' appeal of the dismissal, plaintiffs filed for administrative relief with the PUC. On November 17, 1999, the PUC found that CNUC, the only defendant over which the PUC has jurisdiction, was not in violation of any duties owed the plaintiffs or otherwise in violation of CNUC's approved tariffs. Subsequent to the PUC's decision, plaintiffs voluntarily dismissed their appeal. On May 4, 2000, plaintiffs re-filed their complaint in Nevada District Court, naming all of the above parties with the exception of CNUC. The May 4, 2000 complaint is virtually identical to the amended complaint discussed above and asserts six claims for relief against defendants: breach of deed restrictions, two claims for breach of contract, unjust enrichment, consumer fraud in violation of NRS 41.600 and violation of NRS 119.220, with all claims arising out of the alleged 11 failure to provide water and sewer utilities to the purchasers of land in the subdivisions commonly known as Calvada Valley North and Calvada Meadows located in Nye County, Nevada. On September 8, 2000, the Company filed a motion to dismiss each of the claims made in the complaint. The Court granted the motion to dismiss with respect to Frederick H. Conte in his individual capacity and denied the motion in all other respects in an order entered on December 19, 2000. Plaintiffs then filed a motion to certify class, which defendants opposed. On September 5, 2001, the Court held that "as to Classes A and B, the showings required under NRCP 23(a) and (b)(2) have been made to the extent injunctive relief / specific performance of the subject alleged contractual obligations is sought, and the Court will certify Classes A and B to such extent only. In all other respects, the Court does not deem certification to be appropriate as to both Classes A and B". As a result of this decision, the Court refused to certify a class for the claims of: breach of contract, unjust enrichment, consumer fraud in violation of NRS 41.600 and violation of NRS, 119.220. Accordingly, the defendants are no longer subject to class claims for monetary damages. The defendants only potential liability is for the construction of water and sewer facilities. The case is now beginning the discovery phase of the litigation. The case is scheduled for a jury trial on August 13, 2002. In the general course of business the Company and PEC, at various times, have each been named in other lawsuits. The Company believes that it has meritorious defenses to these lawsuits and that resolution of these matters will not have a material adverse effect on the business or financial condition of the Company. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of the Company's security holders during the fourth quarter of fiscal 2001. PART II Item 5. Market for the Registrant's Common Equity and Related Security Holder Matters Market Information The Company's common stock is traded in the over-the-counter market and since April 1, 1994, prices have been quoted on the Nasdaq National Market under the symbol MEGO. Prior to April 1, 1994, the common stock was quoted on the Nasdaq Small Cap Market under the symbol MEGO and, prior to May 1, 1994, was traded on the Boston Stock Exchange under the symbol MGO. The following table sets forth the high and low sales prices of the common stock as reported on the Nasdaq National Market for the periods presented: High Low ----------- ----------- Fiscal Year 2000: - ----------------- First Quarter $4.88 $3.56 Second Quarter 5.06 3.63 Third Quarter 4.22 3.63 Fourth Quarter 4.63 3.88 Fiscal Year 2001: - ----------------- First Quarter 5.00 4.31 Second Quarter 5.06 4.19 Third Quarter 4.84 3.70 Fourth Quarter 4.20 3.60 Fiscal Year 2002: - ----------------- First Quarter (through November 16, 2001) 4.41 3.85 As of November 16, 2001, there were 1,932 holders of record of the 3,500,557 outstanding shares of common stock. The closing sales price for the common stock on November 16, 2001 was $3.99. The Company did not pay any cash dividends on its common stock during fiscal 2001. The Company intends to retain future earnings for the operation and expansion of its business and does not currently anticipate paying cash 12 dividends on its common stock. Any future determination as to the payment of such cash dividends would depend on a number of factors including future earnings, results of operations, capital requirements, the Company's financial condition and any restrictions under credit agreements existing from time to time, as well as such other factors as the Board of Directors might deem relevant. No assurance can be given that the Company will pay any dividends in the future. Item 6. Selected Consolidated Financial Data The selected financial data set forth below have been derived from the Consolidated Financial Statements of the Company and its subsidiaries. The Consolidated Financial Statements as of August 31, 2001 and for the year then ended have been audited by Ernst & Young LLP, independent certified public accountants, and are included elsewhere herein. The Consolidated Financial Statements as of August 31, 2000 and 1999 and for each of the two years in the period ended August 31, 2000 have been audited by Deloitte & Touche LLP, independent auditors, and are elsewhere included herein. The Consolidated Financial Statements as of August 31, 1998 and 1997, and for the years ended August 31, 1998 and 1997 have been audited by Deloitte & Touche LLP, independent auditors, and are not included herein. Certain prior period amounts have been reclassified to conform prior years with the current year presentation. The selected financial information set forth below should be read in conjunction with the Consolidated Financial Statements, the related notes thereto and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein (thousands of dollars, except per share amounts):
Consolidated Selected Financial Data (1) (2) - -------------------------------------------- For the Years Ended August 31 ------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------------- ------------- ------------- ------------- ------------- Income statement data: Revenues of continuing operations: - ---------------------------------- Timeshare interest sales, net $ 53,974 $ 49,062 $ 41,262 $ 37,713 $ 32,253 Land sales, net 21,687 19,624 15,979 13,812 16,626 Interest income 14,977 12,430 9,310 7,161 7,168 Financial income 2,995 1,153 1,184 3,304 2,922 Gain on sale of notes receivable 668 635 - 656 2,013 Gain on sale of other investments and other assets 124 1,857 513 - - Other (3) 5,981 5,734 6,254 5,944 6,514 ------------- ------------- ------------- ------------- ------------- Total revenues of continuing operations 100,406 90,495 74,502 68,590 67,496 ------------- ------------- ------------- ------------- ------------- Costs and expenses of continuing operations: - -------------------------------------------- Cost of sales (4) 15,876 15,266 13,510 11,789 10,477 Interest expense 12,214 12,468 9,270 7,850 8,458 Marketing and sales 48,781 39,769 35,291 34,167 34,078 Depreciation 1,412 1,827 1,878 2,245 1,964 General and administrative 18,942 17,746 14,333 17,736 17,175 ------------- ------------- ------------- ------------- ------------- Total costs and expenses of continuing operations 97,225 87,076 74,282 73,787 72,152 ------------- ------------- ------------- ------------- ------------- Income (loss) from continuing operations before income taxes 3,181 3,419 220 (5,197) (4,656) Income taxes (benefit) (656) (530) (830) (1,968) (12,662) ------------- ------------- ------------- ------------- ------------- Income (loss) from continuing operations 3,837 3,949 1,050 (3,229) 8,006 Income from discontinued operations, net of income taxes and minority interest (5) - - - - 11,334 ------------- ------------- ------------- ------------- ------------- Net income (loss) applicable to common stock $ 3,837 $ 3,949 $ 1,050 $ (3,229) $ 19,340 ============= ============= ============= ============= =============
13 Per Share Data (6) (7): Basic: - ----- Income (loss) from continuing operations $ 1.10 $ 1.13 $ 0.30 $ (0.92) $ 2.58 Income from discontinued operations - - - - 3.64 ------------- ------------- ------------- ------------- ------------- Net income (loss) applicable to common stock $ 1.10 $ 1.13 $ 0.30 $ (0.92) $ 6.22 ============= ============= ============= ============= ============= Weighted-average number of common shares 3,500,557 3,500,557 3,500,557 3,500,557 3,108,510 ============= ============= ============= ============= ============= Diluted (8) - ----------- Income (loss) from continuing operations $ 1.10 $ 1.13 $ 0.30 $ (0.92) $ 2.46 Income from discontinued operations - - - - 3.48 ------------- ------------- ------------- ------------- ------------- Net income (loss) applicable to common stock $ 1.10 $ 1.13 $ 0.30 $ (0.92) 5.94 ============= ============= ============= ============= ============= Weighted-average number of common shares and common share equivalents outstanding 3,500,557 3,500,557 3,500,557 3,500,557 3,253,718 ============= ============= ============= ============= ============= Balance Sheet Data: Total assets $ 185,828 $ 168,592 $ 158,961 $ 142,076 $ 178,303 Net assets of discontinued operations - - - - 53,276 Total liabilities excluding subordinated debt 153,391 138,524 132,650 117,049 100,745 Subordinated debt (9) 4,211 4,286 4,478 4,348 4,321 Total stockholder's equity 28,226 25,782 21,833 20,679 73,237
(1) On September 2, 1997, the Company distributed all of its 10 million shares of common stock of its former subsidiary, Mego Mortgage Corporation (MMC) to the Company's shareholders in a tax-free Spin-off. The operations of MMC have been reclassified as discontinued operations and the fiscal 1997 prior years' Consolidated Financial Statements of the Company included herein reflect the reclassification accordingly. (2) The income statement data, per share data and balance sheet data herein for the five fiscal years are not necessarily indicative of the results to be expected in the future. Certain reclassifications have been made to conform prior years with the current presentation. (3) Other revenues include incidental operations' income, management fees from Owners' Associations and other miscellaneous items. (4) Cost of sales includes product costs of sales of timeshare interests and land, and incidental operations' expenses. (5) Income from discontinued operations, net of taxes of $9.1 million and minority interest of $2.4 million, includes the net income from MMC, after tax, reduced by the related minority interests and certain general and administrative expense related to the discontinued operations. (6) All share and per share references have been restated to reflect the one for six reverse split of the Company's common stock, effective September 9, 1999. (7) No cash dividends per common share were declared during the fiscal years included herein. (8) The incremental shares from assumed conversions are not included in computing the diluted per share amounts for fiscal 1998 because the Company incurred a net loss and the effect would be anti-dilutive. The incremental shares from assumed conversions are not included in computing the diluted per share amounts for fiscal 2001, 2000 and 1999 because the exercise price of the options and warrants exceeded the average market price of the common shares during these fiscal years. (9) In payment of the exercise price of $4,250,000 of warrants exercised for 166,666 shares of the Company's common stock by the Assignors, the subordinated debt due to the Assignors was reduced by that amount in August 1997. See Note 10 of Notes to Consolidated Financial Statements and "Item 13. Certain Relationships and Related Transactions." 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Special Cautionary Notice Regarding Forward-Looking Statements The following Management's Discussion and Analysis of Financial Condition and Results of Operations and the foregoing Business sections contain certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made by and information currently available to management. Such forward-looking statements include, without limitation, the Company's expectations and estimates as to the Company's business operations, including the introduction of new timeshare and land sales programs and future financial performance, including growth in revenues and net income and cash flows. In addition, included herein the words "anticipates," "believes," "estimates," "expects," "plans," "intends" and similar expressions, as they relate to the Company or its management, are intended to identify forward-looking statements. Such statements reflect the current views of the Company's management with respect to future events and are subject to certain risks, uncertainties and assumptions. The potential losses to the Company stemming from the economic downturn in the tourism industry following the September 11, 2001 terrorist attacks are expected to have some adverse impact on the operating results of the Company's first fiscal quarter, and possibly thereafter. The Company has a mixture of customers who fly and drive into the various resort locations. At this time, there can be no assurances that this economic downturn due to a decrease in travel and anxiety about possible future terrorist attacks will not extend to future periods. In addition, the Company specifically advises readers that the factors listed under the caption "Liquidity and Capital Resources" could cause actual results to differ materially from those expressed in any forward-looking statement. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements, including the notes thereto, contained elsewhere herein. General The business of the Company is primarily the marketing, financing and sale of timeshare interests, retail lots and land parcels, servicing the related receivables, and operating and managing timeshare properties. PEC - --- PEC recognizes revenue primarily from sales of timeshare interests and land sales in resort areas, interest income, gain on sale of receivables, financial income from servicing the related receivables and management fees from operating and managing timeshare properties. PEC periodically sells its consumer receivables while generally retaining the servicing rights. Revenue from sales of timeshare interests and land is recognized after the requisite rescission period has expired and at such time as the purchaser has paid at least 10% of the sales price for sales of timeshare interests and 20% of the sales price for land sales. Land sales typically meet these requirements within six to ten months of closing, and sales of timeshare interests typically meet these requirements at the time of sale. The sales price, less a provision for cancellation, is recorded as revenue and the allocated cost related to such net revenue of the timeshare interest or land parcel is recorded as expense in the period that revenue is recognized. When revenue related to land sales is recognized, the portion of the sales price attributable to uncompleted required improvements, if any, is deferred. Notes receivable with payment delinquencies of 90 days or more have been considered in determining the allowance for cancellations. Cancellations occur when the note receivable is determined to be uncollectible and the related collateral, if any, has been recovered. Cancellation of a note receivable in the quarter the revenue is recognized is deemed to not represent a sale and is accounted for as a reversal of the revenue with an adjustment to cost of sales. Cancellation of a note receivable subsequent to the quarter the revenue was recognized is charged to the allowance for cancellations. The Company generally sells its notes receivable at par value. Proceeds from the sale of notes receivable sold with recourse were $14,858,000, $19,594,000 and $0 for the years ended August 31, 2001, 2000 and 1999, 15 respectively. When the Company sells notes receivable, it retains certain participation in the cash flows of the notes receivable sold and generally retains the associated servicing rights. The sales are generally subject to limited recourse provisions as provided in the respective notes receivable sales agreements. Under these agreements, the Company is generally obligated to replace or repurchase accounts that become over 60 days delinquent or are otherwise subject to replacement or repurchase in either cash or receivables. Reserve for notes receivable sold with recourse represents the Company's estimate of losses to be incurred in connection with the recourse provisions of the sales agreements and is shown separately as a liability in the Company's Balance Sheet. Gain on sale of receivables depends in part on the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the retained interests based on their relative fair value at the date of transfer. To obtain fair values on the retained interests (both at the point of the related receivable sale and periodically thereafter), the Company generally estimates fair value based on the present value of future expected cash flows estimated using management's best estimates of the key assumptions-- default rates, rates of prepayment, loss reserve rates and discount rates commensurate with the risks involved. The Company's retained interests in receivables sold are carried at fair market value as either derivatives or available-for-sale investments. Unrealized holding gains or losses on the retained interests are included in earnings for those transactions structured so that the Company, through its retained interest, receives fixed interest amounts and pays the buyer variable amounts based on a floating interest rate index, as the resulting financial interest meets the definition of a derivative. Unrealized holding gains, if any, on retained interests in notes receivable sold not meeting the definition of a derivative would be included in shareholders' equity, net of income taxes. Losses in such retained interests are reflected in earnings. In September 2000, the Company sold to a financial institution $9.5 million of land receivables at par. The Company recognized a $286,000 gain on the sale of the receivables and recorded a $273,000 retained interest in notes receivable sold, which is included in Other assets, and a $625,000 recourse obligation which is included in Reserve for notes receivable sold with recourse on the Consolidated Balance Sheet. In August 2001, the Company sold to a financial institution $5.4 million of timeshare interest receivables at par. The Company recognized a $382,000 gain on the sale of the receivables and recorded a $356,000 retained interest in notes receivable sold which is included in Other assets, and a $711,000 recourse obligation which is included in Reserve for notes receivable sold with recourse on the Consolidated Balance Sheet. Provision for cancellations relating to notes receivable is recorded as expense in amounts sufficient to maintain the allowance at a level considered adequate to provide for anticipated losses resulting from customers' failure to fulfill their obligations under the terms of their notes receivable. PEC records provision for cancellations at the time revenue is recognized, based on historical experience and current economic factors. The related allowance for cancellations represents PEC's estimate of the amount of the future credit losses to be incurred over the lives of the notes receivable. The allowance for cancellations is reduced by actual cancellations experienced, including cancellations related to previously sold notes receivable which were reacquired pursuant to the recourse obligations discussed herein. Such allowance is also reduced to establish the separate liability for reserve for notes receivable sold with recourse. PEC's judgment in determining the adequacy of this allowance is based upon a periodic review of its portfolio of notes receivable. These reviews take into consideration changes in the nature and level of the portfolio, historical cancellation experience, current economic conditions which affect the purchasers' ability to pay, changes in collateral values, estimated value of inventory that may be reacquired and overall portfolio quality. Changes in the allowance as a result of such reviews are included in the provision for cancellations. Recourse to PEC on sales of notes receivable is governed by the agreements between the purchasers and PEC. The reserve for notes receivable sold with recourse represents PEC's estimate of the fair value of future credit losses to be incurred over the lives of the notes receivable. A liability for reserve for notes receivable sold with recourse is established at the time of each sale based upon PEC's estimate of the fair value of the future recourse obligation under each agreement of sale. Fees for servicing notes receivable originated 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. Financial income includes changes in the fair value of retained interests sold and interest income accreted on such interests. Interest income represents the interest earned on loans held in PEC's portfolio, the accretion of the discount on the retained interests in receivables sold and interest on cash funds. 16 Total costs and expenses consist primarily of marketing and sales expenses, general and administrative expenses, direct costs of sales of timeshare interests and land, depreciation and amortization and interest expense. Marketing and sales costs directly attributable to unrecognized sales are accounted for as deferred selling costs until such time as the sale is recognized. The Company incurs a portion of operating expenses of the timeshare Associations based on ownership of unsold timeshare interests at each of the respective timeshare properties. These costs are referred to as "association assessments" or "maintenance payments", and are included in Costs and Expenses in the Consolidated Income Statements under the caption of General and administrative. Management fees received from the Associations are included in Revenues in the Consolidated Income Statements under the caption of Other. These fees are deemed not to be the result of a separate revenue generating line of business since the management activities to which they relate are part of the support of the timeshare business and the fees are actually a reduction of the expense the Company incurs to fulfill obligations regarding timeshares. The following table sets forth certain data regarding notes receivable additions and servicing through sales of timeshare interests and land:
For the Years Ended August 31 ------------------------------------------- 2001 2000 ------------------- ------------------- Principal balance of notes receivable additions (in thousands) $ 85,821 $ 82,388 =========== =========== Number of notes receivable additions 7,792 7,552 =========== =========== Notes receivable serviced at end of period (in thousands) $ 172,485 $ 152,990 =========== ===========
Land sales as of August 31, 2001 exclude $20.2 million of sales not yet recognized under generally accepted accounting principles (GAAP) since the requisite payment amounts have not yet been received or the respective rescission periods have not yet expired. Of the $20.2 million unrecognized land sales, the Company estimates that it will ultimately recognize $16.5 million of revenues, which would be reduced by a related provision for cancellations of $1.6 million, estimated selling costs of $4.6 million and cost of sales of $2.5 million, for an estimated net profit of $7.8 million. Real Estate Risk Real estate development involves significant risks, including risks that suitable properties will not be available at reasonable prices, that acquisition, development and construction financing may not be available on favorable terms or at all, that infrastructure and construction costs may exceed original estimates, that construction may not be completed on schedule, and that upon completion of construction and improvements, properties may not be sold on favorable terms or at all. In addition, PEC's timeshare activities, as well as its ownership, improvement, subdivision and sale of land, are subject to comprehensive federal, state and local laws regulating environmental and health matters, protection of endangered species, water supplies, zoning, land development, land use, building design and construction and other matters. Such laws and difficulties in obtaining, or the failure to obtain, the requisite licenses, permits, allocations, authorizations and other entitlements pursuant to such laws can adversely impact the development and completion of PEC's projects. The enactment of "slow-growth" or "no-growth" initiatives in any area where PEC sells land or timeshare interests could also delay or preclude entirely the development of such properties. Results of Operations Year Ended August 31, 2001 Compared to Year Ended August 31, 2000 Total revenues for the Company increased 11.0% or $9.9 million to $100.4 million during fiscal 2001 from $90.5 million during fiscal 2000 primarily due to: a net increase of $7.0 million in timeshare and land sales to $75.7 million in fiscal 2001 from $68.7 million in fiscal 2000 (net timeshare sales increased by $4.9 million and net land sales increased by $2.1 million); an increase of $2.6 million in interest income to $15.0 million in fiscal 2001 from $12.4 million in fiscal 2000; and, an increase of $1.8 million in financial income to $3.0 million in fiscal 2001 from $1.2 million in fiscal 2000. This was partially offset by a decrease of $1.7 million in gains on sale of assets and other investments from $1.9 million in fiscal 2000 to $124,000 in fiscal 2001. Gross sales of timeshare interests increased to $61.8 million in fiscal 2001 from $55.3 million in fiscal 2000, an increase of 11.6%. Net sales of timeshare interests increased to $54.0 million from $49.1 million, an increase of 10.0%. This increase is primarily attributable to a comparative increase in unit sales volume and also to certain price increases. 17 The provision for cancellations represented 12.6% and 11.3%, respectively, of gross sales of timeshare interests for fiscal 2001 and 2000. The percentage increase in the provision for cancellations for timeshare interests was primarily due to an increase in the fiscal 2001 provision, as consideration was given to negative economic and industry conditions, and their potential effect on future allowance requirements, and a downward adjustment recorded during the prior fiscal year based on a review of the reserve adequacy at that time. The number of cancellations during fiscal 2001 was 968 compared to 1,048 during fiscal 2000. The number of exchanges, generally for timeshare interests, which are primarily made for upgrades, was 1,819 during fiscal 2001 compared to 1,955 during fiscal 2000. Gross sales of land increased to $23.5 million in fiscal 2001 from $20.7 million in fiscal 2000, an increase of 13.6%. Net sales of land increased to $21.7 million in fiscal 2001 from $19.6 million in fiscal 2000 an increase of 10.5%. The provision for cancellations increased to 7.9% for the year ended August 31, 2001 from 5.3% of gross sales of land for the year ended August 31, 2000, primarily due to an upward adjustment recorded during fiscal 2001 and an increase in the fiscal 2001 provision percentage, as consideration was given to negative economic and industry conditions and their potential effect on future allowance requirements, and a downward adjustment recorded during fiscal 2000 based on a review of reserve adequacy at that time. Gain on sale of investments and other assets of $124,000 was recorded during the fiscal 2001 compared to a gain of $1.9 million recorded during fiscal 2000. In fiscal 2001, the Company sold its two office buildings in sale//leaseback transactions and is recognizing the gain over the term of the leases. In fiscal 2000, the Company sold its golf courses and several commercial non-core land parcels in Pahrump Valley, Nevada. Financial income increased to $3.0 million from $1.2 million. The increase was primarily due to the comparative increased volume of sold loans and the increase in interest rate spread, including an increase in estimated fair value of retained interests in receivables sold, on those sold loan portfolios with a variable pass-through interest rate. Interest income increased to $15.0 million in fiscal 2001 from $12.4 million in fiscal 2000, an increase of 20.5% primarily due to increased average notes receivable balances for the current period. Total costs and expenses for the Company increased to $97.2 million for fiscal 2001 from $87.1 million for fiscal 2000, an increase of 11.7%. The increase resulted primarily from: an increase of 5.0% in direct product costs of timeshare interest and land sales to $14.2 million from $13.6 million, an increase of 22.7% in marketing and sales to $48.8 million from $39.8 million, and, an increase of $1.2 million, or 6.7%, in general and administrative expenses. The increase in direct costs of timeshare interest and land sales is generally attributable to higher net timeshare sales in 2001. The increase in marketing and sales expenses is due primarily to the higher gross sales, new sales offices and general marketing increases related to a competitive sales environment. The increase in general and administrative expenses is due primarily to the increase in recording and filing fees, escrow costs and credit card costs due to increase in volume, and the inclusion of rent expense related to the sale and leaseback of the two office buildings in fiscal 2001, the expense for which was formerly reported in Interest and Depreciation expense. These increases were partially offset on a comparative basis as the fiscal 2000 expenses included reserves for the Company's guaranty of office and equipment leases related to a previously affiliated company. Interest expense decreased $254,000 to $12.2 million from $12.5 million, a decrease of 2.0%. While the average loan balances were higher in fiscal 2001, the Company benefited from the declining interest rate market on its variable debt, net of the interest rate swaps. As a percentage of gross sales of timeshare interests and land, marketing and sales expenses related thereto increased to 57.2% in fiscal 2001 from 52.3% in fiscal 2000. Cost of sales was 16.7% in fiscal 2001 and 17.8% in fiscal 2000. Sales prices of timeshare interests are typically lower than those of land, while selling costs per sale, other than commissions, are approximately the same for timeshare interests and land; accordingly, the Company generally realizes lower profit margins from sales of timeshare interests than from sales of land. Pretax income of $3.2 million was recorded in fiscal 2001 compared to pretax income of $3.4 million in fiscal 2000. The income tax benefit for fiscal 2001 was $656,000 compared to the income tax benefit of $530,000 for fiscal 2000. The benefit for both fiscal 2001 and 2000 was primarily due to the application of net operating loss (NOL) carryforwards and changes in certain income tax liability reserves as a result of facts and circumstances determined in an ongoing review and analysis of the Company's federal income tax liability. See Note 11 of Notes to Consolidated Financial Statements. 18 Net income applicable to common stock amounted to $3.8 million during fiscal 2001 compared to net income of $3.9 million during fiscal 2000, primarily due to the foregoing reported results. Year Ended August 31, 2000 Compared to Year Ended August 31, 1999 Total revenues for the Company increased 21.5% or $16.0 million to $90.5 million during fiscal 2000 from $74.5 million during fiscal 1999 primarily due to: a net increase of $11.5 million in timeshare and land sales to $68.7 million in fiscal 2000 from $57.2 million in fiscal 1999 (net timeshare sales increased by $7.8 million and net land sales increased by $3.7 million); an increase in interest income to $12.4 million in fiscal 2000 from $9.3 million in fiscal 1999; and, a higher gain on sale of notes receivable and sale of investments and other assets. Gross sales of timeshare interests increased to $55.3 million in fiscal 2000 from $45.8 million in fiscal 1999, an increase of 20.7%. Net sales of timeshare interests increased to $49.1 million from $41.2 million, an increase of 18.9%. This increase is primarily attributable to a favorable mix as a comparatively greater number of the high-priced units were sold during fiscal 2000, and also to certain price increases. The provision for cancellations represented 11.3% and 10.0%, respectively, of gross sales of timeshare interests for fiscal 2000 and 1999. The percentage increase in the provision for cancellations for timeshare interests was primarily due to a larger downward adjustment recorded during the prior fiscal year based on a review of the reserve adequacy at that time and cancellation experience during fiscal 2000. The number of cancellations during fiscal 2000 was 1,048 compared to 875 during fiscal 1999. The number of exchanges, generally for timeshare interests, which are primarily made for upgrades, was 1,955 during fiscal 2000 compared to 2,757 during fiscal 1999. Gross sales of land increased to $20.7 million in fiscal 2000 from $17.0 million in fiscal 1999, an increase of 21.6%. Net sales of land increased to $19.6 million in fiscal 2000 from $16.0 million in fiscal 1999 an increase of 22.8%. The provision for cancellations decreased to 5.3% for the year ended August 31, 2000 from 6.2% of gross sales of land for the year ended August 31, 1999, primarily due to a downward adjustment recorded during fiscal 2000 based on a review of reserve adequacy. Gain on sale of notes receivable and investments of $2.5 million was recorded during the fiscal 2000 as the Company, in addition to notes receivable sales in the normal course of business, sold its golf courses and several commercial non-core land parcels in Pahrump Valley, Nevada. This is compared to a gain of $513,000 recorded during fiscal 1999 as the Company sold a parcel of land in Pahrump Valley, Nevada. Interest income increased to $12.4 million in fiscal 2000 from $9.3 million in fiscal 1999, an increase of 33.5%, primarily due to increased average notes receivable balances for the current period. Total costs and expenses for the Company increased to $87.1 million for fiscal 2000 from $74.3 million for fiscal 1999, an increase of 17.2%. The increase resulted primarily from: an increase in direct product costs of timeshare interest sales to $10.5 million from $8.5 million, an increase of 23.3%; an increase in marketing and sales to $39.8 million from $35.3 million, an increase of 12.7%; an increase in interest expense to $12.5 million from $9.3 million, an increase of 34.5%; and, an increase of $3.4 million, or 23.8%, in general and administrative expenses. The increase in direct costs of timeshare sales is directly attributable to higher net timeshare sales in 2000 and to the higher costs to develop new timeshare inventory. The increase in marketing and sales expenses is due primarily to the higher gross sales; however, as noted below, the increase in dollars was accompanied by a related lower percentage of marketing and sales expenses. The increase in interest expense is due to the increase in the average outstanding balance of notes and contracts payable. The increase in general and administrative expenses is due primarily to: increased sales volume; the increase in escrow costs related to the increased sales volume; a net increase in maintenance fees paid to Owner Associations by PEC; an increase in executive incentive plan compensation, which is directly related to the pretax income increase; the full resumption of payment of Directors' fees; and, reserves for the Company's guaranty of office and equipment leases related to a previously affiliated company. As a percentage of gross sales of timeshare interests and land, marketing and sales expenses related thereto decreased to 52.3% in fiscal 2000 from 56.1% in fiscal 1999. Cost of sales was 17.8% in fiscal 2000 and 17.9% in fiscal 1999. Sales prices of timeshare interests are typically lower than those of land, while selling costs per sale, other than commissions, are approximately the same in amount for timeshare interests and land; accordingly, the Company generally realizes lower profit margins from sales of timeshare interests than from sales of land. Subsequent to the first quarter of fiscal 1999, the Company restructured its marketing and sales programs, which 19 restructuring included the closing of unprofitable sales locations, the elimination of certain marketing programs and the layoff of related personnel. Pretax income of $3.4 million was recorded in fiscal 2000 compared to pretax income of $220,000 in fiscal 1999. The income tax benefit for fiscal 2000 was $530,000 compared to the income tax benefit of $830,000 for fiscal 1999. The benefit for both fiscal 2000 and 1999 was primarily due to the application of net operating loss (NOL) carryforwards and changes in certain income tax liability reserves as a result of facts and circumstances determined in an ongoing review and analysis of the Company's federal income tax liability. Net income applicable to common stock amounted to $3.9 million during fiscal 2000 compared to net income of $1.1 million during fiscal 1999, primarily due to the foregoing reported results. Liquidity and Capital Resources Cash and cash equivalents for the Company were $1.9 million at August 31, 2001 compared to $1.1 million at August 31, 2000. The fluctuation in this account is primarily due to the timing of the Company's fundings, which occur in the normal course of business and the increase in restricted cash required by lenders as loans were sold. 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, payments of marketing and sales expenses in connection with sales of timeshare interests and land and payments of income taxes to Mego Financial. Marketing and sales expenses payable by PEC in connection with sales of timeshare interests and land typically exceed the down payments received at the time of sale; as a result, such sales generate cash shortfalls. The cash shortfalls and PEC's other cash requirements are funded primarily through advances under PEC's lines of credit in the aggregate amount of $152.0 million, sales of receivables and cash flow from operations. At August 31, 2001, there were no commitments for material capital expenditures. At August 31, 2001, PEC had $152.0 million in lines of credit with institutional lenders for the financing of receivables in connection with sales of timeshare interests and land and the acquisition of timeshare properties and land. These lines of credit bear interest at variable rates tied to the prime rate and 90-day London Interbank Offering Rate (LIBOR) and are secured by timeshare and land receivables and inventory. At August 31, 2001, an aggregate of $112.9 million was outstanding under such lines of credit, and $39.1 million was available for borrowing. Under the terms of these lines of credit, PEC may, depending upon the terms and conditions of the respective line of credit, borrow 65% to 90% of the balances of the pledged timeshare and land receivables. PEC is required to comply with certain covenants under these agreements, which, among other things, require PEC to meet certain minimum tangible net worth requirements. The most stringent of such requirements provides that PEC maintains a minimum tangible net worth of $27.5 million. At August 31, 2001, PEC's tangible net worth was $33.7 million. Summarized lines of credit information and accompanying notes relating to these lines of credit outstanding at August 31, 2001, consist of the following (thousands of dollars):
Outstanding Borrowing Maximum Balance at Borrowing Revolving August 31, 2001 Amounts Expiration Date (a) Maturity Date (a) Interest Rate - --------------------- ----------------- ------------------------ -------------------- ------------------------- $ 57,418 $ 65,000 (b) December 31, 2001 Various Prime + 2.0 - 2.25% 24,829 35,000 (c) December 1, 2002 Various Prime + 2.0 - 3% 27,950 30,000 (d) April 30, 2003 Various Libor + 4.0 - 4.25% 245 5,000 (e) February 4, 2002 February 6, 2006 Prime + 1.0% 987 15,000 (f) August 8, 2004 August 8, 2004 Prime + 2.5% 1,489 1,972 (g) N/A July 31, 2003 Prime + 2.25% ------------ ------------ $ 112,918 $ 151,972 ============ ============
20 (a) As it has typically done in the past, management expects to extend the Revolving Expiration Date and Maturity Date on similar terms. When the Revolving Expiration Date expires as shown, the loans convert to term loans with maturities as stated or extended. (b) Covenants includes PEC's requirement to maintain a minimum tangible net worth of $25 million; PEC's requirement not to exceed a ratio of 4:1 of consolidated total liabilities to consolidated tangible net worth; PEC's requirement to maintain a minimum net processed sales for each fiscal quarter; and, PEC's requirement to maintain a maximum percentage of costs and expenses for Marketing and sales and General and administrative expenses relating to net processed sales for each rolling 12-month period. The maximum percentage related to costs and expenses referred to above has been exceeded in the last three quarters. This does not constitute an Event of Default under this loan agreement, or this line of credit; however, it gives the lender the option to suspend advances to PEC under this line of credit. The lender has not elected to exercise this option, has continued to make regular advances and has informed PEC verbally that it intends to continue such advances. At August 31, 2001, $55.4 million of loans secured by receivables were outstanding related to financings at prime plus 2%, of which $24.3 million of loans secured by land receivables mature May 15, 2010 and $31.1 million of loans secured by timeshare receivables mature May 15, 2007. The outstanding borrowing amount includes a real estate loan with an outstanding balance of $523,000 maturing December 31, 2001, bearing interest at prime plus 2.25%. The remaining Acquisition and Development (A&D) loans, receivables loans and a resort lobby loan outstanding of $1.5 million are at prime plus 2% and mature December 31, 2001. Negotiations are currently under way for extensions of the A&D, real estate and lobby loans. (c) Covenants include PEC's requirement to maintain a minimum tangible net worth of $25 million during the life of the loan. These credit lines include available financing for A&D and receivables. At August 31, 2001, $4.8 million was outstanding under the A&D loan, which matures on February 28, 2004, and $14.5 million was outstanding under the receivables loan, which matures on June 30, 2004. There also are two working capital loans: $2.4 million at prime plus 3% which expires December 31, 2001, and $3.2 million at prime plus 2%, which expires April 1, 2005, and is secured by inventory. (d) Covenants include PEC's requirement to maintain a minimum tangible net worth of $25 million. These credit lines include available financings for A&D and receivables. At August 31, 2001, $2.5 million was outstanding under the A&D loans, which have a maturity date of April 30, 2003 and bear interest at the 90-day LIBOR plus 4%. The available receivable financings, of which $25.5 million was outstanding at August 31, 2001, are at 90-day LIBOR plus 4% and have a maturity date of March 30, 2006. (e) Covenants include PEC's requirement to maintain a minimum tangible net worth of $20 million. This is a receivables line, which bears interest at prime plus 1% and matures on February 4, 2002. (f) Covenants include PEC's requirement to maintain a minimum tangible net worth of $27.5 million. This is a receivables line, which bears interest at prime plus 2.5% and matures on August 8, 2004. (g) Covenants include PEC's requirement to maintain a minimum tangible net worth of $25 million. A schedule of the cash shortfall arising from recognized and unrecognized sales for the periods indicated is set forth below (thousands of dollars):
For the years ended ------------------------------------------ 2001 2000 1999 ------------ ------------ ------------ Marketing and selling expenses attributable to recognized and unrecognized sales $ 46,514 $ 40,717 $ 35,856 Less: Down payments (13,486) (12,280) (12,452) ------------ ------------ ------------ Cash Shortfall $ 33,028 $ 28,437 $ 23,404 ============ ============ ============
During fiscal 2001, PEC sold notes receivable of $14.9 million from which $13.4 million of the sales proceeds were used to pay down debt. The sold notes receivable, which have interest rates ranging from 11.9% to 14.1% depending on the transaction, were sold to yield returns of 9.8% fixed and 10.1% floating to the respective purchasers, with PEC retaining any excess interest. 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 are over 90 days delinquent or are otherwise subject to replacement or repurchase, in either cash or receivables at the option of the purchaser. At August 31, 2001, and 21 August 31, 2000, PEC was contingently liable to replace or repurchase notes receivable sold with recourse totaling $52.2 million and $59.6 million, respectively. At August 31, 2001, the repurchase provisions provide for $47.2 million in substitution of receivables as recourse for sold notes receivable and $5.0 million in cash payments for receivables repurchase. The undiscounted amounts of the recourse obligations on such notes receivable were $4.4 million and $4.5 million at August 31, 2001 and August 31, 2000, respectively. PEC continually reviews the adequacy of this liability. These reviews take into consideration changes in the nature and level of the portfolio, current and future economic conditions which may affect the obligors' ability to pay, changes in collateral values, estimated value of inventory that may be reacquired and overall portfolio quality. The components of the Company's debt, including lines of credit, consists of the following (thousands of dollars):
August 31 -------------------------- 2001 2000 ------------ ------------ Notes collateralized by receivables $ 96,665 $ 80,593 Mortgages collateralized by real estate properties 22,322 27,407 Installment contracts and other notes payable 1,251 1,131 ------------ ------------ Total $ 120,238 $ 109,131 ============ ============
Financial Condition The Company provides allowance for cancellations in amounts which, in the Company's judgment, will be adequate to absorb losses on notes receivable that may become uncollectible. The Company's judgment in determining the adequacy of this allowance is based on its continual review of its portfolio which utilizes historical experience and current economic factors. These reviews take into consideration changes in the nature and level of the portfolio, historical rates, collateral values, current and future economic conditions which may affect the obligors' ability to pay, collateral values and overall portfolio quality. Changes in the aggregate of the allowance for cancellations, excluding discounts, and the reserve for notes receivable sold with recourse for fiscal 2001, 2000 and 1999, consisted of the following (thousands of dollars):
For the Years Ended August 31 ----------------------------------------- 2001 2000 1999 ----------------------------------------- Balance at beginning of year $ 16,860 $ 18,149 $ 18,488 Provision for cancellations 9,647 7,354 5,626 Amounts charged to allowance for cancellations and reserve for notes receivable sold with recourse (7,806) (8,643) (5,965) --------- --------- --------- Balance at end of year $ 18,701 $ 16,860 $ 18,149 ========= ========= =========
The allowance for cancellations and the reserve for notes receivable sold with recourse consisted of the following at these dates (thousands of dollars):
August 31 ----------------------------------------- 2001 2000 1999 ----------------------------------------- Allowance for cancellations, excluding discounts $ 14,703 $ 12,827 $ 13,987 Reserve for notes receivable sold with recourse 3,998 4,033 4,162 --------- --------- --------- Total $ 18,701 $ 16,860 $ 18,149 ========= ========= =========
The combined allowance for cancellations and reserve for notes receivable sold with recourse as a percentage of total owned and sold notes receivable was 11.2% as of August 31, 2001 compared to 10.8% as of August 31, 2000. August 31, 2001 Compared to August 31, 2000 Cash and cash equivalents was $1.9 million at August 31, 2001 and $1.1 million at August 31, 2000. 22 Notes receivable, net, increased 26.4% to $105.1 million at August 31, 2001 from $83.2 million at August 31, 2000 as a result of the increased fiscal 2001 sales, net of notes receivable sold, during fiscal 2001. Retained interests in receivables sold increased 33.4% to $3.6 million at August 31, 2001 from $2.7 million at August 31, 2000. Land and improvements inventory and timeshare interests held for sale decreased 22.4% to $21.3 million at August 31, 2001 from $27.4 million at August 31, 2000. This decrease is directly related to the increase in sales in fiscal 2001. Notes and contracts payable increased 10.2% to $120.2 million at August 31, 2001 from $109.1 million at August 31, 2000. Net borrowings related to financing customer receivables increased by $16.1 million, which was partially offset by net paydowns on other debt of $5.0 million. Reserve for notes receivable sold with recourse was $4.0 million at August 31, 2001 and 2000. Deferred income taxes decreased 45.7% to $1.6 million at August 31, 2001 from $3.0 million at August 31, 2000, due to the changes in certain income tax liability reserves as a result of facts and circumstances determined in an ongoing review and analysis of the Company's federal income tax liability, and the income tax effect on the unrealized depreciation on interest rate swaps. Stockholders' equity increased to $28.2 million at August 31, 2001 from $25.8 million at August 31, 2000 as a result of net income of $3.8 million during fiscal 2001, partially offset by a net increase in accumulated other comprehensive loss of $1.4 million, reflecting interest rate swap transactions. Timeshare interest and land sales net, for fiscal 2001, 2000 and 1999, and the comparative dollar and percentage changes, are set forth in the following table (thousands of dollars):
For the Years Ended August 31 ------------------------------------------------------------------------------------------- 2001 Change 2000 Change 2001 2000 from 2000 1999 from 1999 ------------- ------------- ----------------------- ------------- ------------------------- Timeshare interest sales, net $ 53,974 $ 49,062 $ 4,912 10.0% $ 41,262 $ 7,800 18.9% Land sales, net 21,687 19,624 2,063 10.5% 15,979 3,645 22.8% --------- --------- --------- --------- --------- Total timeshare interest and land sales, net $ 75,661 $ 68,686 $ 6,975 10.2% $ 57,241 $ 11,445 20.0% ========= ========= ========= ========= =========
August 31, 2000 Compared to August 31, 1999 Cash and cash equivalents was $1.1 million at August 31, 2000 and $1.8 million at August 31, 1999. Notes receivable, net, increased 20.0% to $83.2 million at August 31, 2000 from $69.3 million at August 31, 1999 as a result of the increased fiscal 2000 sales, net of notes receivable sold during fiscal 2000. Retained interests in receivables sold increased 5.3% to $2.7 million at August 31, 2000 from $2.6 million at August 31, 1999. Land and improvements inventory and timeshare interests held for sale decreased 24.2% to $27.4 million at August 31, 2000 from $36.2 million at August 31, 1999. This decrease is directly related to the increase in sales in fiscal 2000. Notes and contracts payable increased 4.4% to $109.1 million at August 31, 2000 from $104.6 million at August 31, 1999. Net borrowings related to financing customer receivables increased by $13.1 million, which was partially offset by net paydowns on other debt of $8.5 million. Reserve for notes receivable sold with recourse decreased 3.1% to $4.0 million at August 31, 2000 from $4.2 million at August 31, 1999. The majority of notes receivable sold during the fiscal year were land receivables, which typically require a lower reserve. The loans previously sold prior to fiscal 2000 continue to amortize, which correspondingly lowers the required reserve. 23 Deferred income taxes decreased 15.1% to $3.0 million at August 31, 2000 from $3.5 million, due to the changes in certain income tax liability reserves as a result of facts and circumstances determined in an ongoing review and analysis of the Company's federal income tax liability. Stockholders' equity increased to $25.8 million at August 31, 2000 from $21.8 million at August 31, 1999 as a result of net income of $3.9 million during fiscal 2000. Recent Accounting Standards In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133 (SFAS 133) "Accounting for Derivative Instruments and Hedging Activities", which was amended by SFAS No. 137, issued in June 1999. SFAS 133 established standards for accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. SFAS 133, as amended, is effective for fiscal years beginning after June 15, 2000 and was adopted by the Company in fiscal 2001. See Note 3 of Notes to Consolidated Financial Statements. In July 2000, the EITF reached a consensus on Issue 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets". The issue is how to record interest income and to measure impairment on retained and purchased beneficial interests. The Task Force concluded that the holder of a beneficial interest should recognize interest income over the life of the investment based on an anticipated yield determined by periodically estimating cash flows. If the fair value of the beneficial interest has declined below its carrying amount and the decline is other-than-temporary, an entity should apply impairment of securities guidance similar to SFAS 115 (fair value method). This EITF is effective for all beneficial interests in securitization transactions for quarters beginning after December 15, 2000. The adoption of this statement did not have a significant impact on the Company's financial statements. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 140). SFAS 140 replaces FASB Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" and provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. SFAS 140 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after March 31, 2001 and is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 31, 2000. The adoption of SFAS 140 in fiscal 2001 did not have a material effect on the financial statements. In July 2001, the FASB issued Statements of Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141), and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141 eliminated the use of the pooling-of- interests method of accounting for business combinations initiated after June 30, 2001 and is effective for any business combination accounted for by the purchase method that is completed after June 30, 2001. SFAS 142, which includes the requirements to test goodwill and indefinite lived intangible assets for impairment rather than amortize them, will be effective for fiscal years beginning after December 15, 2001. Management does not believe the adoption of these statements will have a significant impact on the Company's financial statements. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143). SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. SFAS 143 is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. Management does not believe that the adoption of SFAS 143 will have a material effect on the financial statements. In September 2001, the FASB issued SFAS No. 144 on asset impairment that is applicable to financial statements issued for fiscal years beginning after December 15, 2001. The FASB's new rules on asset impairment supersede FASB No. 121 and provide a single accounting model for long-lived assets to be disposed of. Management does not believe that the adoption of SFAS 144 will have a material effect on the financial statements. 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. 24 Inflationary increases are difficult to pass on to customers since increases in sales prices often result in lower sales closing rates and higher cancellations. The Company's notes receivable consist primarily of fixed-rate long term installment contracts that do not increase or decrease as a result of changes in interest rates charged to the Company. In addition, delinquency and cancellation rates may be affected by changes in the national economy. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Company's various business activities generate liquidity, market and credit risk: . liquidity risk is the possibility of being unable to meet all present and future financial obligations in a timely manner; . market risk is the possibility that changes in future market rates or prices will make the Company's positions less valuable; and . credit risk is the possible loss from a customer's failure to perform according to the terms of the transaction. The table below provides information about the Company's financial instruments that are sensitive to changes in interest rates. Such information includes fair values of the market risk sensitive instruments and contract terms sufficient to determine future cash flows from those instruments, categorized by expected maturity dates (thousands of dollars):
Expected Maturity Date ---------------------------------------------------------------------- There- Fair August 31 2002 2003 2004 2005 2006 after Total Value - ----------------------------------- ----------- ----------- ------------ ----------- ------------ --------- ----------- ------------ Assets: Notes receivable(a) Fixed rate $ 14,019 $ 11,761 $ 10,897 $ 11,004 $ 11,517 $ 45,929 $ 105,127 $ 116,302 Average interest rate 13.87% 13.95% 14.09% 14.21% 14.23% 14.31% Retained interests in receivables sold (b) Fixed rate $ 313 $ 357 $ 407 $ 463 $ 528 $ 192 $ 2,260 $ 2,260 Average interest rate 13.16% 13.16% 13.16% 13.16% 13.16% 13.16% Variable rate $ 65 $ 74 $ 84 $ 95 $ 107 $ 918 $ 1,343 $ 1,343 Average interest rate 12.47% 12.47% 12.47% 12.47% 12.47% 12.47% Liabilities: Notes and contracts payable (c) Fixed rate $ 2,917 $ 2,119 $ 2,109 $ 77 $ 30 $ 7,252 $ 7,252 Average interest rate 9.14% 8.38% 8.22% 11.78% 11.78% Variable rate $ 10,185 $ 4,236 $ 15,843 $ 1,500 $ 25,794 $ 55,428 $ 112,986 $ 112,986 Average interest rate 9.36% 8.60% 8.83% 9.00% 7.68% 10.00% Subordinated debt (d) Fixed rate $ 4,211 $ 4,211 $ 4,211 Average interest rate 10.00% Interest rate swap (e) $ (2,018) $ (93) $ (2,111) $ (2,111) Fixed rate 10.94% 5.34%
(a) The fair value was estimated by discounting future cash flows of the outstanding notes receivable, net of the allowance for cancellations. (b) The fair value was estimated by discounting future cash flows of the instruments using discount rates, default, loss and prepayment assumptions based upon available market data, opinions from financial advisors and portfolio experience. (c) Interest rates on notes payable generally are adjustable, indexed to the prime rate or to the 90-day London Interbank Offering Rate (LIBOR); therefore, carrying value approximates fair value. (d) Carrying value is approximately the same as fair value. (e) The Company engages in business activities that expose it to interest rate risk. The financial exposure is managed as an integral part of the Company's risk management program, which seeks to reduce the potentially adverse effects that the volatility of the interest rate market may have on the Company's operating results. The Company does not engage in speculative transactions or hold financial instruments for trading purposes. In August 2000, the Company entered into a $25 million, 5-year, interest rate swap transaction to hedge potential exposure to its variable rate notes' portfolio. In August 2001, the Company 25 entered into a similar $20 million, 5-year, interest rate swap transaction. The interest rate swaps are considered and are documented as highly effective cash flow hedges. Item 8. Financial Statements and Supplementary Data The following Consolidated Financial Statements of the Company and its subsidiaries are included herewith:
Page ---- Report of Independent Certified Public Accountants F-2 Independent Auditors' Report F-3 Consolidated Balance Sheets at August 31, 2001 and 2000 F-4 Consolidated Income Statements - Years Ended August 31, 2001, 2000 and 1999 F-5 Consolidated Statements of Stockholders' Equity - Years Ended August 31, 2001, 2000 and 1999 F-6 Consolidated Statements of Cash Flows - Years Ended August 31, 2001, 2000 and 1999 F-7 Notes to Consolidated Financial Statements - Years Ended August 31, 2001, 2000 and 1999 F-8 - F-28
All schedules are omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Not applicable. 26 PART III Item 10. Directors and Executive Officers of the Company The following table sets forth certain information with respect to the directors and executive officers of the Company.
Name Age Position (of Company unless otherwise noted) - ----------------------------------- ---------- ----------------------------------------------------------------------- Robert E. Nederlander 68 Chairman of the Board, Chief Executive Officer and Director Jerome J. Cohen 73 President and Director Chairman of the Board, Chief Executive Officer and President, PEC Herbert B. Hirsch 65 Senior Vice President, Chief Financial Officer, Treasurer and Director Eugene I. Schuster 64 Vice President and Director Wilbur L. Ross, Jr. 63 Director John E. McConnaughy, Jr. 72 Director Leonard Toboroff 68 Director Jon A. Joseph 54 Senior Vice President, General Counsel and Secretary Carol W. Sullivan 53 Senior Vice President and Chief Financial Officer, PEC Charles G. Baltuskonis 51 Senior Vice President and Chief Accounting Officer Gregg A. McMurtrie 46 Executive Vice President and Chief Operating Officer, PEC S. Duke Campbell 58 Senior Vice President, Marketing and Sales, PEC
Robert E. Nederlander has been the Chairman of the Board and Chief Executive Officer of the Company since January 1988. Mr. Nederlander is the Chairman of the Executive Committee. Since July 1995, Mr. Nederlander has served on the Board of Directors of Cendant Corporation, formerly Hospitality Franchise Systems, Inc. (HFS). Mr. Nederlander has been Chairman of the Board of Riddell Sports Inc. since April 1988 and was Riddell Sports Inc.'s Chief Executive Officer from April 1988 through March 1993. From February 1992 until June 1992, Mr. Nederlander was also Riddell Sports Inc.'s interim President and Chief Operating Officer. In 2001, Riddell Sports, Inc. changed its name to Varsity Brands, Inc. Since November 1981, Mr. Nederlander has been President and/or a director of the Nederlander Organization, Inc., owner and operator of many legitimate theaters in the City of New York. Since December 1998, Mr. Nederlander has been a co-managing member of the Nederlander Co. LLC, operator of legitimate theaters outside the City of New York. Mr. Nederlander served as the Managing General Partner of the New York Yankees Baseball Club from August 1990 until December 1991, and has been a limited partner since 1973. Since October 1985, Mr. Nederlander has been President of Nederlander Television and Film Productions, Inc.; and Chairman of the Board of Allis-Chalmers Corp. from May 1989 to July 1993, and from July 1993 to October 1996 as Vice Chairman. He remains a director of Allis-Chalmers Corp. Mr. Nederlander was a director of MMC from September 1996 until June 1998. In October 1996, Mr. Nederlander became a director of News Communications Inc., a publisher of community oriented free circulation newspapers. Mr. Nederlander does not currently serve on a full time basis in his capacities with the Company. Jerome J. Cohen has been the President and a Director of the Company since 1988. Mr. Cohen serves as a member of the Executive Committee and is Chairman of the Board, Chief Executive Officer and President of PEC. Mr. Cohen served as Chairman of the Board of MMC from April 1995 to June 1998, as Chief Executive Officer from June 1992 to September 1997 and as President from June 1992 to March 1995. From April 1992 to June 1997, Mr. Cohen was a director of Atlantic Gulf Communities Inc., formerly known as General Development Corporation, a publicly held company engaged in land development, land sales and utility operations in Florida and Tennessee. 27 Herbert B. Hirsch has been the Senior Vice President, Chief Financial Officer, Treasurer and a Director of the Company since 1988. Mr. Hirsch serves as a member of the Executive Committee. Mr. Hirsch served as a director of MMC from June 1992 to June 1998, and served as Vice President, Chief Financial Officer and Treasurer of MMC from 1992 to September 1996. Eugene I. Schuster has been a Vice President and a Director of the Company since 1988. Mr. Schuster is a member of the Stock Option Committee. Mr. Schuster has also been Chief Executive Officer and Chairman of the Board of Directors of Venture Funding, Ltd., a business development corporation, since its inception in May 1983. From February 1986 to December 1999, Mr. Schuster was the President and Chief Executive Officer and a director of Quest BioTechnology, Inc., a publicly held biotechnology research and development firm. From September 1985 to December 1999, 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. From January 1988 to December 1999, Mr. Schuster was the Chairman and from May 1988 through February 1995 was Chief Executive Officer, of Cellex Biosciences, Inc., a publicly held manufacturer of automated cell culture systems. Mr. Schuster is Chairman and Chief Executive Officer of Art Renaissance, Inc., a privately held company which operates several chains of retail art galleries. Mr. Schuster does not currently serve on a full time basis in his capacities with the Company. Wilbur L. Ross, Jr. has been a Director of the Company since 1984. Mr. Ross serves as a member of the Audit, Stock Option and Executive Incentive Compensation Committees. Mr. Ross was Executive Managing Director of Rothschild Inc., an investment banking firm, from August 1996 until April 2000. Chairman of Rothschild Recovery Fund and Asia Recovery Fund since 1997 and 2000, respectively. As of April 1, 2000, he founded WL Ross & Co. LLC. He remains Chairman of Asia Recovery Fund, as well as the former Rothschild Recovery Fund, now named WLR Recovery Fund, and is Chairman of Asia Recovery Co-Investment Partners. Mr. Ross is also a director of News Communication, Casella Waste Systems Inc. and Pacific Life Insurance Company (Korea) and Kansai Sawayaka Bank (Japan). 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 is currently Chairman of the Board of JEMC Corp. He is currently on the Board of Directors of Transact International, Inc., DeVlieg Bullard, Inc., Levcor International, Inc., Riddell Sports, Inc., Fortune National Resources, Inc and Wave Systems, Inc. In 2001, Riddell Sports Inc. changed its name to Varsity Brands, Inc. Mr. McConnaughy is on the Board of Trustees and Executive Committee of the Strang Cancer Prevention Center and is Chairman of the Board Emeritus of the Harlem School of the Arts. Leonard Toboroff has been a director of the Company since March 7, 2001. Mr. Toboroff is a member of the New York bar and a practicing attorney since 1961. He has been Vice President of Riddell Sports, Inc. since April 1988. In 2001, Riddell Sports, Inc. changed its name to Varsity Brands, Inc. Since May 1989, Mr. Toboroff has been a Vice President and Vice Chairman of the Board of Allis-Chalmers Corp. Mr. Toboroff has been a director of Engex, Inc. since 1993. Jon A. Joseph, Senior Vice President, General Counsel and Secretary, has been with the Company since June 1995. Mr. Joseph was Executive Vice President of Valley Bank of Nevada from 1984 to 1991. In 1992, Valley Bank of Nevada was acquired by Bank of America. Mr. Joseph remained with the legal department of Bank of America until June 1, 1995, when he joined the Company. Carol W. Sullivan, Senior Vice President and Chief Financial Officer of PEC, has been with the Company since January 8, 2001. Ms. Sullivan served as Senior Vice President - Mortgage Portfolio for Sunterra Corporation from June 1998 to June 2000 and was appointed Treasurer in January 2000. Prior to that, she was a consultant in the vacation ownership industry from 1988 to 1998, providing financial consulting and advisory services to lenders and developers. Ms. Sullivan was Vice President - Real Estate Receivables Lending from 1980 to 1985 and Vice President - Real Estate Lending and Development from 1985 to 1988 of Finova Financial Corporation. Charles G. Baltuskonis, Senior Vice President and Chief Accounting Officer, has been with the Company since March 1997. He is a certified public accountant and served as Senior Vice President and Controller of Chase Federal Bank from May 1995 to March 1997. Prior to that, he was Chief Financial Officer of F&C Bancshares and First Coastal Bank, a Senior Vice President - Finance of Bank of New England, and was a Senior Manager with the public accounting firm of Ernst & Young. 28 Gregg A. McMurtrie was named Executive Vice President and Chief Operating Officer of PEC in November 1998. Mr. McMurtrie joined the staff of PEC in August 1982. He has served as Vice President of PEC since August 1991. From August 1982 to July 1987, Mr. McMurtrie served in various capacities in the credit, internal auditing, marketing, customer relations, sales and executive departments. He was General Manager, Colorado Land Sales, from September 1987 to February 1989. From September 1989 to November 1998, Mr. McMurtrie served as Director of Sales Administration. S. Duke Campbell, Senior Vice President, Marketing and Sales of PEC, has been with the Company since July 1996. From 1995 to 1996, Mr. Campbell served as a Principal at D.I.A.L. Pro Northwest, Inc., a value added reseller for several customer management systems in the Northwest. Mr. Campbell served as Vice President of Marketing and sales for Hostar International, Inc., a manufacturer of innovative material management systems for hospitals, from 1991 to 1994. From 1989 to 1990, Mr. Campbell was the Senior Principal of Gulf American Financial Services, Inc., a financial services company that specializes in receivables management. Prior to 1990, Mr. Campbell served in various positions at Thousand Trails, Inc., a Texas company that owned and operated member campground resorts. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's Directors and executive officers, and persons who own more than ten percent of the Company's outstanding common stock, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock. Such persons are required by SEC regulation to furnish the Company with copies of all such reports they file. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company, all Section 16(a) filing requirements applicable to its officers, Directors and greater than ten percent beneficial owners have been satisfied. Additional Information Concerning Officers and Directors The Company's officers are elected annually by the Board of Directors and serve at the discretion of the Board of Directors. The Company's Directors hold office until the next annual meeting of shareholders and until their successors have been duly elected and qualified. The Company reimburses all Directors for their expenses in connection with their activities as Directors of the Company. Directors of the Company who are also employees of the Company do not receive additional compensation for their services as Directors. Members of the Board of Directors of the Company who are not employees of the Company received an annual fee of $40,000 in calendar 2000 and are also scheduled to receive an annual fee of $40,000 for calendar 2001. Directors are reimbursed for their expenses incurred in attending meetings of the Board of Directors and its committees. Effective as of September 23, 1998, the Company entered into indemnification agreements with each of its Directors and a former officer, which superseded indemnification agreements entered into by the Company and such persons in April 1998. The new indemnification agreements provide certain protections now afforded by the Company's Articles of Incorporation and By-laws so that they cannot be changed without the consent of such Directors and officer. In addition, such agreements clarify the procedures for obtaining indemnification from the Company and require the Company to maintain directors and officers insurance. Item 11. Executive Compensation The following table sets forth information concerning the annual and long- term compensation earned by the Company's Chief Executive Officer and each of the five other most highly compensated executive officers (Named Executive Officers) whose annual salary and bonus during the fiscal years presented exceeded $100,000. 29
Long-Term Compensation Awards ----------------------------- Annual Compensation -------------------------------------------------------- Number of Fiscal Other Annual Options All Other Name and Principal Position Year Salary Bonus(a) Compensation Granted Compensation(b) ------------------------------------ -------- ---------- ------------ ---------------- ----------- ----------------- Robert E. Nederlander, Chairman of the Board and 1999 $ 65,424 (c) $ - $ 5,901 833 $ - Chief Executive Officer 2000 30,769 (c) - - - - 2001 103,847 (c) - - - - Jerome J. Cohen, President, MFC 1999 $300,002 $ 5,769 $ 9,800 2,083 $ 2,400 Chairman of the Board, Chief 2000 300,002 92,667 - - - Executive Officer and President, PEC 2001 311,540 86,000 (a) - - - Herbert B. Hirsch Senior Vice President, Chief 1999 $200,000 $ 3,486 $ 2,335 1,666 $ 2,809 Financial Officer and Treasurer, MFC 2000 200,000 37,067 - - - Senior Vice President and Chief 2001 115,385 34,400 (a) - - - Financial Officer, PEC (to January 7, 2001) Jon A. Joseph General Counsel and Secretary, MFC 1999 $200,000 $ 1,923 $24,000 - $ 2,838 Senior Vice President, PEC 2000 200,000 25,000 24,000 - - 2001 207,692 17,200 (a) 24,923 - - Carol W. Sullivan Senior Vice President and 2001 $126,154 $ - (a) $ - - $ - Chief Financial Officer, PEC (commencing January 8, 2001) Gregg A. McMurtrie Executive Vice President 1999 $142,462 $ 5,885 $ 3,910 833 $ 2,172 and Chief Operating Officer, PEC 2000 150,000 25,000 2,127 - - 2001 155,769 - (a) 2,260 - -
(a) Incentive compensation is included in the fiscal year it is earned with respect to contractual arrangements. Awards to other executives are discretionary and have not as yet been determined by the Incentive Compensation Committee for fiscal 2001. (b) Represents the Company's discretionary matching contributions of 25% of the employee's contribution to the Company's 401(k) Plan on behalf of the employee. (c) Prior to December 11, 1998, Mr. Nederlander earned an annual salary of $200,000. On that date, his salary was suspended. In April 2000, Mr. Nederlander's salary was reinstated at an annual rate of $100,000. (d) Prior to January 8, 2001, Mr. Hirsch earned an annual salary of $200,000. On that date, his salary was changed to an annual rate of $50,000. Option Grants in Last Fiscal Year There were no grants of stock options during fiscal 2001. Aggregated Fiscal Year-End Option Value Table The following table sets forth certain information concerning unexercised stock options held by the Named Executive Officers as of August 31, 2001. No stock options were exercised by the Named Executive Officers during fiscal 2001. See "Stock Option Plan" below in this section. 30
Number of Unexercised Value of Unexercised In-the-Money Options Held at Options Held at August 31, 2001 August 31, 2001 (1) - ----------------------- --------------------------------------------------- --------------------------------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - ----------------------- ------------------------ ------------------------ ------------------------ ------------------------ Robert Nederlander 1,582 1,334 $ -- $ -- Jerome J. Cohen 2,082 2,084 $ -- $ -- Herbert B. Hirsch 1,165 1,334 $ -- $ -- Jon A. Joseph 3,000 2,000 $ -- $ -- Carol W. Sullivan -- -- $ -- $ -- Gregg A. McMurtrie 1,332 833 $ -- $ --
(1) The closing sales price of the Company's Common Stock as reported on the Nasdaq National Market on August 31, 2001 was $3.99. The exercise price as of August 31, 2001 was $6.00 per share, therefore, the value of the unexercised options at August 31, 2001 was zero. Employment Agreements On September 1, 1996, the Company entered into an employment agreement with Jerome J. Cohen, which originally was to expire on January 31, 2002. The agreement provides for an annual base salary of $300,000 plus a bonus of 2.5% of Incentive Income as defined in the Company's Incentive Plan (See "Executive Incentive Compensation Plan"). On November 10, 2000, the agreement was amended to extend its expiration date to January 31, 2005. Under the agreement as amended, in the event (1) that the Company determines to terminate Mr. Cohen's employment under the agreement, (2) of a change in control of ownership of the Company or (3) of a sale of all or substantially all of the Company's assets, the Company would be required to enter into a termination agreement with Mr. Cohen under which he would receive a termination payment of $750,000. The termination payment would be payable in 36 equal monthly installments except in the case of a further change in control of ownership or sale of assets of the Company, in which case any unpaid balance of the $750,000 would become payable in a lump sum. The Company has entered into an employment agreement which renews annually unless either party gives notice of termination, with Jon A. Joseph. The current expiration date of the agreement is December 31, 2001. The agreement provides for an annual base salary of $200,000 plus .5% of Incentive Income as defined in the Company's Incentive Plan. Further, in the event of a change in control of ownership of the Company, as defined in the agreement, Mr. Joseph would receive a separation payment of $200,000. On September 2, 1997, the Company entered into an agreement with Herbert B. Hirsch pursuant to which the Company would pay him a separation payment of $150,000 at such time as he no longer is employed by the Company. PEC has entered into a compensation agreement with Carol W. Sullivan dated January 8, 2001 which provides for an annual base salary of $200,000. The Agreement is renewable annually, unless terminated by either party upon proper notice. PEC has the right to terminate the Agreement at any time. If PEC shall terminate or fail to renew the Agreement, Ms. Sullivan shall be entitled to a severance payment of $100,000 if such failure to renew or termination takes place during the first year of employment and $200,000 if such failure to renew or termination takes place during the second year or later years of the term of the Agreement. The Company entered into a compensation agreement with S. Duke Campbell dated August 31, 2000, which provides for an annual base salary of $125,000. In addition, Mr. Campbell is to be paid monthly a sales commission of one-quarter of one percent (0.25%) of net sales, occurring after September 1, 2000, and a Profit Contribution Bonus for reducing sales and marketing costs for fiscal 2001. If Mr. Campbell's employment is terminated by PEC, other than for cause, Mr. Campbell shall receive his base salary and sales commissions to the date of termination, the portion of his Profit Contribution Bonus, if any, earned through the immediately preceding quarter and a severance payment in an amount equal to his then current annual base salary. If Mr. Campbell resigns or terminates his employment by PEC he will be entitled to his base salary and sales commissions through the date of such termination. In addition, after the end of fiscal 2001, a new arrangement relating to profitability to take the place of the Profit Contribution Bonus will be agreed upon and added to the agreement by amendment. If PEC and Mr. Campbell have not agreed to such amendment to this agreement by December 31, 2001, and Mr. Campbell has received or earned a Profit Contribution Bonus for fiscal 2001, Mr. Campbell may elect to resign or terminate his employment by PEC during the thirty-day period following December 31, 2001 and he then shall be entitled to a severance payment in an amount equal to his then current annual base salary in addition to his base salary and sales commissions through the date of such termination. 31 Stock Option Plan Under the Company's Stock Option Plan (Plan), as originally adopted, 87,500 shares of common stock were reserved for issuance upon exercise of options. In calendar year 1997, the Company's Board of Directors and shareholders approved an amendment to the Plan to increase by 83,333 shares the number of shares of common stock reserved for issuance pursuant to the Plan. As a result, an aggregate of 170,833 shares of common stock are reserved for issuance pursuant to the Plan, of which 76,833 shares have been issued upon exercise of options through August 31, 1997. During fiscal 1998, the Company's Board of Directors unanimously approved, subject to approval by the Company's shareholders, the amendment and restatement of the Plan. The amendments to the Plan approved by the Company's Board of Directors consist of changes to permit the grant of options to non-employee Directors of the Company and changes to conform the Plan to changes to the federal securities laws. On September 16, 1998, the shareholders approved the amendment and restatement of the Plan. The Plan is designed to serve as an incentive for retaining qualified and competent employees and Directors. The Stock Option Committee of the Company's Board of Directors administers and interprets the Plan and is authorized, in its discretion, to grant options thereunder to all eligible employees of the Company including officers and directors of the Company. The Plan provides for the granting of both "incentive stock options" (as defined in Section 422A of the Internal Revenue Code) and nonstatutory stock options. Options can be granted under the Plan on such terms and at such prices as determined by the Board, or a committee thereof, except that the per share exercise price of options may not be less than 80% of the fair market value of the common stock on the date of grant, and, in the case of an incentive stock option, the per share exercise price may not be less than 100% of such fair market value. In the case of incentive stock options granted to a 10% shareholder, the per share exercise price may not be less than 110% of the fair market value of the common stock on the date of grant and shall expire five years from the date of grant. The aggregate fair market value of the shares covered by incentive stock options granted under the Plan that become exercisable by a grantee for the first time in any calendar year is subject to a $100,000 limit. There are currently 26 individuals, including both officers and directors, that have been granted options. Options granted under the Plan are exercisable after the period or periods specified in the option agreement. Options granted under the Plan are not exercisable after the expiration of ten years from the date of grant (except five years in the case of incentive stock options granted to 10% shareholders) and are not transferable other than by will or by the laws of descent and distribution. In September 1997, an additional 58,083 incentive stock options were granted under the Plan to employees at fair market value. On September 23, 1998, an additional 18,500 incentive stock options were granted under the Plan. An aggregate of 48,570 options were outstanding as of August 31, 2001 under the 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, Hirsch and Schuster) to its President, Mr. Cohen. The compensation paid to Messrs. Nederlander, Cohen, Hirsch and Schuster is determined by the Board of Directors. The Directors who are also executive officers of the Company do not participate in deliberations of the Board of Directors of the Company concerning their own compensation. Executive Incentive Compensation Plan On June 22, 1994, effective for the year ended August 31, 1995, the Board of Directors of the Company approved and adopted an Executive Incentive Compensation Plan (Incentive Plan) for executives and other key employees of the Company and its subsidiaries who contribute to the success of the Company. Under the terms of the Incentive Plan, awards of incentive compensation are determined by the Incentive Compensation Committee of the Board of Directors of the Company, which committee shall be composed of not less than two members. The Incentive Plan provides that the Board of Directors may amend, suspend or terminate the Incentive Plan at any time. Incentive Compensation for any fiscal year is defined as an amount equal to 7.5% of incentive income (Incentive Income) for such year. Incentive Income for any fiscal year is defined as the amount reported as income before taxes in the Consolidated Financial Statements of the Company for such year. The maximum amount of all awards of Incentive Compensation for any fiscal year shall not exceed (a) 7.5% of Incentive Income for such year, reduced by (b) the amount of Incentive Income which must be paid by the Company to employees pursuant to any contractual obligation of the Company, increased by (c) any unawarded Incentive Compensation carried forward from a prior fiscal year. 32 The Board of Directors has also approved an employment agreement with Mr. Cohen, President of the Company, and agreements with Mr. Hirsch and Mr. Joseph, executive officers of the Company, pursuant to which Messrs. Cohen, Hirsch and Joseph are entitled to receive 2.5%, 1% and .5%, respectively, of Incentive Income of the Company, as defined in the Incentive Plan. Split-Dollar Insurance Plan On April 5, 1995, the Board of Directors of the Company established a split-dollar life insurance plan (Split-Dollar Plan) pursuant to which the Company paid the premiums for certain "second to die" life insurance policies on the lives of Messrs. Nederlander, Cohen, and Hirsch, executive officers and Directors of the Company and their respective spouses for a period not to exceed five years, at an annual aggregate premium outlay of $300,000. Each policy is in the name of a trust established for family beneficiaries selected by each executive. On August 3, 1995, the Company approved a life insurance policy for Mr. Schuster at an annual cost of $100,000 for a period of five years. Pursuant to the plan, and with respect to each policy, after ten years, or earlier upon the deaths of the respective insured parties, or certain other events, the Company was to receive the amount of premiums paid on the policy. Through December 31, 1998, $300,000 was paid on Mr. Schuster's policy and $400,000 was paid on each of the others, leaving a balance of premiums in the amount of $500,000 still owed by the Company on the policies. Pursuant to an amendment to the original agreement, executed in April 1999, future payments by the Company relating to the policies were waived by Messrs. Nederlander, Cohen, Hirsch and Schuster. In consideration of the waiver, the Company agreed to accept repayment of the lesser of the premiums paid or the cash value of the policy upon the deaths of the respective insured parties. Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth, as of November 16, 2001, information with respect to the beneficial ownership of the Company's common stock by (i) each person known by the Company to be the beneficial owner of more than 5% of the outstanding shares of common stock, (ii) each director of the Company, (iii) each of the Named Executive Officers (as defined in "Item. 11 Executive Compensation"), and (iv) all Directors and executive officers of the Company as a group. Unless otherwise noted, the Company believes that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them.
