-----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, K5ogzE6zPkiTnze/Z9RNQiqTlOfuKLMzxfq4s/6pg2x81f3/39F5vNEz1SCiIrvW e2k0XAi7qXIHQBmDG8Vx0A== 0001021408-02-007545.txt : 20020523 0001021408-02-007545.hdr.sgml : 20020523 20020522175704 ACCESSION NUMBER: 0001021408-02-007545 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020523 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: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08645 FILM NUMBER: 02660280 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-Q 1 d10q.txt FORM 10-Q =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: March 31, 2002 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 (I. R. S. Employer incorporation or organization) Identification No.) 4310 Paradise Road, Las Vegas, Nevada 89109 (Address of principal executive offices) (Zip Code) (702) 737-3700 (Registrant's telephone number, including area code) 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 [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: As of May 1, 2002, there were 5,577,183 shares of Common Stock, $.01 par value per share, of the Registrant outstanding. ================================================================================ MEGO FINANCIAL CORP. AND SUBSIDIARIES INDEX - -----
Page ---- PART I FINANCIAL INFORMATION Item 1. Condensed Financial Statements (unaudited) Condensed Consolidated Balance Sheets at March 31, 2002 and December 31, 2001...................1 Condensed Consolidated Statement of Operations for the Three Months Ended March 31, 2002 and February 28, 2001.........................................................2 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002 and February 28, 2001.........................................................3 Notes to Condensed Consolidated Financial Statements............................................4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................................6 Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................12 PART II OTHER INFORMATION Item 1. Legal Proceedings..............................................................................12 Item 2. Changes in Securities..........................................................................13 Item 3. Sale of Central Nevada Utilities Company.......................................................13 Item 4. Exhibits and Reports on Form 8-K...............................................................13 SIGNATURE...................................................................................................15
i PART I FINANCIAL INFORMATION Item 1. Condensed Financial Statements MEGO FINANCIAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (thousands of dollars, except per share amounts) (unaudited)
ASSETS March 31, 2002 December 31, 2001 -------------- ----------------- Cash and cash equivalents $ 2,955 $ 1,271 Restricted cash 5,991 6,708 Notes receivable, net of allowance of $13,369 and $14,557 at March 31, 2002 and December 31, 2001, respectively 112,020 109,347 Retained interests in receivables sold, at fair value 3,333 3,688 Vacation ownerships held for resale 19,887 17,865 Land and improvements inventory 2,994 2,757 Assets available for sale 3,392 3,468 Property and equipment, net 9,790 9,690 Deferred financing costs 2,063 2,071 Deferred selling costs 5,336 5,422 Other assets 9,623 14,910 Assets related to discontinued operations 15,121 15,156 -------------- ---------------- TOTAL ASSETS $ 192,505 $ 192,353 ============== ================ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Notes and contracts payable $ 127,621 $ 131,530 Accounts payable 1,520 1,873 Accrued liabilities 12,071 11,775 Interest rate swap liability 1,920 2,251 Deferred income 3,377 2,097 Reserve for notes receivable sold with recourse 3,131 3,560 Customer deposits 2,592 2,831 Deferred income taxes 433 1,289 Liabilities related to discontinued operations 9,838 9,545 -------------- ---------------- Total liabilities before subordinated debt 162,503 166,751 -------------- ---------------- Subordinated debt 4,211 4,211 Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value (authorized--5,000,000 shares, none outstanding) - - Common stock, $.01 par value (authorized--50,000,000 shares; 4,784,307 shares issued and outstanding at March 31, 2002 and 3,500,557 shares at December 31, 2001 48 35 Additional paid-in capital 18,836 13,068 Retained earnings 8,174 9,773 Accumulated other comprehensive loss (1,267) (1,485) -------------- ----------------- Total stockholders' equity 25,791 21,391 -------------- ----------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 192,505 $ 192,353 ============== =================
See notes to condensed consolidated financial statements. 1 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (thousands of dollars, except per share amounts) (unaudited)
Three Months Ended ------------------------------ March 31, February 28, 2002 2001 -------------- ------------- REVENUES Vacation ownership sales $ 9,157 $ 13,626 Land sales 6,324 5,321 Interest income 4,034 3,550 Financial income 192 850 Other 1,120 932 -------------- ------------- Total revenues 20,827 24,279 COSTS AND EXPENSES Direct cost of: Vacation ownership sales 1,480 2,455 Land sales 1,084 777 Interest expense 3,170 3,088 Marketing and sales 8,846 11,057 General and administrative 4,550 4,409 Provision for cancellations 1,342 1,754 Depreciation 434 351 Restructuring charges 2,480 - -------------- ------------- Total costs and expenses 23,386 23,891 -------------- ------------- (LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX BENEFIT (2,559) 388 INCOME TAX BENEFIT 787 - -------------- ------------- (LOSS) INCOME FROM CONTINUING OPERATIONS (1,772) 388 Discontinued operations Income from discontinued operations 232 47 Income tax expense (59) (12) -------------- ------------- INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX 173 35 -------------- ------------- NET (LOSS) INCOME APPLICABLE TO COMMON STOCK $ (1,599) $ 423 ============== ============= (LOSS) INCOME PER COMMON SHARE Basic and Diluted: From continuing operations $ (0.41) $ 0.11 From discontinued operations 0.04 0.01 ============== ============= Diluted: Net income applicable to common stock $ (0.37) $ 0.12 -------------- ------------- Weighted-average number of common shares and common share equivalents outstanding 4,276,007 3,500,557 ============== =============
See notes to condensed consolidated financial statements. 2 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (thousands of dollars, except per share amounts)
Three Months Ended ------------------------------ March 31 February 28 2002 2001 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income $ (1,599) $ 423 ------------- ------------- Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Charges to allowance for cancellations (3,317) (2,380) Provision for cancellations 913 1,754 Gain on sale of assets available for sales and other assets - 8 Cost of vacation ownership interest and land sales 2,564 3,232 Depreciation 434 351 Repayments on notes receivable 14,602 12,698 Additions to notes receivable (15,300) (19,590) Purchase of land and vacation ownership interests (4,823) (1,405) Changes in operating assets and liabilities: Restricted cash 717 (2,610) Deferred financing costs 8 (427) Retained interests in receivables sold 355 (142) Other assets 5,287 2,343 Deferred selling costs 86 99 Accounts payable (353) (301) Accrued liabilities 296 1,597 Interest rate swap liability (113) 378 Deferred income 1,280 86 Customer depostis (239) 333 Assets related to discontinued operations 35 33 Liabilities related to discontinued operations 293 100 Deferred income taxes (856) 284 ------------- ------------- Net cash provided by (used in) operating activities 270 (3,844) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (458) (129) Proceeds from the sale of other investments - - ------------- ------------- Net cash provided by investing activities (458) (129) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings 12,300 13,885 Reduction of debt (16,209) (8,211) Proceeds from issuance of common stock 5,781 - ------------- ------------- Net cash provided by financing activities 1,872 5,674 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,684 1,701 CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD 1,271 4,227 ------------- ------------- CASH AND CASH EQUIVALENTS -- END OF PERIOD $ 2,955 $ 5,928 ============== ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period ended March 31, 2002 for: Interest, net of amounts capitalized $ 3,215 $ 3,238 Income taxes $ 136 $ -
See notes to condensed consolidated financial statements. 3 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the three months ended March 31, 2002 (unaudited) 1. Financial Statements In the opinion of management, when read in conjunction with the audited Consolidated Financial Statements as of and for the four month period ended December 31, 2001 and for the years ended August 31, 2001 and 2000, included in the Form 10-KT of Mego Financial Corp. (the Company) filed with the Securities and Exchange Commission, the accompanying unaudited Condensed Consolidated Financial Statements contain all of the information necessary to present fairly the financial position of the Company and subsidiaries at the results of its operations and cash flows for the three then months ended March 31, 2002 and February 28, 2001. In February 2002 the Company changed its fiscal year end from August 31 to December 31. Accordingly the financial information for the three months ended March 31, 2002 is based on the Company's new fiscal year and the information presented for the three months ended February 28, 2001 is based on the Company's old fiscal year (and is considered to be comparable to the March 31, 2002 information for purposes of this quarterly report.) The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. In the opinion of management, all material adjustments necessary for the fair presentation of these statements have been included herein, which are normal and recurring in nature. The results of operations for the three months ended March 31, 2002 are not necessarily indicative of the results to be expected for the year ended December 31, 2002. The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company and Subsidiaries' annual report on Form 10-KT for the year period December 31, 2001. 2. Nature of Operations The Company is a developer and operator of vacation ownership and a provider of consumer financing to purchasers of its vacation ownership intervals and land parcels through its wholly-owned subsidiary, Leisure Homes Corporation (LHC), formerly Preferred Equities Corporation (PEC), established in 1969. The Company, through its wholly-owned subsidiary Leisure Resorts Corporation (LRC), manages vacation ownership and receives management income in association therewith. By providing financing to virtually all of its customers, LHC also originates consumer receivables that it hypothecates, sells and services. 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. The Company's executive officers are located at 4310 Paradise Road, Las Vegas, Nevada, 89109, and its telephone number is (702) 737-3700. 3. Sale of CNUC In September 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", on asset impairment that is applicable to financial statements issued for fiscal years beginning after December 15, 2001. 4. Interest Rate Swaps To manage its exposure to interest rate risk in August 2000, the Company entered into an interest rate swap agreement with a notional amount of $25 million that expires in August 2005. The Company entered into another similar interest rate swap agreement in August 2001 for a notional amount of $20 million that expires in August 2006. The swaps convert the floating interest rate on certain of the Company's long-term debt obligat_ into fixed interest rates. As of March 31, 2002, and February 28, 2001, the fair value of the swaps was approximately $1,919,867 and $1,654,872, respectively. 4 The FASB's new rules on asset impairment provides a single accounting model for long-lived assets to be disposed of and supersede SFAS 121 and APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". On October 2, 2001, Central Nevada Utilities Company (CNUC) entered into an agreement with Utilities Inc. providing for the acquisition by Utilities Inc. of all the assets of CNUC for $5.5 million (Asset Sale). Utilities Inc. deposited in escrow $500,000 of the purchase price to assure its performance of the agreement. The transaction was subject to the approval of the Nevada Public Utilities Commission, who approved the transaction on April 9, 2002. From the proceeds $5.2 million was used to repay the Subordinated Debt and accrued interest and the at-risk payment. Upon adoption of SFAS No. 144 as of January 1, 2002, the Company began reporting the operations of its wholly-owned subsidiary, CNUC, as discontinued operations. Recent Developments At the annual meeting of the Company held on January 17, 2002, the Company's shareholders approved the following matters: . Elected an entire new Company board of directors, consisting of Floyd W. Kephart, Spencer I. Browne, Michael H. Greco, James D. Locke, Ross Mangano, Thomas G. Palmer and Edward J. Wegel. . Approved the issuance and sale to LC Acquisition Corp. (LCAC) of 750,000 shares of the Company's common stock and the issuance and sale to Doerge Capital Management, later assigned by Doerge Capital Management to Charles Stewart, of 500,000 shares of the Company's common stock in each case for a purchase price of $4.00 per share. . Approved the sale by certain former officers, directors and other shareholders to LC Acquisition Corp. of an aggregate of 1,269,634 shares of the Company's common stock at a price of $4.00 per share. . Approved the amendment of the payment and security terms of certain outstanding subordinated debt issued by Mego to certain affiliates of former officers, directors and other shareholders and the related security agreements. On December 3, 2001, the Company entered into a Fifteenth Amendment (Fifteenth Amendment) to the Assignment and Assumption Agreement between the Company and Comay Corp., Growth Realty, Inc., RER Corp., and H&H Financial, Inc., affiliates of the Company (Assignors), which would: terminate the pledge of the PEC outstanding stock and replace such pledge with a pledge of all of the outstanding stock of CNUC; defer payment of the remaining principle payments of the Subordinated Debt owed to the Assignors aggregating $4.2 million and all accumulated interest from March 1, 2001 until the sale of CNUC is consummated or terminated, but in no event later than August 31, 2002; and limit recourse to the pledged stock of CNUC and an assignment of up to $5.2 million of the proceeds of the Asset Sale. In exchange for the Assignors agreeing to such amendment, including the deferment of principle and accrued interest payments, the release of the pledge of the PEC stock and the limitation of recourse to the CNUC stock (stock may be transferred only with the consent of the Nevada Public Utilities Commission) and the assignment of up to $5.2 million of the proceeds of the Asset Sale, the Company agreed to an at-risk payment to the Assignors in an amount equal to $644,643, which was paid upon the closing of the sale of CNUC. Because the cost to modify the terms of the Subordinated debt of approximately $645,000 exceeded 10 percent of the present value of the remaining debt cash flows under the term of the original subordinated debt agreement, the modification represented a substantial modification. Accordingly, the modification was accounted for like, and reported in the same manner as, an extinguishment in the Company's Form 10-KT for the period ended December 31, 2001 in accordance with EITF 96-19, "Debtor's Accounting for a Modification or Exchange of Debt Instruments." The completion of the transactions approved by the Company's shareholders took place immediately following the shareholders' meeting. The next day, the new board of directors met to begin planning the restructuring and expansion of the Company's core businesses and the initiation and acquisition of complementary business activities. At that meeting, Floyd W. Kephart was elected Chairman of the Board, Chief Executive Officer and President of the Company. The new management's business plan is to focus the company on being a leisure and vacation solutions provider. Elements of the Company's plan include the following: . Expanding its core vacation ownership business through internal development and acquisition of existing vacation ownership operations. . On March 4, 2002, Leisure Services Corporation (LSC), a wholly- owned Company subsidiary was incorporated in Nevada. LSC will be responsible for all Company customer contacts and relationships. On March 29, 2002, LSC entered into a Management Agreement to perform management and related services for Adventure Bound, Inc., a Tempe, Arizona provider of travel and travel related services. The Company, through LSC and Adventure Bound, Inc., intends to offer travel and travel related services to its customers and potential customers. On May 14, 2002, LSC amended the management agreement to perform management and related services for Cheap Seats, Inc. a wholly-owned subsidiary of LCAC. The Company, through LSC and Adventure Bound, Inc., in conjunction with Cheap Seats, intends to offer tour, travel and travel related services to its current and potential customers. . On March 20, 2002, Leisure Resorts Corporation ("LRC") a wholly- owned Company subsidiary was incorporated in Nevada. LRC will perform all vacation ownership resort and related homeowner association management services which were previously performed by LHC. . On March 21, 2002, the Company entered into a letter of intent with Raintree Resorts International, Inc. (Raintree). Under the terms of the proposed agreement, Raintree will become a wholly owned subsidiary of the Company. The transaction is subject to the successful completion of an inspection period, signing of a definitive purchase and sale agreement, and the appropriate approval of both Companies. Raintree is a developer, marketer and operator of luxury vacation ownership resorts in North America with resorts in Mexico, the United States and Canada. On May 5, 2002, the Company amended its Letter of Intent with Raintree to acquire three operations and properties in an initial transaction to be closed on or before June 1, 2002; to perform due diligence on the remaining properties; to negotiate with the Senior Debenture Holders of Raintree; and to complete all transactions on or before December 31, 2004. 6. 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 LHC, LHC's wholly-owned subsidiary, Central Nevada Utilities Company (CNUC), and certain other defendants. The plaintiffs' complaint asked for class action relief claiming that LHC 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. The Company does not believe that any likely outcome of this case will have a material adverse effect on the Company's financial condition or results of operations. In the general course of business the Company and LHC, 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 its financial condition or results of operations. 7. Subsequent Events . On April 17, 2002, Preferred Equities Corporation's ("PEC") name was changed to Leisure Homes Corporation ("LHC"). LHC will continue PEC's current lines of business and operations except resort management operations will now be performed by LRC. . The Company has incorporated Leisure Industries Corporation of America, Inc. in Delaware and proposes, subject to stockholder approval, to merge into that company and thus change its corporate domicile from New York to Delaware. In anticipation of the name change, the Company changed its NASDAQ trading symbol from "MEGO" to "LESR" on April 15, 2002. The Company's wholly- owned subsidiary, Preferred Equities Corporation, changed its name to Leisure Homes Corporation. The Company also formed two new subsidiaries, Leisure Resorts Corporation and Leisure Services Corporation. Leisure Resorts Corporation will perform all vacation ownership resort and related homeowner management services. Leisure Services Corporation will be responsible for all of the Company's customer contacts and relationships. . On April 18, 2002, the Company entered into a Sale Agreement with Atlantic Development Corporation to acquire 2,021 platted one- acre lots located in Mojave County, Arizona, approximately 20 miles south of the Hoover Dam. The Company is to acquire the lots through the exchange of 540,416 shares of the Company's common stock, valued at $6 per share, for a total consideration of $3,242,496 for all of Atlantic Development Corporation's issued and outstanding stock. Closing of the transaction is subject to the receipt of a Public Report from the State of Arizona allowing the sale of the lots. Application for the Public Report has been made, and the Company expects the Public Report to be issued not later than August, 2002. . On April 19, 2002, LHC and Cedant Corporation ("Cendant") mutually agreed to terminate that certain AGREEMENT ("Agreement") entered into as of April 18, 1995 by between LHC and Cedant. Under the Agreement, LHC was granted a license to use the name "Ramada Vacation Suites" in the sale of LHC's vacation ownership product. LHC and Cendant have agreed that on or before May 1, 2002, LHC and its affiliates will delete any and all references to the names "Ramada" and "Ramada Vacation Suites" in its sales, marketing and resort operations. All signage using the "Ramada" and "Ramada Vacation Suites" names is to be removed on or before September 30, 2002. The Company will continue as a Ramada franchisee for the hotel premises located at its Orlando, Florida vacation ownership resort. In consideration of the termination of the Agreement, LHC has agreed to enter into consulting agreements with Resorts Condominiums International ("RCI") a Cendant subsidiary, or certain of RCI's subsidiaries and affiliates, in an amount not to exceed $300,000.00. The termination of the Agreement will eliminate the Company's payment to Cendant of approximately $2,000,000.00 a year. It is unknown whether the discontinuance of the Company's use of the "Ramada" and "Ramada Vacation Suites" names will have a negative affect on sales. 8. Restructuring Charges In January, 2002 the Company's Board of Directors approved a business restructuring. Among other things, this restructuring included: seven terminations at senior management levels; relocation of corporate office facilities from 1500 E. Tropicana Avenue and 4310 Paradise Road to newer office facilities in closer proximity to one another; discontinuance of the license agreement with Cendant Corporation whereby the Company licensed the use of the mane "Ramada Vacation Suites" in its vacation ownership and resort operations; and approval of change in the name of the resort facilities from "Ramada Vacation Suites" to "Leisure Resorts". 6 As a result of these restructurings, the Company recorded a non-recurring charge of $2.5 million. Included in this total were: severance benefits associated with former senior management and officers of approximately $1.9 million; future rental expense to be incurred on vacated office space of $311,000; and non-cash charges associated with the termination of the Cendant license agreement in the amount of $308,000. As of March 31, 2002 the Company has paid in cash $814,000 and expects to pay the remainder by the end of fiscal 2002. Restructuring charges, in certain cases, are based on estimates and subject to change; however, the Company does not believe revisions to the above estimates will be material. Item 2. 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 contains 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 vacation ownership 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 economic downturn in the tourism industry following the September 11, 2001 terrorist attacks had an adverse impact on the operating results of the Company's first fiscal quarter, which impact potentially can continue in the foreseeable future. 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 Company's Form 10-KT for the year ended December 31, 2001, and the Condensed Consolidated Financial Statements, including the notes thereto, contained elsewhere herein. General The business of the Company is the marketing, financing and sale of vacation ownership interests, retail lots and land parcels, servicing receivables related to the purchase money financing of vacation ownership and land sales and managing vacation ownership. LHC provides financing to purchasers of its vacation ownership interests and land. This financing is generally evidenced by notes secured by deeds of trust and mortgages. These notes receivable are payable over a period up to twelve years, bear interest at rates generally ranging from 12.5% to 15.5%, and require equal monthly installments of principal and interest. LHC has entered into financing arrangements with certain purchasers of vacation ownership interests and land parcels 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. Notes receivable of $4.7 million at March 31, 2002 and $5.7 million at December 31, 2001 were made under such arrangement. 