Percentage of Name and Address of Amount and Nature of Outstanding Common Beneficial Owner or Identity of Group Beneficial Ownership (1) Stock Owned - -------------------------------------------------------- --------------------------- ------------------------- Robert E. Nederlander(2) 342,056 9.8% Eugene I. Schuster and Growth Realty Inc. (GRI)(3) 252,005 7.2% Jerome J. Cohen(4) 186,993 5.3% Herbert B. Hirsch(5) 252,243 7.2% John E. McConnaughy, Jr.(6) 24,661 * Wilbur L. Ross, Jr.(7) 1,333 * Leonard Toboroff (8) -- -- Jon A. Joseph (9) 5,083 * Gregg A. McMurtrie (10) 2,166 * Carol W. Sullivan (11) -- -- Friedman Billings Ramsey Group, Inc. and affiliates (12) 571,419 16.3% All Executive Officers and Directors as a Group 1,066,540 30.5% (10 persons) (13)
* Less than 1%. (1) A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from November 16, 2001 upon the exercise of options or warrants. Each beneficial owner's percentage ownership is determined by assuming that options and warrants that are held by such person (but not those held by any other person) and that are exercisable within 60 days from the applicable date have been exercised. (2) 1450 Broadway, New York, New York 10018. Includes 41,666 shares held by an affiliate of Mr. Nederlander and 2,583 shares issuable under options granted pursuant to the Company's Stock Option Plan. Does not include 16,666 shares of common stock owned by the Robert E. Nederlander Foundation, an entity organized 33 and operated exclusively for charitable purposes (the Nederlander Foundation), of which Mr. Nederlander is President. Mr. Nederlander disclaims beneficial ownership of the shares owned by the Nederlander Foundation. (3) 321 Fisher Building, Detroit, Michigan 48202. Consists of (i) 211,506 shares held of record by GRI, a wholly-owned subsidiary of Venture Funding, Ltd. of which Mr. Schuster is a principal shareholder, Director and Chief Executive Officer, (ii) 39,166 shares held of record by Growth Realty Holdings L.L.C., a limited liability corporation owned by Mr. Schuster, GRI and Mr. Schuster's three children, and (iii) 1,333 shares issuable under options granted pursuant to the Company's Stock Option Plan. (4) 1125 N. E. 125/th/ Street, Suite 206, North Miami, Florida 33161. Includes 3,333 shares issuable under options granted pursuant to the Company's Stock Option Plan. Excludes 83,333 shares owned by a trust for the benefit of his children over which Mr. Cohen does not have any investment or voting power, as to which he disclaims beneficial ownership. Also excludes 4,000 shares of common stock owned by the Rita and Jerome J. Cohen Foundation, Inc., an entity organized and operated exclusively for charitable purposes (the Cohen Foundation), of which Mr. Cohen is President. Mr. Cohen disclaims beneficial ownership of the shares owned by the Cohen Foundation. (5) 230 East Flamingo Road, Las Vegas, Nevada 89109. Includes 1,833 shares issuable under options granted pursuant to the Company's Stock Option Plan. (6) 1011 High Ridge Road, Stamford, Connecticut 06905. Includes 2,333 shares issuable under options granted pursuant to the Company's Stock Option Plan. (7) 101 East 52/nd/ Street, New York, New York 10022. Consists of 1,333 shares issuable under an option granted pursuant to the Company's Stock Option Plan. Excludes 41,666 shares owned by Rothschild, Inc., of which Mr. Ross was a Managing Director until April 1,2000. Mr. Ross does not have any investment or voting power over such shares and disclaims beneficial ownership. (8) 1450 Broadway, 20/th/ Floor, New York, New York 10018. (9) 4310 Paradise Road, Las Vegas, Nevada 89109. Includes 3,000 shares issuable under options granted pursuant to the Company's Stock Option Plan. (10) 4310 Paradise Road, Las Vegas, Nevada 89109. Consists of shares issuable under options granted pursuant to the Company's Stock Option Plan. (11) 4310 Paradise Road, Las Vegas, Nevada 89109. (12) 1001 19/th/ Street North, Arlington, VA. 22209. Based upon a Schedule 13G dated July 13, 1998, as amended on each of February 16, 1999, 2000 and 2001, July 11,2001 and August 13, 2001, filed jointly by Friedman Billings Ramsey Group, Inc., Orkney Holdings, Inc., Eric F. Billings, Emanuel J. Friedman and W. Russell Ramsey with the SEC. (13) See Notes (2)-(11). Item 13. Certain Relationships and Related Transactions Purchase of Preferred Equities Corporation. Pursuant to a Stock Purchase and Redemption Agreement dated October 6, 1987 and amended October 25, 1987, Comay Corp., an affiliate of Mr. Cohen (Comay), GRI, an affiliate of Mr. Schuster, RRE Corp., an affiliate of Mr. Nederlander (together with its assignee, RER Corp., another affiliate of Mr. Nederlander, RER), and H&H Financial Inc., an affiliate of Mr. Hirsch (H&H), obtained the rights (PEC Purchase Rights) to acquire PEC, a privately-held Nevada corporation engaged in retail land sales, resort time-sharing and other real estate related activities. (Comay, GRI, RER and H&H are collectively referred to as the Assignors). Certain Arrangements Between the Company and Affiliates of Certain Officers and Directors. Pursuant to the Assignment and Assumption Agreement, dated February 1, 1988 as subsequently amended, the Assignors assigned (Assignment) their PEC Purchase Rights to the Company. As part of the consideration for the Assignment to the Company, the Assignors were entitled to receive from the Company, on a quarterly basis until January 31, 1995, amounts equal in the aggregate to 63% of the "Unrestricted Cash Balances" of PEC. The Assignment and Assumption Agreement defines Unrestricted Cash Balances of PEC as the cash on hand and on deposit of PEC and its subsidiary as 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. 34 At January 31, 1995, when accrual of payments to assignors ceased, $13.3 million was payable to the Assignors. On March 2, 1995, the Assignors agreed to defer payment of $10 million of the amounts due to them pursuant to an amendment to the Assignment and Assumption Agreement providing for the subordination of such amounts to payment of debt for money borrowed by the Company or obligations of the Company's subsidiaries guaranteed by the Company (Subordinated Debt). Warrants (Warrants) to purchase 166,666 shares of common stock, at an exercise price of $25.50 per share (the closing market price per share on March 2, 1995), were granted to the Assignors in consideration of the payment deferral and subordination. The balance of $3.3 million was paid to the assignors as follows: $809,000 including interest of $59,000 in June 1995, and the balance of $2.6 million including interest of $45,000 in January 1997. The Warrants were exercised in August 1997 in a non-cash transaction, whereby the Subordinated Debt was reduced by $4.25 million. Interest on the Subordinated Debt was to be paid semiannually at the rate of 10% per year starting September 1, 1995, and the Subordinated Debt was to be repaid in semiannual principal payments commencing March 1, 1997. On March 1, 1997, the Assignors received the first semiannual principal payment of $1.4 million plus interest related to the repayment of the Subordinated Debt. In connection with exercise of the Warrants, payments aggregating $4.25 million were deemed paid and the semiannual payments were scheduled to resume in March 1999, with a partial payment made in September 1998. The final $4.29 million was scheduled to be paid in 3 equal installments on March 1, 1999, September 1, 1999 and March 1, 2000. In accordance with the Amended and Restated Fourteenth Amendment to Assignment and Assumption Agreement, the principal and interest payments have been deferred until March 1, 2002. Payments of interest of $429,000 and principal of $75,000 on Subordinated Debt were made during fiscal 2001. The Subordinated Debt is collateralized by a pledge of PEC's outstanding stock. In fiscal 2001, an advance by the Company of $100,000 at an interest rate of 10% was made to Eugene I. Schuster, an affiliate of one of the Assignors, against the amount owed to it. The balance outstanding under this advance was $11,000 as of August 31, 2001. In April 1995, PEC entered into an arrangement with Ramada, a subsidiary of Cendant Corporation, of which Mr. Nederlander became a director in July 1995. See "Business-Preferred Equities Corporation-Timeshare Properties and Sales." PART IV Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K (a) Certain documents filed as part of Form 10-K. See Item 8 above for a list of financial statements included as part of this Annual Report on Form 10-K. Reports on Form 8-K. The Company filed the following reports on Form 8-K during the quarter ended August 31, 2001: 1. Current Report on Form 8-K, dated August 7, 2001, filed with the Securities and Exchange Commission on August 14, 2001, with respect to the termination of the engagement of Deloitte & Touche LLP as the Company's independent accountant. 2. Current Report on Form 8-K, dated August 21, 2001, filed with the Securities and Exchange Commission on August 24, 2001, with respect to the engagement of Ernst & Young LLP as the Company's independent accountant. (b) 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. 35 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. 10.4(a)(1) Stock Purchase Agreement dated October 25, 1987 by and among the Company, and Robert Nederlander, Jerome J. Cohen, Don A. Mayerson, Herbert Hirsch and Growth Realty Inc. (GRI) (collectively, the Purchasers) filed as Exhibit A to a Schedule 13D dated October 25, 1987, filed by Jerome J. Cohen, et al., and incorporated herein by reference. 10.4(b)(1) Letter dated January 7, 1988 from the Purchasers of the Company, updating representations made by the Company, in the Stock Purchase Agreement (Exhibit 10.5(a)) filed as Exhibit 10.2 to a Current Report on Form 8-K of the Company, dated January 7, 1988, and incorporated herein by reference. 10.5(a)(1) Assignment Agreement dated October 25, 1987 by and among Comay Corp. (Comay), GRI, RER Corp. (RER) (as successor in interest to RRE Corp.) and H&H Financial, Inc. (H&H) (collectively the Assignors) and the Company, with respect to shares of Common Stock of Preferred Equities Corporation (PEC), filed as Exhibit B to a Schedule 13D dated October 25, 1987 filed by Jerome J. Cohen, et al., and incorporated herein by reference. 10.5(b)(1) Assignment and Assumption Agreement dated February 1, 1988 by and among the Assignors and the Company filed as Exhibit 10.2 to a Current Report of Form 8-K of the Company, dated February 1, 1988 and incorporated herein by reference. 10.5(c)(1) Amendment to Exhibit 10.6(b) dated as of July 29, 1988 filed as Exhibit 10.3 to a Current Report on Form 8-K of the Company, dated August 1, 1988 and incorporated herein by reference. 10.6(a)(1) Stock Purchase and Redemption Agreement dated as of October 6, 1987 by and among PEC, Comay, GRI, RRE Corp., H&H, Linda Sterling and the 1971 Rosen Family Stock Trust filed as Exhibit C to a Schedule 13D dated October 25, 1987 filed by Jerome J. Cohen, et al., and incorporated herein by reference. 10.6(b)(1) Amendment dated as of October 25, 1987 of Exhibit 10.7(a) filed as Exhibit 10.3(b) to a Current Report on Form 8-K of the Company dated February 1, 1988, and incorporated herein by reference. 10.7(1) Loan and Security Agreement dated February 1, 1988 by and between the Company and Greyhound Real Estate Finance Company filed as Exhibit 10.7 to a Current Report on Form 8-K of the Company dated February 1, 1988 and incorporated herein by reference. 10.8(1) Pledge and Security Agreement dated February 1, 1988 by and among the Company and Comay, GRI, REF, H&H and PEC regarding the pledge of PEC stock pursuant to the Assignment Agreement and the Assignment and Assumption Agreement (Exhibits 10.6(a) and (b)) filed as Exhibit 10.8 to the Form 8 Amendment dated April 18, 1988 to a Current Report on Form 8-K of the Company dated February 1, 1988 and incorporated herein by reference. 10.9(1) Purchase Agreement dated June 30, 1988 by and among Preferred Equities Corporation (PEC), Southern Colorado Properties, Inc., Colorado Land and Grazing Company and The Oxford Finance Companies, Inc. filed as Exhibit 10.1 to a Quarterly Report of the Company on Form 10-Q for the quarter ended May 31, 1988 and incorporated herein by reference. 10.10(2) Amendment to Exhibit 10.5(b), dated July 29, 1988. 10.11(3) Amended and Restated Loan and Security Agreement between Greyhound Real Estate Finance Company and Vacation Spa Resorts, Inc., dated May 10, 1989 and Amended and Restated Promissory Note and Guarantee and Subordination Agreement. 10.12(3) Amendment No. 2 to Loan and Security Agreement between Greyhound Real Estate Finance Company and Vacation Spa Resorts, Inc., dated April 16, 1990 and Amendment No. 2 to Promissory Note and Guarantee and Subordination Agreement. 10.13(3) Purchase Agreement dated 24th day of September 1990 by and among Brigantine Inn, Ltd., Brigantine Preferred Properties, Inc. and Preferred Equities Corporation. 10.14(3) Purchase Agreement dated 24th day of September, 1990 by and among Brigantine Villas, L.P., Brigantine Preferred Properties, Inc., and Preferred Equities Corporation. 10.15(4) Amendment No. 3 to Loan and Security Agreement between Greyhound Real Estate Finance Company and Preferred Equities Corporation, dated May 31, 1991 and Amendment No. 2 to Promissory Note. 36 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. 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. 37 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. 10.42(8) Amendment No. 8 to Amended and Restated Loan and Security Agreement between Greyhound Real Estate Finance Company and Preferred Equities Corporation, dated April 15, 1994. 10.43(8) Purchase and Servicing Agreement dated as of June 1, 1994, between Preferred Equities Corporation as Seller and Servicer, and NBD Bank, N.A. as Purchaser. 10.44(8) Purchase and Servicing Agreement dated as of July 6, 1994, between Preferred Equities Corporation as Seller, and First National Bank of Boston as Purchaser. 10.45(8) Amendment No. 9 to Amended and Restated Loan and Security Agreement between Greyhound Real Estate Finance Company and Preferred Equities Corporation, dated August 31, 1994, and Amendment No. 4 to Amended and Restated Promissory Note dated August 31, 1994, Amendment No. 6 to Loan and Security Agreement between Greyhound Real Estate Finance Company and Preferred Equities Corporation dated August 31, 1994, and Amendment No. 4 to Promissory Note dated August 31, 1994, between Preferred Equities Corporation as successor-in-interest to Vacation Spa Resorts, Inc., and Greyhound Financial Corporation. 10.47(9) Third Amendment to Loan and Security Agreement and Assumption Agreement dated August 23, 1994, by and between Preferred Equities Corporation, Colorado Land and Grazing Corp. and Dorfinco Corporation. 10.48(9) General Loan and Security Agreement dated October 5, 1994, between Steamboat Suites, Inc. and Textron Financial Corporation. 10.49(9) Purchase and Servicing Agreement, Second Closing, dated November 29, 1994, between Preferred Equities Corporation and NBD Bank, N.A. 10.50(9) Form of Agreement with respect to the Company's "Split-Dollar" Life Insurance Plan, including Form of Assignment of Limited Interest in Life Insurance as Collateral Security. 10.51(9) Construction Loan Agreement dated January 20, 1995, by and between Preferred Equities Corporation and NBD Bank. 10.52(9) Amendment No. 10 to Amended and Restated Loan and Security Agreement dated January 26, 1995, by and between Greyhound Financial Corporation and Preferred Equities Corporation. 10.53(9) Loan Agreement re: Calvada Golf Course dated January 31, 1995, by and among The First National Bank of Boston and Preferred Equities Corporation. 10.54(9) Second Amendment to Assignment and Assumption Agreement dated March 2, 1995, by and between RER Corp., Comay Corp., Growth Realty, Inc. and H&H Financial, Inc. and Mego Financial Corp. 10.55(9) First Amendment to General Loan and Security Agreement dated February 27, 1995, between Steamboat Suites, Inc. and Textron Financial Corporation. 10.57(9) Licensing Agreement dated April 18, 1995, by and among Hospitality Franchise Systems, Inc., Ramada Franchise Systems, Inc. and Preferred Equities Corporation. 10.58(9) Purchase and Servicing Agreement, Third Closing, dated May 24, 1995, between NBD Bank, N.A. and Preferred Equities Corporation. 10.60(9) Purchase and Servicing Agreement, dated as of August 31, 1995, between Preferred Equities Corporation, Colorado Land and Grazing Corp. and First National Bank of Boston. 10.85(12) Amendment No. 11 to Amended and Restated Loan and Security Agreement dated September 22, 1995, by and between Finova Capital Corporation and Preferred Equities Corporation and related Promissory Note relating to Aloha Bay Phase II. 10.86(12) Amendment No. 12 to Amended and Restated Loan and Security Agreement dated September 29, 1995, by and between Finova Capital Corporation and Preferred Equities Corporation and Amended and Restated Promissory Note relating to Corporate Office Building. 10.87(12) Fourth Amendment to Loan and Security Agreement and Assumption Agreement dated September 30, 1995, by and between Preferred Equities Corporation, Colorado Land and Grazing Corp., Mego Financial Corp. and Dorfinco Corporation. 38 10.89(12) Second Amendment to General Loan and Security Agreement dated November 30, 1995, by and between Steamboat Suites, Inc. and Textron Financial Corporation and Restated and Amended Receivables Promissory Note. 10.90(12) Amendment No. 13 to Amended and Restated Loan and Security Agreement dated December 13, 1995, by and between Finova Capital Corporation and Preferred Equities Corporation and three (3) related Promissory Notes, relating to the Grand Flamingo Towers Lobby, Ida and Winnick Building Additions. 10.91(12) Purchase and Sale Agreement dated December 29, 1995, by and between Overlook Lodge Limited Liability Company as Seller and Preferred Equities Corporation as Purchaser. 10.92(12) Second Amendment to Purchase and Sale Agreement dated February 8, 1996, as previously amended by an Amendment to Purchase and Sale Agreement dated May 10, 1994, between Preferred Equities Corporation, Marine Midland Bank, and Wellington Financial Corp. 10.93(12) Acquisition and Construction Loan Agreement dated March 27, 1996, by and between Heller Financial, Inc. and Preferred Equities Corporation and three (3) related Promissory Notes; Acquisition Promissory Note, Revolving Renovation Promissory Note, and Receivables Promissory Note. 10.94(12) Construction Loan Agreement dated April 30, 1996, by and between Preferred Equities Corporation and NBD Bank and related Promissory Note. 10.95(12) Amendment No. 14 to Amended and Restated Loan and Security Agreement dated June 5, 1996, by and between Finova Capital Corporation and Preferred Equities Corporation and Second Amended and Restated Promissory Note, relating to Headquarters and FCFC Property. 10.96(12) Amendment No. 15 to Amended and Restated Loan and Security Agreement dated August 16, 1996, by and between Finova Capital Corporation and Preferred Equities Corporation; Amendment No. 7 to Loan and Security Agreement; Amendment No. 5 to Amended and Restated Promissory Note; Amendment No. 5 to Promissory Note; Amendment No. 1 to Promissory Note [Towers Lobby]. 10.97(12) Request for Receivables Purchase dated July 30, 1996, by and between Preferred Equities Corporation as Seller and NBD Bank as Purchaser. 10.99(12) Amendment to Common Stock Purchase Warrant issued by Mego Financial Corp. to Legg Mason Special Investment Trust, Inc. 10.100(14) Third Amendment to General Loan and Security Agreement dated November 29, 1996 between Steamboat Suites, Inc. as Debtor and Textron Financial Corporation as Lender and the related Restated and Amended Receivables Promissory Note dated November 30, 1996 effective October 6, 1994. 10.101(14) Fifth Amendment to Loan and Security Agreement dated November 29, 1996 by and among Preferred Equities Corporation and Colorado Land and Grazing Corp. as Borrower; Mego Financial Corp. as Guarantor; and Dorfinco Corporation as Lender and the related Fourth Amendment to Promissory Note dated November 29, 1996. 10.102(14) Acquisition and Renovation Loan Agreement dated August 6, 1996 between Heller Financial, Inc. as Lender and Preferred Equities Corporation as Borrower; and Interval Receivables Loan and Security Agreement dated August 6, 1996 by and among Heller Financial, Inc. as Lender and Preferred Equities Corporation as Borrower and Mego Financial Corp. as Guarantor, and the three related Promissory Notes. 10.103(15) Subdivision Improvement Agreement dated March 7, 1995 between Preferred Equities Corporation and the Board of County Commissioners of the County of Nye, State of Nevada. 10.104(15) Subdivision Improvement Agreement dated February 20, 1996 between Preferred Equities Corporation and the Board of County Commissioners of the County of Nye, State of Nevada. 10.105(15) Subdivision Improvement Agreement dated February 20, 1996 between Preferred Equities Corporation and the Board of County Commissioners of the County of Nye, State of Nevada. 10.106(15) Subdivision Improvement Agreement dated December 17, 1996 between Preferred Equities Corporation and the Board of County Commissioners of the County of Nye, State of Nevada. 10.107(15) Subdivision Improvement Agreement dated December 17, 1996 between Preferred Equities Corporation and the Board of County Commissioners of the County of Nye, State of Nevada. 10.108(15) Subdivision Improvement Agreement dated December 17, 1996 between Preferred Equities Corporation and the Board of County Commissioners of the County of Nye, State of Nevada. 10.109(15) Subdivision Improvement Agreement dated December 17, 1996 between Preferred Equities Corporation and the Board of County Commissioners of the County of Nye, State of Nevada. 39 10.110(15) Subdivision Improvement Agreement dated December 17, 1996 between Preferred Equities Corporation and the Board of County Commissioners of the County of Nye, State of Nevada. 10.112(15) Employment Agreement between Mego Financial Corp. and Irving J. Steinberg dated August 1, 1996. 10.113(16) Employment Agreement between Jerome J. Cohen and Mego Financial Corp. dated September 1, 1996. 10.114(16) Purchase and Servicing Agreement between Preferred Equities Corporation as Seller and BankBoston, N.A. as Purchaser dated May 30, 1997. 10.115(16) Second Amended and Restated and Consolidated Loan and Security Agreement between Preferred Equities Corporation as Borrower and FINOVA Capital Corporation as lender, dated May 15, 1997. 10.116(16) Form of Owners Association Agreement between Resort Condominiums International, Inc. and Homeowners Associations with schedule listing the associations. 10.129(17) Third Amendment to Assignment and Assumption Agreement by and between RER Corp., Comay Corp., Growth Realty, Inc. and H&H Financial, Inc. and Mego Financial Corp. dated August 20, 1997. 10.130(17) Loan and Security Agreement between Litchfield Financial Corporation and Preferred Equities Corporation dated July 30, 1997. 10.132(17) Employment Agreement between Jon A. Joseph and Mego Financial Corp. dated August 31, 1997. 10.133(17) Agreement between the Company and Herbert B. Hirsch dated September 2, 1997 relating to a severance payment. 10.134(17) Agreement between the Company and Don A. Mayerson dated September 2, 1997 relating to a severance payment. 10.137(17) Agreement between Mego Mortgage Corporation and Preferred Equities Corporation, dated February 9, 1998, regarding assignment of rights related to the Loan Program Sub-Servicing Agreement to Greenwich Capital Markets, Inc. 10.138(17) Mortgage Loan Facility Agreement between FINOVA Capital Corporation and Preferred Equities Corporation dated February 18, 1998. 10.142(23) Amended and Restated Real Estate Purchase and Sales Agreement by and among Preferred Equities as borrower and Mercantile Equities Corporation and Hartsel Springs Ranch of Colorado, Inc., as Note holder dated as of November 25, 1997. 10.143(23) Letter Amendment to General Loan and Security Agreement dated December 1, 1997, between Steamboat Suites, Inc. and Textron Financial Corporation. 10.144(23) Mortgage Loan Facility Agreement between FINOVA Capital Corporation and Preferred Equities Corporation dated March 20, 1998. 10.145(23) Loan and Security Agreement dated August 12, 1998 between Preferred Equities Corporation as Borrower and Dorfinco Corporation as Lender and the related Promissory Note. 10.146(23) Post-72 Lots Purchase Money Promissory Note by and among Preferred Equities and Mercantile Equities Corporation and Hartsel Springs Ranch of Colorado, Inc. dated as of February 20, 1998. 10.147(23) Purchase Money Promissory Note by and among Preferred Equities as borrower and Mercantile Equities Corporation and Hartsel Springs Ranch of Colorado, Inc., as Noteholder dated as of February 20, 1998. 10.148(23) Compensation Agreement between Frederick H. Conte and Preferred Equities Corporation dated September 1, 1998. 10.149(23) Form of Indemnification Agreement, each dated as of September 23, 1998 between the Company and each of Robert Nederlander, Jerome J. Cohen, Eugene I. Schuster, Herbert B. Hirsch, John E. McConnaughy, Jr., Wilbur L. Ross, Jr. and Don A. Mayerson. 10.150(20) Amended and Restated and Consolidated Loan and Security Agreement between Finova and PEC & Mego Financial dated December 23, 1998 10.151(20) Common Stock Purchase Warrant issued by Mego Financial to Finova Capital Corporation dated December 23, 1998. 10.152(21) First Amended and Restated and Consolidated Promissory Note dated as of November 5, 1998 between FINOVA Capital Corporation and Preferred Equities Corporation relating to Aloha Bay Phase I. 40 10.153 (21) Third Amended and Restated Promissory Note dated as of September 29, 1998 by and between FINOVA Capital Corporation and Preferred Equities Corporation relating to the Headquarters and FCFC Property. 10.154 (21) Amendment No. 4 to Second Amended and Restated and Consolidated Loan and Security Agreement dated as of November 6, 1998 between Finova Capital Corporation and Preferred Equities Corporation. 10.155 (21) Amendment No. 4 to Second Amended and Restated and Consolidated Loan and Security Agreement dated as of November 6, 1998 between Greyhound Real Estate Finance Company and Preferred Equities Corporation. 10.156 (21) Amended and Restated Guarantee and Subordination Agreement dated as of September 29, 1998 between Greyhound Real Estate Finance Company and Mego Financial Corporation relating to the Headquarters Re-advance. 10.157 (21) First Amended and Restated Promissory Note dated as of November 6, 1998 between FINOVA Capital Corporation and Preferred Equities Corporation relating to the IDA Building Addition. 10.158 (21) Letter Agreement dated as of September 29, 1998 between FINOVA Capital Corporation and Preferred Equities Corporation relating to the Headquarters Re-advance. 10.159 (21) Additional Advance Note dated as of November 6, 1998 between FINOVA Capital Corporation and Preferred Equities Corporation relating to Aloha Bay Phase II. 10.160 (21) Request for Advance and Disbursement Instructions dated as of November 11, 1998 between FINOVA Capital Corporation and Preferred Equities Corporation. 10.161 (21) First Amended and Restated Promissory Note dated as of November 6, 1998 between FINOVA Capital Corp. and Preferred Equities Corporation relating to the Winnick Building Addition. 10.162 (21) Fourth Amendment to Assignment and Assumption Agreement dated as of February 26, 1999 by and between RER Corp, COMAY Corp., Growth Realty Inc. and H & H Financial, Inc. and Mego Financial Corporation. 10.163 (21) Amended and Restated Stock Option Plan dated September 16, 1998 for Mego Financial Corp. 10.164 (22) Amendment No.2 to Interval Receivables Loan and Security Agreement dated as of March 28, 1999 between Heller Financial, Inc. and Preferred Equities Corporation. 10.165 (22) Sales Agreement dated as of March 8, 1999 between Great Escape Marketing, Inc. and Preferred Equities Corporation relating to 6950 Villa de Costa Dr. Orlando, Florida. 10.166 (22) Sales Agreement dated as of March 10, 1999 between D&D Marketing, Inc. and Preferred Equities Corp and Brigantine Preferred Properties. 10.167 (22) Forbearance and Modification Agreement dated as of May 7, 1999 by and between Preferred Equities Corporation and Heller Financial, Inc. 10.168 (22) Management Agreement dated May 20, 1999 by and between Hotel Maison Pierre Lafitte, LTD. Owners Association, Inc. and Preferred Equities Corporation. 10.169 (22) Fifth Amendment to Assignment and Assumption Agreement dated May 28, 1999 by and between RER Corp, COMAY Corp., Growth Realty Inc. and H&H Financial, Inc. and Mego Financial Corp. 10.170 (22) Amendment No. 2 to Severance Agreement, and Consulting Agreement dated June 18, 1999 between Don A. Mayerson and Mego Financial Corp. 10.171 (22) First Amendment to Forbearance Agreement and Amendment No. 6 to Second Amended and Restated and Consolidated Loan and Security Agreement dated May 7, 1999 by and among Finova Capital Corporation, Preferred Equities Corporation and Mego Financial Corp. 10.172 (24) Sixth Amendment to Assignment and Assumption Agreement dated May 28, 1999 by and between RER Corp, COMAY Corp., Growth Realty Inc. and H&H Financial, Inc. and Mego Financial Corp. 10.173 (24) Forbearance Agreement dated August 6, 1999 among Preferred Equities, and Mego Financial Corporation and Litchfield Financial Corporation. 10.174 (24) Purchase and Sale Agreement between The Villas at Monterey Limited Partnership and Tango Bay of Orlando and Preferred Equities Corporation regarding Ramada Suites at Tango Bay Orlando. 10.175 (24) Extension dated September 7, 1999 to the Second Amendment to Forbearance Agreement and Amendment No. 7 to Second Amended and Restated Consolidated Loan and Security Agreement dated December 23, 1998 between Preferred Equities Corporation and Finova Capital Corporation. 41 10.176 (24) Purchase and Security Agreement dated June 11, 1999 between Preferred Equities Corporation and Preferred RV Resort Owners Association regarding the Preferred RV Resort. 10.177 (24) Forbearance Agreement and Amendment No. 5 to Second Amended and Restated and Consolidated Loan and Security Agreement dated December 23, 1998 between Finova Capital Corporation and Preferred Equities Corp. 10.178 (24) Letter Agreement dated February 8, 1999 between Preferred Equities Corporation and Finova Capital Corporation regarding additional agreements to the Forbearance Agreement and Amendment No. 5 to Second Amended and Restated Consolidated Loan and Security Agreement dated December 23, 1998. 10.179 (24) Amendment No. 3 to Severance Agreement and Consulting Agreement between Mego Financial Corp. and Don A. Mayerson dated September 28, 1999. 10.180 (24) Compensation Agreement between S. Duke Campbell and Preferred Equities Corporation dated July 27, 1998. 10.181 (24) Amendment dated October 15, 1999 to the General Loan and Security Agreement Inventory Advance between Preferred Equities Corporation and Textron Financial Corporation dated October 5, 1994. 10.182 (24) Amendment dated April 26, 1999 to the Agreement made January 1, 1995 between Mego Financial Corp. and Herbert A. Krasow, as Trustee of the Herbert B. Hirsch Property Trust Insurance Trust dated October 22, 1990 regarding the Agreement concerning "Split-Dollar" Life Insurance Plan. 10.183 (24) Amended Assignment of Limited Interest in Life Insurance as Collateral Security dated April 26, 1999 to an Assignment made as of January 1, 1995 by Herbert A. Krasow, as Trustee of the Herbert B. Hirsch Property Trust Insurance Trust, dated October 22, 1990 to Mego Financial Corp. 10.184 (24) Amended Agreement Concerning "Split-Dollar" Life Insurance Plan dated April 26, 1999 to the Agreement made January 1, 1995, between Mego Financial Corp., Lawrence J. Cohen and Clifford A. Schulman as Trustees of the Cohen 1994 Insurance Trust dated December 2, 1994, Jerome J. Cohen and Rita Cohen. 10.185 (24) Amended Assignment of Limited Interest in Life Insurance as Collateral Security dated April 26, 1999 to an Assignment made as of January 1, 1995, by Lawrence J. Cohen and Clifford A. Schulman, as Trustees of the Cohen 1994 Insurance Trust dated December 21, 1994 to Mego Financial Corp. 10.186 (24) Amended Agreement Concerning "Split-Dollar" Life Insurance Plan dated April 23, 1999 to the Agreement made as of June 1, 1995 between Mego Financial Corp, Joseph A. Schuster, as Trustee of the Eugene I Schuster Irrevocable Trust - dated May 30 1995, and Eugene I. Schuster. 10.187 (24) Amended Assignment of Limited Interest in Life Insurance as Collateral Security dated April 23, 1999 to an Assignment made as of June 1, 1995, by Joseph A. Schuster, as Trustee of the Eugene I. Schuster Irrevocable Trust - Mego, dated May 30, 1995 to Mego Financial Corp. 10.188 (24) Amended Agreement Concerning "Split-Dollar" Life Insurance Plan dated April 26, 1999 to the Agreement made January 1, 1995 between Mego Financial Corp., Tracy Allen, and Jane Gerard, as Trustees of the Nederlander 1994 Insurance Trust, dated December 19, 1994, Robert e. Nederlander and Gladys Nederlander. 10.189 (24) Amended Assignment of Limited Interest in Life Insurance as Collateral Security Amendment made April 26, 1999 to as Assignment made January 1, 1995 by Tracy Allen and Jane Gerard, as Trustees of the Nederlander 1994 Insurance Trust, dated December 19, 1994 to Mego Financial Corp. 10.190 (24) Amended Agreement Concerning "Split-Dollar" Life Insurance Plan Amendment made as of April 26, 1999 to the Agreement made as of January 1, 1995, between Mego Financial Corp., Gary Steven Mayerson and Robert Keith Mayerson, as Trustees of the Mayerson 1994 Insurance Trust, dated December 21, 1994, Don A. Mayerson and Evelyn W. Mayerson. 10.191 (24) Amended Assignment of Limited Interest in Life Insurance as Collateral Security Amendment made April 26, 1999 to an Assignment made January 1, 1995, by Gary Steven Mayerson and Robert Keith Mayerson, as Trustees of the Mayerson 1994 Insurance Trust, dated December 21, 1994 to Mego Financial Corp. 10.192 (24) Seventh Amendment to Assignment and Assumption Agreement by and between RER Corp., Comay Corp., Growth Realty Inc. and H&H Financial, Inc. and Mego Financial Corp. dated November 20, 1999. 42 10.193 (25) Purchase and Sale Agreement dated October 6, 1999 between Preferred Equities Corporation and Covington Nevada Corp regarding the Sale of Calvada Championship Golf Course and Calvada Executive Golf Course. 10.194 (25) Amendment No. One to Third Amended and Restated Promissory Note - Headquarters and FCFC Property dated November 9, 1999 between Preferred Equities Corporation and Finova Capital Corporation. 10.195 (25) Amendment No. One to Promissory Note - Additional Advances dated November 9, 1999 between Preferred Equities Corporation and Finova Capital Corporation. 10.196 (25) Third Amendment to Forbearance Agreement and Amendment No. 8 to Second Amended and Restated and Consolidated Loan and Security Agreement dated November 9, 1999, by and among Finova Capital Corporation, Preferred Equities Corporation, and Mego Financial Corp. 10.197 (25) Fourth Amendment to Forbearance Agreement and Amendment No. 9 to Second Amended and Restated and Consolidated Loan and Security Agreement dated December 17, 1999 by and among Finova Capital Corporation, Preferred Equities Corporation, and Mego Financial Corp. 10.198 (25) Second Amendment to Deed of Trust - Hartsel Springs Ranch dated December 17, 1999 by and among Preferred Equities Corporation and Finova Capital Corporation. 10.199 (26) Fifth Amendment to Forbearance Agreement and Amendment Number 10 to Second Amended and Restated and Consolidated Loan and Security Agreement dated as of February 25, 2000 by and among FINOVA Capital Corporation, Preferred Equities Corporation, and Mego Financial Corp. 10.200 (26) Eighth Amendment to Assignment and Assumption Agreement by and between RER Corp., COMAY Corp., Growth Realty Inc. and H&H Financial Inc., and Mego Financial Corp., dated January 31, 2000. 10.201 (26) Amended, Restated and Increased Receivables Promissory Note No. 1 by Preferred Equities Corp. to Heller Financial, Inc. dated December 22, 1999. 10.202 (26) Amended, Restated and Consolidated Acquisition Promissory Note No. 1 by Preferred Equities Corp. to Heller Financial, Inc. dated December 22, 1999. 10.203 (26) Fourth Amendment to Interval Receivables Loan and Security Agreement dated December 22, 1999 between Heller Financial, Inc., and Preferred Equities Corporation. 10.204 (26) Third Amendment to Acquisition and Construction Loan Agreement dated December 22, 1999 between Heller Financial, Inc., and Preferred Equities Corporation. 10.205 (26) General Loan and Security Agreement (Inventory Loan) executed December 17, 1999 by and among Textron Financial Corp., Preferred Equities Corp. and Steamboat Suites, Inc. 10.206 (26) General Loan and Security Agreement (Receivable Loan Facility) executed December 17, 1999 by and among Textron Financial Corp., Preferred Equities Corp. and Steamboat Suites, Inc. 10.207 (26) Sixth Amendment to Forbearance Agreement and Amendment No. 11 to Second Amended and Restated and Consolidated Loan and Security Agreement dated March 31, 2000 by and among Finova Capital Corporation, Preferred Equities Corporation and Mego Financial Corp. 10.208 (27) Amendment No. 4 to Severance Agreement and Consulting Agreement dated December 30, 1999 by and between Mego Financial Corp. and Don A. Mayerson. 10.209 (27) Amendment No. 5 to Severance Agreement and Consulting Agreement dated May 20, 2000 by and between Mego Financial Corp. and Don A. Mayerson. 10.210 (27) Ninth Amendment to Assignment and Assumption Agreement by and between RER Corp., COMAY Corp., Growth Realty Inc. and H&H Financial, Inc. and Mego Financial Corp. dated April 30,2000. 10.211 (28) Seventh Amendment to Forbearance Agreement and Amendment No. 12 to Second Amended and Restated and Consolidated Loan and Security Agreement dated July 20, 2000 by and among FINOVA Capital Corporation, Preferred Equities Corporation and Mego Financial Corp. 10.212 (28) Second Amendment to Loan and Security Agreement between Litchfield Financial Corporation and Preferred Equities Corporation dated July 15, 2000. 10.213 (28) Tenth Amendment to Assignment and Assumption Agreement by and between RER Corp., COMAY Corp., Growth Realty Inc. and H&H Financial, Inc. and Mego Financial Corp. dated August 31, 2000. 10.214 (28) Fourth Amendment to Acquisition and Construction Loan Agreement dated September 7, 2000 between Heller Financial, Inc., and Preferred Equities Corporation. 10.215 (28) ISDA Master Swap Agreement between Sovereign Bank and Preferred Equities Corporation dated 43 August 31, 2000. 10.216 (28) Five year extension of Licensing Agreement dated April 18, 1995, by and among Hospitality Franchise Systems, Inc., Ramada Franchise Systems, Inc. and Preferred Equities Corporation. 10.217 (28) Extension of Loan and Security Agreement dated August 12, 1998 between Dorfinco Corporation and Preferred Equities Corporation to December 31, 2001. 10.218 (28) Master Lease Agreement and Guaranty of Lease among Jozac Business Center, LLC, Landlord; Preferred Equities Corporation, Tenants; and Mego Financial Corporation, Guarantor, for 4310 Paradise Road, Las Vegas, NV dated October 2, 2000. 10.219 (28) Master Lease Agreement and Guaranty of Lease among Jozac Business Center, LLC, Landlord; Preferred Equities Corporation, Tenants; and Mego Financial Corporation, Guarantor, for 1500 Tropicana, Las, Vegas, NV dated November 9, 2000. 10.220 (28) Eleventh Amendment to Assignment and Assumption Agreement by and between RER Corp., COMAY Corp., Growth Realty Inc. and H&H Financial, Inc. and Mego Financial Corp. dated November 15, 2000. 10.221 (29) Amended and Restated Employment Agreement dated November 10, 2000 by and between MEGO Financial Corp and Jerome J. Cohen. 10.222 (29) Seventh Amendment to loan and security agreement by Preferred Equities Corporation and Colorado Land and Grazing Corp., dated December 15, 2000. 10.223 (29) Fifth Amendment to Promissory Note made by Preferred Equities Corporation and Colorado Land And Grazing Corp on December 15, 2000. 10.224 (29) Compensation Agreement between Carol Sullivan and Preferred Equities Corporation dated January 8, 2001. 10.225 (30) First Amendment to Loan and Security Agreement by and between Preferred Equities Corporation and Dorfinco Corporation dated November 30, 2000. 10.226 (30) First Amendment to General Loan and Security Agreement between Steamboat Suites, Inc., and Preferred Equities Corporation dated February 1, 2001. 10.227 (30) Eighth Amendment to Forbearance Agreement and Amendment No. 13 to Second Amended and Restated and Consolidated Loan and Security Agreement between Finova Capital corporation and Preferred Equities Corporation dated December 29, 2000. 10.228 (30) Twelfth Amendment to Assignment and Assumption Agreement by and between RER Corp., COMAY Corp., Growth Realty Inc. and H&H Financial, Inc. and Mego Financial Corp. dated February 15, 2001. 10.229 (31) Hypothecation Loan Agreement dated February 6, 2001 between Preferred Equities Corporation and HSBC Bank USA. 10.230 (31) Amended and Restated Loan and Security Agreement by and between Preferred Equities Corporation and Heller Financial, Inc. dated April 5, 2001. 10.231 General Loan and Security Agreement for Inventory Loan III executed March 30, 2001 among Textron Financial Corporation and Preferred Equities Corporation and Brigantine Preferred Properties, Inc. 10.232 First Amendment to General Loan and Security Agreement on Receivable Loan Facility executed 7/9/01 between Steamboat Suites, Inc., Preferred Equities Corporation and Brigantine Preferred Properties and Textron Financial Corporation. 10.233 First Amended and Restated Loan and Security Agreement executed on June 22, 2001 between Preferred Equities Corporation and Colorado Land and Grazing Corporation, Mego Financial Corp, and Dorfinco Corporation. 10.234 Thirteenth Amendment to Assignment and Assumption Agreement, by and between RER Corp., COMAY Corp., Growth Realty INC., and H&H Financial dated June 29, 2001. 10.235 Loan and Security Agreement by and between Preferred Equities Corporation and Capital Source Finance LLC effective August 8, 2001. 10.236 Amended and Restated Fourteenth Amendment to Assignment and Assumption Agreement, by and between RER Corp., COMAY Corp., Growth Realty INC., and H&H Financial dated November 15, 2001. 21.1 List of subsidiaries. - --------------- 44 (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. (14) Filed as part of the Company's Form 10-Q for the quarter ended November 30, 1996 and incorporated herein by reference. (15) Filed as part of the Company's Form 10-Q for the quarter ended February 28, 1997 and incorporated herein by reference. (16) Filed as part of the Company's Form 10-Q for the quarter ended May 31, 1997 and incorporated herein by reference. (17) Filed as part of the Company's Form 10-Q for the quarter ended February 28, 1998 and incorporated herein by reference. (18) Filed as part of the Company's Form 10-Q for the quarter ended May 31, 1998 and incorporated herein by reference. (19) Filed as part of the Company's Form 10-K for the fiscal year ended August 31, 1997 and incorporated herein by reference. (20) Filed as part of the Company's Form 10-Q for the quarter ended November 30, 1998 and incorporated herein by reference. (21) Filed as part of the Company's Form 10-Q for the quarter ended February 28, 1999 and incorporated herein by reference. (22) Filed as part of the Company's Form 10-Q for the quarter ended May 31, 1999 and incorporated herein by reference. (23) Filed as part of the Company's Form 10-K for the fiscal year ended August 31, 1998 and incorporated herein by reference. (24) Filed as part of the Company's Form 10K for the fiscal year ended August 31, 1999 and incorporated herein by reference. (25) Filed as part of the Company's Form 10-Q for quarter ended November 30, 1999 and incorporated herein by reference. (26) Filed as part of the Company's Form 10-Q for the quarter ended February 29, 2000 and incorporated herein by reference (27) Filed as part of the Company's Form 10-Q for the quarter ended May 31, 2000 and incorporated herein by reference. (28) Filed as part of the Company's Form 10-K for the fiscal year ended August 31, 2000 and incorporated herein by reference. (29) Filed as part of the Company's Form 10-Q for quarter ended November 30, 2000 and incorporated herein by reference. (30) Filed as part of the Company's Form 10-Q for the quarter ended February 29, 2001 and incorporated herein by reference 45 (31) Filed as part of the Company's Form 10-Q for the quarter ended May 31, 2001 and incorporated herein by reference. (d) Financial Statement schedules required by Regulation S-X. No financial statement schedules are included because of the absence of the conditions under which they are required or because the information is included in the financial statements or the notes thereto. 46 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 29, 2001 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 E. Nederlander Chairman of the Board, Chief Executive November 29 , 2001 - -------------------------------------------- Officer and Director Robert E. Nederlander /s/ Jerome J. Cohen President and Director November 29, 2001 - -------------------------------------------- Jerome J. Cohen /s/ Herbert B. Hirsch Senior Vice President, Chief Financial November 29, 2001 - -------------------------------------------- Officer, Treasurer and Director Herbert B. Hirsch /s/ Charles G. Baltuskonis Senior Vice President and November 29, 2001 - -------------------------------------------- Chief Accounting Officer Charles G. Baltuskonis /s/ Eugene I. Schuster Vice President and Director November 29, 2001 - -------------------------------------------- Eugene I. Schuster /s/ John E. McConnaughy, Jr. Director November 29, 2001 - -------------------------------------------- John E. McConnaughy, Jr. /s/ Wilbur L. Ross, Jr. Director November 29, 2001 - -------------------------------------------- Wilbur L. Ross, Jr. /s/ Leonard Toboroff Director November 29, 2001 - -------------------------------------------- Leonard Toboroff
47 MEGO FINANCIAL CORP. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No. ----------- Report of Independent Certified Public Accountants.................................... F-2 Independent Auditors' Report.......................................................... F-3 Consolidated Financial Statements: Consolidated Balance Sheets at August 31, 2001 and 2000 ......................... F-4 Consolidated Income Statements - Years Ended August 31, 2001, 2000 and 1999...... F-5 Consolidated Statements of Stockholders' Equity - Years Ended August 31, 2001, 2000 and 1999................................................................ F-6 Consolidated Statements of Cash Flows - Years Ended August 31, 2001, 2000 and 1999......................................................................... F-7 Notes to Consolidated Financial Statements............................................ F-8
F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Mego Financial Corp. and Subsidiaries Las Vegas, Nevada We have audited the accompanying consolidated balance sheet of Mego Financial Corp. and its subsidiaries (the Company) as of August 31, 2001, and the related consolidated income statement, statement of stockholders' equity, and statement of cash flows for the year then ended. 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Mego Financial Corp. and its subsidiaries at August 31, 2001, and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP Miami, Florida November 16, 2001 F-2 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Mego Financial Corp. and Subsidiaries Las Vegas, Nevada We have audited the accompanying consolidated balance sheet of Mego Financial Corp. and its subsidiaries (the "Company") as of August 31, 2000 and the related consolidated income statements, statements of stockholders' equity, and statements of cash flows for each of the two years in the period ended August 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Mego Financial Corp. and its subsidiaries at August 31, 2000, and the results of its operations and its cash flows for each of the two years in the period ended August 31, 2000, in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP San Diego, California November 22, 2000 F-3 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (thousands of dollars, except per share amounts)
August 31 -------------------------------- 2001 2000 -------------- -------------- ASSETS Cash and cash equivalents $ 1,894 $ 1,069 Restricted cash 1,926 1,255 Notes receivable, net of allowance for cancellations and discounts of $15,084 and $13,234 at August 31, 2001 and 2000, respectively 105,127 83,156 Retained interests in receivables sold, at fair value 3,603 2,701 Timeshare interests held for sale 18,139 23,307 Land and improvements inventory 3,152 4,113 Other investments 10,251 4,492 Property and equipment, net of accumulated depreciation of $17,098 and $17,632 at August 31, 2001 and 2000, respectively 16,867 23,167 Deferred selling costs 5,466 5,231 Prepaid debt expenses 2,359 2,060 Other assets 17,044 18,041 --------- --------- TOTAL ASSETS $ 185,828 $ 168,592 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Notes and contracts payable $ 120,238 $ 109,131 Accounts payable and accrued liabilities 24,337 19,544 Reserve for notes receivable sold with recourse 3,998 4,033 Deposits 3,201 2,841 Deferred income taxes 1,617 2,975 --------- --------- Total liabilities before subordinated debt 153,391 138,524 --------- --------- Subordinated debt 4,211 4,286 Stockholders' equity: Preferred stock, $.01 par value (authorized--5,000,000 shares, none outstanding) - - Common stock, $.01 par value (authorized--50,000,000 shares; 3,500,557 shares issued and outstanding at August 31, 2001 and 2000) 35 35 Additional paid-in capital 13,068 13,068 Retained earnings 16,516 12,679 Accumulated other comprehensive loss (1,393) - --------- --------- Total stockholders' equity 28,226 25,782 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 185,828 $ 168,592 ========= =========
See notes to consolidated financial statements. F-4 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (thousands of dollars, except per share amounts)
For the Years Ended August 31 ----------------------------------------------------- 2001 2000 1999 -------------- -------------- ------------- REVENUES Timeshare interest sales, net $ 53,974 $ 49,062 $ 41,262 Land sales, net 21,687 19,624 15,979 Interest income 14,977 12,430 9,310 Financial income 2,995 1,153 1,184 Gain on sale of notes receivable 668 635 - Gain on sale of investments and other assets 124 1,857 513 Incidental operations 1,817 2,033 2,597 Other 4,164 3,701 3,657 ------------- ------------- ------------ Total revenues 100,406 90,495 74,502 ------------- ------------- ------------ COSTS AND EXPENSES Direct cost of: Timeshare interest sales 10,886 10,518 8,527 Land sales 3,359 3,050 2,709 Interest expense 12,214 12,468 9,270 Marketing and sales 48,781 39,769 35,291 Incidental operations 1,631 1,698 2,274 Depreciation 1,412 1,827 1,878 General and administrative 18,942 17,746 14,333 ------------- ------------- ------------ Total costs and expenses 97,225 87,076 74,282 ------------- ------------- ------------ INCOME BEFORE INCOME TAXES 3,181 3,419 220 INCOME TAXES (BENEFIT) (656) (530) (830) ------------- ------------- ------------ NET INCOME APPLICABLE TO COMMON STOCK $ 3,837 $ 3,949 $ 1,050 ============= ============= ============ INCOME PER COMMON SHARE Basic and Diluted: Net income applicable to common stock $ 1.10 $ 1.13 $ 0.30 ============= ============= ============ Weighted-average number of common shares and common share equivalents outstanding 3,500,557 3,500,557 3,500,557 ============= ============= ============
See notes to consolidated financial statements. F-5 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (thousands of dollars, except share and per share amounts)
Accumulated Common Stock Additional Other $.01 par value Paid-In Retained Comprehensive ------------------------------ Shares Amount Capital Earnings Loss Total --------------- ------------- ------------- ------------- --------------- ------------- Balances at September 1, 1998 3,500,557 $ 35 $ 12,964 $ 7,680 $ 20,679 Warrants issued 104 104 Net income fiscal 1999 1,050 1,050 --------------- ------------- ------------- ------------- --------------- ------------- Balances at August 31, 1999 3,500,557 35 13,068 8,730 21,833 Net income fiscal 2000 3,949 3,949 --------------- ------------- ------------- ------------- --------------- ------------- Balances at August 31, 2000 3,500,557 35 13,068 12,679 25,782 Net income fiscal 2001 3,837 3,837 Cumulative effect of change in accounting principle as of September 1, 2000 for unrealized $ (168) (168) loss of interest rate swaps, net of related income tax benefit of $87 Unrealized loss on interest rate swaps for fiscal 2001, net of related income tax benefit of $631 (1,225) (1,225) --------------- ------------- ------------- ------------- --------------- ------------- Total comprehensive income 2,444 ------------- Balances at August 31, 2001 3,500,557 $ 35 $ 13,068 $ 16,516 $ (1,393) $ 28,226 =============== ============= ============= ============= =============== =============
See notes to consolidated financial statements. F-6 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (thousands of dollars)
For the Years Ended August 31 ------------------------------------------------------- 2001 2000 1999 ------------------ ---------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,837 $ 3,949 $ 1,050 ------------------ ---------------- ----------------- Adjustments to reconcile net income to net cash used in operating activities: Charges to allowance for cancellations (7,802) (8,643) (5,987) Provision for cancellations 9,647 7,354 5,626 Gain on sale of notes receivable (668) (635) - Gain on sale of other investments and other assets (124) (1,857) (513) Provision for uncollectible owner's association advances - (200) - Cost of timeshare interest and land sales 14,245 13,568 11,236 Depreciation 1,412 1,827 1,979 Additions to retained interests in receivables sold (1,824) (660) - Amortization of retained interests in receivables sold 922 525 801 Repayments on notes receivable 47,112 50,733 42,962 Additions to notes receivable (85,821) (82,388) (64,112) Proceeds from sales of notes receivable 15,526 19,594 - Purchase of land and timeshare interests (8,116) (4,810) (3,651) Changes in operating assets and liabilities: (Increase) decrease in restricted cash (671) 421 18 (Increase) decrease in other assets 698 (4,779) (5,557) Increase in deferred selling costs (235) (946) (566) Increase (decrease) in accounts payable and accrued liabilities 2,890 1,403 (632) Increase (decrease) in deposits 360 554 (2,590) Decrease in deferred income taxes (640) (530) (963) ------------------ ---------------- ----------------- Total adjustments (13,089) (9,469) (21,949) ------------------ ---------------- ----------------- Net cash used in operating activities (9,252) (5,520) (20,899) ------------------ ---------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (1,463) (2,230) (1,589) Proceeds from sale of property and equipment 6,286 1,617 - Purchase of other investments (5,927) (34) (950) Proceeds from the sale of other investments 149 1,031 747 ------------------ ---------------- ----------------- Net cash provided by (used in) investing activities (955) 384 (1,792) ------------------ ---------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings 73,980 64,363 59,047 Reduction of debt (62,873) (59,787) (36,478) Payments on subordinated debt (75) (192) (465) Increase in subordinated debt - - 595 ------------------ ---------------- ----------------- Net cash provided by financing activities 11,032 4,384 22,699 ------------------ ---------------- ----------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 825 (752) 8 CASH AND CASH EQUIVALENTS-BEGINNING OF YEAR 1,069 1,821 1,813 ------------------ ---------------- ----------------- CASH AND CASH EQUIVALENTS-END OF YEAR $ 1,894 $ 1,069 $ 1,821 ================= =============== ================ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for interest, net of amounts capitalized $ 15,199 $ 12,339 $ 9,000 ================= =============== ================
See notes to consolidated financial statements. F-7 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended August 31, 2001, 2000 and 1999 1. Nature of Operations Mego Financial Corp. (Mego Financial) is a premier developer and operator of timeshare properties and a provider of consumer financing to purchasers of timeshare intervals and land parcels through its wholly-owned subsidiary, Preferred Equities Corporation (PEC), established in 1970. PEC is engaged in originating, selling, servicing and financing consumer receivables generated through timeshare and land sales. Mego Financial and its subsidiaries are herein individually or collectively referred to as the Company as the context requires. PEC markets and finances timeshare interests and land in select resort areas. By providing financing to virtually all of its customers, PEC also originates consumer receivables that it hypothecates or sells, and services. Mego Financial was incorporated under the laws of the state of New York in 1954 under the name Mego Corp. and, in 1992, changed its name to Mego Financial Corp. In February 1988, Mego Financial acquired PEC, pursuant to an assignment by the Assignors, as defined below, of their contract right to purchase PEC. To facilitate its sales of timeshare interests, the Company has entered into several trust agreements. The trustees administer the collection of the related notes receivable. The Company has assigned title to certain of its resort properties in Nevada and its interest in certain related notes receivable to the trustees. In 1992, Mego Financial organized a subsidiary, Mego Mortgage Corporation (MMC), which was a specialized consumer finance company that originated, purchased, sold, securitized and serviced consumer loans consisting primarily of conventional uninsured home improvement and debt consolidation loans. After an initial public offering (IPO) of MMC common stock in November 1996, Mego Financial held 81.3% of the outstanding stock of MMC. On September 2, 1997, Mego Financial distributed all of its remaining 10,000,000 shares of MMC's common stock to Mego Financial's shareholders in a tax-free spin-off (Spin-off). Acquisition of Preferred Equities Corporation --------------------------------------------- The acquisition of PEC on February 1, 1988, was effected pursuant to an Assignment Agreement, dated October 25, 1987, between Mego Financial and several corporations (Assignors) and a related Assignment and Assumption Agreement (Assignment and Assumption Agreement), dated February 1, 1988, and amended on July 29, 1988, between Mego Financial and the Assignors (collectively, such agreements constitute the Assignment). The acquisition of PEC was accomplished by PEC issuing 2 shares of its common stock to Mego Financial for a purchase price of approximately $50,000. Simultaneously, the previously outstanding shares held by others were surrendered and redeemed by PEC at a cost to PEC of approximately $10,463,000 plus fees and expenses, leaving Mego Financial with all of the outstanding shares of PEC. The right to purchase shares from PEC was obtained by Mego Financial pursuant to the Assignment, which assigned to Mego Financial the right to purchase shares from PEC pursuant to the Stock Purchase and Redemption Agreement, dated October 6, 1987, between PEC and the Assignors, as amended on October 25, 1987. Consideration for the Assignment consisted of promissory notes (Purchase Notes) from Mego Financial to the Assignors in the aggregate amount of $2,000,000 and additional payments to the Assignors as described below. The Purchase Notes were paid in full prior to August 31, 1988. After the payment of the Purchase Notes, the Assignors were entitled to receive from Mego Financial on a quarterly basis, as determined as of the end of each quarter, additional payments equal in the aggregate to 63% of PEC's consolidated unrestricted cash balances, for a period ended on January 31, 1995. The additional payments were collateralized by a pledge of PEC stock to the Assignors. See Note 10 for further discussion. F-8 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For the years ended August 31, 2001, 2000 and 1999 (thousands of dollars, except share and per share amounts 2. Recent Events On October 2, 2001, CNUC entered into an agreement with Utilities Inc. providing for the acquisition by Utilities Inc. of all of the assets of CNUC for $5,500,000 (Asset Sale). Utilities Inc. has deposited $500,000 of the purchase price to assure its performance of the agreement. The transaction is subject to the approval of the Nevada Public Utilities Commission, which approval is expected on or before April 15, 2002. CNUC has assigned a portion of the proceeds from the Asset Sale to secure the Note mentioned below. The proceeds from the Asset Sale will be used for working capital and to reduce debt. The Asset Sale is not expected to have a significant impact on the Company's fiscal 2002 results of operations. On October 15, 2001, the Company and LC Acquisition Corp., a California corporation (LC), entered into a short-term financing agreement, modified on November 8, and November 15, 2001, pursuant to which LC agreed to lend to the Company an aggregate of $3,000,000 in two tranches. In connection with this financing arrangement, the Company issued to LC a promissory note (Note) bearing interest at 12% per annum. Payment of the Note is guaranteed by PEC and the guaranty is secured by a pledge of the stock of CNUC and a partial assignment of proceeds from the Asset Sale referred to above. The Note is payable on the date the Asset Sale is consummated or August 31, 2002, whichever is earlier. 3. Summary of Significant Accounting Policies Principles of Consolidation and Basis of Presentation--The ----------------------------------------------------- accompanying Consolidated Financial Statements include the accounts of Mego Financial and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. See Note 1. Parent Company Only Basis--At August 31, 2001 and 2000, respectively, ------------------------- Mego Financial, on a "parent company only" basis, reflected total assets of $41,999,000 and $34,398,000, which were comprised principally of its equity investment in subsidiaries of $34,650,000 and $32,962,000, and other assets, including amounts due from subsidiaries, of $7,349,000 and $1,438,000, and liabilities of $10,826,000 and $4,187,000, excluding subordinated debt. At August 31, 2001 and 2000, respectively, liabilities, excluding subordinated debt, were comprised principally of notes payable of $5,927,000 and $0 and deferred income taxes of $1,617,000 and $2,975,000. At August 31, 2001 and 2000, subordinated debt of $4,211,000 and $4,286,000, respectively, was outstanding. See Notes 1, 10 and 17. Cash Equivalents--Cash equivalents consist primarily of certificates ---------------- of deposit with original maturities of 90 days or less. Restricted Cash--Restricted cash represents: cash on deposit which --------------- relates to CNUC's 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 and servicing agreements. Notes Receivable--Notes receivable are stated at amortized cost ---------------- reduced by the allowance for cancellations and discounts. If the note receivable is at a "below market" interest rate, a discount is applied to the note receivable balance and amortized over the note's term so that the effective yield is 10%. Allowance for Cancellations--Provision for cancellations relating to --------------------------- notes receivable is recorded as expense in amounts sufficient to maintain the allowance at a level considered adequate to provide for anticipated losses resulting from customers' failure to fulfill their obligations under the terms of their notes receivable. The Company records the provision for cancellations at the time revenue is recognized based upon periodic analysis of the portfolio, collateral values, historical credit loss experience, borrowers' ability to repay and current economic factors. The allowance for cancellations represents the Company's estimate of the future credit losses to be incurred over the lives of the notes receivable. The 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 F-9 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For the years ended August 31, 2001, 2000 and 1999 consideration changes in the nature and level of the portfolio, current economic conditions which may affect the purchasers' ability to pay, the estimated value of inventory that may be reacquired and overall portfolio quality. Changes in the allowance as a result of such reviews are reflected in the provision for cancellations. Timeshare Interests Held for Sale--Costs incurred in connection with --------------------------------- preparing timeshare interests for sale are capitalized and include all costs of acquisition, renovation and furnishings. Timeshare interests held for sale are valued at the lower of cost or fair value. Land and Improvements Inventory--Land and improvements inventory ------------------------------- include carrying costs capitalized during the development period and costs of improvements incurred to date and are stated at the lower of cost or fair value. Property and Equipment--Property and equipment is stated at cost and ---------------------- is depreciated over its estimated useful life (generally 3 - 40 years) using the straight-line method. Costs of maintenance and repairs that do not improve or extend the life of the respective assets are recorded as expense. Utility Accounting Policies--The Company, through a wholly-owned --------------------------- subsidiary, provides water and sewer services to customers in the Pahrump valley of Nevada. This subsidiary is subject to regulation by the Public Utilities Commission of Nevada and the Company's accounting policies conform to generally accepted accounting principles as applied in the case of regulated public utilities in accordance with the accounting requirements of the regulatory authority having jurisdiction. Contributions in aid of construction (CIAC) received by the Company from its customers are included as a separate liability and amortized over the period of 9 - 25 years, which represents the estimated remaining useful life of the corresponding improvements. Amortization of CIAC reduces depreciation expense. CIAC is included in Accounts Payable and Accrued Liabilities on the Balance Sheet in the amounts of $9,244,000 and $9,173,000 at August 31, 2001 and 2000, respectively. Reserve for Notes Receivable Sold with Recourse--Recourse to the ----------------------------------------------- Company on sales of notes receivable is governed by the agreements between the purchasers and the Company. The reserve for notes receivable sold with recourse represents the Company's estimate of the fair value of future credit losses to be incurred over the lives of the notes receivable. Proceeds from the sale of notes receivable sold with recourse were $14,858,000, $19,594,000 and $0 for the years ended August 31, 2001, 2000 and 1999, respectively. A liability for reserve for notes receivable sold with recourse is established at the time of each sale based upon the Company's estimate of the fair value of the recourse obligation under each agreement of sale and is reviewed for adequacy on a quarterly basis. At August 31, 2001 and 2000, the outstanding balance of notes receivable sold with recourse was $52,180,000 and $59,600,000, respectively. Income Taxes--The Company utilizes the provisions of SFAS No. 109, ------------ "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires the Company to adhere to an asset/liability approach for financial accounting and reporting for income taxes. Income tax expense is provided for the tax effects of transactions reported in the financial statements and consists of taxes currently due plus deferred taxes related primarily to differences between the bases of the balance sheet for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when they are recovered or settled. See Note 11. Revenue and Profit Recognition--Timeshare Interests and Land Sales-- ------------------------------ Sales of timeshare interests and land are recognized and included in revenues after certain "down payment" and other "continuing investment" criteria are met. Land sale revenues are recorded using the deposit method in accordance with the provisions of SFAS No. 66, "Accounting for Sales of Real Estate." The agreement for sale generally provides for a down payment and a note secured by a deed of trust or mortgage payable to the Company in monthly installments, including interest, over a period of up to 12 years. Revenue is recognized after the requisite rescission period has expired and at such time as the purchaser has paid at least 10% of the sales price for sales of timeshare interests and 20% of the sales price for land sales. Land sales usually meet these requirements within eight to ten months from closing and sales of timeshare interests usually meet these requirements at the time of sale. The sales price, less a provision for cancellation, is recorded as revenue and the allocated cost related to such net revenue of the timeshare interest or land is recorded as F-10 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For the years ended August 31, 2001, 2000 and 1999 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 accounted for as deposits. Selling costs directly attributable to unrecognized sales are accounted for as deferred selling costs until the sale is recognized . Cancellations occur when the note receivable is determined to be uncollectible and the related collateral, if any, has been recovered. Cancellation of a sale in the quarter the revenue is recognized is deemed to not represent a sale and is accounted for as a reversal of the revenue with an adjustment to cost of sales. Cancellation of a note receivable subsequent to the quarter the revenue was recognized is charged to the allowance for cancellations. Sales of Notes Receivable--The Company generally sells its notes ------------------------- receivable at par value. When the Company sells notes receivable, it retains certain participation in the cash flows of the notes receivable sold and generally retains the associated servicing rights. The sales are generally subject to limited recourse provisions as provided in the respective notes receivable sales agreements. Under these agreements, the Company is generally obligated to replace or repurchase accounts that become over 60 days delinquent or are otherwise subject to replacement or repurchase in either cash or receivables. Reserve for notes receivable sold with recourse represents the Company's estimate of losses to be incurred in connection with the recourse provisions of the sales agreements and is shown separately as a liability in the Company's Balance Sheet. Gain on sale of receivables depends in part on the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the retained interests based on their relative fair value at the date of transfer. To obtain fair values on the retained interests (both at the point of the related receivable sale and periodically thereafter), the Company generally estimates fair value based on the present value of future expected cash flows estimated using management's best estimates of the key assumptions-- default rates, rates of prepayment, loss reserve rates and discount rates commensurate with the risks involved. The Company's retained interests in receivables sold are carried at fair market value as either derivatives or available-for-sale investments. Unrealized holding gains or losses on the retained interests are included in earnings for those transactions structured so that the Company, through its retained interest, receives fixed interest amounts and pays the buyer variable amounts based on a floating interest rate index, as the resulting financial interest meets the definition of a derivative in accordance with Statement of Financial Accounting Standards No. 133 (SFAS 133) "Accounting for Derivative Instruments and Hedging Activities". Unrealized holding gains, if any, on retained interests in notes receivable sold not meeting the definition of a derivative would be included in shareholders' equity, net of income taxes. Losses in such retained interests are reflected in earnings. In September 2000, the Company sold to a financial institution $9.5 million of land receivables at par. The Company recognized a $286,000 gain on the sale of the receivables and recorded a $273,000 retained interest in notes receivable sold and a $625,000 recourse obligation which is included in Reserve for notes receivable sold with recourse on the Consolidated Balance Sheet. In August 2001, the Company sold to a financial institution $5.4 million of timeshare interest receivables at par. The Company recognized a $382,000 gain on the sale of the receivables and recorded a $356,000 retained interest in notes receivable sold and a $711,000 recourse obligation which is included in Reserve for notes receivable sold with recourse on the Consolidated Balance Sheet. The assumptions used to measure the initial fair value of the retained interest and recourse obligation for the above sales are as follows: F-11 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For the years ended August 31, 2001, 2000 and 1999
Land Receivables Sale Timeshare Receivables Sales ----------------------------- ------------------------------------ Contractual rate 12.9% 13.84% Guarantee rate 10.5% 9.75% Discount rate 15.0% 15.00% Prepayment rate 19.0% 19.00% Loss reserve rate 8.8% 15.00% Servicing fee 1.0% not applicable Weighted-average life (in months) 93 92
Interest Income--Interest income is recorded as earned. Interest --------------- income represents the interest earned on notes receivable and short-term investments. Interest income is reversed on all notes receivable when principal or interest payments are more than three months contractually past due and not resumed and such loans are less than three months past due. Loan Origination Fees--The direct incremental cost of originating --------------------- loans to customers is deferred and amortized to interest income as an adjustment to yield over the estimated life of the related loans. Financial Income--Fees for servicing notes receivable originated 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. Financial income includes changes in the fair value of retained interests in receivables sold and interest income accreted on such interests. Advertising--The Company expenses advertising costs as incurred. ----------- Timeshare Owners' Associations--The Company is responsible for a ------------------------------ portion of operating expenses of the timeshare Owners' Associations based on the Company's ownership percentage in the unsold timeshare interests at each of the respective timeshare properties. These costs are referred to as Association Assessments and are included in the Income Statement in General and administrative expenses. Management fees and costs received from the Associations are included in Revenues under the caption of Other. Income Per Common Share--Basic income per common share is based on the ----------------------- net income applicable to common stock for each period divided by the weighted- average number of common shares outstanding during the period. Diluted income per common share is computed by dividing net income applicable to common stock by the weighted-average number of common shares plus common share equivalents. In loss periods, or periods whereby the option and warrants' exercise price exceeds the average market price, anti-dilutive common share equivalents are excluded. At August 31, 2001, options to purchase 48,570 shares of common stock at $6.00 per share were outstanding and warrants to purchase 83,333 shares of common stock at $6.00 per share were outstanding. The options and warrants were not included in the computation of diluted EPS because the options' and warrants' exercise prices were greater than the average market price of the common shares and, thus, would be anti-dilutive. The options, which expire on September 2, 2002 through September 22, 2008, and the warrants, which expire on January 1, 2004, were still outstanding at August 31, 2001. Effective September 9, 1999, the Company consummated a one for six reverse stock split for all of the Company's common shares outstanding. All share and per share references have been restated to retroactively show the effect of this reverse stock split. Comprehensive Income--Comprehensive income, summarized on Consolidated -------------------- Statements of Stockholders' Equity, consists of net income for the fiscal year and the change in net unrealized gain (loss) on interest rate swaps, net of related tax benefit. F-12 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For the years ended August 31, 2001, 2000 and 1999 Interest Rate Swaps--In August 2000, the Company entered into a $25 ------------------- million, 5-year, interest rate swap transaction with a financial institution to hedge potential exposure to its variable rate notes' payable portfolio. In August 2001, the Company entered into a similar $20 million, 5-year, interest rate swap transaction. The interest rate swaps are considered and are documented as highly effective cash flow hedges. The interest rate swaps are carried at fair value and the unrealized gain or loss is included, in the Consolidated Balance Sheets in Accounts payable and accrued liabilities, and the amount net of income taxes, in a separate Stockholders' Equity caption titled "Accumulated Other Comprehensive Loss". The unrealized loss on the two swaps as of August 31, 2001 was $1,393,000, net of related income tax benefit of $718,000. Evaluation of Long-Lived Assets--Statement of Financial Accounting ------------------------------- Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and For Long-Lived Asses to Be Disposed Of" requires that impairment losses be recognized when the carrying value of an asset will not be recoverable based on future cash flows. The Company's policy is to evaluate, at each balance sheet date, the appropriateness of the net carrying values of its long-lived assets. If such evaluation were to indicate a material impairment of these assets, such impairment would be recognized by a write down of the applicable asset to its estimated fair value. Segment Information-- In accordance with SFAS No. 131, "Disclosures ------------------- about Segments of an Enterprise and Related Information", the Company considers its business to consist of one reportable operating segment. The Company does not allocate revenues and expenses, or assets and liabilities, in a segmented format for internal use or decision-making processes. Recent Accounting Standards--In July 2000, the EITF reached a --------------------------- consensus on Issue 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets". The issue is how to record interest income and to measure impairment on retained and purchased beneficial interests. The Task Force concluded that the holder of a beneficial interest should recognize interest income over the life of the investment based on an anticipated yield determined by periodically estimating cash flows. If the fair value of the beneficial interest has declined below its carrying amount and the decline is other-than-temporary, an entity should apply impairment of securities guidance similar to SFAS 115 (fair value method). This EITF is effective for all beneficial interests in securitization transactions for quarters beginning after December 15, 2000. The adoption of this statement did not have a significant impact on the Company's financial statements. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 140). SFAS 140 replaces SFAS Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" and provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. SFAS 140 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after March 31, 2001 and is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 31, 2000. The adoption of SFAS 140 in fiscal 2001 did not have a material effect on the Company's financial statements. In July 2001, the FASB issued Statements of Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141), and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141 eliminated the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001 and is effective for any business combination accounted for by the purchase method that is completed after June 30, 2001. SFAS 142, which includes the requirements to test goodwill and indefinite lived intangible assets for impairment rather than amortize them, will be effective for fiscal years beginning after December 15, 2001. Management does not believe the adoption of these statements will have a significant impact on the Company's financial statements. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143). SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. SFAS 143 is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. Management does not believe that the adoption of SFAS 143 will have a material effect on the Company's financial statements. F-13 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For the years ended August 31, 2001, 2000 and 1999 In September 2001, the FASB issued SFAS No. 144 on asset impairment that is applicable to financial statements issued for fiscal years beginning after December 15, 2001. The FASB's new rules on asset impairment supersede SFAS No. 121 and provide a single accounting model for long-lived assets to be disposed of. Management does not believe that the adoption of SFAS 144 will have a material effect on the Company's financial statements. Reclassification--Certain prior period amounts have been reclassified to ---------------- conform with the current year presentation. Use of Estimates--The preparation of financial statements in conformity ---------------- with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements. Actual results could differ from those estimates. 4. Notes Receivable The Company provides financing to the purchasers of its timeshare interests and land. This financing is generally evidenced by notes secured by deeds of trust or mortgages. These notes receivable are generally payable over a period of up to 12 years, bear interest at rates generally ranging from 12.5% to 15.5% and require equal monthly installments of principal and interest. Notes receivable consist of the following (thousands of dollars): August 31 ---------------------------- 2001 2000 ---------- ---------- Related to timeshare sales $ 93,011 $ 71,306 Related to land sales 27,200 25,084 --------- --------- 120,211 96,390 --------- --------- Less: Allowance for cancellations (14,707) (12,827) Discounts (377) (407) --------- --------- (15,084) (13,234) --------- --------- Total $ 105,127 $ 83,156 ========= ========= The Company has entered into financing arrangements with certain purchasers of timeshare interests and land whereby a 5% interest rate is charged if the aggregate down payment is at least 50% of the purchase price and the balance is payable in 36 or fewer monthly payments. Notes receivable of $5,777,000 and $6,421,000 at August 31, 2001 and 2000, respectively, made under this arrangement are included in the table above. A discount is established to provide for an effective interest rate (currently 10%) on notes receivable bearing a below market interest rate at the time of sale, and is applied to the principal balance and amortized over the terms of the notes receivable. The effective interest rate is based upon the economic interest rate environment and similar industry data. The Company is obligated under certain agreements for the sale of notes receivable and certain loan agreements to maintain various minimum tangible net worth requirements. The most restrictive of these agreements requires PEC to maintain a minimum tangible net worth of $27,500,000. PEC's tangible net worth at August 31, 2001 was $33,684,000. Allowance for Cancellations--Changes in both the allowance for --------------------------- cancellations and the reserve for notes receivable sold with recourse consist of the following (thousands of dollars): F-14 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For the years ended August 31, 2001, 2000 and 1999
For the Years Ended August 31 ------------------------------------------------ 2001 2000 1999 ----------- ----------- ------------ Balance at beginning of year $ 16,860 $ 18,149 $ 18,488 Provision for cancellations 9,647 7,354 5,626 Amounts charged to allowance for cancellations and reserve for notes receivable sold with recourse (7,802) (8,643) (5,965) ---------- ---------- ---------- Balance at end of year $ 18,705 $ 16,860 $ 18,149 ========== ========== ========== Allowance for cancellations $ 14,707 $ 12,827 $ 13,987 Reserve for notes receivable sold with recourse 3,998 4,033 4,162 ---------- ---------- ---------- Total $ 18,705 $ 16,860 $ 18,149 ========== ========== ==========
Number of Notes Receivable Accounts Serviced--The number of notes -------------------------------------------- receivable accounts serviced at August 31, 2001 and 2000, was 22,000 and 19,300, including 5,100 and 5,900, respectively, serviced for others. At August 31, 2001 and 2000, the amount of notes receivable with payment delinquencies of 90 days or more was $7,689,000 and $6,593,000, including $14,000 and $0, respectively, serviced for others. Notes Receivable Serviced and Originated--At August 31, 2001 and 2000, ---------------------------------------- notes receivable serviced were $172,485,000 and $152,990,000, including $35,783,000 and $39,671,000, respectively, serviced for others. Notes receivable originated were $85,821,000 and $82,388,000 for the years ended August 31, 2001 and 2000, respectively. 5. Timeshare Interests Held for Sale Timeshare interests held for sale consist of the following (thousands of dollars):
August 31 ------------------------------ 2001 2000 ----------- ------------ Timeshare interests (including capitalized interest of $32 and $100 in fiscal 2001 and 2000, respectively) $ 14,972 $ 18,755 Timeshare interests in process (including capitalized interest of $85 and $130 in fiscal 2001 and 2000, respectively) 3,167 4,552 ----------- ----------- $ 18,139 $ 23,307 =========== ===========
At August 31, 2001 and 2000, 7,396 and 9,423 timeshare interests, respectively, were available for sale. Timeshare units amounting to 42 and 32, representing 2,184 and 1,632 timeshare interests, at August 31, 2001 and 2000, respectively, were awaiting registration and/or completion of construction. 6. Other Investments Other investments consist of the following (thousands of dollars): August 31 ------------------ 2001 2000 ------- ------- Ramada All Suites Inn, Orlando $ 5,927 $ - Water rights: Huerfano County, Colorado 543 548 Nye County, Nevada 417 417 Land: Nye County, Nevada 944 1,108 Biloxi, Mississippi 2,080 2,080 Other 340 339 ------- ------- Total $10,251 $ 4,492 ======= ======= F-15 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For the years ended August 31, 2001, 2000 and 1999 7. Property and Equipment Property and equipment and related accumulated depreciation, consist of the following (thousands of dollars): August 31 -------------------------------- 2001 2000 --------- ---------- Water and sewer systems $ 20,390 $ 19,391 Furniture and equipment 6,814 6,745 Vehicles 3,155 3,051 Buildings 2,820 9,737 Leasehold improvements 563 533 Land 223 1,342 -------- --------- 33,965 40,799 Less: Accumulated depreciation (17,098) (17,632) -------- --------- Total $ 16,867 $ 23,167 ======== ========= Leases--In fiscal 2001, the Company entered into sale/leaseback ------ transactions for its two primary office buildings. The two buildings were sold for a total consideration of $8,300,000, less transaction costs. The gains of $1,621,000 were deferred and are being amortized into income in proportion to the related gross rental charged to expense over the lease terms. The deferred gain as of August 31, 2001 was $1,478,300 and is included in the Consolidated Balance Sheet in Accounts payable and accrued liabilities. The Company leases certain real estate for sales offices and also leases its Hawaii real estate for timeshare usage. Rental expense for fiscal 2001, 2000 and 1999 was $4,199,000, $2,327,000 and $2,112,000, respectively, and is included in the Income Statement in General and administrative expenses. Future minimum rental payments under operating leases are set forth below (thousands of dollars): For the Years Ending August 31 ------------------------------ 2002 $ 3,732 2003 2,028 2004 1,490 2005 1,287 2006 939 Thereafter 3,669 ------- Total $13,145 ======= 8. Other Assets Other assets consist of the following (thousands of dollars): F-16 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For the years ended August 31, 2001, 2000 and 1999
August 31 --------------------------------------- 2001 2000 ---------------- ----------------- Trust deeds' clearing account $ 2,811 $ 4,450 Sold receivables' reserves held by lender 2,190 2,922 Prepaid expenses 2,805 1,527 Owners' association receivables 1,828 2,314 Cash surrender value of split-dollar life insurance plan 1,546 1,411 Interest receivable 1,165 1,059 White Sands HOA maintenance fees receivable 785 424 Inventories 775 861 Deposits and impounds 530 973 Ramada license 367 466 Other 2,242 1,634 ---------------- ----------------- Total $ 17,044 $ 18,041 ================ =================
9. Notes and Contracts Payable The Company's debt consists of the following (thousands of dollars):
August 31 ------------------------------------- Borrowings Under Lines of Credit 2001 2000 - -------------------------------- ---------------- --------------- Notes collateralized by receivables Borrowings bearing interest at prime plus 2-2.50% $ 96,665 $ 80,593 Mortgages collateralized by real estate properties Mortgages collateralized by the respective underlying assets with various repayment terms and variable rates of prime plus 2% to 3% and 90-day LIBOR plus 4.25% 16,253 26,619 ---------------- --------------- 112,918 107,212 Other - --------- Other mortgages collateralized by the respective underlying assets with various repayment terms and fixed interest rates of 8% and variable rates of prime plus 2% 5,995 788 Installment contracts and other notes payable 1,325 1,131 ---------------- --------------- Total $ 120,238 $ 109,131 ================ ===============
The prime rate of interest was 6.50% and the 90-day LIBOR was 3.49% at August 31, 2001. In the preceding table, mortgages collateralized by real estate properties consists of the following:
August 31 ------------------------------------- 2001 2000 ---------------- --------------- Acquisition and development loans $ 10,646 $ 22,074 Working capital loans 5,607 4,545 ---------------- --------------- $ 16,253 $ 26,619 ================ ===============
Lines of Credit-- At August 31, 2001, PEC had $152.0 million in lines --------------- of credit with institutional lenders for the financing of receivables in connection with sales of timeshare interests and land and the acquisition of timeshare properties and land. These lines of credit bear interest at variable rates tied to the prime rate and 90-day London Interbank Offering Rate (LIBOR) and are secured by timeshare and land receivables and inventory. At F-17 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For the years ended August 31, 2001, 2000 and 1999 August 31, 2001, an aggregate of $112.9 million was outstanding under such lines of credit and $39.1 million was available for borrowing. Under the terms of these lines of credit, PEC may, depending upon the terms and conditions of the respective line of credit, borrow 65% to 90% of the balances of the pledged timeshare and land receivables. PEC is required to comply with certain covenants under these agreements, which, among other things, require PEC to meet certain minimum tangible net worth requirements. The most stringent of such requirements provides that PEC maintains a minimum tangible net worth of $27.5 million. At August 31, 2001, PEC's tangible net worth was $33.7 million. Summarized lines of credit information and accompanying notes relating to these lines of credit outstanding at August 31, 2001, consist of the following (thousands of dollars):
Outstanding Borrowing Maximum Balance at Borrowing Revolving August 31, 2001 Amounts Expiration Date (a) Maturity Date (a) Interest Rate - ----------------------- --------------- ----------------------- ------------------- ------------------------ $ 57,418 $ 65,000 (b) December 31, 2001 Various Prime + 2.0 - 2.25% 24,829 35,000 (c) December 1, 2002 Various Prime + 2.0 - 3% 27,950 30,000 (d) April 30, 2003 Various Libor + 4.0 - 4.25% 245 5,000 (e) February 4, 2002 Prime + 1.0% 987 15,000 (f) August 8, 2004 August 8, 2004 Prime + 2.5% 1,489 1,972 (g) N/A July 31, 2003 Prime + 2.25% - ----------------------- --------------- $ 112,918 $ 151,972 ======================= ===============
(a) As it has typically done in the past, management expects to extend the Revolving Expiration Date and Maturity Date on similar terms. When the Revolving Expiration Date expires as shown, the loans convert to term loans with maturities as stated or extended. (b) Covenants includes PEC's requirement to maintain a minimum tangible net worth of $25 million; PEC's requirement not to exceed a ratio of 4:1 of consolidated total liabilities to consolidated tangible net worth; PEC's requirement to maintain a minimum net processed sales for each fiscal quarter; and, PEC's requirement to maintain a maximum percentage of costs and expenses for Marketing and sales and General and administrative expenses relating to net processed sales for each rolling 12-month period. The maximum percentage related to costs and expenses referred to above has been exceeded in the last three quarters. This does not constitute an Event of Default under this loan agreement, or this line of credit; however, it gives the lender the option to suspend advances to PEC under this line of credit. The lender has not elected to exercise this option, has continued to make regular advances and has informed PEC verbally that it intends to continue such advances. At August 31, 2001, $55.4 million of loans secured by receivables were outstanding related to financings at prime plus 2%, of which $24.3 million of loans secured by land receivables mature May 15, 2010 and $31.1 million of loans secured by timeshare receivables mature May 15, 2007. The outstanding borrowing amount includes a real estate loan with an outstanding balance of $523,000 maturing December 31, 2001, bearing interest at prime plus 2.25%. The remaining Acquisition and Development (A&D) loans, receivables loans and a resort lobby loan outstanding of $1.5 million are at prime plus 2% and mature December 31, 2001. Negotiations are currently under way for extensions of the A&D, real estate and lobby loans. (c) Covenants include PEC's requirement to maintain a minimum tangible net worth of $25 million during the life of the loan. These credit lines include available financing for A&D and receivables. At August 31, 2001, $4.8 million was outstanding under the A&D loan, which matures on February 28, 2004, and $14.5 million was outstanding under the receivables loan, which matures on June 30, 2004. There also are two working capital loans: $2.4 million at prime plus 3% which expires December 31, 2001, and $3.2 million at prime plus 2%, which expires April 1, 2005, and is secured by inventory. (d) Covenants include PEC's requirement to maintain a minimum tangible net worth of $25 million. These credit lines include available financings for A&D and receivables. At August 31, 2001, $2.5 million was outstanding F-18 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For the years ended August 31, 2001, 2000 and 1999 under the A&D loans, which have a maturity date of April 30, 2003 and bear interest at the 90-day LIBOR plus 4%. The available receivable financings, of which $25.5 million was outstanding at August 31, 2001, are at 90-day LIBOR plus 4% and have a maturity date of March 30, 2006. (e) Covenants include PEC's requirement to maintain a minimum tangible net worth of $20 million. This is a receivables line, which bears interest at prime plus 1% and matures on February 4, 2002. (f) Covenants include PEC's requirement to maintain a minimum tangible net worth of $27.5 million. This is a receivables line, which bears interest at prime plus 2.5% and matures on August 8, 2004. (g) Covenants include PEC's requirement to maintain a minimum tangible net worth of $25 million. At August 31, 2001 and 2000, receivables aggregating $108,456,000 and $88,641,000, 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 sales related to such receivables have been recognized for accounting purposes. Maturities--Scheduled maturities of the Company's notes and contracts ---------- payable are as follows (thousands of dollars):
Years Ending August 31 ---------------------- 2002.......................................................... $ 13,101 2003.......................................................... 6,355 2004.......................................................... 17,952 2005.......................................................... 1,577 2006.......................................................... 25,824 Thereafter.................................................... 55,429 --------- $ 120,238 =========
10. Subordinated Debt On March 2, 1995, Mego Financial entered into the Amendment whereby the Assignors agreed to defer payment of $10,000,000 of the amount payable to Assignors and to subordinate such amount, constituting Subordinated Debt, in right of payment to debt for money borrowed by Mego Financial or obligations of subsidiaries guaranteed by Mego Financial. Warrants for 166,666 shares of Mego Financial common stock, at an exercise price of $25.50 per share (the closing market price per share on March 2, 1995) were granted to the Assignors in consideration of the payment deferral and subordination. The Warrants were exercised in August 1997 in a non-cash transaction whereby the Subordinated Debt was reduced by $4,250,000. The Amendment calls for interest to be paid semi-annually at the rate of 10% per annum starting September 1, 1995, and semi-annual payments of $1,429,000 plus interest, which commenced March 1, 1997. In connection with the exercise of Warrants, payments aggregating $4,250,000 were deemed paid and the semiannual payments were scheduled to resume in March 1999 (subsequently deferred until February 1, 2000) with a partial payment in September 1998. The final $4.29 million was scheduled to be paid in 3 equal installments on March 1, 1999, September 1, 1999 and March 1, 2000. In accordance with the Amended and Restated Fourteenth Amendment to Assignment and Assumption Agreement, the principal payments totaling $4,211,000 have been deferred until March 1, 2002. At that date, any interest owed is also scheduled to be paid. Interest of $429,000 on Subordinated Debt was paid during each fiscal year 2001 and 2000, respectively. The Subordinated Debt is collateralized by a pledge of PEC's outstanding stock. See Notes 1 and 16. The following table represents Subordinated Debt activity (thousands of dollars): F-19 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For the years ended August 31, 2001, 2000 and 1999
For the Years Ended August 31 --------------------------------------------- 2001 2000 -------------------- ------------------- Balance at beginning of year $ 4,286 $ 4,478 Accreted interest (1) - 237 Less: Interest payments (1) - (429) Principal paydowns (75) - -------------------- ------------------- Balance at end of year $ 4,211 $ 4,286 ==================== ===================
(1) Until originally scheduled maturity date of March 1, 2000, due to the discounting of the Subordinated Debt, interest calculations were included in the carrying value. 11. Income Taxes Mego Financial files a consolidated federal income tax return with its subsidiaries for its tax year, which ends the last day of February. The income tax benefits of $656,000, $530,000 and $830,000, respectively, in fiscal 2001, 2000 and 1999 all represent deferred income tax benefits. Deferred income taxes shown in Consolidated Balance Sheets reflect the net tax effects of (a) temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, (b) temporary differences between the timing of revenue recognition for book purposes and for income tax purposes, and (c) operating loss and tax credit carryforwards. The tax effects of significant items comprising the Company's net deferred income taxes as of August 31, 2001 and 2000 are as follows (thousands of dollars):
August 31 ---------------------------------------- 2001 2000 ----------------- ----------------- Deferred tax liabilities Timing of revenue recognition $ 45,646 $ 21,612 Deferred tax assets Net operating loss carryforwards 44,029 18,637 ----------------- ----------------- Net deferred income taxes $ 1,617 $ 2,975 ================= =================
At August 31, 2001, the Company had net operating loss carryforwards totaling approximately $129.5 million that expire beginning in 2008 through 2022. The provision for income taxes as reported is different from the tax provision computed by applying the statutory federal rate of 34%. The differences are as follows (thousands of dollars): F-20 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For the years ended August 31, 2001, 2000 and 1999
For the Years Ended August 31 ------------------------------------------- 2001 2000 1999 ----------- ----------- ---------- Income before income taxes $ 3,181 $ 3,419 $ 220 ========= ========= ======== Tax at the statutory federal rate $ 1,082 $ 1,162 $ 75 Decrease in income taxes resulting from changes in certain income tax liability reserves (1,738) (1,692) (905) --------- --------- -------- Income taxes (benefit) $ (656) $ (530) $ (830) ========= ========= ========
12. Stockholders' Equity Mego Financial has a stock option plan (Stock Option Plan), adopted November 1993, amended September 9, 1997, and amended and restated as of September 16, 1998 by approval of shareholders, for officers, key employees and directors which provides for non-qualified and qualified incentive options. The Stock Option Committee of the Board of Directors determines the option price (not to be less than fair market value for qualified incentive options) at the date of grant. The options generally expire ten years from the date of grant and are exercisable over the period stated in each option generally at the cumulative rate of 20% per year for three years from the date of grant, and the remaining 40% at the end of the fourth year. In August 1997, in connection with the Spin-off of MMC, the Stock Option Committee vested all options previously granted, excluding those granted subsequent to February 26, 1997. On September 23, 1998, an additional 18,500 incentive and non-incentive stock options were granted under the Stock Option Plan. In addition, the exercise prices of 50,750 of options issued on September 2, 1997 were revised from $18.75 per share to $6.00 per share (restated for the one for six reverse stock split effective September 9, 1999), which represented the fair value at date of repricing. The following table sets forth shares reserved and options exercised, granted and forfeited for the following periods:
Exercise Number of Price Per Reserve Shares Options Share ------------------ ------------- ----------------- At August 31, 1998 94,000 57,406 $ 18.75 / 33.75 Forfeited - (17,000) 15.00 / 52.50 Granted - 18,500 6.00 ------------------ ------------- ----------------- At August 31, 1999 94,000 58,906 6.00 / 33.75 Forfeited - (7,254) 6.00 / 33.75 ------------------ ------------- ----------------- At August 31, 2000 94,000 51,652 6.00 Forfeited - (3,082) 6.00 ------------------ ------------- ----------------- At August 31, 2001 94,000 48,570 $ 6.00 ================== ============= =================
SFAS 123 establishes financial accounting and reporting standards for stock-based employee compensation plans and for transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. Those transactions must be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The Company elected to continue to apply the provisions of APB Opinion No. 25 as permitted by SFAS 123 and, accordingly, provides pro forma disclosure herein. F-21 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For the years ended August 31, 2001, 2000 and 1999 Stock options granted under Mego Financial's Stock Option Plan are qualified and unqualified stock options that: (1) are generally granted at prices which are equal to the fair value of the stock on the date of grant; (2) generally subject to a grantee's continued employment with the Company, vest at various periods over a four-year period; and (3) generally expire ten years subsequent to the award. A summary of the status of Mego Financial's stock options granted under the Stock Option Plan as of August 31, 2001, 2000 and 1999 and the changes during those years is presented below:
August 31, 2001 August 31, 2000 August 31, 1999 ------------------------- --------------------------- --------------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ----------- ------------ ------------ ------------- ------------ ------------- Outstanding at beginning of year 51,652 $ 6.00 58,906 $ 9.14 57,406 $ 9.22 Granted - - - - 18,500 6.00 Forfeited (3,082) 6.00 (7,254) 31.50 (17,000) 6.00 ---------- ---------- --------- Outstanding at end of year 48,570 6.00 51,652 6.00 58,906 9.14 ========== ========== ========= Options exercisable at end of year 26,242 6.00 17,532 6.00 9,783 13.56 ========== ========== =========
The fair value of each option granted during fiscal 1999 (none were granted during fiscal 2001 and 2000) is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: (1) dividend yield of zero; (2) expected volatility of 35%; (3) risk-free interest rate of 6%; and, (4) expected life of 7 years. The weighted-average fair value of options granted during fiscal 1999 was $1.63. As of August 31, 2001, there were 48,570 options outstanding, which have an exercise price of $6.00 per common share and a weighted-average remaining contractual life of 6 years. Had compensation cost for grants of stock options been determined consistent with SFAS 123, the Company's pro forma net income and pro forma net income per common share for fiscal 2001, 2000 and 1999 would approximate the pro forma amounts below (thousand of dollars, except per share amounts):
August 31, 2001 August 31, 2000 August 31, 1999 ----------------------------- ----------------------------- ----------------------------- As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma ------------- ----------- ------------- ----------- ------------- ----------- Net income applicable to common stock $ 3,837 $ 3,817 $ 3,949 $ 3,929 $ 1,050 $ 850 Net income per common share: Basic and Diluted 1.10 1.09 1.13 1.12 0.30 0.24
13. Fair Values of Financial Instruments SFAS No. 107, "Disclosure about Fair Value of Financial Instruments" (SFAS 107), requires disclosure of estimated fair value information for financial instruments, whether or not recognized in the Balance Sheets. Fair 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, 2001 and 2000 are set forth below (thousands of dollars): F-22 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For the years ended August 31, 2001, 2000 and 1999
August 31, 2001 August 31, 2000 ------------------------------- -------------------------------- Carrying Estimated Fair Carrying Estimated Fair Value Value Value Value ---------- ---------------- ---------- ----------------- Financial Assets: Cash and cash equivalents (a) $ 1,894 $ 1,894 $ 1,069 $ 1,069 Notes receivable, net (b) 105,127 116,302 83,156 86,864 Retained interests in receivables sold (c) 3,603 3,603 2,701 2,701 Interest rate swaps (d) (2,111) (2,111) - (255) Financial Liabilities: Notes and contracts payable (e) 120,238 120,238 109,131 109,131 Subordinated debt (a) 4,211 4,211 4,286 4,286
(a) Carrying value is approximately the same as fair value. (b) The fair value was estimated by discounting future cash flows of the outstanding notes receivable, net of the allowance for cancellations. (c) The fair value was estimated by discounting future cash flows of the instruments using discount rates, default, loss and prepayment assumptions based upon available market data, opinions from financial advisors and historical portfolio experience. (d) Fair value was estimated by obtaining a third-party quote. (e) Notes payable generally are adjustable rate, indexed to the prime rate or LIBOR; therefore, carrying value approximates fair value. Fair value estimates were based upon pertinent market data and relevant information on the financial instruments at that time. Because no market exists for a certain portion of the financial instruments, fair value estimates may be based upon judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and historical and other factors. Changes in assumptions could significantly affect the estimates and do not reflect any premium or discount that could result from the bulk sale of the entire portion of the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Fair value estimates are based upon existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax implications related to the realization of the unrealized gains and losses can have an effect on fair value estimates and have not been considered in any of the estimates. 14. Concentrations of Risk Availability of Funding Sources--The Company funds substantially all of ------------------------------- the notes receivable, timeshare inventory and land inventory with borrowings through its financing facilities and internally generated funds. These borrowings are in turn repaid with the proceeds received by the Company from such notes receivable through loan sales and payments. Any failure to renew or obtain adequate financing under its financing facilities, or other borrowings, or any substantial reduction in the size of or pricing in the markets for the Company's notes receivable, could have a material adverse effect on the Company's operations. Geographic Concentrations--The Company services notes receivable in all ------------------------- 50 states, the District of Columbia and Canada. At August 31, 2001, 25.3%, 19.9% and 13.3%, respectively, of the dollar value of notes receivable serviced had been originated in California, Texas and Colorado. No other state accounted for more than 10% of the F-23 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONCOLIDATED FINANCIAL STATEMENTS (continued) For the years ended August 31, 2001, 2000 and 1999 portfolio of the Company's receivables. The risk inherent in such concentrations is dependent upon regional and general economic stability, which affects property values, and the financial stability of the borrowers. The Company's timeshare and land inventories are concentrated in Nevada, New Jersey, Colorado, Florida and Hawaii. The risk inherent in such concentrations is in the continued popularity of these resort destinations, which affects the marketability of the Company's products. Credit Risk--The Company is exposed to on-balance sheet credit risk related ----------- to its notes receivable. The Company is exposed to off-balance sheet credit risk related to notes receivable sold under recourse provisions. The outstanding balance of notes receivable sold with recourse provisions totaled $52,180,000 and $59,588,000 at August 31, 2001 and 2000, respectively. Interest Rate Risk--The Company's profitability is in part determined by ------------------ the difference, or "spread," between the effective rate of interest received on the notes receivable originated by the Company and the interest rates payable under its financing facilities to fund the Company's notes receivable and inventory held for sale and the yield required by financial institutions on notes receivable hypothecated or sold. The spread can be adversely affected after a note is originated and while it is held, by increases in the interest rate. Additionally, the fair value of the retained interests in receivables sold 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. The Company engages in business activities that expose it to interest rate risk. The financial exposure is managed as an integral part of the Company's risk management program, which seeks to reduce the potentially adverse effects that the volatility of the interest rate market may have on the Company's operating results. The Company does not engage in speculative transactions or hold financial instruments for trading purposes. In August 2000, the Company entered into a $25 million, 5-year, interest rate swap transaction to hedge potential exposure to its variable rate notes' portfolio. In August 2001, the Company entered into a similar $20 million, 5-year, interest rate swap transaction. The interest rate swaps are considered and are documented as highly effective cash flow hedges. See Note 3. 15. Timeshare Interest Sales and Land Sales Timeshare interest sales, net -- A summary of the components is as follows ----------------------------- (thousands of dollars):
For the Years Ended August 31 -------------------------------------------------------------- 2001 2000 1999 ------------------ ------------------ ----------------- Timeshare interest sales $ 61,759 $ 55,317 $ 45,830 Less: Provision for cancellations (7,785) (6,255) (4,568) ------------------ ------------------ ----------------- Total $ 53,974 $ 49,062 $ 41,262 ================== ================== =================
Land sales, net -- A summary of the components is as follows (thousands of --------------- dollars):
For the Years Ended August 31 -------------------------------------------------------------- 2001 2000 1999 ------------------- ------------------ ------------------ Land sales $ 23,549 $ 20,723 $ 17,037 Less: Provision for cancellations (1,862) (1,099) (1,058) ------------------- ------------------ ------------------ Total $ 21,687 $ 19,624 $ 15,979 =================== ================== ==================
F-24 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONCOLIDATED FINANCIAL STATEMENTS (continued) For the years ended August 31, 2001, 2000 and 1999 The following table reflects the maturities of notes receivable from land sales for each of the five years after August 31, 2001 (thousands of dollars):
2002 2003 2004 2005 2006 ----------- -------------- -------------- -------------- -------------- Land notes receivable maturities $ 323 $ 1,166 $ 1,792 $ 402 $ 724
The range of interest rates are from 0% to 15.0% and the weighted-average interest rate at August 31, 2001 was 12.0%. The delinquency information related to land loans at August 31, 2001 is as follows (thousands of dollars): Principal Balance % of Loans Serviced --------------------- ----------------------- 30 - 59 days $ 1,444 .9% 60 - 90 days 830 .5 Over 90 days 3,648 2.4 At August 31, 2001, there were no material estimated costs and expenditures for improvements on these loans for the next five years. No material obligations for future improvements on land existed at August 31, 2001. 16. Related Party Transactions Timeshare Owners' Associations--Owners' Associations (Associations) have ------------------------------ been incorporated for the Grand Flamingo, Reno Spa, Brigantine, Steamboat Springs, Aloha Bay and Orlando timesharing resorts. The respective Associations are independent not-for-profit corporations. PEC acts as the managing agent for these Associations and the White Sands Waikiki Resort Club, which is a division of PEC, and has received management fees for its services of $2,884,000, $2,692,000 and $2,540,000 in 2001, 2000 and 1999, respectively. Such fees were recorded in Revenues under the caption of Other. The expenses of PEC for management of each timeshare resort are incurred to preserve the integrity of the property and the portfolio performance on an ongoing basis beyond the end of the sales period. The owners of timeshare interests in each Association are responsible for payment to the Associations of assessments, which are intended to fund all of the operating expenses at each of the resort facilities. The Company's share of the Association assessments, based on unsold inventory owned, net of room income, was $934,000, $1,581,000 and $968,000 for 2001, 2000 and 1999, respectively, and has been recorded in Costs and Expenses under the caption of General and administrative. The Company has in the past financed budget deficits of the Associations as is reflected in the receivable from such Associations, but is not obligated to do so in the future, except in its Florida resorts. The Public Offering Statements for the Indian Shores and Orlando resorts contain a provision whereby PEC guarantees that the annual assessment fees will not exceed a specified amount, in which case PEC agrees to pay any monetary deficiencies. These guarantees are effective through the Associations' calendar year of December 31, 2001. In calendar 2000, PEC financed a budget deficit of $132,000 and $645,000 for the Associations at Indian Shores and Orlando respectively. The Company has agreed to pay to the Associations the lien amount fees of timeshare interest owners who are delinquent with respect to such fees, but have paid the Company in full for their timeshare interests. In exchange for the payment by the Company of such fees, the Associations assign their liens for non-payment on the respective timeshare interests to the Company. In the event the timeshare interest holder does not satisfy the lien after having an opportunity to do so, the Company typically acquires the timeshare interest for the amount of the lien and any related foreclosure costs. At August 31, 2001 and 2000, $1,828,000 and $2,314,000, respectively, were due from the Associations and are included under the caption of Other assets. Payments to Assignors--Certain transactions have been entered into with the --------------------- Assignors, who are affiliates of certain officers and directors of the Company, and these transactions are more fully described in Notes 1 and 10. During the years ended August 31, 2001 and 2000, respectively, approximately $429,000 of interest for both years and principal of $75,000 and $0 was paid to the Assignors. In fiscal 2001, an advance by the Company of $100,000 at an F-25 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONCOLIDATED FINANCIAL STATEMENTS (continued) For the years ended August 31, 2001, 2000 and 1999 interest rate of 10% was made to an affiliate of one of the Assignors against the amount owed to it. The balance outstanding under the advance was $11,000 as of August 31, 2001. Subordinated Debt--See Note 10. ----------------- 17. Commitments and Contingencies Litigation-- On August 27, 1998, an action was filed in Nevada District ---------- Court, County of Clark, No. A 392585, by Robert and Jocelyne Henry, husband and wife individually and on behalf of all others similarly situated against PEC, PEC's wholly-owned subsidiary, Central Nevada Utilities Company (CNUC), and certain other defendants. The plaintiffs' complaint asked for class action relief claiming that PEC and CNUC were guilty of collecting certain betterment fees and not providing associated sewer and water lines. The court determined that plaintiffs had not properly pursued their administrative remedies with the Nevada Public Utilities Commission (PUC) and dismissed plaintiffs' complaint, as amended, without prejudice. Notwithstanding plaintiffs' appeal of the dismissal, plaintiffs filed for administrative relief with the PUC. On November 17, 1999, the PUC found that CNUC, the only defendant over which the PUC has jurisdiction, was not in violation of any duties owed the plaintiffs or otherwise in violation of CNUC's approved tariffs. Subsequent to the PUC's decision, plaintiffs voluntarily dismissed their appeal. On May 4, 2000, plaintiffs re-filed their complaint in Nevada District Court, naming all of the above parties with the exception of CNUC. The May 4, 2000 complaint is virtually identical to the amended complaint discussed above and asserts six claims for relief against defendants: breach of deed restrictions, two claims for breach of contract, unjust enrichment, consumer fraud in violation of NRS 41.600 and violation of NRS 119.220, with all claims arising out of the alleged failure to provide water and sewer utilities to the purchasers of land in the subdivisions commonly known as Calvada Valley North and Calvada Meadows located in Nye County, Nevada. On September 8, 2000, the Company filed a motion to dismiss each of the claims made in the complaint. The Court granted the motion to dismiss with respect to Frederick H. Conte in his individual capacity and denied the motion in all other respects in an order entered on December 19, 2000. Plaintiffs then filed a motion to certify class, which defendants opposed. On September 5, 2001, the Court held that "as to Classes A and B, the showings required under NRCP 23(a) and (b)(2) have been made to the extent injunctive relief / specific performance of the subject alleged contractual obligations is sought, and the Court will certify Classes A and B to such extent only. In all other respects, the Court does not deem certification to be appropriate as to both Classes A and B". As a result of this decision, the Court refused to certify a class for the claims of: breach of contract, unjust enrichment, consumer fraud in violation of NRS 41.600 and violation of NRS 119.220. Accordingly, the defendants are no longer subject to class claims for monetary damages. The defendants' only potential liability is for the construction of water and sewer facilities. The case is now beginning the discovery phase of the litigation. The case is scheduled for a jury trial on August 13, 2002. In the general course of business the Company and PEC, at various times, have each been named in other lawsuits. The Company believes that it has meritorious defenses to these lawsuits and that resolution of these matters will not have a material adverse effect on the business or financial condition of the Company. Future Improvements-- Central Nevada Utilities Company (CNUC), a ------------------- subsidiary, has issued performance bonds of $3,709,000 outstanding at August 31, 2001, to ensure the completion of water, sewer and other improvements in portions of the Calvada development areas. The cost of the improvements will be offset by the future receipt of betterment fees and connection fees. Contingencies--At August 31, 2001, irrevocable letters of credit in the ------------- amount of $310,000 were issued and outstanding to secure certain obligations of the Company. These letters are collateralized by notes receivable. 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 F-26 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For the years ended August 31, 2001, 2000 and 1999 payment by PEC of an initial access fee of $1,000,000, which has been paid, and monthly recurring fees equal to 1% of PEC's Gross Sales (as defined) each month through January 1996 and 1.5% of PEC's Gross Sales each month commencing in February 1996 with certain minimums increasing each year. The initial term of the arrangement is five years and PEC has exercised its option to renew the arrangement for an additional term of five years, expiring December 31, 2005. 18. Quarterly Financial Data (unaudited). The following tables reflect consolidated quarterly financial data for the Company for the fiscal years ended August 31, 2001 and 2000 (thousands of dollars, except share and per share amounts):
Three Months Ended --------------------------------------------------------------- August 31, May 31, February 28, November 30, 2001 2001 (1) 2001 (1) 2000(1) ------------- -------------- -------------- -------------- Revenues: Net timeshare interest and land sales $ 19,077 $ 20,631 $ 17,193 $ 18,760 Net gain on sale of assets 429 22 41 300 Interest income 4,253 3,965 3,550 3,209 Financial income and other 2,467 2,328 2,170 2,011 ------------- -------------- -------------- -------------- Total revenues 26,226 26,946 22,954 24,280 ------------- -------------- -------------- -------------- Expenses: Direct costs of timeshare interest and land sales 3,054 4,033 3,232 3,926 Operating expenses 18,626 18,963 16,173 17,004 Interest expense 3,036 3,046 3,088 3,044 ------------- -------------- -------------- -------------- Total expenses 24,716 26,042 22,493 23,974 ------------- -------------- -------------- -------------- Income before income taxes 1,510 904 461 306 Income taxes (benefit) 79 (108) 13 (640) ------------- -------------- -------------- -------------- Net income applicable to common stock $ 1,431 $ 1,012 $ 448 $ 946 ============= ============== ============== ============== Income per common share: Basic and Diluted: Net income applicable to common stock $ 0.41 $ 0.29 $ 0.13 $ 0.27 ============= ============== ============== ============== Weighted-average number of common shares 3,500,557 3,500,557 3,500,557 3,500,557 ============= ============== ============== ============== Net gain on sale of assets $ 41 $ 41 $ (1,600) Operating expenses 3 3 (120) Income before income taxes 38 38 (1,480) Income taxes (benefit) 13 13 (503) Net income applicable to common stock 25 25 (977) Income per common share: Net income applicable to common stock: as restated $ 0.29 $ 0.13 $ 0.27 ============== ============= ============== as previously reported $ 0.28 $ 0.12 $ 0.47 ============== ============= ==============
(1) Certain amounts have been restated in connection with adjustment of net gain on sale of two buildings in accordance with SFAS No. 98, "Accounting for Leases", Sale-Leaseback Transactions Involving Real Estate. See Note 7. The preceding table summarizes the increase (decrease) of the line items which were restated. F-27 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For the years ended August 31, 2001, 2000 and 1999
Three Months Ended ----------------------------------------------------------------- August 31, May 31, February 29, November 30, 2000 2000 2000 1999 ------------- -------------- -------------- -------------- Revenues: Net timeshare interest and land sales $ 17,979 $ 19,228 $ 15,469 $ 16,010 Net gain on sale of assets 1,179 635 678 - Interest income 3,132 3,255 3,172 2,871 Financial income and other 1,755 1,617 1,699 1,816 ------------- -------------- -------------- -------------- Total revenues 24,045 24,735 21,018 20,697 ------------- -------------- -------------- -------------- Expenses: Direct costs of timeshare interest and land sales 3,753 3,930 2,951 2,934 Operating expenses 16,634 16,216 13,948 14,242 Interest expense 3,295 3,194 3,113 2,866 ------------- -------------- -------------- -------------- Total expenses 23,682 23,340 20,012 20,042 ------------- -------------- -------------- -------------- Income before income taxes 363 1,395 1,006 655 Income taxes (benefit) (530) - - - ------------- -------------- -------------- -------------- Net income applicable to common stock $ 893 $ 1,395 $ 1,006 $ 655 ============= ============== ============== ============== Income per common share: Basic and Diluted: Net income applicable to common stock $ 0.26 $ 0.40 $ 0.29 $ 0.19 ============= ============== ============== ============== Weighted-average number of common shares 3,500,557 3,500,557 3,500,557 3,500,557 ============= ============== ============== ==============
F-28 Exhibit Index Ex # Exhibit Description 10.231 General Loan and Security Agreement for Inventory Loan III executed March 30, 2001 among Textron Financial Corporation and Preferred Equities Corporation and Brigantine Preferred Properties, Inc. 10.232 First Amendment to General Loan and Security Agreement on Receivable Loan Facility executed 7/9/01 between Steamboat Suites, Inc., Preferred Equities Corporation and Brigantine Preferred Properties and Textron Financial Corporation. 10.233 First Amended and Restated Loan and Security Agreement executed on June 22, 2001 between Preferred Equities Corporation and Colorado Land and Grazing Corporation, Mego Financial Corp, and Dorfinco Corporation. 10.234 Thirteenth Amendment to Assignment and Assumption Agreement, by and between RER Corp., COMAY Corp., Growth Realty INC., and H&H Financial dated June 29, 2001. 10.235 Loan and Security Agreement by and between Preferred Equities Corporation and Capital Source Finance LLC effective August 8, 2001. 10.236 Amended and Restated Fourteenth Amendment to Assignment and Assumption Agreement, by and between RER Corp., COMAY Corp., Growth Realty INC., and H&H Financial dated November 15, 2001. EX-10.231 3 dex10231.txt GENERAL LOAN AND SECURITY AGREEMENT Exhibit 10.231 GENERAL LOAN AND SECURITY AGREEMENT (Inventory Loan-III) among PREFERRED EQUITIES CORPORATION And BRIGANTINE PREFERRED PROPERTIES, INC. and TEXTRON FINANCIAL CORPORATION Dated as of March 30, 2001 SECTION 1. INTERPRETATION OF THIS AGREEMENT 1.1 Terms Defined 1.2 Directly or Indirectly 1.3 Headings 1.4 Accounting Principles SECTION 2. ADVANCES AND NOTE 2.1 Inventory Advances; Inventory Loan 2.2 Issuance of Note; Rate of Interest; Receipt of Payments 2.4 Release Payments; Voluntary Prepayments of Inventory Loan 2.5 Participating Lender SECTION 3. COLLATERAL 3.1 Security 3.2 Undertakings Regarding Collateral 3.3 Financing Statements 3.4 Location of Collateral; Books and Records 3.5 Insurance of Collateral 3.6 Condemnation 3.7 Taxes Affecting Collateral 3.8 Discharge of Liens Affecting Collateral 3.9 Use of Resort 3.10 Other Timeshare Covenants 3.11 Protection of Collateral; Assessments; Reimbursement 3.12 Interest on Lender Paid Expenses 3.13 Lender Responsibility 3.14 Release of Lien on Unsold Inventory Lot/Timeshare Intervals SECTION 4. REPRESENTATIONS AND WARRANTIES 4.1 Subsidiaries and Capital Structure 4.2 Corporate Organization and Authority 4.3 Business and Property 4.4 Financial Statements 4.5 Full Disclosure 4.6 Pending Litigation 4.7 Title to Properties 4.8 Trademarks; Licenses and Permits 4.9 Transaction Is Legal and Authorized 4.10 No Defaults 4.11 Governmental Consent 4.12 Taxes 4.13 Use of Proceeds 4.14 Compliance with Law 4.15 Restrictions of Debtor 4.16 Brokers' Fees 4.17 Deferred Compensation Plans 4.18 Labor Relations 2 4.19 Validity and Enforceability 4.20 Validity of Liens Granted to Lender 4.21 Timeshare Regimen Reports 4.22 The Timeshare Intervals 4.23 Pre-Sale of Timeshare Intervals SECTION 5. CONDITIONS PRECEDENT TO ACQUISITION INVENTORY ADVANCE AND EFFECTIVENESS OF THIS AGREEMENT 5.1 Opinions of Counsel 5.2 Warranties and Representations True as of Closing Date 5.3 Compliance with this Agreement 5.4 Officer's Certificates; Secretary's Certificates; Good-Standing Certificates 5.5 Uniform Commercial Code Financing Statements 5.6 Assignment of Property-Related Contracts 5.7 Intentionally Deleted 5.8 Guaranty Agreement 5.9 Subordination of Indebtedness 5.10 Expenses 5.11 Inventory Note; Inventory Deed of Trust 5.12 Title Insurance; Casualty Insurance 5.13 Environmental Site Assessment Report 5.14 Taxes 5.15 Inspection 5.16 Survey 5.17 Engineering Report 5.18 Intentionally Deleted 5.19 Intentionally Deleted 5.20 First Lienholder Status; Quit-Claim Deed; Proxy Acknowledged 5.21 Proceedings Satisfactory SECTION 6. Intentionally Deleted SECTION 7. COVENANTS 7.1 Payment of Taxes and Claims 7.2 Maintenance of Properties; Corporate Existence; Stock Ownership; Renovations; Supervisory Architect; Indebtedness; Liens; Business 7.3 Payment of Note and Maintenance of Office 7.4 Sale of Properties 7.5 Consolidation and Merger 7.6 Guaranties 7.7 Compliance with Environmental Laws 7.8 Transactions with Affiliates; Principal Properties 7.9 Use of the Lender Name 7.10 Subordinated Obligations 7.11 Notice of Legal Proceedings 7.12 Further Assurances 7.13 Financial Statements 7.14 Officers' Certificate 7.15 Inspection 3 7.16 Minimum Tangible Net Worth SECTION 8. EVENTS OF DEFAULT 8.1 Default 8.2 Default Remedies SECTION 9. REVIVAL OF OBLIGATIONS AND LIENS SECTION 10. MISCELLANEOUS 10.1 Governing Law 10.2 Expenses and Closing Fees 10.3 Parties, Successors and Assigns 10.4 Notices 10.5 Total Agreement 10.6 Survival 10.7 Litigation 10.8 Power of Attorney 10.9 Survival of Indemnities 10.10 Conflicting Obligations; Rights and Remedies Schedule 1ai-iv - Property Description of Grand Flamingo Properties Schedule 1b - Property Description of Reno Schedule 1c - Property Description of Pahrump Schedule 1d - Property Description of Brigantine Schedule 1e - Property Description of Florida Schedule 1f - Property Description of Hawaii Schedule 2 - Property-Related Contracts Schedule 3 - Affiliates and Capital Structure Schedule 4 - Reserved Schedule 5 - Reserved Schedule 6 - Litigation Schedule 7 - Title Exceptions Schedule 8 - Reserved Schedule 9 - Permitted Leases and Rentals of Units Schedule 10 - Hazardous Substances Schedule 11 - Use of Proceeds Schedule 12 - Licenses, Permits, Etc. Not Obtained Schedule 13 - Deferred Compensation Plans Schedule 14 - Payment Instructions Schedule 15 - Address of Debtor for Books and Records Schedule 16 - Address of Debtor for Notices Schedule 17 - Address of Lender for Notices 4 Exhibit A1&2 - Form of Inventory Deed of Trust/Mortgage (Nevada, New Jersey, Hawaii, Florida) Exhibit B - Form of Inventory Note Exhibit C - Form of Proxy Exhibit D - Form of Request for Lien Release Exhibit E - Form of Partial Release from Inventory Deed of Trust/Mortgage Exhibit F [Reserved] Exhibit G [Reserved] Exhibit H [Reserved] Exhibit I - Form of Opinion of Jon Joseph, Esq. Exhibit J - Form of Opinion of Greenburg Traurig Exhibit K - Form of Officers Certificates of Debtor Exhibit L - Form of Steamboat Suites, Inc. Secretary's Certificate Exhibit M - Form of Preferred Equities and Brigantine Preferred Secretary's Certificate. Exhibit N - Form of Mego Financials Secretary's Certificate. Exhibit O - Form of Guaranty Agreement Exhibit P [Reserved] 5 GENERAL LOAN AND SECURITY AGREEMENT (INVENTORY LOAN-III) THIS GENERAL LOAN AND SECURITY AGREEMENT (as amended from time to time, this "Agreement"), made and executed as of the 30/th/ day of March, 2001, by and among TEXTRON FINANCIAL CORPORATION, a Delaware corporation, as secured party (herein referred to as the "Lender") and PREFERRED EQUITIES CORPORATION and BRIGANTINE PREFERRED PROPERTIES, INC, both being Nevada corporations, jointly and severally as debtor (herein collectively referred to as the "Debtor"). BACKGROUND: Lender and Preferred Equities Corporation, and Lender and Preferred Equities Corporation's subsidiary, Steamboat Suites, Inc. ("Steamboat"), are parties to various loan and security agreements providing in the aggregate for financing and financing commitments up to $23,800,000. Of the existing financing and financing commitments, Lender agreed to provide up to $10,900,000 for the acquisition and retention, until further resale, of real estate lots, condominiums, deeded timeshare intervals and right to use timeshare intervals which are held by Preferred Equities Corporation and Steamboat Suites, Inc. for sale or resale to the general public. Certain of the real estate lots, condominiums, deeded timeshare intervals and right to use timeshare intervals owned by Preferred Equities Corporation and Steamboat Suites, Inc. are subjected to a lien in favor of Lender prior to the time of sale of such item or interest by Preferred Equities Corporation and by Steamboat Suites, Inc. and are collateral for the repayment and performance of obligations due to Lender by each of Preferred Equities Corporation and Steamboat Suites, Inc. Brigantine Preferred Properties, Inc. is the owner of the Ramada Vacation Suites at Brigantine Beach consisting of the Brigantine Inn Resort Club and the Brigantine Villas located in Brigantine, New Jersey which offers deeded timeshare intervals for sale to the public. Preferred Equities Corporation and Brigantine Preferred Properties, Inc. have with respect to the Resorts (as hereafter defined) entered into sales of real estate lots, condominiums, deeded timeshare intervals and right to use timeshare intervals which sales have for one or more reasons not been fully complied with by the purchasers in accordance with the terms of the sale documents and Preferred Equities Corporation and Brigantine Preferred Properties, Inc. have reacquired fee title to certain of the real estate lots, condominiums, deeded timeshare intervals and right to use timeshare intervals in the Resorts which were the subject of the purchasers contracts and upon which the purchaser has defaulted ("Re-Acquired Intervals"). Preferred Equities Corporation has requested and Lender has agreed to increase the existing aggregate inventory financing commitment of $10,900,000 by $3,700,000 to a maximum aggregate outstanding amount of $14,600,000 under the terms and conditions stated herein provided that Preferred Equities Corporation and Brigantine Preferred Properties, Inc. subject the Re-Acquired Intervals to a Lien in favor of Lender together with other unsold and unencumbered real estate lots, condominiums, deeded timeshare intervals and right to use timeshare intervals and other collateral as described herein. 6 SECTION 1. INTERPRETATION OF THIS AGREEMENT 1.1 Terms Defined. As used in this Agreement, the following terms shall have the following respective meanings set forth below or set forth in the Section referred to following such term: Advance -- means one or more Inventory Advances. Affiliate -- means any Person (a) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the Debtor; (b) which beneficially owns or holds 5% or more of any class of the Voting Stock of the Debtor; or (c) 5% or more of the Voting Stock (or in the case of a Person which is not a corporation, 5% or more of the equity interest) of which is beneficially owned or held by the Debtor. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of Voting Stock, other voting Securities, by contract or otherwise. Agreement or this Agreement -- as defined in the preamble hereto. Assignment of Rents -- as defined in Section 5.11 of this Agreement. Association and Associations -- means collectively or individually, as applicable, The Ramada Vacation Suites at Brigantine Inn Resort Club and Brigantine Villas Owners Association, or any successor association thereto as provided in the Brigantine Timeshare Documents, The Grand Flamingo Suites Owners Association, or any successor association thereto as provided in the Grand Flamingo Timeshare Documents, The Calvada Lot Owners Association, or any successor association thereto, The Ramada Vacation Suites Resort at Reno Owners Association, or any successor association thereto as provided in the Reno Timeshare Documents, The Ramada Vacation Suites Resort at Indian Shores, Owners Association, or any successor association thereto as provided in the Indian Shores Timeshare Documents and The Ramada Vacation Suites Resort at White Sands Owners Association, or any successor association thereto as provided in the White Sands Timeshare Documents. Books and Records -- means all books, records, computer tapes, disks, software and microfiche records of the Debtor related to the Resorts. Business Day -- means a day other than a Saturday or Sunday or a day on which banks in the State of Nevada, the State of Rhode Island or the State of Connecticut are required or authorized by law to be closed (other than for a general banking moratorium or holiday for a period exceeding 4 consecutive days). Calvada Lot -- means a parcel of land available for sale located in Pahrump, Nevada and which 7 is subject to the Inventory Deed of Trust. Change in Management -- means that Guarantor shall cease to own, directly or indirectly, in the aggregate 100% of the total combined voting power of all classes of Voting Stock or other equity interests of any Person which shall have managerial and/or supervisory operational responsibilities in respect of any Resort. Closing Date -- means, March 30, 2001. Collateral -- as defined Section 3.1 of this Agreement. Commitment Letter -- means that certain letter dated January 18, 2001 from the Lender to Debtor, which letter was accepted by Debtor on January 22, 2001 and subsequently modified by Lender and Preferred Equities Corporation. Common Amenities -- means the common areas and other amenities at the Resorts as contemplated in the Declarations which any purchaser of a Timeshare Interval or Calvada Lot shall be entitled to use pursuant to the Declarations. Compensation -- as defined in Section 3.1(g) of this Agreement. Condemnation Compensation -- as defined in Section 3.6(a) of this Agreement. Contract -- means any purchase and sale agreement between one or more natural Persons and the Debtor which agreement provides for the sale by the Debtor to such natural Person or Persons of one or more Timeshare Intervals and/or Calvada Lots. Debtor -- collectively, on a joint and several basis, or individually as the context requires, each of Preferred Equities Corporation and/or Brigantine Preferred Properties, Inc. as is more particularly defined in the preamble hereto. Declaration or Declarations -- means collectively and individually the Declaration applicable to any of the Resorts. Declarant -- the status of the Debtor as the declarant under applicable law and under the respective Declarations and the Articles of Incorporation and By- Laws of the respective Associations. Default -- means an event or condition the occurrence of which would, with the lapse of time or the giving of notice or both, become an Event of Default. Default Rate -- means, at any time, the per annum rate of interest equal to the Interest Rate, then in effect, plus 2% per annum; provided, however, that the Default Rate shall in no event exceed the Maximum Rate. Environmental Protection Law -- means each federal, state, county, regional or local law, statute, or regulation enacted in connection with or relating to the protection or regulation of the environment, including, without limitation, those laws, statutes, and regulations regulating the disposal, removal, production, storing, refining, handling, transferring, processing, or transporting of Hazardous Substances, and any regulations issued or promulgated in connection with such statutes by any 8 governmental authority and any orders, decrees or judgments issued by any court of competent jurisdiction in connection with any of the foregoing. Equipment -- means the furniture, fixtures and furnishings of each Unit, but excluding Property owned by the Associations, Property owned by occupants of the Units and telephone and computer equipment leased in the ordinary course of business. Event of Default -- as defined in Section 8.1 of this Agreement. Fair Market Value -- at any time with respect to any Property means the sale value of such Property that would be realized in an arm's-length sale at such time between an informed and willing buyer, and an informed and willing seller, under no compulsion to buy or sell, respectively. Guaranty -- as defined in Section 7.6(b) of this Agreement. Guaranty Agreement -- as defined in Section 5.8 of this Agreement. Guarantor -- means Mego Financial. Hazardous Substances -- means any and all pollutants, contaminants, toxic or hazardous wastes or any other substances that might pose a hazard to health or safety, the removal of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage or filtration of which is or shall be restricted, prohibited or penalized by any Environmental Protection Law (including, without limitation, asbestos, urea formaldehyde foam insulation and polychlorinated biphenyls); provided, however, that "Hazardous Substances" shall not include any substance used by the Debtor, any homeowner or their respective agents in the ordinary course of business in compliance with applicable Environmental Protection Laws. Impositions -- as defined in Section 3.7 of this Agreement. Insurance Premiums -- as defined in Section 3.5(a) of this Agreement. Interest Rate -- means, with respect to any calendar month, a per annum rate of interest equal to the greater of: (a) 8.75%, or (b) the sum of (i) 2.0%, plus (ii) the Prime Rate then in effect for such month. The interest rate for each calendar month shall be based upon the Prime Rate in effect at 9:00 a.m. (Eastern time) on the 1st day of such month. The term "Prime Rate" shall mean the "prime rate" as announced from time to time by Chase Manhattan Bank, N.A. or any successor thereto. In the event Chase Manhattan Bank, N.A., or any successor thereto, shall discontinue announcement of said Prime Rate, a comparable index designated by the Lender shall be used in calculating the Interest Rate. It is 9 expressly agreed that the use of the term "prime rate" or any other similar designation is not intended to, nor does it, imply that said rate of interest is a preferred rate of interest or one which is offered by Chase Manhattan Bank, N.A. or any successor thereto to its most creditworthy customers. Inventory Advance -- as defined in Section 2.1 of this Agreement. Inventory Deed of Trust -- means that certain combination Deed of Trust, Security Agreement and Fixture Financing Statement, substantially in the form of Exhibit A-1 or the Mortgage, Security Agreement and Fixture Financing Statement, substantially in the form of Exhibit A-2 to this Agreement, as applicable to any Resort, as the same may be amended from time to time. Inventory Loan -- means, at any time, the non-revolving loan facility comprised of a maximum of $3,700,000, provided however that the maximum amount of the Inventory Loan shall at no time exceed a 12% advance against the retail value of the remaining unsold inventory at the Resorts. Inventory Maturity Date -- means April 1, 2005. Inventory Note -- as defined in Section 2.2(a) of this Agreement. Lender -- as defined in the preamble to this Agreement. Lien -- any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and including, but not limited to, attachments, judgments or tax liens (except for inchoate tax liens which arise in connection with taxes not yet due and payable) and the security interest or lien arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights- of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purpose of this Agreement, the Debtor shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes. Loan -- means the Inventory Loan. Loan Costs -- as defined in Section 10.2 of this Agreement. Maker -- means any natural Person, who shall have, in a bona fide transaction, purchased a Timeshare Interval or Calvada Lot and executed a Contract and a Note Receivable in respect thereof. Mandatory Inventory Prepayment -- means any prepayment required by Section 2.4(c) of this Agreement. Maximum Rate -- as defined in Section 2.2(b) of this Agreement. Mego Financial -- means Mego Financial Corp., a New York corporation. Monthly Average Weighted Loan Balance -- means, for any calendar month with respect to the Inventory Loan the quotient of 10 (a) the aggregate of the Daily Loan Balances for each of the days of such month in respect of such Loan divided by (b) the number of days in such month. For purposes of this definition, "Daily Loan Balance" shall mean, for any day, the principal balance of the Inventory Loan outstanding as of the close of business of the Lender for such day after giving effect to all payments received made during such day. Note -- means the Inventory Note. Note Receivable -- means any promissory note made payable to the order of the Debtor which provides for payment of the deferred purchase price of one or more Timeshare Intervals or and/or Calvada Lots purchased by the Maker thereof. Obligations -- means all sums now or hereafter loaned, advanced or incurred by the Lender to or on behalf of the Debtor under this Agreement, the Inventory Note and any other Security Document (including, without limitation, accrued and unpaid interest, unpaid prepayment premium and Loan Costs), and all Obligations due from Preferred Equities Corporation or Steamboat Suites, Inc. in connection with a General Loan and Security Agreement (Inventory Loan) dated as of December 17, 1999 and a General Loan and Security Agreement (Receivables Loan) dated as of December 17, 1999 and due from Preferred Equities Corporation in connection with a Loan and Security Agreement dated as of August 12, 1998 and the full, prompt and complete performance of all obligations owed by, or undertakings or indemnities of, Debtor arising hereunder or thereunder. Participating Lender -- means any Person which (a) shall have been granted the right by the Lender to participate in the Note and the Collateral and (b) shall have entered into a participation agreement in form and substance satisfactory to the Lender which shall provide, inter alia, that the Participating Lender shall communicate and deal only with the Lender with respect to the Participating Lender's interest in the Note and the Collateral. Permitted Exceptions -- means the title exceptions set forth in Schedule 7 of this Agreement. Person -- means an individual, partnership, corporation, trust, unincorporated organization, or a government or agency or political subdivision thereof. Prime Rate -- as defined in the definition of "Interest Rate" in this Section 1.1. Property or Properties -- means any interest in any kind of property or asset of Debtor, whether real, personal or mixed, or tangible or intangible. Property-Related Contract -- as defined in Section 3.1(b) of this Agreement. Release Fee -- as defined in Section 3.14 of this Agreement. Release Price -- means, with respect to any Unsold Inventory Lot/Timeshare Interval, $1,350 or such other amount as is necessary to retire the Inventory Loan upon a 70% sell out of the then remaining Unsold Inventory Lot/Timeshare Intervals. 11 Resort or Resorts -- collectively and individually, as applicable, means The Ramada Vacation Suites at Brigantine Beach Resort, consisting of Brigantine Inn Resort Club and Brigantine Villas in Brigantine, New Jersey and The Ramada Vacation Suites Resort at Las Vegas consisting of Grand Flamingo Terraces and Grand Flamingo Towers and Grand Flamingo Villas and Grand Flamingo Winnick, Las Vegas, Nevada and The Calvada Lots located in Pahrump, Nevada and The Ramada Vacation Suites Resort at Reno, Reno, Nevada and The Ramada Vacation Suites Resort at Indian Shores, Indian Shores, Florida and The Ramada Vacation Suites Resort at White Sands, Honolulu, Hawaii. Rhode Island Uniform Commercial Code -- means the Uniform Commercial Code as adopted and in force in the State of Rhode Island, as from time to time in effect. Security -- shall have the same meaning as in Section 2(1) of the Securities Act of 1933, as amended. Security Documents -- means this Agreement, the Inventory Note, all assignments of Property-Related Contracts, the Inventory Deed of Trust, the Guaranty Agreement and all assignments, instruments, certificates, notices and other documents executed and delivered in connection with the transactions contemplated herein. Subordination Agreement -- as defined in Section 5.9 of this Agreement. Subsidiary -- means any present or future corporation of which the Debtor owns, directly or indirectly, more than 50% of the Voting Stock. Tangible Net Worth -- The Tangible Net Worth of any Person shall mean, as of any date, (a) the amount of any capital stock, paid in capital and similar equity accounts plus (or minus in the case of a deficit) the capital surplus and retained earnings of such Person and the amount of any foreign currency translation adjustment account shown as a capital account of such Person, less (b) the net book value of all items of the following character which are included in the assets of such Person: (i) good will, including without limitation, the excess of cost over book value of any asset, (ii) organization or experimental expenses, (iii) unamortized debt discount and expense, (iv) patents, trademarks, trade names and copyrights, (v) treasury stock, (vi) deferred taxes and deferred charges, (vii) franchises, licenses and permits, and (viii) other assets which are deemed intangible assets under generally accepted accounting principles, provided, however, that, notwithstanding the foregoing, no deduction shall be made pursuant to clause (b) in respect of any asset presently shown on the statement of financial condition of Borrower as "Deferred Selling Expense" as determined in accordance with generally accepted accounting principles. Timeshare Documents - collectively or individually all documents and instruments establishing, memorializing, governing, or affecting the rights and obligations of the purchasers of Timeshare Intervals in and to a Unit or a Calvada Lot, including, without limitation, the documents and certificates creating and effecting the timeshare regimen for such Unit, which shall include, without limitation, the respective Declarations, the Articles of Incorporation and By-Laws of the Associations, any restrictive covenants in respect of such regimen and all other project instruments in respect of such regimen. Timeshare Interval -- means (i) (A) an estate for years in and to any Unit which shall confer an exclusive right to use, occupy and possess such or any other similar Unit for a stipulated week or a week in a stipulated season, together with a vested remainder as a tenant in common in such Unit at the end of such estate for years, all as more particularly provided for by the Declarations and the other Timeshare 12 Documents in respect of such Unit or (B) a freehold estate in any Unit created by the Declarations and the other Timeshare Documents in respect of such Unit, which freehold estate shall entitle the owner thereof to the exclusive use and occupancy of one of the 51 annually recurring weekly timeshare periods or a week in a stipulated season established and designated in said Declarations in respect of such Unit or any other similar Unit and (ii) the proportionate interest in the Common Amenities related to such Unit, as set forth in the Declarations. Title Insurance Policy -- as defined in Section 5.12 hereof. Unit -- means any unit (within the meaning of such term in the Declaration) which is subject to the Inventory Deed of Trust in any Resort other than a Calvada Lot. Unsold Inventory Lot/Timeshare Interval -- means, at any time, any Timeshare Interval or a Calvada Lot, subjected to the Lien of the Inventory Deed of Trust, which Timeshare Interval or Calvada Lot shall, as of such time, shall not have been released from the Lien of the Inventory Deed of Trust. Voting Stock -- means securities of any class or classes of a corporation the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors (or Persons performing similar functions) of such corporation. 1.2 Directly or Indirectly. Where any provision in this Agreement refers to action to be 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. 1.3 Headings. Section headings have been inserted in this Agreement as a matter of convenience of reference only; such section headings are not a part of this Agreement and shall not be used in the interpretation of this Agreement. 1.4 Accounting Principles. Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, the same shall be determined or made in accordance with generally accepted accounting principles, procedures and practices consistently applied at the time in effect, to the extent applicable, except where such principles are inconsistent with the requirements of this Agreement. SECTION 2. ADVANCES AND NOTE. 2.1 Inventory Advances; Inventory Loan. The Lender agrees, pursuant to the terms of this Agreement and subject to Debtor's satisfaction of the conditions precedent in Section 5 of this Agreement, through September 30, 2001, to make up to three (3) advances (each an "Inventory Advance") to the Debtor, upon Debtor's prior written notice and request to Lender of at least fifteen (15) business days and not occurring more than once in any calendar month, aggregating a maximum amount of $3,700,000 for the purposes stated herein. Each Inventory 13 Advance shall be related to Timeshare Intervals in a Resort or more than one Resort and/or for the Calvada Lots to be subjected to the Lien of an Inventory Deed of Trust and shall be in an amount not greater than Twelve (12%) percent of the average retail value (calculated as 12% of the average sale price offered to a Purchaser) during the immediately preceding ninety (90) days of the Timeshare Intervals in one or more of the Resorts or of the Calvada Lots provided however that the use of the proceeds of each such Inventory Advance must be utilized to pay all prior Liens and encumbrances related to the Timeshare Intervals or Calvada Lots, such that Lender shall have a first priority Lien on each such Timeshare Interval or such Calvada Lot and further provided that: (a) the proceeds of the first Inventory Advance repay Lender $832,546.49 of the Obligations due and owing under the Loan and Security Agreement between Preferred Equities Corporation and Lender of August 12, 1998; and (b) the proceeds or a portion thereof of the Inventory Advance related to the Ramada Vacation Suites at Reno, Reno, Nevada Resort shall be dedicated to the payment of $400,000 of expenses related to the renovation of such Resort. Other than Mandatory Prepayments under Section 2.4(c), Voluntary Prepayments under Section 2.5, payments of the Release Price with respect to Timeshare Intervals or a Calvada Lot that have been sold pursuant to a Contract, the application of insurance proceeds to the prepayment of the Inventory Loan pursuant to Section 3.5 hereof or the application of Condemnation Compensation pursuant to Section 3.6 hereof, the Debtor may not prepay the Inventory Loan, and in no circumstance may it re-borrow previously paid Inventory Advances. The Inventory Loan shall be payable in the manner set forth in Section 2.4 of this Agreement and in the Inventory Note. The Inventory Loan shall be due and payable on the Inventory Maturity Date together with any accrued interest thereon then remaining unpaid and any other amounts then due in connection therewith, under the Inventory Note or under any of the other Security Documents relating to, or otherwise securing, the Inventory Loan. 2.2 Issuance of Note; Rate of Interest; Receipt of Payments. (a) Inventory Note. The Debtor shall authorize, issue and deliver to the Lender a promissory note (as amended from time to time, the "Inventory Note") substantially in the form attached to this Agreement as Exhibit B. (b) Rate of Interest: Inventory Loan. Interest shall accrue on the Inventory Loan and be due monthly in arrears on the first (1st) Business Day of each month, as more particularly provided in the last sentence of this paragraph, and shall be paid as provided in Section 2.4 of this Agreement. Subject to the accrual of interest on the Inventory Loan after the occurrence of a Default or Event of Default, as more particularly provided below in this clause (b), the Monthly Average Weighted Loan Balance in respect of the Inventory Loan for each calendar month shall bear interest at a rate per annum equal to the Interest Rate. Interest shall be calculated under this clause (b) on the basis of actual days elapsed over a period of a 360-day year. The Inventory Loan shall bear interest as of the date of the Lender's wiring of funds thereof through the date of the receipt by the Lender of the repayment of such Loan (if the repayment of all or any portion of the Loan is received by the Lender later than 3:00 p.m. Eastern time, then interest accrual thereon shall be through the next Business Day following such receipt). After the occurrence of an Event of Default or after the Inventory Maturity Date (if the aggregate principal balance of the Inventory Loan is not paid in full on the Inventory Maturity Date), the Inventory Loan will bear interest at the Default 14 Rate. The Debtor and the Lender intend to comply at all times with applicable usury laws. All agreements between the Debtor and the Lender, 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 any Note or otherwise, shall the interest contracted for, charged, received, paid or agreed to be paid to the Lender exceed the maximum amount permissible under applicable law, or in the absence of a maximum allowable rate under applicable law, then, 45% per annum (the "Maximum Rate"). The Lender 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 Lender which exempts the Lender from any limit upon the rate of interest it may charge or grants to the Lender 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 Lender in excess of the Maximum Rate, the interest payable to the Lender shall be reduced to the Maximum Rate; and if from any circumstance the Lender 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 Loan and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal of the Loan, such excess shall be refunded to the Debtor. All interest paid or agreed to be paid to the Lender 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 Loan for such full period shall not exceed the Maximum Rate. The Debtor agrees that in determining whether or not any interest payment under the Security 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 Lender hereby expressly disclaims any intent to contract for, charge or receive interest in an amount which exceeds the Maximum Rate. The provisions of this Agreement, the Note, and all other Security Documents are hereby modified to the extent necessary to conform with the limitations and provisions of this paragraph, and this paragraph shall govern over all other provisions in any document or agreement now or hereafter existing. This paragraph shall never be superseded or waived unless there is a written document executed by the Lender and the Debtor, expressly declaring the usury limitation set forth in this paragraph to be null and void, and no other method or language shall be effective to supersede or waive this paragraph. (c) Interest and Other Payments Due on Holidays. If any payment due on, or with respect to, this Agreement, the Note or any other Security Document shall fall due on a day other than a Business Day, then such payment shall be made on the 1st Business Day following the day on which such payment shall have so fallen due; provided that if all or any portion of such payment shall consist of a payment of interest, for purposes of calculating such interest, such payment shall be deemed to have been originally due on such first following Business Day, and such interest shall accrue and be payable to (but not including, subject to clause (d) below) the actual date of payment. (d) Application of Payments Received after 3:00 p.m. Any payment actually received by the Lender at or before 3:00 p.m. Eastern time, by federal funds wire transfer on any Business Day, shall be deemed to have been received by the Lender on such day. Any payment actually received by the Lender after 3:00 p.m. Eastern time, by federal funds wire transfer on any Business Day, shall be deemed to have been received on the next following Business Day. All payments received by the Lender on a day other than a Business Day, or in a manner other than by federal funds wire transfer, shall be deemed to have been received by the Lender on the Business Day such amounts actually become available to the Lender prior to 3:00 p.m. Eastern time in immediately available funds. 15 2.3 Intentionally Deleted 2.4 Release Payments; Voluntary Prepayments of Inventory Loan. (a) Release Payments. Payments of Release Prices in respect of Unsold Inventory Lot/Timeshare Intervals shall be applied by the Lender when received in good, collected funds to the payment of the principal amount of the Inventory Loan. Debtor shall be responsible on the first (1st) business day of each month to pay to Lender all fees, costs and expenses as set forth in Section 10.2 of this Agreement, in each case, as the same may have arisen in respect of the Inventory Loan, payment of all unpaid Release Fees in respect of the Inventory Loan, the payment of all billed and unpaid interest, if any, in respect of the Inventory Loan, the payment of any other Obligations unpaid and in default and all Interest which accrues on the Inventory Loan in respect of the prior calendar month. (b) Voluntary Prepayments. Debtor shall have the right to prepay the Inventory Loan as provided in Section 2.1 or in full at any time provided however in connection with a full repayment of the Obligations hereunder, Debtor shall pay a prepayment fee equal to (i) or (ii) below: (i) For the period from and after the Closing Date through the date of such prepayment, if $1.00 or more of obligations remains due to Lender under a General Loan and Security Agreement of August 12, 1998, the difference between either (a) $136,745.00 or (b) if the number of Unsold Inventory Lot/Timeshare Intervals on the Closing Date is less than Three Thousand Nine Hundred Seven (3,907), the number of Unsold Inventory Lot/Timeshare Intervals on the Closing Date multiplied by seventy (70%) percent and further multiplied by $50.00 less (c) the aggregate of all Release Fees paid by Debtor and received by Lender to the date of such repayment; or (ii) For the period from and after the Closing Date through the date of such prepayment, if no obligations remain due to Lender under a General Loan and Security Agreement of August 12, 1998, the number of Unsold Inventory Lot/Timeshare Intervals on the date of such repayment multiplied by seventy percent (70%) and further multiplied by $25.00. (c) Mandatory Prepayment. Debtor shall make mandatory payments or prepayments, as the case may be, in addition to the Release Payments as follows: (i) At any time, the retail value (calculated as the aggregate of the average offering prices for each Timeshare Interval or Lot for sale to Purchasers over the immediately preceding ninety (90) days) of the Timeshare Intervals and Calvada Lots remaining subject to the Inventory Deed of Trust exceeds Twelve (12%), such amount as is necessary to reduce the Obligations to such maximum amount; and (ii) At any time that seventy percent (70%) of the remaining Timeshare Intervals and Calvada Lots subject to the Inventory Deed of Trust at the current retail value (calculated as the aggregate of the average offering prices for each Timeshare Interval or Lot for sale to Purchasers over the immediately preceding ninety (90) days) are less than the Obligations, Debtor shall either make a mandatory payment of such amount as is necessary to cause the retail value of seventy percent (70%) of the remaining Timeshare Intervals and Calvada Lots to exceed the Obligations by $1.00 or more if Debtor desires 16 to have the Release Price remain at $1,350 or shall on all future sales pay such increased Release Price so as to cause the Obligations due to Lender to be repaid at such time as seventy percent (70%) of the remaining Timeshare Intervals and Calvada Lots subject to the Inventory Deed of Trust are sold; and (iii) On or before the following anniversary dates to the extent necessary so that the principal balance of the Inventory Loan does not exceed the following levels: Date Principal Balance Remaining ---- --------------------------- April 1, 2002 $2,700,000 April 1, 2003 $1,900,000 April 1, 2004 $1,500,000 April 1, 2005 $ 0.00 2.5 Participating Lender. The Lender shall have the right, without prior notice to the Debtor or the approval of the Debtor, to designate one or more Participating Lenders and to grant to such Participating Lenders participations in the Receivable Loan Agreement and/or the Inventory Loan, on terms and conditions satisfactory to the Lender. In the event that the Lender so designates a Participating Lender and grants such Participating Lender a participation in any of such Loans, such Participating Lender shall communicate and deal only with the Lender in respect to such Participating Lender's interest in any of such Loans and the Collateral and the Debtor shall communicate and deal hereunder only with the Lender and not with any Participating Lender. SECTION 3. COLLATERAL 3.1 Security. For the purpose of securing the prompt and complete payment and performance by the Debtor of all of the Obligations, the Debtor does unconditionally and irrevocably hereby grant to the Lender a security interest in, and a Lien upon, the following Property of the Debtor, whether now owned or hereafter acquired (such Property being herein referred to as the "Collateral"): (a) all of the Debtor's right, title and interest in, to and under (including, without limitation, all revenues, proceeds, rents and other benefits derived from) any franchises (excluding the Hospitality Franchise System and Ramada Franchise Systems license agreements), permits, trade names, trademarks (and goodwill associated therewith), approvals, leasehold interests (whether as lessor or lessee), management contracts, marketing contracts, maintenance contracts, utility contracts, security contracts, licensing contracts, Timeshare Documents or other similar contracts and all guaranties of any of the foregoing, including, without limitation, the contracts set forth on Schedule 2 to this Agreement (individually, a "Property-Related Contract" and, collectively, the "Property-Related Contracts") relating, in each case, to the Calvada Lots or Timeshare Intervals; (b) all other accounts, contract rights, general intangibles, documents, instruments and proceeds of the Debtor related to the Property described in clause (a) above, or otherwise connected with, or related to, the operation and/or use of the Calvada Lots or Timeshare Intervals (including, without limitation, all rights of the Debtor in and to unearned or prepaid Insurance Premiums, Impositions or 17 other charges for utilities and any deposits with respect thereto relating to any Resort and any interest thereon and any Compensation that would be payable in respect of any construction, architect and engineering contracts entered into or to be entered into by the Debtor in connection with the refurbishing of the Timeshare Intervals, Calvada Lots or a Resort; (c) all Books and Records; (d) all Equipment; (e) all of the Debtor's right, title and interest of whatever character (whether as owner, vendor, chattel lessee, Declarant, Unit owner, Timeshare Interval owner or otherwise, vested and now owned) in and to (i) all Timeshare Intervals owned by Debtor (now existing) in any Resort which Timeshare Interval is subjected to the Inventory Deed of Trust, (ii) the Declarations, (iii) all building materials, supplies and other Property now or hereafter stored at or delivered to the Resorts or any other location for installation in or on any Unit, (iv) except to the extent included in clause (a) or clause (b) above, all rents, issues, profits and condemnation awards now or hereafter belonging or in any way pertaining to any Unit, provided that nothing in this clause shall limit or restrict the right of the Debtor to collect "Rents" as defined, and provided for, in the Assignment of Rents, and (v) any and all plans, specifications, drawings, books, records, marketing materials and similar items now or hereafter relating to any Unit, the operation thereof, any rights of the Debtor thereto or any interest therein; (f) all of the Debtor's right, title and interest of whatever character (whether as owner, vendor, chattel lessee, Declarant, or otherwise, vested and now owned) in and to (i) The Calvada Lots owned by Debtor (now existing) and subjected to the Inventory Deed of Trust, (ii) the Declarations, (iii) except to the extent included in clause (a) or clause (b) above, all rents, issues, profits and condemnation awards now or hereafter belonging or in any way pertaining to any Calvada Lot subjected to the Inventory Deed of Trust, provided that nothing in this clause shall limit or restrict the right of the Debtor to collect "Rents" as defined, and provided for, in the Assignment of Rents and (iv) any and all plans, specifications, drawings, books, records, marketing materials and similar items now or hereafter relating to any Calvada Lot or any rights of the Debtor thereto or any interest therein; (g) all of the Debtor's right, title and interest of whatever character (whether as owner, chattel lessee, Declarant, Unit owner, Timeshare Interval owner or otherwise, whether vested or contingent and whether now owned or hereafter acquired) in and to any and all judgments, settlements, claims, awards, insurance proceeds and other proceeds and compensation, and any interest thereon (collectively, "Compensation"), now or hereafter made or payable in connection with (i) any casualty or other damage to all or any part of the Timeshare Intervals, Units or Calvada Lots subjected to the Inventory Deed of Trust, (ii) any condemnation proceedings affecting the Timeshare Intervals, Units or Calvada Lots subjected to the Inventory Deed of Trust or any rights thereto or any interest therein, (iii) any damage to or taking of the Timeshare Intervals, Units or Calvada Lots subjected to the Inventory Deed of Trust or any rights thereto or any interest therein arising from or otherwise relating to any exercise of the power of eminent domain (including, without limitation, any and all Compensation for change of grade of streets or any other injury to or decrease in the value thereof), or any conveyance in lieu of or under threat of any such taking, (iv) any and all proceeds of any sale, assignment or other disposition of the Timeshare Intervals, Units or Calvada Lots subjected to the Inventory Deed of Trust or any rights thereto or any interest therein, (v) any and all proceeds of any other conversion (whether voluntary or involuntary) of the Timeshare Intervals, Units or Calvada Lots subjected to the Inventory Deed of Trust or any rights thereto or any interest therein or to cash or any liquidated claim relating thereto, and (vi) any and all refunds and rebates of or with respect to any Insurance Premium, any Imposition or any other charge for utilities 18 relating to the Timeshare Intervals, Units or Calvada Lots subjected to the Inventory Deed of Trust (including, without limitation, any and all refunds and rebates of or with respect to any deposit or prepayment relating to any such Insurance Premium, Imposition or charge), and any and all interest thereon, whether now or hereafter payable or accruing; and (h) all other "Mortgaged Property," as such term is defined in the Inventory Deed of Trust, whether such Collateral shall be presently in existence or whether it shall be acquired or created by the Debtor at any time hereafter, wherever located, together with the products and proceeds thereof, and any replacements, additions and/or accessions thereto and substitutions thereof and after-acquired Property related to the Timeshare Intervals, Units or Calvada Lots subjected to the Inventory Deed of Trust, provided that any Collateral which shall have been released by the Lender from the Liens provided for herein or in any other Security Document shall not be deemed to have again become subject to such Liens solely by virtue of becoming after-acquired Property of the Debtor. The Lender agrees that, upon the release of a Timeshare Interval or Calvada Lot from the Inventory Deed of Trust, the Lender will release any security interest, together with all documents, instruments, chattel paper, proceeds, revenues, Property rights, privileges and other benefits relating thereto. 3.2 Undertakings Regarding Collateral. (a) The Lender shall not be required to take any steps to perfect or maintain the perfection of its security interest in the Collateral and no loss of, or damage to, the Collateral shall release the Debtor from any of the Obligations. (b) The execution and delivery of this Agreement, and the granting of the Liens in and to the Collateral, shall not subject the Lender to, or transfer or pass to the Lender or in any way affect or modify, the liability of the Debtor under any or all of the Property-Related Contracts or in connection with the Resorts or Calvada Lots, the Declaration or the Association's Articles of Incorporation or By-Laws, it being understood and agreed that notwithstanding this Agreement, and the granting of the Liens in and to the Collateral, all of the obligations of the Debtor (whether as owner, chattel lessee, vendor, mortgagee, Declarant, Unit owner, Timeshare Interval owner or otherwise) to each and every other party under each and every one of the Property-Related Contracts and/or in connection with the Resorts or the Declaration and Articles of Incorporation and By-Laws of the Association shall be and remain enforceable by such other party, its successors and assigns, only against the Debtor or Persons other than the Lender, and the Lender has not assumed any of the obligations or duties of the Debtor under or with respect to any of the Property-Related Contracts or otherwise in connection with the Resorts or the Declaration or the Articles of Incorporation or By-Laws of the Association. (c) The Debtor hereby agrees and acknowledges that neither the acceptance of this Agreement or any other Security Document by the Lender nor the exercise of, or failure to exercise, any right, power or remedy in this Agreement or in any other Security Document conferred upon the Lender shall be deemed or construed to obligate the Lender to pay any sum of money, take any other action or incur any liability in connection with, or collect or realize upon, any other Collateral. It is further agreed and understood by the Debtor that the Lender shall not be liable in any way for any cost, expense or liability connected with, or any charge or liability arising from, any of the Property-Related Contracts or any other Collateral. 19 (d) The Debtor hereby agrees to indemnify the Lender, and hold it harmless, from any and all liability, loss or damage which it may or might incur by reason of any and all claims and demands whatsoever which may be asserted against the Lender arising out of, as a result of, or otherwise connected with, the Liens hereby granted to the Lender by the Debtor under or in respect of any of the Property-Related Contracts or any other Collateral by reason of (i) the failure by the Debtor to perform any obligations or undertakings required to be performed by the Debtor under or in connection with any of such Property-Related Contracts or any other Collateral, (ii) any failure by the Debtor, in connection with any of the Property-Related Contracts or any other Collateral, to comply with any applicable federal, state or local consumer credit, sale rescission or usury statute, and (iii) failure by the Debtor to comply with any applicable federal, state or local statutes or ordinances and the rules and regulations promulgated thereunder pertaining to the renovation, construction, use or operation of the Resorts (including, without limitation, the Units) or to otherwise discharge its duties and obligations under applicable law and under the Declaration or the Association's Articles of Incorporation or By-Laws as Declarant. 3.3 Financing Statements/Perfection Documents. The Debtor agrees, at its own expense, to execute the financing statements required by the Rhode Island Uniform Commercial Code together with any and all other instruments or documents and take such other action, including delivery of such instruments and documents, as may be necessary to perfect, and to continue the perfection of, the Lender's security interest and Liens in the Collateral and, unless prohibited by law, the Debtor hereby authorizes the Lender to execute and file any such financing statement on the Debtor's behalf. The parties agree that a legible carbon, photographic or other reproduction of this Agreement or of a financing statement shall be sufficient as a financing statement. 3.4 Location of Collateral; Books and Records. All tangible Collateral (other than Collateral delivered to the Lender and other than certain Books and Records which may be kept on Debtor's premises in Las Vegas, Nevada) which is personal Property is to remain, at all times, on the premises of the Debtor at 4310 Paradise Road, Las Vegas, Nevada or on the premises of one of the Resorts and the Debtor represents and warrants to the Lender that all of the currently existing tangible Collateral is now located either at Debtors Las Vegas premises or on the premises of one of the Resorts , and the Debtor will not transfer the Collateral from such premises to other locations without the prior written approval of the Lender. The Debtor shall, upon receipt of a written request therefor from the Lender, deliver to the Lender, then current copies of all computer tapes, disks, software and microfiche records constituting, in whole or in part, the Books and Records. 3.5 Insurance of Collateral. (a) Maintenance of Insurance. The Debtor agrees to maintain, or cause to be maintained, insurance, with financially sound and reputable insurers acceptable to the Lender, with respect to the Calvada Lots, Units and the personal Property located therein (including, without limitation, the furniture, fixtures and furnishings thereof), all other equipment and other personal Property of every nature whatsoever now or hereafter located in or on, or attached to, and used or intended to be used in connection with the Resorts, the Common Amenities and the Books and Records, against casualties, contingencies, hazards and such other risks (including, without limitation, (i) fire, hurricane, tornado, wind damage, and such other risks insured against by a standard all-risk property and fire insurance policy and endorsement for extended coverage and (ii) flood insurance, if required by applicable law) and in such amounts as shall be reasonably satisfactory to the Lender (such insurance to be maintained during the refurbishing of the Resorts and to cover materials in as well as adjacent to the structures so insured; 20 such insurance shall also be maintained prior to such refurbishing as well as after such refurbishing); provided, however, that such casualty insurance shall (A) in no case be in an amount less than an amount sufficient to rebuild the Units or the Common Amenity which shall have suffered the loss and replace any of the personal Property located therein and (B) be sufficient to provide funds to fully compensate owners of Timeshare Intervals in and to such Unit for any inability to utilize such Unit and/or Common Amenity during any period following a loss to such Unit or Common Amenity. The Debtor shall deliver copies of the policies of such insurance to the Lender, with satisfactory lender's loss payable endorsements naming the Lender as loss payee to the extent of its interest and as such interest may appear on the Closing Date, as set forth in Section 5.12 hereof and within 15 days after the Closing Date, Debtor shall deliver a certification from the insurance company or insurance companies issuing such policies certifying that such copies are true and correct. Each such policy of insurance or endorsement shall contain a clause requiring the insurer to give not less than 30 days' prior written notice to the Lender in the event of cancellation of the policy for any reason whatsoever and a clause that the interest of the Lender shall not be impaired or invalidated by any act or neglect of the Debtor or owner of the Property nor by the occupation of the premises for purposes more hazardous than are permitted by said policy. If the Debtor shall fail to provide and pay for such insurance, or have the same provided and paid for, the Lender may, at the Debtor's expense, procure the same, but shall not be required to do so. The Debtor agrees to deliver to the Lender, promptly as rendered, true copies of all reports made by the Debtor in any reporting form to insurance companies. The Debtor shall maintain or caused to be maintained insurance with financially sound and reputable insurers with respect to its Property and business (including, without limitation, the Collateral) covering any public liability of the Debtor, its officers, agents or employees (including, without limitation, damage by Debtor or its officers, agents or employees or the Association to the Property of other Persons, any bodily injury caused by Debtor or its officers, agents or employees to any other Person, or any negligent act or other similar liability of Debtor or its officers, agents or employees) and in such amounts as are satisfactory to the Lender; the Lender shall be named as a co-insured thereon. The Debtor shall, on or prior to August 15 of each year, commencing on August 15, 2001, submit to the Lender insurance certificates showing the type and amounts of insurance coverage maintained, or caused to be maintained, by Debtor in respect of the Resorts, the then current premium cost in respect thereof and the amount of such cost which shall have been previously paid. The Debtor shall, to the extent permitted by applicable law, cause all casualty policies of insurance provided under the Declarations to have mortgagee endorsements in respect of the Lender's interests in and to the Timeshare Interval or Calvada Lot that is the subject of the Inventory Deed of Trust. The Debtor shall pay, or cause to be paid, all premiums on the aforesaid insurance policies and all other fees and charges payable in connection with such insurance policies (such premiums, fees and charges being collectively referred to herein as "Insurance Premiums") not later than the due date thereof. If the Debtor shall fail to pay, or cause to be paid, any such Insurance Premiums, the Lender may (but shall not be obligated to), at Debtor's expense, pay the same. Any such payment shall be subject to Section 3.11 hereof. If the Mortgaged Property (as defined in the Inventory Deed of Trust) is sold at a foreclosure sale or if the Lender shall acquire title to said Mortgaged Property, the Lender shall have all of the right, title and interest of the Debtor in and to all insurance policies required under this clause (a) and the unearned premiums thereon, related to the Mortgaged Property, and in and to the proceeds resulting from any damage to said Mortgaged Property prior to such sale or acquisition. (b) Condominium/Timeshare Insurance Proceeds. The Lender acknowledges that application of all or a portion of any proceeds of insurance may be subject to the Nevada, New Jersey, 21 Florida or Hawaii Condominium Ownership Acts, the Nevada, New Jersey, Florida or Hawaii Common Interest Ownership Acts and the terms and provisions of the Declaration, and the foregoing requirements in this Section 3.5 shall be subject thereto (unless such laws may be modified by agreement and have been so modified). For so long as the Inventory Loan shall remain outstanding, any proceeds of insurance payable by the Association, any manager retained by it or by the Declarant in respect of any Unit or Timeshare Interval to the Debtor under the Declarations, the Associations' Articles of Incorporation or By-Laws or under the applicable law shall be promptly paid and/or turned over to the Lender as proceeds of the Collateral and applied either in accordance with the applicable law or, if no such requirement exists, to the prepayment of the Loan without prepayment penalty (after deducting therefrom all out-of-pocket costs and expenses of the Lender in respect thereof) as provided in Section 2.1 hereof. Without limiting the immediately preceding sentence, any proceeds of insurance in respect of any Unit or Timeshare Interval received by the Debtor or received by the Debtor as Declarant or received by the Associations at a time during which (i) the Debtor (as Debtor or as Declarant) or any Affiliate shall be the only owner or owners of Units or Timeshare Intervals, or (ii) the insurance provisions of the Declarations shall have been suspended, shall be promptly paid and/or turned over to the Lender (and the Debtor, as Debtor or as Declarant, shall cause such payment and/or turnover) as proceeds of the Collateral and applied to the prepayment of the Loan (after deducting therefrom all out-of-pocket costs and expenses of the Lender in respect thereof) as provided in Section 2.1 hereof. (c) Miscellaneous Application of Insurance Proceeds. Subject to the terms, provisions and requirements of the Declarations and applicable law and to the extent that clause (b) above shall not be applicable, the Lender is hereby irrevocably authorized and appointed the agent and attorney-in-fact of the Debtor (with full right of substitution) to adjust or compromise any insured loss in respect of the Collateral and to collect and receive the proceeds from any such policy in respect of any such loss, which appointment shall be deemed to be coupled with an interest. Each insurance company issuing any of the above- mentioned insurance policies is hereby irrevocably authorized and directed to make payment in respect of any such loss (whether or not the Lender shall have exercised its option to adjust or compromise such loss) directly to the Lender alone and not to the Debtor and the Lender jointly. The Debtor shall immediately pay over to the Lender any such payments received directly from any such insurance company. The Lender is hereby irrevocably authorized and appointed the agent and attorney-in-fact of the Debtor (with full right of substitution) to endorse the Debtor's name on any instrument in payment of such proceeds, which appointment shall be deemed to be coupled with an interest. Such insurance proceeds received by the Lender shall not be, nor be deemed to be, trust funds and may be commingled with the general funds of the Lender. No interest shall be payable in respect of any such insurance proceeds received by the Lender. After deducting from such insurance proceeds any expenses incurred by the Lender in the adjustment or compromise of such loss or in the collection or handling of such funds (including, without limitation, attorneys' fees and disbursements), the Lender shall (i) if an Event of Default shall then exist, apply such net insurance proceeds to the prepayment of the Loan as provided in Section 2.1; (ii) if no Event of Default shall then exist and such loss shall not have been in respect of all, or substantially all, of the Collateral located at any Resort and shall have exceeded $20,000 and if the insurer which paid such insurance proceeds shall not claim any right of participation and/or assignment of rights in respect of the Lender with respect to the Obligations, either deliver the net insurance proceeds to 22 the Debtor as contemplated in clause (A) below but subject to the conditions set forth in said clause (A) or apply the same as contemplated in clause (B) below: (A) (1) the Debtor shall have, within 30 days of such loss, delivered to the Lender a written undertaking to rebuild, restore and/or repair the Collateral damaged or destroyed; (2) the Debtor shall have, within 60 days of such loss, submitted to the Lender for its approval (x) plans and specifications in respect of such rebuilding, restoration and/or repairing, which plans and specifications shall be reasonably satisfactory to the Lender and which shall have been prepared by an architect reasonably satisfactory to the Lender, (y) an estimate of all costs of such rebuilding, restoration and/or repairing signed by such architect and (z) copies of approvals or consents of all necessary governmental authorities; (3) at the time of each disbursement contemplated by subclause (8) below, the Lender shall be reasonably satisfied that such net insurance proceeds, together with any additional funds made available for such purpose by the Debtor and deposited with the Lender, shall be sufficient to effect such rebuilding, restoration and/or repairing in accordance with the aforesaid plans and specifications, free and clear of all Liens except the Liens contemplated or otherwise permitted herein and in the other Security Documents; (4) at the time of each disbursement contemplated by subclause (8) below, the Lender shall be reasonably satisfied that such rebuilding, restoration and/or repairing can be completed within any applicable time limitation imposed by law or, if there are no such time limitations, within a reasonable period of time; (5) at the time of each disbursement contemplated by subclause (8) below, the Lender shall be reasonably satisfied that, after such application and such rebuilding, restoration and/or repairing (taking into account any restrictions imposed by law or agreement on such rebuilding, restoration and/or repairing or on the use of the Collateral after such rebuilding, restoration and/or repairing), the Collateral shall have a Fair Market Value substantially the same as, or greater than, the Fair Market Value of the Collateral immediately prior to the occurrence of such damage or destruction; (6) at the time of each disbursement contemplated by subclause (8) below, no Property-Related Contract shall have been terminated or, if any Property-Related Contract shall have been terminated, the Lender shall be reasonably satisfied that the Debtor will be able to replace such Property- Related Contract reasonably promptly; (7) the holder of any encumbrance senior to the Liens provided herein or in any other Security Document in respect of the Collateral shall have consented and agreed to the application of insurance proceeds as set forth in this clause (A); and (8) the disbursement of such net insurance proceeds shall be in accordance with terms, conditions and procedures customarily followed by prudent institutional lenders in making construction loans in similar amounts and on such other terms, conditions and procedures as the Lender may reasonably require (as evidenced by its written notice thereof to the Debtor prior to the first disbursement pursuant to this subclause (8)) to assure the proper application of such proceeds and the continuing performance by the Debtor of its obligations hereunder and under the other Security Documents, including without limitation, receipt by the Lender of evidence of suitable payment bonds with respect to all material contracts and Builder's All Risk Insurance and a certificate from the Debtor 23 certifying that (x) all rebuilding, restoration and/or repairing to the date of such disbursement has been performed substantially in accordance with the aforesaid plans and specifications and that there have been no material changes or modifications made in such plans and specifications, (y) the labor, services and/or materials to be paid by such disbursement have been performed upon, or furnished in respect of, the rebuilding, restoration and/or repairing of the Collateral and (z) no Event of Default exists at the time of such disbursement, or (B) the Lender shall apply such net insurance proceeds to the prepayment of the Loan as provided in Section 2.1 of this Agreement, if the Lender shall not have received the written confirmation referred to in subclause (A)(1) above within the time period required therefor or if the Debtor shall have informed the Lender, in writing, of its intention not to rebuild, repair and restore the Collateral or the Lender shall have determined the same at any time during the rebuilding, repairing or restoration process referred to in clause (A) above; (iii) if no Event of Default shall then exist and such loss shall not have been in respect of all, or substantially all, of the Collateral at any Resort and shall not have exceeded $20,000, deliver all of such net insurance proceeds to the Debtor and the Debtor shall thereupon be obligated to, and shall, promptly rebuild, repair and restore the Collateral subject to such loss (or shall cause such Property to be so promptly rebuilt, repaired and restored) to the equivalent of its condition immediately prior to such loss, whether or not such net insurance proceeds shall be sufficient to cover the costs thereof, and shall certify, within 120 days of such loss, to the Lender that such rebuilding, repairing and restoration has been completed and paid for in full; or (iv) if no Event of Default shall then exist and if such loss shall be in respect of all, or substantially all, of the Collateral at any Resort, apply such net insurance proceeds to the prepayment of the Loan, first, as provided in Section 2.1 of this Agreement and second, as provided in the Receivable Loan Agreement. Any payment of insurance proceeds over to the Debtor, as provided above, shall not affect the Lien of this Agreement or any other Security Document as security for the Obligations. Notwithstanding any such loss, the Debtor shall continue to pay interest and principal at the applicable rate and amounts and at the applicable times provided in this Agreement and in the Note. Although the Lender intends to use reasonable efforts to collect such insurance proceeds in a timely fashion, the Lender shall not be responsible for any failure to collect any proceeds due under the terms of any insurance policy, regardless of the cause of such failure. Any balance of such net insurance proceeds remaining after the aforesaid application thereof shall, if no Event of Default shall then exist, belong, or be paid to, as the case may be, the Debtor, provided that, if an Event of Default shall then exist, the Debtor shall promptly deliver any such balance to the Lender and such balance shall be applied as a prepayment of the Loan as provided in Section 2.1 hereof. (d) Debtor Undertakings. In the event of any casualty or loss in respect of the Collateral, (i) the Debtor shall immediately notify the Lender of the same, (ii) the Lender may, in addition to its rights as beneficiary under the Inventory Deed of Trust, elect to exercise the voting rights of the Debtor as the owner of any Timeshare Interval, as such voting rights are provided for under the Declaration, regarding all matters of repair and restoration and (iii) the Debtor shall pay all assessments as required by the Declaration and/or the Association's Articles of Incorporation or By-Laws for repair and restoration due to inadequacy of insurance. Debtor agrees to cause any contractor hired by it to effect any of the refurbishing of the Collateral 24 to carry adequate insurance in respect of bodily injury or other personal liability or property damage in respect of its employees or other third persons in connection with such refurbishing or construction. Certificates of such insurance shall be filed with the Lender prior to commencement of work and shall be reasonably acceptable to the Lender in form and substance. 3.6 Condemnation. (a) Condominium/Timeshare Condemnation Compensation. Any compensation, awards, damages, claims, rights of action, proceeds, payment and other relief (collectively, "Condemnation Compensation") of, or on account of, any damage or taking of all or any part of the Collateral at any Resort in connection with any condemnation proceedings or any exercise of the power of eminent domain (or any conveyance in lieu of or under threat of any such taking), including, without limitation, any such Condemnation Compensation for change of grade of streets or any other injury to or decrease in the value of all or any part of the Collateral payable by the Association, any manager retained by it or by the Declarant in respect of any Unit or Timeshare Interval to the Debtor under the Declaration, the Association's Articles of Incorporation or By-Laws or under applicable law shall be promptly paid and/or turned over to the Lender as proceeds of the Collateral and applied to the prepayment of the Loan as provided in Section 2.1 hereof. (b) Applicable Law. (i) The Lender acknowledges that application of all or a portion of any Condemnation Compensation may be subject to the Nevada, New Jersey, Florida or Hawaii Condominium Ownership Act, the Nevada, New Jersey, Florida or Hawaii Common Interest Ownership Act and the terms and provisions of the Declaration, and the foregoing requirements in this Section 3.6 shall be subject thereto (unless such laws may be modified by agreement and have been so modified). (ii) Any Condemnation Compensation in respect of any Unit or Timeshare Interval received by the Debtor or received by the Debtor as Declarant or received by the Association at a time during which (A) only the Debtor (as Debtor or as Declarant) or any Affiliate shall be the only owner of Units or Timeshare Intervals or Calvada Lots or (B) the condemnation provisions of the Declaration shall have been suspended shall be promptly paid and/or turned over to the Lender (and the Debtor, as Debtor or as Declarant, shall cause such payment and/or turnover) as proceeds of the Collateral and applied to the prepayment of the Loan as provided in Section 2.1 hereof. (c) Miscellaneous Application of Condemnation Compensation. Subject to the requirements, terms and provisions of the Declaration and to the extent that clause (b) above shall not be applicable, the Lender shall be entitled to all Condemnation Compensation of, or on account of, any damage or taking of all or any part of the Collateral in connection with any condemnation proceedings or any exercise of the power of eminent domain (or any conveyance in lieu of or under threat of any such taking), including, without limitation, any such Condemnation Compensation for change of grade of streets or any other injury to or decrease in the value of all or any part of the Collateral at any Resort. All such Condemnation Compensation, and the right thereto, is hereby assigned to the Lender and included in the Collateral. The Debtor shall promptly execute such further assignments of any such Condemnation Compensation as the Lender may require, and the Lender shall take all steps to assure that such 25 Condemnation Compensation shall be paid to the Lender alone, and not to the Debtor and the Lender jointly, and that such Condemnation Compensation at all times shall be free and clear of any Liens, charges or encumbrances of any kind whatsoever, except the Liens permitted or otherwise provided for herein or in the other Security Documents. The Lender is hereby irrevocably authorized and appointed the agent and attorney-in-fact of the Debtor (with full right of substitution) to endorse the Debtor's name on any instrument in payment of such Condemnation Compensation, which appointment shall be deemed to be coupled with an interest. The Lender is hereby irrevocably authorized and appointed the agent and attorney-in-fact of the Debtor (with full right of substitution) to commence, appear in and prosecute in its own and/or the Debtor's name any action or proceeding relating to any condemnation or exercise of the power of eminent domain, to settle or compromise any claim in connection therewith and to collect and receive such Condemnation Compensation and give proper receipts and acquittances therefor, which appointment shall be deemed to be coupled with an interest. The Debtor from time to time shall promptly deliver to the Lender any and all instruments and authorizations which the Lender may request to enable the Lender to take any such action. Such Condemnation Compensation received by the Lender shall not be, nor be deemed to be, trust funds and may be commingled with the general funds of the Lender. No interest shall be payable in respect of any such Condemnation Compensation. After deducting from such Condemnation Compensation any expenses incurred by the Lender in connection therewith (including, without limitation, attorneys' fees and disbursements), the Lender shall (i) if an Event of Default shall then exist, apply such net Condemnation Compensation to the prepayment of the Loan as provided in Section 2.1; (ii) if no Event of Default shall then exist, such damage or taking shall have not been in respect of all, or substantially all, of the Collateral at any Resort, such damage or taking shall not have rendered the remainder of the Collateral at any Resort economically inviable or unusable to the same extent and in the same manner as it was immediately prior to such damage or taking, and the Condemnation Compensation payable in respect thereof shall have exceeded $20,000, either deliver the Condemnation Compensation to the Debtor as contemplated in clause (A) below but subject to the conditions set forth in said clause (A) or apply the same as contemplated in clause (B) below: (A) (1) the Debtor shall have, within 30 days of such condemnation or taking, delivered to the Lender a written undertaking to rebuild, restore and/or repair the Collateral not condemned or taken; (2) the Debtor shall have, within 60 days of such condemnation or taking, submitted to the Lender for its approval (x) plans and specifications in respect of such rebuilding, restoration and/or repairing, which plans and specifications shall be reasonably satisfactory to the Lender and which shall have been prepared by an architect reasonably satisfactory to the Lender, (y) an estimate of all costs of such rebuilding, restoration and/or repairing signed by such architect and (z) copies of approvals or consents of all necessary governmental authorities; (3) at the time of each disbursement contemplated by subclause (8) below, the Lender shall be reasonably satisfied that such Condemnation Compensation, together with any additional funds made available for such purpose by the Debtor and deposited with the Lender, shall be sufficient to effect such rebuilding, restoration and/or repairing in accordance with the aforesaid plans and specifications, free and clear of all Liens except the Liens contemplated or otherwise permitted herein and in the other Security Documents; 26 (4) at the time of each disbursement contemplated by subclause (8) below, the Lender shall be reasonably satisfied that such rebuilding, restoration and/or repairing can be completed within any applicable time limitation imposed by law or, if there are no such time limitations, within a reasonable period of time; (5) at the time of each disbursement contemplated by subclause (8) below, the Lender shall be reasonably satisfied that, after such application and such rebuilding, restoration and/or repairing (taking into account any restrictions imposed by law or agreement on such rebuilding, restoration and/or repairing or on the use of the Collateral after such rebuilding, restoration and/or repairing), the Collateral shall have a Fair Market Value substantially the same as, or greater than, the Fair Market Value of the Collateral immediately prior to the occurrence of such condemnation or taking; (6) at the time of each disbursement contemplated by subclause (8) below, no Property-Related Contract shall have been terminated or, if any Property-Related Contract shall have been terminated, the Lender shall be reasonably satisfied that the Debtor will be able to replace such Property- Related Contract reasonably promptly; (7) the holder of any encumbrance senior to the Liens provided herein or in any other Security Document in respect of the Collateral shall have consented and agreed to the application of Condemnation Compensation as set forth in this clause (A); and (8) the disbursement of such Condemnation Compensation shall be in accordance with terms, conditions and procedures customarily followed by prudent institutional lenders in making construction loans in similar amounts and on such other terms, conditions and procedures as the Lender may reasonably require (as evidenced by its written notice thereof to the Debtor prior to the first disbursement pursuant to this subclause (8)) to assure the proper application of such proceeds and the continuing performance by the Debtor of its obligations hereunder and under the other Security Documents, including without limitation, receipt by the Lender of evidence of suitable payment bonds with respect to all material contracts and Builder's All Risk Insurance and a certificate from the Debtor certifying that (x) all rebuilding, restoration and/or repairing to the date of such disbursement has been performed substantially in accordance with the aforesaid plans and specifications and that there have been no material changes or modifications made in such plans and specifications, (y) the labor, services and/or materials to be paid by such disbursement have been performed upon, or furnished in respect of, the rebuilding, restoration and/or repairing of the Collateral and (z) no Event of Default exists at the time of such disbursement, or (B) the Lender shall apply such Condemnation Compensation to the prepayment of the Loan as provided in Section 2.1 of this Agreement, if Lender (or its agent) shall have not received the written confirmation referred to in subclause (A)(1) above within the time period required therefor or if the Debtor shall have informed the Lender, in writing, of its intention not to rebuild, repair and restore the Collateral at any Resort or the Lender shall have determined the same at any time during the rebuilding, repairing or restoration process referred to in clause (A) above; (iii) if no Event of Default shall then exist and such damage or taking shall not have been in respect of all, or substantially all, of the Collateral at any Resort and the Condemnation Compensation payable in respect thereof shall not have exceeded $20,000, deliver all of such net Condemnation Compensation to the Debtor and the Debtor shall thereupon be obligated to, and shall, promptly rebuild, repair and restore the Collateral (or shall cause the Collateral to be so promptly rebuilt, repaired and restored) such that the Collateral is useable to the same extent and in the same manner, and is in 27 substantially an equivalent condition, after such damage or taking as it was immediately prior to such damage or taking, whether or not such net Condemnation Compensation shall be sufficient to cover the costs thereof, and shall certify, within 120 days of such damage or taking, to the Lender that such rebuilding, repairing and restoration has been completed and paid for in full; or (iv) if no Event of Default shall then exist and if such damage or taking loss shall be in respect of all, or substantially all, of the Collateral at any Resort or the Resort is no longer economically viable or no longer useable to the same extent and in the same manner after such damage or taking as it was immediately prior to such damage or taking, apply such net Condemnation Compensation to the prepayment of the Loan as provided in Section 2.1of this Agreement. The Lender may release such net Condemnation Compensation to the Debtor without affecting the Lien of this Agreement or any other Security Document as security for the Obligations. Any balance of such net Condemnation Compensation remaining after the aforesaid application thereof shall, if no Event of Default shall then exist, belong to, or be paid to, as the case may be, the Debtor, provided that, if an Event of Default shall then exist, the Debtor shall promptly deliver any such balance to the Lender and such balance shall be applied as a prepayment of the Loan as provided in Section 2.1 hereof. Notwithstanding any such condemnation, the Debtor shall continue to pay interest and principal at the applicable rate and amounts and at the applicable times provided in this Agreement and in the Note. Although the Lender intends to use reasonable efforts to collect such Condemnation Compensation, in a timely fashion, the Lender shall not be responsible for any failure to collect such Condemnation Compensation, regardless of the cause of such failure. (d) Debtor Undertakings. In the event of any condemnation or taking in respect of any Resort (including, without limitation, any of the Collateral), (i) the Debtor shall immediately notify the Lender of the same, (ii) the Lender may, in addition to its rights as beneficiary under the Inventory Deed of Trust, elect to exercise the voting rights of the Debtor as the owner of any Timeshare Interval or of Calvada Lots, as such voting rights are provided for under the Declaration, regarding all matters of repair and restoration and (iii) the Debtor shall pay all assessments as required by the Declaration and/or the Association's Articles of Incorporation or By-Laws for repair and restoration due to inadequacy of the Condemnation Compensation. 3.7 Taxes Affecting Collateral. The Debtor shall pay or cause to be paid, on or before the last day when they may be paid without interest or penalty, all taxes, assessments, rates, dues, charges, fees, levies, excises, duties, fines, impositions, liabilities, obligations and encumbrances (including, without limitation, water and sewer rents and charges, charges for setting or repairing meters and charges for other utilities or services), general or special, ordinary or extraordinary, foreseen or unforeseen, of every kind whatsoever, now or hereafter imposed, levied or assessed by any public or quasi-public authority or instrumentality upon or against any of the Collateral or the use, occupancy or possession of any Resort, or upon or against this Agreement, the Note or the other Security Documents, the Obligations or the interest of the Lender in the Inventory Deed of Trust or any other item of Collateral (provided that this Section 3.7 shall not be construed to require the Debtor to pay any income tax imposed upon the general income of the Lender), as well as all assessments and other governmental charges imposed, levied or assessed in respect of any Collateral, and any and all interest, costs and penalties on or with respect to any of the foregoing (collectively, the "Impositions"). Upon request by the Lender, the Debtor shall deliver to the Lender receipts or other satisfactory proof of payment of any Impositions. 28 The Debtor shall not claim, demand or be entitled to receive any reduction of, or credit toward, any Imposition on account of the Obligations. No deduction shall be claimed from the taxable value of any Collateral or any Resort by reason of the Obligations, any of the Security Documents or the interest of the Lender in the Collateral. If existing laws or procedures governing the taxation of mortgages, security documents or debts secured by mortgages or other security documents shall be changed in any manner after the date hereof so as to materially adversely impair the security of the Inventory Deed of Trust or the security interest herein granted or granted in any of the other Security Documents or to reduce the net income to the Lender in respect of the Obligations (excluding from any such determination of net income any reduction in such net income attributable to a change in taxes imposed on, or measured by, the net income of the Lender), then, upon request by the Lender, the Debtor shall pay to the Lender or to the taxing authority (if so directed by the Lender), all taxes, charges and related costs for which the Lender may be liable as a result thereof. The Debtor shall pay, or cause to be paid, when due, any and all recording (mortgage or personal property), intangible property and documentary stamp taxes, all similar taxes, and all filing, registration and recording fees, which are now or hereafter may become payable in connection with the Obligations, the Inventory Deed of Trust, this Agreement, any of the other Security Documents or any of the other Collateral. The Debtor shall pay when due any and all excise, transfer and conveyance taxes which are now or hereafter may become payable in connection with the Obligations, the Inventory Deed of Trust, this Agreement or any of the other Security Documents, or in connection with any foreclosure of the Inventory Deed of Trust or any other foreclosure of any Collateral under this Agreement or under any of the other Security Documents, or any other transfer of any item of Collateral in extinguishment of all or any part of the Obligations or any other enforcement of the rights of the Lender with respect thereto. 3.8 Discharge of Liens Affecting Collateral. If any mechanic's, laborer's, materialman's, statutory or other Lien (other than Permitted Exceptions) shall be filed or otherwise imposed upon or against any item of the Collateral or any Resort, then the Debtor shall, within 30 days after being given notice of the filing of such Lien or otherwise becoming aware of the imposition of such Lien, cause such Lien to be vacated or discharged of record by payment, deposit, bond, final order of a court of competent jurisdiction or otherwise. The Debtor shall have the right, at its sole expense, to contest the validity of any such Lien or of the claim evidenced or secured thereby, by appropriate proceedings commenced prior to the expiration of the aforesaid 30- day period and thereafter diligently and continuously conducted in good faith to final determination, in which event the Debtor shall not be required to cause any such Lien to be vacated or discharged of record in accordance with the immediately preceding paragraph if, and only so long as: (a) no final judicial determination in respect of any foreclosure or other enforcement proceeding in respect of such Lien or the claim evidenced or secured thereby shall have been rendered and no nonjudicial foreclosure proceeding or sale in respect of such Lien or such claim shall have been commenced; (b) no claim for liability of any kind shall have been asserted against the Lender in connection with such Lien or the claim evidenced or secured thereby; and (c) if such Lien shall secure a claim of more than $20,000, the Debtor shall have established 29 an escrow with the Lender, or shall have delivered to the Lender a satisfactory bond issued by a surety acceptable to the Lender or a satisfactory letter of credit for the benefit of the Lender issued by a bank acceptable to the Lender, in each case in an amount estimated by the Lender to be adequate to cover (i) the unpaid amount of such claim, (ii) all interest, penalties and similar charges which reasonably can be expected to accrue by reason of such contest or by reason of such nonpayment, and (iii) all costs, fees and expenses (including, without limitation, attorneys' fees and disbursements) which reasonably can be expected to be incurred in connection therewith by the Lender, which escrow, bond or letter of credit shall be maintained in effect throughout such contest and the amount of which shall be increased from time to time if reasonably required by the Lender to cover the foregoing amounts in subclause (i), subclause (ii) and subclause (iii). The Debtor shall inform the Lender, in advance and in writing, of its intention to contest any Lien securing a claim, or such claim itself, under this Section 3.8 if such claim shall exceed $20,000. Upon termination of any such contest (whether by final determination or otherwise), or at any time during the course of any such contest that the conditions relieving the Debtor of its obligation to cause such Lien to be vacated or discharged shall no longer be satisfied or shall be discovered not to have been satisfied, the Debtor shall cause such Lien to be vacated or discharged of record. At the Lender's option, the escrow established or bond or letter of credit, as the case may be, delivered pursuant to this Section 3.8 may be, in the case of the escrow, liquidated, or, in the case of the bond or the letter of credit, drawn upon, at such time and the proceeds thereof may be applied to payment of all or any part of the claim evidenced or secured by such Lien and the interest, penalties, charges, costs, fees and expenses (including, without limitation, attorneys' fees and disbursements) referred to in subclause (ii) and subclause (iii) of the immediately preceding paragraph. Promptly after such Lien has been vacated or discharged of record, the Debtor shall deliver to the Lender evidence reasonably satisfactory to the Lender that such Lien has been vacated or discharged of record. Thereafter, the amount then remaining in the escrow established pursuant to this Section 3.8 or such bond or letter of credit, as the case may be, shall be returned to the Debtor free and clear of the Lien of this Agreement or any other Security Document so long as no Event of Default shall have occurred and be continuing or, if an Event of Default shall have occurred and be continuing, shall be retained by the Lender as part of the Collateral. If any Lien shall not be vacated or discharged as required by this Section, then, in addition to any other right or remedy of the Lender, the Lender may, but shall not be obligated to, discharge such Lien in such manner as the Lender may select, and the Lender shall be entitled, if the Lender shall so elect, to compel the prosecution of an action for the foreclosure of such Lien by the lienor and, if the Lender shall so elect, to pay the amount of any judgment in favor of such lienor with interest, costs and allowances. Upon request by the Lender, the Debtor shall pay to the Lender, or to any other Person designated by the Lender, the amount of all payments made by the Lender as provided above and all costs, expenses and liabilities (including, without limitation, attorneys' fees and disbursements) incurred by the Lender in connection therewith, together with interest thereon at the Default Rate from the date paid or incurred by the Lender until the date so paid to, or as directed by, the Lender. To the extent permitted by law, the Lender shall thereupon be subrogated to the rights of such lienor and any such payments made by the Lender pursuant to this Section 3.8 shall be secured by the Collateral. 3.9 Use of Resorts; Voting Rights of Debtor; Lender Consent to Timeshare Declaration Amendment. (a) Resorts. The Debtor shall not, as Declarant, Calvada Lot owner, Timeshare Interval owner or Unit owner, without the prior written consent of the Lender: 30 (i) request or otherwise initiate, consent to or acquiesce in any zoning classification or reclassification of any Resorts or the adoption, issuance, imposition or amendment of any other law, ordinance, rule, regulation, order, judgment, injunction or decree relating to the use, occupancy, operation, development or disposition of any Resort or which would limit the use of the Calvada Lots, Units or the Timeshare Intervals therein or reduce their Fair Market Value; (ii) request or otherwise initiate, consent to or acquiesce in the annexation of any part of any Resort by or into any municipality or other governmental or quasi-governmental unit; (iii) execute, file or record any subdivision plat affecting any Resort or request or otherwise initiate, consent to or acquiesce in any subdivision of any Resort; (iv) enter into, consent to or otherwise cause, permit or suffer any Resort to become subject to any covenant, agreement or other arrangement restricting or limiting the use, occupancy, operation, development or disposition thereof (other than any covenant of this Agreement or the other Security Documents and the Declarations ); (v) materially and substantially modify, alter, remove or improve the Common Amenities without the prior written consent of the Lender; (vi) except as set forth in Schedule 9 of this Agreement, maintain the Units and/or Timeshare Intervals owned by it for lease or as a rental project or maintain the Calvada Lots for sale; (vii) add or withdraw real Property from any Resort, or (VIII) permit the Units or any Timeshare Interval to be used other than for nonpermanent residential purposes or permit any Calvada Lot to be used other than for residential purposes. (b) Use by Public. The Debtor shall not cause, permit or suffer the Collateral to be used by the public without restriction (except as required by applicable law) or in any manner that might tend to impair the Debtor's right, title and interest in and to the Resorts or in any manner that might make possible any claim of adverse usage or adverse possession by the public or any claim of implied dedication of all or any part of any Resort. (c) Voting Rights. The Debtor hereby appoints and constitutes the Lender as its attorney-in-fact (with full power of substitution) to exercise all of its voting rights pertaining to any Calvada Lot, Unit or Timeshare Interval owned by the Debtor or in which the Debtor has an interest giving rise to the right to vote (whether as Declarant, as "Lienholder" under any Pledged Note Receivable Deed of Trust or otherwise). This power of attorney is coupled with an interest and shall be irrevocable for so long as any Obligations are owing by the Debtor to the Lender. This power of attorney may be used from time to time in the sole discretion of the Lender if there shall exist an Event of Default, or a material casualty, condemnation or taking shall have occurred with respect to any Resort or any part thereof. The Debtor agrees to execute, from time to time, such other documents as the Lender may request (including, without limitation, the form of proxy substantially in the form of Exhibit C to this Agreement) and file the same with the Secretary of the Association in accordance with the Association's By-Laws. Except with the prior written consent of the Lender, the Debtor shall not propose or vote for or 31 consent to any modification of, or amendment to, the Declarations or the Associations' Articles of Incorporation or By-Laws which could have (in the reasonable sole opinion of the Lender) an adverse effect on the Collateral or the operation or prospects of the Resorts. In each case under the Declarations and/or the Associations' Articles of Incorporation or By-Laws in which the Debtor's consent is required (as Declarant or as an owner of a Calvada Lot, Unit or a Timeshare Interval or as a vendor) for any proposed action, the Debtor shall not vote or give such consent without obtaining the prior written consent of the Lender if such action (in the reasonable sole opinion of the Lender) could have an adverse effect on the Collateral or the operation or prospects of any Resort. 3.10 Other Timeshare Covenants. (a) Access. The Debtor as owner of Calvada Lots, a Unit or a Timeshare Interval shall have direct access to a publicly dedicated road. (b) Utilities. The Debtor shall have electric, gas, sewer, and water service and other necessary utilities available to the Calvada Lots and Units in sufficient capacity to service the Calvada Lots and Units. (c) Use of Amenities. The Debtor shall have access to, and the use of, all of the amenities and public utilities relating to the Calvada Lots and any Unit in which such Timeshare Interval is located (consistent with the contractual provisions and rules and regulations existing with respect to such amenities and public utilities), including, without limitation, the Common Amenities. (d) Timeshare Regimen. The Debtor shall take all necessary actions to preserve the condominium and timeshare regimens in respect of each of the Timeshare Intervals and shall take all necessary action to preserve the Calvada Lots as a residential subdivision. (e) Exchange Program. The Debtor shall maintain its membership in, and the Timeshare Intervals eligibility for, the timeshare exchange program of Resorts Condominium International, Inc or Interval International, Inc. (f) Local Legal Compliance. The Debtor shall comply, and shall cause the Units and the Calvada Lots to comply, with all applicable restrictive covenants, zoning or land use ordinances and building codes, health laws and regulations, and all other applicable laws, rules, ordinances and regulations. (g) Registration Compliance. The Debtor shall maintain, or cause to be maintained, all necessary consents, franchises, approvals, and exemption certificates, and the Debtor will make, or cause to be made, all registrations or declarations with any government or any agency or department thereof required in connection with the Calvada Lots, Units and the Timeshare Intervals and the occupancy, use and operation of the Units, and the sale and offering for sale of Timeshare Intervals and Calvada Lots. (h) Records. The Debtor shall maintain accurate and complete files relating to the Collateral to the reasonable satisfaction of the Lender. (i) Property-Related Contracts. Except as required by applicable law, the Debtor shall not materially modify or amend, or (subject to the rights and obligations of the Associations under the Declarations or the Associations' Articles of Incorporation or By-Laws) permit to be materially modified or amended, any material Property-Related Contract without the prior written consent of the Lender, 32 which consent shall not be unreasonably withheld, or enter into, or (subject to the rights and obligations of the Associations under the Declarations or the Associations' Articles of Incorporation or By-Laws) permit to be entered into, any new material Property-Related Contract without the prior written consent of the Lender, which consent shall not be unreasonably withheld. The Debtor shall deliver any proposed amendment or modification of an existing Property-Related Contract or proposed new Property-Related Contract to the Lender at least 30 days prior to the execution thereof and shall request the Lender's consent to the form and substance of such amendment, modification or new Property-Related Contract. If the Debtor shall not have received a written response to such request from the Lender within 20 days of the delivery of such amendment, modification or new Property-Related Contract to the Lender, then the Debtor shall send a second request via nationally recognized overnight courier. Failure by the Lender to respond to such second request within 10 days of receipt thereof shall be deemed to constitute a consent to such request. The Debtor shall perform all of its obligations in a timely fashion under each Property- Related Contract. (j) Undertaking. The Debtor shall perform each and every covenant, agreement, and undertaking applicable to the Debtor (whether as Declarant, Calvada Lot owner, owner of a Unit, owner of a Timeshare Interval or otherwise) under the Declarations and/or the Association's Articles of Incorporation or By- Laws. (k) Notices. The Debtor shall promptly deliver to the Lender copies of each written notice or request, financial statement, budget or other information received by the Debtor under or with respect to the Declarations and/or the Associations' Articles of Incorporation or By-Laws, whether in its capacity as Declarant, Calvada Lot owner, owner of a Unit, owner of a Timeshare Interval, Lienholder or otherwise. 3.11 Protection of Collateral; Assessments; Reimbursement. All Insurance Premiums and all expenses of protecting, storing, warehousing, insuring, handling, maintaining and shipping the Collateral, any and all Impositions on any of the Collateral or in respect of the sale or other disposal thereof shall be borne and paid by the Debtor or the Debtor shall cause the Association or any manager retained by it to pay the same, as provided for in the Declaration and/or the Association's Articles of Incorporation or By- Laws. The Debtor shall promptly pay, as the same become due and payable, its share of all Insurance Premiums, expenses, Impositions and/or assessments as required by the Declaration and/or the Association's By-Laws. If the Debtor shall fail to pay, or cause to be paid, any such Insurance Premiums, expenses, Impositions and/or assessments, the Lender may, at the Debtor's expense, pay the same. If, by reason of any suit or proceeding of any kind, nature or description against the Debtor, or by the Debtor or any other party against any other Person, or by reason of any other facts or circumstances, which in the Lender's sole discretion makes it advisable for the Lender to seek counsel for the protection and preservation of the Collateral, or to defend its own interest, such expenses and counsel fees shall be allowed to the Lender and borne and paid by the Debtor. 3.12 Interest on Lender Paid Expenses. All sums paid or incurred by the Lender under this Section 3, and any and all other sums for which the Debtor may become liable hereunder, and all costs and expenses (including payments to other Lien holders and attorneys' fees, legal expenses and court costs) which the Lender may incur in enforcing or protecting its Lien on, or rights and interest in, the Collateral or any of its rights or remedies under this Agreement or any other Security Document or in respect of any of the transactions contemplated herein 33 or therein shall (a) be considered as additional indebtedness owing by the Debtor to the Lender hereunder and, as such, shall be secured by all of the Collateral and (b) accrue interest at the Default Rate from the date paid or incurred by the Lender until paid in full by the Debtor. 3.13 Lender Responsibility. The Lender shall not be (a) obligated or responsible for, the payment of any of the amounts or sums referred to in this Section 3 or (b) liable or responsible in any way for the safekeeping of any of the Collateral or for any loss or damage thereto other than, to exercise the standard of care in respect thereof which would be exercised by an institutional custodian similarly situated to the Lender and similarly engaged in the safekeeping of collateral and, in any case, shall not be liable or responsible in any way for any diminution in the value of the Collateral or for any act or default of any manager of any Resort and shall not be liable for any warranty (implied or express) whether created by statute, at law or pursuant to the Declaration or any other Timeshare Document. Upon the full, final and indefeasible payment of all Obligations , the Lender shall release its Liens in and to the Collateral, execute in favor of the Debtor any UCC release or termination statement in respect thereof. The Debtor shall bear all out-of-pocket expenses (including, without limitation, legal fees and disbursements of the Lender) in connection with such release, reassignment and delivery. All such release and/or termination documentation shall be reasonably satisfactory to the Lender and its counsel. The Debtor shall bear all expenses (including, without limitation, legal fees and disbursements of the Lender) in connection with such reassignment and delivery. All such reassignment and release documentation shall be reasonably satisfactory to the Lender and its counsel. 3.14 Release of Lien on Unsold Inventory Lot/Timeshare Intervals. (a) Incremental Release. The Lender, once a month, agrees to execute and deliver to the Debtor the documents referred to below pursuant to which the Lien in its favor in and to any Unsold Inventory Lot/Timeshare Interval created by this Agreement, the Inventory Deed of Trust or any other Security Document will be released if, but only if, all of the following conditions shall have been fully satisfied: (i) the full Release Price in respect of such Unsold Inventory Lot/Timeshare Interval shall have been paid to the Lender in good, collected funds; (ii) a request, substantially in the form of Exhibit D attached hereto, shall have been completed and executed by the Debtor and submitted to the Lender not less than 5 Business Days in advance of the date on which the Debtor desires to consummate such release together with a (nonrefundable) administrative processing fee of $50 for each Unsold Inventory Lot/Timeshare Interval to be so released so long as there are Obligations outstanding under a Loan and Security Agreement between Debtor and Lender dated August 12, 1998 and a (nonrefundable) administrative processing fee of $25 for each Unsold Inventory Lot/Timeshare Interval to be so released after full repayment of all Obligations outstanding under a Loan and Security Agreement between Debtor and Lender dated August 12, 1998 (a "Release Fee"); (iii) a request for partial release of deed of trust, substantially in the form of Exhibit E attached hereto or such other form reasonably acceptable to the Lender and its counsel, and a partial release of security interest, substantially in the form of Exhibit F attached hereto, shall have been completed by the Debtor and submitted to the Lender with the aforesaid request; and 34 (iv) no Event of Default shall then exist. The Debtor shall bear the responsibility of recording any and all documents executed by the Lender under this Section 3.15. The Debtor shall pay all escrow costs and recording costs in respect of such documents. If the Debtor shall have established an escrow in respect of any sale of an Unsold Inventory Lot/Timeshare Interval to a bona fide consumer purchaser, the Lender shall deposit the documents to be executed by it pursuant to clause (iii) above in such escrow if: (A) the documentation establishing such escrow is in form and substance satisfactory to the Lender and such documentation shall have been submitted to the Lender together with the written request referred to in clause (ii) above, (B) the escrowee under such escrow documentation is satisfactory to the Lender, (C) such escrow documentation provides that simultaneously with the release from such escrow of the documents referred to in clause (iii) above, the Release Price in respect of the Unsold Inventory Lot/Timeshare Interval to be so released shall be wired via Federal Reserve Bank wire (in immediately available funds) to the Lender, (D) such escrow documentation provides that such escrow will be consummated within 5 Business Days of the Lender's depositing of such release documents therein or such release documents shall be returned to the Lender by the escrowee of such escrow and (E) at the time of the depositing of such documentation into such escrow, all of the conditions in clauses (ii) through (iv) above shall have been fully satisfied. (b) Full Release of Inventory Deed of Trust. Upon the full, final and indefeasible payment of all Obligations in respect of the Inventory Loan and if no Event of Default shall then exist, the Lender shall release the Inventory Deed of Trust and the Assignment of Rents and shall release its Liens in and to the Collateral and its Liens in respect of the Development Rights or Special Declarant Rights, of the Debtor under the assignment referred to in Section 5.6 hereof. The Debtor shall bear all out-of-pocket expenses (including, without limitation, legal fees and disbursements of the Lender) in connection with such releases, provided that a release of the Inventory Deed of Trust pursuant to this clause (b) shall not require the payment of Release Fees with respect to remaining Unsold Inventory Lot/Timeshare Intervals. All documentation in connection with any of the aforesaid releases shall be reasonably satisfactory to the Lender and its counsel. SECTION 4. REPRESENTATIONS AND WARRANTIES As an inducement to the Lender to make the Inventory Loan, Debtor warrants and represents, as of the date hereof, and covenants to the Lender as follows: 4.1 Subsidiaries and Capital Structure. Schedule 3 to this Agreement states (a) the name of each of the Affiliates of Debtor and the nature of the affiliation, (b) the number, nature and the holder of the outstanding Securities of Debtor, (c) the number of authorized, issued and treasury shares of Debtor, and (d) the name of each subsidiary of 35 Debtor. 4.2 Corporate Organization and Authority. (a) Each of Preferred Equities Corporation and Brigantine Preferred Properties, Inc. is duly organized, validly existing and in good standing under the laws of the State of Nevada. (b) Each of Preferred Equities Corporation and Brigantine Preferred Properties, Inc. has all requisite power and authority and necessary licenses and permits to own and operate its Properties and to carry on its respective business as now conducted; and (c) Each of Preferred Equities Corporation and Brigantine Preferred Properties, Inc. has duly qualified and is authorized to do business and is in good standing as a foreign corporation in each jurisdiction where the character of its Properties or the nature of its activities makes such qualification necessary or desirable. 4.3 Business and Property. Form 10K dated as of August 31, 2000 filed by Guarantor with the United States Securities and Exchange Commission and delivered by Debtor to Lender and except as set forth in the Form 10K correctly describes the general nature of the businesses and Properties (including all owned real Property, leases and leasehold interests) of Debtor. Except as set forth in the Form 10K the Debtor has not changed its name, been the surviving corporation of a merger or consolidation or acquired all or substantially all of the assets of any Person. 4.4 Financial Statements. Preferred Equities Corporation shall have delivered its consolidated (with Brigantine Preferred Equities, Inc.) tax returns and consolidated and consolidating balance sheets and statements of income and expenses and such other financial statements as requested by Lender. 4.5 Full Disclosure. Neither this Agreement nor any written statement made by Preferred Equities Corporation or Brigantine Preferred Properties, Inc. in connection with this transaction contains any untrue statement of a material fact or omits a material fact necessary to make the statements contained herein or therein not misleading. There is no fact which the Debtor has not disclosed to the Lender in writing which materially affects adversely or, so far as the Debtor can now foresee, will materially affect adversely the Property, business, prospects, profits or condition (financial or otherwise) of the Debtor or the ability of the Debtor to perform its Obligations under this Agreement, the Note or the other Security Documents. 4.6 Pending Litigation. Except as set forth in Schedule 6 to this Agreement, there are no proceedings pending, or to the knowledge of the Debtor threatened, against or affecting the Debtor, any Affiliate, the Guarantor, any Resort or any Unit in any court or before any governmental authority or arbitration board or tribunal which involve the possibility of materially and adversely affecting the Property, business, prospects, profits or condition (financial or otherwise) of the Debtor or the ability of the Debtor to perform its obligations under this Agreement, the Note or the other Security Documents, provided that no such 36 proceedings shall be deemed to satisfy such material and adverse effect standard if such proceeding shall have been commenced by one or more of the aforesaid Persons as plaintiff and no counterclaim is pending in respect thereof against such Person. Neither the Debtor nor any Affiliate nor any Resort nor any Unit is in default with respect to any order of any court, governmental authority or arbitration board or tribunal. 4.7 Title to Properties. Preferred Equities Corporation has good and marketable title in fee simple (or its equivalent under applicable law) to all of the Resorts other than Ramada Vacation Suites at Brigantine Beach and Brigantine Preferred Equities, Inc. has good and marketable title in fee simple (or its equivalent under applicable law) to the Ramada Vacation Suites at Brigantine Beach Resort free from Liens except as set forth on Schedule 7 to this Agreement. Except as set forth on Schedule 9 hereto, the Resorts are not subject to any leases. Neither the buildings in which the Units are located nor any of the Resorts are under investigation with respect to, and is not in violation of, any Environmental Protection Law. No proceedings have been commenced against, nor notice received by, the Debtor or any Affiliate concerning any alleged violation of any Environmental Protection Law. Neither the buildings in which the Units are located nor any Resort is, or has been, the subject of any threatened, proposed or actual cleanup or other protective or remedial action relating to any Hazardous Substances, whether pursuant to any Environmental Protection Law or otherwise. There are no Hazardous Substances in, on, or under the buildings in which the Units are located or any Resort, except as set forth on Schedule 10 to this Agreement and except as used or stored in compliance with all applicable Environmental Protection Laws or, with respect to ordinary cleaning materials and supplies, as customarily and prudently used or stored in operations similar to the Units or any Resort. The Debtor shall cause all asbestos located in any Resort to be removed by a duly licensed asbestos abatement contractor, all in accordance with applicable federal and state law. 4.8 Trademarks; Licenses and Permits. The Debtor owns or possesses all of the trademarks, service marks, trade names, copyrights, franchises and licenses, and rights with respect thereto necessary for the conduct of its business as now conducted and as proposed to be conducted, without any known conflict with the rights of others. 4.9 Transaction Is Legal and Authorized. The execution and delivery of this Agreement, the Note and the other Security Documents by the Debtor and the grant of the Liens to the Lender with respect to the Collateral by the Debtor and compliance by the Debtor with all of the provisions of this Agreement, the Note and the other Security Documents are: (a) within the corporate powers of each of Preferred Equities Corporation and Brigantine Preferred Properties, Inc.; (b) duly authorized and approved by the Board of Directors of each of Preferred Equities Corporation and Brigantine Preferred Properties, Inc.; and 37 (c) valid and legal acts and will not conflict with, or result in any breach in any of the provisions of, or constitute a default under, or result in the creation of any Lien (except Liens contemplated under this Agreement or any other Security Document) upon any Property of either of Preferred Equities Corporation or Brigantine Preferred Properties, Inc. under the provisions of, any agreement, charter instrument, bylaw or other instrument to which either is a party or by which its Property may be bound. 4.10 No Defaults. No Default or Event of Default exists, and there is no violation in any material respect of any term of any agreement, charter instrument, bylaw or other instrument to which either of Preferred Equities Corporation or Brigantine Preferred Properties, Inc. is a party or by which it may be bound. 4.11 Governmental Consent. Neither the nature of the Debtor, or of any of its businesses or Properties, or any relationship between the Debtor and any other Person, or any circumstance in connection with the execution or delivery of this Agreement, the Note or the other Security Documents, is such as to require a consent, approval or authorization of, or filing, registration or qualification with, any governmental authority on the part of the Debtor, as a condition of the execution, delivery or performance of this Agreement, the Note or any other Security Document. 4.12 Taxes. The Debtor is not in default with respect to the payment of any taxes levied or assessed against it or any of its assets and has not failed to file any tax return required to be filed by it. 4.13 Use of Proceeds. The proceeds from the Inventory Loan will be used as set forth on Schedule 11 to this Agreement. None of the transactions contemplated in this Agreement will violate or result in the violation of Section 7 of the Securities Exchange Act of 1934, as amended, or any regulations issued pursuant thereto, including, without limitation, Regulations G, T, U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II. The Debtor does not intend to carry or purchase any "margin security" within the meaning of said Regulation G. None of the proceeds will be used to purchase or carry (or refinance any borrowing, the proceeds of which were used to purchase or carry) any "margin security" within the meaning of said Regulation. 4.14 Compliance with Law. Neither Preferred Equities Corporation nor Brigantine Preferred Properties, Inc.: (a) is not in violation of any laws, ordinances, governmental rules or regulations to which it is subject; and (b) except as set forth in Schedule 12 hereto, has not failed to obtain any licenses, permits, franchises or other governmental authorizations, or make or cause to be made any registrations or declarations with any government or agency or department thereof, necessary to the ownership of its Property or to the conduct of its business; 38 which violation or failure to obtain or register would materially adversely affect the business, prospects, profits, Property or condition (financial or otherwise) of the Debtor. 4.15 Restrictions of Debtor. Each of Preferred Equities Corporation and Brigantine Preferred Properties, Inc. is not a party to any contract or agreement which restricts its right or ability to incur indebtedness with respect to any Resort, or prohibits the execution of, or compliance with, this Agreement or any of the other Security Documents by the Debtor. Each of Preferred Equities Corporation and Brigantine Preferred Properties, Inc. has not agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its Property constituting the Collateral, whether now owned or hereafter acquired, to be subject to a Lien other than the Liens provided for herein and in the other Security Documents. 4.16 Brokers' Fees. The Debtor and the Lender hereby agree that there are no brokers or finders which are entitled to receive compensation for their services rendered to the Debtor with respect to the transactions described in this Agreement. 4.17 Deferred Compensation Plans. Except as set forth on Schedule 13 hereto, the Debtor has no pension, profit sharing or other compensatory or similar plan providing for a program of deferred compensation for any employee or officer which is subject to any requirement of the Employee Retirement Income Security Act of 1974, as amended. 4.18 Labor Relations. The employees of the Debtor are not a party to any collective bargaining agreement with the Debtor. 4.19 Validity of Liens Granted to Lender. Except with respect to the Permitted Exceptions, all Liens granted to the Lender in respect of the Collateral are, and shall continue to be, prior in right and superior to all other Liens granted to, or held by, any other Person. SECTION 5. CONDITIONS PRECEDENT TO INVENTORY ADVANCE AND EFFECTIVENESS OF THIS AGREEMENT. The effectiveness of this Agreement and the obligation of the Lender to make each Inventory Advance shall be subject to the following conditions precedent which in all cases shall be satisfied not less than fifteen (15) days prior to each requested Inventory Advance: 5.1 Opinions of Counsel. The Lender shall have received from counsel for the Debtor, a closing opinion substantially in the form of Exhibit I attached to this Agreement and from Jon Joseph, Esq., special counsel to Mego Financial, a closing opinion substantially in the form of Exhibit J attached to this Agreement. 39 5.2 Warranties and Representations True as of Closing Date. (a) The warranties and representations contained in this Agreement shall (except as affected by transactions contemplated by this Agreement) be true in all material respects on the Closing Date with the same effect as though made on and as of that date. (b) The Debtor shall not have taken any action, or permitted any condition to exist which would have been prohibited by any provision of this Agreement if such provision had been binding and effective at all times during the period from January 18, 2001 to and including the Closing Date. 5.3 Compliance with this Agreement. The Debtor shall have performed and complied with all covenants, agreements and conditions contained herein which are required to be performed or complied with by it before or on the Closing Date, shall have provided to Lender a Request for Inventory Advance listing the Resorts for which an Inventory Advance is requested and providing such reasonable detail as is satisfactory to Lender to show that the Inventory Advance requested meets the requirements of Section 2.1 and after the making of such Inventory Advance when aggregated with all other Inventory Advances outstanding at the time, there will be no requirement of a Mandatory Prepayment under Section 2.4(c). 5.4 Officer's Certificates; Secretary's Certificates; Good-Standing Certificates. (a) The Lender shall have received a certificate, substantially in the form of Exhibit K to this Agreement, dated as of the Closing Date and signed by the President or a Vice-President of each of Preferred Equities Corporation and Brigantine Preferred Properties, Inc., certifying that the conditions specified in Section 5.2(a), Section 5.2(b) and Section 5.3 of this Agreement have been fulfilled. (b) For the initial Inventory Advance only, the Lender shall have received a certificate of the Secretary or any Assistant Secretary of Steamboat, substantially in the form of Exhibit L to this Agreement, dated as of the Closing Date, certifying (i) the adoption by the Board of Directors of Steamboat Suites of a resolution authorizing Steamboat Suites to enter into a First Amendment to General Loan and Security Agreement between Debtor, Steamboat and Lender dated as of February , 2001 ("Steamboat First Amendment") and the transactions and instruments contemplated thereby and (ii) the incumbency and authority of, and verifying the specimen signatures of, the officers of Steamboat authorized to execute and deliver the Steamboat First Amendment. (c) For the initial Inventory Advance only, Steamboat shall have delivered to the Lender, in form satisfactory to the Lender, a recent good standing certificate from the Secretary of State of Colorado certifying the Steamboat's due corporate existence. (d) The Debtor shall have delivered to the Lender, in form satisfactory to the Lender, (i) recent certificates of the Secretary of State of each respective state certifying the due corporate existence of the Associations, (ii) copies of the Articles of Incorporation and all amendments thereto and (iii) copies of the By-Laws of the Associations. (e) The Lender shall have received a certificate of the Secretary or any Assistant Secretary of each of Preferred Equities Corporation and Brigantine Preferred Properties, Inc., substantially in the form of Exhibit M to this Agreement, dated as of the Closing Date, certifying (i) the adoption by the Board of Directors of Debtor of a resolution authorizing each of Preferred Equities Corporation and Brigantine 40 Preferred Properties, Inc. to enter into this Agreement and the transactions and instruments contemplated hereby and (ii) the incumbency and authority of, and verifying the specimen signatures of, the officers of each of Preferred Equities Corporation and Brigantine Preferred Properties, Inc. authorized to execute and deliver this Agreement, the Note, the other Security Documents and the other documents contemplated thereunder. (f) Each of Preferred Equities Corporation and Brigantine Preferred Properties, Inc. shall have delivered to the Lender, in form satisfactory to the Lender, a recent good standing certificate from the Secretary of State of Nevada certifying its due corporate existence. (g) The Lender shall have received a certificate of the Secretary or any Assistant Secretary of Mego Financial, substantially in the form of Exhibit N to this Agreement, dated as of the Closing Date, certifying (i) the adoption by the Board of Directors of Mego Financial of a resolution authorizing Mego Financial to enter into the Guaranty Agreement and the transactions and instruments contemplated thereby and (ii) the incumbency and authority of, and verifying the specimen signatures of, the officers of Mego Financial authorized to execute and deliver the Guaranty Agreement and the other documents contemplated thereunder. (h) Mego Financial shall have delivered to the Lender, in form satisfactory to the Lender, a recent good standing certificate from the Secretary of State of New York certifying Mego Financial's due corporate existence. 5.5 Uniform Commercial Code Financing Statements. All filings of Uniform Commercial Code financing statements and all other filings and actions necessary to perfect the Lender's security interests in and to the Collateral shall have been filed and confirmation thereof received. 5.6 Assignment of Property-Related Contracts. The Debtor shall have delivered to the Lender certified copies of all material Property-Related Contracts and executed and delivered in favor of the Lender an assignment or assignments thereof, each in form and substance satisfactory to the Lender and its counsel. All such Property-Related Contracts shall be satisfactory to the Lender in form and substance. Each Person (other than the Debtor) which is a party to any such Property-Related Contract shall have been notified of the assignment thereof. 5.7 Maximum Number of Advances and Termination Date of Advances. Debtor shall not have received in the same month any other Inventory Advance and the date of such Inventory Advance shall be on or before September 30, 2001. 5.8 Guaranty Agreement. Guarantor shall have executed and delivered to the Lender a Guaranty Agreement (as amended from time to time, individually, a "Guaranty Agreement" and, collectively, the "Guaranty Agreements") substantially in the form of Exhibit O attached to this Agreement. 5.9 Subordination of Indebtedness. 41 The Debtor, the Lender and Guarantor shall have entered into one or more Subordination Agreements, substantially in the form of Exhibit A attached to the Guaranty Agreements (individually, a "Subordination Agreement" and, collectively, the "Subordination Agreements"). 5.10 Expenses. The Debtor shall have authorized payment from the first Inventory Advance of all fees and expenses required to be paid by it pursuant to Section 10.2 of this Agreement and shall have paid or authorized payment from the first Inventory Advance of the commitment fee of $37,000 referred to in the Commitment Letter and the transaction fee of $37,000 referred to in the Commitment Letter. 5.11 Inventory Note; Inventory Deed of Trust. The Debtor shall have executed, the Inventory Note and the Inventory Deed of Trust relating to the Timeshare Intervals or Calvada Lots relating to the Resort for which an Inventory Advance is being requested. The Inventory Deed of Trust shall have been recorded, as of the Closing Date, in the Office of the Clerk and Recorder for the applicable jurisdiction and all taxes, recording fees and other fees and charges required by applicable law to be paid in connection therewith shall have been duly paid in full. The Inventory Deed of Trust shall have created a valid Lien in and to the Collateral located at the Resort for which an Inventory Advance is being requested in respect of the Obligations subject to no other Liens except to the extent permitted by Section 7.2(j) of this Agreement. The Debtor shall have executed and delivered to the Lender an assignment of leases and rents (as may be amended from time to time, the "Assignment of Rents"), substantially in the form of Exhibit P to this Agreement. The Assignment of Rents shall have been recorded in the Office of the Clerk and Recorder for the applicable jurisdiction for the Resort for which an Inventory Advance is being requested and all taxes, recording fees and other fees and charges required by applicable law to be paid in connection therewith shall have been duly paid in full. The Assignment of Rents shall have created a valid Lien in and to the Property referred to therein in respect of the Obligations subject to no other Liens except to the extent permitted by Section 7.2(j) of this Agreement. 5.12 Title Insurance; Casualty Insurance. The Debtor shall have delivered to the Lender a mortgagee's title insurance policy (issued to the Lender and in full force and effect) in respect of the Inventory Deed of Trust for the Timeshare Intervals or Calvada Lots relating to the Resort for which an Inventory Advance is being requested (the "Title Insurance Policy") together with such endorsements thereto as the Lender may require, dated the Closing Date. The Title Insurance Policy (a) shall have been issued by a title insurance company which is satisfactory to the Lender, (b) shall be in form and substance satisfactory to the Lender and its special counsel, (c) shall be in amount not less than the principal amount of the Inventory Loan, (d) shall insure that the Inventory Deed of Trust creates a valid first Lien in and to the Collateral free and clear of all defects, encumbrances and other Liens unacceptable to the Lender and (e) shall contain such further endorsements and affirmative coverage as the Lender may request, All premiums in respect of such Title Insurance Policy shall have been paid in full and evidence thereof shall have been delivered to the Lender. The Debtor shall have delivered to the Lender certificates of insurance evidencing the insurance policies and endorsements required to be delivered pursuant to Section 3.5 hereof, together with copies of such insurance policies certified by the Debtor to be true and correct except as otherwise provided in 42 Section 3.5. All premiums in respect of such insurance policies shall have been paid in full and evidence thereof shall have been delivered to the Lender. 5.13 Environmental Site Assessment Report. The Debtor shall have delivered to the Lender such Phase I environmental surveys of each Resort as Debtor shall have performed during the past three years or be in possession of as a result of another of its lenders commissioning same. 5.14 Taxes. The Debtor shall have delivered to the Lender copies of the most recent tax receipts for the Collateral and each of the Timeshare Intervals and Calvada Lots subject to the Lien of the Inventory Deed of Trust (or certificates in respect thereof) evidencing no delinquency in the payment thereof and that each of the Units has been segregated from all other Property at any Resort on the applicable municipal tax rolls. 5.15 Inspection. The Debtor shall have permitted the Lender or its representatives to make an inspection/audit of its books, accounts and records and such other papers as it may desire and of its premises and the Resorts, as the Lender may in its sole discretion determine. Such inspection/audit shall have been satisfactory to the Lender (in its sole determination). 5.16 Survey. The Debtor shall have delivered to the Lender such surveys of the Resorts, other than the Calvada Lots, as Debtor shall have or be in possession of as a result of one of its other lenders commissioning same. Debtor shall provide or cause to be provided the recorded location of the plat maps for each of the Calvada Lots in such detail that Lender may obtain a copy of same if its determines same to be necessary. 5.17 Engineering Report. The Debtor shall keep available for delivery to Lender, to the extent same exist, upon Lender's request, engineering reports which shall confirm that the Units at the Resorts, other than the Calvada Lots, are structurally and mechanically sound. 5.18 Intentionally Deleted. 5.19 Intentionally Deleted. 5.20 First Lienholder Status; Proxy Acknowledged. The Debtor shall have informed the Associations, in writing, as to the first Lienholder status of the Lender in and to the Calvada Lots and Timeshare Intervals in Units and the Associations shall have recognized the Lender as such First Lienholder. The Associations shall have acknowledged and recognized the proxy referred to in Section 3.9 hereof. 5.21 Proceedings Satisfactory. 43 All actions taken in connection with the execution of this Agreement, the Inventory Note, any other Security Document and all documents and papers relating thereto shall be satisfactory to the Lender and its counsel. The Lender shall be satisfied with its physical inspection of the Calvada Lots, the Units and the Resorts. The Lender and its counsel shall have received copies of such documents and papers as the Lender or such counsel may reasonably request in connection therewith, all in form and substance satisfactory to the Lender and its counsel, including, without limitation, certified copies of the Declarations and the Associations' Articles of Incorporation and By-Laws. SECTION 6. Intentionally Deleted. SECTION 7. COVENANTS The Debtor covenants that on and after the date hereof and so long as any Obligation of the Debtor to the Lender exists as follows: 7.1 Payment of Taxes and Claims. Except as otherwise provided for in Section 3.8 hereof, the each of Preferred Equities Corporation and Brigantine Preferred Properties, Inc. shall pay, or cause to be paid, before they become delinquent: (a) all taxes, assessments and governmental charges or levies imposed upon it or its Property at the Resorts, including, without limitation, the Collateral; and (b) all claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons which, if unpaid, might result in the creation of a Lien upon its Property at the Resorts, including, without limitation, the Collateral. 7.2 Maintenance of Properties; Corporate Existence; Stock Ownership; Renovations; Indebtedness; Liens; Business. Each of Preferred Equities Corporation and Brigantine Preferred Properties, Inc. shall: (a) Property -- maintain its Property at the Resorts in good repair, working order and condition and make all necessary renewals, repairs, replacements, additions, betterments and improvements thereto and, without limiting the generality of the foregoing, maintain, or cause to be maintained, the Resorts in good repair, working order and condition and shall make, or shall cause to be made, all necessary repairs, replacements, additions, betterments and improvements to the Resorts; (b) Insurance -- maintain, or cause to be maintained, insurance as required by Section 3.5 of this Agreement; (c) Financial Records -- (i) keep true books of records and accounts (including, without limitation, the Books and Records) in which full and correct entries will be made of all its business transactions and (ii) reflect in its financial statements adequate accruals and appropriations to reserves, all in accordance with generally accepted accounting principles, practices and procedures at the time in effect and consistently applied; (d) Corporate Existence and Rights -- do or cause to be done all things necessary or required (i) to preserve and keep in full force and effect its corporate existence, rights, powers and franchises and 44 (ii) to continue to own 100% of all legal and beneficial interest in all of the Voting Stock and other capital stock of Steamboat; (e) Compliance with Law -- not be in violation of (i) any laws, ordinances, governmental rules and regulations to which it is subject, and to that end, the Debtor shall not fail to obtain any licenses, permits, franchises or other governmental authorizations necessary to the ownership of its Properties or to the conduct of its business, which violation or failure to obtain might materially and adversely affect the business, prospects, profits, Property or condition (financial or otherwise) of the Debtor, including, without limitation, any zoning, land use, subdivision control or Environmental Protection Laws applicable to its real Property (including, without limitation, the Units and the Resorts), (ii) any statutes, rules and regulations, whether now or hereafter in force, in such jurisdictions as the Debtor may make sales of Timeshare Intervals or Calvada Lots relating to the right to do business in any of such jurisdictions and (iii) any applicable federal, state or municipal statutes, rules and regulations relating to sales of Timeshare Intervals and Calvada Lots and the manner of evidencing and financing the same; (f) Deferred Compensation Plans -- to the extent that it has one or more pension, profit sharing or other compensatory or similar plans providing for a program of deferred compensation for any employee or officer, be in compliance with all requirements of the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated in connection therewith; (g) Renovations and Construction -- retain only duly licensed and qualified architects, engineers, contractors and subcontractors to complete all renovations at the Resorts, provided that the Debtor may use qualified employees to complete such renovations and construction; (h) Equity Contributions -- until such time as all obligations of the Debtor under the Inventory Loan, the Inventory Note and the Inventory Deed of Trust have been fully and indefeasibly satisfied, not pay out as a dividend or other distribution (in cash or Property) or otherwise transfer back (directly or indirectly by loans, investments, redemption of capital stock, repurchase of capital stock or otherwise) or return to any Affiliate for so long as any Obligation shall be outstanding or the Lender shall have any obligation hereunder to make Inventory Advances the equity capital contributions previously made to Steamboat by Debtor; (i) Indebtedness/Right of First Refusal -- not incur any indebtedness (other than the Loan and the leasing of motor vehicles, telephone and computer equipment in the ordinary course of business) in respect of the Collateral and/or the Resorts, whether such indebtedness is secured or unsecured, and not permit the Association to incur any indebtedness, whether secured or unsecured, provided that the Debtor may incur additional indebtedness for borrowed money secured principally by Notes Receivable; (j) Liens -- (i) not allow any Liens or encumbrances whatsoever to attach to the Collateral other than the Liens and security interests of the Lender created by the Security Documents, any Liens in favor of the Association under the Declaration, the Liens set forth on Schedule 7, Schedule 8 and Schedule 9 hereto and any Liens permitted in connection with additional indebtedness for borrowed money permitted under clause (i) above or in connection with the sale of Notes Receivable and (ii) cause the Liens and security interests of the Lender created by the Security Documents in and to the Collateral to continue to be valid, enforceable, perfected Liens and security interests subject to no other Liens except as set forth in this Agreement or in any other Security Document and in Schedule 7, Schedule 8 and Schedule 9 hereto; 45 (k) Material Adverse Effect -- not undertake any action that would have a material adverse effect on the operation of the Resorts or the Collateral; and (l) Notification of Claims -- promptly notify the Lender of any claim, action or proceeding affecting title to the Collateral, or any part thereof, or any of the security interests granted hereunder, and, at the request of the Lender, appear in and defend, at the Debtor's expense, any such claim, action or proceeding. 7.3 Payment of Note and Maintenance of Office. The Debtor shall punctually pay or cause to be paid the principal and interest (and the accelerated release fee payment, to the extent applicable) to become due in respect of the Note according to the terms thereof (all of which are incorporated herein by reference). All payments hereunder or under the Note shall be made in accordance with the payment instructions set forth in Schedule 14 to this Agreement. The Debtor shall maintain an office in Las Vegas, Nevada where notices, presentations and demands in respect of this Agreement, the Note or any other Security Document may be made upon the Debtor. Such offices shall be maintained at the address of the Debtor set forth on Schedule 15 to this Agreement until such time as the Debtor shall so notify the Lender, in writing, of any change of location of such offices. The books and records of the Debtor shall be maintained at the Las Vegas, Nevada office of the Debtor. The Debtor shall not change its name without 30-day prior written notice to the Lender. 7.4 Sale of Properties. Without the prior written consent of the Lender, the Debtor shall not sell, lease, transfer or otherwise dispose of any of the Collateral, provided that the Debtor may sell the Unsold Inventory Lot/Timeshare Intervals in the ordinary course of its business to unaffiliated consumers and remove and dispose of (and receive the proceeds thereof) in the ordinary course of its business, free from any Liens created or contemplated by this Agreement, items of Collateral consisting of Equipment which shall have become worn out or obsolete. 7.5 Consolidation and Merger. Without the prior written consent of Lender, the neither Preferred Equities Corporation nor Brigantine Preferred Properties, Inc. shall consolidate with or merge into any other Person or permit any other Person to consolidate with or merge into it or consent or agree to a Change in Management. 7.6 Guaranties. (a) Except as required by applicable law or any government agency having regulatory authority with respect to the sale of the Timeshare Intervals and/or Calvada Lots, neither of Preferred Equities Corporation and Brigantine Preferred Properties, Inc. shall become liable in respect of, or be liable in respect of, any Guaranty except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection. (b) "Guaranty" by any Person shall mean all obligations of such Person guaranteeing or in effect guaranteeing any indebtedness, dividend or other obligation of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including but not limited to obligations incurred through an agreement, contingent or otherwise, by such Person: 46 (i) to purchase such indebtedness or obligation or any Property or assets constituting security therefor; (ii) to advance or supply funds (A) for the purchase or payment of such indebtedness or obligation, or (B) to maintain working capital or other balance sheet conditions or otherwise to advance or make available funds for the purchase or payment of such indebtedness or obligation; (iii) lease Property or to purchase any Security or other Property or services primarily for the purpose of assuring the owner of such indebtedness or obligation of the ability of the primary obligor to make payment of the indebtedness or obligation; or (iv) otherwise to assure the owner of the indebtedness or obligation of the primary obligor against loss in respect thereof. 7.7 Compliance with Environmental Laws. Each of Preferred Equities Corporation and Brigantine Preferred Properties, Inc. shall comply, and shall cause the Resorts to be in compliance, in a timely and diligent fashion with (a) all Environmental Protection Laws (including, without limitation, all federal, state and local environmental or pollution-control laws, regulations, orders and decrees governing the emission of waste water effluent, the treatment, transportation, disposal, generation and storage of solid and hazardous waste, hazardous and toxic substances and air pollution, and/or setting forth general environmental conditions), (b) any other applicable requirements for conducting, on a timely basis, periodic tests and monitoring for contamination of ground water, surface water, air and/or land, and for biological toxicity of the aforesaid and (c) the regulations of each relevant federal, state or local authority administering environmental laws, ordinances or regulations, to the extent that the failure to so comply could have a material and adverse effect on the business, prospects, profits, Property or condition (financial or otherwise) of the Debtor or the Resorts. Without limiting the generality of the foregoing, each of Preferred Equities Corporation and Brigantine Preferred Properties, Inc. shall not release or otherwise dispose of any Hazardous Substance or any other substance regulated, controlled or described as hazardous under any Environmental Protection Law on or beneath any real Property owned, leased or otherwise used by the Debtor or allow the same to occur with respect to the Resorts; and no asbestos, urea formaldehyde foam, polychlorinated biphenyls, aluminum wire or lead-containing paint shall be installed or used on any such Property or the Resorts. The Debtor shall not take or suffer to be taken any act or omission that would subject it or the Resorts to liability under any Environmental Protection Law which liability could have a material and adverse effect on the business, prospects, profits, Property or condition (financial or otherwise) of the Debtor or the Resorts. 47 The Lender shall have the right, but shall not be obligated, to notify any state, federal or local governmental authority of information which may come to its attention with respect to Hazardous Substances on or emanating from the Resorts and the Debtor irrevocably releases the Lender from any claims of loss, damage, liability, expense or injury relating to or arising from, directly or indirectly, any such disclosure. The Lender will notify the Debtor prior to or contemporaneously with any action taken by the Lender pursuant to this paragraph, provided that the failure by the Lender to provide such notification shall not affect any action so taken. Without limiting the scope and the effectiveness of the foregoing undertakings in this Section 7.7, each of Preferred Equities Corporation and Brigantine Preferred Properties, Inc. agrees to indemnify and hold the Lender harmless from and against any losses, liabilities, damages, claims, causes of action, costs or expenses (including, without limitation, attorneys' fees and disbursements), arising from, incurred by, or asserted against, the Lender in connection with any cleanup, removal or similar protective or remedial action that may be required or undertaken by any governmental authority as a result of the presence of any Hazardous Substances at the Resorts, the release of any other Hazardous Substance on or from the Collateral at the Resorts or the generation, treatment, storage, handling or disposal of any Hazardous Substances on or from the Resorts (unless such presence, release, generation, treatment, storage, handling or disposal is directly caused by the Lender or by any agent of the Lender acting under the Lender's direct orders). The liability of the Debtor to the Lender under this paragraph shall survive any assignment, transfer, discharge or foreclosure of the Inventory Deed of Trust or any transfer of any of the Resorts (or any portion thereof) by deed in lieu of foreclosure or otherwise, and any one or more transfers of any Resort (or any portion thereof) by deed or otherwise, by whosoever made. If either of Preferred Equities Corporation or Brigantine Preferred Properties, Inc. fails to diligently take any action required under this Section 7.7 or by any governmental entity with respect to the cleanup, control or reporting of any Hazardous Substances, materials or wastes in, on, from or under the Resorts, the Lender, at its option, may enter upon the Resorts, retain such experts and consultants at the expense of the Debtor and take such action as the Lender deems advisable, and the Lender may advance such sums of money as it deems necessary, with respect to the cleanup, control or reporting of any such substances, materials or wastes in, on or under the Resorts. The Debtor shall pay to the Lender immediately and upon demand, all sums of money so advanced or expended by the Lender pursuant to this paragraph, together with interest on each such advance at the Default Rate, and all such sums, and the interest thereon, shall be secured by the Collateral. The Lender will notify the Debtor prior to or contemporaneously with any action taken by the Lender pursuant to this paragraph, provided that the failure by the Lender to provide such notification shall not affect any action so taken. 7.8 Transactions with Affiliates; Principal Properties. Each of Preferred Equities Corporation and Brigantine Preferred Properties, Inc. shall not enter into any transaction including, without limitation, the purchase, sale or exchange of Property or the rendering of any service with any Affiliate except in the ordinary course of, and pursuant to the reasonable requirements of, the Debtor's business and upon fair and reasonable terms no less favorable to the Debtor than would be obtained in a comparable arm's-length transaction with a Person not an Affiliate. 7.9 Use of the Lender Name. Each of Preferred Equities Corporation and Brigantine Preferred Properties, Inc. shall not, nor shall it permit any Affiliate to, without the prior written consent of the Lender, use the name of the Lender 48 or the name of any affiliate of the Lender in connection with any of its respective businesses or activities, except in connection with internal business matters and as required in dealings with governmental agencies. 7.10 Subordinated Obligations. Each of Preferred Equities Corporation and Brigantine Preferred Properties, Inc. shall not, directly or indirectly, (a) permit any payment to be made in respect of any indebtedness, liabilities or obligations, direct or contingent, which are subordinated by the terms thereof or by separate instrument to the payment of principal of, and interest on, the Note except in accordance with the terms of such subordination, (b) permit the amendment, rescission or other modification of any such subordination provisions of any of the Debtor's subordinated obligations in such a manner as to affect adversely the Lender's Lien or the prior position of the Note, or (c) permit the unscheduled prepayment or redemption of all or any part of any subordinated obligations of the Debtor except in accordance with the terms of such subordination and except as provided in this Section 7.10 in respect of indebtedness extended to Steamboat by Debtor and except for payments pursuant to tax sharing agreements. The Debtor shall cause Guarantor to subordinate all indebtedness, liabilities or obligations, direct or contingent, owing to it from the Debtor to the payment of the Obligations. The Debtor shall cause each of its other Affiliates to subordinate all indebtedness, liabilities or obligations, direct or contingent, owing to it from the Debtor to the payment of the Obligations. The terms of such subordination shall be satisfactory to the Lender. 7.11 Notice of Legal Proceedings. Promptly upon becoming aware of the existence thereof, each of Preferred Equities Corporation and Brigantine Preferred Properties, Inc. shall deliver to the Lender written notification of the institution of any litigation, legal proceeding or dispute with any Person, entity or governmental authority in any way involving the Debtor, the Guarantor, the Resorts, the Collateral or any of the Debtor's other assets as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, would materially adversely affect the Debtor, the Guarantor, the Resorts, or the Collateral. 7.12 Further Assurances. Each of Preferred Equities Corporation and Brigantine Preferred Properties, Inc. shall from time to time execute and deliver to the Lender such other instruments, certificates and documents and shall take such other action and do all other things as may from time to time be reasonably requested by the Lender in order to implement or effectuate the provisions of, or more fully perfect the rights granted or intended to be granted by the Debtor to the Lender pursuant to the terms of, this Agreement, the Note or any other Security Document. The Debtor agrees, in its capacity as Declarant (to the extent permitted by applicable law), to cause the Association to take such action and to do all other things as may from time to time be reasonably requested by the Lender in order to implement or effectuate the provisions of this Agreement and the other Security Documents. 7.13 Financial Statements and Other Information. Preferred Equities Corporation shall, on a consolidated and consolidating basis, submit to the Lender the following: (a) Annual Statements -- As soon as practicable after the end of each fiscal year of the Preferred Equities Corporation, and in any event no later than 120 days thereafter, duplicate copies of: 49 (i) a consolidated and consolidating balance sheet of the Preferred Equities Corporation and its subsidiaries as at the end of such fiscal year, and (ii) a consolidated and consolidating statement of income of the Preferred Equities Corporation and its subsidiaries for such fiscal year, and (iii) a consolidated and consolidating statement of changes in cash flows of the Preferred Equities Corporation and its subsidiaries during such fiscal year, and (iv) a statement of material changes of accounting policies, presentations or principles during such fiscal year, and (v) notes to such financial statements, if any, prepared in reasonable detail and in accordance with generally accepted accounting principles, procedures and practices consistently applied, setting forth, in each case, in comparative form the figures for the previous fiscal year, certified as complete and correct by the principal financial officer of the Preferred Equities Corporation and accompanied by an opinion thereon of independent certified public accountants of recognized national standing selected by the Guarantor and reasonably satisfactory to the Lender, which opinion shall be acceptable to the Lender and shall, without qualification, state that such financial statements fairly present the financial condition of Preferred Equities Corporation and its Subsidiaries and have been prepared in accordance with generally accepted accounting principles consistently applied (except for changes in application in which such accountants concur) and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as were considered necessary in the circumstances. (b) Quarterly Statements -- As soon as practicable after the end of each fiscal quarter of the Debtor, and in any event no later than 90 days thereafter, duplicate copies of: (i) a consolidated and consolidating balance sheet of Preferred Equities Corporation and its Subsidiaries (including all assets and liabilities of, or in respect of, the Resorts) as at the end of such fiscal quarter, and (ii) a consolidated and consolidating statement of income of Preferred Equities Corporation and its Subsidiaries (including the operations of the Resorts) for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter, and (iii) a consolidated and consolidating statement of changes in cash flows of Preferred Equities Corporation and its Subsidiaries (including the cash flows of, or in respect of, the Resorts) during such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter, and (iv) a statement of material changes of accounting policies, presentations or principles during such quarter. 50 Each of the above shall have been prepared in reasonable detail and in accordance with generally accepted accounting principles, procedures and practices consistently applied (other than the preparation of notes to such financial statements), subject to changes resulting from year-end adjustments, and shall set forth in each case in comparative form the figures for the corresponding periods in the immediately preceding fiscal year, and shall be certified as complete and correct by the chief accounting officer of the Debtor. (c) Notice of Default or Event of Default -- Promptly upon becoming aware of the existence of any condition or event which constitutes a Default or an Event of Default, a written notice specifying the nature and period of existence thereof and what action the Debtor is taking or proposes to take with respect thereto. (d) Notice of Claimed Default -- Immediately upon becoming aware that the holder of any obligation or of any evidence of indebtedness or other Security of the Debtor or Guarantor has given notice or taken any other action with respect to a claimed default or event of default thereunder, a written notice specifying the notice given or action taken by such holder and the nature of the claimed default or event of default and what action the Debtor is taking or proposes to take with respect thereto. (e) Material Adverse Developments -- Immediately upon becoming aware of any development or other information which may materially and adversely affect the Property, business, prospects, profits or condition (financial or otherwise) of the Debtor or the ability of the Debtor to perform its obligations under this Agreement, the Note or the other Security Documents, telephonic, telefax or telegraphic notice specifying the nature of such development or information and the anticipated effect. (f) Financial Information. As promptly as possible after the receipt thereof, all financial statements, budgets and other information distributed by the Association. The Debtor, as Declarant or otherwise, shall cause the Association to prepare annual financial statements, substantially as provided in clause (a) above, and an annual budget, and shall deliver the same to the Lender within 120 days of the end of each of its fiscal years. (g) Quarterly Certifications Regarding Remaining Unsold Inventory Lot/Timeshare Interval. As soon as practicable after the end of each calendar quarter, Debtor, but in no event later than 15 days thereafter, Debtor shall provide to Lender a listing current as of the end of the calendar quarter of all remaining Unsold Inventory Lot/Timeshare Intervals and the average retail selling price of each to Purchasers over the prior 90 days and shall also provide such calculations as may be required to show to Lender the amount of any Mandatory Prepayment which shall be due under Section 2.4 of this Agreement. (h) Requested Information. With reasonable promptness, such other data and information as from time to time may be reasonably requested by the Lender. 7.14 Officers' Certificate. The financial statements delivered to the Lender pursuant to Section 7.13(a) and Section 7.13(b) of this Agreement shall be accompanied by a certificate , substantially in the form of Exhibit Q, of the President or a Vice-President and the Treasurer or an Assistant Treasurer of the Debtor setting forth: (a) Covenant Compliance -- the information (including detailed calculations) required in 51 order to establish whether the Debtor was in compliance with all financial covenants contained in Section 7 of this Agreement during the period covered by the financial statements or reports then being furnished; and (b) Event of Default -- that the signers have reviewed the relevant terms of the Agreement (and all other agreements and exhibits between the parties) and have made, or caused to be made, under their supervision, a review of the transactions and conditions of the Debtor from the beginning of the period covered by the financial statements or reports being delivered therewith to the date of the certificate and that such review has not disclosed the existence during such period of any condition or event which constitutes a Default or Event of Default or, if any such condition or event existed or exists or will exist, specifying the nature and period of existence thereof and what action the Debtor has taken or proposes to take with respect thereto. 7.15 Inspection. The Debtor shall permit the Lender or its representatives to make such inspections/audits of its books, accounts, records, orders, original correspondence and such other papers as it may desire and of its premises, the Resorts, the Units, and the other Collateral, from time to time, as the Lender may in its sole discretion determine. The Debtor shall supply copies of such records and papers as the Lender may reasonably request, and shall permit the Lender to discuss the Debtor's respective affairs, finances and accounts with the Debtor's officers, employees and independent public accountants (and by this provision the Debtor hereby authorizes said accountants to discuss with the Lender the finances and affairs of the Debtor), all at reasonable times and as often as may be desired by the Lender. The Debtor further agrees to supply the Lender with such other reasonable information relating to the Debtor and the Collateral as the Lender may request. With respect to any inspections and/or audits referred to in this Section 7.15, the Debtor shall pay for all out-of- pocket costs and reasonable expenses incurred by the Lender (including, without limitation, travel expenses, but excluding salaries of employees of the Lender) and shall promptly reimburse the Lender therefor upon receipt by the Debtor of a written demand therefor from the Lender. 7.16 Minimum Tangible Net Worth. Borrower shall not permit or suffer its Tangible Net Worth to be less than $25,000,000 at any time. SECTION 8. EVENTS OF DEFAULT 8.1 Default. The Debtor hereby covenants, agrees and acknowledges that an Event of Default shall exist under this Agreement if any of the following events or conditions (each, an "Event of Default") shall occur and be continuing: (a) Payments -- (i) failure to make any payment of interest on the Inventory Note, (ii) failure to make any payment of principal of, or Release Fee or Release Price or accelerated Release Fee payment on the Inventory Note; (iii) failure to make any Mandatory Inventory Prepayment; or (iv) failure to make any other payment required pursuant to the terms of this Agreement, the Note or any other Security Document; in each case on or before 2 Business Days after the date such payment is due; or (b) Warranties or Representations -- any warranty, representation or other statement made or furnished to the Lender by or on behalf of the Debtor or Guarantor in this Agreement or any other 52 Security Document proves to have been false or misleading in any material respect when made or furnished; or (c) Collateral and Financial Covenants -- failure by Debtor to comply with any covenant set forth in Section 3.5, Section 3.6, and Section 7 of this Agreement; or (d) Other Covenants -- failure by the Debtor to comply with any other covenant relating to the Debtor contained in this Agreement or any other Security Document, and the continuance of such failure for more than 30 days after such failure shall have first become known to any officer of the Debtor or Guarantor; or (e) Material Adverse Change -- any material adverse change in or in respect of the Collateral (including, without limitation, the termination of any applicable timeshare or condominium regimen {whether by consent of the condominium or timeshare owners thereunder or otherwise}, any modification or amendment to the Declaration which shall, in the opinion of the Lender, adversely affect the Collateral or the operations or prospects of the Resorts, or the substantial destruction of any uninsured Unit) or in the financial condition of the Debtor or Guarantor; or (f) Insolvency -- (i) a receiver, liquidator, custodian or trustee of the Debtor or Guarantor, or of all or any of the Property of any of them, shall be appointed by court order and such order remains in effect for more than 50 days; or an order for relief shall be entered with respect to the Debtor or Guarantor, or the Debtor or Guarantor shall be adjudicated a bankrupt or insolvent; or any of the Property of any of them shall be sequestered by court order and such order remains in effect for more than 50 days; or a petition shall be filed against the Debtor or Guarantor under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, and shall not be dismissed within 50 days after such filing; or (ii) the Debtor or Guarantor shall file a petition in voluntary bankruptcy or seeking relief under any provision of any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, or shall consent to the filing of any petition against it under any such law; or (iii) the Debtor or Guarantor shall make an assignment for the benefit of its creditors, or shall admit in writing its inability, or shall fail, to pay its debts generally as they become due, or shall consent to the appointment of a receiver, liquidator or trustee of the Debtor or Guarantor, or of all or any part of the Property of any of them; or (g) Judgment -- final judgment or judgments for the payment of money, the aggregate of which exceeds $100,000, shall be outstanding against one or more of the Debtor and the Guarantor and any of such judgments shall have been outstanding for more than 30 days from the date of its entry and shall not have been discharged in full or stayed; or (h) Default in Lender Agreements -- any default (after giving effect to the expiration of any applicable grace periods) under, and as defined in any other agreement, now existing or hereafter entered into, between (i) the Debtor and the Lender or any affiliate of the Lender, (ii) Mego Financial and the Lender or any affiliate of the Lender or (iii) any Affiliate of the Debtor and the Lender or any affiliate of the Lender; or (i) Default by Debtor in Other Agreements -- any default by the Debtor or Guarantor in the payment of indebtedness for borrowed money; any other default under such indebtedness which accelerates or permits the acceleration (after the giving of notice or passage of time, or both) of the maturity of such indebtedness, whether or not such default has been waived by the holder of such 53 indebtedness, provided that any such acceleration or permitted acceleration with respect to a default by Guarantor shall be an Event of Default only if such acceleration or permitted acceleration could reasonably be expected to have a material adverse affect on Guarantor and provide further that any default with respect to that indebtedness described on Schedule 18 shall not be an Event of Default hereunder unless such default becomes an unappealable judgment against Debtor; or (j) Suspension of Sales -- the issuance of any stay order, cease and desist order or similar judicial or nonjudicial sanction limiting or otherwise affecting the sale of Timeshare Intervals or Calvada Lots in any state or any jurisdiction thereof and any one of such orders or sanctions shall have been outstanding for more than 30 days from the date of its entry and shall not have been discharged in full or stayed by appeal, bond or otherwise; or (k) Guaranty -- any Guaranty Agreement shall have been terminated, revoked or declared invalid. 8.2 Default Remedies. (a) Acceleration of Obligations; Right To Dispose of Collateral. If an Event of Default under Section 8.1(f) of this Agreement shall occur, then the Obligations shall, automatically and without notice or demand by the Lender, become at once due and payable, and the Debtor will forthwith pay to the Lender, in addition to any and all sums and charges otherwise due in respect of the Obligations, the entire principal of and interest accrued on and the Inventory Note. If any other Event of Default shall occur, all of the Obligations shall, at the option of the Lender, and without notice or demand by the Lender, become at once due and payable, and the Debtor will forthwith pay to the Lender, in addition to any and all sums and charges otherwise due in respect of the Obligations, the entire principal of and interest accrued on the Inventory Note. The Lender shall have all the rights and remedies of a secured party under the Rhode Island Uniform Commercial Code, all the rights and remedies of a beneficiary under the Inventory Deed of Trust and all other legal and equitable rights to which it may be entitled. The Lender shall also have the right to require the Debtor to assemble the Collateral, at the Debtor's expense, and make it available to the Lender at a place to be designated by the Lender, which is reasonably convenient to both parties, and the Lender shall have the right to take immediate possession of the Collateral and may enter any of the premises of the Debtor or wherever the Collateral shall be located, in accordance with applicable law, and to keep and store the same on said premises until sold (and if said premises be the Property of the Debtor, the Debtor agrees not to charge the Lender for storage thereof for a period of at least 90 days after sale or disposition of such Collateral). The Debtor and the Lender agree that 10 days' notice to the Debtor of any public or private sale or other disposition of Collateral shall be reasonable notice thereof and such sale shall be at such location(s) as the Lender shall designate in said notice. The Lender shall have the right to bid at any such sale on its own behalf. In view of the fact that federal and state securities laws may impose certain restrictions on the methods by which a sale of Collateral, if comprised of Securities, may be effected after an Event of Default, the Debtor agrees that, upon the occurrence and continuance or existence of an Event of Default, the Lender may, from time to time, attempt to sell all or any part of such Collateral by means of a private placement restricting the bidding and prospective purchasers to those who will represent and agree that they are purchasing for investment only and not for, or with a view to, distribution. In so doing, and without limiting any other means of private placement, the Lender may solicit offers to buy such Collateral, or any part of it for cash, from a limited number of investors deemed by the Lender, in its reasonable judgment, to be responsible parties who might be interested in purchasing the Collateral, and if the Lender solicits such offers from not less than four (4) such investors (and otherwise acts in good 54 faith), then the acceptance by the Lender of the highest offer obtained therefrom shall be deemed to be a commercially reasonable method of disposition of such Collateral. (b) Application of Collateral; Termination of Agreements. Upon the occurrence of any Event of Default, the Lender may, with or without proceeding with such sale or foreclosure or demanding payment of the Obligations, without notice, terminate the Lender's further performance under this Agreement, without further liability or obligation by the Lender, and may also, at any time, appropriate and apply (as provided below) to any Obligations any and all Collateral in its possession and any and all balances, credits, deposits, accounts, reserves, indebtedness or other monies due or owing to the Debtor held by the Lender hereunder or under any other financing agreement or otherwise, whether accrued or not. Neither such termination, nor the termination of this Agreement by lapse of time, the giving of notice or otherwise, shall absolve, release or otherwise affect the liability of the Debtor in respect of transactions prior to such termination, or affect any of the Liens, security interests, rights, powers and remedies of the Lender hereunder, but they shall, in all events, continue until all of the Obligations are satisfied. (c) Application of Proceeds. To the extent permitted under applicable law, the proceeds of any exercise of rights with respect to Collateral or any part thereof shall be paid to and applied as follows: First, to the payment of (i) all costs and charges in connection therewith, including, without limitation, (A) attorneys' fees for advice, counsel or other legal services, (B) costs and expenses incurred as a result of pursuing, reclaiming, seeking to reclaim, taking, keeping, removing, storing, advertising for sale, selling and foreclosing on the Collateral and any and all other charges and expenses in connection therewith, and (C) any costs and expenses (including, without limitation, costs and expenses in the management and operation of the Resorts) provided for in the Assignment of Rents, the Inventory Deed of Trust or any other Security Document, (ii) all taxes, assessments or Liens superior to the Lien of this Agreement or the other Security Documents, except any taxes, assessments or other superior Liens subject to which any sale of Collateral may have been made, (iii) all fees, costs and expenses as set forth in Section 10.2 of this Agreement, and (iv) all Release Fees; Second, towards the payment of accrued and unpaid interest then due and payable, if any, at the Default Rate in respect of the Loan, Third, towards the payment of all other accrued and unpaid interest, if any, then due and payable in respect of the Loan, Fourth, to the payment of the principal amount of the Loan, and Fifth, to the payment of the surplus, if any, to the Debtor, its successors and assigns, or to whomsoever may be lawfully entitled to receive the same, provided that if any Obligations then due and 55 payable shall not have been paid in full, any such surplus shall continue to be held as Collateral hereunder and shall continue to be subject to the terms and conditions hereof until such Obligations then due and payable shall have been paid in full. The Debtor shall remain liable hereunder for payment of any deficiency owing on the Obligations after application of such proceeds. To the extent that any amount allocated to any of the payment categories set forth above is insufficient to fully satisfy all of the Obligations referred to in said category, such amount shall be allocated ratably to each of such Obligations in accordance with the ratio that the amount of such Obligation bears to the aggregate amount of such Obligations referred to in such category. (d) Remedies Cumulative. All covenants, conditions, provisions, warranties, guaranties, indemnities and other undertakings of the Debtor contained in this Agreement, or in any document referred to herein or contained in any agreement supplementary hereto or in any schedule given to the Lender or contained in any other agreement between the Lender and the Debtor, heretofore, concurrently or hereafter entered into, including, without limitation, the Inventory Deed of Trust, shall be deemed cumulative to and not in derogation or substitution of any of the terms, covenants, conditions or agreements of the Debtor herein contained. The failure or delay of the Lender to exercise or enforce any rights, Liens, powers or remedies hereunder or under any of the aforesaid agreements or other documents or security or Collateral shall not operate as a waiver of such Liens, rights, powers and remedies, but all such Liens, rights, powers and remedies shall continue in full force and effect until the Loan and all other Obligations shall have been fully satisfied. All Liens, rights, powers and remedies herein provided for are cumulative and none are exclusive. The acceptance by the Lender at any time and from time to time of partial payments of the Obligations shall not be deemed to be a waiver of any Event of Default then existing. No waiver by the Lender of any Event of Default shall be deemed to be a waiver of any other or subsequent Event of Default. No delay or omission by the Lender in exercising any right or remedy under the Security Documents shall impair such right or remedy or be construed as a waiver thereof or an acquiescence therein, nor shall any single or partial exercise of any such right or remedy preclude other or further exercise thereof, or the exercise of any other right or remedy under the Security Documents or otherwise. SECTION 9. REVIVAL OF OBLIGATIONS AND LIENS The Debtor expressly agrees that if the Debtor makes a payment to the Lender, which payment or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, or otherwise required to be repaid to a trustee, receiver or any other party under any bankruptcy act, state or federal law, common law or equitable cause, then to the extent of such repayment, the Obligations or any part thereof intended to be satisfied and the Liens provided for hereunder securing the same shall be revived and continued in full force and effect as if said payment had not been made. SECTION 10. MISCELLANEOUS 10.1 Governing Law. This Agreement and all transactions, assignments and transfers hereunder, and all the rights of the parties hereto shall be governed as to the validity, construction, enforcement and in all other respects by the internal laws of the State of Rhode Island. To the extent any provision of this Agreement is not enforceable under applicable law, such provision shall be deemed null and void and shall have no effect on the remaining portions of this Agreement. 56 10.2 Expenses and Closing Fees. Whether or not the transactions contemplated hereunder are completed, the Debtor shall pay all expenses of Lender relating to negotiating, preparing, documenting, closing and enforcing this Agreement and relating to the making by the Lender of any Inventory Advances hereunder to the Debtor (the "Loan Costs"), including, but not limited to: (a) the cost of reproducing this Agreement, the Inventory Note, and the other Security Documents; (b) the fees and disbursements of the Lender's counsel (including in-house counsel; (c) the Lender's out-of-pocket expenses, including, without limitation, Lender's out-of-pocket expenses in connection with any audits in respect of the Debtor and/or the Collateral conducted by Lender prior to the date hereof (but excluding salaries of employees of the Lender); (d) all fees and expenses relating to any amendments, waivers, consents or review of documents in connection with any subsequent closings pursuant to the provisions of this Agreement; (e) all costs, outlays, attorneys' fees and expenses of every kind and character had or incurred in (i) the enforcement of any of the provisions of, or rights and remedies under, this Agreement, any assignment agreement, or any other Security Document and (ii) the preparation for, negotiations regarding, consultations concerning, or the defense of legal proceedings involving, any claim or claims made or threatened against the Lender arising out of this transaction or the protection of the Collateral securing the Obligations, expressly including, without limitation, the defense by the Lender of any legal proceedings instituted or threatened by any Person to seek to recover or set aside any payment or setoff theretofore received or applied by the Lender with respect to the Obligations; and (f) all taxes levied against or paid by the Lender (other than taxes on, or measured by, the income or profits of the Lender) and all filing and recording fees, costs and expenses which may be incurred by the Lender with respect to the filing or recording of any document or instrument relating to the transactions described in this Agreement. 10.3 Parties, Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns (except that the Debtor may not assign any of its rights hereunder), and all representations, covenants, provisions and agreements by or on behalf of the Debtor which are contained in this Agreement shall inure to the benefit of the successors and assigns of the Lender. Except as provided in this Section 10.3, this Agreement shall not create and shall not be construed as creating any rights enforceable by, or benefits in favor of, any Person not a party hereto. 10.4 Notices. All notices or demands by either party to the other relating to this Agreement shall, except as otherwise provided herein, be in writing and sent by certified or registered United States mail, first class postage prepaid and return receipt requested, or by a nationally recognized overnight courier service with all delivery fees prepaid. Notices shall be deemed received (a) on the 3rd succeeding Business Day following deposit in the United States mail, certified or registered and first class postage prepaid and 57 return receipt requested or (b) upon delivery if sent by nationally recognized overnight courier with all delivery fees prepaid. Notices and demands shall be addressed, if to the Debtor, at the mailing address set forth on Schedule 16 to this Agreement or to such other address as the Debtor may from time to time specify in writing or, if to the Lender, at the mailing address of the Lender set forth on Schedule 17 hereto or to such other address as the Lender may from time to time specify in writing to the Debtor. 10.5 Total Agreement. This Agreement, including the Exhibits, the Schedules and the other agreements referred to herein, is the entire agreement between the parties hereto relating to the subject matter hereof, incorporates or rescinds all prior agreements and understandings between the parties hereto relating to the subject matter hereof, and may not be changed or terminated orally or by course of conduct. This Agreement may be modified or changed only in a writing executed by both the Lender and the Debtor. The failure or delay of the Lender to exercise or enforce any rights, Liens, powers, remedies, conditions or other terms hereunder or under any other agreement or instrument executed in connection herewith shall not operate as a waiver of any such rights, Liens, powers, remedies, conditions or other terms. 10.6 Survival. All warranties, representations and covenants made by the Debtor herein or in any certificate or other instrument delivered by it or on its behalf under this Agreement shall be considered to have been relied upon by the Lender and shall survive the delivery to the Lender of the Note regardless of any investigation made by the Lender or on its behalf. All statements in any such certificate or other instrument shall constitute warranties and representations by the Debtor hereunder. 