7 The Company recognizes revenue primarily from sales of vacation ownership 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 vacation ownership. LHC periodically sells its consumer receivables while generally retaining the servicing rights. Revenue from sales of vacation ownership 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 vacation ownership interests and 20% of the sales price for land sales. Land sales typically meet these requirements within three to ten months of closing and sales of vacation ownership interests typically meet these requirements at the time of sale. The sale price is recorded as revenue and the allocated cost related to such net revenue of the vacation ownership 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 has been recovered or is in the process of being recovered. Cancellation of a note receivable in the quarter the related sales revenue is recognized 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. 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 60 to 90 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 the 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 certain key assumptions including: default dates; 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 interests, receives fixed interest amounts and pays the buyer variable amounts based on a floating rate index, as the resulting financial interest meets the definition of a derivative in accordance with Statement of Financial Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities". Unrealized holding gains, if any, on retained interests in receivables 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. 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. LHC records provision for cancellations at the time revenue is recognized, based on historical experience and current economic factors. The related allowance for cancellations represents LHC'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 adjusted for 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. LHC'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 may affect the purchasers' ability to pay, changes in collateral values, estimated value of inventory that may be reacquired and overall portfolio quality. Changes in the allowance as a result of such reviews are included in the provision for cancellations. 8 Fees for servicing notes receivable originated by LHC and sold with servicing rights retained are generally based on a stipulated percentage of the outstanding principal balance of such notes receivable and are recognized when earned. Interest received on notes receivable sold, less amounts paid to investors, is reported as financial income. Retained interests in receivables sold are amortized systematically to reduce notes receivable servicing income to an amount representing normal servicing income and the present value discount. Late charges and other miscellaneous income are recognized when collected. Costs to service notes receivable are recorded to expense as incurred. Interest income represents the interest received on loans held in LHC's portfolio, the accretion of the discount on the retained interests in receivables sold and interest on cash funds. Total costs and expenses consist primarily of marketing and sales expenses, general and administrative expenses, direct costs of sales of vacation ownership interests and land, depreciation 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. Land sales as of March 31, 2002, exclude $17.6 million of sales not yet recognized under generally accepted accounting principles since the requisite payment amounts have not yet been received or the respective rescission periods have not yet expired. Of the $17.6 million unrecognized land sales, the Company estimates that it will ultimately recognize $15.0 million of revenues, which would be reduced by a related provision for cancellations of $2.6 million, estimated deferred selling costs of $3.73 million and cost of sales of $3.0 million, for an estimated net profit of $6.0 million. Results of Operations Three Months Ended March 31, 2002 compared to Three Months Ended February 28, 2001 Total revenues for the Company decreased 14.4% or $3.5 million to $20.8 million during the three months ended March 31, 2002 from $24.2 million during the three months ended February 28, 2001. The net decrease was primarily due to a net decrease of $3.5 million in vacation ownership interest and land sales to $15.5 million during the three months ended March 31, 2002 from $18.9 million during the three months ended February 28, 2001 vacation ownership interest sales decreased by $4.5 million and land sales increased by $1.0 million and an increase in interest income to $4.0 million during the three months ended March 31, 2002 from $3.6 million during the three months ended February 28, 2001. Interest income increased to $4.0 million during the three months ended March 31, 2002 from $3.6 million for the three months ended February 28, 2001, an increase of 13.6%, primarily due to an increase in notes receivable balance during the period. Total costs and expenses for the Company decreased to $23.4 million for the three months ended March 31, 2002 from $23.9 million for the three months ended February 28, 2001, a decrease of 2.1%. The decrease resulted primarily from the net effect of the following: a decrease in direct costs of vacation ownership interest sales to $1.5 million from $2.5 million, a decrease of 40%; and, a decrease to $8.8 million from $11.1 million in marketing and sales expense, a decrease of 20%. As there are substantially variable cost elements in marketing and sales, the percentage of marketing and sales expenses to gross sales would remain relatively constant in periods of lower sales. As the tourism industry has experienced an economic downturn since the September 11, 2001 terrorist attacks, the Company believes that the decline in sales volume is directly related to such events, but is unable to quantify the sales volume decline that is directly attributable to such events. Interest expense increased to $3.2 million during the first 2002 quarter from $3.1 million during the first 2001 quarter, an increase of 2.7%. 9 A pretax loss of $2.6 million was recorded during the first 2002 quarter compared to pretax income of $0.4 million earned during the first 2001 quarter. In January, 2002 the Company's Board of Directors approved a business restructuring. Among other things, this restructuring included: seven terminations at senior management levels; relocation of corporate office facilities from 1500 E. Tropicana Avenue and 4310 Paradise Road to newer office facilities in closer proximity to one another; discontinuance of the license agreement with Cendant Corporation whereby the Company licensed the use of the name "Ramada Vacation Suites" in its vacation ownership and resort operations; and approval of change in the name of the resort facilities from "Ramada Vacation Suites" to "Leisure Resorts". As a result of these restructurings, the Company recorded a non-recurring charge of $2.5 million. Included in this total where: severance benefits associated with former senior management and officers of approximately $1.9 million; future rental expense to be incurred on vacated office space of $311,000; and non-cash charges associated with the termination of the Cendant license agreement in the amount of $308,000. As of March 31, 2002 the Company has paid in cash $814,000 and expects to pay the remainder by the end of fiscal 2002. Restructuring charges, in certain cases, are based on estimates and subject to change; however, the Company does not believe revisions to the above estimates will be material. An income tax benefit of $0.8 million was recorded for the period ended, March 31, 2002 compared to an income tax benefit of $0 recorded for the period ended, February 28, 2001. The income tax calculation for the period ended, February 28, 2001 was reduced due to the use of net operating loss carry forwards which were previously fully reserved and were used to offset income on a consolidated basis. Income taxes are recorded based on an ongoing review of related facts and circumstances. Net loss applicable to common stock amounted to $1.6 million during the period ended, March 31, 2002 compared to net income applicable to common stock of $0.4 million during the period ended, February 28, 2001, primarily due to the foregoing. Liquidity and Capital Resources The following discussion relates to our financial position at March 31, 2002 and the results of our operations for the period then ended. In January, 2002, the Company's new management adopted a business plan contemplating, among other things, the substantial expansion of our vacation resort business, and the initiation and acquisition of businesses that complement our vacation resort business. See "Business - Recent Events" for a discussion of the elements of our business plan. This change in our business model, as well as the risks and uncertainties inherent in our historical business, are expected to cause our results of operations and the components thereof to change materially in the future. In addition, we will require substantial additional capital in the near term to implement certain elements of our business plan, including the acquisition of the three properties from Raintree and other businesses. There is no assurance that we will be able to raise the necessary capital in a timely manner and on terms acceptable to us. Any failure to raise the necessary capital may have a material adverse effect on our operations and financial results. At March 31, 2002, no commitments existed for material capital expenditures. However, if the Company completes the transactions contemplated by the outstanding Letters of Intent as stated in Item 1 and adheres to the Company's business plan, the Company will incur material capital expenditures in the future. At March 31, 2002, the Company had arrangements, as amended for subsequent agreement revisions, with institutional lenders for the financing of receivables in connection with sales of vacation ownership interests and land and the acquisition of vacation ownership properties and land, which provide for lines of credit of up to an aggregate of $167.0 million. Such lines of credit are secured by vacation ownership and land receivables and mortgages. At March 31, 2002, an aggregate of $120.9 million was outstanding under such lines of credit and $46.1 million was available for borrowing (subject to the availability of qualified collateral). Under the terms of these lines of credit, LHC may borrow 65% to 90% of the balances of the pledged vacation ownership and land receivables. 10 LHC is required to comply with certain covenants under these agreements which, among other things, require LHC to meet certain minimum tangible net worth requirements. The most stringent of such requirements provides that LHC maintains a minimum tangible net worth of $27.5 million. At March 31, 2002, LHC's tangible net worth was $36.8 million. Summarized lines of credit information and accompanying notes relating to these lines of credit outstanding at March 31, 2002, consist of the following: (thousands of dollars)
Outstanding at Maximum Revolving Lender March 31, 2002 Amounts Expiration Date (a) Maturity Date (a) Interest Rate ------ -------------- ----------- --------------------- -------------------- -------------------- Finova $ 57,780 $ 65,000 December 31, 2002 2/28/02 - 5/15/10 Prime + 2.0 - 2.25% Textron 28,652 35,000 December 1, 2002 12/31/02 - 12/31/05 Prime + 2.0 - 3% GE Capital 27,178 40,000 April 30, 2003 March 30, 2006 Libor + 4.0 - 4.25% HSBC 165 - Inactive February 6, 2006 Prime + 1.0% Capital Source 5,791 27,000 9/11/03 - 3/11/05 August 11, 2005 Prime + 2.5% ------------- --------- September 11, 2003 March 11, 2005 $ 119,566 $ 167,000 ============= =========
(a) As it has typically done in the past, management expects 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. LHC is required to comply with certain financial and non-financial covenants under these line of credit agreements. Among other things, these agreements require LHC to meet certain minimum tangible net worth requirements, maintain certain liabilities to tangible net worth ratios and maintain marketing & sales and general & administrative expenses, as defined, relative to net processed sales for each rolling 12-month period below a certain percentage. The maximum percentage related to costs and expenses referred to above has been exceeded in the last four quarters. This does not constitute an Event of Default as defined under this loan agreement, or this line of credit; however, it gives the lender the option to suspend advances to LHC. The lender has not elected to exercise this option, but has continued to make regular advances and has verbally informed LHC that it intends to continue such advances. The maximum loan-to-value ratio referred to above was exceeded in the last two quarters. As a result, there presently exists the right of the Lender to declare an Event of Default as defined under this loan agreement, or this line of credit. Default of the loan-to-value ratio, under this line, can only cause the lender to cease advance to the Company. The lender has agreed to forbear from exercising any of its remedies under the loan agreement through July 31, 2002 as set forth in the side letter dated January 3, 2002. In exchange for the lender agreeing to the provisions of the side letter, the Company was required to pay the lender $250,000. Under this letter, the Company has pledged additional eligible receivables on a schedule to bring this line into compliance by July 31, 2002. Scheduled maturities of the Company's notes and contracts payable are as follows: Period Ended March 31, (thousands of dollars) ---------------------- 2002......................... $ 5,533 2003......................... 5,549 2004......................... 13,605 2005......................... 18,356 2006......................... 28,198 Thereafter................... 56,380 ---------- ................... $ 127,621 ---------- A schedule of the cash shortfall arising from recognized and unrecognized sales for the periods indicated is set forth below: (thousands of dollars) March 31, February 28, -------------------------- 2002 2001 ----------- ----------- Marketing and selling expenses attributable to recognized and unrecognized sales $ 9,037 $ 22,025 Less: Down payments (2,438) (6,375) ----------- ----------- Cash Shortfall $ 6,599 $ 15,650 =========== =========== The Company sells notes receivable subject to recourse provisions as contained in each agreement. At December 31, 2001, total sold notes receivable was $47.0 million. The Company is obligated under these agreements to replace or repurchase accounts that become over 90 days delinquent or are otherwise subject to replacement or repurchase in either cash or receivables generally at the option of the purchaser. The repurchase provisions provide for substitution of receivables as recourse for $49.4 million of sold notes receivable and cash payments for repurchase relating to $6.6 million of sold notes receivable. 11 The undiscounted amounts of the recourse obligations on such notes receivable were $3.1 million and $3.6 million at March 31, 2002 and December 31, 2001, respectively. LHC 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 consist of the following: (thousands of dollars) March 31, December 31, 2002 2001 ------------ ------------ Notes collateralized by receivables $ 104,725 $ 106,599 Mortgages collateralized by real estate properties 15,313 14,781 Installment contracts and other notes payable 7,583 10,150 ------------ ------------ Total $ 127,621 $ 131,530 ============ ============ 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, including the reserve for notes receivable sold with recourse for the three months ended March 31, 2002 consisted of the following: (thousands of dollars) March 31, 2002 ---------- Balance at beginning of period $ 18,470 Provision for cancellations 1,342 Amounts charged to allowance for cancellations, net (3,312) ----------- 16,500 Reserve for notes sold with recourse (3,131) ----------- Allowance for cancellations 13,369 =========== March 31, 2002 compared to December 31, 2001 Cash and cash equivalents increased to $3.3 million at March 31, 2002 from $1.7 million at December 31, 2001. Notes receivable, net, increased 2.4% to $112.0 million at March 31, 2002 from $109.3 million at December 31, 2001. 12 Land and improvements inventory and vacation ownership interests held for sale increased 11.3% to $19.9 million at March 31, 2002 from $17.9 million at December 31, 2001. (thousands of dollars) March 31, December 31, ------------ ------------ 2002 2001 ------------ ------------ Vacation ownership interests $ 18,029 $ 13,771 Vacation ownership interests in development 1,858 4,094 ------------ ------------ Total $ 19,887 $ 17,865 ============ ============ Notes and contracts payable increased 3.0% to $127.6 million at March 31, 2002 from $131.5 million at December 31, 2001. Stockholders' equity increased 20.6% to $25.8 million at March 31, 2002 from $21.4 million at December 31, 2001. Item 3. Quantitative and Qualitative Disclosures About Market Risk There was no material change for the quarter ended March 31, 2002 in the information about the Company's "Quantitative and Qualitative Disclosures About Market Risk" as disclosed in its Annual Report on Form 10-KT for the year ended December 31, 2001. PART II OTHER INFORMATION Item 1. Legal Proceedings There has been no material change in the status of litigation reported in the Company's Annual Report on Form 10-KT for the year ended December 31, 2001. Item 2. Changes in Securities On January 18, 2002, the Company issued 750,000 shares of its Common Stock to LC Acquisition Corp. for cancellation of indebtedness in the amount of $3,000,000. The Company issued 500,000 shares to Charles K. Stewart, as assignee of the purchase commitment of Doerge Capital Management. These transactions were approved by the stockholders of the Company at a meeting held on January 17, 2002. The issuance of the shares was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof. In January, 2002, the Company issued a warrant to purchase 175,000 shares of Common Stock at $4.00 per share to Roan/Meyer Associates, LP as compensation for financial advisory services. The issuance of the warrant was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof. The warrant has been exercised in full and the resale of the shares issued upon exercise of the warrant has been registered under the Securities Act. During the quarter ended March 31, 2002, the Company issued for $4.40 per share a total of 226,767 shares of Common Stock and warrants to purchase 226,767 shares at an exercise price of $5.00 per share. The warrants are callable if the underlying Common Stock trades for $7.00 per share for a consecutive period of ten days. The purchasers of the shares were Stonestreet Limited Partnership, Perg Galleon LLC, Michael D. Brown, Jeffrey Catuara, Robert W. Baird, Hazlett Burt & Watson and William C. White. The issuance of the shares and accompanying warrants was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof. 13 Item 3. Sale of Central Nevada Utilities Company On April 11, 2002, LHC's wholly owned subsidiary, Central Nevada Utilities Company completed the sale of substantially all of its assets to Utilities, Inc. for $5,500,000. $5,200,000 was used to pay the Subordinated Debt in full. This sale is not expected to have a significant impact on the Company's 2002 results of operation. The Company estimates that the gain on the sale of CNUC to be approximately $371,000. Item 4. Exhibits and Reports on Form 8-K Exhibits -------- Exhibit Description - ------- ----------- Number - ------ 10.238 Termination Agreement dated January 17, 2002 between The Company Corp and Jerome J. Cohen. 10.239 Employment Agreement dated January 17, 2002 between The Company Corp and Herbert B. Hirsch. 10.240 Amended, Restated and Increased Receivables Promissory Note No. 2 for $40,000,000 dated December 20, 2001 by Preferred Equities Corporation to Heller Financial Inc. 10.241 Purchase Money Promissory Note between M & J Wilkow as agent for The Villas at Monterey Limited Partnership and Tango Bay of Orlando for $5,927,164.65 dated August 15, 2001. 10.242 Letter Agreement and Amendment No. 4 dated January 3, 2002 between Preferred Equities Corporation and FINOVA Capital Corporation regarding the Biloxi Property. 10.243 Letter Agreement dated January 23, 2002 between FINOVA Capital Corporation and Preferred Equities Corporation regarding the purchase of the Great Vacations Resort of Hershey. 10.244 Loan and Security Agreement dated March 11, 2002 for Acquisition and for Construction of 158 Ida with Promissory Notes and First Modification Agreement for Receivables between Preferred Equities Corporation and Capital Source Finance LLC. 10.245 Employment Contract by and between The Company Corporation and Jon Arlington Joseph dated January 1, 2002. A report on Form 8-K was filed on January 30, 2002. This form 8-K refers to the Company's change in control, reporting the consummation of the transactions reported in December. A report on Form 8-K was filed on March 1, 2002. This form 8-K refers to the Company's change in fiscal year, reporting the Board's decision to change the fiscal year from August 31st to December 31st. A report 8-K was filed on March 1, 2002. This form 8-K refers to the Company's other events, reporting the sale to Charles Stewart of 500,000 shares pursuant to the assignment to and assumption by him of the Doerge subscription agreement. 14 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MEGO FINANCIAL CORP. By: /s/ Robert S. Understein ------------------------------- Robert S. Understein Chief Financial Officer Date: May 21, 2002 15 EX-10.238 3 dex10238.txt TERMINATION AGREEMENT Exhibit No. 10.238 TERMINATION AGREEMENT --------------------- THIS TERMINATION AGREEMENT (this "Agreement") is made and entered into this 17th day of January, 2002, between MEGO FINANCIAL CORP., a New York corporation (the "Company"), and JEROME J. COHEN ("Cohen"). This Agreement is intended to replace that certain Amended and Restated Employment Agreement, dated as of November 10, 2000, by and between Mego and Cohen (the "Employment Agreement"). Accordingly, effective as of the Commencement Date hereof as that term is hereafter defined, the Employment Agreement shall be terminated and declared null and void and no payment of Executive Incentive Income shall be due respecting income of the Company for the period from September 1, 2001 to the Commencement Date. R E C I T A T I O N S --------------------- A. The Company recognizes that Cohen has performed substantial services for the Company which have contributed to its growth. B. The Company and Cohen now each desire to terminate their existing business relationship on the terms and conditions set forth in this Agreement. O P E R A T I V E P R O V I S I O N S ----------------- ------------------- In consideration of the foregoing recitations, the mutual promises hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which are acknowledged hereby, the parties hereto, intending to be legally bound, hereby covenant and agree as follows: ARTICLE I TERMINATION AGREEMENT 1.1 Termination Fee. In consideration for prior services provided by --------------- Cohen to Company and for the termination of Cohen's Employment Agreement, the Company shall pay a fee to Cohen equal to Seven Hundred Fifty Thousand Dollars ($750,000), payable in thirty six (36) equal consecutive monthly installments of Twenty Thousand Eight Hundred and Thirty-Three Dollars and Thirty-Three cents ($20,833.33) per month, commencing February 1, 2002 (the "Commencement Date"). In the event of Cohen's death prior to the entire distribution of the fee set forth in this Section 1.1, the remaining amounts shall be paid to the beneficiary designated by Cohen, in writing, to the Company, or if no such beneficiary shall be designated, then to Cohen's estate, at such times and in such amounts as if Cohen had not died. 1.2 Other Benefits. -------------- (a) Medical Insurance Coverage. During the period commencing on the -------------------------- Commencement Date and ending three years from such date (the "Coverage Period") Cohen and his Spouse shall continue to be covered under that certain Equitable Life Assurance Society of the United States medical insurance policy, number PPB N 86 803 722 (the "Policy"), and the Company shall pay the premiums thereon that are allocable to the Coverage Period. In addition, the Company shall reimburse Cohen for any medical expenses incurred by Cohen (but not for those medical expenses incurred by his Spouse) during the Coverage Period that are not covered under the Policy including, without limitation, any amounts that are not covered by the reason of the deductible and/or copayment provisions of the Policy. Reimbursements made by the Company to Cohen shall be made on a quarterly basis and the amount of the quarterly reimbursement shall be based upon invoices submitted by Cohen to the Company during such quarter. Notwithstanding anything to the contrary herein, the Company shall not be required to pay any medical expenses incurred by Cohen that are not covered by the Policy by reason of their being in excess of the maximum amount of covered expenses under the Policy. (b) Occupancy of Office. During the period beginning on the ------------------- Commencement Date and ending on the last day of the third calendar month that begins after the Commencement Date (as defined in Section 1.1 hereof ) (the "Office Period"), the Company shall continue to lease, and pay the rent and utility costs of, and Cohen shall have the right to continue utilizing, the Company's office space in Miami, Florida (the "Miami Office") where Cohen previously performed services for Mego. In addition, as of the Commencement Date, Cohen shall be entitled to keep any office furniture, furnishings or equipment located in the Miami Office. During the Office Period, Cohen shall organize all records, files and transaction bibles of the Company, and arrange to have those documents packaged and shipped, at the Company's expense, to the Company's offices in Las Vegas, Nevada. Cohen shall be entitled to keep or discard any such documents that the Company does not wish to have shipped as aforesaid. ARTICLE II Restrictive Covenants. --------------------- 2.1 Non-Competition. For the three (3) year period ending on the third --------------- anniversary of the Commencement Date (the "Restricted Period") and provided that the Company is not in breach of any of its obligations under Sections 1.1, 1.2 or 3.4 of this Agreement, Cohen shall not, directly or indirectly, engage in or have any interest in any sole proprietorship, corporation, company, partnership, association, venture or business or any other person or entity (whether as an employee, officer, director, partner, agent, security holder, creditor, consultant or otherwise) that directly or indirectly (or through any affiliated entity) competes with the Company's business (for this purpose, the Company's business shall mean any business that engages in time share sales in North America); provided that such provision shall not apply to Cohen's ownership of Common Stock of the Company or the acquisition by Cohen, solely as an investment, of securities of any issuer that is registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended, and that are listed or admitted for trading on any United States national securities exchange or that are quoted on the National Association of Securities Dealers Automated Quotations System, or any similar system or automated dissemination of quotations -2- of securities prices in common use, so long as Cohen does not control, acquire a controlling interest in or become a member of a group which exercises direct or indirect control of, more than five percent of any class of capital stock of such corporation. 