10.7 Litigation. EACH OF THE DEBTOR AND THE LENDER HEREBY WAIVES TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND OR NATURE IN ANY COURT IN WHICH AN ACTION MAY BE COMMENCED ARISING OUT OF THIS AGREEMENT, THE NOTE, ANY OTHER SECURITY DOCUMENT, THE COLLATERAL OR ANY ASSIGNMENT THEREOF OR BY REASON OF ANY OTHER CAUSE OR DISPUTE WHATSOEVER BETWEEN THE DEBTOR AND THE LENDER OF ANY KIND OR NATURE. THE DEBTOR AND THE LENDER HEREBY AGREE THAT THE FOLLOWING COURTS: STATE COURT: RHODE ISLAND COURT FOR THE DISTRICT SITTING AT PROVIDENCE; FEDERAL COURT: UNITED STATES DISTRICT COURT FOR THE DISTRICT OF RHODE ISLAND SITTING AT PROVIDENCE, OR, (TO THE EXTENT PERMITTED BY APPLICABLE RHODE ISLAND LAW) AT THE OPTION OF THE LENDER, ANY OTHER COURT LOCATED IN THE STATES OF RHODE ISLAND OR NEVADA IN WHICH IT SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH SHALL HAVE SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY, SHALL HAVE NONEXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE DEBTOR AND THE LENDER, PERTAINING DIRECTLY OR INDIRECTLY TO THIS AGREEMENT OR TO ANY MATTER ARISING HEREFROM. THE DEBTOR AND THE LENDER EXPRESSLY SUBMIT AND CONSENT IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED IN ANY SUCH COURT. 58 THE STIPULATIONS OF THE DEBTOR AND THE LENDER IN THIS SECTION 10.7 SHALL SURVIVE THE FINAL PAYMENT OF ALL OF THE OBLIGATIONS OF THE DEBTOR AND THE RESULTING TERMINATION OF THIS AGREEMENT. Initials____/____ 10.8 Power of Attorney. The Debtor hereby makes, constitutes and appoints the Lender the true and lawful agent and attorney-in-fact of the Debtor, with full power of substitution, (a) to receive, open and dispose of all mail addressed to the Debtor; (b) to open all such mail and remove therefrom any notes, checks, acceptances, drafts, money orders or other instruments constituting Collateral, with full power to endorse the name of the Debtor upon any such notes, checks, acceptances, drafts, money orders, instruments or other documents, and to effect the deposit and collection thereof, and the Lender shall have the further right and power to endorse the name of the Debtor on any documents relating to the Collateral; (c) to execute on behalf of the Debtor assignments, notices of assignment, financing statements and other public records and notices related thereto; (d) to do any and all things necessary or take action in the name and on behalf of the Debtor to carry out the intent of this Agreement, including, without limitation, the grant of the security interest provided herein and to perfect and protect the security interest granted to the Lender with respect to the Collateral and the Lender's rights created under this Agreement. The Debtor agrees that neither the Lender nor any of its agents, designees or attorneys-in- fact will be liable for any acts of commission or omission, or for any error of judgment or mistake of fact or law with respect to the exercise of the power of attorney granted under this Section 10.8 except for its own gross negligence or willful misconduct. The power of attorney granted under this Section 10.8 is coupled with an interest and shall be irrevocable during the term of this Agreement. 10.9 Survival of Indemnities. All indemnities set forth in this Agreement shall survive the execution and delivery of this Agreement and the execution and delivery of the Note as well as the payment in full of the Note and the otherwise full performance of this Agreement. 10.10 Conflicting Obligations; Rights and Remedies. To the extent that the terms of any of the Security Documents contain conflicting obligations, the terms set forth in this Agreement shall be deemed to be the controlling terms, provided that all rights and remedies of the Lender under the Security Documents are cumulative and in addition to every other right or remedy, and no right or remedy is intended to be exclusive of any other right or remedy. 59 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. Debtor: Lender: PREFERRED EQUITIES CORPORATION TEXTRON FINANCIAL CORPORATION By: By: Title: President Title: Assistant Vice President [CORPORATE SEAL] BRIGANTINE PREFERRED PROPERTIES, INC. By: Title: President [CORPORATE SEAL] STATE OF NEVADA ) ) ss. COUNTY OF CLARK ) At Las Vegas in said County and State on this _____ day of March, 2001, personally appeared _________________, duly authorized officer of Preferred Equities Corporation, and he/she acknowledged the foregoing instrument by him/her signed and sealed to be his/her free act and deed and the free act and deed of Textron Financial Corporation. Before me: Notary Public in and for said State My Commission expires: STATE OF NEVADA ) ) ss. COUNTY OF CLARK ) At Las Vegas in said County and State on this _____ day of March, 2001, personally appeared _________________, duly authorized officer of Brigantine Preferred Properties, Inc., and he/she acknowledged the foregoing instrument by him/her signed and sealed to be his/her free act and deed and the free act and deed of Textron Financial Corporation. Before me: Notary Public in and for said State 60 My Commission expires: STATE OF CONNECTICUT ) ) ss. COUNTY OF HARTFORD ) At in said County and State on this _______ day of April, 2001, personally appeared , duly authorized officer of Textron Financial Corporation, and he/she acknowledged the foregoing instrument by him/her signed and sealed to be his/her free act and deed and the free act and deed of Textron Financial Corporation. Before me: Notary Public in and for said State My Commission expires: 61 INVENTORY LOAN AGREEMENT SCHEDULE 1 Property Descriptions: a. Grand Flamingo Winnick An undivided 73/612 interest in and to Lot 51 in Block 3 of Flamingo Estates as shown on a map thereof on file in Book 5 of Plats, Page 22 in the Clark County, Nevada Recorder's office, excepting from such interests in Lots 51all gas and oil rights that now exist or may be developed upon said property as reserved by Rose Rabin, in a Deed recorded on February 18, 1952 as Document 381100 in the Clark County Nevada Recorders Office and subsequently conveyed to Harry Cobb by a Deed recorded March 25, 1957 as Document 102052 in the Clark County, Nevada Recorders Office but including the west ten (10) feet of that certain pedestrian walkway abutting the easterly line of said Lot 51 by that certain order of vacation recorded June 21, 1962 as document #297340 in the Official Records of Clark County Nevada Grand Flamingo Terraces An undivided 379/2550 interest in and to Lots 21 and 22, 23 and 24 in Block 2 of Flamingo Estates as shown on a map thereof on file in Book 5 of Plats, Page 22 in the Clark County, Nevada Recorder's office, excepting from such interests in Lots 21, 22, 23 and 24 all gas and oil rights that now exist or may be developed upon said property as reserved by Rose Rabin, in a Deed recorded on February 18, 1952 as Document 381100 in the Clark County Nevada Recorders Office and subsequently conveyed to Harry Cobb by a Deed recorded March 25, 1957 as Document 102052 in the Clark County, Nevada Recorders Office Grand Flamingo Towers An undivided 225/4743 interest in and to Lots 16, 17, 18, 19 and 20 in Block 2 of Flamingo Estates as shown on a map thereof on file in Book 5 of Plats, Page 22 in the Clark County, Nevada Recorder's office, excepting from such interests in Lots 21, 22, 23 and 24 all gas and oil rights that now exist or may be developed upon said property as reserved by Rose Rabin, in a Deed recorded on February 18, 1952 as Document 381100 in the Clark County Nevada Recorders Office and subsequently conveyed to Harry Cobb by a Deed recorded March 25, 1957 as Document 102052 in the Clark County, Nevada Recorders Office Grand Flamingo Villas An undivided 295/4794 interest in and to Lots 4 through 15 in Block 1 of Flamingo Estates as shown on a map thereof on file in Book 5 of Plats, Page 22 in the Clark County, Nevada Recorder's office, excepting from such interests in Lots 4 through 15 all gas and oil rights that now exist or may be developed upon said property as reserved by Rose Rabin, in a Deed recorded on February 18, 1952 as Document 381100 in the Clark County Nevada Recorders Office and subsequently conveyed to Harry Cobb by a Deed recorded March 25, 1957 as Document 102052 in the Clark County, Nevada Recorders Office 62 b. Reno Spa, Reno An undivided 1103/4845 interest in and to Lots 4 through 7 in Block 9 of Lake's Addition to the City of Reno as shown on the map thereof on file in the Washoe County, Nevada Recorder's office dated September 29, 1887, excepting from such interests in Lots 4 through 7 all gas, oil and mineral rights, if any, and water rights, the foregoing being subject to all restrictions, reservations and easements of record as recorded in the Official Records of Washoe County, Nevada in a Deed recorded March 30, 1990 as File #1389863. c. Calvada Lot 10, Block 18 of Calvada Valley Unit No. 1 recorded October 5, 1970 as document number 20290, in the office of the County Recorder of Nye County, Nevada Lot 1, Block 104; Lot 6, Block 157 of Calvada Valley Unit 4B recorded July 5, 1975 as document number 33044, in the office of the County Recorder of Nye County, Nevada Lot 8, Block 5; Lot 19, Block 6 of Calvada Valley Unit 6 recorded February 5, 1973 as document number 36024, in the office of the County Recorder of Nye County, Nevada Lot 14, Block 29 of Calvada Valley Unit 7 recorded February 5, 1973 as document number 36023, in the office of the County Recorder of Nye County, Nevada Lot 104, Block 16, Lot 147, Block 16 of Calvada Valley Unit 8A recorded April 5, 1971 as document number 23255, in the office of the County Recorder of Nye County, Nevada Lots 8, 10, 14 and 16, Block 12 of Calvada Valley Unit 9A recorded June 5, 1973 as document number 36870, in the office of the County Recorder of Nye County, Nevada Lot 7, Block 36; Lot 31, Block 42; Lot 10, Block 50 of Calvada Valley Unit 11 recorded February 5, 1974 as document number 40749, in the office of the County Recorder of Nye County, Nevada Lots 126, 173 and 270, Block 16 Calvada Meadows Unit 2 recorded March 4, 1980 as document number 18918, amended March 11, 1986 in document number 157274 and amended August 22, 1986 in document number 166510, in the office of the County Recorder of Nye County, Nevada Lot 21 and 22, Block 13; Lot 11, Block 15, Lot 11, Block 19 of Calvada Meadows Unit 4 recorded January 2, 1997 as document number 411499, in the 63 office of the County Recorder of Nye County, Nevada Lots 19 and 20, Block 50; Lot 8, Block 52; Lot 13, Block 54; Lot 16, Block 55; Lot 228, Block 57 of Calvada Valley North Unit 1 recorded February 5, 1975 as document number 46310, in the office of the County Recorder of Nye County, Nevada Lot 2, Block 71; Lot 22, Block 81; Lot 138, 141 and 157, Block 88; Lot 13, Block 94 of Calvada Valley North Unit 2, recorded February 5, 1975 as document 46311, in the office of the County Recorder of Nye County, Nevada Lot 330, Block 12; Lots 210, 246, 260, 275 and 291, Block 24; Lots 21 and 24, Block 25; Lot 13, Block 27 of Calvada Valley North Unit 3, recorded February 5, 1975 as document 46312, in the office of the County Recorder of Nye County, Nevada Lot 1, Block 1; Lot 11, Block 5 of Clavada Valley North Unit 4, recorded March 23, 1995 as file number 369307, in the office of the County Recorder of Nye County, Nevada Brigantine Villas and Inn, New Jersey Brigantine Villas, a condominium, together with the fee interest in the common elements as set forth in the Master Deed dated August 4, 1988 recorded August 5, 1988 in the office of the Atlantic County Clerk in Book 4750 at Page 45 also being known as part of Block 1402 on the official tax map of the City of Brigantine Brigantine Inn Resort Club, a condominium, together with the fee interest in the common elements as set forth in the Master Deed dated May 2, 1985 recorded May 7, 1985 in the office of the Atlantic County Clerk in Book 4056 at Page 263 also being known as part of Block 1401 on the official tax map of the City of Brigantine d. Indian Springs, Florida Lots 1 & 2, Block 6, Indian Rocks South Shore, according to the Plat thereof recorded in Plat Book 4, Page 20 of the General Records of Pinellas County, Florida, together with the non-exclusive rights as a member of the public to use that certain easement for public highway over Bay Place as set forth on the Plat of said Indian Rocks South Shore recorded in Plat Book 4, Page 20 of the Public Records of Pinellas County. Said property is also known as Units 101, 102A-102, 103-103A, 104-112, inclusive, 114, 115A-115, 116-116A, 117, 201, 202A- 202, 203-203A,204-212, inclusive, 214, 215A-215, 216-216A and 217 Aloha Bay, a condominium, according to the Declaration of condominium thereof, recorded in Official Records Book 9477 at Pages 1645 et seq of the Public Records of Pinellas County, Florida. 64 e. White Sands, Hawaii The estate created under a Ground Lease dated July 14, 1983 between the Queen Emma Foundation and First Hawaiian Bank, as Trustee, being Document #1182895 being noted on Transfer Certificate of Title #251,194 being Lot 3-A-1-B as shown on Map 5 filed in the office of the Assistant Registrar of the Land Court of the State of Hawaii with Land Court Application 634 of Guardian Trust Company, Limited and Lot 26-A-5 as shown on Map 10 filed in the office of the Assistant Registrar of the Land Court of the State of Hawaii with Land Court Application 571 of Guardian Trust Company, Limited and Lot 26-A-5 and the estate created under a Ground Lease dated January 8, 1958 between Waikiki Development Co and South Pacific Hotels, Inc. filed in the office of the Assistant Registrar of the Land Court of the State of Hawaii as Document #211800 which was assigned to First Hawaiin Bank , Trustee by an Assignment dated May 15, 1979 as Document #941188 being noted on Transfer Certificate of Title #210,979 being Lot 36 as shown on Map 22 filed in the office of the Assistant Registrar of the Land Court of the State of Hawaii with Land Court Application 324 of Bruce Cartwright, deceased and being a portion of the land described in Transfer Certificate of Title 210,979. 65 INVENTORY LOAN AGREEMENT SCHEDULE 2 Property Related Contracts-NONE 66 INVENTORY LOAN AGREEMENT SCHEDULE 3 Affiliates and Capital Structure SEE MEGO FINANCIAL CORP. 10-K DATED AUGUST 31, 2000 67 INVENTORY LOAN AGREEMENT SCHEDULE 6 Litigation 68 INVENTORY LOAN AGREEMENT SCHEDULE 7 Title Exceptions-See Individual Commitments and Policies 69 INVENTORY LOAN AGREEMENT SCHEDULE 9 Permitted Leases and Rentals- 70 INVENTORY LOAN AGREEMENT SCHEDULE 10 Hazardous Substances NONE 71 INVENTORY LOAN AGREEMENT SCHEDULE 11 Use of Proceeds To pay all prior Liens on Collateral To repay $832,546.49 of the financial accommodation from Lender of August 12, 1998 To pay for up to $400,000 of the cost of renovations for the Ramada Vacations Suites Reno Resort To pay existing indebtedness due to vendors and for working capital 72 INVENTORY LOAN AGREEMENT SCHEDULE 12 Licenses, Permits, Etc. Not Obtained NONE 73 INVENTORY LOAN AGREEMENT SCHEDULE 13 Deferred Compensation Plans and Arrangements-See Mego Financial Corp. 10 K 74 INVENTORY LOAN AGREEMENT SCHEDULE 14 Payment Instructions WIRING INSTRUCTIONS: BANK OF AMERICA, LAS VEGAS, NV ACCOUNT NAME: PREFERRED EQUITIES CORPORATION ABA #122400724 ACCOUNT #140000169 75 INVENTORY LOAN AGREEMENT SCHEDULE 15 Address of Debtor for Books and Records PREFERRED EQUITIES CORPORATION 4310 PARADISE ROAD LAS VEGAS, NV. 89109 BRIGANTINE PREFERRED PROPERTIES, INC. 4310 PARADISE ROAD LAS VEGAS, NV. 89109 76 INVENTORY LOAN AGREEMENT SCHEDULE 16 Address of Debtor for Notices PREFERRED EQUITIES CORPORATION 4310 PARADISE ROAD LAS VEGAS, NV. 89109 ATTN: JON JOSEPH, SENIOR VICE PRESIDENT AND GENERAL COUNSEL BRIGANTINE PREFERRED PROPERTIES, INC. 4310 PARADISE ROAD LAS VEGAS, NV. 89109 ATTN: JON JOSEPH SENIOR VICE PRESIDENT AND GENERAL COUNSEL WITH COPIES TO: ROMIVEST 1125 N.E. 125th St. North Miami 33161 ATTN: JEROME COHEN HERBERT HIRSCH 64 HURDLE FENCE DRIVE AVON, CT 06001 77 INVENTORY LOAN AGREEMENT SCHEDULE 17 Address of Lender for Notices TEXTRON FINANCIAL CORPORATION COMMERCE CENTER 333 EAST RIVER DRIVE, SUITE #305 HARTFORD, CT 06108 ATTN: JOHN D'ANNIBALE 78 INVENTORY LOAN AGREEMENT EXHIBIT A Deeds of Trust & Mortgages 79 INVENTORY LOAN AGREEMENT EXHIBIT B Form of Inventory Note 80 INVENTORY LOAN AGREEMENT EXHIBIT C Form of Proxy 81 INVENTORY LOAN AGREEMENT EXHIBIT D Form of Request for Lien Release 82 INVENTORY LOAN AGREEMENT EXHIBIT E Form of Partial Release from Inventory Deed of Trust/Mortgage 83 INVENTORY LOAN AGREEMENT EXHIBIT I Form of Opinion of Jon Joseph, Esq. 84 INVENTORY LOAN AGREEMENT EXHIBIT J Form of Opinion of Jon Joseph, Esq. 85 INVENTORY LOAN AGREEMENT EXHIBIT K Form of Officers Certificates of Debtor 86 INVENTORY LOAN AGREEMENT EXHIBIT L Form of Steamboat Suites, Inc. Secretary's Certificate 87 INVENTORY LOAN AGREEMENT EXHIBIT M Form of Preferred Equities and Brigantine Preferred Secretary's Certificate. 88 INVENTORY LOAN AGREEMENT EXHIBIT N Form of Mego Financials Secretary's Certificate. 89 INVENTORY LOAN AGREEMENT EXHIBIT O Form of Guaranty Agreement 90 EX-10.232 4 dex10232.txt FIRST AMENDMENT TO GENERAL LOAN Exhibit 10.232 FIRST AMENDMENT TO GENERAL LOAN AND SECURITY AGREEMENT ------------------------------------------------------ (Receivable Loan Facility) THIS First Amendment to General Loan and Security Agreement (Receivable Loan Facility) (the "Amendment") is made as of this day of July, 2001, by and between STEAMBOAT SUITES, INC., a Colorado Corporation, PREFERRED EQUITIES CORPORATION, a Nevada corporation and BRIGANTINE PREFERRED PROPERTIES, INC., a Nevada corporation, each having an address of 4310 Paradise Road Las Vegas, Nevada 89109 (hereinafter collectively referred to as "Debtor"); and TEXTRON FINANCIAL CORPORATION, a Delaware Corporation, having an address of 333 East River Drive, East Hartford, CT 06108 (hereinafter referred to as "Lender") RECITALS As of this date, Lender's affiliate, Dorfinco Corporation, has extended to Preferred Equities Corporation an inventory loan facility of up to $3,400,000 pursuant to a General Loan and Security Agreement (Inventory Loan Facility-I) of August 12, 1998 and Lender has extended to Preferred Equities Corporation and Steamboat Suites, Inc. an inventory loan facility of up to $8,400,000 pursuant to a General Loan and Security Agreement (Inventory Loan Facility-II) of December 17, 1999 and to Preferred Equities Corporation and Brigantine Preferred Properties, Inc. an inventory loan facility of up to $3,700,000 pursuant to a General Loan and Security Agreement (Inventory Loan Facility-III) pursuant to which inventory loan facilities, Debtor may have outstanding at any one time an aggregate of $15,500,000 (the "Inventory Facility"). As of this date, Lender's affiliate, Dorfinco Corporation, has extended to Preferred Equities and Colorado Land and Grazing Corp. a receivables loan facility of up to $10,000,000 pursuant to a First Amended and Restated General Loan and Security Agreement of June 30, 2001 and Lender has extended to Preferred Equities and Steamboat Suites, Inc. a receivables loan facility of up to $15,000,000 pursuant to a General Loan and Security Agreement (Receivable Loan Facility) of December 17, 1999 pursuant to which receivable loan facility, Debtor may have outstanding at any one time an aggregate of $15,000,000 (the "Receivable Facility"). Debtor and Lender, and Lender's affiliate Dorfinco Corporation, have agreed that notwithstanding that the aggregate of the Inventory Facility and the Receivable Facility provide for fundings by Lender and Dorfinco Corporation in excess of $27,500,000, the maximum amount under the Inventory Facility and under the Receivables Facility to be extended and outstanding at any time shall be $27,500,000. It is also the intention of the Lender, Dorfinco and Debtor that the Inventory Facility and the Receivables Facility be cross collateralized and cross defaulted during the term of each loan and with any and all other indebtedness owed to Lender or Dorfinco by any Debtor. This Amendment modifies and amends that certain General Loan and Security Agreement (Receivable Loan Facility) dated as of December 17, 1999 (the "Existing GLSA"). The Existing GLSA established a line of credit of up to $15,000,000 for the benefit of Steamboat Suites, Inc. and Preferred Equities Corporation for the financing of Pledged Notes Receivable from the Steamboat Resort and from the Hilltop Resort (the defined terms, Pledged Notes Receivable, Steamboat Resort and Hilltop Resort shall have the definitions contained in the Existing GLSA). The Existing GLSA, as amended herein will be referred to herein as the "Agreement". Debtor has requested that Lender modify certain terms of the Existing GLSA to incorporate the terms and provisions hereinafter set forth in order to expand the definition of Eligible Notes Receivables to include promissory notes and related deeds of trust and/or mortgages from Preferred Equities additional resort properties consisting of the Brigantine Inn Resort Club and Brigantine Villas in Brigantine, New Jersey and the Ramada Vacation Suites Resort at Las Vegas in Las Vegas, Nevada consisting of Grand Flamingo Terraces and Grand Flamingo Towers and Grand Flamingo Villas and Grand Flamingo Winnick, and The Ramada Vacation Suites Resort at Reno in Reno, Nevada and the Ramada Vacation Suites Resort at Indian Shores in Indian Shores, Florida and the Ramada Vacation Suites Resort at White Sands in Honolulu, Hawaii and to make certain other conforming amendments to the provisions contained therein. Because the resort properties consisting of the Brigantine Inn Resort Club and Brigantine Villas in Brigantine, New Jersey are owned by Brigantine Preferred Properties, Inc., this First Amendment to General Loan and Security Agreement (Receivable Loan Facility) will also evidence the assumption of all Obligations due from Steamboat Suites, Inc. and Preferred Equities Corporation as an additional Obligor. 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 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 -------- 2 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. II. AMENDMENTS ---------- A. Definitions. 1. The parties hereto mutually agree that the definition of "Association and Associations" contained in Section 1.1 of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: Association and Associations -- means collectively or individually, as appropriate, the Suites at Steamboat Owners' Association, a Colorado nonprofit corporation, or any successor association thereto as provided in the Timeshare Documents relating to the Steamboat Resort, the Hilltop Resort Owners' Association, Inc., a Colorado nonprofit corporation, or any successor association thereto as provided in the Timeshare Documents relating to the Hilltop Resort, the Ramada Vacation Suites at Brigantine Inn Resort Club and Brigantine Villas Owners Association, or any successor association thereto as provided in the Timeshare Documents relating to the Brigantine Beach Club Resort, the Grand Flamingo Suites, Villas, Towers and Winnick Owners Associations, or any successor associations thereto as provided in the Timeshare Documents relating to the Grand Flamingo Resorts, the Ramada Vacation Suites Resort at Reno Owners Association, or any successor association thereto as provided in the Timeshare Documents relating to the Reno Spa Resort, the Ramada Vacation Suites Resort at Indian Shores Owners Association, or any successor association thereto as provided in the Timeshare Documents relating to the Indian Shores and the Ramada Vacation Suites Resort at White Sands Owners Association, or any successor association thereto as provided in the Timeshare Documents relating to the White Sands Resort. 2. The parties hereto mutually agree that the definition of "Building" contained in Section 1.1 of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: Building -- means Building A and/or Building B, Building I and/or any other residential buildings of the Resorts consisting of residential units as provided for under the Declarations. 3. The parties hereto mutually agree that the definition of "Debtor" contained in Section 1.1 of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: Debtor - means, collectively or individually as the context requires, and on a joint and several basis, each of Preferred Equities Corporation, Steamboat Suites, Inc. and/or 3 Brigantine Preferred Properties, Inc. 4. The parties hereto mutually agree that the definition of "Declarations" contained in Section 1.1 of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: Declaration or Declarations -- means collectively and individually the Declarations of Condominium and Timeshare applicable to each of the Resorts. 5. The parties hereto mutually agree that the definition of "Declarant" contained in Section 1.1 of the Existing Agreement is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: Declarant -- the status of the Debtor as the declarant under applicable law and under the respective Declaration and the Articles of Incorporation and By-Laws of the respective Associations. 6. The parties hereto mutually agree to add a new definition to Section 1.1 of Inventory Facility to read as follows: Inventory Facility - The Dorfinco Corporation loan to Preferred Equities Corporation of up to $3,400,000 pursuant to a General Loan and Security Agreement (Inventory Loan Facility-I) of August 12, 1998 and the Textron Financial Corporation loan to Preferred Equities Corporation and Steamboat Suites, Inc. of up to $8,400,000 pursuant to a General Loan and Security Agreement (Inventory Loan Facility-II) of December 17, 1999 and the Textron Financial Corporation loan to Preferred Equities Corporation and Brigantine Preferred Properties, Inc. of up to $3,700,000 pursuant to a General Loan and Security Agreement (Inventory Loan Facility-III). 7. The parties hereto mutually agree that the definition of "Loan" contained in Section 1.1 of the Existing Agreement is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: Loan -- means the Receivables Facility and the Inventory Facility. 8. The parties hereto mutually agree that the definition of "Obligations" contained in Section 1.1 of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: Obligations -- means all sums now or hereafter loaned, advanced or incurred by the Lender or Dorfinco Corporation to or on behalf of the Debtor under this Agreement, the Inventory Facility, the Receivables Facility or any other Security Document (including, without limitation, accrued and unpaid interest, unpaid prepayment premium and Loan Costs) and the full, prompt and complete performance of all obligations owed by, or undertakings or indemnities of, Debtor arising hereunder or thereunder. 4 9. The parties hereto mutually agree that the definition of "PEC Obligations" contained in Section 1.1 of the Existing GLSA is hereby deleted in its entirety. 10. The parties hereto mutually agree that the definition of "Pledged Note Receivable Deed of Trust" contained in Section 1.1 of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: Pledged Note Receivable Deed of Trust -- with respect to any Pledged Note Receivable financing the purchase of a Timeshare Interval means a deed of trust or mortgage as the case may be, in form and substance reasonably acceptable to the Lender, (a) which deed of trust or mortgage shall have created a first priority Lien in and to such Timeshare Interval, (b) which deed of trust or mortgage shall have been duly recorded (and all fees and taxes in connection therewith paid by the Debtor) in the appropriate land records, (c) the original of which deed of trust or mortgage, which shall contain an appropriate official acknowledgement of its due recordation in the appropriate local land records, shall have been delivered to the Lender by the Debtor, provided that if such original deed of trust or mortgage has been delivered for recordation but has not yet been returned to the Debtor, the Debtor shall deliver to the Lender a copy of such original deed of trust or mortgage, certified by the Debtor to be a true copy, together with a certificate of the Debtor certifying that such original deed of trust or mortgage has been delivered for recordation, provided, further, that the Debtor shall deliver to the Lender the original deed of trust or mortgage containing an official acknowledgement of its due recordation within 60 days of the purchase of the related Timeshare Interval, (d) which deed of trust or mortgage shall have been assigned to the Lender by the Debtor pursuant to an assignment, in form and substance reasonably acceptable to the Lender (and such assignment shall have been duly recorded {and all fees and taxes in connection therewith paid by the Debtor} in the appropriate land records) and (e) in respect of which deed of trust or mortgage a mortgagee's title insurance policy shall have been issued by a title insurance company acceptable to the Lender and delivered to the Lender (each such mortgagee's title insurance policy shall be in form and substance reasonably satisfactory to the Lender and its counsel {all exceptions thereto, other than Permitted Exceptions, being subject to the approval of the Lender and its counsel} and shall name the Lender, by way of an endorsement thereto {which endorsement shall have been delivered to the Lender}, as the insured party thereon, and the amount of coverage provided by each such mortgagee's title insurance policy shall not be less than the principal amount of such Pledged Note Receivable. 11. The parties hereto mutually agree that the definition of "Receivable Borrowing Base" contained in Section 1.1 of the Existing GLSA 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) the remainder of (i) $27,500,000 minus (ii) the principal amount of the Obligations outstanding under the Inventory Facility minus (iii) Obligations outstanding under the Dorfinco Corporation First Amended and Restated General Loan and Security 5 Agreement dated as of June 30, 2001 with Preferred and Colorado Land and Grazing Corp., provided however such remainder shall not exceed $15,000,000; and (b) balances of all Eligible Notes Receivable outstanding at such time plus (ii) 90% of the aggregate of the unpaid principal balances of all Eligible Notes Receivable in respect of which at least three or more scheduled monthly installment payment shall have been made. 12. The parties hereto mutually agree to add a new definition to Section 1.1 of Receivable Facility to read as follows: Receivable Facility -- The Dorfinco Corporation loan to Preferred Equities and Colorado Land and Grazing Corp. of up to $10,000,000 pursuant to a First Amended and Restated General Loan and Security Agreement of June 30, 2001 and the Textron Financial Corporation loan to Preferred Equities and Steamboat Suites, Inc. of up to $15,000,000 pursuant to a General Loan and Security Agreement (Receivable Loan Facility) of December 17, 1999. 13. The parties hereto mutually agree that the definition of "Release Fee" contained in Section 1.1 of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: Release Fee - as appropriate for the Unit being financed, as defined in the Inventory Loan Agreement or in the Preferred Equities Corporation and Brigantine Preferred Properties, Inc. General Loan and Security Agreement (Inventory Loan Facility-III). 14. The parties hereto mutually agree that the definition of "Release Price" contained in Section 1.1 of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: Release Price -- means, with respect to any Unsold Inventory Timeshare Interval, $3,075 for an interval in the Steamboat Resort or the Hilltop Resort or $1,350 in the case of an interval in any other Resort. 15. The parties hereto mutually agree that the definition of "Resort or Resorts" contained in Section 1.1 of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: Resort or Resorts -- collectively and individually, as applicable, means and includes without limitation, all of the currently existing and hereafter created buildings, Units, Timeshare Intervals, Common Amenities, and improvements of every nature now or hereafter situated on or serving the Hilltop Resort, the Steamboat Resort, the Ramada Vacation Suites at Brigantine Beach Resort (consisting of Brigantine Inn Resort Club and Brigantine Villas in Brigantine, New Jersey and the Ramada Vacation Suites Resort at 6 Las Vegas consisting of Grand Flamingo Terraces and Grand Flamingo Towers and Grand Flamingo Villas and Grand Flamingo Winnick, Las Vegas, Nevada and The Ramada Vacation Suites Resort at Reno, Reno, Nevada and the Ramada Vacation Suites Resort at Indian Shores, Indian Shores, Florida and the Ramada Vacation Suites Resort at White Sands, Honolulu, Hawaii. 16. The parties hereto mutually agree that the definition of "Unsold Inventory Timeshare Interval" contained in Section 1.1 of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: Unsold Inventory Timeshare Interval -- means, at any time, any Timeshare Interval arising out of a Unit, which Timeshare Interval shall, as at such time, not have been released from the Lien of any Deed of Trust in favor of Lender to which such Timeshare Interval was subjected under the Inventory Facility. B. Terms, Conditions and Covenants. 1. The parties hereto mutually agree that Section 2.1(b) of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: 2.1(b) Lending Limit: Debtor acknowledges, agrees and confirms that the obligations of Lender after giving effect to all participations in connection with the Loan shall be limited to a maximum aggregate principal amount of $20,000,000. Debtor further acknowledges, agrees and confirms that the obligation of Lender to make the full amount of the Receivable Loan shall be subject to Lender participating $7,500,000 of the Receivable Loan. 2. The parties hereto mutually agree that the 4/th/ paragraph of Section 2.2(b) of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: The Debtor and the Lender intend to comply at all times with applicable usury laws. All agreements between the Debtor and the Lender, 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 any Note or otherwise, shall the interest contracted for, charged, received, paid or agreed to be paid to the Lender exceed the maximum amount permissible under applicable law, or in the absence of a maximum allowable rate under applicable law, then, 45% per annum (the "Maximum Rate"). The Lender 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 Lender which exempts the Lender from any limit upon the rate of interest it may charge or grants to the Lender 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 Lender in excess of the Maximum Rate, the interest payable to the Lender shall be reduced to the Maximum Rate; and if from any 7 circumstance the Lender 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 Inventory Loan and the Receivable Loan and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal of the Loan, such excess shall be refunded to the Debtor. All interest paid or agreed to be paid to the Lender 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 Inventory Loan and the Receivable Loan for such full period shall not exceed the Maximum Rate. The Debtor agrees that in determining whether or not any interest payment under the Security 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 Lender hereby expressly disclaims any intent to contract for, charge or receive interest in an amount which exceeds the Maximum Rate. The provisions of this Agreement, the Notes, and all other Security Documents are hereby modified to the extent necessary to conform with the limitations and provisions of this paragraph, and this paragraph shall govern over all other provisions in any document or agreement now or hereafter existing. This paragraph shall never be superseded or waived unless there is a written document executed by the Lender and the Debtor, expressly declaring the usury limitation set forth in this paragraph to be null and void, and no other method or language shall be effective to supersede or waive this paragraph. 3. The parties hereto mutually agree that Section 3.3 of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: 3.3 Financing Statements. The Debtor agrees, at its own expense, to execute the financing statements required by the Colorado Uniform Commercial Code together with any and all other instruments or documents and take such other action, including delivery of such instruments and documents, as may be necessary to perfect, and to continue the perfection of, the Lender's security interest and Liens in the Collateral and, unless prohibited by law, the Debtor hereby authorizes the Lender to execute and file any such financing statement on the Debtor's behalf. In those jurisdictions where, Revised Article 9 is adopted and in effect, Secured Party may file such financing statements, continuation statements or amendments without the signature of the Debtor based upon Debtor's execution of this Agreement as an "Authenticated Document". The parties agree that a legible carbon, photographic or other reproduction of this Agreement or of a financing statement shall be sufficient as a financing statement. 4. The parties hereto mutually agree that Section 3.4 of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: 3.4 Location of Collateral; Books and Records. 8 All tangible Collateral (other than Collateral delivered to the Lender and other than certain Books and Records which may be kept on Debtors' premises in Las Vegas, Nevada) which is personal Property is to remain, at all times, on the premises of the Debtor in Steamboat Springs, Colorado, Las Vegas, Nevada, Reno, Nevada, Brigantine, New Jersey, Indian Shores, Florida or Honolulu, Hawaii as applicable to each Resort and the Debtor represents and warrants to the Lender that all of the currently existing tangible Collateral is now located there, and the Debtor will not transfer the Collateral from such premises to other locations without the prior written approval of the Lender. The Debtor shall, upon receipt of a written request therefor from the Lender, deliver to the Lender, then current copies of all computer tapes, disks, software and micro-fiche records constituting, in whole or in part, the Books and Records. 5. The parties hereto mutually agree that Section 3.5(b) of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: 3.5(b) Condominium/Timeshare Insurance Proceeds. The Lender acknowledges that application of all or a portion of any proceeds of insurance may be subject to the applicable State Condominium Ownership Act, the applicable State Common Interest Ownership Act and the terms and provisions of the Declaration, and the foregoing requirements in this Section 3.5 shall be subject thereto (unless such laws may be modified by agreement and have been so modified). For so long as the Inventory Loan shall remain outstanding, any proceeds of insurance payable by the Association, any manager retained by it or by the Declarant in respect of any Unit or Timeshare Interval to the Debtor under the Declaration, the Association's Articles of Incorporation or By-Laws or under applicable Colorado law shall be promptly paid and/or turned over to the Lender as proceeds of the Collateral and applied either in accordance with applicable Colorado law or, if no such requirement exists, to the prepayment of the Loan without prepayment premium (after deducting therefrom all out-of- pocket costs and expenses of the Lender in respect thereof), first, as provided in the Inventory Loan Agreement and second, as provided in Section 2.3(c) hereof. Without limiting the immediately preceding sentence, any proceeds of insurance in respect of any Unit or Timeshare Interval received by the Debtor or received by the Debtor as Declarant or received by the Association at a time during which (i) the Debtor (as Debtor or as Declarant) or any Affiliate shall be the only owner or owners of Units or Timeshare Intervals, or (ii) the insurance provisions of the Declaration shall have been suspended, shall be promptly paid and/or turned over to the Lender (and the Debtor, as Debtor or as Declarant, shall cause such payment and/or turnover) as proceeds of the Collateral and applied (after deducting therefrom all out- of-pocket costs and expenses of the Lender in respect thereof) first, as provided in the Inventory Loan Agreement and second, as provided in Section 2.3(c) hereof. 9 6. The parties hereto mutually agree that the first sentence of subsection (c) of Section 3.5 of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: Subject to the terms, provisions and requirements of the Declaration and any applicable state law and to the extent that clause (b) above shall not be applicable, the Lender is hereby irrevocably authorized and appointed the agent and attorney-in-fact of the Debtor (with full right of substitution) to adjust or compromise any insured loss in respect of the Resort and to collect and receive the proceeds from any such policy in respect of any such loss, which appointment shall be deemed to be coupled with an interest. 7. The parties hereto mutually agree that Section 3.5(c)(i) of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: 3.5(c)(i) if an Event of Default shall then exist, apply such net insurance proceeds first, as provided in the Inventory Loan Agreement and second, as provided in Section 2.3(c) hereof; 8. The parties hereto mutually agree that Section 3.5(c)(ii)(B) of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: 3.5(c)(ii)(B) the Lender shall apply such net insurance proceeds first, as provided in the Inventory Loan Agreement and second, as provided in Section 2.3(c) of this Agreement, if the Lender shall not have received the written confirmation referred to in sub-clause (A)(1) above within the time period required therefor or if the Debtor shall have informed the Lender, in writing, of its intention not to rebuild, repair and restore the Resort or the Lender shall have determined the same at any time during the rebuilding, repairing or restoration process referred to in clause (A) above; 9. The parties hereto mutually agree that Section 3.5(c)(iv) of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: 3.5(c)(iv) if no Event of Default shall then exist and if such loss shall be in respect of all, or substantially all, of the Resort, apply such net insurance proceeds first, as provided in the Inventory Loan Agreement and second, as provided in Section 2.3(c) of this Agreement. 10. The parties hereto mutually agree that the last paragraph of Section 3.5 of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: Any payment of insurance proceeds over to the Debtor, as provided above, shall not affect the Lien of this Agreement or any other Security Document as security for the Obligations. Notwithstanding any such loss, the Debtor shall continue to pay interest and 10 principal at the applicable rate and amounts and at the applicable times provided in this Agreement and in the Notes. Although the Lender intends to use reasonable efforts to collect such insurance proceeds in a timely fashion, the Lender shall not be responsible for any failure to collect any proceeds due under the terms of any insurance policy, regardless of the cause of such failure. Any balance of such net insurance proceeds remaining after the aforesaid application thereof shall, if no Event of Default shall then exist, belong, or be paid to, as the case may be, the Debtor, provided that, if an Event of Default shall then exist, the Debtor shall promptly deliver any such balance to the Lender and such balance shall be applied first, as provided in Section 2.4(b) hereof and second, as provided in Section 2.3(c) hereof. 11. The parties hereto mutually agree that Subsection (a) of Section 3.6 of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: (a) Condominium/Timeshare Condemnation Compensation. Any compensation, awards, damages, claims, rights of action, proceeds, payment and other relief (collectively, "Condemnation Compensation") of, or on account of, any damage or taking of all or any part of the Resort in connection with any condemnation proceedings or any exercise of the power of eminent domain (or any conveyance in lieu of or under threat of any such taking), including, without limitation, any such Condemnation Compensation for change of grade of streets or any other injury to or decrease in the value of all or any part of the Resort payable by the Association, any manager retained by it or by the Declarant in respect of any Unit or Timeshare Interval to the Debtor under the Declaration, the Association's Articles of Incorporation or By-Laws or under any applicable state law shall be promptly paid and/or turned over to the Lender as proceeds of the Collateral and applied to first, as provided in the Inventory Loan Agreement and second, as provided in Section 2.3(c) hereof. 12. The parties hereto mutually agree that the last paragraph of Subsection (b) of Section 3.6 of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: shall be promptly paid and/or turned over to the Lender (and the Debtor, as Debtor or as Declarant, shall cause such payment and/or turnover) as proceeds of the Collateral and applied first, as provided in the Inventory Loan Agreement and second, as provided in Section 2.3(c) hereof. 13. The parties hereto mutually agree that the first paragraph of Subsection (c) of Section 3.6 of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: (c) Miscellaneous Application of Condemnation Compensation. Subject to the requirements, terms and provisions of the Declaration and any applicable state law and to the extent that clause (b) above shall not be applicable, the Lender shall be entitled to all Condemnation Compensation of, or on account of, any damage or taking of all or 11 any part of the Resort in connection with any condemnation proceedings or any exercise of the power of eminent domain (or any conveyance in lieu of or under threat of any such taking), including, without limitation, any such Condemnation Compensation for change of grade of streets or any other injury to or decrease in the value of all or any part of the Resort. 12 14. The parties hereto mutually agree that Subsection (c)(i) of Section 3.6 of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: 3.6(c)(i) if an Event of Default shall then exist, apply such net Condemnation Compensation first, as provided in the Inventory Loan Agreement and second, as provided in Section 2.3(c) of this Agreement; 15. The parties hereto mutually agree that Subsection (c)(ii)(B) of Section 3.6 of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: 3.6(c)(ii)(B)the Lender shall apply such Condemnation Compensation first, as provided in the Inventory Loan Agreement and second, as provided in Section 2.3(c) of this Agreement, if Lender (or its agent) shall have not received the written confirmation referred to in sub- clause (A)(1) above within the time period required therefor or if the Debtor shall have informed the Lender, in writing, of its intention not to rebuild, repair and restore the Resort or the Lender shall have determined the same at any time during the rebuilding, repairing or restoration process referred to in clause (A) above; 16. The parties hereto mutually agree that Subsection (c)(iv) of Section 3.6 of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: 3.6(c)(iv) if no Event of Default shall then exist and if such damage or taking loss shall be in respect of all, or substantially all, of the Resort or the Resort is no longer economically viable or no longer useable to the same extent and in the same manner after such damage or taking as it was immediately prior to such damage or taking, apply such net Condemnation Compensation first, as provided in the Inventory Loan Agreement and second, as provided in Section 2.3(c) of this Agreement. 17. The parties hereto mutually agree that the last paragraph of Subsection (c) of Section 3.6 of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: The Lender may release such net Condemnation Compensation to the Debtor without affecting the Lien of this Agreement or any other Security Document as security for the Obligations. Any balance of such net Condemnation Compensation remaining after the aforesaid application thereof shall, if no Event of Default shall then exist, belong to, or be paid to, as the case may be, the Debtor, provided that, if an Event of Default shall then exist, the Debtor shall promptly deliver any such balance to the Lender and such balance shall be applied first, as provided in the Inventory Loan Agreement and second, as provided in Section 2.3(c) hereof. Notwithstanding any such condemnation, the Debtor shall continue to pay interest and principal at the applicable rate and amounts and at the applicable times provided in this Agreement and in the Notes. Although the 13 Lender intends to use reasonable efforts to collect such Condemnation Compensation, in a timely fashion, the Lender shall not be responsible for any failure to collect such Condemnation Compensation, regardless of the cause of such failure. 18. The parties hereto mutually agree that A new Section 3.15 is added to the Existing GLSA to read as follows: 3.15 Security Agreement Transition Provisions Addressing Revised Article 9 3.15(a) Concerning Revised Article 9 of the Uniform Commercial Code. ----------------------------------------------------------- The parties acknowledge and agree to the following provisions of this Agreement in anticipation of the application, in one or more jurisdictions to the transactions contemplated hereby, of the revised Article 9 of the Uniform Commercial Code in the form or substantially in the form approved by the American Law Institute and the National Conference of Commissioners on Uniform State Law and contained in the 1999 Official Text of the Uniform Commercial Code ("Revised Article 9"). 3.15(b) Attachment. In applying the law of any jurisdiction in which ---------- Revised Article 9 is in effect, the Collateral shall include all of the assets of the Debtor set forth in Section 3.1 above, whether or not within the scope of Revised Article 9. The Collateral shall include, without limitation, the following categories of assets as defined in Revised Article 9: goods (including inventory, equipment and any accessions thereto) located in or on any Lot encumbered by a Pledged Deed of Trust, instruments (including promissory notes), documents, accounts, chattel paper (whether tangible or electronic), deposit accounts, letter-of-credit rights (whether or not the letter of credit is evidenced by a writing), commercial tort claims, securities and all other investment property, general intangibles (including payment intangibles and software), supporting obligations and any and all proceeds of any thereof, wherever located, whether now owned and hereafter acquired. If the Debtor shall at any time, whether or not Revised Article 9 is in effect in any particular jurisdiction, acquire a commercial tort claim, as defined in Revised Article 9, the Debtor shall immediately notify the Secured Party in writing signed by the Debtor of the brief details thereof and grant the Secured Party in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance satisfactory to the Secured Party. 3.15(c) Additional Grant of Security Interest in Specified Property. ----------------------------------------------------------- Debtor acknowledges and agrees that in anticipation of the possible application, in one or more jurisdictions of the revised Article 9 of the Uniform Commercial Code in the form or substantially in the form approved by the American Law Institute and the National Conference of Commissioners on Uniform State Law and contained in the 1999 Official Text of the Uniform Commercial Code ("Revised Article 9") that the Debtor, in addition to the items previously described as constituting Collateral hereby gives, grants, bargains, assigns and confirms that it has granted a security interest in the following now owned or hereafter acquired and wherever located properties, assets and rights of the Debtor: All other goods, rights to payment of money, insurance refund claims and all other 14 insurance claims and proceeds, tort claims, electronic chattel paper, securities and other investment property, rights to proceeds of letters of credit, letter of credit rights, supporting obligations of every nature, all tax refund claims, license fees, rights to sue and recover for past infringement of patents, trademarks and copyrights, computer programs, computer software, engineering drawings, customer lists, goodwill and all licenses, permits, agreements of any kind or nature pursuant to which (i) the Debtor operates or has authority to operate, (ii) the Debtor possesses, uses or has authority to possess or use property (whether tangible or intangible) of others, or (iii) others possess, use or have authority to possess or use property (whether tangible or intangible) of the Debtor, and all recorded data of any kind or nature, regardless of the medium of recording, including without limitation, all software, writings, plans, specifications and schematics. Debtor acknowledges and agrees that, with respect to any term used herein that is defined in either (a) Article 9 of the Uniform Commercial Code as in force in the jurisdiction in which this financing statement was signed by the Debtor at the time that it was signed or (b) Article 9 as in force at any relevant time in the jurisdiction in which this financing statement is filed, the meaning to be ascribed thereto with respect to any particular item of property shall be that under the more encompassing of the two definitions. The Debtor further acknowledges and agrees that the grant of Collateral in this Loan and Security Agreement covers, and is intended to cover, all assets of the Debtor. 3.15(d) Perfection by Filing. The Secured Party may at any time and -------------------- from time to time, pursuant to the provisions of Section 10.8 hereof, file financing statements, continuation statements and amendments thereto that describe the Collateral as all assets of the Debtor or words of similar effect and which contain any other information required by Part 5 of Revised Article 9 for the sufficiency or filing office acceptance of any financing statement, continuation statement or amendment, including whether the Debtor is an organization, the type of organization and any organization identification number issued to the Debtor. The Debtor agrees to furnish any such information to the Secured Party promptly upon request. Any such financing statements, continuation statements or amendment may be signed by the Secured Party on behalf of the Debtor, as provided in Section 10.8 hereof, and may be filed at any time in any jurisdiction whether or not Revised Article 9 is then in effect in that jurisdiction. 3.15(e) Other Perfection, etc. The Debtor shall at any time and from --------------------- time to time, whether or not Revised Article 9 is in effect in any particular jurisdiction, take such steps as the Secured Party may reasonably request for the Secured Party (a) to obtain an acknowledgment, in form and substance satisfactory to the Secured Party, of any bailee having possession of any of the Collateral that the bailee holds such Collateral for the Secured Party, (b) to obtain "control" of any investment property, deposit accounts, letter-of-credit rights or electronic chattel paper (as such terms are defined in Revised Article 9 with corresponding provisions in Rev. (S)(S) 9-104, 9-105, 9-106 and 9-107 relating to what constitutes "control" for such items of Collateral), with any agreements establishing control to be in form and substance satisfactory to the Secured Party, and (c) 15 otherwise to insure the continued perfection and priority of the Secured Party's security interest in any of the Collateral and of the preservation of its rights therein, whether in anticipation and following the effectiveness of Revised Article 9 in any jurisdiction. 16 3.15(f) Other Provisions. In applying the law of any jurisdiction in ---------------- which Revised Article 9 is in effect, the following references to sections of existing Article 9 of that jurisdiction shall be to the Revised Article 9 Section of that jurisdiction as indicated below: - -------------------------------------------------------------------------------- Existing Article 9 Revised Article 9 - -------------------------------------------------------------------------------- (S) 9-103(3) Rev. (S) 9-102(a)(34) - -------------------------------------------------------------------------------- (S) 9-207 Rev. (S) 9-207 - -------------------------------------------------------------------------------- (S)(S) 8-106 and 9-115 (1994) Rev. (S)(S) 8-106 and 9-106 - -------------------------------------------------------------------------------- (S) 9-504(1)(c) Rev. (S)(S) 9-608(a)(1)(C) and 9-615(a)(3) - -------------------------------------------------------------------------------- 3.15(g) Savings Clause. Nothing contained in this Section shall be -------------- construed to narrow the scope of the Secured Party's security interest in any of the Collateral or the perfection or priority thereof or to impair or otherwise limit any of the rights, powers, privileges or remedies of the Secured Party hereunder except (and then only to the extent) mandated by Revised Article 9 to the extent then applicable. 19. The parties hereto mutually agree that the penultimate sentence of Section 4.7 of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: The Debtor shall cause all asbestos located in the Resorts to be removed by a duly licensed asbestos abatement contractor, all in accordance with applicable federal and state law. 20. The parties hereto mutually agree that Subsection (e) of Section 4.22 of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: (e) Sale of Timeshare Intervals. The sale, offering of sale, and financing of Timeshare Intervals (i) do not constitute the sale, or the offering of sale, of Securities subject to the registration requirements of the Securities Act of 1933, as amended, or the blue-sky securities laws of the States of Colorado, California, Nevada, New Jersey , Florida, Texas or Hawaii, (ii) are only done in the States of Colorado, California, Nevada, New Jersey , Florida, Hawaii and/or the State of Texas and will only be done in such jurisdictions where the Debtor has made all necessary filings and obtained all necessary permits to do so (and no solicitation and no advertising in respect of the sale of Timeshare Intervals that would, in either case, be in violation of applicable law is done in any other State or Province), (iii) do not violate any applicable federal, state or local consumer credit, sale rescission or usury statute, including, without limitation, any such statute of any state in which an obligor of a Note Receivable may reside, and (iv) do not violate in any material respect any other applicable federal, state or local law, statute or regulation. Without limiting the generality of the immediately preceding sentence, the Debtor has, to the extent required by its activities and businesses, fully complied with (1) all of the applicable provisions of (A) the Consumer Credit Protection Act, as amended, 17 (B) the Federal Trade Commission Act, as amended, (C) all rules and regulations promulgated under the foregoing Acts, (D) the Interstate Land Sales Full Disclosure Act and the rules and regulations promulgated thereunder, (E) on and after July 1, 2001, to the extent applicable, the provisions of The Financial Services Modernization Act (Gramm-Leach-Bliley Act) and (F) all other applicable federal statutes and the rules and regulations promulgated thereunder pertaining to the operation of the Resort and (2) all of the applicable provisions of any law of any state (and the rules and regulations promulgated thereunder) or municipality relating to the operation of the Resort, including, without limitation, the laws, rules and regulations of the State of Colorado, the County of Routt, Colorado and the Town of Steamboat Springs, Colorado and all other applicable laws, rules and regulations of the States of Colorado, Nevada, New Jersey , Florida or Hawaii and all applicable county and local recording authorities. The sale and offering of sale of Timeshare Intervals is not effected by any home solicitations. 21. The parties hereto mutually agree that Section 6.1 of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: 6.1 Requests for Advances. Each request for a Receivables Advance (a) shall be in writing, (b) shall designate the principal amount of the Receivables Advance requested, the Subsequent Receivables Advance Date on which such Receivables Advance is to be made, and the account to which the proceeds of such requested Receivables Advance are to be transferred, (c) shall have been delivered to the office of the Lender at least 10 Business Days in advance of the Subsequent Receivables Advance Date in respect of such requested Receivables Advance, (d) shall be substantially in the form of Exhibit P attached to the Existing GLSA and (e) shall aggregate by Resort the listing of Notes Receivable and Deeds of Trust to be pledged to Lender. 22. The parties hereto mutually agree that Section 6.2 of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: 6.1 Pledged Notes Receivable. With respect to any Receivables Advance in respect of Notes Receivable, not less than 5 18 Business Days prior to such Subsequent Receivables Advance Date, the Debtor shall have: (a) delivered to the Lender a list by Resort of all Notes Receivable which are to be the subject of such requested Receivables Advance, together with such additional information by Resort concerning such Notes Receivable, the obligors of such Notes Receivable and the Pledged Note Receivable Deeds of Trust securing the same as the Lender may reasonably require, together with detailed computations showing borrowing availability as of such Subsequent Receivables Advance Date under the Receivables Borrowing Base; (b) delivered to the Lender, grouped in packages by Resort, the original of each such Note Receivable (duly endorsed to the order of the Lender) referred to in such list, together with the original Pledged Note Receivable Deed of Trust (bearing a recordation acknowledgement from the Office of the Clerk and Recorder for Routt County, Colorado, Atlantic County Recorder, New Jersey, Pinnellas County Recorder, Florida, Clark County Recorder, Nevada, Washoe County Recorder, Nevada or the Honolulu Recorder, Hawaii, as applicable) referred to in such list, and copies of all other related Timeshare Instruments in respect of each such Note Receivable, provided that, if the original Pledged Note Receivable Deed of Trust bearing a recordation acknowledgement is not then available, the Debtor may substitute therefor a copy of such Pledged Note Receivable Deed of Trust showing the recordation of the same or if such copy with such recordation noted thereon is not then available, the Debtor may deliver a copy of such Pledged Note Receivable Deed of Trust together with a certificate of an officer of the Debtor certifying the recordation information in respect of such Pledged Note Receivable Deed of Trust together with a receipt showing the payment of all recording fees in respect thereof; the Debtor agrees to promptly deliver the original thereof to the Lender upon its receipt thereof; (c) delivered to the Lender by a separate instrument for each Resort (substantially in the form of Exhibit Q to the Existing GLSA) assigning to the Lender all of the Debtor's right, title and interest in and to each such Note Receivable and the related Pledged Note Receivable Deed of Trust; (d) delivered to the Lender all filings of Uniform Commercial Code financing statements and all other filings and shall have taken all other actions necessary to perfect the Lender's security interests in and to the aforesaid Notes Receivable and such financing statements and other filings shall have been recorded and confirmation thereof received; and (e) delivered to the Lender either (i) a separate mortgagee's title insurance policy insuring the Lien of each of the Pledged Note Receivable Deeds of Trust in the amount of the Note Receivable (referred to in the aforesaid list) secured thereby outstanding on the Subsequent Receivables Advance Date or (ii) a blanket mortgagee's title insurance policy (in the case of the first Receivables Advance) or an endorsement to an existing blanket mortgagee's title insurance policy (in the case of any subsequent 19 Receivables Advance), in either case, in respect of the Pledged Note Receivable Deeds of Trust securing the Notes Receivable referred to in the aforesaid list (which blanket policy and/or endorsement are more particularly described below) and, in either case, showing that such Pledged Note Receivable Deeds of Trust have been assigned as collateral to Lender. The Pledged Note Receivable Deeds of Trust and the assignments thereof to the Lender shall each have been duly recorded in the Office of the Clerk and Recorder for Routt County, Colorado, Atlantic County Recorder, New Jersey, Pinnellas County Recorder, Florida, Clark County Recorder, Nevada, Washoe County Recorder, Nevada or the Honolulu Recorder, Hawaii, as applicable in order to constitute the same a valid first Lien on the Timeshare Interval encumbered thereby and an effective assignment of the same to the Lender. The aforesaid mortgagee's title insurance policies shall be in form and substance satisfactory to the Lender and shall be issued by Chicago Title Insurance Company (or such other title insurance company as shall be satisfactory to the Lender) and shall name the Lender, by way of an endorsement thereto (which endorsement shall have been delivered to the Lender), as the insured party thereon; as an alternative to the aforesaid mortgagee's title insurance policies in respect of each Pledged Note Receivable Deed of Trust, the Debtor may maintain a blanket mortgagee's title insurance policy insuring the Lender and, by way of an endorsement thereto, add the Pledged Note Receivable Deeds of Trust to the coverage thereof, increase the amount of coverage thereunder to include the Notes Receivable secured by the Pledged Note Receivable Deeds of Trust and make such changes effective as of such Subsequent Receivables Advance Date, provided that (A) such blanket mortgagee's title insurance policy shall be in form and substance satisfactory to the Lender and shall be issued by Chicago Title Insurance Company (or such other title insurance company as shall be satisfactory to the Lender) and shall name the Lender as the insured party thereon (and no exceptions or exclusions not satisfactory to the Lender shall be included therein) and (B) such endorsement thereto shall be satisfactory to the Lender in both form and substance (and no exceptions or exclusions not satisfactory to the Lender shall be included therein, provided that, with respect to any such endorsement, any such exceptions or exclusions previously accepted in respect of such blanket mortgagee's title insurance policy shall be deemed satisfactory to the Lender). The Title Insurance Policy {Blanket} shall have been "brought down to date" and shall otherwise be acceptable to the Lender. The contemporaneous funding of the requested Receivables Advance and delivery of the aforesaid Collateral and title insurance endorsement and recording of the original Pledged Note Receivable Deeds of Trust and assignments thereof shall be effected by way of an escrow arrangement with Chicago Title Insurance Company (or such other title insurance company as shall be acceptable to the Lender), the form and substance of which shall be satisfactory to the Lender. 23. The parties hereto mutually agree that the second, third and fourth sub paragraphs of subsection (c) of Section 8.2 of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: 20 Second, towards the payment of accrued and unpaid interest then due and payable, if any, at the Default Rate in respect of the Receivables Loan or the Inventory Loan, Third, towards the payment of all other accrued and unpaid interest, if any, then due and payable in respect of the Receivables Loan or the Inventory Loan, Fourth, to the payment of the principal amount of the Receivables Loan or the Inventory Loan (and any prepayment premium payable in respect thereof), and 24. The parties hereto mutually agree that subsection (d) of Section 8.2 of the Existing GLSA is hereby deleted in its entirety and in lieu thereof, the following provision is inserted: 8.2(d) Remedies Cumulative. All covenants, conditions, provisions, warranties, guaranties, indemnities and other undertakings of the Debtor contained in this Agreement, or in any document referred to herein or contained in any agreement supplementary hereto or in any schedule given to the Lender or contained in any other agreement between the Lender and the Debtor, heretofore, concurrently or hereafter entered into, including, without limitation, the Inventory Deed of Trust, shall be deemed cumulative to and not in derogation or substitution of any of the terms, covenants, conditions or agreements of the Debtor herein contained. The failure or delay of the Lender to exercise or enforce any rights, Liens, powers or remedies hereunder or under any of the aforesaid agreements or other documents or security or Collateral shall not operate as a waiver of such Liens, rights, powers and remedies, but all such Liens, rights, powers and remedies shall continue in full force and effect until the Receivable Loan and Inventory Loan and all other Obligations shall have been fully satisfied. All Liens, rights, powers and remedies herein provided for are cumulative and none are exclusive. 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. 2. Debtor acknowledges and agrees that the Notes, Agreement, Inventory Deed of Trust, assignment of Pledged Notes Receivable, Pledged Notes Receivable 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. 21 3. Debtor, and as applicable, Guarantor, 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, Guarantor) represents and warrants as follows: a. This Amendment 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 Guarantor, this Amendment is the legal, valid and binding obligation of Guarantor, 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). 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, or result in the creation of any lien, charge or encumbrance upon the Collateral, under any provision of law, or any indenture, agreement or instrument to which Debtor or Guarantor is a party or by which the Debtor or Guarantor may be bound or affected except for liens in favor of Lender and the Pledged Notes Receivable Deeds of Trust. 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 Guarantor have any defense, set-offs, claims, counterclaims or recoupments against Lender or with respect to the Loan. 3. Debtor and 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 Guarantor, the guaranteed Indebtedness defined in the Guaranty and as amended herein, are the valid, legally binding and enforceable obligations of Debtor, and Guarantor, respectively. Guarantor further agrees and affirms that the term "Debtor" as used in the Guaranty shall be and is hereby modified and amended to mean Debtor as defined herein. 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 July 31, 2001. a. Debtor shall pay Lender's counsel all reasonable attorney's fees and costs 22 incurred by such counsel in connection with the preparation of this Amendment and related documentation. b. Lender shall have received from Debtor fully executed original or executed counterpart originals of this Amendment. c. Except as provided in any certificates to the contrary, 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. d. 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. e. 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. f. Lender shall have received a certificate or certificates in form and substance satisfactory to it, dated as of the date hereof 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. g. Debtor shall deliver to Lender, and Lender shall have approved, by no later than July 31, 2001: 1. A certificate of current good standing for each Debtor, together with copies of any amendments to the certificate of incorporation or bylaws of each Debtor since last provided to Lender, certified to be true, correct and complete by the Debtor, its secretary or assistant secretary, or the Colorado, Nevada and New Jersey Secretary's of State as may be applicable; 2. 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; 3. A certificate of the secretary or assistant secretary of each 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 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; 23 4. 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 and the other documents, instruments and materials to be executed and delivered in connection herewith; 5. 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 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 6. A certificate of the secretary or assistant secretary of Guarantor certifying the incumbency of, and verifying the authenticity of signatures of, the officers of Guarantor authorized to sign this Amendment and the other documents, instruments and materials to be executed and delivered in connection herewith. h. 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 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 Lender fees and expenses required to be paid prior to or at the closing pursuant to this Amendment. V. GUARANTOR'S OBLIGATIONS ----------------------- 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 December 17, 1999 and remains liable with respect to the guaranteed Indebtedness as defined and provided in its Guaranty Agreement; 24 e. acknowledges and agrees that the guaranteed Indebtedness encompasses and apply to all Advances to Debtor (as Debtor is defined herein), 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 (as Debtor is defined herein) 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 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 date hereof and signed by the president or other authorized officer of Guarantor, certifying that the conditions specified in this Amendment have been fulfilled, and "bringing down" the representations and warranties contained in the Guaranty Agreement. VI. ASSUMPTION BY BRIGANTINE PREFERRED PROPERTIES, INC. --------------------------------------------------- Brigantine Preferred Properties, Inc. by its execution below hereby acknowledges and agrees that: a. it has reviewed this Amendment with counsel of it's choice, assumes the Obligations owing to Lender and agrees to be jointly and severally liable with Preferred Equities Corporation and Steamboat Suites, Inc. for the repayment of all sums due under the Loan and consents to the terms of this Amendment and the transactions provided for herein; b. it acknowledges and agrees that it receives material benefit and valuable consideration as a result of the transactions provided for herein or contemplated hereunder; c. it assumes all of the terms, provisions, agreements, conditions and undertakings contained in any of the Security Documents as modified herein and in full force and effect; d. it is fully aware of the financial and other conditions of Preferred Equities Corporation and Steamboat Suites, Inc. and is executing and delivering this Amendment based solely upon its own independent investigation and not upon any representation or statement of Lender; 25 e. it affirms all of the representations, warranties and covenants made in this Amendment as of this date; and f. it acknowledges that the agreements, consents and acknowledgments contained herein are a material inducement to Lender to enter into this Amendment, and that, but for the agreements as set forth herein, Lender would decline to enter into this Amendment. VII. 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. Guarantor is 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 Guarantor. 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, 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 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, GUARANTOR AND LENDER FURTHER WAIVE 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 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, 26 SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION. DEBTOR AND GUARANTOR ACKNOWLEDGE THAT THE PROVISIONS OF THIS SECTION ARE A MATERIAL INDUCEMENT TO LENDER'S ACCEPTANCE OF THIS AMENDMENT AND THE OTHER SECURITY DOCUMENTS. 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. 27 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:_________________________________ DEBTOR: PREFERRED EQUITIES CORPORATION By: DEBTOR: BRIGANTINE PREFERRED PROPERTIES, INC. By: LENDER: TEXTRON FINANCIAL CORPORATION _____________________________ By:_________________________________ _______________________________ on behalf of Lender ACKNOWLEDGED AND AGREED: GUARANTOR: MEGO FINANCIAL CORP. _____________________________ By:_________________________________ 28 CORPORATE ACKNOWLEDGMENT ------------------------ STATE OF NEVADA: COUNTY OF CLARK: On this, the ___ day of July 2001 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 NEVADA: COUNTY OF CLARK: On this, the ___ day of July 2001 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: 29 CORPORATE ACKNOWLEDGMENT ------------------------ STATE OF NEVADA: COUNTY OF CLARK: On this, the ___ day of July 2001 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 BRIGANTINE PREFERRED PROPERTIES, 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 NEVADA: COUNTY OF CLARK: On this, the ___ day of July 2001 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 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: 30 CORPORATE ACKNOWLEDGMENT ------------------------ STATE OF CONNECTICUT: COUNTY OF HARTFORD: On this, the ___ day of July 2001 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: 31 EX-10.233 5 dex10233.txt FIRST AMENDED AND RESTATED LOAN EXHIBIT 10.233 FIRST AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT ------------------------------------------------------ This FIRST AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT ("Agreement") is made and executed as of June ___, 2001, by and between PREFERRED EQUITIES CORPORATION, a Nevada corporation, having a business address of 4310 Paradise Road, Las Vegas, Nevada 89109 and COLORADO LAND AND GRAZING CORP., a Colorado corporation having a business address of 4310 Paradise Road, Las Vegas, Nevada 89109 (Individually and collectively hereinafter referred to as "Borrower"), MEGO FINANCIAL CORP., a New York corporation having a business address of 4310 Paradise Road, Las Vegas, Nevada 89109 ("Guarantor") and DORFINCO CORPORATION, a Delaware corporation, having a business and mailing address of 40 Westminster Street, P.O. Box 6687, Providence, Rhode Island 02940-6687 ("Lender"). WHEREAS, on July 31, 1991, Preferred Equities Corporation and Lender entered into a certain Loan and Security Agreement with (the "LSA"); and WHEREAS, by letter agreement dated January 8, 1992, Preferred Equities Corporation and Lender entered into an amendatory agreement pursuant to which Schedule 6.5(a) to the LSA was amended; and WHEREAS, on or about June 30, 1993, Preferred Equities Corporation, Guarantor and Lender entered into an amendatory agreement entitled Second Amendment to Loan and Security Agreement revising certain of the provisions of Sections 1, 2.1, 2.2, and 2.5 of the LSA, as amended; and WHEREAS, on or about August 23, 1994, Borrower, Guarantor and Lender entered into an amendatory agreement entitled Third Amendment and Assumption Agreement to Loan and Security Agreement and Assumption Agreement revising certain of the provisions of Sections 1.1, 2.2, 3.5, 4.1, 5.1, 6.1, 6.2, 6.5, 6.5, 7.1, 7.2, 12.1 and 12.3 of the LSA as amended; and WHEREAS, on or about September 30, 1995, Preferred Equities Corporation and Colorado Land and Grazing Corp acting together as Borrower, Guarantor and Lender entered into a Fourth Amendment to Loan and Security Agreement revising certain of the provisions of Section 1.1, 2.2 and 2.5 of the LSA, as amended; and WHEREAS, on or about November 29, 1996, Preferred Equities Corporation and Colorado Land and Grazing Corp acting together as Borrower, Guarantor and Lender entered into an amendatory agreement entitled Fifth Amendment to Loan and Security Agreement revising certain of the provisions of Sections 1.1 and 2.2 of the LSA, as amended; and WHEREAS, by letter agreement dated June 11, 1998, Preferred Equities Corporation and Colorado Land and Grazing Corp acting together as Borrower, Guarantor and Lender entered into an amendatory agreement pursuant to which Section 1.1(e) of the LSA, as amended was amended; and -1- WHEREAS, on or about December 31, 1998, Preferred Equities Corporation and Colorado Land and Grazing Corp acting together as Borrower, Guarantor and Lender entered into a Sixth Amendment to Promissory Note; and WHEREAS, on or about June 30, 1999, Preferred Equities Corporation and Colorado Land and Grazing Corp acting together as Borrower, Guarantor and Lender entered into an amendatory agreement entitled Sixth Amendment to Loan and Security Agreement revising certain of the provisions of Sections 1.1 and 2.2 of the LSA, as amended; and WHEREAS, on or about December 15, 2000, Preferred Equities Corporation and Colorado Land and Grazing Corp acting together as Borrower, Guarantor and Lender entered into an amendatory agreement entitled Seventh Amendment to Loan and Security Agreement revising certain of the provisions of Sections 1.1, 2.2, 2.5, 3.5, 4.1, 5.1 and 7.1 of the LSA, as amended (hereinafter the LSA as previously amended, and as supplemented by such additional letter agreements, interim consents, waivers and extensions and other modifications by and between Preferred Equities Corporation and Colorado Land and Grazing Corp acting together as Borrower, Guarantor and Lender, shall be referred to as the "Amended Agreement"); and WHEREAS, in connection with the execution of the LSA, Preferred Equities Corporation, directly, and Colorado Land and Grazing Corp, by assumption subsequent to the original date of issuance, acting together as Borrower executed in favor of Lender a certain promissory note, which promissory note was amended and restated from time to time pursuant to and in accordance with the above recitals; and WHEREAS, Preferred Equities Corporation and Colorado Land and Grazing Corp acting together as Borrower and Lender have discussed and agreed to enter into a further amendatory agreement revising the terms and provisions of the Amended Agreement to increase the maximum amount of the Loan from $7,500,000 to $10,000,000, to modify the Borrowing Base definition contained in Section 1.1(e) and to modify the Eligible Note Receivable definition contained in Section 1.1(s) and to revise other provisions of the Amended Agreement, as agreed to by the parties thereto; and WHEREAS, due to the numerous amendments pre-dating this Agreement, Preferred Equities Corporation and Colorado Land and Grazing Corp acting together as Borrower, Guarantor and Lender have agreed to completely amend and restate the terms and provisions of the financing accommodation between them effective as of the date stated herein by the this First Amended and Restated Loan and Security Agreement containing the provisions set forth below; NOW, THEREFORE, Borrower and Lender hereby agree that effective as of the date stated herein as the date of execution by Lender, the Amended Agreement shall be further amended, restated, substituted and replaced by this Agreement, except that any Exhibits or Schedules attached to the Amended Agreement, other than the Promissory Note, shall be deemed preserved and attached hereto, made a part hereof and incorporated herein. This First Amended and Restated Loan and Security Agreement shall contain the terms and provisions of the financing accommodation between the parties hereto. -2- In consideration of the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged the Preferred Equities Corporation and Colorado Land and Grazing Corp acting together as Borrower, Guarantor and Lender hereby agree as follows: SECTION I DEFINITION OF TERMS ------------------- 1.1 Terms Defined. Certain terms used in this Agreement shall have the -------------- definitions assigned to them in this Section 1.1. Such definitions shall be equally applicable to both the singular and plural forms of the terms defined, and words of any gender shall include each other gender where appropriate. All definitions set forth below shall apply to all provisions of this Agreement, and except to the extent otherwise defined therein, to all exhibits, schedules and riders hereto. 1.1(a) Account Debtor. A maker of or other Person responsible for --------------- payment of a Pledged Note Receivable. 1.1(b) Advance. A portion of the proceeds of the Loan advanced from -------- time to time by Lender to Borrower in accordance with Section 2.6 of this Agreement. 1.1(c) Agreement. This First Amended and Restated Loan and Security ---------- Agreement between Borrower and Lender (including all original Exhibits and Schedules attached or affixed to the Amended Agreement from time to time) as it may be subsequently amended from time to time. 1.1(d) Bank. Bank of America, N.A., a Nevada banking corporation, ----- successor in interest to Valley Bank of Nevada. 1.1(e) Borrowing Base. An amount equal to the lesser of (a) --------------- $10,000,000.00; or (b) the sum of (i) 75% of the aggregate of the unpaid principal balances of Eligible Notes Receivable in respect of which not less than five (5) scheduled monthly installment payment shall have been made; and (ii) 90% of the aggregate of the unpaid principal balance of Eligible Notes Receivable in respect of which at least six (6) scheduled monthly installment payments have been made. 1.1(f) Business Day. Each day which is not a Saturday or Sunday or a ------------- legal or banking holiday under the laws of the States of Connecticut, Nevada, New York, Pennsylvania, Rhode Island, Colorado or The United States. 1.1(g) Closing Date. The latest to occur of: (a) the initial closing ------------- date of July 31, 1991, (b) the date of this First Amended and Restate Loan and Security Agreement, or (c) the date of any requested Advance pursuant to this Agreement. -3- 1.1(h) Code. The Uniform Commercial Code as adopted and in force in ----- the state of Nevada as the same may be amended from time to time and the State of Colorado with respect to the procedures for perfecting any security interest in any Collateral located within or subject to the laws of the State of Colorado including but not limited to any Pledged Deeds of Trust or Eligible Notes Receivables generated by the sale of SPR Lots or HSR Lots. In all other respect the parties hereto agree that the Uniform Commercial Code of the State of Nevada shall govern. 1.1(i) Collateral. Collectively, all now existing or hereafter ----------- arising: (i) Pledged Notes Receivable; (ii) All amendments, extensions, renewals and replacements of, and substitutions for the Pledged Notes Receivable; (iii) Pledged Deeds of Trust; (iv) All amendments, extensions, renewals and replacements of, and substitutions for the Pledged Deeds of Trust; (v) All title insurance policies insuring the Pledged Deeds of Trust, and all proceeds of insurance, including, without limitation, property, casualty and title insurance, payable to Borrower pursuant to the Pledged Deeds of Trust; (vi) All proceeds (cash and noncash), property, property rights, privileges and benefits pertaining to, or arising from the enforcement of, the Pledged Notes Receivable and the Pledged Deeds of Trust, including, without limitation, proceeds in the form of all funds held in any accounts pursuant to any agency or lockbox agreement or similar arrangement related to any of the Pledged Notes Receivable to the extent such funds represent or arise from any of the foregoing, accounts, accounts receivable, chattel paper, contract rights, general intangibles and other receivables arising under or arising in connection with the Pledged Notes Receivable, instruments and documents, and all payments made from time to time on the Pledged Note Receivable in whatever form, including cash, checks, notes, drafts and other instruments for the payment of money, all property returned by or reclaimed or repossessed from Account Debtors, all rights of foreclosure, termination, repossession, dispossession, all documents, instruments, contracts, liens and security instruments and guaranties relating to the Pledged Notes Receivable, all collateral, security deposits, tax escrows (to the extent the same may be pledged under applicable law) or other security securing the obligations of any Person under or relating to the Pledged Notes Receivable; (vii) Documents, instruments, pledged assets and chattel paper relating to the Pledged Notes Receivable, the Pledged Deeds of Trust and the other properties and rights described in this Section 1.1(i); (viii) Extensions, additions, improvements, betterments, renewals, -4- substitutions and replacements of any of the properties and rights described in this Section 1.1(i), wherever located, together with the products and proceeds thereof, any replacements, additions or accessions thereto or substitutions thereof, the proceeds of any insurance policies covering any of the properties and rights described in this Section 1.1(i) and the proceeds of any claims of Borrower regarding any of the properties and rights described herein; (ix) All books, records, computer tapes and disks summarizing or evidencing the Collateral; (x) All right, title and interest of Borrower, if any, in and to all improvements, goods, machinery, equipment, furniture, furnishings, fixtures, tools and supplies of every kind and description (and all improvements and accessions thereto) located in or on any Lot encumbered by a Pledged Deed of Trust; and (xi) All credit balances in favor of Borrower on Lender's books and all property of Borrower in Lender's possession. The Collateral consisting of Pledged Notes Receivable; all amendments, extensions, renewals and replacements of, and substitutions for, the Pledged Notes Receivable; the Pledged Deeds of Trust; all amendments, extensions, renewals and replacements of, and substitutions for, the Pledged Deeds of Trust; and all proceeds of the Pledged Notes Receivable and the Pledged Deeds of Trust shall constitute "Primary Collateral" and all other Collateral shall constitute "Secondary Collateral". 1.1(j) Collection Agent. The Person acting as Agent for Lender, which ---------------- is responsible for receiving payments under the Pledged Notes Receivable from Account Debtors. The Collection Agent is the Bank. 1.1(k) Commitment. Intentionally Deleted. ---------- 1.1(1) Commitment Fee. None. -------------- 1.1(m) Custodial Agreement. An agreement among Borrower, Lender and ------------------- Custodian, as it may be amended from time to time, providing for the delivery of Pledged Notes Receivable and Pledged Deeds of Trust by Borrower to Custodian. A copy of which is attached hereto as Exhibit E. --------- 1.1(n) Custodian. The Person, acting as agent for Lender, which at --------- any time is authorized by Lender in writing to maintain physical possession of the Pledged Notes Receivable. 1.1(o) Debtor Relief Laws. Any applicable liquidation, ------------------ conservatorship, bankruptcy, moratorium, rearrangement, insolvency, reorganization or similar law providing for the relief of debtors from time to time in effect and generally affecting the rights of creditors. -5- 1.1(p) Deed of Trust. A deed of trust and assignment of rents, ------------- executed by a Person in connection with the purchase of a Lot (Purchaser) and delivered to Borrower, securing that Purchaser's Note Receivable and constituting a Lien upon the fee simple estate and interest of the Purchaser in and to its Lot. Said Deed of Trust and assignment shall be in the substantially the form attached hereto as Exhibit M-1 for any Lot located in the State of ----------- Nevada, and in substantially the form attached hereto as Exhibit M-2 for any SPR ----------- Lot located in the State of Colorado, and in substantially the form attached hereto as Exhibit M-3 for any HSR Lot located in the State of Colorado. ----------- 1.1(q) Default. An event or condition the occurrence of which would, -------- with a lapse of time or the giving of notice or both, become an Event of Default. 1.1(r) Default Rate. Defined in the Note. ------------- 1.1(s) Eligible Notes Receivable. Those Pledged Notes Receivable -------------------------- which satisfy each of the following criteria: (i) The Note Receivable shall arise from the sale by Borrower of a Lot; (ii) The Note Receivable is secured by a recorded Deed of Trust on the purchased Lot, constituting a first priority Lien thereon, as evidenced by a Title Policy; (iii) Principal and interest payments shall be payable in legal tender of the United States to Collection Agent pursuant to the Lockbox Agreement; (iv) In the case of an interest bearing Note Receivable, the remaining term of the Note Receivable is one hundred and twenty (120) months or less, payable in equal monthly payments of principal and interest. Notwithstanding the foregoing, up to twenty percent (20%) of the total Pledged Notes Receivable may include interest bearing Notes Receivable with a maximum term of up to one hundred and forty four (144) months, provided that such Notes Receivable otherwise meet the other criteria set forth in this Section 1.1(s); (v) The Purchaser shall have previously paid to the Borrower, in connection with the execution and delivery of the Note Receivable related to such Pledged Notes Receivable a down payment (prior to all discounts not offered to purchasers generally in the ordinary course of business of the Borrower) of not less than ten percent (10%) of the actual purchase price (as set forth in such purchase contracts related to such Pledged Notes Receivable) of the Purchaser's Lot being so purchased by Purchaser provided that notwithstanding subsection (viii) herein, Pledged Notes Receivable evidencing 0% or 5% interest for terms of 24 or 36 months respectively, shall be acceptable provided Purchaser has paid to Borrower 50% of such purchase price and such Pledged Notes Receivable do not exceed 30% of the aggregate principal balance of all Pledged Notes Receivable outstanding at the time of such determinations; -6- (vi) No installment on the Note Receivable is more than sixty (60) days contractually past due or more than thirty (30) days contractually past due at the time of the Advance with respect thereto; (vii) The rate of interest payable on the unpaid balance of the Note Receivable is at least ten percent (10%) per annum, however, (i) up to thirty percent (30%) of the total Eligible Notes Receivable may have zero (0%) or five (5%) percent interest rates provided that a fifty percent (50%) cash down payment has been received by Borrower from the Purchaser and the original term is twenty four (24) months or less with respect to a 0% interest rate or the original term is thirty six (36) months or less with respect to a 5% interest rate; and (ii) the weighted average interest rate on all Eligible Notes Receivable must be a minimum of eleven percent (11%) per annum; (viii) The creditworthiness of the Purchaser meets Borrower's credit standards, as set forth in Schedule 3.4 hereof; ------------ (ix) The Purchaser has fee title and access to the Lot described in the Purchaser's Deed of Trust at the time the Note Receivable is assigned to Lender, which Lot has been developed, to the satisfaction of Lender, with street and utility access and such other specifications provided in the Purchaser's purchase contract and related documents or provisions for such development have been made to Lender's satisfaction; and such Lot is free of all Hazardous Materials; (x) The Purchaser is not affiliated in any way, related to, or employed by Borrower or Guarantor or any of the shareholders of Borrower or Guarantor; (xi) The Purchaser has no claim against Borrower and no defense, set-off or counterclaim with respect to its Note Receivable; (xii) The Purchaser has no right to rescind the purchase of the Lot purchased in connection with the execution of its Note Receivable; (xiii) The Note Receivable shall have been endorsed to Lender as required by Section 3.2, and Lender shall have received all of the items described in Section 5.1(c) hereof with respect to the Note Receivable; (xiv) All documents relating to the Note Receivable shall have been executed and delivered to Borrower or the Purchaser, as the case may be, and the original executed Note Receivable shall have been delivered to Lender, or if directed by Lender, to the Custodian, and copies of all other documents shall be readily available to Lender in the files of Borrower; (xv) The terms of the Note Receivable and all instruments related thereto shall comply in all respects with all applicable federal and state laws and the regulations promulgated thereunder, including, without limitation, the provisions of the -7- Federal Consumer Credit Protection Act, as amended, the Federal Interstate Land Sales Full Disclosure Act, as amended ("ILSFDA"), and Regulation Z of the Federal Reserve Board, as amended; (xvi) The maximum principal balance of the Note Receivable shall not exceed $35,000.00 without the prior written approval of Lender; (xvii) The maker of the Note Receivable shall be a U.S. resident, except that up to ten percent (10%) of the outstanding balance of all Pledged Notes Receivable may represent the obligations of Canadian residents; (xviii) The Lot being financed by such Note Receivable shall not be subject to any Lien not previously consented to by Lender; and (xix) At the time of the pledging of such Note Receivable and after giving effect thereto and assuming that it otherwise qualifies as an Eligible Note Receivable, the aggregate outstanding principal balances of all Eligible Notes Receivable of the Account Debtor of such Note Receivable and/or affiliate of such Account Debtor shall not exceed $35,000.00. 1.1(t) Event of Default. See Section 8.1 of this Agreement. ----------------- 1.1(u) Final Maturity Date. December 31, 2005. -------------------- 1.1(v) GAAP. 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 comparable in all material respects to those applied in a preceding period, with any exceptions thereto noted. 1.1(w) Guarantor. Mego Financial Corp., a New York corporation. ---------- 1.1(x) Hazardous Materials. "Hazardous substances", "hazardous waste" -------------------- or "hazardous constituents" as defined in any federal, state or local environmental statute, regulation or order. 1.1(y) Indebtedness. (i) The Loan, including all principal, interest, ------------- fees and other amounts payable to Lender pursuant to the Loan Documents; (ii) all covenants, conditions, agreements and obligations to be performed pursuant to the terms of this Agreement, or any of the Loan Documents; (iii) all sums expended or advanced by Lender pursuant to this Agreement or any of the Loan Documents; and (iv) any other present or future indebtedness of Borrower owed to Lender or TFC or any of its subsidiaries. -8- 1.1(z) Ineligible Note Receivable. Any Note Receivable which either --------------------------- is not an Eligible Note Receivable or is an Eligible Note Receivable at a time when Borrower and/or Lender determines in good faith that a Note Receivable no longer meets any one (1) or more of the criteria set forth in Section 1.1(s) or when any one (1) or more of the following occurs: (i) Any installment on the Eligible Note Receivable becomes more than sixty (60) days contractually past due or was more than thirty (30) days contractually past due at the time of the Advance with respect thereto; (ii) The Purchaser asserts any defense or setoff with respect to its Eligible Note Receivable in a written communication or asserts any claim against Borrower or Lender in a written communication which could result in an offset or reduction of any of the amounts payable under its Eligible Note Receivable and which, in the good faith determination of Lender, has a probability of success on the merits; or (iii) The Purchaser asserts a claim in a written communication for rescission of the purchase of its Lot which, in the good faith determination of Lender, has a probability of success on the merits. 1.1(aa) Interest Rate. A variable rate equal to the sum of the prime -------------- rate established by The Chase Manhattan Bank, N.A., adjusted monthly as of the first day of each month, plus two percent (2%) per annum as more particularly described in the Note. 1.1(bb) Lien. Any interest in Property securing an obligation owed ----- to, or claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute, or contract, and including, but not limited to attachments, judgments or tax liens and the security interest or lien arising from a mortgage, encumbrance, pledge, conditional sale or other title retention agreement, trust receipt of a lease, consignment or bailment for security purposes. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. The term "Lien" does not include any Permitted Exceptions. 1.1(cc) Loan. Lender's agreement, subject to the terms and conditions ----- hereof, to make Advances of up to $10,000,000.00 at any one time outstanding during the Revolving Credit Period and to accept repayment thereof during the Term, all as more particularly described in this Agreement. 1.1(dd) Loan Documents. Collectively, this Agreement, the Note, and --------------- any and all other agreements, documents, instruments and certificates delivered or contemplated to be delivered in connection with this Agreement (including, without limitation, the agreements, documents and instruments described in Sections 4.1(1) and 5.1(c) hereof), as such agreements, documents, instruments or certificates may be amended, renewed, extended, restated or supplemented from time to time. 1.1(ee) Intentionally Deleted. ---------------------- -9- 1.1(ff) Lockbox Agreement. An agreement between Borrower, Lender and ------------------ Collection Agent, as may be amended from time to time, providing for the receipt by Collection Agent of payments on the Notes Receivable and disbursement of such payments to Lender. 1.1(gg) Lot. Unless otherwise agreed to by Lender, one of the legally ---- subdivided, single family residential lots within the Subdivisions, as more particularly described in Schedule 1.1gg attached hereto, together with any -------------- additions, substitutions and replacements of such Subdivisions agreed to by Lender. Notwithstanding the foregoing, the term "SPR Lots", as may be used herein, shall specifically refer to those Lots located in the SPR Subdivision and the term "HSR Lots", as may be used herein, shall specifically refer to those Lots located in the HSR Subdivision. 1.1(hh) Lot Sales Acts. The ILSFDA, NRS Chapter 119, and the laws of --------------- any other state applicable to the sale of Lots by Borrower as the same may be amended from time to time, together with any rules and regulations promulgated thereunder. 1.1(ii) Mandatory Prepayment. Any prepayment required by Section --------------------- 2.5(c) of this Agreement. 1.1(jj) Note. The First Amended and Restated Promissory Note ----- evidencing the Loan, substantially in the form of Exhibit A attached hereto, as --------- amended from time to time. 1.1(kk) Note Receivable. A promissory note, substantially in the form ---------------- attached hereto as Exhibit L-1 where such note pertains to the sale of any Lot ----------- located in the State of Nevada, and in substantially in the form attached hereto as Exhibit L-2 or Exhibit L-3 where such note pertains to the sale of any SPR ----------- ----------- Lot located in the State of Colorado, and in substantially in the form attached hereto as Exhibit L-4 or Exhibit L-5 where such note pertains to the sale of any ----------- ----------- HSR Lot located in the State of Colorado. 