2.2 Nonsolicitation of Employees. During the Restricted Period, and ---------------------------- provided that the Company is not in breach of any of its obligations under Sections 1.1, 1.2 or 3.4 of this Agreement, Cohen shall not, directly or indirectly, for himself or for any other person, firm, corporation, partnership, association or other entity employ or attempt to employ or enter into any contractual arrangement with any employee or former employee of the Company, unless such employee or former employee has not been employed by the Company for a period in excess of six months. 2.3 Acknowledgment by Cohen. Cohen acknowledges and confirms that (i) the ----------------------- restrictive covenants contained in this Article II are reasonably necessary to protect the legitimate business interests of the Company, and (ii) the restrictions contained in this Article II (including without limitation the length of the term of the provisions of this Article II) are not overbroad, overlong, or unfair and are not the result of overreaching, duress or coercion of any kind. Cohen further acknowledges and confirms that his full, uninhibited and faithful observance of each of the covenants contained in this Article II will not cause him any undue hardship, financial or otherwise, and that enforcement of each of the covenants contained herein will not impair his ability to obtain employment commensurate with his abilities and on terms fully acceptable to him or otherwise to obtain income required for the comfortable support of him and his family and the satisfaction of the needs of his creditors. Cohen acknowledges and confirms that his special knowledge of the business of the Company is such as would cause the Company serious injury or loss if he were to use such ability and knowledge to the benefit of a competitor or were to compete with the Company in violation of the terms of this Article II. Cohen further acknowledges that the restrictions contained in this Article II are intended to be, and shall be, for the benefit of and shall be enforceable by, the Company's successors and assigns. 2.4 Reformation by Court. In the event that a court of competent -------------------- jurisdiction shall determine that any provision of this Article II is invalid or more restrictive than permitted under the governing law of such jurisdiction, then only as to enforcement of this Article II within the jurisdiction of such court, such provision shall be interpreted and enforced as if it provided for the maximum restriction permitted under such governing law. 2.5 Survival. The provisions of this Article II shall survive the -------- payment by the Company to Cohen of the Lump Sum Payment pursuant to Article II hereof. 2.6 Injunction. It is recognized and hereby acknowledged by the parties ---------- hereto that a breach by Cohen of any of the covenants contained in Article II of this Agreement will cause irreparable harm and damage to the Company, the monetary amount of which may be virtually impossible to ascertain. As a result, Cohen recognizes and hereby acknowledges that the Company shall be entitled to an injunction from any court of competent jurisdiction enjoining -3- and restraining any violation of any or all of the covenants contained in Article II of this Agreement by Cohen or any of his affiliates, associates, partners or agents, either directly or indirectly, and that such right to injunction shall be cumulative and in addition to whatever other remedies the Company may possess. ARTICLE III Miscellaneous ------------- 3.1 Entire Agreement; Amendment. This Agreement constitutes the entire --------------------------- agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements, understandings, negotiations and discussions, both written and oral, among the parties hereto. This Agreement may not be amended or modified in any way except by a written instrument executed by the Company and Cohen. 3.2 Notice. All notices under this Agreement shall be in writing and ------ shall be given by personal delivery, or by registered or certified United States mail, postage prepaid, return receipt requested, to the address set forth below: If to Cohen: Jerome J. Cohen 11111 Biscayne Blvd. #227 Miami, Florida, 33181 If to Company: MEGO FINANCIAL CORP. 4310 Paradise Road Las Vegas, Nevada 89109 Attn: Floyd W. Kephart, President or to such other person or persons or to such other address or addresses as Cohen and the Company or their respective successors or assigns may hereafter furnish to the other by notice similarly given. Notices, if personally delivered, shall be deemed to have been received on the date of delivery, and if given by registered or certified mail, shall be deemed to have been received on the fifth business day after mailing. 3.3 Governing Law. This Agreement shall be governed by, and construed and ------------- interpreted in accordance with, the laws of the State of Florida, without giving effect to the conflict of laws principles of each State. With respect to any disputes concerning federal law, such disputes shall be determined in accordance with the law as it would be interpreted and applied by the United States Court of Appeals for the Eleventh Circuit. 3.4 Assignment: Successors and Assigns. Neither Cohen nor the Company may ---------------------------------- make an assignment of this Agreement or any interest herein, by operation of laws or otherwise, without the prior written consent of the other party. This Agreement shall inure to the benefit -4- of, and be binding upon, the Company and Cohen, his heirs, personal representatives, executors, legal representatives, successors and their permitted assigns, if any. In the event that the Company shall effect a reorganization, consolidate with or merge into any other corporation, partnership, organization or other entity, or transfer all or substantially all of its properties or assets to any other corporation, partnership, organization or other entity, or if more than fifty percent (50%) of its stock shall be sold, transferred or issued to another party or parties, the Company shall immediately pay Cohen the balance of the $750,000 fee set forth in Section 1.1 hereof not previously paid by the monthly payments provided for in the said Section 1.1 hereof (such payment being referred to as the "Lump Sum Payment"). Upon payment by the Company of the Lump Sum Payment in accordance with the foregoing sentence of this Section 3.4, then the Coverage Period for the continued payment of health insurance premiums and reimbursement of medical expenses under Section 1.2(a) hereof shall cease for expenses incurred after the date on which the Company has made the Lump Sum Payment to Cohen. 3.5 Waiver. The waiver by any party hereto of the other party's prompt ------ and complete performance or breach or violation of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach or violation, and the waiver by any party hereto to exercise any right or remedy which he or it may possess shall not operate nor be construed as the waiver of such right or remedy by such party or as a bar to the exercise of such right or remedy by such party upon the occurrence of any subsequent breach or violation. 3.6 Severability. The invalidity of any one or more of the words, ------------ phrases, sentences, clauses, sections or subsections contained in this Agreement shall not affect the enforceability of the remaining portions of this Agreement or any part thereof, all of which are inserted conditionally on their being valid in law, and, in the event that any one or more of the words, phrases, sentences, clauses, sections or subsections contained in this Agreement shall be declared invalid by a court of competent jurisdiction, then this Agreement shall be construed as if such invalid word or words, phrase or phrases, sentence or sentences, clause or clauses, section or sections, or subsection or subsections had not been inserted. 3.7 Damages. Nothing contained herein shall be construed to prevent the ------- Company or Cohen from seeking and recovering from the other damages sustained by either or both of them as a result of its or his breach of any term or provision of this Agreement. In the event that either party hereto brings suit for the collection of any damages resulting from, or the injunction of any action constituting, a breach of any of the terms or provisions of this Agreement, then the party found to be at fault shall pay all reasonable court costs and attorneys' fees of the other. -5- 3.8 Consent to Jurisdiction. In the event any controversy or claim arises ----------------------- out of or relates to this Agreement or the breach thereof, the parties hereby consent to the jurisdiction of the Supreme Court of Florida, the Florida District Court of Appeal, and the United States District Court for the District of Florida. Accordingly, with respect to any such court action, Cohen and the Company each (i) submit to the personal jurisdiction of such courts; (ii) consent to service of process; and (iii) waive any other requirement (whether imposed by statute, rule of court, or otherwise) with respect to personal jurisdiction or service of process. 3.9 Gender and Number. Wherever the context shall so require, all words ----------------- herein in the male gender shall be deemed to include the female or neuter gender, all singular words shall include the plural and all plural words shall include the singular. 3.10 Section Headings. The section or other headings contained in this ---------------- Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of any or all of the provisions of this Agreement. 3.11 No Third Party Beneficiary other than Company. Nothing expressed or --------------------------------------------- implied in this Agreement is intended, or shall be construed, to confer upon or give any person, firm, corporation, partnership, association or other entity, other than the parties hereto and each of their respective heirs, personal representatives, legal representatives, successors and permitted assigns, any rights or remedies under or by reason of this Agreement. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. THE COMPANY: MEGO FINANCIAL CORP., a New York corporation /s/ Floyd W. Kephart --------------------------------- FLOYD W. KEPHART, President COHEN: /s/ Jerome Cohen --------------------------------- JEROME J. COHEN -6- EX-10.239 4 dex10239.txt EMPLOYMENT AGREEMENT Exhibit No. 10.239 EMPLOYMENT AGREEMENT -------------------- This Employment Agreement ("Agreement") is made and entered into on this 17th day of January, 2002, by and between MEGO FINANCIAL CORP., a New York corporation (the "Company") and HERBERT B. HIRSCH (the "Executive"). This Agreement is intended to replace those certain agreements, dated August 1, 1994 and September 2, 1997, by and between the Company and the Executive. Accordingly, effective as of the Commencement Date hereof as that term is hereafter defined, the agreements of August 1, 1994 and September 2, 1997 shall be terminated and declared null and void. As to the agreement of August 1, 1994, no payments shall be due respecting income of the Company for the period from September 1, 2001 to the Commencement Date. R E C I T A L S --------------- A. The Executive is currently employed as the Senior Vice President and Chief Financial Officer of Company. B. The Executive possesses intimate knowledge of the business and affairs of Company, its policies, methods and personnel. C. The Board of Directors of Company (the "Board") recognizes that the Executive has contributed to the growth and success of Company, and desires to assure Company of the Executive's continued employment and to compensate him therefor. D. The Board has determined that this Agreement will reinforce and encourage the Executive's continued attention and dedication to the Company. E. The Executive is willing to make his services available to the Company and on the terms and conditions hereinafter set forth. AGREEMENT --------- NOW, THEREFORE, in consideration of the premises and mutual covenants set forth herein, the parties agree as follows: 1. Employment. ---------- 1.1 Employment and Term. The Company hereby agrees to continue to ------------------- employ the Executive and the Executive hereby agrees to continue to serve the Company on the terms and conditions set forth herein. 1.2 Duties of Executive. During the Term of Employment under this ------------------- Agreement, the Executive shall diligently perform all services as may be assigned to him by the Chairman of the Board and Chief Executive Officer ("CEO") (provided that, such services shall not materially differ from the services currently provided by the Executive), and shall exercise only such power and authority as may from time to time be delegated to him by the CEO. The Executive shall not, however, be required to devote more than five (5) hours per calendar month to the performance of services under this Agreement. 2. Term. ---- 2.1 Term. The term of this Agreement shall 2002, (the ---- "Commencement Date") and shall commence on February 1, expire on July 31, 2004, unless sooner terminated in accordance with Section 5 hereof. This Agreement may be renewed for an additional period(s) only upon the mutual written agreement of the parties. 2.2 Term of Employment and Expiration Date. The period during -------------------------------------- which the Executive shall be employed by the Company pursuant to the terms of this Agreement is sometimes referred to in this Agreement as the "Term of Employment", and the date on which the Term of Employment shall expire (including the date on which any additional term shall expire), is sometimes referred to in this Agreement as the "Expiration Date". 3. Salary. During the Term of Employment, the Company shall pay the ------ Executive a salary at the annual rate of Ten Thousand Dollars ($10,000) for services provided hereunder, payable in 30 equal consecutive monthly installments of Eight Hundred Thirty-Three Dollars and Thirty Three Cents ($833.33) per month, subject to applicable withholding and other taxes, commencing on the Commencement Date. Executive shall not be eligible for the Company's Executive Incentive Income Plan or any other bonus. 4. Deferred Compensation. As consideration for services previously --------------------- rendered to the Company, the Company shall pay the Executive deferred compensation in an aggregate amount of One Hundred Twenty-Five Thousand Dollars ($125,000), payable in 30 equal consecutive monthly installments of Four Thousand One Hundred Sixty-Six Dollars and Sixty-Six Cents ($4,166.66) per month, commencing on the Commencement Date. 5. Expense Reimbursement and Other Benefits. ---------------------------------------- 5.1 Reimbursement of Expenses. Upon the submission of proper ------------------------- substantiation by the Executive, and subject to such rules and guidelines as the Company may from time to time adopt, the Company shall reimburse the Executive for all reasonable expenses actually paid or incurred by the Executive during the Term of Employment in the course of and pursuant to the business of the Company. The Executive shall account to the Company in writing for all expenses for which reimbursement is sought and shall supply to the Company copies of all relevant invoices, receipts or other evidence reasonably requested by the Company. 5.2 Medical/Health Insurance Coverage. During the Term of --------------------------------- Employment, the Executive shall continue to be covered under the Company's health plan and the Company shall continue to pay the entire premium for the Executive's coverage under that plan. If the Executive so chooses, his Spouse shall continue to be covered under the Company's health plan during the Term of Employment, but the Executive shall be responsible for paying the premiums with respect to her coverage. Upon termination of this Agreement, the Executive and his Spouse shall be eligible for COBRA coverage under the Company's health plan, at the Executive's expense. -2- 6. Termination; Death or Disability. -------------------------------- 6.1 Termination. ----------- (a) Notwithstanding anything to the contrary contained in this Agreement, the Executive's employment under this Agreement shall terminate only on the earliest of: (i) the expiration of the Term of Employment as set forth in Section 2.1 hereof; (ii) the date on which the Executive commits fraud, embezzlement or any criminal act that is a felony, in connection with the Executive's duties hereunder; or (iii) the date on which the Company shall effect a reorganization, consolidate with or merge into any other corporation, partnership, organization or other entity, or transfer all or substantially all of its properties or assets to any other corporation, partnership, organization or other entity, or if more than fifty percent (50%) of its stock shall be sold, transferred or issued to another party or parties. (b) In the event that the Executive's employment with the Company terminates pursuant to Section 6.1(a)(iii) hereof, then the Company shall immediately pay the Executive the remaining balance of both the Salary and the Deferred Compensation set forth in Sections 3 and 4 hereof not previously paid by the monthly payments provided for in the said Sections 3 and 4 hereof (such payment being referred to as the "Lump Sum Payment"). 6.2 Death or Disability. Notwithstanding anything to the ------------------- contrary contained in this Agreement, in the event of the Executive's death or Disability during the Term of Employment, the Executive, his beneficiary, his estate or personal representative shall continue to receive the Salary and Deferred Compensation provided for in Sections 3 and 4 hereof, at such times and in such amounts as if the Executive had not died or suffered a Disability. For purposes of this Agreement, "Disability" shall mean if the Executive shall as a result of mental or physical incapacity, illness or disability, become unable to perform his obligations hereunder for a period of 180 days in any 12-month period. 7. Restrictive Covenant. -------------------- 7.1 Nonsolicitation of Employees. For the thirty (30) month ---------------------------- period commencing after the Commencement Date (the "Restricted Period") and provided that the Company is not in breach of any of its obligations under Sections 3, 4 or 5 of this Agreement, the Executive shall not, directly or indirectly, for himself or for any other person, firm, corporation, partnership, association or other entity employ or attempt to employ or enter into any contractual arrangement with any employee or former employee of the Company, unless such employee or former employee has not been employed by the Company for a period in excess of six months. 7.2 Acknowledgment by the Executive. The Executive acknowledges ------------------------------- and confirms that (i) the restrictive covenant contained in this Section 7 is reasonably necessary to -3- protect the legitimate business interests of the Company, and (ii) the restriction contained in this Section 7 (including without limitation the length of the term of the provision of this Section 7) is not overbroad, overlong, or unfair and is not the result of overreaching, duress or coercion of any kind. The Executive further acknowledges and confirms that his full, uninhibited and faithful observance of the covenant contained in this Section 7 will not cause him any undue hardship, financial or otherwise, and that enforcement of the covenant contained herein will not impair his ability to obtain employment commensurate with his abilities and on terms fully acceptable to him or otherwise to obtain income required for the comfortable support of him and his family and the satisfaction of the needs of his creditors. The Executive further acknowledges that the restriction contained in this Section 7 is intended to be, and shall be, for the benefit of and shall be enforceable by, the Company's successors and assigns. 7.3 Reformation by Court. In the event that a court of competent -------------------- jurisdiction shall determine that any provision of this Article II is invalid or more restrictive than permitted under the governing law of such jurisdiction, then only as to enforcement of this Section 7 within the jurisdiction of such court, such provision shall be interpreted and enforced as if it provided for the maximum restriction permitted under such governing law. 7.4 Injunction. It is recognized and hereby acknowledged by the ---------- parties hereto that a breach by the Executive of the covenant contained in Section 7 of this Agreement will cause irreparable harm and damage to the Company, the monetary amount of which may be virtually impossible to ascertain. As a result, the Executive recognizes and hereby acknowledges that the Company shall be entitled to an injunction from any court of competent jurisdiction enjoining and restraining any violation of the covenant contained in Section 7 of this Agreement by the Executive or any of his affiliates, associates, partners or agents, either directly or indirectly, and that such right to injunction shall be cumulative and in addition to whatever other remedies the Company may possess. 8. Assignment; Successors and Assigns. Neither the Executive nor the ---------------------------------- Company may make an assignment of this Agreement or any interest herein, by operation of laws or otherwise, without the prior written consent of the other party. This Agreement shall inure to the benefit of and be binding upon the Company and the Executive, their respective heirs, personal representatives, executors, administrators, legal representatives, successors and assigns. 9. Governing Law. This Agreement shall be governed by, and ------------- construed and interpreted in accordance with, the laws of the State of Delaware, without giving effect to the conflict of laws principles of each State. With respect to any disputes concerning federal law, such disputes shall be determined in accordance with the law as it would be interpreted and applied by the United States Court of Appeals with federal jurisdiction in the State of Delaware. 10. Entire Agreement. This Agreement constitutes the entire ----------------- agreement between the parties hereto with respect to the subject matter hereof and, upon its effectiveness, shall supersede all prior agreements, understandings and arrangements, both oral and written, between the Executive and the Company with respect to such subject matter. This Agreement may not be modified in any way unless by a written instrument signed by both the Company and the Executive. -4- 11. Notices: All notices under this Agreement shall be in writing ------- and shall be given by personal delivery, or by registered or certified United States mail, postage prepaid, return receipt requested, to the address set forth below: If to the Executive: Herbert B. Hirsch 64 Hurdle Fence Drive Avon, CT. 06001 If to the Company: MEGO FINANCIAL CORP. 8910 Paradise Road Las Vegas, Nevada 89109 Att: Floyd W. Kephart, President or to such other person or persons or to such other address or addresses as the Executive and the Company or their respective successors or assigns may hereafter furnish to the other by notice similarly given. Notices, if personally delivered, shall be deemed to have been received on the date of delivery, and if given by registered or certified mail, shall be deemed to have been received on the fifth business day after mailing. 12. Severability. The invalidity of any one or more of the words, ------------ phrases, sentences, clauses or sections contained in this Agreement shall not affect the enforceability of the remaining portions of this Agreement or any part thereof, all of which are inserted conditionally on their being valid in law, and, in the event that any one or more of the words, phrases, sentences, clauses or sections contained in this Agreement shall be declared invalid, this Agreement shall be construed as if such invalid word or words, phrase or phrases, sentence or sentences, clause or clauses, or section or sections had not been inserted. If such invalidity is caused by length of time or size of area, or both, the otherwise invalid provision will be considered to be reduced to a period or area which would cure such invalidity. 13. Waivers. The waiver by any party hereto of the other party's ------- prompt and complete performance or breach or violation of any provision of this Agreement shall not operate nor be construed as a waiver of any subsequent breach or violation, and the waiver by any party hereto to exercise any right or remedy which he or it may possess shall not operate nor be construed as the waiver of such right or remedy by such party or as a bar to the exercise of such right or remedy by such party upon the occurrence of any subsequent breach or violation. 14. Damages. Nothing contained herein shall be construed to prevent ------- the Company or the Executive from seeking and recovering from the other damages sustained by either or both of them as a result of its or his breach of any term or provision of this Agreement. In the event that either party hereto brings suit for the collection of any damages resulting from, or the injunction of any action constituting, a breach of any of the terms or provisions of this Agreement, then the party found to be at fault shall pay all reasonable court costs and attorneys' fees of the other. -5- 15. Section Headings. The section headings contained in this ---------------- Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 16. No Third Party Beneficiary. Nothing expressed or implied in this -------------------------- Agreement is intended, or shall be construed, to confer upon or give any person other than the Company, the parties hereto and their respective heirs, personal representatives, legal representatives, successors and assigns, any rights or remedies under or by reason of this Agreement. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. THE COMPANY: MEGO FINANCIAL CORP. /s/ Floyd W. Kephart ------------------------------- FLOYD W. KEPHART, President THE EXECUTIVE: /s/ Herbert Hirsch ------------------------------- HERBERT B. HIRSCH -6- EX-10.240 5 dex10240.txt LOAN SECURITY AGREEMENT Exhibit No. 10.240 ------------------ Loan No. 95-227 FIRST AMENDMENT OF ------------------ AMENDED AND RESTATED -------------------- LOAN AND SECURITY AGREEMENT --------------------------- THIS FIRST AMENDMENT OF AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT dated as of this 20 day of December____, 2001 (this "Amendment") is made by and among HELLER FINANCIAL, INC., a Delaware corporation ("Lender"), and PREFERRED EQUITIES CORP., a Nevada corporation ("Borrower"). RECITALS -------- Borrower and Lender are parties to that certain Amended and Restated Loan and Security Agreement dated April 5, 2001 (the "Loan Agreement"), providing to Borrower a secured interval receivables credit facility in the amount of $30,000,000. Borrower and Lender desire to amend the terms and conditions of the Loan Agreement to provide for, among other things, an increase in the amount of the credit facility and the modification of the Interest Rate and certain other terms, covenants, conditions, representations and warranties as more particularly set forth herein or in the other Loan Documents executed or amended in connection herewith. Mego Financial Corp., a New York corporation ("Guarantor") shall guaranty all of the obligations of Borrower to Lender under the Loan Documents as amended hereby. All capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Loan Agreement, including the Appendix attached thereto. NOW, THEREFORE, in consideration of the foregoing premises and the agreements, provisions and covenants herein contained, Borrower and Lender hereby agree as follows: The Recitals set forth above are true and correct and incorporated herein by reference. The current outstanding principal balance of the Note is $26,329,566.21. In Section 1.5(b)(i) regarding Excess Outstandings, each reference to "$30,000,000.00" in the second sentence is hereby deleted and replaced with "Forty Million Dollars and No/100 ($40,000,000.00)." Section 1.6, Commitment Fee, is hereby deleted in its entirety and replaced with the following: Commitment Fee. The Commitment Fee has been fully earned by Lender. -------------- Borrower has agreed to pay Lender, in addition to amounts previously paid to Lender, an additional Commitment Fee in the amount of $125,000.00, $30,000.00 of which was paid on August 29, 2001, and the remainder of which shall be due and payable in the amount of $20,000.00 upon the date hereof, with the balance of $75,000.00 due and payable no later than forty-five (45) days after the date of this 1 Amendment. Borrower hereby authorizes Lender to advance $25,000.00 to itself at the time of each Advance hereunder until the Commitment Fee is fully paid and to advance to itself the full amount of any unpaid balance of the Commitment Fee which may be due and payable at the time of any Advance on or after the forty-fifth (45/th/) day after the date hereof. Section 4.12 is hereby inserted as follows: Pledge of Interest in Management Company. AB Preferred Holdings, Inc., ---------------------------------------- is an Affiliate of Borrower engaged in the management of the Resort and will enjoy a material economic benefit due to the making of the Loan, and Borrower's pledge of its equity ownership interests in AB Preferred Holdings, Inc. to Lender shall be deemed additional consideration for the making of the Loan to Borrower. Section 5.5(h) is hereby deleted in its entirety and replaced with the following: (h) Accounting for Defaulted Notes. All financial reporting for ------------------------------ Borrower shall incorporate either current charge-offs in the amount of the principal balance of Defaulted Notes (as defined below) or allowances equal to or greater than the principal balance of Defaulted Notes, in accordance with GAAP, where "Defaulted Notes" for purposes of this provision shall mean the principal balance, with respect to all of Borrower's operations, of all of Borrower's notes receivable given by purchasers of timeshare intervals and all notes receivable given by purchasers of parcels of land including, but not limited to, recreational vehicle lots, which are either ninety (90) days or more contractually delinquent or are properly deemed uncollectible by Borrower or Guarantor on the basis of the maker's bankruptcy, foreclosure on such note or other similar criteria. Section 5.7, Management, is hereby deleted in its entirety and replaced with the following: Management. The manager and the management contracts for the Resort ---------- shall at all times be satisfactory to Lender. Borrower has further pledged and created in favor of Lender a perfected security interest in a majority of all of the equity ownership of AB Preferred Holdings, Inc., a Florida corporation as the management entity by way of that certain Pledge Agreement of even date herewith. Borrower covenants to maintain the effectiveness of the Pledge Agreement at all times indebtedness is outstanding under the Loan or Lender is obligated to make Advances. For so long as Borrower controls the Timeshare Association for the Resort, and unless required by law, 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. At least two of the following individuals, unless replaced in a timely manner with others who are reasonably 2 acceptable to Lender who shall approve or reject a proposed replacement within thirty (30) days of written request, shall remain the principal officers of Borrower and the Resort manager and shall have authority to make all material business decisions: Jerome Cohen, Jon Joseph, Gregg McMurtie and Carol Sullivan. Sections 5.12 and 5.13 are hereby deleted in their entirety and replaced with the following, and Section 5.25 is inserted as follows: 5.12 Orlando Delinquency Rate. At all times Indebtedness is ------------------------ outstanding or Lender is obligated to make Advances, Borrower agrees to maintain the ratio of (i) the principal balance of all Notes Receivable, the principal balances of which are sixty (60) to eighty-nine (89) days delinquent to (ii) the principal balance of all Notes Receivable, determined in accordance with GAAP on a three (3) month rolling basis ("Orlando Delinquency Rate"), and calculated monthly pursuant to Section 5.5(a), in an amount not greater than 0.035:1 (3.5 percent). As of the date hereof, Borrower's Delinquency Rate is in the amount set forth on Schedule 5.8-13 attached hereto. 5.13 Overall Delinquency Rate. At all times Indebtedness is ------------------------ outstanding or Lender is obligated to make Advances, Borrower shall, with respect to all of its operations, maintain the ratio of (i) the aggregate principal balance of all notes receivable given by purchasers of timeshare intervals and all notes receivable given by purchasers of parcels of land including, but not limited to, recreational vehicle lots, the principal balances of which are sixty (60) to eighty-nine (89) days or more delinquent to (ii) the principal balance of all such foregoing notes receivable, determined in accordance with GAAP on a three (3) month rolling basis ("Overall Delinquency Rate"), and calculated monthly pursuant to Section 5.5(a), in an amount not greater than 0.035:1 (3.5 percent). As of the date hereof, the Overall Delinquency Rate is in the amount set forth on Schedule 5.8-.13 attached hereto. 5.25 Conveyance of Resort; Preparation of Cost Analysis. No later -------------------------------------------------- than July 1, 2002, Borrower shall transfer all of its right, title and interest in the Resort, the Units, the land described in Exhibit "B", the improvements thereon, all development rights, entitlements, permits, contracts, and any and all other property or collateral related thereto or securing this Loan to a special purpose, bankruptcy remote entity, directly or indirectly wholly owned by Borrower and pursuant to such documentation as Lender in its sole and absolute discretion may require, and in connection therewith Borrower shall cause the Guaranty and all other documents, instruments and agreements related to the Loan to be modified as required by Lender in its sole and absolute discretion to reflect the foregoing transfer and conveyance and the contractual rights and perfected interest of Lender in all collateral. In addition, no later than July 1, 2002, Borrower shall deliver to Lender a quantitative analysis in form and substance meeting Lender's approval in its sole and absolute discretion of the overall cost, without regard to which party may properly bear such expense, of installing all water, sewer and other utility services to every lot within each entire project in which any prospective plaintiff or class member under the matter styled as Henry et al. v. Preferred Equities Corporation, Case No. A414827, Nevada District Court, County of Clark, owns property. Section 9.9, Lender's Right to Provide Financing, is hereby deleted in its entirety. Section 9.11 is hereby inserted as follows: 3 9.11 UCC Financing Statements. To the extent permitted by law, Borrower hereby authorizes Lender to complete, file and record, without the requirement that Borrower join in the execution thereof, such UCC financing statements as may be required in Lender's judgment to perfect Lender's lien in any Collateral or other property in which a security interest is or has been granted hereunder or in any of the other Loan Documents. The definition of Availability in the Appendix is hereby deleted in its entirety and replaced with the following: Availability. At all times during the Revolving Period, the lesser of : $40,000,000.00 minus the sum of (i) Advances then outstanding, plus (ii) the then outstanding principal balance of the Acquisition Loan, plus (iii) the then outstanding principal balance of the Construction Loan; or an amount equal to 80% of the principal balance of Eligible Notes Receivable to be assigned to Lender in connection with any then current Advance; provided, however, that the percentage of the principal balance of Eligible Notes Receivable for which a Purchaser has made a cash down payment of at least twenty-five (25) percent of the actual purchase price of the Interval, and for which no part of such payment was made or loaned to Purchaser by Borrower or an Affiliate, and to be assigned to Lender in connection with any then current Advance shall be 85%. After expiration of the Revolving Period, Availability shall be zero ($0). The definition of Commitment Fee in the Appendix is hereby deleted in its entirety and replaced with the following: Commitment Fee. A loan commitment fee with respect to the Loan equal to $125,000.00, which is payable in accordance with Section 1.6. Effective on the date hereof, Subsection (u) of the definition of Eligible Note Receivable in the Appendix shall be deleted in its entirety and replaced with the following: (u) In addition to the foregoing eligibility criteria applicable to each Note Receivable, a sample shall be drawn by Lender from all the accounts submitted with each Request for Advance and in the event that either (i) the minimum score based on FICO guidelines falls below five hundred (500) (the "Minimum Credit Score"), (ii) more than five (5) percent of the accounts have a score based on FICO guidelines below five hundred fifty (550) or (iii) more than twenty (20) percent of the accounts have a score based on FICO guidelines below six hundred (600), Borrower shall submit the FICO score for each account which is the subject of the Request for Advance and Lender shall have the right to reject any and all accounts whose FICO score falls below the Minimum Credit Score and, in addition, to reject any and such other accounts as Lender may elect until all the foregoing FICO score criteria are satisfied. In the definition of Interest Rate in the Appendix, the reference to "four percent 4 (4.0%)" is hereby deleted and replaced with "four and one-half percent (4.50%)." In the definition of Loan in the Appendix, each reference to "Thirty Million and No/100 Dollars ($30,000,000.00)" is hereby deleted and replaced with "Forty Million and No/100 Dollars ($40,000,000.00)." The definition of Maximum Exposure in the Appendix is hereby deleted in its entirety and replaced with the following: Maximum Exposure. The positive remaining amount, if any, calculated by deducting the aggregate outstanding principal balance of the Acquisition and Construction Loan from the lesser of (a) $40,000,000.00 and (b) that percentage set forth below of the outstanding principal balance of all Financed Notes Receivable: as of the date of this Amendment: 84.5%, from the date of this Amendment until thirty (30) days thereafter: 83.5%, from the thirty-first (31/st/) day after the date of this Amendment until thirty (30) days thereafter: 82%, from the sixty-first (61/st/) day after the date of this Amendment until thirty (30) days thereafter: 81%, and beginning on the ninety-first (91/st/) day after the date of this Amendment and at all times thereafter: 80%; provided, however, that applicable percentage of the outstanding principal balance of Financed Notes Receivable shall at all times be eighty-five (85) percent for each Financed Note Receivable which originated as an Eligible Note Receivable for which a Purchaser made a cash down payment of at least twenty- five (25) percent of the actual purchase price of the Interval and for which no part of such payment was made or loaned to Purchaser by Borrower or an Affiliate. The definition of Timeshare Association in the Appendix is hereby deleted in its entirety and replaced with the following: Timeshare Association. The not-for-profit Florida corporations which are responsible for operating and maintaining the Resort pursuant to the terms of the Declaration. Section 3 of Schedule 3.2, Deliveries for all Advances, is hereby deleted in its entirety and replaced with the following: 3. The score based on FICO guidelines calculated on each account in a sample drawn by Lender from all the accounts submitted with each Request for Advance and, in the event that either (i) the minimum score based on FICO guidelines falls below five hundred (500) (the "Minimum Credit Score"), (ii) more than five (5) percent of the accounts have a score based on FICO guidelines below five hundred fifty (550) or (iii) more than twenty (20) percent of the accounts have a score based on FICO guidelines below six hundred (600), Borrower shall submit the FICO score for each account which is the subject of the Request for Advance and Lender shall have the right to reject any 5 and all accounts whose FICO score falls below the Minimum Credit Score and, in addition, to reject any and such other accounts as Lender may elect until all the foregoing FICO score criteria are satisfied. Schedule 4.5, List of Litigation Matters, is hereby deleted in its entirety and replaced with Schedule 4.5 attached hereto. Schedule 5.8-.13 is hereby deleted in its entirety and replaced with Schedule 5.8-.13 attached hereto. Exhibit "F", Permitted Exceptions, is hereby deleted in its entirety and replaced with Exhibit "F" attached hereto. Exhibit "H", Borrower's Debt, Liabilities and Obligations to any Affiliates of Borrower, is hereby supplemented with Exhibit "H" attached hereto. In connection with this Amendment, Borrower hereby certifies to Lender that (a) all of Borrower's representations, warranties, covenants and agreements contained in the Loan Agreement are true and correct and in full force and effect as of the date hereof, (b) as of the date hereof there are no Events of Default under the Loan Agreement and all other Loan Documents and there are no facts or conditions which but for the passing of time or the giving of notice would constitute an Event of Default, and (c) all of the Loan Documents as defined herein are in full force and effect. 6 Except as modified by this Amendment, all other terms and conditions of the Loan Agreement and other Loan Documents as amended, modified, restated or supplemented shall remain in full force and effect. Should Borrower currently be in default under the Loan Agreement, which default would not have existed if this Amendment were effective, such default is hereby waived. As consideration for, and as a mutual inducement to Lender entering into this Amendment, Borrower and Guarantor each hereby waive and release any and all claims, setoffs, counterclaims and defenses either has as of the date hereof with respect to this credit facility and performance by Lender under the Loan Documents, and each hereby acknowledge that Lender has fully performed all obligations and is not in default under the Loan Documents. Execution of this Amendment shall not be deemed to constitute a waiver or release by Lender of any its rights or remedies under the Loan Documents. This Amendment 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. IN WITNESS whereof the parties have executed this Amendment as of the date above. BORROWER: LENDER: PREFERRED EQUITIES CORPORATION, HELLER FINANCIAL, INC., a a Nevada corporation a Delaware corporation BY: /s/ Carol W. Sullivan BY: /s/ Dennis K. Holland ------------------------ ---------------------- Carol Sullivan Dennis K. Holland ------------------------ ---------------------- Print Name Print Name Its: Sr. V.P Its: Sr. V.P. ------------------------ ---------------------- APPROVED BY: GUARANTOR: MEGO FINANCIAL CORP., a New York corporation BY: /s/ Charles G. Baltuskonis --------------------------- Charles G. Baltuskonis --------------------------- Print Name Its: Sr. V.P --------------------------- 7 Schedule 4.5 Litigation Disclosure 8 Schedule 5.8-.13 Tangible Net Worth: $ 33,6854,000 - ------------------ Debt to Tangible Net Worth Ratio: 4.7:1 - --------------------------------- ------ EBITDA Ratio: 17.8 - ------------- ----- Total Interest Coverage Ratio: 1.52:1 - ------------------------------ ------- Orlando Delinquency Rate: _____ :1 ( 10.05%) - -------------------------- ------------ Overall Delinquency Rate: _____ :1 ( 8.57%) - -------------------------- ----------- 9 Exhibit "F" Permitted Exceptions 10 Exhibit "H" Borrower's Debt, Liabilities and Obligations to any Affiliates of Borrower None. 11 ASSIGNMENT AND ASSUMPTION AGREEMENT ----------------------------------- THIS ASSIGNMENT AND ASSUMPTION AGREEMENT is made and entered into this 20th day of December, 2001, by and between PREFERRED EQUITIES CORPORATION, a Nevada corporation (hereinafter referred to as "Assignor"); and AB PREFERRED HOLDINGS, INC., a Florida corporation ("Assignee"). W I T N E S S E T H: ------------------- WHEREAS, Assignor entered into that certain Management Agreement dated July 7, 1997 with RVS-Orlando Condominium Association, Inc., a Florida not-for-profit corporation, attached hereto as Exhibit "A" (the "Management Agreement"); and ----------- WHEREAS, Assignor has agreed to transfer and assign to Assignee all of Assignor's rights, title and interests in and to the Management Agreement; and WHEREAS, Assignee has agreed to assume all of Assignor's liabilities and obligations relating to or arising out of the Management Agreement following the Effective Date (as described in Paragraph 3 hereinbelow); and WHEREAS, the parties hereto desire to provide for the assignment of such rights, title and interests and the assumption of such liabilities and obligations in accordance with the terms contained herein. NOW, THEREFORE, in consideration of the foregoing premises and satisfaction of their respective obligations contained herein, the parties hereto hereby agree as follows: 1. Assignment. Assignor does hereby convey, sell, transfer, assign and ---------- deliver unto Assignee, its successors and assigns forever, all of its benefits, rights, title and interests in and to the Management Agreement. 2. Assumption of Obligations and Liabilities. Assignee hereby assumes and ----------------------------------------- agrees to satisfy and perform all of the liabilities and obligations of Assignor contained under the Management Agreement being assigned hereunder following the Effective Date hereof. Assignee shall indemnify and hold Assignor harmless from and against any losses, damages, expenses, liabilities, claims and suits which arise out of or relate to Assignee's failure to perform such obligations or satisfy such liabilities assumed by Assignee herein. 3. Effective Date. The effective date of the assignment and assumption of -------------- the Management Agreement set forth in Paragraphs 1 and 2 hereinabove is December 20, 2001 (the "Effective Date"). 4. Third Party Consents and Waivers. The Assignor agrees and undertakes -------------------------------- to secure any and all consents and waivers required by the Management Agreement, including 12 without limitation, the Consent to Assignment attached hereto as Exhibit "B", ---------- and the Assignor and Assignee agree to cooperate in obtaining any and all consents or waivers of third parties necessary to transfer to Assignee all duties, obligations, rights and benefits in and under the Management Agreement. 5. Further Assurances. Each party hereto shall from and after the date ------------------ hereof, upon the reasonable request of any other party hereto, execute and deliver such other documents as such other party may reasonably request to obtain the full benefit of this Assignment and Assumption Agreement. 