1.1(mm) Person. An individual, partnership, corporation, trust, ------- unincorporated organization or a government or agency or political subdivision thereof. 1.1(nn) Pledged Deed of Trust. A Deed of Trust, and all right, title ---------------------- and interest of Borrower therein, which (i) secures payment of a Pledged Note Receivable; (ii) has been assigned by Borrower to Lender; and (iii) has not been reassigned by Lender to Borrower. 1.1(oo) Pledged Note Receivable. A Note Receivable in which Lender ------------------------ has a first priority security interest pursuant to this Agreement and which has not been reassigned by Lender to Borrower. 1.1(pp) Property or Properties. Any interest in any kind of property ----------------------- or asset, whether real, personal or mixed, tangible or intangible. 1.1(qq) Purchase Price. The total cash purchase price of a Lot, as --------------- set forth in the purchase and sale agreement between Borrower and the Purchaser. -10- 1.1(ss) Revolving Credit Period. The period from the date of this ------------------------ Agreement to June 30, 2002. 1.1(tt) Security. Shall have the same meaning as in Section 2(1) of --------- the Securities Act of 1933, as amended. 1.1(uu) Subdivision. One of seven subdivisions (NRS 278.320) in a ------------ planned community called Calvada located in Pahrump, Nye County, Nevada, known as Calvada Valley, Calvada Valley North, Calvada Meadows, County View Estates, Country Place II, Vegas Acres Unit 2 and Golden Spring Ranch, and a subdivision known as South Park Ranches located in Park County, Colorado (the "SPR Subdivision") and a subdivision known as Hartsel Springs Ranch consisting of parcels of land within such subdivision known as either Estates of Colorado or Hartsel Ranch located in Park County, Colorado (the "HSR Subdivision"). 1.l(vv) Term. The period commencing on the date of this Agreement and ----- continuing until December 31, 2005. The term includes both the Revolving Credit Period and the period during which no Advances are permitted. 1.l(ww) Title Company. Chicago Title Insurance Corporation or -------------- Security Title Guaranty Co. or any other reputable title insurer acceptable to Lender and doing business in Nye County, Nevada or Park County, Colorado. 1.1(xx) Title Policy. A lender's policy of title insurance, in the ------------- face amount of the Note Receivable, issued by the Title Company in favor of Lender, either directly or as assignee of Borrower, insuring that each Deed of Trust constitutes a first priority lien upon the Lot sold to the Purchaser, subject only to the Permitted Exceptions. 1.1(yy) Voluntary Prepayment. Any voluntary prepayment permitted to --------------------- be made by Borrower under the terms of the Note. SECTION 2 --------- THE LOAN -------- 2.1 Revolving Loan. Upon the terms and subject to the conditions set --------------- forth in this Agreement during the Revolving Credit Period Lender shall make available to Borrower Advances under the Loan in an aggregate principal amount up to the least of (a) $10,000,000.00 or (b) the total amount of the Borrowing Base or (c) an amount, which when aggregated with all other sums advanced and remaining outstanding from Lender and Textron Financial Corporation (hereinafter referred to as ("TFC"), on a combined basis, to Borrower and its subsidiaries, including but not limited to, Brigantine Preferred Properties, Inc. and Steamboat Suites, Inc. would exceed $27,500,000. The Loan shall be funded upon request of Borrower in Advances made no more frequently than two (2) times each calendar month in amounts not exceeding the Borrowing Base less the outstanding principal balance of the Loan immediately prior to each such Advance; provided, however, that in no event shall Borrower be entitled to receive any -11- Advance hereunder unless the amount of such Advance is equal to or greater than $50,000.00. Upon the terms and subject to the conditions set forth in this Agreement, during the Revolving Credit Period, Borrower may obtain readvances under this Agreement of the amounts repaid. 2.2 Non-Revolving Period. Notwithstanding anything contained herein to --------------------- the contrary, no Advances under the Loan will be made after June 30, 2002. 2.3 Interest Rate. The outstanding principal balance of the Loan will -------------- bear interest at a rate equal to the Interest Rate. The outstanding principal balance of the Loan shall bear interest as of Lender's wiring of funds through its receipt of repayment of the Loan (if received by Lender later than 12 noon, E.S.T., then interest accrual shall be through the next business day following such receipt). After the occurrence and during the continuance of an Event of Default and after the Final Maturity Date (if the Loan is not paid in full on the Final Maturity Date), the Loan will bear interest at the Default Rate. -12- 2.4 Payments. Borrower shall make the following payments on the Loan: --------- 2.4(a) Monthly Payments. One hundred percent (100%) of the funds ----------------- collected from the Pledged Notes Receivable each week will be paid to Lender by Collection Agent pursuant to the Lockbox Agreement, and will be applied by Lender in the following order: first to the payment of out-of-pocket costs or expenses incurred by Lender in good faith in the administration of the Loan or the collection of any amounts due to Lender under any of the Loan Documents; second, to any Late Charges (as defined in the Note) and interest accrued at the Default Rate; third, to the payment of accrued and unpaid interest at the Interest Rate; and thereafter, to the reduction of the principal balance of the Loan. If the amount of the funds received by Lender from Collection Agent with respect to any month is insufficient to pay in full the amount of interest which accrues on the Loan for such month at the Interest Rate, Borrower shall pay the difference to Lender on or before the fifteenth (15th) day of the following month. In the event Borrower receives any payments on any of the Pledged Notes Receivable directly from any Account Debtor(s), Borrower shall deliver such payments to Collection Agent pursuant to the Lockbox Agreement within two (2) Business Days following Borrower's receipt thereof, unless Borrower shall have received notice from Lender as permitted by this Agreement or the Lockbox Agreement requiring that all payments on the Pledged Notes Receivable be paid directly to Lender, in which event such payments shall be delivered to Lender. 2.4(b) Final Payment. The entire outstanding principal amount of the -------------- Loan, together with all accrued but unpaid interest, fees, and charges, shall be payable on the Final Maturity Date. 2.5 Prepayments. ------------ 2.5(a) Voluntary Prepayments. Subject to the provisions of Section ---------------------- 2.5(b), Borrower may not prepay the Loan, in whole or in part, prior to December 31, 2001; subject to the terms of this Agreement and to the payment of the applicable premium set forth below in Section 2.5(d), at any time on or after the date hereof, Borrower may prepay the Loan, in whole but not in part, upon thirty (30) day's prior written notice to Lender. Any such prepayment must include all outstanding principal, accrued but unpaid interest, accrued but unpaid fees and charges (if any), and the applicable prepayment premium provided below. 2.5(b) Permitted Prepayments. Borrower may prepay the Loan without ---------------------- premium or penalty (i) as a result of any payments or prepayments made under the Pledged Notes Receivable or (ii) in connection with a Mandatory Prepayment required under Section 2.5(c). 2.5(c) Mandatory Prepayments. If at any time and for any reason, the ---------------------- outstanding principal balance of the Loan shall exceed the Borrowing Base, then, within three (3) Business Days following Borrower's receipt of telecopied notice from Lender of the occurrence and amount of such excess over the Borrowing Base (provided that if the dollar amount of such excess is not equal to or greater than five percent (5%) of the then outstanding aggregate principal balance of all Pledged Notes Receivable, then, within five (5) Business Days -13- of Borrower's receipt of such telecopied notice); or, absent such telecopied notice, within the later of fifteen (15) days after the end of the calendar month in which such excess occurred or five (5) days after receipt by Borrower of Lender's monthly statement, Borrower shall either: (i) prepay the Loan in an amount sufficient to eliminate the Borrowing Base deficiency; and/or (ii) execute and deliver to Custodian and Title Company all documents other than Title Policies required in order to increase the Borrowing Base in an amount sufficient to eliminate the Borrowing Base deficiency. Except for required Title Policies, which shall be delivered within fifteen (15) days of the initial deliveries, the pledge and delivery to Lender of additional Eligible Notes Receivable shall comply with the document delivery and recordation requirements set forth in Section 5.1(c) of this Agreement and shall be accompanied by a written certification of the Borrower to the effect that such additional Pledged Notes Receivable are Eligible Notes Receivable, and that, after giving effect to the pledge to Lender of such Eligible Notes Receivable, the outstanding principal balance of the Loan will be equal to or less than the adjusted Borrowing Base. If Borrower elects to prepay the Loan pursuant to this Section 2.5(c), no prepayment premium shall be payable in connection with such prepayment. 2.5(d) Premiums. Any prepayment of the Loan pursuant to Section --------- 2.5(a) above and not pursuant to Section 2.5(b) or Section 2.5 (c) above must be accompanied by a premium calculated as follows: Date of Prepayment Premium ------------------ ------- On or after the date hereof: one percent (1%) of the outstanding principal balance of the Loan. 2.6 Funding Procedure. ------------------ 2.6(a) Request for Funding. At least ten (10) business days in -------------------- advance of any proposed Advance, Borrower shall deliver to Lender a written draw request in the form attached hereto as Exhibit B and made a part hereof ("Draw --------- Request"), as further described in Section 5.1(b), hereof along with all other items which Borrower is required to deliver to Lender in connection with the requested Advance. 2.6(b) Conditions Precedent. Lender shall not be obligated to make any --------------------- Advance of any portion of the Loan to Borrower pursuant to any request made in accordance with Section 2.6(a) above unless and until Lender determines that all of the conditions described in this Agreement are satisfied, including, without limitation, Section 5 of this Agreement. In addition, Lender shall not be obligated to advance any portion of the Loan to Borrower at any time after the occurrence and during the continuance of an Event of Default, a monetary Default or a material non-monetary Default. -14- SECTION 3 --------- COLLATERAL ---------- 3.1 Grant of Security Interest. To secure the payment and performance of --------------------------- the Indebtedness, Borrower does hereby unconditionally and irrevocably assign, pledge and grant to Lender a first priority security interest in and to the Primary Collateral as well as a security interest in and to the Secondary Collateral as well as a security interest in and to all other collateral granted to Lender or to TFC under any other loan and security agreement for any other obligation owing by Borrower or any of its subsidiaries to Lender or to TFC. Lender agrees that, notwithstanding the provisions of the preceding sentence to the contrary, upon Borrower's payment in full of the Indebtedness described in clauses (i) through (iii), inclusive, of Section 1.1(y) of this Agreement, Lender shall fully release its security interest in and to all of the Collateral. 3.2 Delivery of Notes Receivable. Concurrently herewith, Borrower shall ----------------------------- endorse and deliver each of the Pledged Notes Receivable in existence as of the date hereof to Lender. Each of the Pledged Notes Receivable shall be endorsed by Borrower as follows: "Pay to the order of Dorfinco Corporation with recourse." 3.3 Certain Releases. ----------------- 3.3(a) Note Payoffs. Lender agrees to give its written consent to the ------------- release of portions of the Primary Collateral to Borrower or any party designated in writing by Borrower upon receipt of evidence satisfactory to Lender that the Pledged Note Receivable applicable thereto has been paid in full by the Account Debtor. 3.3(b) Return of Notes Receivable. Borrower may replace Eligible --------------------------- Notes Receivable with upgrades or downgrades of such notes without Lender's prior consent so long as (i) no Default or Event of Default exists and is continuing; (ii) the Account Debtor is not more than thirty (30) days past due; (iii) the aggregate principal balances of the Pledged Notes Receivable which are being (but have not been) replaced do not exceed an amount of more than $100,000.00 outstanding at any one time; and (iv) Lender is notified within ten (10) days of such replacement and thereafter all Primary Collateral pertinent to such replacement is delivered to Lender or, if applicable, to the Custodian, within the earlier of the next Advance or fifteen (15) days from the date of notification to Lender of such replacement. 3.3(c) Return of Notes Receivable. Provided that no Event of Default --------------------------- has occurred and is continuing and no Default exists, then within fifteen (15) days after its receipt of a written request and all appropriate documentation necessary for release from Borrower, Lender shall endorse or, if there then shall be a Custodian, give appropriate instructions to the Custodian to endorse the Ineligible Notes Receivable specified in the request "Pay to the order of Preferred Equities Corporation, without recourse", and deliver such Ineligible Notes Receivable and the -15- related Pledged Deeds of Trust to Borrower. In addition, if requested by Borrower, Lender shall execute and deliver to Borrower UCC-2 release statements covering the Ineligible Notes Receivable and the portion of the Collateral relating thereto, and an assignment of the related Deeds of Trust being returned to Borrower, provided that such release statements and assignment of Deeds of Trust are limited to the specific Ineligible Notes Receivable and the portion of the Collateral relating thereto being released, are prepared by Borrower at Borrower's sole cost and expense, and are acceptable to Lender and its counsel. 3.4 Creditworthiness. Each Purchaser's creditworthiness shall be ----------------- satisfactory to Lender in accordance with Borrower's credit standards attached hereto as Schedule 3.4, as the same may be amended from time to time by ------------ Borrower, with Lender's prior written consent. Such creditworthiness shall be deemed acceptable to Lender unless Lender has so advised Borrower within two (2) Business Days of Lender's receipt of the applicable Notes Receivable given to support the requested Advance (the "Advance Receivables"). Borrower shall in good faith determine that Advance Receivables comply with Borrower's credit standards based on the information supplied by the Account Debtor. Upon any such advice, Borrower may elect, within three (3) Business Days by written notice, to replace the uncreditworthy Advance Receivable(s), to exclude the uncreditworthy Advance Receivables from the requested Advance or to receive no further Advances under the Loan ("Special Line Termination"). In the event of a Special Line Termination, Borrower may elect at any time thereafter to prepay the Loan as provided in Section 2.5(b) of this Agreement. 3.5 Representations and Warranties Regarding Collateral. Borrower hereby ---------------------------------------------------- represents and warrants to Lender as follows: 3.5(a) Borrower has good and marketable title to the Primary Collateral, free and clear of any Lien, except for (i) the security interest created by this Agreement or otherwise created in favor of Lender and (ii) those Liens specifically consented to in writing by Lender. No financing statement or other instrument similar in effect covering all or any part of the Primary Collateral is on file in any filing or recording office, except such as may have been filed in favor of Lender. 3.5(b) Attached hereto as Exhibit L-1, Exhibit L-2, Exhibit L-3, ----------- ----------- ----------- Exhibit L-4 and Exhibit L-5 and Exhibit M-1, Exhibit M-2 and Exhibit M-3, ----------- ----------- ----------- ----------- ----------- respectively, are true, accurate and complete copies of the forms of Note Receivable and the Deed of Trust in use by Borrower. Attached hereto as Exhibit N-1 is a true, accurate and complete copy of the form of Grant, ----------- Bargain, Sale Deed conveying fee simple interest in a Lot to a Purchaser, in use by Borrower in the State of Nevada. Attached hereto as Exhibit N-2 ----------- and Exhibit N-3 are true, accurate and complete copies of the form of ----------- Special Warranty Deed conveying fee simple interest in a Lot to a Purchaser, in use by Borrower for a SPR Lot and HSR Lot respectively, in the State of Colorado. 3.5(c) Borrower has the lawful right, power and authority to grant a security interest in the Collateral. This Agreement, together with all filings and other actions necessary or desirable to perfect and protect such security interest, including, without -16- limitation, the endorsement and delivery of all of the Pledged Notes Receivable to the Custodian, when duly taken, create a valid and perfected first priority security interest in the Primary Collateral securing the payment and performance of the Indebtedness; and except as otherwise specifically provided in Section 3.3(b) of this Agreement, Borrower shall not grant extensions of time for the payment of, compromise for less than the full face value, release in whole or in part any Purchaser liable for the payment of, or allow any credit whatsoever except for the amount of cash to be paid upon, any Primary Collateral or any instrument or document representing the Primary Collateral, or release, in whole or in part, any security for any Pledged Note Receivable, including, without limitation, a Pledged Deed of Trust. 3.5(d) Except for filings with the Nevada and Colorado Secretaries of State and the Park County, Colorado and Nye County, Nevada Recorders' offices, no authorization, approval or other action by, and no notice to or filing with, any other governmental authority or regulatory body is required either (i) for the grant by Borrower of the security interest herein granted or for the execution, delivery or performance of this Agreement by Borrower, or (ii) for the perfection or exercise by Lender of its rights and remedies hereunder; nor shall the loss of, or damage to, the Collateral release Borrower from any of the Indebtedness except as provided in NRS 104.9501 et. seq., or any equivalent provision of Colorado law, if -------- any. 3.5(e) Borrower is the legal owner and holder of the Primary Collateral, with full right, power and authority (without the consent of any party) to assign its right, title and interest in and to all the Collateral to Lender in accordance with the terms hereof. 3.5(f) The unpaid principal balance owing on each of the Pledged Notes Receivable deemed to be an Eligible Note Receivable is as set forth on the Draw Request form submitted to Lender from time to time pursuant to Section 5 of this Agreement. 3.5(g) Borrower shall pay and discharge, when due, all taxes, levies and other charges upon the Collateral and upon the goods evidenced by any documents constituting Collateral and shall protect, defend and indemnify Lender against and save it harmless from all claims of any Persons other than Lender, and this indemnity shall include all reasonable attorneys' fees and legal expenses incurred in good faith. 3.5(h) There have been no modifications or amendments to the Pledged Notes Receivable or the Pledged Deeds of Trusts which are not fully disclosed in the respective instruments or in written addenda attached thereto. 3.5(i) The makers of the Eligible Notes Receivable have no defenses, offsets, counterclaims or claims relating to the Eligible Notes Receivable or the Deeds of Trust. 3.5(j) The Pledged Notes Receivable and the Pledged Deeds of Trust were executed by Purchasers in connection with the purchase of Lots. -17- 3.5(k) The Pledged Deeds of Trust constitute valid and enforceable first and prior liens and security interests on the Purchaser's respective fee simple interests in the Lot or Lots subject thereto. 3.5(1) The Pledged Notes Receivable and the Pledged Deeds of Trust are in full force and effect and are valid and binding obligations of the respective Account Debtors. 3.5(m) The grant of the security interests described herein has not affected the validity or enforceability of the obligations of the Accounts Debtors under their respective Pledged Notes Receivable and Pledged Deeds of Trust. 3.5(n) Prior to each Advance with respect thereto, Borrower shall deliver to the Custodian each original executed Pledged Note Receivable and the original or a conformed copy of each Pledged Deed of Trust. If a conformed copy of a Pledged Deed of Trust is delivered, Borrower shall deliver the recorded original thereof promptly after it is returned by the Recorder's office of the County in which the encumbered property is located. 3.6 Security Agreement Transition Provisions Addressing Revised Article 9 --------------------------------------------------------------------- 3.6(a) Concerning Revised Article 9 of the Uniform Commercial Code. ----------------------------------------------------------- The parties acknowledge and agree to the following provisions of this Agreement in anticipation of the application, in one or more jursidictions to the transactions contemplated hereby, of the revised Article 9 of the Uniform Commercial Code in the form or substantially in the form approved by the American Law Institute and the National Conference of Commissioners on Uniform State Law and contained in the 1999 Official Text of the Uniform Commercial Code ("Revised Article 9"). 3.6(b) Attachment. In applying the law of any jurisdiction in which ---------- Revised Article 9 is in effect, the Collateral shall include all of the assets of the Debtor set forth in Section 1.1 (i) above, whether or not within the scope of Revised Article 9. The Collateral shall include, without limitation, the following categories of assets as defined in Revised Article 9: goods (including inventory, equipment and any accessions thereto) located in or on any Lot encumbered by a Pledged Deed of Trust, instruments (including promissory notes), documents, accounts, chattel paper (whether tangible or electronic), deposit accounts, letter-of-credit rights (whether or not the letter of credit is evidenced by a writing), commercial tort claims, securities and all other investment property, general intangibles (including payment intangibles and software), supporting obligations and any and all proceeds of any thereof, wherever located, whether now owned and hereafter acquired. If the Debtor shall at any time, whether or not Revised Article 9 is in effect in any particular jurisdiction, acquire a commercial tort claim, as defined in Revised Article 9, the Debtor shall immediately notify the Secured Party in writing signed by the Debtor of the brief details thereof and grant the Secured Party in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance satisfactory to the Secured Party. -18- 3.6(c) Additional Grant of Security Interest in Specified Property. ----------------------------------------------------------- Debtor acknowledges and agrees that in anticipation of the possible application, in one or more jurisdictions of the revised Article 9 of the Uniform Commercial Code in the form or substantially in the form approved by the American Law Institute and the National Conference of Commissioners on Uniform State Law and contained in the 1999 Official Text of the Uniform Commercial Code ("Revised Article 9") that the Debtor, in addition to the items previously described as constituting Collateral hereby gives, grants, bargains, assigns and confirms that it has granted a security interest in the following now owned or hereafter acquired and wherever located properties, assets and rights of the Debtor: All other goods, rights to payment of money, insurance refund claims and all other insurance claims and proceeds, tort claims, electronic chattel paper, securities and other investment property, rights to proceeds of letters of credit, letter of credit rights, supporting obligations of every nature, all tax refund claims, license fees, rights to sue and recover for past infringement of patents, trademarks and copyrights, computer programs, computer software, engineering drawings, customer lists, goodwill and all licenses, permits, agreements of any kind or nature pursuant to which (i) the Debtor operates or has authority to operate, (ii) the Debtor possesses, uses or has authority to possess or use property (whether tangible or intangible) of others, or (iii) others possess, use or have authority to possess or use property (whether tangible or intangible) of the Debtor, and all recorded data of any kind or nature, regardless of the medium of recording, including without limitation, all software, writings, plans, specifications and schematics. Debtor acknowledges and agrees that, with respect to any term used herein that is defined in either (a) Article 9 of the Uniform Commercial Code as in force in the jurisdiction in which this financing statement was signed by the Debtor at the time that it was signed or (b) Article 9 as in force at any relevant time in the jurisdiction in which this financing statement is filed, the meaning to be ascribed thereto with respect to any particular item of property shall be that under the more encompassing of the two definitions. The Debtor further acknowledges and agrees that the grant of Collateral in this Loan and Security Agreement covers, and is intended to cover, all assets of the Debtor. 3.6(d) Perfection by Filing. The Secured Party may at any time and -------------------- from time to time, pursuant to the provisions of Section 10.12 hereof, file financing statements, continuation statements and amendments thereto that describe the Collateral as all assets of the Debtor or words of similar effect and which contain any other information required by Part 5 of Revised Article 9 for the sufficiency or filing office acceptance of any financing statement, continuation statement or amendment, including whether the Debtor is an organization, the type of organization and any organization identification number issued to the Debtor. The Debtor agrees to furnish any such information to the Secured Party promptly upon request. Any such financing statements, continuation statements or amendment may be signed by the Secured Party on behalf of the Debtor, as provided in Section 10.12 hereof, and may be filed at any time in any -19- jurisdiction whether or not Revised Article 9 is then in effect in that jurisdiction. In those jurisdictions where, Revised Article 9 is adopted and in effect, Secured Party may file such financing statements, continuation statements or amendments without the signature of the Debtor based upon Debtor's execution of this Agreement as an "Authenticated Document". 3.6(e) Other Perfection, etc. The Debtor shall at any time and from ---------------------- time to time, whether or not Revised Article 9 is in effect in any particular jurisdiction, take such steps as the Secured Party may reasonably request for the Secured Party (a) to obtain an acknowledgment, in form and substance satisfactory to the Secured Party, of any bailee having possession of any of the Collateral that the bailee holds such Collateral for the Secured Party, (b) to obtain "control" of any investment property, deposit accounts, letter-of-credit rights or electronic chattel paper (as such terms are defined in Revised Article 9 with corresponding provisions in Rev. (S)(S) 9-104, 9-105, 9-106 and 9-107 relating to what constitutes "control" for such items of Collateral), with any agreements establishing control to be in form and substance satisfactory to the Secured Party, and (c) otherwise to insure the continued perfection and priority of the Secured Party's security interest in any of the Collateral and of the preservation of its rights therein, whether in anticipation and following the effectiveness of Revised Article 9 in any jurisdiction. -20- 3.6(f) Other Provisions. In applying the law of any jurisdiction in ---------------- which Revised Article 9 is in effect, the following references to sections of existing Article 9 of that jurisdiction shall be to the Revised Article 9 Section of that jurisdiction as indicated below: - -------------------------------------------------------------------------------- Existing Article 9 Revised Article 9 - -------------------------------------------------------------------------------- (S) 9-103(3) Rev. (S) 9-102(a)(34) - -------------------------------------------------------------------------------- (S) 9-207 Rev. (S) 9-207 - -------------------------------------------------------------------------------- (S)(S) 8-106 and 9-115 (1994) Rev. (S)(S) 8-106 and 9-106 - -------------------------------------------------------------------------------- (S) 9-504(1)(c) Rev. (S)(S) 9-608(a)(1)(C) and 9-615(a)(3) - -------------------------------------------------------------------------------- 3.6(g) Savings Clause. Nothing contained in this Section shall be -------------- construed to narrow the scope of the Secured Party's security interest in any of the Collateral or the perfection or priority thereof or to impair or otherwise limit any of the rights, powers, privileges or remedies of the Secured Party hereunder except (and then only to the extent) mandated by Revised Article 9 to the extent then applicable. SECTION 4 --------- CONDITIONS PRECEDENT TO CLOSING ------------------------------- 4.1 Conditions Precedent. The obligation of Lender to make the Loan shall -------------------- be subject to the satisfaction of each of the following conditions precedent: 4.1(a) Opinions of Counsel. Lender shall have received the opinion of ------------------- counsel for Borrower and Guarantor, dated as of the Closing Date, substantially in the form of Exhibit D to this Agreement; and --------- 4.1(b) Representations, Warranties, Covenants and Agreements. The ------------------------------------------------------ representations and warranties contained in the Loan Documents (including, without limitation, those contained in Section 3.5 and Section 6 hereof) shall be true and correct in all respects, and all covenants and agreements contained in this Agreement have been complied with and performed by Borrower to the satisfaction of Lender. 4.1(c) Officer's Certificates. ----------------------- (i) Lender shall have received a certificate, in form satisfactory to it, dated as of the Closing Date and signed by the President, Executive Vice President or a Senior Vice President of Preferred Equities Corporation, certifying that the conditions specified in Section 4.1 of this Agreement have been fulfilled; and (ii) Lender shall have received a certificate, in form satisfactory to it, dated as of the Closing Date and signed by the President, Vice President or Secretary of Colorado Land Grazing Corp., certifying that the conditions -21- specified in Section 4.1 of this Agreement have been fulfilled; and (iii) Lender shall have received a certificate, in form satisfactory to it, dated as of the Closing Date and signed by the President, Executive Vice President or a Senior Vice President of Preferred Equities Corporation, the President, Vice President or Secretary of Colorado Land Grazing Corp. and by the President and Secretary of Guarantor, certifying all material facts pertinent to this transaction and all material facts pertinent to the legal opinions specified in Section 4.1(a) above, including facts and representations regarding the sales practices of Preferred Equities Corporation and Colorado Land Grazing Corp. 4.1(d) Note. The Note shall have been duly executed by Borrower and ----- delivered to Lender. 4.1(e) No Default. No Default or Event of Default shall exist and be ----------- continuing. 4.1(f) Borrower Organization, Authority. There shall have been --------------------------------- delivered to Lender by Borrower at least fifteen (15) business days prior to the Closing Date: (i) if changed or revised from that last received by Lender, copies of the articles of incorporation of Preferred Equities Corporation and any amendments thereto certified to be true and complete by the Nevada Secretary of State, certificates of good standing for Preferred Equities Corporation from the Nevada Secretary of State and the secretary of state of each other jurisdiction wherein Preferred Equities Corporation is conducting business, and copies of the bylaws of Preferred Equities Corporation certified to be true and correct by the Secretary or Assistant Secretary of Borrower and copies of the articles of incorporation of Colorado Land and Crazing Corp. and any amendments thereto certified to be true and complete by the Colorado Secretary of State, certificates of good standing for Colorado Land and Crazing Corp. from the Colorado Secretary of State and the secretary of state of each other jurisdiction wherein Colorado Land and Crazing Corp. is conducting business, and copies of the bylaws of Colorado Land and Crazing Corp. certified to be true and correct by the Secretary or Assistant Secretary of Borrower; and (ii) certificates of the Secretary or Assistant Secretary of Preferred Equities Corporation and Colorado Land and Crazing Corp. certifying the adoption by the board of directors thereof of a resolution authorizing specified officers of Preferred Equities Corporation and Colorado Land and Crazing Corp. to enter into and execute this Agreement, the Note, and the other documents in connection therewith and to borrow the Loan from Lender; and (iii) certificates of the Secretary or Assistant Secretary of Preferred Equities Corporation and Colorado Land and Crazing Corp. certifying the incumbency of, and verifying the authenticity of the signatures of, the officers of -22- Preferred Equities Corporation and Colorado Land and Crazing Corp. authorized to sign this Agreement, the Note and the other documents in connection therewith. 4.1(g) Guarantor Organization, Authority. There shall have been ---------------------------------- delivered to Lender by Guarantor at least fifteen (15) business days prior to the Closing Date: (i) if changed or revised from that last received by Lender, copies of the articles of incorporation of Guarantor and any amendments thereto certified to be true and complete by the New York Secretary of State, certificates of good standing for Guarantor from the New York Secretary of State and the secretary of state of each other jurisdiction wherein Guarantor is conducting business, and copies of the bylaws of Guarantor certified to be true and correct by the Secretary or Assistant Secretary of Guarantor; (ii) 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 Guarantor to enter into and execute the Guaranty and the other documents in connection therewith; and (iii) a certificate of the Secretary or Assistant Secretary of Guarantor certifying the incumbency of, and verifying the authenticity of the signatures of, the officers of Guarantor authorized to sign the Guaranty and the other documents in connection therewith. 4.1(h) Evidence of Insurance. Lender shall have received evidence ---------------------- satisfactory to Lender that Borrower is maintaining all policies of insurance required by and in accordance with Section 7.1(d). 4.1(i) Approval by Lender. If an Advance is to be made on the Closing ------------------- Date, Lender shall have determined that sufficient Eligible Notes Receivable exist to support the Advance. 4.1(j) Applicable Laws. Lender shall have received evidence ---------------- satisfactory to Lender that Borrower is in compliance with all applicable laws in connection with the creation of the Lots, the intended use and occupancy thereof for single family residential purposes and the offering of the Lots for sale to the general public in interstate commerce, including, without limitation, the Lot Sales Acts. 4.1(k) Litigation. There shall be no bankruptcy, foreclosure action or ----------- other material litigation or judgments pending or outstanding against any Subdivision, Collateral, Borrower, Guarantor or any of the principal officers of Borrower (each a "Material Party") as of the Closing Date. "Other material litigation" shall not include matters (i) in which a Material Party is plaintiff and no counterclaim is pending; (ii) which Lender determines, in its sole discretion, are immaterial due to settlement, -23- insurance coverage, frivolity, or amount of claim; or (iii) described in Schedule 6.7 to this Agreement. ------------ 4.1(1) Loan Documents. To secure and/or ensure full and complete --------------- payment and performance of the Loan, Borrower shall have executed and delivered (or cause to be executed and delivered, as the case may be) to Lender, on or prior to the Closing Date, the following Loan Documents: (i) Lockbox Agreement. The Lockbox Agreement, executed by ----------------- Collection Agent, Borrower and Lender. (ii) Custodial Agreement. The Custodial Agreement, executed ------------------- by Custodian, Borrower and Lender. (iii) Guaranty. An unconditional, continuing guaranty -------- agreement executed by Guarantor, substantially in the form attached hereto as Exhibit G. --------- (iv) Assignment of Additional Collateral. Borrower shall have ------------------------------------ executed and delivered to Lender an Assignment of Additional Collateral substantially in the form attached hereto as Exhibit I. --------- (v) Subordination Agreement. A Subordination Agreement ----------------------- executed by Borrower, Guarantor, each officer of Borrower who is an affiliate of Guarantor, each subsidiary of Borrower (except Central Nevada Utilities Company and those subsidiaries listed in Schedule 6.6 ------------ noted with an asterisk) and each subsidiary of Guarantor other than Borrower, substantially in the form attached hereto as Exhibit J. --------- (vi) Environmental Indemnity. An Environmental Indemnity ------------------------ Agreement, executed by Borrower in favor of Lender, substantially in the form attached hereto as Exhibit K. --------- (vii) Financing Statements. UCC Financing Statements covering --------------------- the Collateral, in form and substance satisfactory to Lender and its counsel, to be recorded in Nye County, Nevada, and with the Nevada Secretary of State (if the Collateral was generated by the sale of lots in Nye County, Nevada) or in Park County, Colorado and with the Colorado Secretary of State (if the Collateral was generated from the sale of SPR Lots or HSR Lots). (viii) Other Items. Such other agreements, documents, ------------ instruments and certificates as Lender may request in good faith to evidence the Indebtedness and to evidence and perfect the liens and security interests contemplated by the Loan Documents. 4.1(m) UCC Searches. Lender shall have obtained such searches of the ------------- applicable -24- public records as it deems necessary under Nevada and Colorado law to verify that it has a first and prior perfected lien and security interest covering all of the Primary Collateral. Lender shall not be obligated to fund any Advance if Lender determines that it does not have a first and prior perfected lien and security interest covering any portion of the Primary Collateral. 4.1(n) Government Permits. Lender shall have received copies of all ------------------- applicable governmental permits, subdivision approvals, consents and licenses for the intended use and operation of the Subdivisions and the Lots, and letters from utility companies confirming that water, sanitary sewer, electricity, and telephone service are or will be made available to each of the Lots encumbered by the Pledged Deeds of Trust. 4.1(o) Lot Sale Documents. Lender shall have received copies and ------------------- approved of the form of all documents relating to the purchase, sale, conveyance and financing of the Lots (the "Lot Sale Documents"), including: (i) the current registration with and approval from the Real Estate Division of the Department of Commerce of the State of Nevada (for Lots located or sold in the State of Nevada) and registration with and the approval of the Colorado Real Estate Commission of the State of Colorado (for Lots located in the State of Colorado), to sell the Lots; (ii) other current registrations, approvals and permits for creation, offering for sale and sale of the Lots; and (iii) the current forms of all documents used to sell, convey or finance the Lots, including but not limited to the Lot purchase and sale agreement, the Grant, Bargain, Sale Deed for the Lots, the Note Receivable, the Deed of Trust, truth-in-lending statements and the Assignment of Deed of Trust to Lender. 4.1(p) Real Property Information. There shall have been delivered to -------------------------- Lender by Borrower at least fifteen (15) business days prior to the Closing Date: (i) evidence satisfactory to Lender that each of the Lots encumbered by the Pledged Deeds of Trust has been separately assessed and constitutes a single parcel for property tax purposes; (ii) evidence, which is satisfactory to Lender acting in good faith, that Borrower has good and marketable fee simple title to unsold Lots, subject to no Liens other than purchase money deeds of trust as listed in Schedule 4.1(p) to this Agreement; --------------- (iii) copies of recorded plat maps of the Subdivisions that identify the location of all Lots together with copies satisfactory to Lender of recorded exceptions to title appearing on any Title Policy; provided, however, that each -25- Title Policy insures over matters of survey; (iv) a "Phase I" engineering report or reports covering each Subdivision, confirming: (1) the absence of Hazardous Materials at the Subdivisions; and (2) that the engineering firm has obtained, reviewed and included within its report a CERCLIS printout from the Environmental Protection Agency (the "EPA"), statements from the EPA and other applicable state and local authorities and such other information as Lender may reasonably require, all of which information shall confirm that there is no known or suspected toxic or hazardous waste site located at any of the Subdivisions or in such proximity thereto as to create a material risk of contamination of any of the Subdivisions or any Lot encumbered by a Pledged Deed of Trust. 4.1(q) Taxes. Evidence satisfactory to Lender that all taxes owed by ------ Borrower have been paid, including but not limited to sales taxes, payroll taxes, personal property taxes, real property taxes, and income taxes. 4.1(r) Financial Statements. Current consolidated financial statements -------------------- for Borrower and Guarantor in form and substance satisfactory to Lender. 4.1(s) Audit. Information satisfactory to Lender to allow Lender to ------ conduct an audit of Borrower's and Guarantor's operations, assets, liabilities and the Collateral prior to the Closing Date. 4.1(t) Additional Items. Lender shall have received such additional ----------------- agreements, documents, instruments and certificates as it deems in good faith appropriate or necessary to effectuate the transactions contemplated by this Agreement. 4.2 Proceedings Satisfactory. All actions taken in connection with the ------------------------- execution of this Agreement and the Note and all documents and papers relating thereto or submitted to Lender pursuant to this Agreement shall be 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 therewith or as a basis for the closing opinion, if any, of Lender's counsel, all in form and substance satisfactory to Lender and its counsel. 4.3 Expenses. Borrower shall have paid all fees and expenses required to --------- be paid by Section 7.1(cc) of this Agreement. SECTION 5 --------- -26- CONDITIONS PRECEDENT TO ADVANCES -------------------------------- 5.1 Advances. The obligation of Lender to make an Advance shall be --------- subject all of the conditions precedent applicable to the closing of the Loan, including those set forth in Section 4 and Schedule 4.4. ------------ 5.1(a) Closing Conditions. Borrower shall have satisfied all of the ------------------- conditions precedent applicable to the closing of the Loan, including those set forth in Section 4 and Schedule 4.4. ------------- 5.1(b) Draw Request. Borrower shall have delivered a completed Draw ------------- Request substantially in the form of Exhibit B attached hereto, which --------- shall: (i) be in writing and shall designate the amount of the Borrowing Base for the requested Advance; (ii) be delivered to the office of Lender at least ten (10) business days prior to the date of the requested Advance; (iii) be signed by a principal financial or executive officer of Borrower; (iv) designate the principal amount of the Advance requested and the account to which the proceeds of such Advance are to be transferred; (v) state that the representations and warranties of Borrower contained in this Agreement are true and correct as of the date of the request and, after giving effect to the making of such requested Advance, will be true and correct as of the date on which the requested Advance is to be made, except as previously or contemporaneously disclosed in writing to Lender and, if permission or consent is required under this Agreement, such permission or consent has been granted in writing by Lender, or as otherwise permitted by this Agreement; (vi) state that no Default or Event of Default exists as of the date of the request and, after giving effect to the making of such requested Advance, no Default or Event of Default would exist as of the date on which the requested Advance is to be made; (vii) certify that Borrower has no knowledge of any asserted or threatened defense, offset, counterclaim, discount not disclosed in writing to Lender or allowance not disclosed in writing to Lender in respect of each Note Receivable to be pledged in connection with such requested Advance; and (viii) contain an aging report of the Notes Receivable. 5.1(c) Collateral Documents. Not less than fifteen (15) business days --------------------- prior to -27- the date of the requested Advance, Borrower shall have: (i) delivered to Custodian, with a copy to Lender, (or if Lender shall so instruct, to Lender) sufficient Eligible Notes Receivable to support the Advance requested, together with an executed and acknowledged Assignment of Notes Receivable relating thereto in the form of Exhibit H.1-1 (as to the Lots sold in the State of Nevada) ------------- and Exhibit H.1-2 (as to the SPR Lots sold in the State of Colorado) ------------- and Exhibit H.1-3 (as to the HSR Lots sold in the State of Colorado) ------------- attached hereto and made a part hereof; (ii) delivered to Title Company, with a copy to Lender and Custodian, (or if Lender shall so instruct, to Lender) a list of all Pledged Deeds of Trust and the Lots encumbered thereby, which are to be the subject of such requested Advance, together with an executed and acknowledged Assignment of Deeds of Trust relating thereto in the form attached hereto, made a part hereof and marked as Exhibit H.2-1 ------------- (for Deeds of Trust encumbering Lots in the State of Nevada), and in the form attached hereto, made a part hereof and marked as Exhibit ------- H.2-2 (for Deeds of Trust encumbering SPR Lots), and in the form ----- attached hereto, made a part hereof and marked as Exhibit H.2-3 (for ------------- Deeds of Trust encumbering HSR Lots) and such additional information as Lender may in good faith request. (iii) delivered to Custodian, with a copy to Lender, (or, if Lender shall so instruct, to Lender) the original of each Pledged Note Receivable (duly endorsed) referred to in such Assignment of Notes Receivable, together with the original or a conformed copy of each Pledged Deed of Trust referred to in such Assignment of Deeds of Trust, the related Truth-in-Lending Statement and "right to cancel notice" required under Nevada or Colorado statutes, as may be applicable, and copies of all other related Lot Sale Documents in respect of each such Pledged Note Receivable which Lender may request, together with a copy of the applicable recorded Grant, Bargain, Sale Deed; (iv) delivered to Lender, (or, if Lender shall so instruct, the Custodian, or an acceptable escrow agent with instructions to deliver the original thereof to Custodian upon recordation) the Title Policy with respect to each Lot encumbered by a Pledged Deed of Trust; and (v) delivered to Lender (or, if Lender shall so instruct, the Custodian) UCC Financing Statements covering the Collateral, to be recorded in the County in which the Lot is located and with the Secretary of State of the State of the State in which the Lot is located. The aforesaid Deeds of Trust and the assignments thereof to Lender shall each have been duly recorded in the land records of the Nye County, Nevada Recorder or Park County, Colorado, as may be applicable, or in such other land records as may be required to constitute the same a valid first lien on the Lot encumbered thereby and an effective assignment of the same to -28- Lender. The aforesaid mortgagee's title insurance policies shall be in form and substance satisfactory to Lender and shall be issued by a title insurance company satisfactory to Lender and name Lender, either as the Original insured party or by way of an endorsement thereto (which endorsement shall have been delivered to Lender), as the insured party thereon. If requested by Borrower, the contemporaneous funding of the requested Advance and delivery of the aforesaid Collateral and Title Policies and recording of the assignments of the Pledged Deeds of Trust shall be effected by way of an escrow arrangement with the Title Company, the form and substance of which shall be satisfactory to Lender. 5.1(4) Proceeds. The amount of such requested Advance shall equal or --------- exceed the amount necessary to pay to any holder of a senior or junior Lien in and to Pledged Notes Receivable being delivered in connection with such requested Advance and/or being encumbered by the liens in favor of Lender provided herein to procure the absolute and complete release of such senior or junior Lien in and to such Pledged Notes Receivable. 5.1(e) Other Conditions. The making of each requested Advance shall ----------------- further be subject to the satisfaction of the following conditions: (i) no Default or Event of Default shall exist immediately prior to the making of such requested Advance or, after giving effect thereto, immediately after the making of such requested Advance; (ii) each agreement required to have been executed and delivered in connection with any prior Advance shall be in full force and effect; (iii) the date on which such requested Advance is to be made is not on or after the Revolving Credit Period expires and shall be a Business Day; (iv) Borrower shall have delivered to Lender a current aging report in respect of all Pledged Notes Receivable previously pledged hereunder and the Pledged Notes Receivable being pledged contemporaneously with such requested Advance, which report shall be in form and substance satisfactory to Lender; shall show which of such Pledged Notes Receivable is delinquent and the duration of such delinquency; and shall be as of the last day of the preceding month; (v) not more than one Advance shall have previously been made in the same calendar month in which such requested Advance is to be made; and (vi) such requested Advance shall be in a principal amount of not less than $50,000.00. 5.1(f) Expenses. Borrower shall have paid all fees and expenses -------- required to be paid by Section 7.1(cc) of this Agreement in connection with such requested Advance. -29- 5.1(g) Proceedings Satisfactory. All actions taken in connection with ------------------------- such requested Advance and all documents and papers relating thereto shall be satisfactory to Lender and its counsel acting in good faith. Lender and its counsel shall have received copies of such documents and papers as Lender or such counsel may in good faith request in connection with such requested Advance, all in form and substance satisfactory to Lender and its counsel. SECTION 6 --------- GENERAL REPRESENTATIONS AND WARRANTIES -------------------------------------- Borrower hereby represents and warrants to Lender as follows: 6.1 Organization, Standing, Qualification. Borrower (a) is a corporation -------------------------------------- duly organized, validly existing and in good standing under the laws of the State of Nevada (as to Preferred Equities Corporation) and is a corporation duly organized, validly existing and in good standing under the laws of the State of Colorado (as to Colorado Land and Grazing Corp.), (b) are duly qualified and in good standing as a foreign corporation under the laws of those states wherein the nature of its business or the ownership of its properties requires such qualification, and (c) have all requisite power, corporate or otherwise, to conduct their business and to execute and deliver, and to perform their obligations under, the Loan Documents. 6.2 Authorization, Enforceability, Etc. ----------------------------------- 6.2(a) The execution, delivery and performance by Borrower of the Loan Documents has been duly authorized by all necessary corporate action by Borrower and does not and will not (i) violate any provision of the certificate or articles of incorporation, bylaws, or any agreement, law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect to which Borrower is a party or is subject; (ii) result in, or require the creation or imposition of, any lien upon or with respect to any asset of Borrower other than liens and security interests in favor of Lender; or (iii) result in a breach of, or constitute a default by Borrower under, any indenture, loan or credit agreement or any other agreement, document, instrument or certificate to which Borrower is a party or by which it or any of its assets are bound or affected. 6.2(b) No approval, authorization, order, license, permit, franchise or consent of, or registration, declaration, qualification or filing with, any governmental authority is required in connection with the execution, delivery and performance by Borrower of any of the Loan Documents. 6.2(c) The Loan Documents, when duly executed and delivered by Borrower, will constitute legal, valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, subject to the exceptions, limitations and qualifications set forth in the closing opinion relating to Borrower referred to in Section 4.1(a) of this -30- Agreement. 6.2(d) Each of the Eligible Notes Receivable and Pledged Deeds of Trust constitutes the legal, valid and binding obligations of the respective Account Debtor thereof, enforceable against such Account Debtor in accordance with their respective terms, subject to the same exceptions, limitations and qualifications referred to in Section 6.2(c) above and to the procedural requirements and limitations of NRS 40.430, NRS 40.451 et. seq. and NRS 107.020 -------- et. seq. and similar provisions of Colorado law, if any, and to the best - -------- knowledge of Borrower, none of the Pledged Notes Receivable is forged or has affixed thereto any unauthorized signatures or has been entered into by any Person without the required legal capacity; and during the term of this Agreement, none will be forged, or will have affixed thereto, any unauthorized signatures or will be entered into by any Person without the required legal capacity. 6.3 Financial Statements and Business Condition. Preferred Equities -------------------------------------------- Corporation's and Guarantor's annual financial statements were prepared in accordance with GAAP and fairly present the respective financial conditions and results of operations of Preferred Equities Corporation and Guarantor as of the date or dates thereof and for the periods covered thereby. There were no material liabilities, direct or indirect, fixed or contingent, of Preferred Equities Corporation or Guarantor as of the dates of such annual financial statements which were not reflected therein or in the notes thereto, which have not otherwise been disclosed to Lender in writing. Preferred Equities Corporation's and Guarantor's quarterly interim financial statements fairly present the respective financial conditions and results of operation of Preferred Equities Corporation and Guarantor as of the dates thereof and for the periods covered thereby, subject to any changes required as a result of year end adjustments. Except for any such changes heretofore expressly disclosed in writing to Lender, there has been no material adverse change in the respective financial conditions of Preferred Equities Corporation or Guarantor from the financial conditions shown in their respective financial statements, nor have Preferred Equities Corporation or Guarantor incurred any material liabilities, direct or indirect, fixed or contingent, which are not shown in their respective financial statements. Preferred Equities Corporation is able to pay all of its debts as they become due, Preferred Equities Corporation shall maintain such solvent financial condition, giving effect to the Indebtedness, as long as Preferred Equities Corporation is obligated to Lender under this Agreement or in any other manner whatsoever. Preferred Equities Corporation's obligations under this Agreement and under the Loan Documents will not render Preferred Equities Corporation unable to pay its debts as they become due. The present fair market value of its assets is greater than the amount required to pay its total liabilities. 6.4 Taxes. Borrower has paid all ad valorem taxes and other taxes and ------ assessments that are due and payable against its Properties, including each of the Lots owned by Borrower, and knows of no basis for any additional taxes or assessments against the Lots or such other Properties. Borrower has filed all tax returns required to have been filed by it and has paid all taxes shown to be due and payable on such returns, including interest and penalties, and all other taxes which are payable by it, to the extent the same have become due and payable. 6.5 Title to properties: Prior Liens. --------------------------------- -31- 6.5(a) Lots. Borrower has good and marketable title to the Lots, and ----- there are no Liens against the Lots other than (i) as set forth in Schedule -------- 4.1(p) to this Agreement, (ii) covenants, conditions, restrictions and easements - ------ of record as set forth in Schedule 6.5(a) or otherwise approved in writing by --------------- Lender and (iii) real property taxes which are a lien but the current installments of which are not yet due and payable (clauses (ii) and (iii) hereof being collectively the "Permitted Exceptions"). 6.5(b) Other Properties. With the exception of the temporary ----------------- unmarketability of title to Borrower's interests in a 48.7 acre parcel resulting from Borrower's reconfiguration of the Preferred RV Resort, Borrower has good and marketable record or beneficial title to its other real Property, subject to various Liens. Borrower is not in material default under any of the documents evidencing or securing any indebtedness which is secured, wholly or in part, by such other real Property, and no event has occurred which with the giving of notice, the passage of time or both, would constitute a material default under any of the documents evidencing or securing any such indebtedness. 6.6 Subsidiaries and Capital Structure. Borrower has no subsidiaries other ----------------------------------- than the subsidiaries identified in Schedule 6.6 to this Agreement or otherwise ------------ disclosed to Lender. With the exception of Central Nevada Utilities Company and Central Nevada Realty Company, Borrower has no affiliates that have any involvement or interest in the Subdivisions in any way. Preferred Equities Corporation is the sole stockholder of Colorado Land and Grazing Corp., and shall remain the sole stockholder of Colorado Land and Grazing Corp. as long as of Colorado Land and Grazing Corp. is obligated to Lender under this Agreement. The Guarantor is the sole stockholder of Borrower, and shall remain the sole stockholder of Borrower, as long as Borrower is obligated to Lender under this Agreement. 6.7 Litigation, Proceedings, Etc. Except as set forth in Schedule 6.7 ----------------------------- ------------ attached to this Agreement, there are no actions, suits, proceedings, orders or injunctions pending or threatened against or affecting Borrower or Guarantor, at law or in equity, or before or by any governmental or quasi-governmental authority or agency, which (a) could have a material adverse effect on Borrower or Guarantor or (b) relate to the Loan or any of the Subdivisions or the Lots. Borrower has received no notice from any court or governmental authority alleging that Borrower has violated the Lot Sales Acts or any other applicable laws. 6.8 Licenses, Permits, Etc. Borrower, and any affiliate of Borrower ----------------------- having any involvement or interest in the Subdivisions, possess all requisite franchises, certificates of convenience and necessity, operating rights, licenses, permits, consents, authorizations, exemptions and orders as are necessary to carry on its business as now being conducted, without any known conflict with the rights of others. 6.9 Environmental Matters. Borrower represents and warrants that (a) the ---------------------- Subdivisions do not contain any Hazardous Material, (b) neither Borrower nor, to Borrower's knowledge, any owner of a Lot has received notice from any governmental agency, entity or other Person with regard to Hazardous Materials on or affecting the Subdivisions or any Lot, and (c) neither Borrower nor the Subdivisions, Lots or any portions thereof, are in violation of any -32- applicable federal, state, or local environmental or health laws relating to or affecting the Subdivisions, the Lots or Borrower. 6.10 Full Disclosure. No information, exhibit or written report furnished ---------------- by or on behalf of Borrower to Lender in connection with the Loan contains any material misstatement of fact or omits the statement of a material fact necessary to make the statement contained herein or therein not misleading. Borrower knows of no fact or condition which will prevent it from selling the Lots to Purchasers. 6.11 Use of Proceeds; Margin Stock. The use of the proceeds from the Loan ------------------------------ shall not be materially (as determined in good faith by Lender) different from the uses set forth in Schedule 6.11 to this Agreement. None of the proceeds of ------------- the Loan will be used to purchase or carry any "margin stock" (as defined under Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time), and no portion of the proceeds of the Loan will be extended to others for the purpose of purchasing or carrying margin stock. None of the transactions contemplated in this Agreement (including, without limitation, the use of the proceeds from the Loan) will violate or result in the violation of Section 7 of the Securities Exchange Act of 1934, as amended, or any regulations issued pursuant thereto, including, without limitation, Regulations G, T, U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter 11. 6.12 No Defaults. No Default or Event of Default exists, and with the ------------ possible exception of controverted matters set forth in Schedule 6.7 attached ------------ hereto, there is no violation in any material respect of any term of any material agreement, charter instrument, bylaw or other material instrument to which Borrower is a party or by which it may be bound. 6.13 Compliance with Law. Neither Borrower nor any affiliate of Borrower -------------------- having any involvement or interest in the Subdivisions: 6.13(a) is in material violation of any laws, ordinances, governmental rules or regulations to which it is subject; and 6.13(b) has failed to obtain any material licenses, permits, franchises or other governmental authorizations, or to make or cause to be made any registrations or declarations with any government or agency or department thereof, necessary to the ownership of its Property or to the conduct of its business including, without limitation, the development of the Subdivisions and the sale, or offering for sale, of the Lots; which violation under Section 6.13(a) above or failure to obtain or register under this Section 6.13(b) materially adversely affects the business, prospects, profits, Properties or condition (financial or otherwise) of Borrower. Borrower has, to the extent required by its activities and businesses, fully complied with (1) all material requirements of the applicable provisions of (a) the Consumer Credit Protection Act, as amended; (b) the Federal Trade Commission Act, as amended; (c) the ILSFDA; (d) all rules and regulations promulgated under the foregoing Acts; and (e) all other applicable federal statutes and the rules and regulations promulgated thereunder; and (2) all material -33- requirements of the applicable provisions of any law of any state (and the rules and regulations promulgated thereunder) applicable to the sale, offering for sale, or financing of Lots. Borrower further represents and warrants that any noncompliance with any of the above laws, rules and regulations has no and will not have any adverse effect on the Collateral. 6.14 Restrictions of Borrower. Borrower is not a party to any contract or ------------------------- agreement, or subject to any charter or other corporate restriction, which materially and adversely affects its business. Borrower will not be, on or after the Closing Date, a party to any contract or agreement which prohibits the execution and delivery of, or compliance with, this Agreement by Borrower. With the exception of the Loan Documents, Borrower has not agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its Property constituting the Primary Collateral, whether now owned or hereafter acquired, to be subject to a Lien. 6.15 Broker's Fees. Lender and Borrower represent to each other that -------------- neither of them has made any commitment or taken any action which will result in a claim for any brokers, finders' or other similar fees or commitments with respect to the transactions described in this Agreement. Lender represents to Borrower that TFC has not made any such commitment or taken any such action. Subject to the accuracy of the foregoing representations by Lender, Borrower agrees to protect, defend and indemnify Lender and save and hold it harmless from all claims of any Persons for any such fees and this indemnity shall include reasonable attorneys' fees and legal expenses. 6.16 Deferred Compensation Plans. Except for a 401(k) Plan, Borrower has ---------------------------- no pension, profit sharing or other compensatory or similar plan (herein called a "Plan") providing for a program of deferred compensation for any employee or officer. No fact or situation, including but not limited to, any "Reportable Event," as that term is defined in Section 4043 of the Employee Retirement Income Security Act of 1974 as the same may be amended from time to time ("Pension Reform Act"), exists or will exist in connection with any Plan of Borrower which might constitute grounds for termination of any Plan by the Pension Benefit Guaranty Corporation or cause the appointment by the appropriate United States District Court of a Trustee to administer any such Plan. No "Prohibited Transaction" within the meaning of Section 406 of the Pension Reform Act exists or will exist upon the execution and delivery of this Agreement or the performance by the parties hereto of their respective duties and obligations hereunder. Borrower will (1) at all times make prompt payment of contributions required to meet the minimum funding standards set forth in Sections 302 through 305 of the Pension Reform Act with respect to each of its Plans; (2) promptly, after the filing thereof, furnish to Lender copies of each annual report required to be filed pursuant to Section 103 of the Pension Reform Act in connection with each Plan for each Plan Year, including any certified financial statements or actuarial statements required pursuant to said Section 103; (3) notify Lender immediately of any fact, including, but not limited to, any Reportable Event arising in connection with any Plan which might constitute grounds for termination thereof by the Pension Benefit Guaranty Corporation or for the appointment by the appropriate United States District Court of a Trustee to administer the Plan; and (4) notify Lender of any Prohibited Transaction. Borrower will not -34- (a) engage in any Prohibited Transaction or (b) terminate any such Plan in a manner which could result in the imposition of a Lien on the Property of Borrower pursuant to Section 4068 of the Pension Reform Act. 6.17 Labor Relations. The employees of Borrower are not a party to any ---------------- collective bargaining agreement with Borrower, and, to the best knowledge of Borrower and its officers, there are no material grievances, disputes or controversies with any union or any other organization of Borrower's employees, or threats of strikes, work stoppages or any asserted pending demands for collective bargaining by any union or organization. 6.18 Improved Lots. -------------- 6.18(a) Access. Each Lot encumbered by a Pledged Deed of Trust has ------- direct access to a publicly dedicated right of way. 6.18(b) Utilities. Electric, sewer, water facilities and other ---------- necessary utilities are available in sufficient capacity to service foreseeable development of the Lots encumbered by the Pledged Deeds of Trust upon extension thereto and request therefor, and any easements necessary to the furnishing of such utility service have been obtained and duly recorded. 6.18(c) Amenities. Subject to payment of required charges and ---------- compliance with reasonable requirements, each Purchaser of a Lot encumbered by a Pledged Deed of Trust has right of access to and the use of all of the public amenities and public utilities of the Subdivision in which it is located. 6.18(d) Construction. All costs arising from the construction by ------------- Borrower of any improvements to the Lots encumbered by the Pledged Deeds of Trust have been paid. 6.18(e) Sale of Lots. The sale, offering of sale, and financing of ------------- the Lots (1) do not constitute the sale, or the offering of sale, of Securities subject to the registration requirements of the Securities Act of 1933, as amended, or any state securities law; (2) do not violate any applicable lot sales law, statute or regulation of the State of Nevada, State of Colorado or any other state in which a Purchaser resides; and (3) do not violate any applicable consumer credit or usury statute of any of the State of Nevada, State of Colorado or any other state in which a Purchaser resides. 6.19 Lot Sale Reports. Borrower has furnished to Lender true and correct ----------------- copies of all current forms of Lot Sale Documents placed on file by Borrower with any federal, state or local regulatory or recording agencies, offices or departments. All such filings in respect of the Lots have been made and all laws and statutes in connection therewith have been complied with. All such current filings in respect of the Lots are listed in Schedule 6.19 attached hereto. ------------- -35- SECTION 7 --------- COVENANTS --------- 7.1 Affirmative Covenants. So long as any portion of the Indebtedness ---------------------- remains unpaid, Borrower hereby agrees with Lender as follows: 7.1(a) Payment and Performance of Indebtedness. Borrower shall pay ---------------------------------------- all of the Indebtedness when and as the same become due and payable, and Borrower shall strictly observe and perform all covenants, agreements, terms, conditions and limitations contained in the Loan Documents and will do all things necessary which are not prohibited by law to prevent the occurrence of any Event of Default hereunder, and Borrower will maintain an office or agency in the State of Nevada where notices, presentations and demands in respect of this Agreement or the Note may be made upon Borrower. Such office or agency and the books and records of Borrower shall be maintained at Las Vegas, Nevada until such time as Borrower shall so notify Lender, in writing, of any change of location of such office or agency. 7.l(b) Maintenance Of Existence, Qualification and Assets. Borrower --------------------------------------------------- shall at all times (i) maintain its legal existence, (ii) maintain its qualification to transact business and good standing in the State of Nevada (as to Preferred Equities Corporation) and in the State of Colorado (as to Colorado Land and Grazing Corp.), and (iii) comply with all governmental laws, rules, regulations and ordinances applicable to Borrower or its business, including, without limitation, the Lot Sales Acts. 7.1(c) Consolidation and Merger. With the exception of one or more of ------------------------- its Subsidiaries, Preferred Equities Corporation will not consolidate with or merge into any other Person or permit any other Person to consolidate with or merge into it. 7.1(d) Maintenance of Insurance. Borrower shall maintain (or shall ------------------------- cause to be maintained) original paid-up insurance policies issued by insurance companies, in amounts, in form and in substance, and with expiration dates all acceptable to Lender providing public liability insurance covering Lots owned by Borrower. All insurance policies required pursuant to this Agreement shall provide that the coverage afforded thereby shall not expire or be amended, canceled, modified or terminated without at least thirty (30) days prior written notice to Lender. At least thirty (30) days prior to the expiration date of each policy maintained pursuant to this Section 7.1(d), a renewal or replacement thereof satisfactory to Lender shall be delivered to Lender. Borrower shall deliver to Lender receipts evidencing the payment for all such insurance policies and renewals or replacements. 7.1(e) Maintenance of Security. Borrower shall execute and deliver ------------------------ (or cause to be executed and delivered) to Lender all security agreements, financing statements, assignments and such other agreements, documents, instruments and certificates, and -36- supplements and amendments thereto, and take such other actions, as Lender deems in good faith necessary or appropriate in order to maintain (i) as valid, enforceable and perfected first priority liens and security interests, all liens and security interests in and to the Primary Collateral and (ii) as valid and enforceable, all liens and security interests in and to the Secondary collateral, granted to Lender to secure the Indebtedness described in clauses (i) through (iii), inclusive, of Section 1.1(y) of this Agreement. 7.1(f) Payment of Taxes and Claims. Borrower will pay all taxes ---------------------------- imposed upon it or any of its Property (including, without limitation, the Lots and Collateral), or with respect to any of its franchises, businesses, income or profits before any penalty or interest accrues thereon, and shall pay all other charges and assessments against Borrower before any material claim (including, without limitation, claims for labor, services, materials and supplies) arises for sums which have become due and payable. Borrower shall not allow any Liens whatsoever (including, without limitation, claims for labor, services, materials and supplies) to arise for sums which have become due and payable. Borrower shall not allow any Liens whatsoever (including, without limitation, mechanic's, materialmen's or tax liens) to attach to any of the Collateral. In the event any Lien attaches to any of the Collateral, Borrower shall, within ten (10) days of the earlier of Borrower receiving formal notice or obtaining actual knowledge thereof, either (i) bond or otherwise cause such lien to be released of record or (ii) provide Lender with a bond in accordance with the applicable laws of the State of Nevada or State of Colorado, as may be applicable, such bond being issued by a corporate surety acceptable to Lender, in an amount acceptable to Lender and in form acceptable to Lender. 7.1(g) Inspections. Borrower shall invoice and provide accounting and ------------ servicing for the Pledged Notes Receivable so long as the Loan is outstanding and no Default or Event of Default exists. All servicing expenses shall be paid by Borrower. 7.1(h) Reporting Requirements. So long as any portion of the ----------------------- Indebtedness remains unpaid, Borrower shall furnish (or cause to be furnished, as the case may be) to Lender the following: (i) Monthly Financial Reports. As soon as available and in -------------------------- any event within fifteen (15) days after and as of the end of each calendar month, a report showing (i) the trial balance of the Pledged Notes Receivable, (ii) an aging report on the Pledged Notes Receivable, (iii) a report detailing the collections on each of the Pledged Notes Receivable, all in such form as may be approved by Lender; and (iv) a Borrowing Base Certificate; (ii) Annual Financial Statements. As soon as available and in ---------------------------- any event within one hundred twenty (120) days after the end of each fiscal year of Preferred Equities Corporation, copies of the audited income statements and statement of changes in financial position of Preferred Equities Corporation for the annual period ended as of the end of such fiscal year, and copies of the audited balance sheet of Preferred Equities Corporation as of the end of such -37- fiscal year, prepared in accordance with GAAP on a basis consistent with prior accounting periods. Each annual financial statement of Preferred Equities Corporation shall be certified by Preferred Equities Corporation to fairly present the financial condition or results of operations of the Preferred Equities Corporation as of the date thereof or for the period covered thereby and to be in substantial compliance with any applicable regulations of the Securities and Exchange Commission. Each such financial statement shall be accompanied by a certificate executed by Preferred Equities Corporation and in form acceptable to Lender evidencing Preferred Equities Corporation's compliance with the financial covenants described in Section 7.2(h) hereof. All financial statements of Preferred Equities Corporation required hereunder shall be consolidated statements; (iii) Guarantor's Financial Statements. As soon as available and --------------------------------- in any event within one hundred twenty (120) days after the end of each fiscal year of Guarantor, copies of the audited income statements and statement of changes in financial position of Guarantor for the annual period ended as of the end of such fiscal year, and copies of the audited balance sheet of Guarantor as of the end of such fiscal year, all prepared in accordance with GAAP on a basis consistent with prior accounting periods. Each annual financial statement of Guarantor shall be certified by Guarantor to fairly present the financial condition or results of operations of the Guarantor as of the date thereof or for the period covered thereby and to be in substantial compliance with all applicable regulations of the Securities and Exchange Commission; (iv) Officer's Certificate. Each set of annual financial ---------------------- statements or reports delivered to Lender pursuant to Section 7.1(h)(ii) of this Agreement will be accompanied by a certificate of either the President, Executive Vice President or a Senior Vice President and the chief financial officer of Borrower setting forth: (1) Covenant Compliance. That the information -------------------- (including detailed calculations) required in order to establish whether Borrower was in compliance with all financial covenants contained in this Agreement during the period covered by the financial statements or reports then being furnished: (2) Event of Default. That the signers have reviewed ----------------- the relevant terms of this Agreement (and all other agreements and exhibits between the parties relating to the Loan) and have made, or caused to be made, under their supervision, a review of the transactions and conditions of Borrower from the beginning of the period covered by the financial statements or reports being delivered therewith to the date of the certificate and that such review has not disclosed the existence during such period of any condition or event which constitutes a Default or Event -38- of Default or, if any such condition or event existed or exists or will exist, specifying the nature and period of existence thereof and what action Borrower has taken or proposes to take with respect thereto; (v) Accountant's Certificate. The annual financial statements ------------------------- delivered pursuant to Section 7.1(h) (ii) of this Agreement will be accompanied by a certificate of the accountants who prepare such financial statements, stating that in making the examination required for the audit they did not obtain knowledge of any condition or event which then constitutes a Default or Event of Default, or if they shall have obtained such knowledge, specifying the same; (vi) Sales Reports. Concurrently with the financial statements -------------- required pursuant to Section 7.1(h) (ii), Borrower shall deliver to Lender an annual sales report from the Subdivisions detailing the sales of all Lots for the period covered thereby, certified by Borrower to be true, correct and complete in all material respects and otherwise in the form approved by Lender; (vii) Opinions of Independent Accountants. As soon as ------------------------------------ practicable after the end of each fiscal year of Borrower, and in any event not later than one hundred twenty (120) days thereafter, copies of all opinions of independent accountants relied upon by the accountants in connection with the certificate referred to in Section 7.1(h) (v) above; (viii) Audit Reports. Promptly upon receipt thereof, one (1) copy -------------- of each other report submitted to Borrower by independent public accountants in connection with any annual, interim or special audit made by them of the books of Borrower; (ix) SEC and Other Reports. Promptly upon their coming ---------------------- available one (1) copy of each financial statement, report, notice or proxy statement sent by Borrower or Guarantor to Security holders generally, and of each regular or periodic report and any registration statement, prospectus or non-routine written communication in respect thereof filed by Borrower or Guarantor with, or received by Borrower or Guarantor in connection therewith from, any securities exchange or the Securities and Exchange Commission or any successor agency; (x) Notice of Default or Event of Default. Immediately upon -------------------------------------- becoming aware of the existence of any condition or event which constitutes a Default or an Event of Default, a written notice specifying the nature and period of existence thereof and what action Borrower is taking or proposes to take with respect thereto; (xi) Notice of Claimed Default. Immediately upon becoming -------------------------- aware that the holder of any obligation or of any evidence of indebtedness or other Security of Borrower has given notice or taken any other action with respect to a -39- claimed default or event of default thereunder, a written notice specifying the notice given or action taken by such holder and the nature of the claimed default or event of default and what action Borrower is taking or proposes to take with respect thereto; (xii) Material Adverse Developments. Immediately upon becoming ------------------------------ aware of any development or other information which may materially and adversely affect the subdivisions or any material part thereof, business, prospects, profits or condition (financial or otherwise) of Borrower or the ability of Borrower to perform its obligations under this agreement, telephonic or telegraphic notice specifying the nature of such development or information and such anticipated effect; and (xiii) Other Information. Borrower will promptly deliver to ------------------ Lender any other information related to the Loan, the Collateral, Borrower, Guarantor or the financial statements of Borrower and Guarantor as Lender may in good faith request. In addition, concurrently with the financial statements described in Section 7.1(h) above, Borrower shall cause to be furnished to Lender the financial statements described in the Guaranty from time to time. 7.1(i) Records. Borrower shall keep adequate records and books of -------- account reflecting all financial transactions of Borrower, in which complete entries will be made in accordance with GAAP. In addition, Borrower shall keep accurate records of all sales of Lots. 7.1(j) Inspection. Borrower shall permit Lender or its ----------- representatives to make, from time to time, inspections of its books, accounts, records, orders, original correspondence, computer tapes, disks and software and such other papers as it may desire and of its premises, the Subdivisions, its Properties and the Collateral. Such inspections shall be at the expense of Borrower. Borrower shall supply copies of such records and papers as Lender may request, and shall permit Lender to discuss Borrower's respective affairs, finances and accounts with Borrower's officers, employees and independent public accountants (and by this provision Borrower hereby authorizes said accountants to discuss with Lender the finances and affairs of Borrower) all at such reasonable times and as often as may be reasonably requested. Borrower further agrees to supply Lender with such reasonable information relating to Borrower and the Collateral as Lender may request. 7.1(k) Other Obligations. Borrower shall, within seven (7) days after ------------------ Borrower learns of any such default, provide Lender with written notice of the occurrence of any default by Borrower of which Borrower becomes aware (i) in the payment of any indebtedness of Borrower in an aggregate amount in excess of $100,000.00 other than the Loan or (ii) in the performance of any other obligations of Borrower to any other Person if such default would have a material adverse effect on Borrower's business or properties. -40- 7.1(1) Management. Preferred Equities Corporation shall cause at ----------- least two (2) of Messrs. Jerome J. Cohen, President, Jon A. Joseph, General Counsel and Senior Vice President, Gregg A. McMurtrie, Executive Vice president and Chief Operating Officer and Carol Sullivan, Senior Vice president and Chief Financial Officer of Preferred Equities Corporation to remain engaged in the active management of Preferred Equities Corporation and perform duties substantially similar to those presently performed by such Persons, in their respective executive offices set forth above. In the event of the retirement, voluntary termination or death of three or more of such persons, the third and/or fourth of such person or persons shall be replaced by a person or persons who have substantially equivalent experience, background and demonstrated ability to perform the duties performed by the individual being replaced and who is in all other respects reasonably satisfactory to Lender within six (6) months of the date of any such event. 7.1(m) FICA. Upon request by Lender, Borrower shall furnish to ----- Lender within thirty (30) days after the expiration of each calendar quarter proof reasonably satisfactory to Lender that Borrower's obligations to make deposits for F.I.C.A., social security and withholding taxes have been satisfied. 7.1(n) Information. Borrower shall notify Lender within five (5) days ------------ after Borrower's receipt of notice of (i) any claims asserted by any third party against or with respect to the Collateral and (ii) any other information which Borrower may receive with regard to the Collateral which might in any way materially and adversely affect the value of the Collateral or the rights or remedies of Lender in respect of the Collateral. In addition, Borrower shall promptly notify Lender of any material change in any facts or circumstances represented or warranted by Borrower under any of the Loan Documents. 7.1(o) Notices. Borrower shall notify Lender within five (5) days of -------- the occurrence of any event (i) as a result of which any representation or warranty of Borrower contained in any Loan Documents would be false or materially misleading if made at that time (other than events in the ordinary course of business that are not materially adverse to Borrower, Guarantor or the Subdivisions), or (ii) as a result of which Borrower is not in full compliance with all of its covenants and agreements contained in this Agreement, or (iii) which constitutes or, with the passage of time, notice or a determination by Lender would constitute, an Event of Default. 7.1(p) Maintenance. Borrower shall maintain, or shall cause to be ------------ maintained, any roads, utility service and supply systems and required offsite improvements for the Subdivisions which are owned or leased by Borrower in good repair, working order and condition and shall make all necessary replacements thereto. 7.1(q) Proceeds. Immediately upon Borrower's receipt of proceeds from --------- the sale of any of the Collateral, Borrower shall deliver such proceeds to Lender in their original form and pending delivery to Lender, Borrower will hold such proceeds as agent for Lender and in trust for Lender. -41- 7.1(r) Title. Borrower shall promptly notify Lender of any claim, ------ action or proceeding affecting title to the Collateral, or any part thereof, or any of the security interests granted hereunder, and, at the request of Lender, appear in and defend, at Borrower's expense, any such claim, action or proceeding. 7.1(s) Transaction with Affiliates. Borrower will not enter into any ---------------------------- transaction including, without limitation, the purchase, sale or exchange of Lots or the rendering of any service with any affiliate except in the ordinary course of, and pursuant to the reasonable requirement of, Borrower's business and upon fair and reasonable terms no less favorable to Borrower than would be obtained in a comparable arm's-length transaction with a Person not an affiliate. 7.1(t) Use of Lender Name. Borrower will not, and will not permit any ------------------- affiliate to, without the prior written consent of Lender, use the name of Lender or the name of any affiliates of Lender in connection with any of their respective businesses or activities, except in connection with internal business matters and as required in dealings or filings with governmental agencies. 7.1(u) Registration and Regulations. ----------------------------- (i) Local Legal Compliance. Borrower has complied and will ----------------------- comply with all material requirements of all restrictive covenants, zoning or land use ordinances and building codes, health and environmental laws and regulations, and all other laws, rules and regulations applicable to the Lots. Borrower will not without Lender's prior written consent seek, consent to, or otherwise acquiesce in, any change in any private restrictive covenant, zoning law or other public or private restriction, which would limit the use of the Lots encumbered by the Pledged Deeds of Trust or reduce their fair market value; (ii) Registration Compliance. Borrower will maintain, or ------------------------ cause to be maintained, all necessary consents, franchises, approvals, and exemption certificates, and Borrower will make, or cause to be made, all registrations or declarations with any government or any agency or department thereof required in connection with the development of the Subdivisions and the sale and offering for sale of Lots. All such filings and reports will be truthfully completed; and true and complete copies of such applications, consents, licenses, permits, franchises, approvals, exemption certificates, filings and reports will be delivered to Lender. Before it sells or offers for sale Lots in jurisdictions other than the States of Nevada, Colorado, California or Hawaii, Borrower will promptly notify Lender and provide it with evidence that it has complied with all laws of such jurisdictions governing the proposed conduct of Borrower if any Note Receivable resulting from such sales are pledged or proposed to be pledged to Lender; and (iii) Other Compliance. Borrower has complied with and will ----------------- comply with all material requirements of applicable laws and regulations of the United States, the -42- States, Counties, if any, and municipal jurisdictions, in which the Lots or Account Debtors are located and each State or other jurisdiction in which Lots encumbered by the Pledged Deeds of Trust have been sold or offered for sale, including to the extent applicable, but not limited to: (1) the Consumer Credit Protection Act, as amended; (2) Regulation Z of the Federal Reserve Board, as amended; (3) the Equal Credit Opportunity Act, as amended; (4) Regulation B of the Federal Reserve Board; (5) the Commission's 3-day cooling-off Rule for Door-to-Door Sales; (6) Section 5 of the Federal Trade Commission Act, as amended, and the regulations promulgated thereunder; (7) ILSFDA, as amended, and the regulations promulgated thereunder; (8) the federal postal laws and the regulations promulgated thereunder; (9) the securities laws and regulations of each such jurisdiction; (10) the usury laws and regulations of each such jurisdiction; (11) the trade practices, home and telephone solicitation, sweepstakes, anti-lottery and consumer credit and protection laws and regulations of each such jurisdiction; and (12) the real estate sales licensing laws of each such jurisdiction. Borrower further represents and warrants that any noncompliance with any of the above laws and regulations has no and will not have any adverse effect on the Collateral. 7.1(v) Other Documents. Borrower will maintain accurate and complete ---------------- files relating to the Pledged Notes Receivable and other Collateral to the satisfaction of Lender, and such files will contain copies of each Pledged Note Receivable, as amended from time to time, copies of all relevant credit memoranda relating to such Pledged Notes Receivable and all collection information and correspondence relating thereto. 7.1(w) Form of Note Receivable. Instruments in substantially the ------------------------ form of Exhibit L-1, Exhibit L-2, Exhibit L-3, Exhibit L-4, Exhibit L-5 ----------- ----------- ----------- ----------- ----------- attached hereto shall be used by Borrower for all Notes Receivable transactions which may be entered into in the future during the term of the Loan. Borrower will not modify, amend or otherwise alter the form of or any of the terms of the Notes Receivable or any other documents relating thereto without Lender's prior written consent, except as may be required by law or regulatory agency. Borrower will promptly notify Lender of any such modification, amendment or alteration required by any such law or regulatory agency. 7.1(x) Subordinated Indebtedness. Borrower will not, directly or -------------------------- indirectly, (a) permit any payment to be made in respect of any indebtedness, liabilities or obligations, director or contingent, which are subordinated by the terms thereof or by separate instrument to the payment of principal of, and interest on, the Note (the "Subordinated Obligations") except to the extent permitted in accordance with the terms of such subordination, (b) permit the amendment, rescission or other modification of any such subordination provisions of any Subordinated Obligations in such a manner as to affect adversely Lender's Collateral or the prior position of the Note, or (c) permit the prepayment or redemption, except for mandatory prepayments, of all or any part of any Subordinated Obligations except to the extent permitted in accordance with the terms of such subordination. 7.1(y) Further Assurances. Borrower will execute and deliver, or ------------------- cause to be -43- executed and delivered, such other and further agreements, documents, instruments, certificates and assurances as, in the judgment of Lender exercised in good faith, may be necessary or appropriate to more effectively evidence or secure the Indebtedness and to ensure the performance of the terms and provisions of the Loan Documents. In addition, Borrower shall deliver to Lender from time to time upon each request by Lender such documents, instruments or other matters or items as Lender may in good faith require to evidence Borrower's compliance with the covenants set forth in this Section 7.1. 7.1(z) Notice of Legal Proceedings. Promptly upon becoming aware of ---------------------------- the existence thereof, Borrower shall deliver to Lender written notification of the institution of any litigation, legal proceeding or dispute with any Person involving the Collateral and of any material litigation, legal proceeding or dispute with any Person involving Borrower, Guarantor, the Lots or any of Borrower's other assets. 7.1(aa) Utility Availability. If and to the extent Borrower has any --------------------- obligation to do so under the Lot Sales Documents or other written document, Borrower will cause electric, gas, sewer, water facilities and other necessary utilities to be available to the Lots encumbered by the Pledged Deeds of Trust in sufficient capacity to service such Lots on or before the date or dates such availability is required pursuant to the applicable Lot Sales Document(s) or other written document. In the event Borrower fails or refuses to perform its obligations under this Section with respect to a Lot encumbered by a Pledged Deed of Trust, the related Pledged Note Receivable shall be deemed to be an Ineligible Note Receivable under this Agreement, and if Borrower eliminates any Borrowing Base deficiency resulting from such ineligibility in compliance with Section 2.5(c) hereof, such compliance shall cure the breach of this Section arising from or out of such failure or refusal. 7.1(bb) Access and Amenities Availability. If and to the extent ---------------------------------- Borrower has any obligation to do so under the Lot Sales Documents or other written document, Borrower will cause each Purchaser of a Lot encumbered by a Pledged Deed of Trust to have access to, and the use of, all of the amenities and public utilities within the Subdivision in which such Lot is located on or before the date or dates Borrower is required to do so pursuant to the applicable Lot Sales Document(s) or other written document. In the event Borrower fails or refuses to perform its obligations under this Section with respect to a Lot encumbered by a Pledged Deed of Trust, the related Pledged Note Receivable shall be deemed to be an Ineligible Note Receivable under this Agreement, and if Borrower eliminates any Borrowing Base deficiency resulting from such ineligibility in compliance with Section 2.5(c) hereof, such compliance shall cure the breach of this Section arising from or out of such failure or refusal. 7.1(cc) Expenses and Closing Fees. Whether or not the transactions -------------------------- contemplated hereunder are completed, Borrower shall pay all expenses of Lender incurred in good faith relating to negotiating, preparing, documenting, closing and enforcing the Loan Documents, including, but not limited to each of the following to the extent incurred in good faith: -44- (i) the cost of reproducing this Agreement and the Note; (ii) the fees and disbursements of Lender's counsel; (iii) Lender's out-of-pocket expenses; (iv) all fees and out-of-pocket expenses (including fees and expenses of Lender's counsel) relating to any amendments, waivers, consents or subsequent closing pursuant to the provisions hereof; (v) all costs, outlays, attorneys' fees and out-of-pocket expenses of every kind and character had or incurred in (1) the enforcement of any of the provisions of, or the exercise of rights and remedies under, any of the Loan Documents; (2) the preparation for, negotiations regarding, consultations concerning, or the defense of legal proceedings involving any claim or claims made or threatened against Lender arising out of this transaction or the protection of the Collateral securing the Loan or Advances made hereunder, expressly including, without limitation, the defense by Lender of any legal proceedings instituted or threatened by any Person to seek to recover or set aside any payment or setoff theretofore received or applied by Lender with respect to the Indebtedness; and (3) the advancement of any expenses provided for under any of the Loan Documents; (vi) all expenses relating to the maintenance and administration of the lockbox account by the Collection Agent; (vii) all expenses relating to the safekeeping of the Pledged Notes Receivable and related documents by the Custodian; (viii) all out-of-pocket expenses of Lender relating to or arising under Section 4.1(s) of this Agreement; (ix) all costs and expenses incurred by Lender under the Note; and (x) all taxes levied against or paid by Lender in connection with the Loan or the Collateral (other than taxes on, or measured by, the revenues or income of Lender) and all filing and recording fees, costs and expenses which may be incurred by Lender with respect to the filing or recording of any document or instrument relating to the transactions described in this Agreement. 7.1(dd) Loan and Collateral Expenses. Subject to the provisions of ----------------------------- Section 7.1(cc) hereof, all advances, costs, expenses, charge and attorneys' fees which Lender may make, pay or incur in good faith under any provision of this Agreement, including, but not limited to, the protection of its security or for the enforcement of any of its rights hereunder or thereunder, or in foreclosure proceedings commenced and subsequently -45- abandoned, or in any dispute or litigation in which Lender may become involved by reason of or arising out of the Collateral, shall be a part of the Indebtedness and shall be paid by Borrower to Lender pursuant to Section 2.4(a) hereof or if there be insufficient funds to so pay Lender, such expenses shall be included in Lender's monthly statement provided for in Section 2.5(c) hereof. Upon the occurrence and during the continuance of an Event of Default, all such unpaid expenses that are due and payable shall bear interest at the Default Rate from the date of such payment by Lender until repaid by Borrower. Notwithstanding any other provision of this Agreement or any of the other Loan Documents to the contrary, Borrower shall not have any obligation or liability for payment or reimbursement of any cost or expense incurred by Lender or TFC for salaries or wages of their respective officers or employees or for any fixed overhead expenses. 