6. Governing Law. This Assignment and Assumption Agreement shall be ------------- subject to, and construed and enforced in accordance with, the laws of the State of Florida without regard to principles of conflicts of law. IN WITNESS WHEREOF, Assignor and Assignee have executed this Assignment and Assumption Agreement as of the date first written above. ASSIGNOR: PREFERRED EQUITIES CORPORATION, a Nevada corporation By: s/s/ Carol W. Sullivan ----------------------- Name: Carol W. Sullivan ----------------- Title: Sr. V.P. -------- ASSIGNEE: AB PREFERRED HOLDINGS, INC., a Florida corporation By: s/s/ Victor McElroy ------------------- Name: Victor McElroy -------------- Title: President --------- 13 EXHIBIT "A" ----------- Management Agreement 14 EXHIBIT "B" ----------- Consent to Assignment 15 CONSENT TO ASSIGNMENT --------------------- RVS-Orlando Condominium Association, Inc. ("RVS-Orlando"), a Florida not- for-profit corporation, consents to the assignment by Preferred Equities Corporation, a Nevada corporation ("PEC"), to AB Preferred Holdings, Inc., a Florida corporation ("AB Preferred"), of the Management Agreement dated July 7, 1997 between PEC and RVS-Orlando. EXECUTED: _____12/20_______, 2001 WITNESSES: RVS-ORLANDO CONDOMINIUM ASSOCIATION, INC., a Florida not-for-profit corporation s/s/ Mark Prasse ---------------- Print Name: Mark Prasse By: s/s/ Gregg A. McMurtrie ---- ------ ----------------------- Name: Gregg A. McMurtrie ------------------ S/s/ Syonja Gustafson - ---------- ---------------- Title: President --------- Print Name: Syonja Gustafson ---------------- 16 PLEDGE AGREEMENT ---------------- THIS PLEDGE AGREEMENT (the "Pledge Agreement") is made and entered into this 20 day December of 2001, by and between PREFERRED EQUITIES CORPORATION, a Nevada corporation located at 4310 Paradise Road, Las Vegas, Nevada 89109 (hereinafter referred to as the "Pledgor"); and HELLER FINANCIAL, INC., a Delaware corporation, located at 500 West Monroe Street, 30th Floor, Chicago, Illinois 60661 (hereinafter referred to as the "Secured Creditor"). W I T N E S S E T H: ------------------- WHEREAS, the Pledgor and the Secured Creditor entered into that certain Interval Receivables Loan and Security Agreement dated as of March 28, 1996, as amended by that certain Interval Receivables Loan and Security Agreement dated December 23, 1997, that certain Second Amendment to Interval Receivables Loan and Security Agreement dated July 7, 1998, that certain Amendment No. 2 to Interval Receivables Loan and Security Agreement dated March 1, 1999, that certain Fourth Amendment to Interval Receivables Loan and Security Agreement dated December 22, 1999 and that certain Amended and Restated Loan and Security Agreement dated April 5, 2001 (the "Receivables Loan Agreement"), and that certain Acquisition and Construction Loan Agreement dated March 27, 1996, as amended by that certain Amendment to Acquisition and Construction Loan Agreement dated December 23, 1997, that certain Second Amendment to Acquisition and Construction Loan Agreement dated July 7, 1998, that certain Third Amendment to Acquisition and Construction Loan Agreement dated December 22, 1999, that certain Fourth Amendment to Acquisition and Construction Loan Agreement dated September 7, 2000 and that certain Amended and Restated Acquisition and Construction Loan Agreement dated April 5, 2001 (the "Construction Loan Agreement", which together with the Receivables Loan Agreement are collectively referred to as the "Loan and Security Documents") (as amended, modified, supplemented or restated from time to time, the Loan and Security Documents, the notes as provided in and relating to the Loan and Security Agreements, and all other documents relating to the Loans collectively referred to herein as the "Loan Agreements"), providing for the availability of credit (the "Loans") to the Pledgor upon the terms and conditions set forth therein; and WHEREAS, the Secured Creditor and the Pledgor desire to further amend and modify the terms of the Loan Agreements, as set forth under that certain First Amendment of Amended and Restated Loan and Security Agreement and that certain First Amendment of Amended and Restated Acquisition and Construction Loan Agreement, all of which are dated of even date herewith (the "First Amendments"); and WHEREAS, the Pledgor is a sole shareholder of AB Preferred Holdings, Inc., a Florida corporation (the "Company"), and the Pledgor and the Company will derive financial and other benefits from the ongoing lending relationship between the Secured Creditor and the Pledgor; and 17 WHEREAS, the Pledgor is and shall be at all times during the term of this Pledge Agreement the sole legal and beneficial owner of all of the outstanding shares of capital stock (constituting all equity interest and voting rights) of the Company; and WHEREAS, pursuant to that certain Assignment and Assumption Agreement dated December 20, 2001 (the "Assignment Agreement"), the Company assumes all of the Pledgor's rights, benefits, interests and obligations under that certain Management Agreement dated July 7, 1997 between the Pledgor and RVS-Orlando Condominium Association, Inc., a Florida not-for-profit corporation (the "RVS- Orlando I Management Agreement"); and WHEREAS, the Company entered into that certain Management Agreement between the Company and RVS-Orlando II Condominium Association, Inc., a Florida not-for- profit corporation, effective November 5, 2001 (the "RVS-Orlando II Management Agreement", which together with the RVS-Orlando I Management Agreement are collectively referred to as the "Management Agreements"); and WHEREAS, pursuant to the Management Agreements and the Assignment Agreement the Company is the Manager of the Resort (as defined in the Amended and Restated Loan and Security Agreement dated April 5, 2001) which is being developed by the Pledgor; and WHEREAS, it is in the best interest of the Pledgor to enter into this Pledge Agreement; and WHEREAS, it is in the best interest of the Company to execute the Joinder by Company hereto; and WHEREAS, as a condition, among other things, to the amendment and modification of Loans under the Loan Agreements, the Secured Creditor required and the Pledgor has agreed, by executing and delivering this Pledge Agreement, to secure the payment in full of the Pledgor's obligations under the Loan Agreements. NOW, THEREFORE, in consideration of the mutual premises contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. DEFINITIONS. As used in this Pledge Agreement, the following terms and ----------- conditions shall have the meanings set forth below: "1933 Act" shall mean the Securities Act of 1933, as amended. -------- "1934 Act" shall mean the Securities Exchange Act of 1934, as amended. -------- "Blank Stock Power" shall mean a blank stock power in form and substance ----------------- acceptable to the Secured Creditor executed by the Pledgor and delivered to the Secured Creditor for each Stock Certificate. "Collateral" shall mean One Thousand (1,000) shares of Common Stock and all ---------- 18 additional Shares issued in regard thereto as a result of any stock dividend, stock split, etc., and all other Shares owned at any time by the Pledgor, whether acquired from the Company or by gift, purchase or otherwise from any other person whatsoever. "Common Stock" shall mean all of the issued and outstanding common stock of ------------ the Company, par value of $0.01 per share. "Distributions" shall mean any and all present and future payments by the ------------- Company to the Pledgor whether in the form of dividends, liquidation payments, profit-sharing payments or any other distribution related to the Shares, any interest of the Pledgor in the Company, or the sale, transfer or conveyance of any real or personal property owned by the Company. "Event of Default" shall mean the occurrence of a default under paragraph ---------------- 4. "Liability" or "Liabilities" shall mean each and all of the following: --------- ----------- (a) Principal and interest and all other monies due or to become due under any of the Loan Agreements, as the same may be amended, changed, modified or renewed from time to time. (b) All other monies (in addition to principal and interest) due or to become due to the Secured Creditor from the Pledgor including, but not limited to, all indemnities, costs and expenses including attorney's fees which the Secured Creditor is entitled or permitted for any reason whatsoever to recover under any statute or promissory note or agreement by the Pledgor in favor of the Secured Creditor in connection with the Loans, including, but not limited to, the Loan Agreements. As used herein and elsewhere in this Pledge Agreement, costs and expenses, including attorney's fees, shall include costs and expenses incurred by the Secured Creditor in proceeding against the Collateral or against the Pledgor and shall include costs and expenses, including attorney's fees, which the Secured Creditor may incur or become liable for as a result of enforcing any of its rights and privileges under this Pledge Agreement or of any of the Loan Agreements, whether in any initial suit or an appeal therefrom. (c) All future advances, if any, made by the Secured Creditor to the Pledgor; provided, however, the Secured Creditor shall not by virtue of this Pledge Agreement be obligated to make any such future advances to the Pledgor. However, if, after the date of this Pledge Agreement, the Secured Creditor does advance monies to the Pledgor, said advances shall be presumed to be future advances under the provisions of this paragraph such that such future advances shall be secured by the Collateral under this Pledge Agreement. "Rule 144" shall mean Rule 144 as promulgated by the SEC under the 1933 -------- Act, as amended from time to time. "SEC" shall mean the Securities and Exchange Commission. --- "Shares" shall mean the shares of Common Stock. ------ "Stock Certificate(s)" shall mean the stock certificate(s) representing -------------------- Shares in which the 19 Secured Creditor has been granted a security interest under this Pledge Agreement which constitute Collateral. "UCC" shall mean the applicable Uniform Commercial Codes of the State of --- Florida and the State of Nevada, as the same may now exist or may hereafter be amended from time to time. 2. GRANT OF SECURITY INTEREST. To secure the payment of all Liabilities -------------------------- to the Secured Creditor, the Pledgor does hereby pledge, assign and grant to the Secured Creditor a security interest in all of the Collateral. By executing and delivering this Pledge Agreement, the Pledgor hereby consents to the transfer by Secured Creditor of ownership of the Shares upon the foreclosure sale thereof effected in accordance with the terms and conditions of this Pledge Agreement. 3. REPRESENTATIONS, WARRANTIES AND COVENANTS. The Pledgor does hereby ----------------------------------------- represent and warrant to and covenant with the Secured Creditor as follows: (a) That the Pledgor is the absolute and sole legal, record and beneficial owner of, or at the time pledged hereunder will have, good and marketable title to, the Collateral pledged hereunder by the Pledgor, free and clear of all liens and security interests whatsoever except the security interest granted the Secured Creditor by this Pledge Agreement, and no person or person other than the Secured Creditor has any type of interest, claim or lien whatsoever upon the Collateral and during the term of this Pledge Agreement the Pledgor shall not grant to any person other than the Secured Creditor any claim, interest or lien whatsoever in the Collateral. (b) That the Pledgor will defend the Collateral against the claims and demands of all persons at any time claiming the same or any interest therein. (c) That by virtue of this Pledge Agreement and delivery of the Stock Certificate(s) and Blank Stock Power(s) to the Secured Creditor, the Secured Creditor has a valid, enforceable, perfected and first security interest in the Collateral. (d) That there is not now and will not be filed in the future any financing statement listing any person other than the Secured Creditor as a secured party covering any or all of the Collateral. (e) That the Pledgor will not permit any liens or security interests other than the Secured Creditor's security interest to attach to any of the Collateral, permit any of the Collateral to be levied upon under legal process, sell, transfer, convey, or otherwise dispose of any of the Collateral or any interest therein or offer to do so, without the prior written consent of the Secured Creditor, or permit anything to be done that may impair the value of any of the Collateral (except any loss of value attributable to fluctuation in the market price thereof) or the security intended to be afforded by this Pledge Agreement. (f) That the Pledgor will pay promptly when due all taxes and assessments upon the Collateral. 20 (g) That at its option, the Secured Creditor may discharge taxes, liens or security interests or encumbrances at any time levied upon or placed on the Collateral and to the extent the Secured Creditor elects to do so, the Pledgor agrees to immediately reimburse the Secured Creditor on demand for any such payments made or any expenses incurred by the Secured Creditor together with interest hereon at the highest rate permitted by law. (h) That the Pledgor will immediately notify the Secured Creditor if the Company suffers or permits any substantial or material changes in control or management or the Management Agreements, or ceases to be the Manager of the Resort or suffers or experiences any material adverse financial change; provided, however, this shall not apply to any adverse financial changes resulting from changes in market value of the Collateral. (i) That the Collateral was acquired by the Pledgor on August 14, 2001, and, as of and by said date, the full purchase price for the Collateral was paid by the Pledgor, and the "holding period" for the Collateral within the meaning of Rule 144 commenced on said date. (j) That in the event the Pledgor subsequently acquires any additional Shares of the Company whether than by way of stock dividend, stock split, etc., or by gift, purchase or otherwise from any third party, that it will immediately deliver the Stock Certificate(s) for said additional Shares along with Blank Stock Power(s) therefor to the Secured Creditor and said Shares shall be deemed to be within the term "Collateral" and subject to the terms and conditions of this Pledge Agreement; provided, however, this clause shall not, of itself, authorize the issuance by the Company of any additional Shares. (k) That in the event the Secured Creditor is entitled to dispose of the Collateral under this Pledge Agreement, the Pledgor shall, at the request of the Secured Creditor, execute and file all forms required to be filed under Rule 144 with the SEC and, upon the failure of any Pledgor to do so, such Pledgor does hereby designate and appoint the Secured Creditor as its attorney-in-fact to execute in the name of the Pledgor all appropriate forms to be filed under Rule 144. (l) That the Pledgor owns the Collateral and the Collateral constitutes one hundred percent (100%) of all the outstanding Common Stock of the Company and shall at all times during the term of the Pledge Agreement represent one hundred percent (100%) equity and ownership interest and one hundred percent (100%) voting interest of the Company. (m) That the Pledgor owns One Thousand (1,000) Shares, and all such Shares owned by the Pledgor and delivered to the Secured Creditor as Collateral constitute one hundred percent (100%) of the total outstanding capital stock of the Pledgor and, throughout the term of this Pledge Agreement, the Shares which have been delivered to the Secured Creditor as Collateral under this Pledge Agreement shall not constitute less than one hundred percent (100%) of the issued and outstanding capital stock of the Company. (n) That the Pledgor shall not enter into any stock restriction or similar agreement with respect to the Collateral or any voting trust agreement which applies to the Collateral without the prior written consent of the Secured Creditor. 21 (o) That the "Whereas" recitals above are true and correct and are made a part hereof. All of the foregoing representations, warranties and covenants shall be true and correct throughout the term of this Pledge Agreement and shall be fulfilled and maintained by the Pledgor throughout the term hereof. 4. DEFAULT. The occurrence and continuance of one or more of the ------- following events shall constitute an Event of Default in this Pledge Agreement: (a) The failure or omission of Pledgor to pay within five (5) days of the date when due any Liability, including but not limited to, the failure to pay when due any payment of interest and/or principal of the Loan Agreements. (b) Pledgor or the Company shall fail to perform or observe any covenant, agreement or obligation contained in this Pledge Agreement or in any of the Loan Agreements (other than any covenant or agreement obligating Pledgor to pay the Liabilities), and such failure shall continue for thirty (30) days after Secured Creditor deliver written notice thereof to Pledgor, provided, however, if the failure is incapable of cure within such thirty (30) day period and Pledgor shall be diligently pursuing a cure, such thirty (30) day cure period shall be extended by an additional period not to exceed sixty (60) days. (c) The making or furnishing by Pledgor to the Secured Creditor of any representation, warranty or covenant in connection with this Pledge Agreement which is false or misleading in any material respect as of the date hereof. (d) A petition under any Chapter of Title 11 of the United States Code or any similar law or regulation is filed by or against Pledgor, the Company 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 Resorts then owned by Pledgor is appointed, or Pledgor, the Company or Guarantor makes an assignment for the benefit of creditors, or any of them are adjudged insolvent by any state or federal court of competent jurisdiction, or any of them admit their insolvency or inability to pay their debts as they become due or an attachment or execution is levied against any of the Resorts then owned by Pledgor. (e) The issuance, filing or levy against Pledgor, the Company or Guarantor of one or more attachments, injunctions, executions, tax liens or judgments for the payment of money cumulatively in excess of fifty thousand dollars ($50,000.00) which is not discharged in full or stayed within thirty (30) days after issuance or filing. (f) An Event of Default under the terms and conditions of any document, instrument or agreement executed by Pledgor in favor of the Secured Creditor in connection with the Loans including, but not limited to, the Loan Agreements and any other loan agreement or security agreement relating thereto. (g) The dissolution, merger or consolidation, or transfer of a substantial part 22 of the property of Pledgor (other than the sale of inventory in the ordinary course of business). (h) Pledgor becomes unable to pay debts as they mature. (i) Either of the Management Agreements is terminated or modified in any material respect without the Secured Creditor's written consent or the Pledgor is in material default (after the expiration of applicable cure periods) under any of the Management Agreements. 5. RIGHTS UPON DEFAULT. Upon the occurrence and continuance of any Event ------------------- of Default, the Secured Creditor shall have and may exercise any or all of the following rights (all of which rights shall be cumulative); provided, however, the Secured Creditor shall be under no duty or obligation to do so: (a) to receive all Distributions and any other amounts payable in respect of the Collateral otherwise payable under paragraph 8 below to the Pledgor; (b) To exercise from time to time any and all rights and remedies of a secured party under the UCC and any and all rights and remedies available to it under any other applicable law. (c) To dispose of the Collateral under the UCC and, in such case, if any notice is required under the UCC, the giving of five (5) days written notice to the Pledgor as set forth in paragraph 11 hereof shall constitute reasonable notice to the Pledgor provided, however, that this Pledge Agreement and this subparagraph (c) shall not, of itself, require the giving of any such written notice. (d) To declare the Liabilities secured hereby, or any of them (notwithstanding any provision thereof), immediately due and payable without demand or notice of any kind and the same thereupon shall immediately become due and payable without demand or notice, and from and after the date of default the amount due on the Liabilities shall from and thereafter bear interest at the Default Rate as defined in the Receivables Loan Agreement. (e) To immediately offset against the Liabilities all other monies due or to become due Pledgor from the Secured Creditor. (f) To exercise any other remedies available to the Secured Creditor under applicable law or any other agreement. (g) All proceeds resulting from the disposition of any of the Collateral shall be applied without marshalling of assets (i) first to the expenses of retaking and preparing the Collateral for sale including expenses of sale, (ii) next to other costs and attorneys' fees incurred by the Secured Creditor in exercising its rights under this Pledge Agreement, (iii) next to the payment of interest and/or principal due on the Liabilities, as the Secured Creditor may determine, and (iv) finally to any other moneys due the Secured Creditor from Pledgor . (h) To make demand upon the Company to make directly to the Secured 23 Creditor all payments with respect to the Shares such as, for example, dividends, liquidation payments, etc. Further, the Secured Creditor shall have the right, but not the duty, to thereafter exercise all rights with respect to voting privileges for the Shares and upon notice from the Secured Creditor, the Pledgor shall no longer exercise any voting rights with respect to the Shares, or if so directed by the Secured Creditor, shall vote the Shares as directed by the Secured Creditor. The exercise by the Secured Creditor of any of its rights hereunder with respect to the voting of the Shares shall not constitute in any way an election by the Secured Creditor to become owner of the Shares and until such time as the Secured Creditor has so exercised its rights hereunder, the Pledgor shall be entitled to exercise all voting privileges with respect to the Shares. 6. PURCHASE OF COLLATERAL. Upon any sale of any Collateral by the Secured ---------------------- Creditor hereunder (whether by virtue of the power of sale herein granted, pursuant to judicial process or otherwise), the receipt of the Secured Creditor or the officer making the sale shall be a sufficient discharge to the purchaser or purchasers of the Collateral so sold, and such purchaser or purchasers shall not be obligated to see to the application of any part of the purchase money paid over to the Secured Creditor or such officer or be answerable in any way for the misapplication or nonapplication thereof. 7. INDEMNIFICATION. To the extent permitted by law, in no event shall the --------------- Secured Creditor be liable for any matter or thing in connection with this Pledge Agreement other than to account for moneys actually received by it in accordance with the terms hereof and except for fraud, gross negligence, willful misconduct or violation of law. 8. DIVIDENDS AND OTHER DISTRIBUTIONS. Unless an Event of Default shall --------------------------------- have occurred and be continuing, all Distributions payable in respect of the Collateral may be paid to the Pledgor. Nothing contained in this paragraph 8 shall limit or restrict in any way the Secured Creditor's right to a security interest in proceeds of the Collateral in any form in accordance with paragraph 2. All Distributions or other payments that are received by the Pledgor in violation of the provisions of this paragraph 8 and paragraph 5 herein shall be received in trust for the benefit of the Secured Creditor, shall be segregated from other property or funds of the Pledgor and shall be forthwith paid over to the Secured Creditor as Collateral in the same form as so received. 9. PERFECTION. In order to perfect the security interest in the ---------- Collateral granted to the Secured Creditor by the Pledgor hereunder, the Pledgor shall simultaneously with the execution of the Pledge Agreement deliver possession of the Stock Certificate(s) for the Collateral and Blank Stock Power(s) therefor to the Secured Creditor. The Pledgor further agrees from time to time to execute and deliver to the Secured Creditor any and all documents which are, in the opinion of the Secured Creditor or its counsel, necessary to perfect said security interest. To the extent any Pledgor subsequently acquires any additional Shares which are not already pledged to the Secured Creditor, such Pledgor shall promptly deliver to the Secured Creditor the Stock Certificate(s) and Blank Stock Power(s) for said Shares and the Shares 24 shall be deemed to be within the definition of the term "Collateral". 10. POSSESSION OF COLLATERAL. The Secured Creditor shall have no duties ------------------------ or obligations whatsoever to exercise or preserve rights in regard to the Collateral as against any third parties and the sole duty of the Secured Creditor shall be the reasonable preservation of the physical Collateral itself. By way of illustration and not limitation, the Secured Creditor shall have no duty or obligation whatsoever to maintain any market value for the Collateral. Upon the termination of this Pledge Agreement, the Secured Creditor shall return the Collateral (including the Stock Certificate(s) and the Blank Stock Power(s)) to the Pledgor along with such endorsements as may be necessary to transfer title to the Collateral to the Pledgor; provided, however, the transfer shall be without recourse and the Secured Creditor shall make no representations or warranties whatsoever in regard to said transfer. 