7.2 Negative Covenants. So long as any portion of the Loan remains unpaid ------------------- or Lender is committed to lend hereunder, Borrower hereby covenants and agrees with Lender, that except with Lender's prior written consent: 7.2(a) Limitation on Other Debt. Borrower will not pledge, assign or ------------------------- transfer any of the Collateral or obtain any other financing with respect to the Collateral, other than the Loan. 7.2(b) Restrictions on Transfers. Borrower will not, whether -------------------------- voluntarily or involuntarily, by operation of law or otherwise, transfer, sell, pledge, convey or assign all or any portion of the Collateral, or contract to do any of the foregoing. In the event that Lender, in Lender's sole discretion, is willing to consent to a transfer which would otherwise be prohibited by this Section 7.2(b) Lender may condition its consent on such terms as it desires, including, without limitation, an increase in the Interest Rate and the requirement that Borrower pay a transfer fee, together with any expenses incurred by Lender in connection with the granting of such consent (including, without limitation, attorneys' fees). 7.2(c) No Contracts. Borrower will not enter into any contracts or ------------- agreements whatsoever with respect to the Lots encumbered by the Pledged Deeds of Trust except in the ordinary course of Borrower's business. In addition, no contracts or agreements in existence with respect to the Lots encumbered by the Pledged Deeds of Trust as of the date of this Agreement will be amended or modified by Borrower. The prohibitions in this section 7.2(c) shall not be applicable to contracts or agreements which either (i) are for a nonrenewable term of one (1) year or less or (ii) require the payment by the parties thereto of a total amount which is less than $25,000.00. 7.2(d) No Further Encumbrances. Borrower will not allow any Liens ------------------------ whatsoever to attach to the Primary Collateral other than the liens and security interests of Lender created by any of the Loan Documents. 7.2(e) Lot Sales Documents. Except as required by law or by a -------------------- regulatory -46- authority, which requirement shall be disclosed in writing to Lender, Borrower will not amend or modify any of the Lot Sales Documents approved by Lender hereunder if such amendments or modifications would affect any transaction resulting in a Note Receivable pledged or proposed to be pledged to Lender. 7.2(f) Restrictive Covenants. Borrower will not amend, modify or ---------------------- terminate the restrictive covenants regarding the Subdivisions, nor shall Borrower file or permit to be filed any additional covenants, conditions, easements or restrictions against the Subdivisions (or any portion thereof) which in any case would limit the use of the Lots in any material respect or reduce their fair market value. 7.2(g) Name Change. Borrower will not change its name and will not ------------ change its principal place of business to a location outside of Clark County, Nevada without (i) giving Lender at least thirty (30) days prior notice of the new name or address and (ii) providing to Lender such executed documents required to ensure the continued perfection of the Lender's lien in any Collateral in which it has a perfected security interest. 7.2(h) Financial Covenants. Preferred Equities Corporation will not -------------------- cause, suffer or permit its consolidated tangible net worth to be less than $15,000,000.00. For purposes of this Agreement, the "consolidated tangible net worth" of a corporation shall mean, on the date of determination thereof, the consolidated net worth of the corporation and its subsidiaries, as determined in accordance with GAAP, after deducting the value of patents, trademarks, goodwill and other intangible assets and the value of assets treated as "questionable" by the accounting firm which shall have prepared such corporation's most recent financial statement. It is agreed that deferred selling expenses determined in accordance with GAAP shall not be classified as intangible assets. 7.2(i) Collateral. Borrower will not take any action (nor permit or ----------- consent to the taking of any action) which might impair the value of the Collateral or any of the rights of Lender in the Collateral. 7.2(j) No Sales Outside of Nevada, Colorado, California and Hawaii. ------------------------------------------------------------ Borrower shall not market, attempt to sell or sell any Lots in any jurisdiction other than the States of Nevada, Colorado, California and Hawaii if such sales would result in any Notes Receivable pledged or proposed to be pledged to Lender unless prior to taking any such actions, Borrower delivers to Lender (i) written statements by the applicable state authorities, in form acceptable to Lender, stating that no registration is necessary for the sale of Lots in the particular state, (ii) an opinion of counsel in form acceptable to Lender and rendered by counsel acceptable to Lender, stating that no such registrations are necessary, or (iii) such other evidence of compliance with applicable laws as Lender may require. Notwithstanding the foregoing, Borrower shall not be required to deliver the written statement described in (i) above with respect to any state which does not have a governmental agency or governmental authority which enforces or interprets laws or regulations of such state regarding the sale of real property or interests in real property in such state. -47- SECTION 8 --------- EVENTS OF DEFAULT ----------------- 8.1 Nature of Events. An "Event of Default" shall exist if any of the ----------------- following shall occur: 8.1(a) Payments. If Borrower shall fail to make any payment or --------- mandatory prepayment of principal, interest, fees or other amounts with respect to any of the Indebtedness (i) as required by Section 2.5(c) or (ii) otherwise on or before the date any such payment is due and such failure shall continue for two (2) Business Days after Lender delivers notice thereof to Borrower. 8.1(b) Covenant Defaults. If Borrower shall fall to perform or observe ------------------ any covenant, agreement or warranty contained in this Agreement or in any of the Loan Documents (other than any covenant or agreement obligating Borrower to pay the Indebtedness, or any part thereof, or any other covenants, agreements or warranties specifically described in this Section 8.1), and such failure shall continue for ten (10) days after Lender delivers written notice thereof to Borrower. 8.1(c) Warranties or Representations. If any representation or other ------------------------------ statement made by or on behalf of Borrower in this Agreement, in any of the Loan Documents or in any certificate furnished in compliance with or in reference to the Loan Documents, is knowingly false, misleading or incorrect in any material respect as of the date made. 8.1(d) Enforceability of Liens. If any lien or security interest in ------------------------ and to the Primary Collateral granted by Borrower to Lender in connection with the Loan is or becomes invalid or unenforceable or is not, or ceases to be a perfected first priority lien or security interest in favor of Lender encumbering the asset to which it is intended to encumber or if any valid or enforceable lien or security interest granted by Borrower to Lender in and to the Secondary Collateral becomes invalid or unenforceable by Lender, and Borrower fails to cause such lien or security interest to become a valid, enforceable, and, in the case of the Primary Collateral, first and prior lien or security interest in a manner satisfactory to Lender within ten (10) days after Lender delivers notice thereof to Borrower. 8.1(e) Involuntary Proceedings. If an order for relief is entered ------------------------ against Borrower or Guarantor under any Debtor Relief Law; a receiver, liquidator or trustee of Borrower or Guarantor or of any material asset of Borrower or Guarantors is appointed by court order and such order remains in effect for more than fifty (50) days; or if any material asset of Borrower or Guarantor is sequestered by court order and such order remains in effect for more than fifty (50) days. 8.1(f) Proceedings. If either Borrower or Guarantor voluntarily seek, ------------ consent to or acquiesce in the benefit of any provision of any Debtor Relief Law, whether now or -48- hereafter in effect; consent to the filing of any petition against it under such law; make an assignment for the benefit of its creditors; admit in writing its inability to pay its debts generally as they become due; or consents to the appointment of a receiver, trustee, liquidator or conservator for it or any part of its assets. 8.1(g) Attachment, Judgment, Tax Liens. The issuance, filing or levy -------------------------------- against Borrower or the Guarantor of one or more attachments, injunctions, executions, tax liens or judgments for the payment of money cumulatively in excess of $100,000.00, which is not stayed, discharged or released, by bond or otherwise, within thirty (30) days after issuance or filing. 8.1(h) Failure to Deposit Proceeds. If Borrower shall fail to deposit ---------------------------- any payments made under the Pledged Notes Receivable received by Borrower, through deposit in Borrower's account or otherwise, with Collection Agent as required by the Lockbox Agreement, or to remit payments directly to Lender as may be required under the Loan Documents, or if Borrower shall take any other act that Lender shall deem in good faith based on Lender's review of relevant evidence to constitute a conversion of the Collateral or fraud with respect to Lender. 8.1(i) Lot Sales Documents. If the Lot Sales Documents shall be -------------------- amended or modified in any substantive respect without Lender's prior written consent except as required by law or by a regulatory authority. 8.1(j) Removal of Collateral. If Borrower conceals, removes, or ---------------------- permits to be concealed or removed, any of the Collateral with the intent to hinder, delay or defraud its creditors or any of them including, without limitation, Lender. 8.1(k) Material Adverse Change. Any material adverse change in the ------------------------ financial condition of: (i) Borrower that results in a violation of Section 7.2(h) of this Agreement or (ii) Guarantor that results in the Guarantor's consolidated tangible net worth being less than $11,000,000.00. 8.1(l) Default of Guarantor. Any default under the Guaranty or the --------------------- revocation thereof, in whole or part, by the Guarantor. 8.1(m) Loss of License. The loss, revocation or failure to renew or ---------------- file for renewal of any license, permit, franchise, or contract now held or hereafter acquired by Borrower which is necessary for the continued sale of the unsold Lots and that results in a suspension of such sales for more than twenty (20) days, unless and so long as Borrower shall be diligently pursuing the renewal or reinstatement of such license, permit, franchise or the obtaining of a substitute contract, as the case may be, in which event Borrower shall have forty-five (45) days for such purpose. 8.1(n) Suspension of Sales. The issuance of any stay order, cease and -------------------- desist order or similar judicial or nonjudicial sanction materially limiting or otherwise -49- materially adversely affecting any Lot sales activities which is not discharged or stayed within thirty (30) days after issuance. 8.1(o) No Other Liens. The encumbrance of the Primary Collateral by --------------- any Lien, other than the liens created in favor of Lender under the Loan Documents, that (i) is consented to by the Borrower or (ii) that is not consented to by the Borrower and is not discharged or released, by bond or otherwise, within thirty (30) days after Lender delivers notice thereof to Borrower. 8.1(p) Other Defaults. Any default (after giving effect to the --------------- expiration of any applicable grace periods) under, and as defined in any other agreement, now existing or hereafter entered into, between (i) the Debtor and the Lender or any affiliate of the Lender or TFC, (ii) Mego Financial and the Lender or any affiliate of the Lender or TFC or (iii) any Affiliate of the Debtor and the Lender or any affiliate of the Lender or TFC. 8.1(q) Default by Debtor in Other Agreements. Any default by the ---------------------------------------- Debtor or Guarantor in the payment of indebtedness for borrowed money; any other default under such indebtedness which accelerates or permits the acceleration (after the giving of notice or passage of time, or both) of the maturity of such indebtedness, whether or not such default has been waived by the holder of such indebtedness, provided that any such acceleration or permitted acceleration with respect to a default by Guarantor shall be an Event of Default only if such acceleration or permitted acceleration could reasonably be expected to have a material adverse affect on Guarantor. SECTION 9 --------- REMEDIES -------- 9.1 Remedies Upon Default. Should an Event of Default occur and be ---------------------- continuing, Lender may take any one or more of the actions described in this Section 9, all without notice to Borrower except as otherwise provided herein or as required by applicable law: 9.1(a) Acceleration. Without prior demand or notice of any nature ------------- whatsoever, declare by notice to Borrower the unpaid balance of the Indebtedness, or any part thereof, immediately due and payable, whereupon the same shall be due and payable. 9.1(b) Termination of Obligation to Advance. Terminate any commitment ------------------------------------- of Lender to lend under this Agreement in its entirety, or any portion of any such commitment, to the extent Lender shall deem appropriate. Lender shall give notice of any such termination to Borrower and Guarantor. 9.1(c) Judgment. Reduce Lender's claim to judgment, foreclose or --------- otherwise enforce Lender's security interest in all or any part of the Collateral by any available judicial procedure; -50- provided, however, that notwithstanding that the Pledged Notes Receivable have been endorsed in the manner provided in Section 3.2 of this Agreement, Lender's recourse against Borrower under any Pledged Notes Receivable shall be limited to an amount not exceeding the unpaid amounts owed by Borrower to Lender under the Note and this Agreement. 9.1(d) Sale of Collateral. After notification, if any, provided for ------------------- in Section 9.2 below, sell or otherwise dispose of, at the office of Lender, or elsewhere, as chosen by Lender, all or any part of the Collateral, and any such sale or other disposition may be as a unit or in parcels, by public or private proceedings, and by way of one or more contracts (it being agreed that the sale of any part of the Collateral shall not exhaust Lender's power of sale, but sales may be made from time to time until all of the Collateral has been sold or until the Indebtedness has been paid in full), and at any such sale it shall not be necessary to exhibit the Collateral. 9.1(e) Retention of Collateral. At its discretion, retain such portion ------------------------ of the Collateral as shall aggregate in value to an amount equal to the Indebtedness, in satisfaction of the Indebtedness, whenever the circumstances are such that Lender is entitled to do so under the applicable law. 9.1(f) Receiver. Apply by appropriate judicial proceedings for --------- appointment of a receiver for the Collateral, or any part thereof, and Borrower hereby consents to any such appointment. 9.1(g) Purchase of Collateral. Buy the Collateral at any public sale, ----------------------- or buy the Collateral at any private sale if the Collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations. 9.1(h) Exercise of Other Rights. Exercise any and all other rights or ------------------------- remedies afforded by any applicable laws or by the Loan Documents as Lender shall deem appropriate, at law, in equity or otherwise, including, but not limited to, the right to bring suit or other proceeding, either for specific performance of any covenant or condition contained in the Loan Documents or in aid of the exercise of any right or remedy granted to Lender in the Loan Documents. 9.2 Notice of Sale. Reasonable notification of time and place of any --------------- public sale of the Collateral or reasonable notification of the time after which any private sale or other intended disposition of the Collateral is to be made shall be sent to Borrower and to any other person entitled under the Code to notice; provided, however, that if the Collateral threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender may sell or otherwise dispose of the Collateral without notification, advertisement or other notice of any kind. It is agreed that notice sent not less than fifteen (15) calendar days prior to the taking of the action to which such notice relates is reasonable notification and notice for the purposes of this Section 9.2. -51- 9.3 Application of Collateral; Termination of Agreements. Upon the ----------------------------------------------------- occurrence and during the continuance of any Event of Default, Lender may, with or without proceeding with such sale or foreclosure or demanding payment of the Indebtedness, without prior notice, terminate Lender's further performance under this Agreement or any other agreement or agreements between Lender and Borrower, without further liability or obligation by Lender, and may also, at any time, appropriate and apply on any Indebtedness any and all Collateral in its possession, any and all balances, credits, deposits, accounts, reserves, indebtedness or other moneys due or owing to Borrower held by Lender hereunder or under any other financing agreement or otherwise, whether accrued or not. Neither such termination, nor the termination of this Agreement by lapse of time, the giving of notice or otherwise, shall absolve, release or otherwise affect the liability of Borrower in respect of transactions prior to such termination, or affect any of the Liens, security interests, rights, powers and remedies of Lender, but they shall, in all events, continue until all of the Indebtedness is satisfied. 9.4 Rights of Lender Regarding Collateral. In addition to all other rights -------------------------------------- possessed by Lender, Lender, at its option, may from time to time after an Event of Default, and so long as such Event of Default remains uncured, at its sole discretion, take the following actions: 9.5 Delegation of Duties and Rights. Lender may execute any of its duties -------------------------------- and/or exercise any of its rights or remedies under the Loan Documents by or through its officers, directors, employees, attorneys, agents or other representatives. 9.6 Lender Not in Control. None of the covenants or other provisions ---------------------- contained in this Agreement shall give Lender the right or power or obligation to exercise control over the affairs and/or management of Borrower. 9.7 Waivers. The acceptance by Lender at any time and from time to time of -------- partial payments of the Indebtedness shall not be deemed to be a waiver of any Event of Default then existing unless such payment is in the amount demanded by Lender. No waiver by Lender of any Event of Default shall be deemed to be a waiver of any other or subsequent Event of Default. No delay or omission by Lender in exercising any right or remedy under the Loan Documents shall impair such right or remedy or be construed as a waiver thereof or an acquiescence therein, nor shall any single or partial exercise of any such right or remedy preclude other or further exercise thereof, or the exercise of any other right or remedy under the Loan Documents or otherwise. Further, except as otherwise expressly provided in this Agreement or by applicable law, Borrower and each and every surety, endorser, guarantor and other party liable for the payment or performance of all or any portion of the Indebtedness, severally waive notice of the occurrence of any Event of Default, presentment, protest, and notice of protest and notice of intention to accelerate, and agree that their liability shall not be affected by any renewal or extension in the time of payment of the Indebtedness, or by any release or change permitted hereunder in any security for the payment or performance of the Indebtedness, regardless of the number of such renewals, extensions, releases or changes. 9.8 Cumulative Rights. Except to the extent prohibited by law, and except ------------------ as otherwise specifically provided hereunder, all rights and remedies available to Lender under the -52- Loan Documents shall be cumulative of and in addition to all other rights and remedies granted to Lender at law or in equity, whether or not the Indebtedness is due and payable and whether or not Lender shall have instituted any suit for collection or other action in connection with the Loan Documents. 9.9 Expenditures by Lender. Any sums expended by or on behalf of Lender ----------------------- pursuant to the exercise of any right or remedy provided herein shall become part of the Indebtedness and, upon the occurrence and during the continuance of an Event of Default, shall bear interest at the Default Rate from the date of such expenditure until the date repaid. 9.10 Diminution in Value of Collateral. Lender shall not have any ---------------------------------- liability or responsibility whatsoever for any diminution or loss in value of any of the Collateral, specifically including that which may arise from Lender's negligence or inadvertence, whether such negligence or inadvertence is the sole or concurring cause of any damage, but specifically excluding any diminution or loss in value which is proximately caused by Lender's gross negligence, willful misconduct or commercially unreasonable conduct. 9.11 Indemnification of Lender. Borrower hereby agrees to protect, defend -------------------------- and indemnify Lender and hold Lender harmless from and against any and all liabilities, indebtedness, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses, and disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against Lender, in any way relating to or arising out of (i) this Agreement and the Loan Documents and/or (ii) any of the transactions contemplated therein or thereby (including, without limitation, those in any way relating to or arising out of the violation of any federal or state laws including ILSFDA or the Lot Sales Acts), and including those that may result from Lender's negligence or inadvertence, Such indemnification shall not give Borrower any right to participate in the selection of counsel for Lender or the conduct or settlement of any dispute or proceeding for which indemnification may be claimed. It is the express intention of the parties hereto that the indemnity provided for in this Section 9.11, as well as the disclaimers of liability referred to in this Agreement, are intended to and shall protect and indemnify Lender from the consequences of Lender's own negligence, whether or not that negligence is the sole or concurring cause of any liability, obligation, loss, damage, penalty, action, judgment, suit, claim, cost, expense or disbursement, But specifically excluding from such indemnity any consequences proximately caused by Lender's gross negligence, willful misconduct or commercially unreasonable conduct. Lender agrees to give Borrower written notice of the assertion of any claim or the commencement of action or lawsuit described in this Section 9.11. In view of the fact that federal and state securities laws may impose certain restrictions on the methods by which a sale of Collateral comprised of Securities may be effected after an Event of Default, Borrower agrees that upon the occurrence or existence of an Event of Default, Lender may, from time to time, attempt to sell all or any part of such Collateral by means of a private placement restricting the bidding and prospective purchasers to whose who will represent and agree that they are purchasing for investment only and not for, or with a view to, distribution. In so doing, Lender may solicit offers to buy such Collateral, or any part of it for cash, from a limited number of investors deemed by Lender, in its reasonable judgment, to be -53- responsible parties who might be interested in purchasing the Collateral, and if Lender solicits such offers from not less than four (4) such investors, then the acceptance by Lender of the highest offer obtained therefrom shall be deemed to be a commercially reasonable method of disposition of such Collateral. SECTION 10 ---------- CERTAIN RIGHTS OF LENDER ------------------------ 10.1 Protection of Collateral. Lender may at any time and from time to ------------------------- time take such actions as Lender deems necessary or appropriate to protect Lender's liens and security interests in and to preserve the Collateral, all at the expense of Borrower. Borrower agrees to cooperate fully with all of Lender's efforts to preserve the Collateral and Lender's liens and security interests therein and will take such actions to preserve the Collateral and Lender's liens and security interests therein as Lender may direct. All of Lender's expenses of preserving the Collateral and its liens and security interests therein shall be added to the Indebtedness. 10.2 Performance by Lender. If Borrower fails to perform any agreement ---------------------- contained herein, Lender may itself perform, or cause the performance of, such agreement, and the expenses of Lender incurred in connection therewith shall be payable by Borrower under Section 7.1(dd) above. In no event, however, shall Lender have any obligation or duties whatsoever to perform any covenant or agreement of Borrower contained herein, and any such performance by Lender shall be wholly discretionary with Lender. In addition, Borrower acknowledges that Lender shall not at any time or under any circumstances whatsoever have any duty to Borrower or to any third party to exercise any of Lender's rights or remedies hereunder. 10.3 No Liability of Lender. Neither the acceptance of this Agreement by ----------------------- Lender, nor the exercise of any rights hereunder by Lender, shall be construed in any way as an assumption by Lender of any obligations, responsibilities or duties of Borrower arising in connection with the Collateral or otherwise bind Lender to the performance of any obligations with respect to the Collateral, it being expressly understood that Lender shall not be obligated to perform, observe or discharge any obligation, responsibility, duty, or liability of Borrower with respect to any of the Collateral, including, but not limited to, appearing in or defending any action, expending any money or incurring any expense in connection therewith. Without limitation of the foregoing, neither this Agreement, any action or actions on the part of Lender taken hereunder, nor the acquisition of the Notes Receivable and the Deeds of Trust by Lender following the occurrence of an Event of Default shall constitute an assumption by Lender of any obligations of Borrower with respect to the Notes Receivable, the Deeds of Trust or any documents or instruments executed in connection therewith, and Borrower shall continue to be liable for all of its obligations thereunder. Subject only to the exclusions set forth in Sections 9.10 and 9.11 hereof, Borrower agrees to indemnify, protect, defend and hold Lender harmless from and against any and all claims, demands, causes of action, losses, damages, liabilities, suits, costs and expenses, including, without limitation, attorneys' fees and court costs, asserted against or incurred by Lender by reason of, arising out of, or connected in any way with (i) any failure or alleged failure of Borrower to perform any of its covenants or obligations to the Purchasers of any of the -54- Notes Receivable, (ii) a breach of any certification, representation, warranty or covenant of Borrower set forth in this Agreement, (iii) the ownership of the Notes Receivable, the Deeds of Trusts and the rights, titles and interests assigned hereby, or intended so to be, (iv) the debtor-creditor relationships between Borrower and the Purchasers, or (v) the Notes Receivable, the Deeds of Trust or the sale of Lots. The obligations of Borrower to indemnify, protect, defend and hold Lender harmless as provided herein are absolute, unconditional, present and continuing, and shall not be dependent upon or affected by the genuineness, validity, regularity or enforceability of any claim, demand or suit from which Lender is indemnified. Borrower hereby waives all notices with respect to any losses, damages, liabilities, suits, costs and expenses, and all other demands whatsoever hereby indemnified, and agrees that its obligations hereunder shall not be affected by any circumstances, whether or not referred to above, which might otherwise constitute legal or equitable discharges of its obligations hereunder. 10.4 Right to Defend Action Affecting Security. Lender may, at Borrower's ------------------------------------------ expense, appear in and defend any action or proceeding at law or in equity which Lender in good faith believes may affect the security interests granted under this Agreement. 10.5 [Intentionally Omitted]. ------------------------ 10.6 Lender's Right of Set-Off. Upon the occurrence of an Event of -------------------------- Default, or if Lender shall be served with garnishment process in which Borrower shall be named as defendant, whether or not any Event of Default shall have occurred, Lender may, but shall not be required to, set-off any indebtedness owing by Lender to Borrower against any of the Indebtedness without first resorting to the security hereunder and without prejudice to any other rights or remedies of Lender or its security interest herein. 10.7 No Waiver. In case Lender shall have proceeded to enforce any right ---------- or remedy hereunder and such proceedings shall have been discontinued or abandoned for any reason, then in every such case, Borrower and Lender shall be restored to their former positions and rights hereunder with respect to the Collateral, and all rights, remedies and powers of Lender shall continue as if no such proceeding had been taken. No failure or delay on the part of Lender in exercising any right, remedy or power under this Agreement or in giving or insisting upon strict performance by Borrower hereunder or in giving notice hereunder shall operate as a waiver of the same or any other power or right, and no single or partial exercise of any such power or right shall preclude any other or further exercise thereof or the exercise of any other such power or right. Lender, notwithstanding any such failure, shall have the right thereafter to insist upon the strict performance by Borrower of any and all of the terms and provisions of this Agreement to be performed by Borrower. The collection and application of proceeds, the entering and taking possession of the Collateral, and the exercise of the rights of Lender contained in the Loan Documents and this Agreement shall not cure or waive any default, or affect any notice of default, or invalidate any acts done pursuant to such notice. No waiver by Lender of any breach or default of or by any party hereunder shall be deemed to alter or affect Lender's rights hereunder with respect to any prior or subsequent default. 10.8 Right of Lender to Extend Time of Payment, Substitute, Release -------------------------------------------------------------- Security, - --------- -55- Etc. Without affecting the liability of any person or entity for the payment of - ---- any of the Indebtedness or the lien of this Agreement on the Collateral, or the remainder thereof, for the full amount of the Indebtedness unpaid, Lender may from time to time, without notice and without affecting or impairing the security interest or rights of Lender granted or arising under this Agreement: (a) release any person liable for the payment of the Indebtedness, (b) extend the time or otherwise alter the terms of payment of the Indebtedness, (c) accept additional security for the Indebtedness of any kind, including deeds of trust or mortgages and security agreements, (d) alter, substitute or release any property securing the Indebtedness, (e) resort for the payment of all or any portion of the Indebtedness to its several securities therefor in such order and manner as it may deem fit, or (f) join in any subordination or other agreement affecting this Agreement or the lien or charge thereof. Notwithstanding the provisions of subparagraph (d) in this Section 10.8 to the contrary, Lender shall have the right to take the actions described in Section 9.4(c) only after the occurrence and during the continuance of an Event of Default. 10.9 Assignment of Lender's Interest. Lender shall have the right to -------------------------------- assign all or any portion of its rights in this Agreement to any subsequent holder or holders of the Indebtedness; provided however, that if any such assignment is made to any Person other than TFC or any of its subsidiaries, such assignment shall include an amendment to this Agreement deleting clause (iv) of Section 1.1(y) of this Agreement. 10.10 Notice to Purchaser. Borrower authorizes each of Lender, the -------------------- Collection Agent and the Custodian (but neither Lender, Collection Agent nor the Custodian shall be obligated) to communicate at any time and from time to time with any Purchaser or any other Person primarily or secondarily liable under a Pledged Note Receivable with regard to the Lien of Lender thereon and any other matter relating thereto. Borrower agrees to notify each Purchaser in writing of the assignment to Lender of its respective Pledged Note Receivable and to direct such Purchaser to remit all payments thereunder to the Collection Agent or, if permitted under this Agreement of the Lockbox Agreement, to such other Person as Lender may designate. 10.11 Collection of the Notes. Borrower hereby directs and authorizes each ------------------------ party liable for the payment of the Pledged Notes Receivable to pay each installment thereon to the Collection Agent pursuant to the Lockbox Agreement unless and until directed otherwise by written notice from Lender if permitted under this Agreement or the Lockbox Agreement, after which such parties are directed to make all further payments on the Pledged Notes Receivable in accordance with the directions of Lender. Upon the occurrence and during the continuance of an Event of Default, Lender shall have the right to require that all payments becoming due under the Pledged Notes Receivable be paid directly to Lender or Lender's designee, and Lender or Lender's designee is hereby authorized to receive, collect, hold and apply the same in accordance with the provisions of this Agreement. In the event that upon the occurrence and during the continuance of an Event of Default, Lender or Collection Agent does not receive any installment of principal or interest due and payable under any of the Pledged Notes Receivable on or prior to the date upon which such installment becomes due, Lender may, at its election (but without any obligation to do so), give or cause Collection Agent to give notice of such default to the defaulting party or parties, and Lender shall have the right (but not the obligation) to accelerate payment of the unpaid balance of any of the Pledged Notes Receivable in default in accordance -56- with applicable law and to foreclose each of the Pledged Deeds of Trust securing the payment thereof in accordance with applicable law, and to enforce any other remedies available to the holder of such Pledged Notes Receivable with respect to such default. Upon the occurrence and during the continuance of an Event of Default, Borrower hereby further authorizes, directs and empowers Lender to collect and receive all checks and drafts evidencing such payments and to endorse such checks or drafts in the name of Borrower and upon such endorsements, to collect and receive the money therefor. The right to endorse checks and drafts granted pursuant to the preceding sentence is irrevocable by Borrower, and the banks or banks paying such checks or drafts upon such endorsements, as well as the signers of the same, shall be as fully protected as though the checks or drafts have been endorsed by Borrower. 10.12 Power of Attorney. Borrower does hereby irrevocably constitute and ------------------ appoint Lender as Borrower's true and lawful agent and attorney-in-fact, with full power of substitution, for Borrower and in Borrower's name, place and stead, or otherwise, to, upon the occurrence of an Event of Default and while it is continuing: (a) endorse any checks or drafts payable to Borrower in the name of Borrower and in favor of Lender as provided in Section 10.11 above, (b) demand and receive from time to time any and all property, rights, titles, interests and liens hereby sold, assigned and transferred, or intended so to be, and to give receipts for same, (c) institute and prosecute in the name of Borrower or otherwise, but for the benefit of Lender, any and all proceedings at law, in equity, or otherwise, that Lender may deem proper in order to collect, assert or enforce any claim, right or title, of any kind, in and to the property, rights, titles, interests and liens hereby sold, assigned or transferred, or intended so to be, and to defend and compromise any and all actions, suits or proceedings in respect of any of the said property, rights, titles, interests and liens, and (d) generally do all and any such acts and things in relation to the Collateral as Lender shall in good faith deem advisable. Borrower hereby declares that the appointment made and the powers granted pursuant to this Section 10.12 are coupled with an interest and are and shall be irrevocable by Borrower in any manner, or for any reason, unless and until a release of the same is executed by Lender and duly recorded in the appropriate public records of the States of Nevada and Colorado. SECTION 11 ---------- TERM OF AGREEMENT ----------------- This Agreement shall continue in full force and effect and the security interests granted hereby (except as otherwise provided in the second sentence of Section 3.1 and the proviso clause of Section 10.9 hereof) and the duties, covenants and liabilities of Borrower hereunder and all the terms, conditions and provisions hereof relating thereto (except for the provisions of Section 9.11 and Section 10.3 which shall survive the termination of this Agreement) shall continue to be fully operative until all of the Indebtedness has been satisfied in full. Borrower expressly agrees that if either Borrower or the Guarantor makes any payment under this Agreement to Lender, which payment or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, or otherwise required to be repaid to a trustee, receiver or any other party under any bankruptcy act, state or federal law, Common law or equitable cause, then to the extent of such repayment, the Indebtedness or any part thereof intended to be satisfied and the -57- liens provided for hereunder securing the same shall be revived and continued in full force and effect as if said payment had not been made. -58- SECTION 12 ---------- MISCELLANEOUS ------------- 12.1 Notices. All notices, requests and other communications to either -------- party hereunder shall be in writing and shall be given to such party at its address set forth below or at such other address as such party may hereafter specify for the purpose of notice to Lender or Borrower. Each such notice, request or other communication shall be effective (a) if given by mail, five (5) days after such notice is deposited in the United States Mail with first class postage prepaid, addressed as aforesaid, provided that such mailing is by registered or certified mail, return receipt requested, (b) if given by overnight delivery, one (1) Business Day after being deposited with a nationally recognized overnight delivery service such as Federal Express or Airborne with all fees and charges prepaid, addressed as provided below, or (c) if given by telecopy or any other means, when delivered or received at the address specified in this Section 12.1. If to Borrower: Preferred Equities Corporation 4310 Paradise Road Las Vegas, Nevada 89119 Attention: Carol W. Sullivan Senior Vice President Telecopy No. (702) 369-4398 Colorado Land and Grazing Corp. 4310 Paradise Road Las Vegas, Nevada 89119 Attention: Gregg A. McMurtrie President Telecopy No. (702) 369-4398 With a copy to: Mr. Jerome J. Cohen, President 1125 N.E. 125th Street, Suite 206 North Miami, Florida 33161 Telecopy No. (305) 899-1824 and Mego Financial Corp. 4310 Paradise Road Las Vegas, Nevada 89119 Attention: Jon A. Joseph, Esq. Telecopy No. (702) 369-4398 -59- If to Lender: Dorfinco Corporation c/o Textron Financial Corporation 333 East River Drive East Hartford, Connecticut 06108 Attention: John T. D'Annibale, Vice President Telecopy No. (860) 282-9053 12.2 Survival. All representations, warranties, covenants and agreements --------- made by Borrower herein, in the other Loan Documents or in any other agreement, document, instrument or certificate delivered by or on behalf of Borrower under or pursuant to the Loan Documents shall be considered to have been relied upon by Lender and shall survive the delivery to Lender of such Loan Documents and the extension of the Indebtedness (and each part thereof), regardless of any investigation made by or on behalf of Lender. 12.3 GOVERNING LAW. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (EXCEPT -------------- AS MAY BE EXPRESSLY PROVIDED THEREIN TO THE CONTRARY) SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEVADA AND ALL APPLICABLE LAWS OF THE UNITED STATES, EXECPT TO THE EXTENT THAT THE PROCEDURAL LAWS OF THE STATE OF COLORADO MAY GOVERN THE ENFORCEMENT OF ANY REMEDY AGAINST PROPERTY OR COLLATERAL LOCATED WITHIN THE STATE OF COLORADO, AND EXCLUDING PRINCIPLES GOVERNING CONFLICTS OF LAWS. 12.4 Limitation on Interest. All agreements between Lender and Borrower, ----------------------- 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 the Note or otherwise, shall the interest contracted for, charged, received, paid or agreed to be paid to Lender exceed the maximum amount permissible under applicable law. If, from any circumstance whatsoever, interest would otherwise be payable to Lender in excess of the maximum lawful amount, the interest payable to Lender shall be reduced to the maximum amount permitted under applicable law; and if from any circumstance Lender shall ever receive anything of value deemed interest by applicable law in excess of the maximum lawful amount, an amount equal to any excessive interest shall be applied to the reduction of the principal of the Indebtedness and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal of the Indebtedness, such excess shall be refunded to Borrower. All interest paid or agreed to be paid to Lender 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 Indebtedness for such full period shall not exceed the maximum amount permitted by applicable law. Lender hereby expressly disclaims any intent to contract for, charge or receive interest in an amount which exceeds the maximum amount of interest permitted by applicable law. This Section 12.4 shall control all agreements between Lender and Borrower. 12.5 Invalid Provisions. If any provision of this Agreement or any of the ------------------- other Loan -60- Documents is held to be illegal, invalid or unenforceable under present or future laws effective during the term thereof, such provision shall be fully severable, this Agreement and the other Loan Documents shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof or thereof, and the remaining provisions hereof or thereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance therefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision there shall be added automatically as a part of this Agreement and/or the Loan Documents (as the case may be) a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. 12.6 Successors and Assigns. This Agreement and the other Loan Documents ----------------------- shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns; provided that Borrower may not transfer or assign any of its rights or obligations under this Agreement or the other Loan Documents without the prior written consent of Lender. 12.7 Amendment. This Agreement may not be amended or modified, and no ---------- term or provision hereof may be waived, except by written instrument signed by the parties hereto. THIS WRITTEN AGREEMENT, TOGETHER WITH THE OTHER LOW DOCUMENTS A8 WRITTEN, REPRESENT THE FINAL AGREEMENTS AMONG THE PARTIES HERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN LENDER AND BORROWER. 12.8 Counterparts; Effectiveness. This Agreement may be signed in any ---------------------------- number of counterparts, each of which shall be an original, with the same effect as if the signature thereto and hereto were on the same instrument. This Agreement shall become effective upon Lender's receipt of one or more counterparts hereof signed by Borrower and Lender. 12.9 No Duty. All attorneys, accountants, appraisers, consultants and -------- other professional persons retained by Lender shall have the right to act exclusively in the interests of Lender and shall have no duty of disclosure, duty of loyalty, duty of care or other duty or obligation of any type or nature whatsoever to Borrower or its shareholders or any other person or entity. 12.10 Sender Not Fiduciary. The relationship between Borrower and Lender --------------------- is solely that of debtor and creditor, and Lender has no fiduciary or other special relationship with Borrower, and no term or provision of any of the Loan Documents shall be construed so as to deem the relationship between Borrower and Lender to be other than that of debtor and creditor. 12.11 Accounting Principles. Where the character or amount of any asset or ---------------------- liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, the same shall be determined or made in accordance with generally accepted accounting principles, procedures and practices consistently applied at the time in effect, to the extent applicable, except where such -61- principles are inconsistent with the requirements of this Agreement. 12.12 Total Agreement. This Agreement, including the Exhibits, Schedules ---------------- and other agreements referred to herein, is the entire agreement between the parties relating to the subject matter hereof, incorporates or rescinds all prior agreements and understandings between the parties hereto relating to the subject matter hereof, cannot be changed or terminated orally or by course of conduct, and shall be deemed effective as of the date it is accepted by Lender at the offices set forth above. This Agreement may be modified or changed only in a writing executed by both Lender and Borrower. The failure or delay of Lender to exercise or enforce any rights, Liens, powers, remedies, conditions or other terms hereunder or under any other agreement or instrument executed in connection herewith shall not operate as a waiver of any such rights, Liens, powers, remedies, conditions or other terms. 12.13 Litigation. BORROWER HEREBY WAIVES TRIAL BY JURY IN ANY ACTION OR ----------- PROCEEDING OF ANY KIND OR NATURE IN ANY COURT IN WHICH AN ACTION MAY BE COMMENCED ARISING OUT OF THIS AGREEMENT, THE COLLATERAL OR ANY ASSIGNMENT THEREOF OR BY REASON OF ANY OTHER CAUSE OR DISPUTE WHATSOEVER BETWEEN BORROWER AND LENDER OF ANY KIND OR NATURE. Borrower and Lender hereby agree to the following courts: State court: District Court, Clark County, Nevada Federal court: Federal District Court, Las Vegas, Nevada or at the option of Lender, any other court located in the State of Nevada in which it shall initiate legal or equitable proceedings and which shall have subject matter jurisdiction over the matter in controversy, shall have exclusive jurisdiction to hear and determine any claims or disputes between Borrower and Lender, pertaining directly or indirectly to this Agreement or to any matter arising therefrom. Borrower expressly submits and consents in advance to such jurisdiction in any action or proceeding commenced in any such Court. The exclusive choice of forum set forth in this section shall not be deemed to preclude the enforcement or any judgment obtained is such forum or the taking of any action under this Agreement to enforce same in any appropriate jurisdiction. The waiver and stipulations of Borrower and Lender in this Section 12.13 shall survive the final payment of all of the Indebtedness of Borrower and the resulting termination of this Agreement. 12.14 Incorporation of Exhibits. The following Exhibits and Schedules -------------------------- which were provided with and attached to the original Loan and Security Agreement dated July 31, 1991 and any amendments and modifications thereto shall be deemed incorporated herein and be made a part hereof and together with this First Amended and Restated Loan and Security Agreement, constitute one document and agreement which is referred to herein by the use of the defined term -62- "Agreement". The definitions contained in any part of this Agreement shall apply to all parts of this Agreement. Notwithstanding the foregoing the First Amended and Restated Note, a copy of which is attached hereto as Exhibit A shall supercede and replace the original Note and any amendments thereto.
Exhibit Reference Description ------- --------- ----------- B 2.6(a) Draw Request C [Reserved] D 4.1(a) Opinion of Borrower's Counsel E 1.1(m) Custodial Agreement F 1.1(ff) Lockbox Agreement G 4.1(l)(iii) Guaranty Agreement H.1-1 5.1(c)(i) Assignment of Notes Receivable - Nevada H.1-2 5.1(c)(i) Assignment of Notes Receivable - SPR H.1-3 5.1(c)(i) Assignment of Notes Receivable - HSR H.2-1 5.1(c)(ii) Assignment of Deeds of Trust - Nevada H.2-2 5.1(c)(ii) Assignment of Deeds of Trust - SPR H.2-3 5.1(c)(ii) Assignment of Deeds of Trust - HSR I 4.1(l)(iv) Assignment of Additional Collateral J 4.1(1)(v) Subordination Agreement K 4.1(l)(vi) Environmental Indemnification Agreement L-1 1.1(kk) Form of Note Receivable - Nevada L-2 1.1(kk) Form of Note Receivable - SPR - Colorado L-3 1.1(kk) Form of Note Receivable - SPR - Colorado L-4 1.1(kk) Form of Note Receivable - HSR - Colorado L-5 1.1(kk) Form of Note Receivable - HSR - Colorado M-1 1.1(p) Form of Deed of Trust - Nevada M-2 1.1(p) Form of Deed of Trust - SPR - Colorado M-3 1.1(p) Form of Deed of Trust - HSR - Colorado N-1 3.5(b) Form of Grant, Bargain, Sale Deed N-2 3.5(b) Form of Special Warranty Deed - SPR N-3 3.5(b) Form of Special Warranty Deed - HSR
-63- Schedule Reference Description -------- --------- ----------- 1.1(gg) 1.1(gg) Schedule of Subdivisions 3.4 3.4 Creditworthiness Standards for Purchasers 4.1(p) 4.1(p) Liens 4.4 4.4 Exceptions to Satisfaction of Conditions to Closing 6.5(a) 6.5(a) Exceptions to Title 6.6 6.6 Capital Structure 6.7 6.7 Litigation 6.11 6.11 Use of Proceeds 6.19 6.19 Lot Sales Information 12.15 Consent to Advertising and Publicity. Borrower hereby consents that ------------------------------------- Lender may issue and disseminate to the public information describing the credit accommodation entered into pursuant to this Agreement, including the names and addresses of Borrower and any subsidiaries and affiliates, the amount, interest rate, maturity, collateral, and a general description of Borrower's business. 12.16 Directly or Indirectly. Where any provision in this Agreement refers ----------------------- to action to be 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. 12.17 Unrelated Obligations. Notwithstanding any other provision of this ---------------------- Agreement or any of the other Loan Documents to the contrary, Lender shall not apply the Collateral or any portion thereof or the proceeds of any sale or other disposition thereof to any of the obligations of Borrower referred to in clause (iv) of Section 1.1(y) of this Agreement (the "Unrelated Obligations") unless the security other than the Collateral for the payment or performance of the Unrelated Obligations is unavailable to satisfy the Unrelated Obligations because of any court proceeding, sale or otherwise. 12.18 Loan Agreement Controls. In the event of any conflict or ------------------------ inconsistency between any of the provisions of this Agreement and the provisions of any of the other Loan Documents, the provisions of this Agreement shall control. 12.19 Headings. Section headings have been inserted in this Agreement as --------- a matter of convenience of reference only; such section headings are not a part of this Agreement and shall not be used in the interpretation of this Agreement. -64- IN WITNESS WHEREOF, Borrower and Lender have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. BORROWER: PREFERRED EQUITIES CORPORATION, a Nevada corporation By: Name: Title: COLORADO LAND AND GRAZING CORP., a Colorado corporation By: Name: Title: LENDER: DORFINCO CORPORATION, a Delaware corporation By: Name: Title: -65- AGREED AND CONSENTED TO BY THE UNDERSIGNED AS GUARANTOR AND SUBORDINATED CREDITOR: MEGO FINANCIAL CORP., a New York corporation By: Name: Title: -66- $10,000,000 AMENDED AND RESTATED PROMISSORY NOTE ------------------------------------------------ $10,000,000.00 June __, 2001 FOR VALUE RECEIVED and pursuant to the terms of this Promissory Note ("Note"), the undersigned, PREFERRED EQUITIES CORPORATION, a Nevada corporation and Colorado Land and Grazing Corp., a Colorado corporation (collectively, Preferred Equities Corporation and Colorado Land and Grazing Corp. are herein referred to as "Maker"), jointly and severally, promise to pay to the order of DORFINCO CORPORATION, a Delaware corporation ("Lender") (the Lender and all subsequent holders of this Note being hereinafter referred to as the "Holder") at 10 Dorrance 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 TEN MILLION AND NO/100 DOLLARS ($10,000,000.00), or so much thereof as may be outstanding hereunder from time to time (the "Loan"), together with interest on the unpaid principal balance of such indebtedness from time to time outstanding, at the rate or rates hereinafter set forth. 1. LOAN AGREEMENT. This Note is issued pursuant to and subject to the terms and conditions of that certain First Amended and Restated Loan and Security Agreement ("Loan Agreement") dated as of June, 2001 as amended from time to time, between Maker, as borrower and debtor, and Lender, as lender and secured party, to which reference is hereby made for a complete description of the terms and conditions under which advances evidenced hereby are made and are to be repaid. Payment of this Note and all interest, fees and charges herein is secured as set forth in the Loan Agreement and pursuant to such other documents, which recite that they have been given as security for this Note (all the aforementioned documents, including the Loan Agreement, shall herein be referred to as "Loan Documents"). Capitalized terms used herein without definition shall have the meanings set forth in the Loan Agreement. 2. INTEREST RATE. On and after the date hereof (until maturity or default as hereinafter provided), interest shall accrue and be due monthly in arrears at the rate per annum of Two percent (2.0 %) above the "Prime Rate" as announced by The Chase Manhattan Bank, N.A. or successor thereto (the "Basic Interest Rate"), with the Basic Interest Rate for any given calendar month being calculated by using the Prime Rate in effect on the first (1st) day of each month during the term hereof. In the event The Chase Manhattan Bank, N.A., or successor thereto, shall discontinue announcement of said Prime Rate, a comparable index designated by Holder shall be used in calculating the Basic Interest Rate. Interest under this Note shall be calculated hereunder for the actual number of days that principal is outstanding based on a year of 360 days. 3. PAYMENTS. -67- Payments of the amounts due under this Note shall be made in accordance with the Loan Agreement, including, but not limited to the following: (a) Monthly Interest Payments. Commencing on the first (1st) day of July ------------------------- 1, 2001 and continuing on the first (1st) day of each and every month thereafter through and including December 1, 2005 all interest accrued at the Basic Interest Rate shall be due and payable monthly in arrears. (b) Principal Repayments and Mandatory Prepayments. In addition to the ---------------------------------------------- interest payments described in the preceding paragraph, Maker shall also make such principal payments as may be required by the Loan Agreement, including, without limitation, any principal payments required pursuant to Section 2.4(a) and any Mandatory Prepayments required pursuant to Section 2.5(c) thereof. (c) Repayment on Maturity. On Maturity Date, as defined in the Loan --------------------- Agreement, or on such earlier date as this Note becomes due and payable, whether by acceleration or otherwise, the entire outstanding principal balance hereof, together with accrued but unpaid interest thereon, and all other sums owing to Holder hereunder or under the Loan Documents, shall be due and payable in full. 4. APPLICATION OF PAYMENT. All principal, interest and any other amounts due under this Note shall be payable in lawful money of the United States of America at the place or places above stated. All payments shall be credited first to costs and expenses, if any, incurred in good faith by Holder in collecting any amounts due hereunder, second to any Late Charges (as hereinafter defined) and interest accrued at the Default Rate, third to accrued and unpaid interest, and thereafter fourth to principal and any other amounts due hereunder or under the Loan Documents. 5. LATE PAYMENT CHARGES. In the event that any monthly payment is not received at the above said address (or at such other place as is designated pursuant to the terms hereof) before the tenth (10th) day after the due date thereof, in addition to any other permitted charges hereunder, a one-time late payment fee shall be due and owing to Holder in the amount of five percent (5%) of the delinquent portion of such monthly payment. Notwithstanding anything contained herein or in any Loan Document, this paragraph is not intended to, and shall not, create any grace period or indulgence by Holder with respect to the punctual payment by Maker of all sums owed Holder, nor shall this paragraph in any way hinder, prevent or delay Holder from exercising any remedy which it may have hereunder or under any Loan Document, or at law or in equity, with respect to Maker's failure timely to make any payment when due. Maker acknowledges that the aforesaid late payment fee is not imposed as a charge for the use of money, but rather is imposed as a reasonable estimate of the administrative charges and other costs incurred by Holder in dealing with loans not paid on time, and said late payment fee shall in no way be deemed an interest charge. Nothing herein is intended or shall be construed to require payment of a late charge or -68- late payment fee on any sums due other than the sums referred to in Paragraph 3 of this Note. -69- 6. INTEREST UPON DEFAULT. In the event that there occurs an Event of Default under the Loan Agreement, thereafter, the principal and accrued but unpaid interest amount then due and payable hereunder shall bear interest from the due date thereof during the continuance of such Event of Default until paid at the rate of two percent (2%) per annum in excess of the Basic Interest Rate (the "Default Rate"). 7. ACCELERATION. Upon the occurrence and during the continuance of an Event of Default under the Loan Agreement or hereunder, Holder may at its option, in addition to any other remedies to which it may be entitled, declare the total unpaid principal balance of the indebtedness evidenced hereby, together with all accrued but unpaid interest thereon, any applicable prepayment premium and all other sums owing, immediately due and payable and all such amounts shall thereafter bear interest at the Default Rate; provided, however, that no interest at the Default Rate or otherwise, shall accrue on any late charges or prepayment premium. All accrued and unpaid interest shall be paid at the time of and as a condition precedent to the curing of any Event of Default should Holder, in its sole discretion, allow such Event of Default to be cured. Time is of the essence in this Note. 8. PREPAYMENT. (a) Except as otherwise specifically provided in the Loan Agreement, this Loan may not be prepaid prior to December 31, 2001. On and after December 31, 2001, this Loan may be prepaid at any time, in whole but not in part, upon thirty (30) days prior written notice to Holder and upon payment, in addition to such outstanding principal amount, all accrued and unpaid interest, all other amounts then due and payable hereunder and a prepayment premium equal to one percent (1%) of the outstanding principal balance. (b) Notwithstanding anything in Section 8 (a) above or elsewhere in this Note or any of the other Loan Documents to the contrary, no prepayment premium shall be charged with respect to any Mandatory Prepayment or prepayment pursuant to Section 2.5(b) of the Loan Agreement. (c) By placing its initials immediately following this paragraph, Maker expressly agrees that, upon acceleration of the Maturity Date prior to December 31, 2005 as a result of any Event of Default, including without limitation, a tender by Maker or by anyone on behalf of Maker of payment of the amount necessary to satisfy the indebtedness evidenced hereby made at any time prior to or at a foreclosure sale of the Collateral, shall constitute an evasion of the prepayment terms hereof and shall be deemed to be a voluntary prepayment hereunder. Therefore, Maker shall pay a prepayment premium with any such prepayment in an amount equal to any amount which would have been due as a prepayment premium pursuant to Section 8(a) above; provided however that the obligation of Maker to pay a prepayment premium under this Section 8(c) is expressly made subject to Section 9 below. Maker expressly waives the provisions of any present or future statute or law which prohibits or may prohibit the collection -70- of the foregoing prepayment premium in connection with any such acceleration. _____________ (Preferred) Maker's Initials ---------------------------- _____________ (Colorado) Maker's Initials --------------------------- 9. LIMIT OF VALIDITY. All agreements between the Maker and the Holder hereof are expressly limited so that in no contingency or event whatsoever, whether by reason of advancement of the proceeds hereof, acceleration of maturity of the unpaid principal balance hereof, or otherwise, shall the amount paid or agreed to be paid to the Holder hereof for the use, forbearance or detention of the money to be advanced hereunder exceed the highest lawful rate permissible under applicable usury laws. If, from any circumstances whatsoever fulfillment of any provision hereof or of the Security Documents shall involve transcending the limit of validity prescribed by any law which a court of competent jurisdiction may deem applicable hereto, then, ipso facto, the obligation to be fulfilled ---------- shall be reduced to the limit of such validity, and, if from any circumstance the Holder hereof shall ever receive as interest an amount which would exceed the highest lawful rate, such amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance due hereunder and not to the payment of interest. This provision shall control every other provision of all agreements between the Maker and the Holder hereof. 10. MISCELLANEOUS. (a) Any remittances hereunder by check or draft shall be credited on the date of receipt subject to the condition that such check or draft may be handled for collection in accordance with the practice of the collecting bank or banks and any receipt issued therefore shall be void unless the amount due is actually received by Holder hereof. (b) If interest, principal or other sum owing under this Note is not paid when due, whether at maturity or by acceleration, the Maker promises to pay all costs of collection, including but not limited to, attorneys' fees and all expenses incurred in good faith by the Holder in connection with the collection of this Note, the protection or realization of the Collateral and enforcement of any guaranty on account of such collection, whether or not suit is filed hereon. Such fees shall include, without limitation, costs and attorneys' fees incurred in good faith in any appeal. (c) If more than one person has executed this Note or becomes obligated under this Note, the obligations and covenants of each such person shall be joint and several. The release by Holder of any party liable on this Note shall not operate to release any other party liable hereon. (d) This Note is to be governed by and construed in accordance with the laws of the State of Nevada. -71- (e) All notices hereunder shall be deemed to have been duly given if delivered in accordance with the provisions set forth in Section 12.1 of the Loan Agreement. (f) This Note may not be waived, changed, modified or discharged orally, except by an agreement in writing signed by the party against whom the enforcement of waiver, change, modification or discharge is sought. (g) The underlined words appearing at the commencement of the paragraphs are included only as a guide to the contents thereof and are not to be considered as controlling, enlarging or restructuring the language or meaning of those paragraphs. (h) As used herein, the terms "Maker" and "Holder" shall be deemed to include their respective heirs, successors, legal representatives and assigns, whether voluntary by action of the parties or involuntary by operation of law. (i) The Maker hereby consents to the non-exclusive personal jurisdiction of the federal and state courts located in Clark County, Nevada in any and all actions between the Maker and the Holder arising under or in connection with this Note, the Loan or any of the Security Documents. FOR AND IN CONSIDERATION OF HOLDER'S ADVANCEMENT OF THE PRINCIPAL SUM HEREUNDER IN THE AMOUNT OF $100.00, THE MAKER, BEING AN EXPERIENCED DEVELOPER AND PARTICIPANT IN SOPHISTICATED REAL ESTATE VENTURES, AND HAVING CONSULTED WITH COUNSEL OF ITS CHOOSING, HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY ACTION OR PROCEEDING (I) BROUGHT BY THE MAKER, THE HOLDER OR ANY OTHER PERSON RELATING TO (A) THE LOAN OR (B) THE SECURITY DOCUMENTS, OR (II) TO WHICH THE HOLDER IS A PARTY. THE MAKER HEREBY AGREES THAT THIS NOTE CONSTITUTES A WRITTEN CONSENT TO WAIVER OF TRIAL BY JURY, AND THE MAKER DOES HEREBY CONSTITUTE AND APPOINT THE HOLDER ITS TRUE AND LAWFUL ATTORNEY-IN-FACT, WHICH APPOINTMENT IS COUPLED WITH AN INTEREST, AND THE MAKER DOES HEREBY AUTHORIZE AND EMPOWER THE HOLDER, IN THE NAME, PLACE AND STEAD OF THE MAKER, TO FILE THIS NOTE WITH THE CLERK OR JUDGE OF ANY COURT OF COMPETENT JURISDICTION AS A STATUTORY WRITTEN CONSENT TO WAIVER OF TRIAL BY JURY. THE MAKER ACKNOWLEDGES THAT ITS WAIVER OF TRIAL BY JURY HAS BEEN MADE KNOWINGLY, INTENTIONALLY AND WILLINGLY BY MAKER AS PART OF A BARGAINED FOR LOAN TRANSACTION. -72- EXECUTED as of the day and year first above written. PREFERRED EQUITIES CORPORATION, a Nevada corporation By: Its: COLORADO LAND AND GRAZING CORP., a Colorado corporation By: Its: -73- REAFFIRMATION OF GUARANTY In order to induce Dorfinco Corporation, a Delaware corporation, having a business and mailing address of 40 Westminster Street, P.O. Box 6687, Providence, Rhode Island 02940-6687 ("Lender") to grant further credit to and otherwise extend the obligations of Preferred Equities Corporation and Colorado Land and Grazing Corp. (hereinafter collectively referred to as "Borrower") and for other good and valuable consideration, the undersigned, Mego Financial Corp., a New York corporation having a business address of 4310 Paradise Road, Las Vegas, Nevada 89109 ("Guarantor") hereby, unconditionally guarantees to Lender the due and punctual payment, performance and discharge (whether upon acceleration or otherwise in accordance with the terms thereof) of all debts, obligations and liabilities of Borrower to or held by Lender arising out of a Loan and Security Agreement dated as of July 31, 1991, between Lender and Borrower, as amended January 8, 1992, June 30, 1993, August 23, 1994, September 30, 1995, November 29, 1996, June 11, 1998, December 31, 1998, June 30, 1999 and December 15, 2000 and by a First Amended and Restated Loan and Security Agreement dated of even date herewith (the "Agreement"), whether direct or contingent, whether due or to become due, whether now existing or hereafter arising, and whether created directly to or acquired by assignment or otherwise by Lender together with any and all reasonable expenses of, for and incidental to collection including reasonable attorneys' fees (the sums due Lender and the above mentioned expenses and costs being collectively referred to herein as the "Indebtedness"). Guarantor hereby waives notice of acceptance hereof, notice of the extension of credit from time to time given by Lender to Borrower, and notice of the creation, existence or acquisition of any Indebtedness and the amount thereof from time to time, subject, however, to Guarantor's right to make inquiry of Lender to ascertain the amount of the Indebtedness at any reasonable time. Guarantor also waives notice of adverse change in Borrower's financial condition or of any other fact which might increase Guarantor's risks, to notice of presentment for payment, demand, protest and to notice thereof as to any instrument, to notice of default, and to all other notices and demands to which Guarantor might otherwise be entitled. Guarantor further waives the right to a jury trial in any action hereunder and any right by statute or otherwise to require Lender to institute suit against Borrower or to exhaust its rights and remedies against Borrower, Guarantor being bound to the payment of all Indebtedness of Borrower to Lender whether now existing or hereafter accruing as fully as if the Indebtedness was directly owing to Lender by Guarantor. Guarantor further waives any defense arising by reason of any disability or other defense of Borrower or by reason of the cessation from any cause whatsoever of the liability of Borrower and any defense that other indemnity, guaranty, or security was or is to be obtained. Nothing shall discharge or satisfy the liability of Guarantor hereunder except the full performance and payment of the Indebtedness. If Borrower or Guarantor should at any time become insolvent or make a general assignment for the benefit of his creditors, or if a petition in bankruptcy or any insolvency or reorganization proceedings shall be filed or commenced by, against or with respect to Borrower or Guarantor, any and all of the obligations of Guarantor shall forthwith become due and payable without notice. Lender shall have a lien upon and/or right of setoff to any and all credits and other property of Guarantor now or at any time whatsoever with, or in the possession of, Lender or anyone holding for Lender as security for any and all obligations of Guarantor to Lender, no matter how or when arising and whether under this or any other instrument or agreement or otherwise. Without notice to or by Guarantor and without affecting or impairing the obligations of Guarantor hereunder, Lender may compromise or settle, extend the period of duration or the time for the payment or -74- discharge or performance of, or may refuse to enforce or may release all or any parties to any and all of the Indebtedness, or may grant other indulgences to Borrower with respect thereto, or may amend or modify in any manner any documents or agreements relating to the Indebtedness (other than this Guaranty), or may release, surrender, exchange, modify, impair or extend the period of duration or time for performance, discharge or payment of any and all deposits and other property securing the Indebtedness or on which Lender at any time may have a lien, or may refuse to enforce its rights, or may make any compromise or settlement, or any agreement therefor, with respect to any and all of such deposits and property or with any party to the Indebtedness or any other person, firm or corporation whatsoever, or may release or substitute any one or more of the guarantors of the Indebtedness whether parties to this instrument or not, or may exchange, enforce, waive or release any security for any guaranty of the Indebtedness. Lender shall be under no obligation to marshall any assets in favor of Guarantor or against or in payment of any or all of the Indebtedness. Guarantor further agrees that to the extent Borrower makes a payment or payments to Lender which payment or payments or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy act, state or federal law, common law or equitable cause, then to the extent of such payment or repayment, the obligation or part thereof intended to be satisfied shall be revived and continued in full force and effect as if said payment had not been made. Guarantor expressly waives any and all rights of subrogation, reimbursement, indemnity, exoneration, contribution or any other claim which it may now or hereafter have against the Borrower or any other person directly or contingently liable for the Indebtedness, or against or with respect to the Borrower's property (including, without limitation, property collateralizing the Indebtedness), arising from the existence or performance of this guaranty. In furtherance, and not in limitation, of the preceding waiver, the undersigned agrees that any payment to Lender by Guarantor pursuant to this guaranty shall be deemed a contribution to the capital of the Borrower and any such payment shall not constitute the undersigned a creditor of any such party. Any and all present and future debts and obligations of Borrower to Guarantor are hereby subordinated to the full payment of the Indebtedness by Borrower to Lender, and as security for this Guaranty, Guarantor hereby collaterally assigns to Lender all claims of any nature which any Guarantor may now or hereafter have against Borrower. Guarantor agrees that the liability of Guarantor on this Guaranty shall be immediate and not contingent upon the exercise or enforcement by Lender of whatever remedies it may have against Borrower or others, or the enforcement of any lien or realization upon any security Lender may at any time possess. Guarantor represents, warrants and covenants to Lender, as an inducement to Lender to grant credit to Borrower, that as of the date of this Guaranty the fair saleable value of Guarantor's assets exceed Guarantor's liabilities; Guarantor is meeting current liabilities as they mature; the financial statements of Guarantor furnished Lender are true and correct and include in the footnotes thereto all contingent liabilities of Guarantor; since the date of said financial statement there have been no material adverse changes in the financial conditions of Guarantor; there are not now pending any material court or administrative proceedings or undischarged judgments against Guarantor and no federal or state liens have been filed or threatened against Guarantor, nor is Guarantor in default or claimed default under any agreement for borrowed money; Guarantor shall immediately give Lender written notice of any material adverse change in the Guarantor's financial conditions, including, but not limited to, litigation commenced, tax liens filed, defaults claimed under any Guarantor's indebtedness for borrowed money, or bankruptcy proceedings commenced by or against Guarantor or any third party; Guarantor shall within 90 days of every December 31 in which this Guaranty shall be in effect furnish to Lender Guarantor's current financial statements and Guarantor shall also, upon the request of lender, permit Lender or its representatives to inspect at Guarantor's offices Guarantor's financial records and properties and make extracts therefrom in order to evaluate the financial condition of Guarantor. -75- This Guaranty is a primary and original obligation of Guarantor and is an absolute, unconditional and irrevocable guaranty of payment and shall remain in full force and effect without respect to future changes in conditions, including change of law or any invalidity or irregularity with respect to the issuance of any obligations of Borrower to Lender or with respect to the execution and delivery of any agreement between Borrower and Lender. Lender shall have the right to seek recourse against Guarantor to the full extent provided for herein and in any other document or instrument evidencing obligations of Guarantor to Lender, and against Borrower, to the full extent provided for in any loan agreement between Lender and Borrower. No election to proceed in one form of action or proceeding, or against any party, or on any obligation, shall constitute a waiver of Lender's right to proceed in any other form of action or proceeding or against other parties unless Lender has expressly waived such right in writing. Specifically, but without limiting the generality of the foregoing, no action or proceeding by Lender against Borrower under any document or instrument evidencing or securing the Indebtedness shall serve to diminish the liability of Guarantor except to the extent Lender realized payment by such action or proceeding, notwithstanding the effect of any such action or proceeding upon Guarantor's rights of subrogation against Borrower. Guarantor is fully aware of the financial condition of Borrower. Guarantor delivers this Guaranty based solely upon Guarantor's own independent investigations and in no part upon any representation or statement of Lender with respect thereto. Guarantor is in a position to obtain and hereby assume full responsibility for obtaining any additional information concerning Borrower's financial condition as Guarantor may deem material to Guarantor's obligations hereunder, and Guarantor is not relying upon nor expecting Lender to furnish any information in Lender's possession concerning Borrower's financial condition. Guarantor hereby knowingly accepts the full range of risk encompassed within a contract of "Guaranty," which risk includes, without limitation, the possibility that Borrower will contract additional Indebtedness for which Guarantor may be liable hereunder after Borrower's financial condition or ability to pay its lawful debts when they fall due has deteriorated. Guarantor agrees that all the rights, benefits and privileges herein and hereby conferred upon Lender shall vest in and be enforceable by Lender, its successors and assigns. This Guaranty, all acts and transactions hereunder and the rights and obligations of the parties hereto shall be governed, construed and interpreted according to the laws of the Commonwealth of Massachusetts. All actions or proceedings arising directly or indirectly hereunder may, at the option of Lender, be litigated in courts having situs within the Commonwealth of Massachusetts, and Guarantor hereby expressly consents to the jurisdiction of any local, state or federal court located within said state and consents that any service of process in such action or proceeding may be made by personal service upon Guarantor wherever Guarantor may be then located or by certified or registered mail directed to Guarantor at Guarantor's last known addresses. IN WITNESS WHEREOF, Guarantor has executed this Reaffirmation of Guaranty this ___ day of June, 2001. MEGO FINANCIAL CORP., a New York corporation By: Name: Title: STATE OF NEVADA ) ) ss. -76- COUNTY OF CLARK ) On June __, 2001, before me, the undersigned officer, personally appeared ______________, ______________, of Mego Financial Corp., known to me (or satisfactorily proven) to be the person whose name is subscribed to the within instrument and acknowledged that he executed the same as his free act and deed and the free act and deed of Mego Financial Corp.. IN WITNESS WHEREOF, I hereunto set my hand. __________________________ Notary Public -77- SUBORDINATION AGREEMENT SUBORDINATION AGREEMENT (as amended from time to time, "this Agreement"), made as of June ___, 2001, among MEGO FINANCIAL CORP., a New York corporation (the "Subordinated Lender"), COLORADO LAND AND GRAZING CORP., a Colorado corporation and PREFERRED EQUITIES CORPORATION, a Nevada corporation (collectively the "Borrower") and DORFINCO CORPORATION, a Delaware corporation (the "Senior Lender"); WITNESSETH: ---------- WHEREAS, the Subordinated Lender is a party to a Reaffirmation of Guaranty, dated as of June ___, 2001, (as amended from time to time, the "Guaranty"), pursuant to which the Subordinated Lender has agreed to guaranty the loans made by the Lender to the Borrower pursuant to that certain First Amended and Restated Loan and Security Agreement (as amended from time to time, referred to as the "LSA") dated as of June ____, 2001 between the Borrower and the Senior Lender; WHEREAS, all of the indebtedness, liabilities and obligations of the Borrower to the Senior Lender, whether now existing or hereafter arising, under the LSA and all other instruments and documents executed and delivered in connection therewith are hereinafter referred to collectively as the "Senior Debt"; and WHEREAS, all of the indebtedness, liabilities and obligations of the Borrower to the Subordinated Lender, whether now existing or hereafter arising, resulting from loans or other accommodations to the Borrower from the Subordinated Lender (except for any amounts payable by the Borrower to the Subordinated Lender from time to time under income tax sharing arrangements between the Borrower and the Subordinated Lender) is hereinafter referred to collectively as the "Subordinated Debt"; NOW THEREFORE, in consideration of the foregoing and of the mutual undertakings herein contained, the parties hereto hereby agree as follows: 1. Subordination. ------------- (a) The payment of any and all of the Subordinated Debt is hereby expressly made subordinate and junior in right of payment to the payment of the principal amount of, and all interest and premium on, and all other amounts in respect of, the Senior Debt, to the extent and in the manner set forth herein. (b) In the event of (1) any insolvency, bankruptcy, receivership, liquidation, reorganizations, arrangement, assignment for the benefit of creditors, or other similar proceeding -78- relative to the Borrower, its creditors or its Property (as defined in the LSA), or (2) any proceeding for the voluntary or involuntary liquidation, dissolution or other winding up of the Borrower whether or not involving insolvency or bankruptcy proceedings, then and in any such event: (i) the principal amount of, and all interest and premium on, and all other amounts in respect of, the Senior Debt (including interest thereon accruing after the commencement of any such proceeding, whether or not such interest shall be allowed in such proceeding) shall be paid in full before any payment or distribution of any character, whether in cash, Securities (as defined in the LSA) or other Property, shall be made in respect of the Subordinated Debt; (ii) any payment or distribution of any character, whether in cash, Securities or other Property, which would otherwise (but for the terms hereof) be payable or deliverable in respect of the Subordinated Debt (including any payment or distribution in respect of the Subordinated Debt by reason of any other indebtedness of the Borrower being subordinated to the Subordinated Debt), shall be paid or delivered directly to the Senior Lender, or its representatives, until the principal amount of, and all interest and premium on, and all other amounts in respect of, the Senior Debt shall have been paid in full and the Subordinated Lender or any other holder of the Subordinated Debt irrevocably authorizes, empowers and directs all receivers, trustees, liquidators, conservators and others having authority in the premises to effect all such payments and deliveries; (iii) the Subordinated Lender and any other holder of the Subordinated Debt shall (1) execute and deliver to the Senior Lender or its representative or agent all such further instruments confirming the authorization referred to in the foregoing clause (ii), (2) execute and deliver to the Senior Lender or its representative or agent any powers of attorney specifically confirming the rights of the Senior Lender (or such representative or agent) arising hereunder, (3) execute and deliver to the Senior Lender or its representative or agent all proofs of claim, assignments of claim and other instruments as may be requested by the Senior Lender to enforce all claims upon or in respect of the Subordinated Debt, and (4) take all other actions as may be requested by the Senior Lender to enforce all claims upon or in respect of the Subordinated Debt. (c) Until and unless the principal amount of, and all interest and premium on, and all other amounts in respect of, the Senior Debt shall have been paid in full, the Borrower shall not make, and the Subordinated Lender shall not receive, accept or retain, any payments of principal or interest or other amount on account of the Subordinated Debt; provided, however, that the Borrower may -------- ------- make and the Subordinated Lender may receive, accept and retain such payments if (i) no Default or Event of Default under, and as defined in, the LSA shall have occurred and be continuing, (ii) the Borrower would not be rendered insolvent, made unable to pay its debts as they come due or be left without adequate capital to pursue its business and (iii) such payments are in respect of regularly scheduled payments of principal and/or interest under such Subordinated Debt (the terms of which regularly scheduled payments shall have previously been -79- approved, in writing, by the Lender in its sole discretion) and in no case may the Borrower make, or the Subordinated Lender accept, a prepayment of any principal and/or interest in respect of the Subordinated Debt without the prior consent of the Senior Lender. (d) The Borrower agrees that, in the event that any note or other obligation of the Borrower not evidencing Senior Debt, or any portion thereof, shall become due and payable before its expressed maturity for any reason, the Borrower will give prompt notice, in writing, of such occurrence to the Senior Lender. (e) So long as any of the Senior Debt shall remain unpaid, the Senior Lender may at all times exercise any and all powers and rights which it now has or may hereafter acquire with respect to the LSA, the GUARANTY or any of the collateral subject to the LSA or GUARANTY without having to obtain any consent or approval of the Subordinated Lender and without any accountability to the Subordinated Lender, nor shall it have any liability to the Subordinated Lender for any action taken or failure to act with respect to this Agreement, the LSA, the GUARANTY or the aforesaid collateral. (f) Until the entire principal amount of, and all interest and premium on, and all other amounts in respect of, the Senior Debt shall have been paid in full, the Subordinated Lender shall not enforce any right or remedy or cause the Subordinated Debt to be accelerated or otherwise to become due prior to its expressed maturity, which it now has or may hereafter have against the Borrower or its Property, including, without limitation, rights and remedies under any mortgage, deed of trust or security agreement. (g) If, notwithstanding the provisions of this Agreement, any payment or distribution of any character (whether in cash, Securities or other Property) or any Security shall be received by the Subordinated Lender in contravention of the terms of this Agreement, and before the entire principal amount of, and all interest and premium on, and all other amounts in respect of, the Senior Debt shall have been paid in full, such payment, distribution or Security shall not be commingled with any asset of the Subordinated Lender, but shall be held in trust for the benefit of, and shall be paid over or delivered and transferred to, the Senior Lender, or its representatives or agents, for application to the payment of all Senior Debt remaining unpaid, until the principal amount of, and all interest and premium (including interest thereon accruing after the commencement of any proceedings described in Section 1(b) hereof) on, and all other amounts in respect of, the Senior Debt shall have been paid in full. (h) Until the principal amount of, and all interest and premium on, and all other amounts in respect of, the Senior Debt shall have been paid in full, the Subordinated Lender shall not have the right of subrogation, reimbursement or indemnity whatsoever or any right of recourse to or with respect to any assets or Property of the Borrower or to any of the collateral for the Senior Debt. (i) This Agreement, without further reference, shall pass to and may be relied on and enforced by any transferee or subsequent holder of the Senior Debt. In the event of any sale, assignment, disposition or other transfer of the Subordinated Debt, the Subordinated Lender shall -80- cause the transferee thereof to execute and deliver to the Senior Lender a written instrument signed by the transferee, in form and substance satisfactory to the Senior Lender, providing for the continued subordination of the Subordinated Debt to the Senior Debt as provided for herein and for the continued effectiveness of all of the rights of the Senior Lender arising under this Agreement. 2. Continued Effectiveness of This Agreement. ----------------------------------------- The terms of this Agreement, the subordination effected hereby, and the rights of the Senior Lender and the obligations of the Subordinated Lender arising hereunder, shall not be affected, modified or impaired in any manner or to any extent by: (i) any amendment or modification of or supplement to the LSA, the GUARANTY or any instrument or document executed or delivered pursuant thereto, including, without limitation, the extension of the term of the Senior Debt and/or the increase in the amount of the Senior Debt; (ii) the lack of validity, legality or enforceability of any of such documents; (iii) any exercise or non-exercise of any right, power or remedy under or in respect of the Senior Debt or any of such instruments or documents referred to in clause (i) above or arising at law; or (iv) any waiver, consent, release, indulgence, extension, renewal, modification, delay or other action, inaction or omission in respect of the Senior Debt or any of the instruments or documents referred to in clause (i) above, whether or not the Subordinated Lender shall have had notice or knowledge of any of the foregoing and whether or not it shall have consented thereto. 3. Delivery of Promissory Note. --------------------------- In order to more fully implement the subordination effected hereby, the Subordinated Lender shall, upon request of the Senior Lender, deliver to the Senior Lender or its agent all promissory notes of the Borrower payable to, or to the order of, the Subordinated Lender. The Subordinated Lender agrees to take such other action as may be reasonably necessary or appropriate to effectuate, as between the Senior Lender and the Subordinated Lender, the subordination provided for herein. 4. Miscellaneous. ------------- (a) The Subordinated Lender shall join with the Lender in executing one or more financing statements pursuant to the Uniform Commercial Code or other notices appropriate under applicable law, in form satisfactory to the Senior Lender, for filing in all public offices where such filings are deemed by the Senior Lender to be necessary or desirable. (b) All notices, requests and other communications from any of the Subordinated Lender to the Senior Lender or to the Borrower, from the Senior Lender to the Subordinated Lender or to the Borrower or from the Borrower to the Subordinated Lender or to the Senior Lender shall be in writing and shall be given to such Person at its address set forth below or at such other address as such Person may hereafter specify for the purpose of notice to the other Persons. Each such notice, request or other communication shall be effective (i) if given by mail, on the 3rd succeeding Business Day (as such term is defined in the LSA) following deposit -81- in the United States mail, registered or certified with first class postage prepaid and return receipt requested or (ii) if given by overnight delivery, when delivered by a nationally recognized overnight delivery service which maintains receipts for delivery, such as Federal Express or Airborne with all fees and charges prepaid, in each case addressed: -82- if to the Subordinated Lender: Mego Financial Corp. 4310 Paradise Road Las Vegas, Nevada 89109 Attention: Jon A. Joseph, Senior Vice President & General Counsel with a copy to: Mego Financial Corp. 1125 N.E. 125th Street, Suite 206 North Miami, Florida 33161 Attention: Jerome J. Cohen, President Telecopy No. (305) 899-1824 if to the Borrower: Preferred Equities Corporation 4310 Paradise Road Las Vegas, Nevada 89119 Attention: Gregg A. McMurtrie, Executive Vice President ------------------------ Telecopy No. (702) 369-4398 Colorado Land and Grazing Corp. 4310 Paradise Road Las Vegas, Nevada 89119 Attention: Executive Vice President Telecopy No. (702) 369-4398 with a copy to: Mr. Jerome J. Cohen 1125 N.E. 125th Street, Suite 206 North Miami, Florida 33161 Telecopy No. (305) 899-1824 If to the Senior Lender: Dorfinco Corporation 333 East River Drive East Hartford, Connecticut 06108 Attention: Division Manager with a copy to: Dorfinco Corporation c/o Textron Financial Corporation 333 East River Drive East Hartford, Connecticut 06108 Attention: John T. D'Annibale, Vice President Telecopy No. (860) 282- -83- (c) This Agreement may not be amended or modified orally but may be amended or modified only in a writing, signed by all parties hereto. No waiver of any term or provision of this Agreement shall be effective unless it is in writing, making specific reference to this Agreement and signed by the party against whom such waiver is sought to be enforced. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof. This Agreement shall be binding upon the parties hereto and their respective heirs, legal representatives, successors and assigns. This Agreement shall be governed by and construed in accordance with the laws of the State of Rhode Island. (d) Terms used in this Agreement and not defined herein shall have the respective meanings ascribed to them in the LSA. The recitals hereto shall be a part of this Agreement. (e) This Agreement shall terminate upon the final and indefeasible payment in full of the principal amount of, and all interest and premium on, and all other amounts in respect of, the Senior Debt. (f) Two or more duplicate originals of this Agreement may be signed by the parties hereto, each of which shall be an original, but all of which together shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. WITNESS: MEGO FINANCIAL CORP., a New York corporation By__________________________________ Name: Title: COLORADO LAND AND GRAZING CORP., a Colorado corporation By:_______________________________ Name: Title: PREFERRED EQUITIES CORPORATION, a Nevada corporation By:_______________________________ Name: Title: -84- DORFINCO CORPORATION, a Delaware corporation -------------------- By:_______________________________ Name: Title: -85- EX-10.234 6 dex10234.txt THIRTEENTH AMENDMENT TO ASSIGNMENT EXHIBIT 10.234 THIRTEENTH AMENDMENT TO ASSIGNMENT AND ASSUMPTION AGREEMENT This Thirteenth Amendment (the "Amendment") to Assignment and Assumption Agreement, by and between RER Corp., COMAY Corp., GROWTH REALTY INC. and H&H FINANCIAL, INC. (the "Assignors") and MEGO FINANCIAL CORP., formerly named Mego Corp., (the "Assignee") WITNESSETH: WHEREAS, the Assignors are parties to the Assignment Agreement dated October 25, 1987, with the Assignee, and the Assignment and Assumption Agreement, dated February 1, 1988, between the Assignors and the Assignee, which two agreements were amended by the Amendment to Assignment and Assumption Agreement dated July 29, 1988 and by the Second Amendment to Assignment and Assumption Agreement dated as of March 2, 1995, the Third Amendment to Assignment and Assumption Agreement dated as of August 20, 1997 and the Fourth, Fifth, Sixth, Seventh, Eighth, Ninth, Tenth, Eleventh, and Twelfth amendments to Assignment and Assumption Agreement dated as of February 26, 1999, May 28, 1999, August 9, 1999, November 20, 1999, January 31, 2000, April 30, 2000, August 31, 2000, November 15, 2000 and February 15, 2001, respectively, between the Assignors and the Assignee (collectively, the described agreements as so amended are hereinafter referred to as the "Assignment"); and WHEREAS, the Assignment fixed the date of January 31, 1995 as the date on which the accrual of amounts due to the Assignors under the Assignment would terminate, except for interest on any of such amounts which remained unpaid; and WHEREAS, the amount due the Assignors as of January 31, 1995 was $13,328,742.25, plus interest from January 28, 1995, in the amount of $9,322.57, collectively, and with interest from January 31, 1995 to March 2, 1995 (the "Amount Due"); and WHEREAS, $10,000,000 of the Amount Due was agreed to be considered subordinated debt (the "Subordinated Debt"), against which payments were made as follows: (i) $1,428,571.43 was paid on March 1, 1997 as scheduled, (ii) $4,250,000 was deemed paid by credit against the exercise price of certain warrants as is set forth in the Third Amendment, and (iii) $35,714.28 was paid on September 1, 1998, leaving a remaining balance of the Subordinated Debt of $4,285,714.29; and WHEREAS, the balance of the Subordinated Debt continues to be secured by a pledge of all of the issued and outstanding common stock of Preferred Equities Corporation (and any distributions in respect thereto) pursuant to a Pledge and Security Agreement dated as of February 1, 1988 (the "Pledge Agreement") between the Assignee and the Assignors; and WHEREAS, interest on the Subordinated Debt has been paid through March 1, 1 2001; and WHEREAS, under the terms of the Assignment, all of the principal in the amount of $4,285,714.29 will be due and payable on July 1, 2001; and WHEREAS, the Assignee has requested that the Assignors further defer the payment of principal of the Subordinated Debt payable on July 1, 2001, in the total amount of $4,285,714.29, to December 1, 2001. NOW THEREFORE, in consideration of the mutual covenants herein contained it is hereby agreed as follows: 1. The statements in the foregoing preamble are true and correct. 2. The payments previously deferred to July 1, 2001, totaling in the aggregate $4,285,714.29, and hereby deferred to December 1, 2001. 3. The Assignee and Assignors agree that all amounts due to Assignors pursuant to the Assignment as amended by this Amendment shall continue to be secured as set forth in the Pledge Agreement and that the Pledge Agreement remains in full force and effect. 4. The Assignee and Assignors agree that this Amendment is an amendment to the Assignment and not a novation, and that except as modified hereby, all terms and conditions of the Assignment, including but not limited to provisions with respect to the payment of interest and acceleration of the entire balance of principal and interest if any payment is not made within 30 days of its due date, shall remain in full force and effect. 5. It is agreed that this Amendment may be signed in counterparts. IN WITNESS WHEREOF, the parties have duly executed this Amendment as of June 29, 2001. MEGO FINANCIAL CORP. H&H Financial, Inc By: /s/ Jerome J. Cohen By: /s/ Herbert Hirsch -------------------------- ------------------------- Jerome J. Cohen, President Title: President RER CORP. Growth Realty Inc. By: /s/ Robert Nederlander By: /s/ Eugene Schuster -------------------------- ------------------------- Title: President Title: C.E.O. Comay Corp By: /s/ Jerome J. Cohen -------------------------- Title: President 2 EX-10.235 7 dex10235.txt LOAN & SECURITY AGREEMENT EXHIBIT 10.235 LOAN AND SECURITY AGREEMENT by and between PREFERRED EQUITIES CORPORATION ("BORROWER") and CAPITAL SOURCE FINANCE LLC ("LENDER") Effective Date: August 8, 2001 TABLE OF CONTENTS ----------------- SECTION 1 THE LOAN -1- 1.1 Loan. -1- 1.2 Maturity -1- 1.3 Interest Rate -2- 1.4 Payments -2- 1.5 Prepayments -2- 1.6 Commitment Fee -3- 1.7 Unused Line Fee -3- SECTION 2 COLLATERAL -3- 2.1 Grant of Security Interest -3- 2.2 Upgraded Notes Receivable -4- 2.3 Security Agreement -4- SECTION 3 CONDITIONS PRECEDENT TO ADVANCES -4- 3.1 Closing Deliveries -4- 3.2 Deliveries Prior to Each Advance -4- 3.3 Security Interests -4- 3.4 Representations and Warranties -4- 3.5 No Default -4- 3.6 Performance of Agreements -5- SECTION 4 GENERAL REPRESENTATIONS AND WARRANTIES -5- 4.1 Existence -5- 4.2 Authorization and Enforceability -5- 4.3 Financial Statements and Business Condition -5- 4.4 Taxes -6- 4.5 Litigation and Proceedings -6- 4.6 Licenses and Permits -6- 4.7 Full Disclosure -6- 4.8 Employee Benefit Plans -6- 4.9 Representations as to the Resort -6- 4.10 Timeshare Interval Exchange Network -7- 4.11 Collateral -7- SECTION 5 AFFIRMATIVE COVENANTS -8- 5.1 Payment and Performance of Indebtedness -8- 5.2 Maintenance of Insurance -8- 5.3 Condemnation -9- 5.4 Inspections and Audits -9- 5.5 Reporting Requirements -9- 5.6 Records -11- 5.7 Management -11- 5.8 Net Worth -11- 5.9 Legal Covenant -11- 5.10 Maintenance -11- 5.11 Proceeds -11- 5.12 Release and Bonding of Liens -11-
5.13 Claims -11- 5.14 Use of Lender Name -11- 5.15 Other Documents -11- 5.16 Subordinated Obligations -12- 5.17 Loan Servicing -12- 5.18 Custodian -12- SECTION 6 NEGATIVE COVENANTS -12- 6.1 Consolidation and Merger -12- 6.2 Restrictions on Transfers -12- 6.3 Timeshare Regimen -13- 6.4 Collateral -13- 6.5 No Sales Outside of Certain States -13- 6.6 Contracts -13- SECTION 7 EVENTS OF DEFAULT -14- 7.1 Payments -14- 7.2 Failure to Permit Inspections -14- 7.3 Covenant Defaults -14- 7.4 Warranties or Representations -14- 7.5 Bankruptcy -14- 7.6 Attachment, Judgment, Tax Liens -15- 7.7 Default by Borrower or Guarantor in Other Agreements -15- 7.8 Suspension of Sales -15- SECTION 8 REMEDIES -15- 8.1 Remedies Upon Default -15- 8.2 Application of Collateral; Termination of Agreements -16- 8.3 Waivers -16- 8.4 Cumulative Rights -16- 8.5 Proceeds -16- 8.6 Marshalling Waiver -16- SECTION 9 CERTAIN RIGHTS OF LENDER -17- 9.1 Protection of Collateral -17- 9.2 Performance by Lender -17- 9.3 Fees and Expenses -17- 9.4 Assignment of Lender's Interest -17- 9.5 Notice to Purchaser -17- 9.6 Collection of Notes -17- 9.7 Power of Attorney -18- 9.8 Indemnification of Lender -18- SECTION 10 MISCELLANEOUS -18- 10.1 Notice -18- 10.2 Survival -19- 10.3 Governing Law -19- 10.4 Invalid Provisions -19- 10.5 Counterparts; Effectiveness -19- 10.6 Lender Not Fiduciary -20-
10.7 Entire Agreement -20- 10.8 Venue -20- 10.9 Jury Trial Waiver -20- 10.10 Consent to Advertising and Publicity -21- 10.11 Headings -21- 10.12 Broker's Fees -21-
APPENDIX Defined Terms -23- SCHEDULE 3.2 Deliveries for all Advances EXHIBITS A Permitted Exceptions B Description for the Resorts C Requests for Advance D Resort Amenities E Lender Credit Standards F Consumer Documents G Allonge LOAN AND SECURITY AGREEMENT --------------------------- THIS LOAN AND SECURITY AGREEMENT (this "Agreement") dated August 8, 2001, is made by and between PREFERRED EQUITIES CORPORATION, a Nevada corporation, ("Borrower"), whose address is 4310 Paradise Road, Las Vegas, Nevada 89109, CAPITAL SOURCE FINANCE LLC, a Delaware limited liability company ("Lender"), whose address is 1133 Connecticut Avenue, N.W., Suite 310, Washington, D.C. 20036 and MEGO FINANCIAL CORP., a New York corporation ("Guarantor"), whose address is 4310 Paradise Road, Las Vegas, Nevada 89109. RECITALS -------- A. Borrower desires Lender to extend a secured credit facility to Borrower in accordance with the terms of this Agreement. B. Borrower's obligations under the Loan Documents will be secured inter alia by, a security interest in certain Notes Receivable. C. Guarantor shall guaranty all of the obligations of Borrower to Lender under the Loan Documents. D. All capitalized terms used herein shall have the meanings ascribed thereto in the appendix attached hereto and made a part hereof by this reference. NOW, THEREFORE, in consideration of the foregoing premises and the agreements, provisions and covenants herein contained, Borrower and Lender agree as follows: SECTION 1 --------- THE LOAN -------- 1.1 Loan. ---- (a) Availability. During the Revolving Period, Lender shall make ------------ Advances to Borrower not in excess of Availability provided that Borrower satisfies all conditions set forth in Section 3 hereof and any other provisions of the Loan Documents applicable thereto. Advances shall be made no more frequently than four (4) times each month nor more than one (1) time each week. Except in connection with a prepayment mandated under Section 1.5(b)(i) below, any amounts repaid during the Revolving Period may be reborrowed during the Revolving Period. (b) Excess Availability. Lender shall make Advances of Excess ------------------- Availability to Borrower not more often than once per month and within fifteen (15) days of Borrower's delivery to Lender of written request therefor accompanied by Monthly Reports evidencing such Excess Availability to Lender's satisfaction. 1.2 Maturity. The Loan and Revolving Period shall be for a term of three -------- (3) years and the Loan shall be payable in full, together with all other amounts due and obligations owed under the Loan Documents on August 8, 2004. The Loan, Revolving Period and Maturity Date may be extended for two (2) years upon the payment of $150,000 to Lender at least ten (10) days before the end of the initial term. 1.3 Interest Rate. The outstanding principal balance of ------------- the Loan together with all other Indebtedness shall bear interest at the Interest Rate; provided, however, that after the occurrence of an Event of Default the Loan will bear interest at the Default Rate until cured during the time allowed for such cure in this Agreement or otherwise waived by Lender. 1.4 Payments. -------- (a) Monthly Payments. All funds collected by the Lockbox Agent from ---------------- the Financed Notes Receivable shall be paid to Lender at least weekly pursuant to the Lockbox Agreement, and shall be applied by Lender once each week in the following order: first, to the payment of costs or expenses incurred by Lender ----- in collecting any amounts due in connection with the Loan; second, to the ------ payment of accrued and unpaid interest; and third to the reduction of the principal balance of the Loan. If the funds received by Lender from the Lockbox Agent with respect to any month are insufficient to pay interest due and outstanding for any such month in full, Borrower shall pay the difference to Lender within five (5) business days of notice from Lender. Payments received by Borrower directly from any Purchaser shall be delivered to the Lockbox Agent within two (2) Business Days. (b) Final Payment. The Indebtedness shall be payable in full on the ------------- Maturity Date. 1.5 Prepayments. ----------- (a) Voluntary Prepayments. Prepayments of the Loan may be made in --------------------- whole, but not in part, upon five (5) days prior written notice to Lender at any time upon payment of the applicable Prepayment Premium (whether such prepayment results from voluntary payments by Borrower, acceleration, or otherwise); provided, however, that payments or prepayments of Financed Notes Receivable made by Purchasers shall not violate this Section 1.5(a), and no Prepayment Premium shall be payable as a result of any such payment. (b) Mandatory Prepayments. --------------------- (i) Excess Outstandings. If at any time the outstanding ------------------- principal balance of the Loan exceeds the Maximum Exposure, Borrower shall, within ten (10) Business Days after notice, either (A) prepay the Loan in an amount necessary to reduce the principal balance of the Loan, or (B) deliver to Lender such additional or replacement Eligible Notes Receivable, in either event such that the remaining outstanding principal balance of the Loan is equal to or less than the Maximum Exposure. (ii) No Prepayment Premium. No Prepayment Premium shall be due --------------------- in connection with any mandatory prepayment made in accordance with Sections 1.5(b)(i) above. (iii) Ineligible Financed Note Receivable. If at any time a ----------------------------------- Financed Note Receivable ceases to be an Eligible Note Receivable, Borrower shall, within five (5) Business Days after notice, either (A) prepay the Loan in an amount equal to the balance due under such Financed Note Receivable; or (B) deliver to Lender one (1) or more Eligible Notes Receivable having an outstanding aggregate principal balance equal to, or no more than $1,000 in excess of, the outstanding principal balance of such Financed Note Receivable. Thereafter, Lender shall return such ineligible Note Receivable to Borrower and, within five (5) days of Lender's receipt from Borrower of a completed Allonge and Assignment of Deed of Trust relating to such Note Receivable and the Deed of Trust securing the same, in forms acceptable to Lender, Lender shall execute such instruments and return them to Borrower. 1.6 Commitment Fee. The portion of the Commitment Fee of such payment. The -------------- previously paid by Borrower shall be deemed to have been earned as of the date unpaid portion of the Commitment Fee, if any, shall be deemed fully earned as of the date hereof, and Borrower shall pay $100,000.00 to Lender before or upon the Initial Advance, and the balance in three (3) monthly installments of $28,333.33 each, by no later than December 15, 2001; Borrower hereby authorizes Lender to advance the $100,000.00 to itself from the first Advance and to advance the balance due out of subsequent Advances. 1.7 Unused Line Fee. Commencing on the first day of December, 2001 and --------------- continuing on the first day of each quarter thereafter, Borrower shall pay Lender the Unused Line Fee. SECTION 2 --------- COLLATERAL ---------- 2.1 Grant of Security Interest. To secure the payment and performance of -------------------------- the Indebtedness, Borrower does hereby unconditionally and irrevocably assign, pledge and grant to Lender a first priority, continuing security interest and lien in and to all right, title and interest of Borrower in the following property of Borrower, whether now owned or existing or hereafter acquired regardless of where located (collectively, the "Collateral"): (a) The Financed Notes Receivable; (b) The Deeds of Trust and Purchase Documents; (c) All deposits, accounts, accounts receivable, general intangibles and other receivables arising under or in connection with the Pledged Documents, together with all payments, privileges and benefits arising out of the enforcement thereof, and all funds held in any deposit accounts related to any of the Financed Notes Receivable; (d) All policies of title insurance related to the Deeds of Trust; (e) All documents, instruments, pledged assets and chattel paper relating to the Pledged Documents and the other properties and rights described as Collateral herein; (f) All cash and other monies and property of Borrower in the possession or under the control of Lender; (g) All books, records, ledger cards, files, correspondence, computer tapes, disks and software relating to the Pledged Documents or any other Collateral described herein; (h) All management, marketing, servicing, maintenance or other similar contracts for the Resort; and (i) All proceeds, extensions, amendments, additions, improvements, betterments, renewals, substitutions and replacements of the foregoing. 2.2 Upgraded Notes Receivable. Notwithstanding anything to the contrary ------------------------- set forth in this Agreement, Borrower may supplement or replace Financed Notes Receivables with Upgraded Notes Receivable without Lender's prior consent so long as (i) no Event of Default exists and is continuing; and (ii) the Note Receivable that is in default or otherwise not an Eligible Note Receivable has not become an Upgraded Note Receivable through changes in its terms. 2.3 Security Agreement. This Agreement shall be deemed a security ------------------ agreement as defined in the Code, and the remedies for any violation of the covenants, terms and conditions of the agreements herein contained shall be cumulative and be as prescribed (a) herein, or (b) by general law, or (c) as to such part of the Collateral which is also reflected in any filed financing statement, by the specific provisions of the Code now or hereafter enacted, all at Lender's sole election. The Borrower hereby authorizes the Lender to execute and file any financing statements on Borrower's behalf (including, without limitation, any such financing statements filed prior to the making of any Advance hereunder and/or prior to the execution and delivery of this Agreement). Any deposit account held by the Lockbox Agent shall be in the name of Lender or otherwise subject to a control agreement in form and substance satisfactory to the Lender. SECTION 3 --------- CONDITIONS PRECEDENT TO ADVANCES -------------------------------- The obligation of Lender to make Advances is subject to satisfaction of all of the conditions set forth below. 3.1 Closing Deliveries. Lender shall have received, in form and substance ------------------ satisfactory to Lender, all documents, instruments and information identified on the Closing Checklist heretofore delivered by Lender to Borrower. 3.2 Deliveries Prior to Each Advance. Prior to each Advance, Lender shall -------------------------------- have received all documents, instruments and information identified on Schedule 3.2. Requests for Advance shall be made at least three (3) Business Days prior to the requested date of disbursement and shall be in the form of Exhibit C hereto. 3.3 Security Interests. Lender shall have received satisfactory evidence ------------------ that all security interests and liens granted to Lender pursuant to this Agreement or the other Loan Documents have been duly perfected and constitute first priority liens on the Collateral, as described in the Master Escrow Agreement. 3.4 Representations and Warranties. The representations and warranties ------------------------------ contained herein and in the other Loan Documents shall be true, correct and complete in all material respects on and as of the date of funding of the Advance except for any representation or warranty limited by its terms to a specific date and taking into account any amendments to the Schedules or Exhibits attached hereto as a result of any disclosures made by Borrower to Lender after the date hereof and approved by Lender. 3.5 No Default. No Incipient Event of Default shall have occurred and not ---------- been cured or waived by Lender. 3.6 Performance of Agreements. Borrower shall have performed in all ------------------------- material respects all agreements and satisfied all conditions to obtain an Advance which any Loan Document provides shall be performed by it. SECTION 4 --------- GENERAL REPRESENTATIONS AND WARRANTIES -------------------------------------- Borrower and Guarantor, for themselves and each other where applicable, hereby represent and warrant to Lender as follows, which representations and warranties shall remain true throughout the term of the Loan: 4.1 Existence. --------- (a) Borrower is a corporation duly formed, validly existing and in good standing under the laws of the State of Nevada with its principal place of business at 4310 Paradise Road, Las Vegas, Nevada 89109. Borrower is in good standing under the laws of the States of Nevada, Florida, Colorado, Texas, New Jersey, Hawaii and California and is authorized to transact business in the States where the law requires such qualifications to do the customary business of Borrower. (b) 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. Guarantor is in good standing under the laws of the State of New York and is authorized to transact business in the State of Nevada. 4.2 Authorization and Enforceability. -------------------------------- (a) Execution. The Loan Documents have been duly authorized, --------- executed and delivered and constitute the duly authorized, valid and legally binding obligations of Borrower and the other parties signatory thereto (other than Lender) enforceable against such parties in accordance with their respective terms. (b) Other Agreements. The execution, delivery and compliance with ---------------- the terms and provisions of the Loan Documents will not (i) to the best of Borrower's knowledge, violate any provisions of law or any applicable regulation, order or other decree of any court or governmental entity, or (ii) conflict or be inconsistent with, or result in any default under, any contract, agreement or commitment to which Borrower is bound. 4.3 Financial Statements and Business Condition. Borrower's and ------------------------------------------- Guarantor's financial statements fairly present the respective financial conditions and (if applicable) results of operations of Borrower and Guarantor as of the date or dates thereof and for the periods covered thereby. All such financial statements, other than those prepared on behalf of a natural person, if any, were prepared in accordance with GAAP. Except for any such changes heretofore expressly disclosed in writing to Lender, there has been no material adverse change in the respective financial conditions of Borrower or Guarantor from the financial conditions shown in their respective financial statements. Borrower and Guarantor are able to pay all of their debts as they become due, and each shall maintain such solvent financial condition, giving effect to all obligations, absolute and contingent, of Borrower and Guarantor. Borrower's and Guarantor's obligations under this Agreement and under the other Loan Documents will not render Borrower and Guarantor unable to pay their debts as they become due. The present fair market value of Borrower's assets and Guarantor's assets is greater than the amount required to pay their total liabilities. 4.4 Taxes. All ad valorem taxes and other taxes and assessments ----- against the Resort and the Collateral that are due and payable have been paid and Borrower knows of no basis for any additional taxes or assessments against the Resort or the Collateral. Borrower has filed all required tax returns or has made timely requests for extensions and has paid all taxes shown to be due and payable on such returns, including interest and penalties, and all other taxes which are payable by it, to the extent the same have become due and payable. Borrower shall collect and pay any applicable sales or rental tax respecting the sale or rental of any Intervals. 4.5 Litigation and Proceedings. There are no actions, suits, proceedings, -------------------------- orders or injunctions pending or, to the best of Borrower's or Guarantor's knowledge, threatened against or affecting Borrower, Guarantor, the Resort, the Loan or any Timeshare Association, at law or in equity, or before or by any governmental authority, which could have a material adverse effect on Borrower or Guarantor. Borrower has received no notice from any court or governmental authority alleging that Borrower has violated the Timeshare Act, any of the rules or regulations thereunder, or any other applicable laws. 4.6 Licenses and Permits. Borrower possesses all requisite franchises, -------------------- certificates of convenience and necessity, operating rights, licenses, permits, consents, authorizations, exemptions and orders as are necessary to carry on its business as now being conducted. 4.7 Full Disclosure. No information, exhibit or written report furnished --------------- by or on behalf of Borrower and Guarantor to Lender in connection with the Loan contains any material misstatement of fact or omits any material fact necessary to make the statement contained herein or therein not misleading. Borrower knows of no legal or contractual restriction which will prevent it from offering or selling Intervals to Purchasers in any state where it is selling Intervals. 4.8 Employee Benefit Plans. Borrower is in compliance in all material ---------------------- respects with all applicable provisions of ERISA, the IRC and all other applicable laws and the regulations and interpretations thereof with respect to all Employee Benefit Plans. No material liability has been incurred by Borrower which remains unsatisfied for any funding obligation, taxes or penalties with respect to any Employee Benefit Plan. 4.9 Representations as to the Resort. -------------------------------- (a) Title; Prior Liens. Borrower has good and marketable title to ------------------ the Resort (excluding sold Intervals). Borrower is not in default under any of the documents evidencing or securing any indebtedness which is secured, wholly or in part, by the Resort, and no event has occurred which with the giving of notice, the passage of time or both, would constitute a default under any of the documents evidencing or securing any such indebtedness. There are no liens or encumbrances against the Resort other than the Permitted Exceptions. (b) Access. The Resort has direct access to a publicly dedicated ------ road over a recorded easement and all roadways, if any, inside the Resort are common areas under the Declaration. (c) Utilities. Electric, gas, sewer, water facilities and other --------- necessary utilities are lawfully available in sufficient capacity to service the Resort and any easements necessary to the furnishing of such utility service have been obtained and duly recorded. (d) Amenities. All amenities described in the sales prospectus and --------- the Public Reports for the Resort are completed, or a bond insuring their completion has been posted. Such amenities include those listed in Exhibit D attached hereto. Each Purchaser of an Interval has access to and the use of all of the amenities and public utilities of the Resort as and to the extent provided in the Declaration and the Public Reports. (e) Construction. All costs arising from the construction of any ------------ improvements and the purchase of any equipment, inventory, or furnishings located in or on the Resort have been paid on any Units where a Purchaser Deed of Trust is to be assigned to Lender. (f) Resort Documents and Creation of Resort. Borrower has furnished --------------------------------------- to Lender true and correct copies of all Public Reports for the Resort, approval letters from the states where Intervals have been offered for sale, and all documents as recorded establishing the timeshare regime. Borrower is in control of the Association (as defined in the Declaration) of each of the Resorts (the "Timeshare Association"). 4.10 Timeshare Interval Exchange Network. Borrower is a member and ----------------------------------- participant, pursuant to a validly executed and enforceable agreement in writing, in Resorts Condominium International. Borrower has or caused to be paid all fees and other amounts due and owing under such agreement and is not otherwise in default thereunder. 4.11 Collateral. ---------- (a) Title. Borrower has good and marketable title to the Collateral, ----- free and clear of any lien, security interest, charge or encumbrance except for (i) the security interest created by this Agreement or otherwise created in favor of Lender; and (ii) the Permitted Exceptions. No financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office, except such as may have been filed in favor of Lender. Borrower shall defend Lender against and save it harmless from all claims of any Persons other than Lender with respect to the Collateral, and this indemnity shall include all attorneys' fees and legal expenses. (b) No Modification. There have been no modifications or amendments --------------- to the Pledged Documents. Borrower shall not grant extensions of time for the payment of, compromise for less than the full face value, release in whole or in part any Purchaser liable for the payment of, or allow any credit whatsoever except for the amount of cash to be paid upon, any Collateral or any instrument or document representing the Collateral. Borrower may make non-material changes on three (3) business days notice to Lender that do not change the term of the Note, forgive or extend any payment or waive any default, subject, however, to Lender's discretion to disallow any such change (c) Binding Obligations. On the date of the assignment and delivery to ------------------- Lender, each Financed Note Receivable and Upgraded Note Receivable constitutes an Eligible Note Receivable and Borrower is not aware of any facts or information which would cause such Financed Note Receivable to be ineligible hereunder. (d) Community Property. The Pledged Documents were executed by ------------------ Purchasers in connection with the purchase of Intervals and, as to individuals, bind the marital community of married individual partners. SECTION 5 --------- AFFIRMATIVE COVENANTS --------------------- So long as any portion of the Indebtedness remains unpaid, Borrower covenants as follows: 5.1 Payment and Performance of Indebtedness. Borrower shall pay and --------------------------------------- promptly perform all of the obligations hereunder and under the Loan Documents. 5.2 Maintenance of Insurance. ------------------------ (a) Borrower further covenants that: (i) Policies. The Resort shall at all times and for so long as -------- any Indebtedness remains outstanding be kept insured with such general liability coverage and such other coverages acceptable to Lender, by carrier(s), in amounts and in form at all times satisfactory to Lender, which carrier(s), amounts and form shall not be changed without the prior written consent of Lender. All required insurance may be maintained by the Timeshare Association as required by the Declaration, provided that in the event any Timeshare Association fails to maintain any insurance required under this Section 5.2(a), then Borrower shall be required to obtain and maintain such insurance. (ii) Proofs of Claim. In case of loss or damage or other --------------- casualty, Borrower shall give immediate written notice thereof to the insurance carrier(s) and to Lender. Lender is authorized and empowered, and Borrower hereby irrevocably appoints Lender as its attorney-in-fact (such appointment is coupled with an interest), at Lender's option, to make or file proofs of loss or damage and to settle and adjust any claim under insurance policies which insure against such risks, or to direct Borrower, in writing, to agree with the insurance carrier(s) on the amount to be paid in regard to such loss. (iii) Loss or Casualty. Provided no Event of Default then exists ---------------- and Borrower certifies as to same, the net insurance proceeds shall be made available for the restoration or repair of the Resort if (i) in Lender's reasonable judgment: (a) restoration or repair and the continued operation of the Resort is economically feasible; (b) the value of Lender's security is not reduced; and (c) the casualty loss is $250,000 or less; and (ii) the loss does not occur in the six (6) month period preceding the Maturity Date and Lender's independent consultant certifies that the restoration of the property can be completed at least ninety (90) days prior to the Maturity Date. Borrower shall pay all amounts, in addition to the net insurance proceeds, necessary to pay in full the cost of the restoration or repair and shall deposit such amount with Lender or the Insurance Trustee if established by the Declaration, all in the discretion of Lender. (b) 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 exceeding $250,000. 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 subject to the requirements of the Timeshare Association documents. 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 shall be applied to the Loan in such order and manner as Lender may elect, whether or not due and payable, with any excess paid to Borrower. 5.3 Condemnation. The proceeds of any award, payment or claim for damages, ------------ direct or consequential, in connection with any condemnation or other taking of any Unit or Interval which is the subject of a Financed Note Receivable or part thereof, 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. Lender shall apply the net proceeds of any such condemnation award (after deduction of Lender's reasonable costs and expenses, if any, in collecting the same) subject to the requirements of the Timeshare Association documents. Notwithstanding anything to the contrary contained herein, for so long as any part of the Resorts are subject to the Declaration, any and all awards and payment received by Lender arising from any condemnation or conveyances in lieu thereof relating to the Resorts shall be delivered and paid out by Lender to the insurance trustee under the Declaration, to be distributed and used in accordance with the provisions of the Declaration. 5.4 Inspections and Audits. Borrower shall, at such reasonable times ---------------------- during normal business hours and as often as may be reasonably requested, permit any agents or representatives of Lender to inspect the Resort and any of Borrower's assets (including financial and accounting books and records), to examine and make copies of and abstracts from the records and books of account of Borrower or the Timeshare Association or servicer under the Servicing Agreement and to discuss its affairs, finances and accounts with any of its officers, employees or independent public accountants. Borrower acknowledges that Lender intends to conduct such audits and inspections on at least a semi- annual basis. Borrower shall make available to Lender all credit information in Borrower's possession or under Borrower's control with respect to Purchasers as Lender may request. For up to two (2) such inspections per year and for any inspections made after an Event of Default, Borrower agrees to pay all of Lender's reasonable expenses to conduct such inspections; provided, however, that except with respect to any audits conducted after an Event of Default hereunder, Borrower shall not be required to pay in excess of $7,500 in any calendar year for audits performed during such year. 5.5 Reporting Requirements. So long as the Indebtedness remains unpaid, ---------------------- Borrower shall furnish the following to Lender: (a) Every fourteen (14) days a report in a mutually acceptable form to be agreed upon showing remaining Availability certified by the Chief Financial Officer of Borrower as true and accurate. (b) Monthly Reports. Within fifteen (15) days after the end of each --------------- calendar month, reports showing through the end of the preceding month, (i) the following information with respect to each Financed Note Receivable: (a) the opening and closing balances, (b) all payments received allocated to interest, principal, late charges, taxes or the like, (c) the rate of interest, (d) an itemization of delinquencies, extensions, refinances, prepayments, upgrades, payoffs, cancellations and other adjustments, (E) the remaining term, and (f) the nature and status of any claims asserted or legal action pending with respect thereto; and (ii) the weighted average interest rate and the average remaining term of all Financed Notes Receivable. (c) Sales and Inventory Reports. Within fifteen (15) days after the --------------------------- end of each month a monthly report showing all sales and cancellations of sales of Intervals, in form and content satisfactory to Lender; and within thirty (30) days after the end of each Fiscal Year, an annual sales and inventory report for the Resort detailing the sales of all Intervals during such Fiscal Year and the available inventory of Units and Intervals, certified by Borrower to be true, correct and complete and otherwise in the form approved by Lender. (d) Monthly Financial Reports. Within forty-five (45) days after the ------------------------- end of each month, unaudited financial statements of Borrower, Guarantor and any owners' associations, certified by the chief financial officer of the subject thereof. (e) Year-End Financial Reports. As soon as available and in any -------------------------- event within one hundred and twenty (120) days after the end of each Fiscal Year: (i) the balance sheet[s] of Borrower, Guarantor and the Timeshare Association as of the end of such year and the related statements of income and cash flow for such Fiscal Year; (ii) a schedule of all outstanding indebtedness of Borrower and Guarantor describing in reasonable detail each such debt or loan outstanding and the principal amount and amount of accrued and unpaid interest with respect to each such debt or loan; and (iii) with respect to the financial statements of Borrower, Guarantor and the Timeshare Association, copies of reports from a firm of independent certified public accountants selected by Borrower, which report shall be unqualified as to going concern and scope of audit and shall state that such financial statements present fairly the financial position of Borrower, Guarantor and the Timeshare Association as of the dates indicated and the results of its operations and cash flow for the periods indicated in conformity with GAAP. (f) Audit Reports. Promptly upon receipt thereof, one (1) copy of ------------- each other report submitted to Borrower or Guarantor by independent public accountants in connection with any annual, interim or special audit made by them of the books of Borrower or Guarantor; (g) Other Reports. Such other reports, statements, notices or written ------------- communications relating to the Borrower, Guarantor, Timeshare Association or the Resort as Lender may require, in its reasonable discretion. (h) SEC Reports. Promptly upon their becoming available one (1) copy ----------- of each financial statement, report, notice or proxy statement sent by Guarantor to security holders generally, and of each regular or periodic report and any registration statement, prospectus or written communication (other than transmittal letters) in respect thereof filed by Guarantor with, or received by Guarantor in connection therewith from, any securities exchange or the Securities and Exchange Commission or any successor agency. 5.6 Records. Borrower shall keep adequate records and books of account ------- reflecting all financial transactions of Borrower, including sales of Intervals, in which complete entries will be made in accordance with GAAP. 5.7 Management. The manager and the management contracts for the Resort ---------- shall at all times be satisfactory to Lender. For so long as Borrower controls the Timeshare Association for the Resort, Borrower shall not change the Resort manager or amend, modify or waive any provision of or terminate the management contract for the Resort without the prior written consent of Lender, which consent shall not be unreasonably withheld. Three (3) out of Jerome J. Cohen, Gregg A. McMurtrie, Duke Campbell, Carol Sullivan and Jon A. Joseph shall remain the principal officers of Borrower and shall have the authority, subject to necessary Board of Director approval, to make all material business decisions. 5.8 Net Worth. Borrower agrees to maintain a minimum net --------- worth, determined in accordance with GAAP, of Twenty-Seven Million Five Hundred Thousand and 00/100 Dollars ($27,500,000.00) at all time Indebtedness is outstanding, or Lender is obligated to make Advances. 5.9 Legal Covenant. Borrower shall comply in all material respects with -------------- any requirements of the Federal Trade Commission ("FTC") in whatever form including Gramm-Leach-Bliley Act and the Telemarketing Laws and rules promulgated by the FTC and the various state governments. 5.10 Maintenance. Borrower shall maintain the Resort in good repair, ----------- working order and condition and shall make or cause to be made all necessary replacements to the Resort. 5.11 Proceeds. Immediately upon Borrower's receipt of proceeds from the -------- sale of any of the Collateral, Borrower shall deliver such proceeds to Lender in their original form and, pending delivery to Lender, Borrower will hold such proceeds as agent for Lender and in trust for Lender. 5.12 Release and Bonding of Liens. In the event any lien attaches to any ---------------------------- Collateral, Borrower shall, within thirty (30) days after such attachment, either (a) cause such lien to be released of record or (b) provide Lender with a bond in accordance with the applicable laws of the state in which the Resort is located, issued by a corporate surety acceptable to Lender, in an amount acceptable to Lender and in form acceptable to Lender. 5.13 Claims. Borrower shall promptly notify Lender of any material ------ (including any action for more than $50,000) claim, action or proceeding affecting the Collateral, or any part thereof, or any of the security interests granted hereunder, and, at the request of Lender, appear in and defend, at Borrower's expense, any such claim, action or proceeding. 5.14 Use of Lender Name. Borrower will not, and will not permit any ------------------ Affiliate to, without the prior written consent of Lender, use the name of Lender or the name of any affiliates of Lender in connection with any of their respective businesses or activities, except in connection with internal business matters, administration of the Loan and as required in dealings with governmental agencies. 5.15 Other Documents. Borrower will maintain accurate and complete files --------------- relating to the Notes Receivable and other Collateral to the satisfaction of Lender, and such files will contain copies of each Note Receivable together with the purchase agreements, truth-in-lending statements, all relevant credit memoranda and all collection information and correspondence relating to such Notes Receivable. 5.16 Subordinated Obligations. Upon and during an Incipient Event of ------------------------ Default or 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 Borrower or any Affiliate (excluding trade payables incurred in the ordinary course of business), which payments shall be and are hereby made subordinate to the payment of principal of, and interest on, the Note, 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 Collateral. 5.17 Loan Servicing. -------------- (a) Borrower shall serve as the servicing agent without formal agreement and shall continue in such capacity as long as its performance is satisfactory to Lender in its sole discretion. Borrower's right to service shall be cancelable by Lender upon the occurrence of any default under the Loan Documents during the time Borrower or an Affiliate of Borrower is servicer. (b) Borrower agrees to hire Back Up Servicer and pay its fee for standing by and becoming familiar with the servicing operations of Borrower to the extent of reviewing Borrower's collection reports, in an amount not to exceed $2,500 per year. Upon an Event of Default, or if Lender is dissatisfied with the performance of Borrower as above stated, Lender may replace Borrower with Back Up Servicer who shall then receive compensation from Borrower at a market rate for a servicing agent and Borrower shall enter into a customary servicing agreement with Back Up Servicer. 5.18 Custodian. Lender shall have the right at any time to utilize --------- Custodian to maintain custody of the Collateral. Borrower agrees not to interfere with Custodian's performance of its duties under the Custodial Agreement or to take any action that would be inconsistent in any way with the terms of the Custodial Agreement. All custodial fees, and the costs and expenses of the Custodian, shall be paid by Borrower. 5.19 Compliance with Laws and Agreements. Borrower and any Affiliate shall ----------------------------------- comply with, confirm to and obey each and every judgment, law, statute, rule and governmental regulation applicable to it and each indenture, order, instrument, agreement or document to which it is a party or by which it is bound. Each of the Units in which Intervals are being sold shall be in compliance with each and every law, statute, rule and governmental regulation applicable to it. SECTION 6 --------- NEGATIVE COVENANTS ------------------ So long as any portion of the Indebtedness remains unpaid and until this Agreement is terminated, Borrower hereby covenants and agrees with Lender as follows: 6.1 Consolidation and Merger. Borrower will not consolidate with or merge ------------------------ into any other Person or permit any other Person to consolidate with or merge into it. 6.2 Restrictions on Transfers. Borrower shall not, without obtaining the ------------------------- prior written consent of Lender, which may be granted or withheld in Lender's sole discretion, (a) transfer, sell, pledge, convey, assign or encumber all or any portion of the Resort or the Collateral (or contract to do any of the foregoing, including securitizations, options to purchase and so called "installment sales contracts") except sales of Intervals to Purchasers in arms- length transactions and sale of Units that are not underlying any Financed Note Receivables; (b) permit any sale, assignment, encumbrance, dilution or other disposition of any ownership interests in Borrower (including any right to receive profits, losses or cash flow related to the Resort) now held by Guarantor that would cause Guarantor to either (i) own less than less than a fifty-one percent (51%) interest in Borrower; or (ii) cease to have a controlling interest in Borrower; (c) permit any change of the President of Borrower other than by voluntary retirement or natural causes; or (d) permit the creation of any new ownership interests in Borrower, except to the extent such new ownership interests are owned or controlled by Guarantor. 6.3 Timeshare Regimen. Without Lender's prior written consent, Borrower ----------------- shall not amend, modify or terminate the Declaration or the covenants, conditions, easements or restrictions against the Resort (or any portion thereof), except that if any amendment or modification is required either (a) to cause additional Units and Intervals to be annexed into the timeshare regimen of the Resort, or (b) by law, Borrower shall implement the same and give prompt written notice thereof to Lender. 6.4 Collateral. Borrower shall not take any action (nor permit or consent ---------- to the taking of any action) which might reasonably be anticipated to impair the value of the Collateral or any of the rights of Lender in the Collateral. 6.5 No Sales Outside of Certain States. Borrower shall not market, attempt ---------------------------------- to sell or sell any Intervals outside of the States of Florida, Colorado, Texas, New Jersey Hawaii, California, Nevada and Illinois unless, prior to taking any such actions, Borrower delivers to Lender the applicable Compliance Documents. 6.6 Contracts. Borrower shall not materially amend, modify or assign to --------- any other party any management, marketing, servicing, maintenance or other similar contract for the Resort. 6.7 Restricted Transfer and Encumbrance of Units and Intervals. Except ---------------------------------------------------------- for the sale of a Unit or Interval to a Purchaser and the encumbrance of such Unit or Interval as security for the Loan or allowed under Section 6.2 above, Borrower shall not otherwise assign, convey, transfer or cause to be encumbered any interest in any Unit or Interval. All easements, declarations of covenants, conditions and restrictions and private and public dedications affecting such unsold Units and Intervals shall be submitted to Lender for its approval and such approval must be obtained prior to the execution or granting of any thereof by Borrower. 6.8 Minimum Liquidity. Borrower agrees that during the term of the Loan ----------------- and any extension, Borrower shall maintain minimum liquidity of $5,000,000 which shall be defined for purposes of this Agreement as unrestricted cash plus unpledged Eligible Receivables as of the last day of each fiscal quarter of Borrower 6.9 Leverage. As of the last day of each fiscal quarter of Borrower and -------- for so long as Indebtedness is outstanding or the Lender is obligated to make Advances, Borrower and Guarantor each agree to maintain a liabilities to net worth ratio of 4.5:1, as shown on the balance sheet of Borrower and Guarantor prepared in accordance with GAAP. 6.10 Interest Coverage. As of the last day of each fiscal quarter of ----------------- Borrower and for so long as Indebtedness is outstanding or the Lender is obligated to made Advances, Borrower agrees to maintain a ratio of EBITDA to Net Total Interest Expense of not less than 1.0:1 "EBITDA" means, as of the last day of any fiscal quarter of the Borrower, Net Income (as defined below) for the twelve (12) month period ending on such last day, plus all amounts deducted in the computation of such Net Income on account of (a) depreciation expense and amortization expense for Intangible Assets; (b) income taxes; (c) all non-cash charges in respect of pension and retiree benefit expense; and (d) interest expense (including imputed interest in respect of leases capitalized in accordance with GAAP [both current and long-term portions of such imputed interest expense], amortization of debt discount and the current and long-term portion of interest expense for all long-term indebtedness of the Borrower) (the amounts of interest in this subclause (d) are referred to herein as "Total Interest Expense"). "Intangible Assets" means, as of any fiscal quarterly determination date for this covenant, the amount of intangible assets of Borrower, determined in conformity with GAAP, including, without limitation, goodwill, patents, trademarks, tradenames, copyrights, licenses, organizational costs, deferred amounts, prepaid expenses, covenants not to compete, franchises, unearned income, and restricted funds. "Net Income" means, with respect to any period, the net income of the Borrower for such period determined in accordance with GAAP without giving effect to extraordinary gains or losses or gains or losses arising from sales of assets other than inventory sold in the ordinary course of business. "Subordinated Interest Expense" means, with respect to any period, the interest expense accrued for such period in respect of Subordinated Debt. "Net Total Interest Expense" means, for any period, Total Interest Expense for such period minus Subordinated Interest Expense for such period. SECTION 7 --------- EVENTS OF DEFAULT ----------------- An "Event of Default" shall exist if any of the following shall occur: 7.1 Payments. Borrower shall fail to make any payment of the Indebtedness -------- when such payment is due. 7.2 Failure to Permit Inspections. Borrower shall fail to strictly comply ----------------------------- with the provisions of Section 5.4 of this Agreement. 7.3 Covenant Defaults. Borrower shall fail to perform or observe any ----------------- covenant, agreement or obligation contained in this Agreement or in any of the Loan Documents (other than any covenant or agreement obligating Borrower to pay the Indebtedness), and such failure shall continue for fifteen (15) days after Lender delivers notice thereof to Borrower, provided, however, if the failure is incapable of cure within such period and Borrower shall be diligently pursuing a cure, as determined by Lender in its sole discretion, such cure period shall be extended by an additional period not to exceed fifteen (15) days. 7.4 Warranties or Representations. Any representation or other statement ----------------------------- made by or on behalf of Borrower in this Agreement, in any of the other Loan Documents or in any instrument furnished in compliance with or in reference to the Loan Documents, shall be false, misleading or incorrect in any material respect as of the date made. 7.5 Bankruptcy. A petition under any Chapter of Title 11 of the United ---------- States Code or any similar law or regulation is filed by or against Borrower or Guarantor (and in the case of an involuntary petition in bankruptcy, such petition is not discharged within sixty (60) days of its filing), or a custodian, receiver or trustee for any of the Resort is appointed, or Borrower or Guarantor makes an assignment for the benefit of creditors, or either of them is adjudged insolvent by any state or federal court of competent jurisdiction, or either of them admit its insolvency or inability to pay debts as they become due or an attachment or execution is levied against any of the Resorts or any part thereof. 7.6 Attachment, Judgment, Tax Liens. The issuance, filing or levy against ------------------------------- Borrower or Guarantor of one or more attachments, injunctions, executions, tax liens or judgments for the payment of money cumulatively in excess of $100,000, which is not discharged in full or stayed within thirty (30) days after issuance or filing. 7.7 Default by Borrower or Guarantor in Other Agreements. Any default by ---------------------------------------------------- Borrower or Guarantor in the payment of indebtedness for borrowed money after the expiration of any applicable grace or cure period; any other default under such indebtedness which accelerates or permits the acceleration (after the giving of notice or passage of time, or both) of the maturity of such indebtedness; or any default which permits the holders of such indebtedness to elect a majority of the Board of Directors of Borrower or Guarantor. 7.8 Suspension of Sales. The issuance of any stay order, cease and desist ------------------- order or similar judicial or non-judicial sanction that materially adversely limits or otherwise affects any Interval sales activities, and, with respect to any such sanction only, such sanction is not dismissed, terminated or rescinded within thirty (30) days after issuance. SECTION 8 --------- REMEDIES --------- 8.1 Remedies Upon Default. Upon the occurrence of an Event of Default, --------------------- Lender may take any one or more of the following actions, all without notice to Borrower: (a) Acceleration. Declare the unpaid balance of the Indebtedness, or ------------ any part thereof, immediately due and payable, whereupon the same shall be due and payable without further action. (b) Termination of Further Borrowing. Terminate any commitment of -------------------------------- Lender to lend under this Agreement in its entirety, or any portion of any such commitment, to the extent Lender shall deem appropriate. (c) Judgment. Reduce Lender's claim to judgment, foreclose or -------- otherwise enforce Lender's security interest in all or any part of the Collateral by any available judicial procedure or other procedure authorized by the Loan Documents or otherwise available to Lender at law or in equity. (d) Sale of Collateral. Exercise all the rights and remedies of a ------------------ secured party on default under the UCC (whether or not the UCC applies to the affected Collateral) including (i) require Borrower to, and Borrower hereby agrees that it will, at its expense and upon request of Lender forthwith, assemble all or part of the Collateral as directed by Lender and make it available to Lender at a place to be designated by Lender which is reasonably convenient to both parties; (ii) enter upon any premises of Borrower and take possession of the Collateral; and (iii) sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Lender's offices or elsewhere, at such time or times, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as Lender may deem reasonable. Borrower agrees that, to the extent notice of sale shall be required by law, ten (10) days notice of the time and place of any sale shall constitute reasonable notification. At any sale of the Collateral, if permitted by law, Lender may bid (which bid may be, in whole or in part, in the form of cancellation of indebtedness) for the purchase of the Collateral or any portion thereof for the account of Lender. Borrower shall remain liable for any deficiency. Lender shall not be required to proceed against any Collateral but may proceed against Borrower directly. To the extent permitted by law, Borrower hereby specifically waives all rights of redemption, stay or appraisal which it has or may have under any law now existing or hereafter enacted. (e) Receiver. Apply by appropriate judicial proceedings for -------- appointment of a receiver for the Collateral, or any part thereof, and Borrower hereby consents to any such appointment and waives any defenses it may have thereto. (f) Exercise of Other Rights. Exercise any and all other rights or ------------------------ remedies afforded by law, in equity or by the Loan Documents as Lender shall deem appropriate, including, but not limited to, the right to bring suit or other proceeding, either for specific performance of any covenant or condition contained in the Loan Documents or in aid of the exercise of any right or remedy granted to Lender in the Loan Documents. 8.2 Application of Collateral; Termination of Agreements. Upon the ---------------------------------------------------- occurrence of an Event of Default, Lender may apply against the Indebtedness any and all Collateral in its possession, any and all balances, credits, deposits, accounts, reserves, indebtedness or other moneys due or owing to Borrower held by Lender hereunder or under any other financing agreement or otherwise, whether accrued or not. 8.3 Waivers. No waiver by Lender of any Event of Default shall be deemed ------- to be a waiver of any other or subsequent Event of Default. No delay or omission by Lender in exercising any right or remedy under the Loan Documents shall impair such right or remedy or be construed as a waiver thereof or an acquiescence therein, nor shall any single or partial exercise of any such right or remedy preclude other or further exercise thereof, or the exercise of any other right or remedy under the Loan Documents or otherwise. Further, Borrower and Guarantor severally waive notice of the occurrence of any Event of Default, presentment and demand for payment, protest, and notice of protest, notice of intention to accelerate, acceleration and nonpayment, and agree that their liability shall not be affected by any renewal or extension in the time of payment of the Indebtedness, or by any release or change in any security for the payment or performance of the Indebtedness, regardless of the number of such renewals, extensions, releases or changes. Borrower also hereby waives the right to assert any statute of limitations as a bar to the enforcement of the lien created by any of the Loan Documents or to any action brought to enforce the Note or any other obligation secured by the Loan Documents. 8.4 Cumulative Rights. All rights and remedies available to Lender under ----------------- the Loan Documents shall be cumulative and in addition to all other rights and remedies granted to Lender at law or in equity, whether or not the Indebtedness is due and payable and whether or not Lender shall have instituted any suit for collection or other action in connection with the Loan Documents. 8.5 Proceeds. All proceeds in respect of the Collateral realized under -------- this Section 8, net of all Costs and expenses in respect thereof, shall be applied first to the accrued and unpaid interest in respect of the Indebtedness and then to the Indebtedness. Any proceeds remaining thereafter shall be paid to the Borrower or such other person legally entitled thereto. 8.6 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. SECTION 9 --------- CERTAIN RIGHTS OF LENDER ------------------------ 9.1 Protection of Collateral. Lender may at any time and from time to time ------------------------ take such actions as Lender deems necessary or appropriate to protect Lender's liens and security interests in and to preserve the Collateral. Borrower agrees to cooperate fully with all of Lender's efforts to preserve the Collateral and Lender's liens and security interests therein. 9.2 Performance by Lender. If Borrower fails to perform any agreement --------------------- contained herein, Lender may, but shall not be obligated to, cause the performance of, such agreement, and the expenses of Lender incurred in connection therewith shall be payable by Borrower pursuant to Section 9.3 below. 9.3 Fees and Expenses. Borrower agrees to promptly pay all Costs and all ----------------- such Costs shall be included as additional Indebtedness bearing interest at the Default Rate until paid. 9.4 Assignment of Lender's Interest. Lender shall have the right to assign ------------------------------- all or any portion of its rights in this Agreement to any subsequent holder or holders of the Indebtedness provided they agree to be bound by the terms and conditions of this Agreement. 9.5 Notice to Purchaser. Borrower authorizes both Lender and the ------------------- Custodian (but neither Lender nor the Custodian shall be obligated) to communicate at any time and from time to time, whether prior to or after a sale of an Interval, with any Purchaser or any other Person primarily or secondarily liable under a Financed Note Receivable with regard to the lien of Lender thereon and any other matter relating thereto. Lender may perform, at Borrower's expense, any and all credit investigations as Lender may deem necessary to determine whether any such Purchaser meets the requirements to be an Eligible Notes Receivable. 9.6 Collection of Notes ------------------- (a) Borrower shall direct and authorize each party liable for the payment of the Financed Notes Receivable to pay each installment thereon to Lockbox Agent pursuant to the Lockbox Agreement, after which such parties are directed to make all further payments on the Financed Notes Receivable in accordance with the directions of Lender. Following the occurrence of an Event of Default, Lender shall have the right to (a) require that all payments due under the Financed Notes Receivable be paid directly to Lender, and to receive, collect, hold and apply the same in accordance with the provisions of this Agreement, and (b) take such remedial action available to it for the enforcement of any defaulted Financed Note Receivable including the foreclosure of any Deed of Trust securing the payment thereof. Borrower hereby further irrevocably authorizes, directs and empowers Lender to collect and receive all checks and drafts evidencing such payments and to endorse such checks or drafts in the name of Borrower and upon such endorsements, to collect and receive the money therefor. (b) Upon indefeasible payment and satisfaction in full of all Indebtedness, Lender will, at Borrower's request and sole expense, give written notice as necessary to redirect payment of the Financed Notes Receivable as requested by Borrower. 9.7 Power of Attorney. Borrower does hereby irrevocably constitute and ------------------ appoint Lender as Borrower's true and lawful agent and attorney-in-fact, with full power of substitution, for Borrower and in Borrower's name, place and stead, or otherwise, to (a) endorse any checks or drafts payable to Borrower in the name of Borrower and in favor of Lender as provided in Section 9.6 above; (b) to demand and receive from time to time any and all property, rights, titles, interests and liens hereby sold, assigned and transferred, or intended so to be, and to give receipts for same; and (c) upon the occurrence and during the continuance of any Event of Default hereunder, (i) to institute and prosecute in the name of Borrower or otherwise, but for the benefit of Lender, any and all proceedings at law, in equity, or otherwise, that Lender may deem proper in order to collect, assert or enforce any claim, right or title, of any kind, in and to the property, rights, titles, interests and liens hereby sold, assigned or transferred, or intended so to be, and to defend and compromise any and all actions, suits or proceedings in respect of any of the said property, rights, titles, interests and liens, and (ii) generally to do all and any such acts and things in relation to the Collateral as Lender shall in good faith deem advisable. Borrower hereby declares that the appointment made and the powers granted pursuant to this Section are coupled with an interest and are and shall be irrevocable by Borrower in any manner, or for any reason, unless and until all obligations of Borrower to Lender have been indefeasibly satisfied. 9.8 Indemnification of Lender. Borrower shall indemnify Lender, its ------------------------- agents, employees, attorneys, directors and assignees, administrators, subsidiaries, partners, affiliates and affiliated entities (the "Indemnified Parties") and hold the Indemnified Parties harmless from and against any and all liabilities, indebtedness, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses, and disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Indemnified Parties, in any way relating to or arising out of (a) this Agreement and the Loan Documents and/or (b) any of the transactions contemplated therein or thereby (including those in any way relating to or arising out of the violation by Borrower of any federal or state laws including the Federal Trade Commission Act, Interstate Land Sales Act or the Timeshare Act). Upon receiving knowledge of any suit, claim or demand asserted by a third party that Lender believes is covered by this indemnity, and subject to the condition that no Event of Default under this Agreement shall then exist, the Indemnified Parties shall give Borrower notice of the matter and an opportunity to defend it, at Borrower's sole cost and expense, with legal counsel satisfactory to Lender. Notwithstanding any defense by Borrower of any such suit, claim or demand, Lender shall have the right to participate in any material decision affecting the conduct or settlement of any dispute or proceeding for which indemnification may be claimed. SECTION 10 ---------- MISCELLANEOUS ------------- 10.1 Notice. 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, as evidenced by an electronic confirmation report, if before 3:00 p.m. (East Coast time) on a business day; provided 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. Notices to Borrower: Preferred Equities Corporation Attn: Carol W. Sullivan 4310 Paradise Road Las Vegas, NV 89109 Facsimile: 702/369-4398 With a copy to: Preferred Equities Corporation Attn: Jon A. Joseph, Esq. 4310 Paradise Road Las Vegas, NV 89109 Facsimile: 702/369-4398 Notices to Lender: Capital Source Finance LLC Attn: Loan Administration Re: PEC Loan 1133 Connecticut Avenue, N.W. Suite 310 Washington, D.C. 20036 Facsimile: 202/862-3410 With a copy to: Robert E. Dady, Esq. Fieldstone Lester Shear & Denberg 201 Alhambra Circle, Suite 601 Coral Gables, FL 33134 Facsimile: 305/357-5761 10.2 Survival. All representations, warranties, covenants and agreements -------- made by Borrower herein, in the other Loan Documents or in any other agreement, document, instrument or certificate delivered by or on behalf of Borrower or Guarantor under or pursuant to the Loan Documents shall be considered to have been relied upon by Lender and shall survive the delivery to Lender of such Loan Documents and the extension of the Indebtedness (and each part thereof), regardless of any investigation made by or on behalf of Lender. 10.3 Governing Law. This Agreement and the other Loan Documents (except as ------------- may be expressly provided therein to the contrary) shall be governed by and construed in accordance with the laws of the State of New York and applicable laws of the United States. 10.4 Invalid Provisions. If any provision of this Agreement or any of the ------------------ other Loan Documents is held to be illegal, invalid or unenforceable under present or future laws effective during the term thereof, such provision shall be fully severable, this Agreement and the other Loan Documents shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof or thereof, and the remaining provisions hereof or thereof shall remain in full force and effect. 10.5 Counterparts; Effectiveness. This Agreement may be signed in any --------------------------- number of counterparts, each of which shall be an original, with the same effect as if the signature thereto and hereto were on the same instrument. This Agreement shall become effective upon Lender's receipt of one or more counterparts hereof signed by Borrower and Lender. 10.6 Lender Not Fiduciary. The relationship between Borrower and Lender is -------------------- solely that of debtor and creditor, and Lender has no fiduciary or other special relationship with Borrower, and no term or provision of any of the Loan Documents shall be construed so as to deem the relationship between Borrower and Lender to be other than that of debtor and creditor. 10.7 Entire Agreement. This Agreement, including the Exhibits and other ---------------- Loan Documents and agreements referred to herein embody the entire agreement between the parties hereto, supersedes all prior agreements and understandings between the parties whether written or oral relating to the subject matter hereof and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties. There are no oral agreements among Lender, Borrower or Guarantor or between any two or more of them. This Agreement may be modified or changed only in a writing executed by both Lender and Borrower and/or the other affected parties. 10.8 Venue. BORROWER AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING ----- DIRECTLY, INDIRECTLY OR OTHERWISE IN CONNECTION WITH, OUT OF, RELATED TO OR FROM THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS SHALL BE LITIGATED, AT LENDER'S SOLE DISCRETION AND ELECTION, ONLY IN COURTS HAVING A SITUS WITHIN THE STATE OF NEW YORK. BORROWER HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN SAID STATE. BORROWER HEREBY IRREVOCABLY APPOINTS AND DESIGNATES CORPORATION SERVICE COMPANY, TWO WORLD TRADE CENTER, SUITE 8746, NEW YORK CITY, NEW YORK 10048-0203,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. IN THE EVENT SERVICE IS UNDELIVERABLE BECAUSE SUCH AGENT MOVES OR CEASES TO DO BUSINESS IN NEW YORK, NEW YORK, BORROWER SHALL, WITHIN TEN (10) DAYS AFTER LENDER'S REQUEST, APPOINT A SUBSTITUTE AGENT (IN NEW YORK CITY) 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 DOCUMENTS IN ACCORDANCE WITH THIS PARAGRAPH. IN THE EVENT SERVICE OF PROCESS IS MADE ON CORPORATION SERVICE COMPANY, LENDER WILL SEND A COURTESY NOTICE (SERVICE SHALL NOT BE AFFECTED BY LENDER'S FAILURE TO SEND SUCH NOTICE) TO BORROWER AT THE ADDRESS SET FORTH IN SECTION 10.1 OF THIS AGREEMENT. 10.9 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 AGREEMENT AND THE OTHER LOAN DOCUMENTS 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 AGREEMENT AND THE OTHER LOAN DOCUMENTS 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 AGREEMENT AND THE OTHER LOAN DOCUMENTS AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL. 10.10 Consent to Advertising and Publicity. Borrower hereby consents that ------------------------------------ Lender may issue and disseminate to the public information describing the credit accommodation entered into pursuant to this Agreement. 10.11 Headings. Section headings have been inserted in the Agreement as a -------- matter of convenience of reference only; such section headings are not a part of the Agreement and shall not be used in the interpretation of this Agreement. 10.12 Broker's Fees. There are no brokers or other similar fees or ------------- commitments due with respect to the transactions described in the Agreement, except for a broker's fee due to The Resort Capital Group, Inc. Borrower shall defend the Indemnified Parties and save and hold them harmless from all claims of any Persons for any such fees which indemnity shall include reasonable attorneys' fees and legal expenses. The parties hereto have executed this Agreement or has caused the same to be executed by their duly authorized representatives as of the date first above written. BORROWER: PREFERRED EQUITIES CORPORATION, a Nevada corporation By: /s/ Carol W. Sullivan ------------------------------------- Name: Carol W. Sullivan ----------------------------------- Its: Sr. V.P. ----------------------------------- LENDER: CAPITAL SOURCE FINANCE LLC, a Delaware limited liability company By: s/s Steven A. Museles ------------------------------------ Name: Steven A. Museles ---------------------------------- Its: Vice President ----------------------------------- (EXECUTION BY GUARANTOR ON PAGE 22) GUARANTOR: MEGO FINANCIAL CORP, a New York corporation By: /s/ Charles G. Baltuskonis ------------------------------------ Name: Charles G. Baltuskonis ---------------------------------- Its: Sr. V.P. ------------------------- Defined Terms ------------- The following terms used in this Agreement shall have the following meanings: Advance. Proceeds of the Loan advanced from time to time by Lender to Borrower in accordance with this Agreement. Affiliate. Any individual, trust, estate, partnership, limited liability company, corporation or any other incorporated or unincorporated organization (each, a "Person") that directly or indirectly, through one or more intermediaries, controls or is controlled by or is under common control with Borrower or Guarantor; any officer, director, partner or shareholder of Borrower, Guarantor or any relative of any of the foregoing. The term "control" means possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Availability. At all times during the Revolving Period, the lesser of (a) the remainder of [i] $15,000,000 minus [ii] the principal balance of all Advances then outstanding (without giving effect to the currently requested Advance); or (b) the remainder of (i) $15,000,000 minus (a) the sum of eighty- five percent (85%) of the principal balance of New Eligible Note Receivable and (b) ninety percent (90%) of the principal balance of Mature Eligible Notes Receivable. After expiration of the Revolving Period, Availability shall be zero ($0). Back Up Servicer. A company with experience as a servicing agent acceptable to Lender to be hired by Borrower to track Borrower's collections of the Note Receivables and to substitute for Borrower acting as servicing agent upon an Event of Default or as otherwise stated in this Agreement. Business Day. Any day which is not a Saturday or Sunday or a day on which banks in Washington, D.C. are required to close. Code. The Uniform Commercial Code as adopted and in force in the State of Nevada as the same may be amended from time to time. Collateral. Has the meaning assigned in Section 3.1. Compliance Documents. With respect to sales of Intervals in any state or jurisdiction: (i) a memorandum in substance satisfactory to Lender from an attorney licensed in such state or jurisdiction addressing the compliance of Borrower's sales and financing documents and sales practices with the applicable law of such state or jurisdiction, (ii) evidence satisfactory to Lender that the governmental authority of such state or jurisdiction having jurisdiction over sales of timeshare intervals has issued all required approvals of Borrower's sales and financing documents and sales practices, and (iii) copies of Borrower's sales and financing documents as approved by such state. Commitment Fee. A non-refundable loan commitment fee with respect to the Loan equal to $187,500, which is payable as set forth in Section 1.6 above. Borrower has deposited $25,000 with Lender which will be first applied to Lender's cost of doing this transaction and if any funds remain after such cost reimbursement, it shall be applied to the Commitment Fee. Costs. All expenditures and expenses which may be paid or incurred by or on behalf of Lender in connection with the documentation, modification, workout, collection or enforcement of the Loan or any of the Loan Documents. Notwithstanding the foregoing, Costs payable on the date of the initial Advance shall be limited to (i) the fees and costs of Lender's attorneys (including Lender's inside counsel) in connection with the documentation of the Loan and the due diligence review of Borrower's deliveries including travel costs incurred to make such review; (iii) all applicable title, filing and recording fees and other closing costs; and (iv) the payment on behalf of borrower of the broker's fees due under Section 10.12. During the term of the Loan, Costs payable by Borrower shall include: payments to remove or protect against liens; attorneys' fees (including fees of Lender's inside counsel); receivers' fees; engineers' fees; accountants' fees; independent consultants' fees (including environmental consultants); fees of the Custodian and the Back Up Servicer; all costs and expenses incurred in connection with any of the foregoing; outlays for documentary and expert evidence; stenographers' charges; stamp taxes; inspection and audit costs as set forth in Section 5.4 above; 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 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 a true condition of the title to, or the value of, the Collateral. Current Ratio. As defined in Section 6.8 herein. Custodial Agreement. An agency and custodial agreement, on Lender's form, among Borrower, Lender and Custodian providing for the maintenance of the Pledged Documents. Custodian. Chicago Title Insurance Company or such other Person designated by Lender and approved by Borrower to maintain physical possession of the Pledged Documents. Declaration. The Grand Flamingo Plaza Declaration of Timeshare Ownership Covenants, Conditions and Restrictions recorded May 23, 1997 in Book 970523 as Document Number 01649 in the Office of the County Recorder of Clark County, Nevada, as now or hereafter amended or restated; and The Grand Flamingo Fountains Declaration of Timeshare Ownership Covenants, Conditions and Restrictions recorded May 26, 1993 in Book 930526 as Document Number 00566 in the Office of the County Recorder of Clark County, Nevada, as now or hereafter amended or restated; and The Grand Flamingo Terraces Declaration of Timeshare Ownership Covenants, Conditions and Restrictions recorded December 12, 1989 in Book 891212 as Document Number 00188 in the Office of the County Recorder of Clark County, Nevada, as now or hereafter amended or restated; and The Grand Flamingo Suites Declaration of Timeshare Ownership Covenants, Conditions and Restrictions recorded November 8, 1991 in Book 911108 as Document Number 00235 in the Office of the County Recorder of Clark County, Nevada, as now or hereafter amended or restated; and The Grand Flamingo Towers Declaration of Timeshare Ownership Covenants, Conditions and Restrictions recorded August 23, 1984 in Book 1978 as Document Number 1937487 in the Office of the County Recorder of Clark County, Nevada, as now or hereafter amended or restated; and The Grand Flamingo Villas Declaration of Timeshare Ownership Covenants, Conditions and Restrictions recorded November 10, 1983 in Book 1832 as Document Number 1791580 in the Office of the County Recorder of Clark County, Nevada, as now or hereafter amended or restated; and The Grand Flamingo Winnick Declaration of Timeshare Ownership Covenants, Conditions and Restrictions recorded March 19, 1993 in Book 930319 as Document Number 00051 in the Office of the County Recorder of Clark County, Nevada, as now or hereafter amended or restated; and The Reno Spa Resort Club Declaration of Timeshare Ownership Covenants, Conditions and Restrictions recorded April 18, 1984 in Book 2002 as Document Number 919447 in the Office of the County Recorder of Washoe County, Nevada, as now or hereafter amended or restated. Deed of Trust. Any deed of trust or mortgage executed and delivered by a Purchaser, encumbering all of the right, title and interest of each such Purchaser in and to its purchased Interval as security for such Purchaser's obligations under any Financed Note Receivable. Default Rate. A per annum rate of interest equal to the Interest Rate plus four percent (4%). EBITDA. As described in Section 6.10 hereof. Eligible Note Receivable. Each Note Receivable satisfying all of the following criteria: (a) Payments due under the Note Receivable shall be self-amortizing and payable in equal installments of principal and interest; and the original term of a Financed Note Receivable shall not exceed 120 months; the weighted average of the remaining term of all Financed Note Receivables shall not exceed 110 months; (b) Purchaser has made a cash down payment of at least ten percent (10%) of the actual purchase price of the Interval and no part of such payment has been made or loaned to Purchaser by Borrower or a Affiliate; (c) No installment is more than thirty (30) days past due on a contractual basis at the time of assignment to Lender, nor becomes more than sixty (60) days past due on a contractual basis thereafter; (d) The weighted average interest rate of all Financed Notes Receivable shall be 12.5%. Each Note Receivable where there has been a 10% down payment, but not more than 50%, shall bear interest at a minimum of 11% per annum and where the down payment is 50% or more, the interest rate may be at a minimum of 0% for the first two (2) years and at least 5% per annum thereafter. Note Receivables meeting the foregoing qualifications for 0% interest rate may not exceed 20% of all Financed Note Receivables at any one time outstanding. (e) The Unit with respect to the Interval purchased has been completed in accordance with the Purchase Documents; (f) All amenities for the Resort have been completed and are available for use by all Purchasers; (g) The Purchaser is not an Affiliate of, related to or employed by Borrower or Guarantor; (h) The Note Receivable is free and clear of adverse claims, liens and encumbrances and subject to no claims of rescission, invalidity, unenforceability, illegality, defense, offset or counterclaim; (i) Purchaser is personally liable for payment of the Note Receivable; (j) The Note Receivable is secured by a first priority mortgage or deed of trust on the purchased Interval and Lender's interest in same will be insurable as to title in a manner acceptable to Lender; (k) The Purchaser meets credit standards of Lender as set forth in Exhibit E; (l) The aggregate outstanding principal balance of all Notes Receivable made by any one Purchaser shall not exceed $40,000, and any one Note Receivable made by any one Purchaser shall not exceed $25,000, unless prior approval in writing is given by Lender. The average principal balance associated with all Financed Note Receivables shall not exceed $17,000. (m) The Deed of Trust securing the Note Receivable is insured under a mortgagee title insurance policy acceptable to Lender subject only to those exceptions to title as Lender approves; (n) Payments are to be in legal tender of the United States; (o) The Note Receivable and the Purchase Documents are valid, genuine and enforceable against the obligor thereunder, and such obligor has not assigned his or her interest thereunder; (p) One Hundred Percent (100%) of the outstanding principal balance of all Notes Receivable arises from purchasers who are U.S. or Canadian residents unless otherwise approved by Lender in writing; and (q) Payments have been made by the obligor thereunder and not by Borrower or any Affiliate of Borrower on the obligor's behalf. Event of Default. Has the meaning set forth in Section 7 of this Agreement. Excess Availability. At all times during the Revolving Period, the amount by which the Maximum Exposure exceeds Advances then outstanding. After expiration of the Revolving Period, Excess Availability shall be zero ($0). Extension Fee. A payment to Lender of a fee as set forth in Section 1.2 above. Financed Note Receivable. Any Eligible Note Receivable as to which an Advance has been made and which has been assigned and delivered to Lender as security for the Loan. Gaap. 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 comparable in all material respects to those applied in a preceding period, with any exceptions thereto noted. Guarantor. MEGO Financial Corp. Guaranty. A guaranty agreement, on Lender's form, executed by Guarantor guarantying all of the obligations of Borrower to Lender under the Loan Documents. Hazardous Materials. Any hazardous, dangerous or toxic substance or material within the meaning of any federal, state or local law, regulation or ordinance. Incipient Event of Default. An event which would be an Event of Default but for the delivery of notice or the passage of time. Indebtedness. All payment obligations of Borrower to Lender (under the Loan Documents or otherwise). Intangible Assets. As described in Section 6.10 hereof. Interest Rate. A floating rate per annum equal to the Prime Rate plus two and one-half percent (2.50%) (the aggregate rate referred to as the "Interest Rate"). "Prime Rate" shall mean the interest rate published each day in the Wall Street Journal as the "Prime Rate", the base rate on corporate loans posted by at least 75% of the nations's thirty (30) largest banks. Interest shall be calculated based on a 360 day year and charged for the actual number of days elapsed. In no event shall the Interest Rate be less than ten percent (10%) per annum. Interval. An undivided fee simple ownership interest as tenants in common with all other Purchasers with respect to any Unit, with a right to use such Unit for one week annually, together with all appurtenant rights and interests as more particularly described in the Timeshare Documents. Loan. The Fifteen Million and 00/100 Dollars ($15,000,000.00) credit facility described in this Agreement. Loan Documents. Collectively, this Agreement, the Note, and any and all other agreements, documents, instruments and certificates delivered or contemplated to be delivered in connection with this Agreement, as such may be amended, renewed, extended, restated or supplemented from time to time. Loan Year. Each successive twelve (12) month period commencing on the date of this Agreement. Lockbox Agent. Such banking institution selected by Borrower and approved by Lender to act as the depositary of payments on the Financed Notes Receivable under the Lockbox Agreement. Lockbox Agreement. An agreement among Borrower, Lender and Lockbox Agent providing for the receipt by Lockbox Agent of payments on the Financed Notes Receivable and disbursement of such payments to Lender. Mandatory Prepayment. Any prepayment required by Section 1.5(b) of this Agreement. Mature Eligible Note Receivable. An Eligible Note Receivable where the Purchaser has made the initial three (3), or more, monthly payments on the Note Receivable. Mature Financed Note Receivable. A Mature Eligible Note Receivable that has become a Financed Note Receivable. Maturity Date. August 8, 2004. Maturity Date may be extended for a period of two years upon payment of the Extension Fee. Maximum Exposure. The lesser of (a) $15,000,000; or (b) the sum of (A) 90% of the principal balance of all Mature Financed Note Receivables and (B) 85% of the principal balance of all New Financed Note Receivables. Monthly Reports. The monthly reports required pursuant to Section 5.5(a) of this Agreement. Net Income. As described in Section 6.10 hereof. Net Total Interest Expense. As described in Section 6.10 hereof. New Eligible Note Receivables. An Eligible Note Receivable where the Purchaser has made less than the initial three (3) monthly payments on the Note Receivable. New Financed Note Receivables. A New Eligible Note Receivable that has become a Financed Note Receivable. Note. The promissory note evidencing the Loan executed and delivered by Borrower to Lender concurrently herewith. Note Receivable(s). A promissory note executed by a Purchaser in favor of Borrower in connection with Purchaser's acquisition of an Interval. Permitted Exceptions. The exceptions to title listed on Exhibit A. Person. Natural persons, corporations, limited partnerships, general partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments and agencies and political subdivisions thereof. Pledged Documents. The Financed Notes Receivable, the Deeds of Trust and the Purchase Documents. Prepayment Premium. The percentage set forth below multiplied by the amount prepaid, payable in connection with a voluntary prepayment of the Loan in accordance with the provisions of Section 1.5(a) of this Agreement: Loan Year Percentage --------- ---------- First Loan Year Two percent (2%) Second Loan Year One percent (1%) Thereafter None
Public Reports. Any public reports now or hereafter filed with and approved by any jurisdiction having control over the sale of Intervals for the Resort. Purchase Documents. Any purchase agreement and related sale and escrow documents executed and delivered by a Purchaser to Borrower with respect to the purchase of an Interval. Purchaser. Any Person who purchases one or more Intervals. Resorts. Those certain timeshare vacation resorts located in Clark County, Nevada, commonly known as and with addresses as more particularly described in Exhibit B, including all related common elements, limited common elements, parking areas and other amenities, as established by the Declaration. Revolving Period. The period commencing on the date hereof and ending on the last day of the thirty-sixth (36th) month after the date hereof. Servicing Agreement. In Lender's sole discretion, an agreement to be made among Lender, Borrower and Back Up Servicer, which provides for Back Up Servicer to perform for the benefit of Lender accounting, reporting and other servicing functions with respect to the Note Receivables constituting part of the Collateral, as it may be from time to time renewed, amended, restated or replaced. Subordinated Interest Expense. As described in Section 6.9 hereof. Timeshare Act. Nevada Revised Statutes (NRS) 119A. Timeshare Association. As described in Section 4.9(f) hereof. Timeshare Documents. Any and all documents evidencing or relating to the sale of Intervals by Borrower. Total Interest Expense. As described in Section 6.10 hereof. Unit. One individual air-space unit within the Resort, together with all furniture, fixtures and furnishings therein, and together with any and all interest in common elements appurtenant thereto, as provided in the Declaration. Unused Line Fee. A fee payable quarterly by Borrower to Lender equal to one-half of one percent (50 basis points) per annum on the difference between the Loan and the average of the principal amount of all Advances made to Borrower during such quarter. Upgraded Note Receivable. An Eligible Note Receivable made by the maker of an existing Financed Note Receivable which is assigned to Lender in replacement of or as a supplement to such Financed Note Receivable and which satisfies the criteria established in Section 2.2 of this Agreement. Each Upgraded Note Receivable shall also be considered to be a Financed Note Receivable, and shall be subject to the security interest granted to Lender pursuant to Section 2.1 of this Agreement and shall be Collateral as defined herein. SCHEDULE 3.2 ------------ Deliveries For All Advances --------------------------- Pursuant to Section 3.2 of the Agreement, Lender shall not be obligated to fund any Advance unless Lender and Custodian shall have received, in form and substance satisfactory to Lender, all documents, instruments and information as follows and the other conditions set forth below have been satisfied; fundings shall be as provided below: To Lender At Least Five (5) --------------------------- days prior to the requested funding date: ----------------------------------------- 1. A Request for Advance (in the Form of Exhibit C) listing all Intervals to be financed. 2. All information pertaining to the creditworthiness of any such Purchaser available to Borrower and reasonably requested by Lender. 3. A copy of the vehicle for down payment. 4. A current aging report for the Notes Receivable to be pledged in connection with the requested Advance. 5. Such additional information as Lender may reasonably require. 6. A Supplemental Escrow Agreement as contemplated in the Master Escrow Agreement referred to below, executed by Chicago Title Insurance Company ("CTIC"). the Master Escrow Agreement dated as of July 31, 2001 among Borrower, Lender and CTIC shall have been executed by all parties thereto and shall be in full force and effect. To Custodian at least five (5) ------------------------------ days prior to the requested funding date: ----------------------------------------- 1. A Request for Advance in the form of Exhibit C to the Agreement listing all Intervals to be financed. 2. Originals of all Pledged Documents and the Assignment of Contracts, Notes Receivable, and Purchase Money Mortgages, on the form of that attached hereto as Exhibit F (with only such modifications to such form as are necessary to properly identify the collateral and to cause the document to be properly recorded), covering all of the Pledged Documents to be pledged in relation with such Receivables Advance (except that copies of the recordable Purchase Money Mortgages and Assignment of Contracts, Notes Receivable, and Purchase Money Mortgages shall be satisfactory provided that originals are delivered to CTIC contemporaneously with the delivery of the copies thereof to the Lender (or CTIC confirms in writing, in the case of the Purchaser Deeds of Trust, that such Purchaser Deeds of Trust have been delivered to the land records office in Clark County, Nevada and have not yet been returned) and the Custodian obtains the recorded original documents with respect thereto within sixty (60) days after the Advance date, all in forms approved by Lender, with each Note Receivable endorsed with an allonge in the form attached hereto as Exhibit G. Borrower shall, at the same time that it shall deliver copies of the aforesaid Purchaser Deeds of Trust and Assignment of Purchase Documents, Notes Receivable, and Purchaser Deeds of Trust to the Lender, also deliver to the Lender a copy of each of the warranty deeds with respect to the Intervals then being conveyed by the Borrower to the Purchasers of the above referenced Purchaser Deeds of Trust (the originals of all such documents being delivered to CTIC. If Custodian or Lender shall receive a photocopy of the Assignment of Purchase Documents, Notes Receivable, and Purchaser Deeds of Trust, it shall fax the same to CTIC and shall state that such faxed document is what it received from the Borrower. 3. In the case of the first Advance, a commitment for title insurance insuring each individual Purchaser Deed of Trust to be assigned to Lender by Borrower in respect of such first Receivable Advance as a valid first lien subject only to the Permitted Exceptions, provided that a title policy shall be delivered within sixty (60) days after the date of such first Advance. Such title insurance policy will be in the form attached to the Master Escrow Agreement referred to above. With respect to any subsequent Receivables Advance, a fully executed (original) endorsement shall be delivered within sixty (60) days after the date of such subsequent Advance increasing the title insurance policy by the aggregate amount of the Purchaser Deeds of Trust then assigned. All documents to be delivered to Lender and the Custodian should be sent to: Chicago Title Insurance Company National Resort Development Division Attn: Carol Drake 321 Mission Avenue Escondido, California 92025 Fax: 760-746-5756 With respect to any Advance, when Lender and Custodian (or CTIC) shall have received all of the above-referenced documents and agreements as to such Advance and when all other conditions precedent set forth herein with respect thereto shall have been satisfied, Lender agrees to wire transfer the proceeds of such Advance (net of all offsets or deductions provided for herein) as follows: Bank Name: Union Bank of California Account Name: Chicago Title Trust Account/PEC Account No.: 910281101 ABA No.: 122000496 Reference: Preferred Equities Corporation Loan Advance The moneys so wired shall remain in escrow until all conditions set forth in the Master Escrow Agreement and the Supplemental Escrow Letter in respect of such Advance have been satisfied. Borrower agrees that any Advance funded into the escrow account of CTIC by Lender, as set forth above, will accrue interest at the Interest Rate provided for herein from the date so wired by Lender to CTIC and all risk of loss in respect thereof shall be borne solely by Borrower in the event of the insolvency, non-feasance or malfeasance of CTIC in respect thereof or any financial institution with which CTIC deposits all or any portion of any Advance. The aforesaid title insurance company is Chicago Title Insurance Company. If any other title insurance company is to provide title insurance, as contemplated herein, Borrower will first obtain Lender's prior written consent thereto. EXHIBIT A --------- Permitted Exceptions -------------------- AS SET FORTH IN THE PROFORMA TITLE INSURANCE POLICIES ATTACHED TO THE MASTER ESCROW AGREEMENT. EXHIBIT B --------- Descriptions for the Resorts ---------------------------- GRAND FLAMINGO TERRACES GRAND FLAMINGO TERRACE IV 142-148 Ida Avenue 170-196 Ida Avenue Las Vegas, Nevada 89109 Las Vegas, Nevada 89109 GRAND FLAMINGO WINNICK GRAND FLAMINGO FOUNTAINS 154 Winnick Avenue 141-147 Ida Avenue Las Vegas, NV 89109 Las Vegas, Nevada 89109 GRAND FLAMINGO SUITES GRAND FLAMINGO PLAZA 123-153 Winnick Avenue 171 Winnick Avenue & 3972/2982 Audrie Avenue & 184-196 Winnick Avenue Las Vegas, Nevada 89109 Las Vegas, Nevada 89109 RENO SPA RESORT 140 Court Street Reno, Nevada 89501 EXHIBIT C --------- Requests For Advance -------------------- DATE:________________ Capital Source Finance LLC 1133 Connecticut Avenue, N.W. Suite 310 Washington, D.C. 20036 Attn: Terry Grant RE: PEC Loan $________________ credit facility described in that certain Loan and Security Agreement (the "Loan Agreement") between Preferred Equities Corporation ("Borrower") and Capital Source Finance, LLC ("Lender") Dear Sir or Madam: In accordance with the terms of the Loan Agreement, Borrower wishes to obtain an advance of $_______________________ on ___________________, 200__. All terms used herein, unless otherwise specified, shall have the meaning assigned in the Loan Agreement. In order to induce Lender to make such Advance, Borrower hereby represents and warrants to Lender: 1. No Event of Default and no event has occurred which, with the passage of time or notice or both, would constitute an Event of Default has occurred or will as a result of the Advance requested for herein. 2. Borrower shall grant Lender a security interest in and lien upon those certain Notes Receivable, Deeds of Trust and other documents executed in connection with the sale of Intervals as set forth in Exhibit A attached hereto. 3. All of the documents described in A above meet all of the requirements of Eligible Notes Receivable. 4. The representations and warranties contained in the Loan Agreement are true, correct and complete in all material respects to the same extent as though made on the date of the Loan Agreement except for any representation or warranty limited by its terms to a specific date and taking into account any amendments to the schedules or exhibits as a result of any subsequent disclosures made by Borrower in writing to and approved by Lender. 5. Borrower is in compliance with each and every one of its covenants, agreements and obligations under the Loan Agreement. 6. No obligor has any asserted or threatened defense, offset, counterclaim, discount or allowance in respect of each Note Receivable to be pledged in connection with this Advance. Borrower has no knowledge of any facts which would lead a reasonable person to conclude that any such Note Receivable shall not be paid in accordance with its terms. 7. Borrower has no defenses or offsets with respect to the payment of any amounts due Lender. 8. Lender has performed all of its obligations to Borrower. 9. The following information is true and correct as of the date hereof and shall be true and correct on the date of the requested Advance: A. The principal balance of the Loan as of the end of the immediately preceding calendar month: $________________ B. All Advances made this calendar month: $________________ C. Availability as of the end of the immediately preceding calendar month: $________________ D. Additional Availability created during the current calendar month (as supported by the attached Borrowing Base Report): $________________ TOTAL AVAILABILITY {(C + D) - (A + 00B)} $________________ BORROWER: PREFERRED EQUITIES CORPORATION By: _____________________________ Name:______________________________ Its: _____________________________ BORROWING BASE REPORT --------------------- AS OF _______________________ Beginning Receivable Balance $____________________ ADD: New collateral $____________________ LESS: Principal Collections $____________________ LESS: Prepayments $____________________ LESS: Cancellations $____________________ ADD/LESS: Adjustments $____________________ Ending Receivable Balance $____________________ LESS: Ineligible Receivables $____________________ TOTAL Eligible Receivables $____________________ Multiplied by ________% x ______________ ADVANCE AMOUNT $____________________ Total Credit Facility Amount $____________________ LESS: Outstanding Principal Balance: $____________________ AVAILABILITY $____________________ EXHIBIT D --------- RESORT AMENITIES ---------------- AS DESCRIBED IN THE PUBLIC REPORTS FOR THE RESORTS APPROVED ACCORDING TO THE PROVISIONS OF THE ACT. EXHIBIT E CAPITAL SOURCE FINANCE LLC CREDIT STANDARDS ---------------- Lender reserves the right to reject any consumer that has one or more of the following items on their credit report: Bankruptcy - Within the past twelve (12) months - ---------- Foreclosure - Within the past twelve (12) months - ----------- Automobile Repossession - Within the past twelve (12) months - ----------------------- Collections/charge-Offs/Judgments/Tax Liens greater than $5,000 - Within the - --------------------------------------------------------------- past twelve (12) months Lender reserves the right to amend or deviate from these guidelines at anytime upon written notice to Borrower. EXHIBIT F --------- CONSUMER DOCUMENTS ------------------ PREFERRED EQUITIES CORP. 4310 South Paradise Road, Suite 505 LAS VEGAS, NV 89109 702-737-3700 CUSTODIAL DOCUMENT CHECKLIST Agreement No: - ---------------------------------------------------------- Trust: - ---------------------------------------------------------- Account: - ---------------------------------------------------------- Name: - ---------------------------------------------------------- Note Amount: - ---------------------------------------------------------- [_] New Purchase [_] Exchange Agreement [_] Refinance/ADP
NEVADA LAND NEVADA TIMESHARE - ---------------------------------------------------------------------------------------------- Original Note Secured by Deed of Original Note Secured by Deed of Trust Trust - ---------------------------------------------------------------------------------------------- Original Short Form Deed of Trust Original Short Form Deed of Trust - ---------------------------------------------------------------------------------------------- Original Declaration of Value Original Declaration of Value - ---------------------------------------------------------------------------------------------- Original Grant Bargain Sale Deed Original Grant Bargain Sale Deed - ---------------------------------------------------------------------------------------------- Copy Additional Down Payment Copy Additional Down Payment or or Refinance Addendum Refinance Addendum - ---------------------------------------------------------------------------------------------- Copy Purchase Agreement or Copy Purchase Agreement or Exchange Agreement Exchange Agreement Including addendums Including addendums - ---------------------------------------------------------------------------------------------- Copy Down Payment Receipts (if Copy Down Payment Receipts (if applicable) applicable) - ---------------------------------------------------------------------------------------------- Copy Receipt of Nevada Copy Receipt of Nevada Property Property Report Report (if purchased in a Nevada Sales Office) - ---------------------------------------------------------------------------------------------- Copy Receipt, Agent Copy RECEIPTS or Receipt, Agent Certification and Certification and Cancellation Page Cancellation Page Purchase Purchase Receipt Receipt (if purchased in a sales office outside Nevada) - ---------------------------------------------------------------------------------------------- Copy Understanding and Copy Buyer's Understanding and Acknowledgment of Calvada Acknowledgment of Timeshare Property Purchase Interest Purchased - ---------------------------------------------------------------------------------------------- Copy Buyers Understanding and Copy Buyers Understanding and Declaration of Intention Declaration of Intention - ---------------------------------------------------------------------------------------------- Copy Application Copy Application - ----------------------------------------------------------------------------------------------
- ----------------------------------------------- Verified By: - ----------------------------------------------- Date: - ----------------------------------------------- EXHIBIT G --------- FORM OF ALLONGE --------------- ALLONGE ------- Pay to the order of CAPITAL SOURCE FINANCE, LLC PREFERRED EQUITIES CORPORATION By:___________________________________ Name:________________________________ Its:___________________________________ PREFERRED EQUITIES CORPORATION hereby authorizes CAPITAL SOURCE FINANCE LLC to affix copies of this Allonge on any and all notes and other evidence of indebtedness assigned by PREFERRED EQUITIES CORPORATION, to CAPITAL SOURCE FINANCE LLC, pursuant to Assignment dated ________________________________ and such copies shall be deemed originals for all purposes of negotiating or otherwise dealing with such notes and other evidence of indebtedness. PREFERRED EQUITIES CORPORATION By:___________________________________ Name:________________________________ Its:___________________________________ EX-10.236 8 dex10236.txt AMENDED AND RESTATED FOURTEENTH Exhibit 10.236 AMENDED AND RESTATED FOURTEENTH AMENDMENT TO ASSIGNMENT AND ASSUMPTION AGREEMENT This Amended and Restated Fourteenth Amendment (the "Amendment") to Assignment and Assumption Agreement, by and between RER Corp., COMAY Corp., GROWTH REALTY INC. and H&H FINANCIAL, INC. (the "Assignors") and MEGO FINANCIAL CORP., formerly named Mego Corp., (the "Assignee") WITNESSETH: WHEREAS, the Assignors are parties to the Assignment Agreement dated October 25, 1987, with the Assignee, and the Assignment and Assumption Agreement, dated February 1, 1988, between the Assignors and the Assignee, which two agreements were amended by the Amendment to Assignment and Assumption Agreement dated July 29, 1988 and by the Second Amendment to Assignment and Assumption Agreement dated as of March 2, 1995, the Third Amendment to Assignment and Assumption Agreement dated as of August 20, 1997 and the Fourth, Fifth, Sixth, Seventh, Eighth, Ninth, Tenth, Eleventh, Twelfth and Thirteenth amendments to Assignment and Assumption Agreement dated as of February 26, 1999, May 28, 1999, August 9, 1999, November 20, 1999, January 31, 2000, April 30, 2000, August 31, 2000, November 15, 2000, February 15, 2001 and June 29, 2001 respectively, between the Assignors and the Assignee (collectively, the described agreements as so amended are hereinafter referred to as the "Assignment"); and WHEREAS, the Assignment fixed the date of January 31, 1995 as the date on which the accrual of amounts due to the Assignors under the Assignment would terminate, except for interest on any of such amounts which remained unpaid; and WHEREAS, the amount due the Assignors as of January 31, 1995 was $13,328,742.25, plus interest from January 28, 1995, in the amount of $9,322.57, collectively, and with interest from January 31, 1995 to March 2, 1995 (the "Amount Due"); and WHEREAS, $10,000,000 of the Amount Due was agreed to be considered subordinated debt (the "Subordinated Debt"), against which payments were made as follows: (i) $1,428,571.43 was paid on March 1, 1997 as scheduled, (ii) $4,250,000 was deemed paid by credit against the exercise price of certain warrants as is set forth in the Third Amendment, (iii) $35, 714.28 was paid on September 1, 1998 and (iv) $75,000.00 was paid on May 1, 2001, leaving a remaining balance of the Subordinated Debt of $4,210,714.29; and WHEREAS, the balance of the Subordinated Debt continues to be secured by a pledge of all of the issued and outstanding common stock of Preferred Equities Corporation (and any distributions in respect thereto) pursuant to a Pledge and Security Agreement dated as of February 1, 1988 (the "Pledge Agreement") between the Assignee and the Assignors; and 1 WHEREAS, interest on the Subordinated Debt has been paid through March 1, 2001; and WHEREAS, on November 1, 2001, the Assignors entered into a Fourteenth Amendment which, among other things, deferred the payment of the Subordinated Debt from December 1, 2001 to February 1, 2002; and WHEREAS, the Assignees and Assignors have determined that the principal amount as stated in the Fourteenth Amendment as $4,285,714.29 should have been stated as and is agreed to be $4,210,714.29; and WHEREAS, the Assignee has requested that the Assignors further defer the payment of principal of the Subordinated Debt payable on December 1, 2001, in the total amount of $4,210,714.29, and interest due on said date to March 1, 2002; and WHEREAS, in order to correct the error in the Fourteenth Amendment and to extend the maturity date of the Subordinated Debt to March 1, 2002, the Assignee and Assignors desire to enter into this Amendment. NOW THEREFORE, in consideration of the mutual covenants herein contained it is hereby agreed as follows: 1. The statements in the foregoing preamble are true and correct. 2. The payment previously deferred to December 1, 2001, totaling in the aggregate $4,210,714.29, and all interest due and payable thereon is hereby deferred to March 1, 2002. 3. The Assignee and Assignors agree that all amounts due to Assignors pursuant to the Assignment as amended by this Amendment shall continue to be secured as set forth in the Pledge Agreement and that the Pledge Agreement remains in full force and effect. 4. The Assignee and Assignors agree that this Amendment is an amendment to the Assignment and not a novation, and that except as modified hereby, all terms and conditions of the Assignment, including but not limited to provisions with respect to the payment of interest and acceleration of the entire balance of principal and interest if any payment is not made within 30 days of its due date, shall remain in full force and effect. 5. It is agreed that this Amendment may be signed in counterparts. IN WITNESS WHEREOF, the parties have duly executed this Amendment as of November 15, 2001. MEGO FINANCIAL CORP. H&H Financial, Inc _________________________ ________________________ By: Jon A. Joseph, Vice President By: Herbert Hirsch, President & General Counsel RER CORP. Growth Realty Inc ____________________________ ________________________ By: Robert Nederlander, President By: Eugene Schuster, C.E.O. Comay Corp ____________________ By: Jerome J. Cohen, President 2 -----END PRIVACY-ENHANCED MESSAGE-----