11. NOTICE. All notices shall be in writing and delivered to the person ------ to whom the notice is directed, either (i) in person, (ii) by U.S. Mail, as registered or certified item with return receipt requested, (iii) delivered by delivery service, or (iv) sent by facsimile, telex or telecopy. Notices delivered by mail shall be deemed to be given when deposited in a post office or other depository under the care or custody of the United States Postal Service, enclosed in a wrapper, addressed properly with proper postage affixed. All notices shall be addressed as follows: To Secured Creditor: HELLER FINANCIAL, INC. Vacation Ownership Finance 500 West Monroe Street, 30/th/ Floor Chicago, Illinois 60661 Attn: Portfolio Manager, Loan No. 95-227 Fax: (312) 441-7924 And copy to: Heller Financial, Inc. Real Estate Financial Services Attn: Group General Counsel 500 West Monroe Street, 15/th/ Floor Chicago, Illinois 60661 Loan No. 95-227 Fax: (312) 441-7872 And copy to: Baker & Hostetler LLP P.O. Box 112 Orlando, Florida 32802-0112 Attn: Rosemary O'Shea, Esq. Fax: 407-841-0168 To Pledgor: Preferred Equities Corporation 4310 Paradise Road Las Vegas, Nevada 89109 Attn: s/s/ Jon Joseph ------------------- 25 Fax: 702-369-3194 ------------ 12. FURTHER ASSURANCES; SECURED CREDITOR AS ATTORNEY-IN-FACT, SECURED ----------------------------------------------------------------- CREDITOR MAY PERFORM. - -------------------- (a) Pledgor agrees that it will join with the Secured Creditor to execute and, at its own expense, file and refile under any applicable Uniform Commercial Code such financing statements, continuation statements, Blank Stock Powers, all necessary forms for filing with the SEC under Rule 144 (if applicable), and other documents and instruments in such offices as the Secured Creditor may reasonably deem necessary or appropriate, or wherever required or permitted by law in order to perfect and preserve the Secured Creditor's security interest in the Collateral, and hereby authorizes the Secured Creditor to file financing statements and amendments thereto relating to all or any part of the Collateral without the signature of the Pledgor, as applicable, where permitted by law, and agrees to do such further acts and things and to execute and deliver to the Secured Creditor such additional assignments, agreements and other instruments as the Secured Creditor may reasonably require or deem advisable to carry out the purposes of this Pledge Agreement or to further assure and confirm unto the Secured Creditor its rights, powers and remedies hereunder. (b) Pledgor hereby irrevocably appoints the Secured Creditor its lawful attorney-in-fact, with full authority in the place of the Pledgor and in the name of the Pledgor, the Secured Creditor or otherwise, to endorse in the Pledgor's name all checks, drafts and other instruments representing or constituting payments made on the Collateral, and upon the occurrence and during the continuance of an Event of Default, with full power of substitution from time to time in the Secured Creditor's reasonable discretion to take any action and to execute any instrument that the Secured Creditor may reasonably deem necessary or advisable to accomplish the purpose of this Pledge Agreement, including, without limitation: (i) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (ii) to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clause (i) above; and (iii) to file any claims or take any action or institute any proceedings that the Secured Creditor may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Secured Creditor with respect to any of the Collateral; and, in the case of each of clauses (i), (ii), and (iii) above, the Secured Creditor shall use its best efforts to give the Pledgor notice of any action taken by it in accordance with this paragraph as soon as practicable before such action is taken; provided, however, that the failure to give any such notice -------- ------- shall not in any way impair the authority of the Secured Creditor pursuant to this paragraph or the validity of any action taken by the Secured Creditor pursuant hereto, or result in any liability on the part of the Secured Creditor to the Pledgor. The exercise by the Secured 26 Creditor of any of its rights pursuant to this paragraph shall not create any further obligation on the part of the Secured Creditor to exercise any other rights hereunder or to take any other or further action in respect thereof. The power of attorney granted under this paragraph, being coupled with an interest, is irrevocable for so long as this Pledge Agreement shall be in effect. (c) If Pledgor fails to perform any agreement contained herein after written request to do so by the Secured Creditor, the Secured Creditor may itself perform, or cause performance of, such agreement, and the reasonable expenses so incurred in connection therewith shall be payable by the Pledgor. 13. TERM. This Pledge Agreement and the rights and privileges granted ---- hereunder to the Secured Creditor shall continue and remain in full force and effect until all Liabilities have been paid in full to the Secured Creditor and this Pledge Agreement has been marked "Canceled" by the Secured Creditor and returned to the Pledgor. Upon the full payment of all Liabilities and the performance of all obligations under the Loan Agreements and the Pledge Agreement by Pledgor and, if an Event of Default has not occurred and is continuing, the Secured Creditor shall execute and deliver UCC-3 termination statement(s) (to the extent necessary) at the expense of the Pledgor and mark this Pledge Agreement "Canceled" and return same along with the Collateral to the Pledgor. 14. TIME. Time is of the essence of this Pledge Agreement. ---- 15. WAIVER. No waiver by the Secured Creditor of any default shall ------ operate as a waiver of any other default or of the same default on a future occasion. No delay or omission on the part of the Secured Creditor in exercising any right or remedy shall operate as a waiver thereof, and no single or partial exercise by the Secured Creditor of any right or remedy shall include any other or further exercise thereof or the exercise of any other right or remedy. Except as provided herein or in any loan document to the contrary, the Pledgor further waives all notices whatsoever that the Pledgor may be entitled to under any contract or statute including presentment, notice of dishonor, protest or notice of protest. 16. MISCELLANEOUS. The provisions of this Pledge Agreement are cumulative ------------- and are in addition to the provisions of the Loan Agreements secured by this Pledge Agreement and the Secured Creditor shall have all the benefits, rights and remedies under the Loan Agreements secured hereby. All rights of the Secured Creditor hereunder shall inure to the benefits of its successors and assigns and all duties or obligations of the Pledgor hereunder shall bind the heirs, executors, administrators, successors and assigns of the Pledgor. 17. GOVERNING LAW. This Pledge Agreement has been delivered in the State ------------- of Florida and shall be construed and interpreted in accordance with and governed by the laws of Florida (without regard to the conflict of laws provisions thereof). 18. SEVERABILITY. Whenever possible, each provision of this Pledge ------------ Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Pledge Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating 27 the remainder of such provision or the remaining provisions of this Pledge Agreement. 19. NO THIRD PARTY BENEFICIARIES. This Pledge Agreement is solely between ---------------------------- the Pledgor and the Secured Creditor, as joined by the Company in respect to the obligations of the Company as set out in the Joinder By Company, and no persons other than the Pledgor and the Secured Creditor shall have any rights hereunder, either as third party beneficiaries or otherwise. 20. COSTS AND ATTORNEYS FEES. The Pledgor agrees (a) to pay or reimburse ------------------------ the Secured Creditor for any and all reasonable and customary out-of-pocket costs and expenses incurred in connection with the preparation, negotiation, execution, and delivery of, and amendment, supplement, or modification to, or waiver or consent under, this Pledge Agreement, and the consummation of the transactions contemplated hereby; (b) to pay or reimburse the Secured Creditor for all of its costs and expenses incurred in connection with administration, collection, enforcement or preservation of any rights under either of the Loan Agreements and this Pledge Agreement including, without limitation, the fees and disbursements of counsel for the Secured Creditor, including attorneys' fees, out of court, in trial, on appeal, in bankruptcy proceedings, or otherwise; and (c) to pay, indemnify, and hold the Secured Creditor harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance, and administration of the Loan Agreements and this Pledge Agreement other than those resulting solely from its own willful misconduct or gross negligence. This paragraph shall survive the execution of this Pledge Agreement and will continue to remain in force and effect even after all obligations of the Pledgor under the Loan Agreements and this Pledge Agreement are satisfied. 21. COMPLETE AGREEMENT. This Pledge Agreement constitutes the complete ------------------ agreement between the parties and incorporates and sets forth all prior discussions, agreements and representations between the parties in regard to the matters set forth herein and this Pledge Agreement may not be altered, amended or otherwise modified except by a writing signed by the person to be charged by said alteration, amendment or modification. This requirement that this Pledge Agreement may not be altered, amended or modified except by a writing, may not itself be waived except by a writing. 22. COUNTERPARTS. This Pledge Agreement may be executed in any number of ------------ counterparts and by different parties hereto in separate counterparts, each of which, when so executed and delivered, shall be an original, but all of which shall together constitute one and the same instrument. 23. EFFECTIVE DATE. This Pledge Agreement shall be effective as of -------------- December 20, 2001. - ----------------- [SIGNATURES ON FOLLOWING PAGE] 28 IN WITNESS WHEREOF, the parties hereto have executed this Pledge Agreement as of the date and year first above written. WITNESSES: PLEDGOR: /s/ Mark Prasse PREFERRED EQUITIES CORPORATION, a -------------------------- Nevada corporation Mark Prasse -------------------------- Print Name By: /s/ Carol W. Sullivan -------------------------- /s/ Syonja Gustafson Name: Carol W. Sullivan -------------------------- -------------------------- Print Name Its: Sr. V.P -------------------------- Interest in Pledgor: 100% Capital Stock Ownership SECURED CREDITOR: /s/ Angela M. Fabus HELLER FINANCIAL, INC., a Delaware -------------------------- corporation Angela M. Fabus -------------------------- Print Name By: /s/ Dennis K. Hollard -------------------------- /s/ Adrienne Stephens Name: Dennis K. Hollard -------------------------- -------------------------- Print Name Title: Sr. V.P. -------------------------- 29 JOINDER BY COMPANY ------------------ AB PREFERRED HOLDINGS, INC., a Florida corporation whose principal address is 4310 Paradise Road, Las Vegas, Nevada 89109 ("the Company"), being the issuer of the Collateral as defined in paragraph 1 of this Pledge Agreement does hereby state to and agree with the Secured Creditor as follows: 1. That the Collateral is shown on the books of the Company as being owned by the Pledgor. 2. That to the best knowledge of the Company, there are no restrictions on the granting to the Secured Creditor by the Pledgor of a security interest in the Collateral as set forth in this Pledge Agreement. 3. That the percentages and number of Shares set forth in subparagraphs 3(l) and 3(m) of the Pledge Agreement regarding the total number of shares of Common Stock owned by the Pledgor pledged hereunder and the percentage ownership of the total issued and outstanding Common Stock of the Company represented by the Collateral are, as of the date hereof, true and correct. 4. That during the term of this Pledge Agreement, the Company shall not, without the prior written consent of the Secured Creditor, issue any additional shares of capital stock of any form whatsoever by way of stock dividend, stock split, outright sale or for any other reason whatsoever. 5. That during the term of the Pledge Agreement, the Company agrees, if applicable, to promptly and completely file all reports required to be filed under the 1934 Act such that all current public information as defined in Rule 144 is available. 6. That the Company will use its best efforts to cooperate in good faith with the Secured Creditor to release any restrictions on the Stock Certificates for the Collateral as and when permitted under the 1933 Act. The Pledgor agrees at its expense to file whatever forms, statements or documents which are necessary with the SEC and other regulatory agencies so that any legend and/or other restrictions associated with the Collateral may be cleared or released as soon as possible. It is understood all applicable laws must be complied with by the Pledgor. The Pledgor will furnish to the Secured Creditor such documents and information as required by Secured Creditor to determine the necessary holding period under Rule 144 for each and every share of the Collateral. [SIGNATURE ON FOLLOWING PAGE] 30 IN WITNESS WHEREOF, the Company has executed this Joinder to this Pledge Agreement this 20 day of December, 2001. Signed, sealed and delivered in the presence of: /s/ Mark Prasse AB PREFERRED HOLDINGS, INC., a --------------------- Florida corporation Mark Prasse --------------------- Print Name By: /s/ Victor McELroy ----------------------- /s/ Syonja Gustafson Name: Victor McElroy --------------------- ----------------------- Title: President ----------------------- Syonja Gustafso --------------------- Print Name (CORPORATE SEAL) 31 Loan No. 95-227 THIS AMENDED, RESTATED AND INCREASED RECEIVABLES PROMISSORY NOTE NO. 2 AMENDS AND RESTATES IN ITS ENTIRETY AND INCREASES THE PRINCIPAL AMOUNT OF THAT CERTAIN FIRST AMENDMENT AND RESTATEMENT OF AMENDED, RESTATED AND INCREASED RECEIVABLES PROMISSORY NOTE NO. 1 DATED APRIL 5, 2001, IN THE ORIGINAL PRINCIPAL AMOUNT OF $30,000,000.00, THE ORIGINAL OF WHICH IS ATTACHED HERETO. AMENDED, RESTATED AND INCREASED RECEIVABLES PROMISSORY NOTE NO. 2 $40,000,000.00 12/20, 2001 THIS AMENDED, RESTATED AND INCREASED RECEIVABLES PROMISSORY NOTE NO. 2 amends and restates in its entirety and increases the principal amount of the following described promissory note as described in that certain Amended and Restated Loan and Security Agreement dated April 5, 2001 as amended by that certain First Amendment of Amended and Restated Loan and Security Agreement of even date herewith (the "Receivables Loan Agreement"), made by Preferred Equities Corporation, a Nevada corporation, to Heller Financial, Inc.: that certain First Amendment and Restatement of Amended, Restated and Increased Receivables Promissory Note No. 1 dated April 5, 2001, in the principal amount of $30,000,000.00; (the "Original Note"). Pursuant to that certain First Amendment of Amended and Restated Loan and Security Agreement between Holder and Maker of even date herewith, Maker hereby executes and delivers to Holder this Amended, Restated and Increased Receivables Promissory Note No. 2 which amends, restates and increases the principal amount of the Original Note, as follows: 1. Promise to Pay. -------------- FOR VALUE RECEIVED, PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Maker") whose address is 4310 Paradise Road, Las Vegas, Nevada 89109, promises to pay to the order of HELLER FINANCIAL, INC., a Delaware corporation, and its successors and assigns ("Holder"), in lawful money of the United States of America and in immediately available funds, the aggregate unpaid principal amount of all Advances made by Holder to Maker (the "Loan") pursuant to the Receivables Loan Agreement. This is a revolving Note, the principal amount of which may increase or decrease from time to time during the term hereof. This Note shall evidence Advances made under the Receivables Loan Agreement, notwithstanding that the total aggregate of principal advances and repayments exceed the original maximum principal amount hereof, and notwithstanding that the principal balance may be zero at any time. Payments shall be made to Holder at 500 West Monroe Street, 15th Floor, Chicago, Illinois 60661 (or such other address as Holder may hereafter designate in writing to Maker). The repayment of the Loan evidenced by this Note is secured by the Receivables Loan 32 Agreement pursuant to which Maker has assigned, pledged and granted a security interest to Lender in certain receivables related to the sale of Intervals and other collateral described therein. This Note, the Receivables Loan Agreement and any other documents evidencing or securing the Loan or executed in connection therewith, and any modification, renewal or extension of any of the foregoing are collectively called the "Receivables Loan Documents". -------------------------- This Note has been issued pursuant to the Receivables Loan Agreement, and all of the terms, covenants and conditions of the Receivables Loan Agreement (including all Exhibits thereto) and all other instruments evidencing or securing the indebtedness hereunder are hereby made a part of this Note and are deemed incorporated herein in full. Defined terms used herein and not otherwise defined shall have the meanings set forth in the Receivables Loan Agreement. 2. Principal and Interest ---------------------- So long as no Event of Default exists, interest shall accrue on the principal balance hereof from time to time outstanding and Maker shall pay interest thereon at a rate equal to a floating rate per annum equal to four and one-half percent (4.50%) plus the Base Rate (the aggregate rate referred to as the "Interest Rate"). "Base Rate" shall mean the rate published each Business Day in the Wall Street Journal for deposits maturing ninety (90) days after ------------------- issuance under the caption "Money Rates, London Interbank Offered Rates (Libor)." The Interest Rate for each calendar month shall be fixed based upon the Base Rate published prior to and in effect on the first (1st) Business Day of such month. Interest shall be calculated on a 360 day year and charged for the actual number of days elapsed. 3. Payment. ------- This Note is subject to mandatory payments as provided in Section 1.4 of the Receivables Loan Agreement. Maker shall pay interest to Lender monthly, in arrears, on the first day of each calendar month, commencing October 1, 2001, on the unpaid principal amount of this Note outstanding during the previous calendar month at a fluctuating interest rate per annum (computed daily on the basis of a year of 360 days and charged for the actual number of days elapsed) equal to the Interest Rate; provided, however, that after the occurrence of an Event of -------- ------- Default under the Receivables Loan Agreement this Note shall bear interest at the Default Rate set forth below. The Loan shall be due and payable on or before March 30, 2006, or any earlier date on which the Loan shall be required to be paid in full, whether by acceleration or otherwise (the "Maturity Date"). 4. Prepayment. ---------- This Note is (i) subject to mandatory prepayments in whole or in part as provided in Section 1.5(b) of the Receivables Loan Agreement; and (ii) permitted optional prepayments in accordance with Section 1.5(a) of the Receivables Loan Agreement, subject to applicable 33 Prepayment Premiums. Not in limitation of any other mandatory prepayment requirements under the Receivables Loan Agreement, if at any time the outstanding aggregate principal balance under (i) this Note; (ii) that certain First Amendment and Restatement of Amended, Restated and Consolidated Acquisition Promissory Note No. 4 of even date herewith, between Holder and Maker in the principal amount of $_________________ (the "Acquisition Note"); and (iii) that certain Third Amendment and Restatement of Amended, Restated and Consolidated Revolving Renovation Promissory Note of even date herewith, between Holder and Maker in the maximum principal amount of $2,500,000.00 (the "Renovation Note") exceeds $40,000,000.00 or such lesser amount as set forth in the Receivables Loan Agreement, such excess amount shall be due and payable by Maker to Holder within five (5) Business Days after notice from Holder without premium or penalty and such amount shall be applied by Holder to reduce the outstanding principal balance of any of the above-referenced notes in any manner or amount that Holder determines. 5. Default. ------- A. Events of Default. ----------------- An "Event of Default" under this Note shall mean the occurrence of any ---------------- Event of Default under any of the Receivables Loan Documents, after giving effect to any applicable grace or cure period. B. Remedies. -------- So long as an Event of Default remains outstanding: (a) interest shall accrue at a rate equal to the Interest Rate plus four percent (4%) per annum (the "Default Rate"); (b) Holder may, at its option and without notice (such notice being expressly waived), declare the Loan immediately due and payable; and (c) Holder may pursue all rights and remedies available under the Receivables Loan Agreement or any other Receivables Loan Documents. Holder's rights, remedies and powers, as provided in this Note and the other Receivables Loan Documents, are cumulative and concurrent, and may be pursued singly, successively or together against Maker, any guarantor of the Loan, the security described in the Receivables Loan Documents, and any other security given at any time to secure the payment hereof, all at the sole discretion of Holder. Additionally, Holder may resort to every other right or remedy available at law or in equity without first exhausting the rights and remedies contained herein, all in Holder's sole discretion. Failure of Holder, for any period of time or on more than one occasion, to exercise its option to accelerate the Maturity Date shall not constitute a waiver of the right to exercise the same at any time during the continued existence of any Event of Default or any subsequent Event of Default. If any attorney is engaged: (i) to collect the Loan or any sums due under the Receivables Loan Documents, whether or not legal proceedings are thereafter instituted by Holder; (ii) to represent Holder in any bankruptcy, reorganization, receivership or other proceedings affecting creditors' rights and involving a claim under this Note; (iii) to protect the liens and security interests of the Receivables Loan Agreement or any of the Receivables Loan Documents; (iv) to foreclose on the Collateral; (v) to represent Holder in any other proceedings whatsoever in 34 connection with the Receivables Loan Agreement or any of the Receivables Loan Documents including post judgment proceedings to enforce any judgment related to the Receivables Loan Documents; or (vi) in connection with seeking an out-of- court workout or settlement of any of the foregoing, then Maker shall pay to Holder all reasonable costs, attorneys' fees and expenses in connection therewith, in addition to all other amounts due hereunder. 6. Late Charge. ----------- If payments of principal and/or interest, or any other amounts under the other Receivables Loan Documents are not timely made or remain overdue for a period of ten (10) days, Maker, without notice or demand by Holder, promptly shall pay an amount ("Late Charge") equal to four percent (4%) of each ----------- delinquent payment. 7. Governing Law; Severability. --------------------------- This Note shall be governed by and construed in accordance with the internal laws of the State of Illinois. The invalidity, illegality or unenforceability of any provision of this Note shall not affect or impair the validity, legality or enforceability of the remainder of this Note, and to this end, the provisions of this Note are declared to be severable. 8. Waiver. ------ Maker, for itself and all endorsers, guarantors and sureties of this Note, and their heirs, successors, assigns and legal representatives, hereby waives presentment for payment, demand, notice of nonpayment, notice of dishonor, protest of any dishonor, notice of protest and protest of this Note, and all other notices in connection with the delivery, acceptance, performance, default or enforcement of the payment of this Note except as provided in the Receivables Loan Agreement, and agrees that their respective liability shall be unconditional and without regard to the liability of any other party and shall not be in any manner affected by any indulgence, extension of time, renewal, waiver or modification granted or consented to by Holder. Maker, for itself and all endorsers, guarantors and sureties of this Note, and their heirs, legal representatives, successors and assigns, hereby consents to every extension of time, renewal, waiver or modification that may be granted by Holder with respect to the payment or other provisions of this Note, and to the release of any makers, endorsers, guarantors or sureties, and of any collateral given to secure the payment hereof, or any part hereof, with or without substitution, and agrees that additional makers, endorsers, guarantors or sureties may become parties hereto without notice to Maker or to any endorser, guarantor or surety and without affecting the liability of any of them. 9. Security, Application of Payments. --------------------------------- This Note is secured by the liens, encumbrances and obligations created hereby and by the other Receivables Loan Documents. Payments will be applied to any fees, expenses or other costs Maker is obligated to pay under this Note or the other Receivables Loan Documents, to interest due on the Loan and to the outstanding principal balance of the Loan, in any order that Holder, at its sole option, may deem appropriate. 35 10. Miscellaneous. ------------- A. Amendments. ---------- This Note may not be terminated or amended orally, but only by a termination or amendment in writing signed by Holder and Maker. B. Lawful Rate of Interest. ----------------------- In no event whatsoever shall the amount of interest paid or agreed to be paid to Holder pursuant to this Note or any of the Receivables Loan Documents exceed the highest lawful rate of interest permissible under applicable law. If, from any circumstances whatsoever, fulfillment of any provision of this Note and the other Receivables Loan Documents shall involve exceeding the lawful rate of interest which a court of competent jurisdiction may deem applicable hereto ("Excess Interest"), then ipso facto, the obligation to be fulfilled shall be --------------- ---------- reduced to the highest lawful rate of interest permissible under such law and if, for any reason whatsoever, Holder shall receive, as interest, an amount which would be deemed unlawful under such applicable law, such interest shall be applied to the principal of the Loan (whether or not due and payable), and not to the payment of interest, or refunded to Maker if the Loan has been paid in full. Neither Maker nor any guarantor or endorser shall have any action against Holder for any damages whatsoever arising out of the payment or collection of any such Excess Interest. C. Captions. -------- The captions of the Paragraphs of this Note are for convenience of reference only and shall not be deemed to modify, explain, enlarge or restrict any of the provisions hereof. D. Notices. ------- Notices shall be given under this Note in conformity with the terms and conditions of the Receivables Loan Agreement. E. Joint and Several. ----------------- The obligations of Maker under this Note shall be joint and several obligations of Maker and of each Maker, if more than one, and of each Maker's heirs, personal representatives, successors and assigns. F. Time of Essence. --------------- Time is of the essence of this Note and the performance of each of the covenants and agreements contained herein. 11. Venue. ----- MAKER AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING DIRECTLY, INDIRECTLY OR OTHERWISE IN CONNECTION WITH, OUT OF, RELATED TO OR 36 FROM THIS NOTE SHALL BE LITIGATED, AT HOLDER'S SOLE DISCRETION AND ELECTION, ONLY IN COURTS HAVING A SITUS WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS. MAKER HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN SAID COUNTY AND STATE. MAKER HEREBY IRREVOCABLY APPOINTS AND DESIGNATES C T CORPORATION SYSTEM, WHOSE ADDRESS IS MAKER, C/O C T CORPORATION SYSTEM, 208 S. LASALLE STREET, CHICAGO, ILLINOIS 60604, AS ITS DULY AUTHORIZED AGENT FOR SERVICE OF LEGAL PROCESS AND AGREES THAT SERVICE OF SUCH PROCESS UPON SUCH PARTY SHALL CONSTITUTE PERSONAL SERVICE OF PROCESS UPON MAKER PROVIDED A COPY OF SUCH SERVICE OF PROCESS IS ALSO SENT WITHIN THREE (3) DAYS THEREAFTER TO MAKER EXCEPT IN THE CASE OF SERVICE OF PROCESS FOR ACTIONS WHEREIN THE MAKER'S RESPONSE IS DUE IN LESS THAN TWENTY (20) DAYS, A COPY OF SUCH PROCESS WILL BE SENT TO MAKER ON THE SAME DAY AS SERVICE ON C T CORPORATION SYSTEM. IN THE EVENT SERVICE IS UNDELIVERABLE BECAUSE SUCH AGENT MOVES OR CEASES TO DO BUSINESS IN CHICAGO, ILLINOIS, MAKER SHALL, WITHIN TEN (10) DAYS AFTER HOLDER'S REQUEST, APPOINT A SUBSTITUTE AGENT (IN CHICAGO, ILLINOIS) ON ITS BEHALF AND WITHIN SUCH PERIOD NOTIFY HOLDER OF SUCH APPOINTMENT. IF SUCH SUBSTITUTE AGENT IS NOT TIMELY APPOINTED, HOLDER SHALL, IN ITS SOLE DISCRETION, HAVE THE RIGHT TO DESIGNATE A SUBSTITUTE AGENT UPON FIVE (5) DAYS NOTICE TO MAKER. MAKER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO TRANSFER OR CHANGE THE VENUE OF ANY LITIGATION BROUGHT AGAINST IT BY HOLDER ON THE RECEIVABLES LOAN DOCUMENTS IN ACCORDANCE WITH THIS PARAGRAPH. 12. Sale of Loan. ------------ Holder, at any time and without the consent of Maker, may grant participations in or sell, transfer, assign and convey all or any portion of its right, title and interest in and to the Loan, this Note, the Receivables Loan Agreement and the other Receivables Loan Documents, any guaranties given in connection with the Loan and any collateral given to secure the Loan. In the event Holder sells, transfers, conveys or assigns all of Holder's right, title and interest in this Note or the Loan, Holder shall give notice thereof to Maker and Holder shall thereupon be released from liability and obligations of the Lender hereunder and under all other transferred Loan Documents from and after the date of such transfer provided such transferee agrees to be bound by the obligations of Lender thereunder and provided such transferee is of equal or greater financial capacity than Holder. Notice to Maker shall not be required for any partial sale, transfer, assignment or conveyance of this Note. 13. Jury Trial Waiver. ----------------- MAKER, AND HOLDER BY ITS ACCEPTANCE OF THIS NOTE, HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS NOTE AND THE BUSINESS RELATIONSHIP THAT IS BEING ESTABLISHED. THIS WAIVER IS KNOWINGLY, INTENTIONALLY AND VOLUNTARILY MADE BY MAKER 37 AND BY HOLDER, AND MAKER ACKNOWLEDGES THAT NEITHER HOLDER NOR ANY PERSON ACTING ON BEHALF OF HOLDER HAS MADE ANY REPRESENTATIONS OF FACT TO INCLUDE THIS WAIVER OF TRIAL BY JURY OR HAS TAKEN ANY ACTIONS WHICH IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. MAKER AND HOLDER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT MAKER AND HOLDER HAVE ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS NOTE AND THAT EACH OF THEM WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. MAKER AND HOLDER FURTHER ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED (OR HAVE HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS NOTE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL. IN WITNESS WHEREOF, Maker has executed this Note or has caused the same to be executed by its duly authorized representatives as of the date first set forth above. MAKER: Preferred Equities Corporation, a Nevada corporation By: /s/ Carol W. Sullivan ---------------------------- Print Name: Carol W. Sullivan -------------------- As Its: Sr. V.P. ------------------------ 38 EX-10.241 6 dex10241.txt PURCHASE PROMISSORY NOTE PURCHASE MONEY PROMISSORY NOTE ("Note") $5,927,164.65 Orlando, Florida August 15, 2001 THE UNDERSIGNED, ("Maker"), promises to pay to the order of M & J WILKOW, LTD., as agent for THE VILLAS AT MONTEREY LIMITED PARTNERSHIP, a Florida limited partnership, and TANGO BAY OF ORLANDO, LC, a Florida limited liability corporation (collectively the "Payee"), whose mailing address is c/o M & J Wilkow, Ltd., 180 North Michigan Avenue, Chicago, Illinois 60601, Attention: Marc Wilkow, the principal sum of FIVE MILLION NINE HUNDRED TWENTY SEVEN THOUSAND ONE HUNDRED SIXTY FOUR and 65/100 DOLLARS ($5,927,164.65), or so much thereof as may be outstanding from time to time, together with interest thereon at the rate of eight percent (8%) per annum from the date hereof to, until and including the date that the indebtedness owing by the Maker to the Payee hereunder shall have been paid in full. 1. Payments. -------- (a) Accrued Interest hereunder shall be paid on a quarterly basis with the first such interest payment to be made on September 30, 2001, and thereafter on the same date in each succeeding third month until "Maturity" (as hereinafter defined). Principal shall be paid in the following amounts on the following dates: Date: Amount: ---- ------ January 2, 2002 $1,223,000.00 July 1, 2002 $ 814,000.00 January 2, 2003 $1,223,000.00 July 1, 2003 $ 681,000.00 January 2, 2004 $1,022,000.00 July 1, 2004 ("Maturity") The balance of any unpaid principal. (b) So long as no Event of Default under this Note or the "Mortgage" (as defined hereinbelow) shall then exist, the Maker shall have the option to extend the time for making the first principal payment hereunder to no later than June 30, 2002, by providing written notice of the exercise of such option to extend such payment date, which written notice must be provided by Maker to the Payee no later than December 1, 2001. In the event such option is not properly exercised by the delivery of such written notice by Maker to Payee on or before December 1, 2001, then such option shall terminate and be of no further force or effect. If such option is timely and properly exercised each subsequent principal payment date shall be extended by an amount of time equal to the time after January 2, 2002, to and until the date on which the first principal payment was actually made by Maker to Payee. Buildings, as defined in the "Mortgage" (as defined hereinbelow), shall be released from the lien of the Mortgage upon the payment of the principal amount(s) as described in Section 29 of the Mortgage. 2. Default Rate. After the Maturity Date or upon and after any default (not ------------ cured within the applicable cure period, if any) hereunder or under the Mortgage, whichever shall first occur, this Note shall bear interest at a rate which is equal to the maximum allowable rate permitted by law from the date of such default or Maturity until paid in full. 3. Prepayment. The Maker shall have the privilege of prepaying this Note in ---------- part or in full, without premium or penalty, at any time or times. 4. Application of Payment. All payments made on the indebtedness evidenced ---------------------- by this Note shall be applied first, to the payment or reimbursement of any and all costs, expenses or other amounts which may have been paid or incurred by the Payee under the Mortgage or this Note, then to payment of accrued interest, and last to payment of principal. 5. Place and Manner of Payment. All payments of interest and principal are --------------------------- payable at the office of Payee, or at such other place as the holder may designate in writing, in immediately available funds, in lawful money of the United States of America. 6. Event of Default. Maker shall be in default under this Note upon Maker's ---------------- failure to make any scheduled payment of principal or interest due hereunder or under the Mortgage within ten (10) days following the due date thereof without notice or demand. With respect to any other sums due hereunder or under the Mortgage, Maker shall be in default under this Note upon Maker's failure to make any such payment within any applicable curative period provided hereunder or under the Mortgage (or if no such curative period is expressly provided, within ten (10) days after written notice thereof). Maker shall also be in default under this Note upon the occurrence of any other uncured Event of Default under the Mortgage (the foregoing, collectively, an "Event of Default"). 7. Remedies after Default. At the option of Payee, all or any part of the ---------------------- principal and accured interest on the Note, and all other obligations of the Maker to the Payee shall become immediately due and payable in full without additional notice or demand, upon the occurrence of an uncured Event of Default or at any time thereafter. Payee may exercise all rights and remedies provided by law, equity, in this Note, in the Mortgage, or any other Loan Document or any other obligation of the Maker to the Payee. All rights and remedies as set forth in the Loan Documents are cumulative and concurrent and may be pursued singly, successively or together, at the sole discretion of Payee, and may be exercised as often as occasion therefore shall arise. Such remedies are not exclusive, and Payee is entitled to all remedies provided at law or equity, whether or not expressly set forth herein. No act, or omission or commission or waiver of Payee, including specifically any failure to exercise any right, remedy or recourse, shall be effective unless set forth in a written document executed by Payee and then only to the extent specifically recited therein. A waiver or release with reference to one event shall not be construed as continuing, as a bar to, or as a waiver or release of, any subsequent right, remedy or recourse as to any subsequent event. 8. Collection Expenses. All parties liable for the payment of the Note ------------------- agree to pay the Payee all costs and expenses incurred by the Payee, whether or not an action be brought, in collecting the sums due under the Note, enforcing the performance and/or protecting its rights -2- under the Mortgage or the other Loan Documents and in realizing on any of the security for the Note. Such costs and expenses shall include, but are not limited to, filing fees, costs of publication, deposition fees, stenographer fees, witness fees and other court and related costs. 9. Attorneys' Fees. All parties liable for the payment of the Note agree --------------- to pay the Payee reasonable attorneys' fees incurred by the Payee, whether or not an action be brought, in collecting the sums due under the Note, enforcing the performance and/or protecting its rights under the Mortgage or the other Loan Documents and in realizing on any of the security for the Note. Such reasonable attorneys' fees shall include, but not be limited to, fees for attorneys, paralegals, legal assistants, and expenses incurred in mediation, any and all judicial, bankruptcy, reorganization, administrative, receivership, or other proceedings affecting creditor's rights and involving a claim under the Note, the Mortgage, or any Loan Document, which such proceedings may arise before or after entry of a final judgment. Such fees shall be paid regardless whether suit is brought and shall include all fees incurred by Payee before, during or after trial and upon any appellate levels and including bankruptcy court. 10. Waiver and Consent. By the making or guaranty, if any, of this Note, ------------------ and each guarantor, if any, waive protest, presentment for payment, notice of dishonor, notice of intent to accelerate and notice of acceleration. 11. Usury Limitation. Notwithstanding any provision of this Note and/or the ---------------- Mortgage, or any other Loan Documents, or any other instrument securing payment of this Note to the contrary, it is the intent of the undersigned Maker and Payee that the Payee shall never be entitled to receive, collect or apply as interest on principal of the indebtedness any amount in excess of the maximum rate of interest permitted to be charged by applicable law; and in the event Payee ever receives, collects, or applies as interest any such excess, such amount which should be excessive interest shall be deemed a partial prepayment of principal and treated hereunder as such; and, if the principal of the indebtedness secured hereby is paid in full, any remaining excess funds shall forthwith be paid to Maker. In determining whether or not the interest paid or payable under any specific contingency exceeds the highest lawful rate, Maker and Payee shall, to the maximum extent permitted under applicable law, (a) characterize any non-principal payment as an expense, fee or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate and spread, in equal parts, the total amount of interest throughout the entire contemplated term of the indebtedness so that the interest rate is uniform throughout the entire term of the indebtedness; provided that if the indebtedness is paid and performed in full prior to the end of the full contemplated term thereof, and if the interest received for the actual period of existence thereof exceeds the maximum lawful rate, Payee shall refund to Maker the amount of such excess or credit the amount of such excess against the principal portion of the indebtedness, and in such event, Payee shall not be subject to any penalties provided by any laws for contracting for, charging, or receiving interest in excess of the maximum lawful rate. In no contingency or event whatsoever shall the amount paid or agreed to be paid to Payee for the use, forbearance or detention of the indebtedness collateralized hereby exceed the maximum amount permissible under applicable law. If, from any circumstances whatsoever, fulfillment of any provision hereof or any provision of any instrument securing the primary obligation at the time performance of -3- such provision shall be due shall involve transcending the limit of validity prescribed by applicable law, then, ipso facto, the obligation to be fulfilled ---------- shall be reduced to the limit of such validity. This provision shall control every other provision of this Note, the Mortgage or any other Loan Document. 12. Mortgage and other Loan Documents. This Note is secured by a Purchase --------------------------------- Money Mortgage and Security Agreement of even date herewith (the "Mortgage") upon real and personal property located in Orange County, Florida. Any Event of Default occurring under the Mortgage or any other document, instrument or agreement evidencing or securing the loan (collectively the "Loan Documents") shall constitute an Event of Default hereunder. 13. Choice of Law and Venue. This Note shall be governed by the Laws of the ----------------------- State of Florida, and the United States of America, whichever the context may require or permit. The Maker and all guarantor, if any, to this obligation expressly agree that proper venue permitted by law shall be Orange County, Florida. Should Payee institute any action under this Note, the Maker and all guarantors, if any, hereby submit themselves to the jurisdiction of any court sitting in Florida. 14. Severability. If any provision of this Note shall be held unenforceable ------------ or void, then such provision shall be deemed severable from the remaining provisions and shall in no way affect the enforceability of the remaining provisions nor the validity of this Note. 15. Maker and Payee Defined. The term "Maker" includes each and every ----------------------- person or entity signing this Note and any co-signers, guarantors, their successors and assigns. The term "Payee" shall include the Payee and any transferee and assignee of Payee or other holder of this Note. 16. Captions and Pronouns. The captions and headings of the various --------------------- sections of this Note are for convenience only, and are not to be construed as confining or limiting in any way the scope or intent of the provisions hereof. Wherever the context requires or permits, the singular shall include the plural, the plural shall include the singular, and the masculine, feminine and neuter shall be freely interchangeable. 17. Receipt of Copy. By signing this Note, Maker acknowledges that it was --------------- read by Maker prior to execution and a copy was received by Maker. 18. Time of the Essence. Time is of the essence with respect to each ------------------- provision in this Note where a time or date for performance is stated. All time periods or dates for performance stated in this Note are material provisions of this Note. 19. Waiver of Trial By Jury. The Maker and the Payee knowingly, voluntarily ----------------------- and intentionally waive the right either may have to a trial by jury in respect of any litigation based hereon, or arising out of, under or in connection with this Note or any agreement contemplated to be executed in conjunction herewith, or any course of conduct, course of dealing, statements (whether verbal or written) or actions of either party. This provision is a material inducement for the Payee to make the loan to Maker evidenced by this Note. -4- 20. Limitation of Liability. ----------------------- (a) Except as set forth in subparagraphs (b) and (c) of this Section 20, notwithstanding anything to the contrary in this Note, the Payee, by its acceptance of this Note, expressly agrees that the liability of Maker shall be strictly and absolutely limited to the property encumbered by the Mortgage (including, but not limited to, the leases, rents, profits and issues thereof) and any other collateral now or hereafter securing the indebtedness evidenced hereby or as provided by the Mortgage, except as provided below. If an Event of Default shall occur, the Mortgagee shall not and may not seek any judgment for a deficiency or for the payment of the principal amount of the indebtedness evidenced hereby, in any action to foreclose, to exercise a power of sale, to confirm any foreclosure or sale under power of sale, or to exercise any other rights of power under or by reason of the Mortgage evidencing or securing the obligations of the Maker with respect to the indebtedness evidenced hereby or as provided by the Mortgage except to the extent required in order to proceed with judicial proceedings to foreclose the Mortgage. In the event any suit is brought on this Note, or concerning any amount secured by the Mortgage as part of judicial proceedings to foreclose the Mortgage and/or any other security interest granted to the Payee, or to confirm any foreclosure or sale pursuant to power of sale thereunder, except as provided in subparagraphs (b) and (c) hereinbelow, any judgment obtained in such suit shall constitute a lien on and will be and can be enforced only against, the property encumbered by the Mortgage, and the leases, rents, profits and issues thereof, and not against Maker personally or against any other asset of the Maker, and the terms of such judgment shall expressly so provide. (b) Notwithstanding anything herein to the contrary in subparagraph (a) of this Section 20, the Maker shall be personally liable for, and the Payee shall have the right to seek a judgment for money damages (including a deficiency judgment) to enforce or collect any or all of the following: (i) Interest accrued under the terms of this Note or the Mortgage, or both; (ii) Any taxes or other items specified in Section 2 of the Mortgage which are not paid by Borrower as and when required pursuant to said Section 2; (iii) An amount equal to a prorata share of all unpaid taxes and other matters specified in Section 2 of the Mortgage for the year in which a foreclosure or deed in lieu thereof occurs for the period from January 1 of such year to and including the date of an issuance of a certificate of sale or recordation of a deed in lieu of foreclosure; (iv) Any losses resulting from the failure of the Borrower to keep the Mortgaged Property insured as required pursuant to Section 8 of the Mortgage, including, without limitation, the amount of any unpaid premiums for insurance which Borrower was required to maintain pursuant to the provisions of said Section 8 of the Mortgage; (v) Any and all costs and expenses, including reasonable attorneys' and paralegals' fees and disbursements (whether incurred before, during or after trial or upon any appellate level, or in any proceeding in bankruptcy or insolvency) incurred by -5- Payee in the enforcement of the Maker's obligations hereunder or under the Mortgage, in the foreclosure of the Mortgage, or in the collection and enforcement of any judgment obtained against the Maker, provided, however, in the event that Borrower tenders to Lender a properly executed Special Warranty Deed reconveying the Mortgaged Property to Lender in lieu of foreclosure, together with a fully executed owner's affidavit, Form DR-219, non-foreign certification, and a "marked-up" title commitment insuring title to the Mortgaged Property in Lender without exception for any matter other than those matters to which the Mortgaged Property was subject upon conveyance by Lender to Borrower, and Borrower has paid or tenders payment for the documentary stamp tax and cost of recording the deed and the title insurance premium for the title policy to be issued to Lender pursuant to the aforesaid title commitment, Borrower shall not be liable for any costs of foreclosure after the date after such tender; (vi) Indemnification provisions in favor of the Payee set forth in the Mortgage (but excluding any indemnity provisions which would result in the payment of principal under the indebtedness evidenced hereby); (vii) The leases, rents, profits and issues of the property encumbered by the Mortgage following any default under this Note or the Mortgage (without regard to the expiration of any cure period, if any) to the extent not applied toward costs and expenses of operating and maintaining the subject Property or being paid under or pursuant to the terms of this Note or the Mortgage; (viii) Liability for intentional waste, destruction or damage to the Mortgaged Property or any part thereof; (ix) Liability and indemnification under Section 17 of the Mortgage, including, but not limited to, liability and indemnification obligations for removal or cleanup of Hazardous Substances; (x) All condemnation awards and payments in lieu thereof and/or insurance proceeds received by Maker which are not applied to the reasonable costs of the restoration of the property or to the obligations of Maker under this Note or the Mortgage; (xi) The cost to restore the property as a result of a casualty if the net available insurance proceeds, if any, are allowed to be applied to restoration, to the extent that the costs of such restoration is not reimbursed by insurance; and (xii) Any liability, damage, cost or expense incurred by Payee as a result of any fraud, material misrepresentation or bad faith by Mortgagor. Upon the occurrence of an Event of Default hereunder or under the Mortgage, Maker expressly agrees that the Payee shall have the right to obtain a judgment against Maker for the amounts or matters set forth in subparagraphs (i) through (ix), inclusive, of this Section 20(b) proven or stipulated to be due and owing for which Maker shall be personally liable -6- notwithstanding the provisions of Section 20(a) above. Further, in the event of a foreclosure of the Mortgage, Maker hereby further agrees that the Payee shall be entitled to obtain a deficiency judgment against Maker for the amounts or matters set forth in said subparagraphs (i) through (ix), inclusive of this Section 20(b), regardless of the fair market value of the property foreclosed, unless and to the extent the successful bid at the foreclosure sale is made and paid by a third party unrelated to the Payee and is in an amount in excess of the full amount of the Maker's judgment in foreclosure, together with interest thereon. Maker hereby unrevocably and absolutely waives and relinquishes its right to contest such deficiency judgment except as set forth hereinabove. (c) If, and at such time as the Maker actually pays to the Payee the first principal installment to be made hereunder, subparagraphs (a) and (b) above of this Section 20 shall thereupon automatically terminate and as of the date of such first payment of principal hereunder such subparagraphs (a) and (b) of this Section 20 shall be null, void and of no further force and effect whatsoever. From and after said first payment of principal hereunder, the Maker shall be fully personally liable hereunder and under the Mortgage as if this Section 20 had never existed. IN WITNESS WHEREOF, Maker has executed and delivered this instrument the day and year first above written. MEGO FINANCIAL CORP., a New York corporation By: /s/ Jerome J. Cohen --------------------------- Name: Jerome J. Cohen -------------------- Title: President -------------------- (Corporate Seal) -7- PURCHASE AND SALE AGREEMENT --------------------------- THIS AGREEMENT is made and entered into as of this 1st day of August, --- 2001, by and between THE VILLAS AT MONTEREY LIMITED PARTNERSHIP, a Florida limited partnership and TANGO BAY OF ORLANDO, LC, a Florida limited liability company (collectively, "Seller"), and MEGO FINANCIAL CORP., a New York corporation (the "Purchaser"). In consideration of the mutual covenants and promises herein set forth, the parties agree as follows: 1. Purchase and Sale. Seller agrees to sell to Purchaser and Purchaser ----------------- agrees to purchase from Seller those certain parcels of real property (the "Land") located in Orange County, Florida, as more particularly described on Exhibit "A" attached hereto, together with the following property and rights: (a) All improvements located on the Land, including buildings, structures and other facilities (the "Improvements"). The Land and the Improvements are hereinafter collectively referred to as the "Realty;" (b) All fixtures, equipment, furniture and items of personal property used exclusively in the operation of the Realty, and situated on the Realty (the "Personalty"); (c) All licenses, permits, authorizations and approvals pertaining to ownership and/or operation of the Realty which are separable and transferable; (d) All strips and gores of land lying adjacent to the Realty (but which are not otherwise part of the Project), together with all easements, privileges, rights-of-way, riparian and other water rights, lands underlying any adjacent streets or roads, and appurtenances pertaining to or accruing to the benefit of the Realty that are owned by Seller, if any; and (e) All of Seller's interest in and to the Assumed Contracts (hereinafter defined). The Realty and all of the other property and rights described in this Section 1 are hereinafter collectively called the "Property". -8- The Land is a portion of the overall Ramada Inn All Suites at International Drive South project (the "Project"), which Project consists of, among other things, a Reception Building and separate buildings lettered A (a/k/a 1) through S (a/k/a 19), inclusive (the Land and buildings to be conveyed hereunder are all of the remaining Land and buildings at the Project owned by Seller). Seller understands and agrees that, after Closing (as hereinafter defined in Section 15), Purchaser intends to operate the Property under the name "Ramada Vacation Suites at Orlando", or such other name as Purchaser may determine. Because this transaction represents the conveyance by Seller of all of its remaining interests in the Project, Seller agrees that, to the extent that Seller has any interest in the name "Ramada Inn All Suites at International Drive South", "Ramada at Tango Bay," "Ramada" and/or "Ramada Suites", and/or any other variation thereof relating to the Project, or any logos, trademarks and/or other rights in connection therewith, Seller shall transfer all of said interests to Purchaser at Closing, without representation or warranty by Seller, and said interests shall be deemed part of the Property for purposes of this Agreement. 2. Purchase Price. The purchase price to be paid by Purchaser to Seller for -------------- the Property is Five Million Nine Hundred Eighty-Five Thousand and No/100 ($5,985,000.00) Dollars (the "Purchase Price"). 3. Deposit. To secure the performance by Purchaser of its obligations under ------- this Agreement, within two (2) business days following receipt of written notice of execution of this Agreement by Seller, Purchaser shall deliver to Broad and Cassel, as escrow agent (the "Escrow Agent"), the sum of Ten Thousand and No/100 ($10,000.00) Dollars (the "Deposit"). The Escrow Agent shall invest the Deposit in an interest-bearing account, certificate of deposit or repurchase agreement maintained with or issued by a commercial bank or savings and loan -9- association doing business in Orange County, Florida. All interest accrued or earned on the Deposit shall be paid or credited to Purchaser except in the event of a default by Purchaser, without any default of Seller, in which event the interest shall be disbursed to Seller, together with the Deposit, as liquidated damages in accordance with Section 11 below. 4. Terms of Payment. The Purchase Price shall be paid to Seller by ---------------- Purchaser's execution and delivery of a purchase money note and mortgage in favor of Seller in the full amount of the Purchase Price, as more particularly provided in Section 5 of this Agreement. The Deposit, together with the interest accrued thereon, shall be returned to Purchaser at Closing. 5. Purchase Money Note and Mortgage. At Closing, Purchaser shall execute in -------------------------------- favor of Seller a Purchase Money Note (the "Purchase Money Note") in the principal amount of $5,985,000, bearing interest on the unpaid principal balance at the rate of eight percent (8%) per annum simple interest, and payable on a quarterly basis commencing on the last day of the first calendar quarter following Closing. The Purchase Money Note shall be in the form attached to this Agreement as Exhibit "B", and the principal thereof shall be paid as provided therein. The Purchase Money Note shall be secured by a Purchase Money Mortgage (the "Purchase Money Mortgage") encumbering the Property. Upon (i) each payment by Purchaser of the principal of the Purchase Money Note in the amount of the Release Price set forth below and any then accrued but unpaid interest, and (ii) compliance with and subject to the terms and conditions as set forth in the Purchase Money Mortgage pertaining to the granting of partial releases, Seller shall release from the lien and effect of the Purchase Money Mortgage each Building, together with the portion of the Land relating thereto (each such Building and Land relating thereto are hereinafter referred to as a "Release Parcel"), identified across from such Release Price in the below table: -10- - -------------------------------------------------------------------------------- Building Release Price - -------------------------------------------------------------------------------- Building H $1,223,000 - -------------------------------------------------------------------------------- Building I $ 814,000 - -------------------------------------------------------------------------------- Building K $1,223,000 - -------------------------------------------------------------------------------- Building J $ 681,000 - -------------------------------------------------------------------------------- Building D $1,022,000 - -------------------------------------------------------------------------------- Buildings A, B and C $1,022,000 - -------------------------------------------------------------------------------- Total: $5,985,000 - -------------------------------------------------------------------------------- Seller and Purchaser agree to use the legal description for each Release Parcel established by the surveyor under Section 6 hereof as the legal description attached to the partial release for such Release Parcel under Section 29 of the Purchase Money Mortgage, and further agree that said legal description shall meet and satisfy the conditions of Section 29(a) of the Purchase Money Mortgage. In the event that Seller and Purchaser are unable to confirm by the Closing date that the individual legal description for each Release Parcel is adequate to insure that, upon the release of such Release Parcel under the Purchase Money Mortgage, such Release Parcel and the unreleased portion of the Property will have access to a publicly dedicated road and all necessary utilities, and will not be in violation of any applicable governmental requirement as a result of the splitting of the Property, the parties shall nevertheless proceed to Closing (subject to the other terms of this Agreement); however, Seller and Purchaser shall cooperate and work in good faith with the surveyor to achieve legal descriptions which meet the foregoing standard within thirty (30) days following Closing. This provision shall survive Closing. The Purchase Money Mortgage shall be drawn in the form attached to this Agreement as Exhibit "C". 6. Title. Within five (5) days following the date of this Agreement, ----- Seller, at Seller's expense, shall deliver to Purchaser's attorneys, Greenberg Traurig, P.A., 1221 Brickell Avenue, Miami, Florida 33131, Attention: Nancy B. Lash, Esq., a commitment (the "Commitment") for an owner's ALTA Form B Marketability title insurance policy with respect -11- to the Project from First American Title Insurance Corporation (or other national title company reasonably acceptable to Purchaser) in favor of Purchaser in the amount of the Purchase Price. The Commitment shall be endorsed and updated at Seller's expense: (i) within five (5) days following the delivery of the Survey (as hereinafter defined) to delete those matters reflected on the Commitment which are not applicable to the Realty, and (ii) within five (5) days before Closing. The Commitment and any endorsement or update thereof shall show Seller to be vested with good, marketable and insurable fee simple title to the Realty, free and clear of all liens, encumbrances and other matters, except only for those liens and encumbrances to be released and satisfied at Closing and the following (the "Permitted Exceptions"): (a) Ad valorem real estate taxes for the year of Closing, provided same are not then due and payable, and subsequent years. (b) All applicable zoning ordinances and regulations, none of which shall prohibit or otherwise interfere with all uses presently being made of the Property. (c) The Assumed Contracts (as hereinafter defined). (d) The matters described on Exhibit "D" attached hereto. Additionally, at Closing, Purchaser and Seller shall execute such documents as are necessary to: (i) amend that certain Declaration of Restrictions and Protective Covenants for Tango Bay (as heretofore amended, the "Declaration"), recorded April 9, 1996 in Official Records Book 5038, Page 3760 of the Public Records of Orange County, Florida, to allow for the transfer of each Release Parcel from Village A to Village B (as defined in the Declaration) at the time such Release Parcel is released from the Purchase Money Mortgage (the "Declaration Amendment"), (ii) terminate that certain Declaration of Restrictions (6 Year Covenant) recorded April 9, 1996 in Official Records Book 5038, Page 3850 of the Public Records of Orange County, Florida, and (iii) terminate that certain Declaration of Restrictions (30 Month Covenant) -12- recorded April 9, 1996 in Official Records Book 5038, Page 3844 of the Public Records of Orange County, Florida. No later than August 10, 2001, Seller shall also deliver to Purchaser, a survey (the "Survey") of the Realty showing and certifying the exact location and legal description of the Realty and meeting the minimum technical standards of the Florida Board of Land Surveyors and the State of Florida Department of Professional Regulation, certified to Purchaser, Purchaser's title insurer, Seller and Broad and Cassel and prepared as of a date subsequent to the date of this Agreement. The Survey shall also show and certify: (i) the location of all improvements and easements and rights-of-way affecting the Realty, (ii) the location of all roadways adjacent to the Realty, (iii) the acreage of the Realty calculated to the second decimal place, (iv) the perimeter boundaries of the Project, including, without limitation, the location of all streets, roads, accessways, entrance features and fountains located therein, and (v) separate legal descriptions for each Release Parcel, together with the information set forth in clauses (i) through (iv) for such Release Parcel. The legal description and perimeter boundaries for each Release Parcel shall be drawn in such a manner so that the Release Parcel in question and the remaining portion of the Realty not yet released from the Purchase Money Mortgage each have ingress and egress to a publicly dedicated road or a private access easement, and comply with applicable parking, setback and other governmental requirements. Notwithstanding the fact that Seller shall be obligated to obtain and deliver the Survey to Purchaser, responsibility for the cost of the Survey shall be determined as follows: (1) in the event that Purchaser closes on title to the Property as contemplated hereunder, Purchaser shall be solely obligated for the cost of the Survey; (2) in the event that Purchaser elects to cancel this Agreement during the Inspection Period as provided in Section 8 below, Purchaser shall be solely obligated for the cost of the -13- Survey; (3) in the event that the Agreement is cancelled as a result of the failure of any of Purchaser's Conditions Precedents (other than breach of a representation or warranty by Seller), then Purchaser and Seller shall equally share the cost of the Survey; (4) in the event that the Agreement is cancelled as a result of a default by Seller or any breach of a representation or warranty by Seller, then Seller shall be solely obligated for the cost of the Survey; or (5) in the event that the Agreement is cancelled as a result of a default by Purchaser, then Purchaser shall be solely obligated for the cost of the Survey. The provisions of this Section shall survive Closing and any cancellation or termination of this Agreement. Title shall be deemed good, marketable and insurable only if the Commitment allows for issuance of an Owner's ALTA Form B Marketability Policy effective as - of Closing at minimum promulgated risk rate premiums, without any guarantees and without any exceptions, standard or otherwise, other than the Permitted Exceptions. Purchaser shall have fifteen (15) days from receipt of the Commitment and hard copies of all items noted as exceptions therein (the "Title Review Period"), within which to examine same. If Purchaser finds title to be defective or cannot determine the effect of the matter until located on the Survey, Purchaser shall, no later than the expiration of the Title Review Period, notify Seller in writing specifying the defect(s) (which defect(s) shall also include any UCC-1 Financing Statements filed with the Florida Secretary of State) or reserving the right to comment on same after receipt of the Survey; provided that if Purchaser fails to give Seller written notice before the expiration of the Title Review Period of defect(s) in title or of the need for the Survey to review the effect of the exception, then the defects shown in the Commitment (other than those to be evaluated upon receipt of the Survey) shall be deemed to be waived as title objections to closing this transaction. Purchaser may raise as additional objections, however, any matters first shown by the Survey, -14- any endorsement of the Commitment and/or recertifications of Survey, provided that notice of objection to same must be given to Seller within fifteen (15) days from receipt of the Survey, endorsement or recertification, as applicable, but in no event later than the Closing date. If Purchaser has given Seller timely written notice of defect(s) and the defect(s) render the title other than as represented in this Agreement, Seller shall use its best efforts to cause such defects to be cured by the date of Closing, provided, however, that Seller shall not be obligated to file suit or otherwise expend any monies with regard to curing title defects other than with regard to the payment of any liens or encumbrances which have voluntarily and intentionally been created by Seller. At Purchaser's option, the date of Closing may be extended for a reasonable period (not to exceed ninety (90) days) for purposes of eliminating any title defects. In the event that Seller does not eliminate any defects as of the date of Closing as the same may be extended under the preceding sentence, Purchaser shall have the option of either: (i) Closing and accepting the title "as is", without reduction in the Purchase Price, or (ii) canceling this Agreement, in which event the Escrow Agent shall return the Deposit and all interest earned thereon to Purchaser, whereupon both parties shall be released from all further obligations under this Agreement, except only for those obligations which are intended to survive Closing and/or any earlier termination of this Agreement, unless such defects were caused by Seller's willful act or willful omission, in which event, Seller shall remain liable to Purchaser for damages caused thereby. Seller shall execute appropriate documents as required for "gap coverage" by the title insurer and the Closing shall be held in escrow in accordance with customary escrow closings for Orange County, Florida. -15- 7. Deliveries. Within seven (7) business days following the date hereof ---------- (and thereafter, as applicable), Seller shall deliver to Purchaser true, correct and complete copies of all of the following, to the extent in the possession of the Seller: (a) All permits, licenses, authorizations or approvals (other than those which are no longer in effect) issued by any governmental body or agency having jurisdiction over the Property, related to the ownership and/or operation of the Property (the "Licenses"); (b) A true, correct and complete copy of the franchise agreement (the "Franchise Agreement") between Seller and Ramada with respect to the operation of the Project (or the remaining portions thereof); (c) The bill or bills issued for the year 2000 for real estate and personal property taxes and any subsequently issued notices pertaining to real estate or personal property taxes or assessments applicable to the Property; and (d) All engineering and architectural plans and as built plans, specifications, drawings and surveys relating to the Property (the "Plans"), and all engineering and environmental studies or audits relating to the Property ("Studies"), which are within the control or possession of Seller, if any. 8. Purchaser's Conditions Precedent. Purchaser's obligation to close the -------------------------------- transaction provided for in this Agreement shall be subject to the following conditions precedent to Closing: (a) Purchaser shall have until August 15, 2001 (the "Inspection Period") to examine the Licenses, the Plans and the Studies and to decide whether they are satisfactory to Purchaser and to make such physical, zoning, land use, environmental, and other examinations, inspections and investigations of the Property or the use or operation thereof which Purchaser, in Purchaser's sole discretion, may determine to make, subject, however, to the provisions of Section 18 below. In the event Purchaser is not satisfied with any of the foregoing, in Purchaser's sole and absolute discretion, Purchaser may cancel this transaction on or before August 15, 2001 as hereinafter provided. (b) Purchaser shall also have until August 15, 2001 to obtain all appropriate final, non-appealable land use, zoning, environmental, and other governmental and utility approvals (collectively, the "Approvals"), whether by ordinance, variance, amendment, special use and/or otherwise, including, without limitation, any necessary amendments to the P.U.D. and the applicable -16- comprehensive plan necessary to permit the operation and marketing of the Property as a timeshare, interval ownership or vacation club and a building permit for any and all improvements and/or renovations intended to be undertaken by Purchaser with respect to the Property. Purchaser agrees that it shall not seek to rezone the Property or change the land use designations or approvals in a manner which would prohibit the Property from being used and operated as currently used and operated by Seller; however, the foregoing is not intended to restrict Purchaser's ability to convert the Property to timeshare or interval ownership, but merely to provide that the Purchaser's Approvals shall not prohibit the current uses being made of the Property. The immediately preceding sentence shall apply to each Building comprising the Property until such Building is released from the Purchase Money Mortgage. Purchaser agrees to proceed diligently to obtain the Approvals, at Purchaser's expense, and Seller agrees to reasonably cooperate in that regard, including, without limitation, executing applications or other governmental submissions as the owner of the Property and/or obtaining and pulling any permits in Seller's name if required by the applicable governmental authorities, provided, however, that said cooperation shall not require Seller to post any bonds and/or other financial assurances with any governmental authorities or incur any liability, cost or expense with regard to such cooperation. In the event that Purchaser has not timely obtained the Approvals, Purchaser may cancel this transaction as hereinafter provided. In order for Seller to keep abreast of the status of the application for the Approvals, Purchaser hereby authorizes Seller to make direct inquiries of Purchaser's local counsel from time to time, and Purchaser shall authorize Purchaser's local counsel to communicate directly with Seller and/or Seller's counsel in this regard. (c) At all times during the term of this Agreement and as of Closing, all of the representations and warranties by Seller contained in this Agreement shall be true and correct in all material respects. (d) Ramada shall have consented to the assignment of the Seller's interest in and to the Franchise Agreement to Purchaser, without imposing payment of any transfer, assignment or termination fees, charges, premiums or penalties. In the event any of the foregoing conditions precedent are not fulfilled as of Closing (or earlier date if specified otherwise), then Purchaser shall have the option of either: (i) waiving the condition and Closing "as is", without reduction in the Purchase Price or claim against Seller therefor, or (ii) canceling this Agreement by written notice to Seller given by Closing (or earlier date if specified otherwise), in which event the Escrow Agent shall return the Deposit and all -17- interest thereon to Purchaser, whereupon both parties shall be released from all further obligations under this Agreement, except those obligations which are specifically stated to survive termination or Closing. In the event Purchaser timely elects to cancel this Agreement, and as consideration for Seller granting Purchaser the investigation and inspection condition precedent therein, Purchaser shall deliver to Seller within ten (10) days following any notice of cancellation, a copy of all written studies or reports obtained by or prepared for Purchaser by third parties in connection with the Inspection Period, without warranty or representation of any kind whatsoever on the part of Purchaser as to the content, accuracy or completeness thereof, and, in addition, Purchaser shall return any materials delivered to Purchaser by Seller under Section 7 above. In the event that the condition set forth in Section 8(d) is not fulfilled as of Closing (or earlier date if specified otherwise), then Seller shall have the right to cancel this Agreement by written notice to Purchaser given by Closing (or earlier date if specified otherwise), in which event the Escrow Agent shall return the Deposit and all interest thereon to Purchaser, whereupon both parties shall be released from all further obligations under this Agreement, except those obligations which are specifically stated to survive termination or Closing. 9. Seller's Representations. Seller represents and warrants to Purchaser ------------------------ and agrees with Purchaser as follows: (a) There are no service contracts, license agreements, management agreements or other contracts or agreements affecting the Property, other than those identified on Exhibit "E" hereto (collectively, the "Contracts"). Seller has delivered to Purchaser true, correct and complete copies of the Contracts. At Closing, there shall be no contracts, insurance policies, leases, tenancies, arrangements, licenses, concessions, easements, service arrangements, employment contracts or agreements, brokerage agreements, and any and all other contracts or agreements, either recorded or unrecorded, written or oral, affecting the Property or any portion thereof, or the use thereof, other than the Permitted Exceptions, the -18- Assumed Contracts, and the 30-Day Cancellation Contracts. With respect to the Contracts, Seller agrees as follows: (i) Seller shall, at Seller's sole cost and expense (including without limitation the payment of any termination fees associated therewith), terminate the Contracts with Pagenet, Nextel, Job Finders and Copytronics, each of which is designated as a "Terminated Contract" in Exhibit "E", with such termination to be effective at or prior to Closing. Purchaser shall have no liability or responsibility whatsoever with regard to the Terminated Contracts. (ii) On the Closing date, Seller shall, at Seller's sole cost and expense (including without limitation the payment of any termination fees associated therewith), terminate the Contracts with Dunbar Armored, Inc., The Steritech Group, Inc., Crystal Springs and Poolworks, each of which is designated as a "30-Day Cancellation Contract" in Exhibit "E", with such termination to be effective on the thirtieth (30/th/) day following Closing. Purchaser shall be responsible for only the regular scheduled payments due under the 30-Day Cancellation Contracts for the 30-day period following Closing only. Seller shall be responsible for all other costs associated with the 30-Day Cancellation Contracts. (iii) At Closing, Seller shall assign and Purchaser shall assume all of Seller's interest in and to the Contracts listed in Exhibit "E" as the "Assumed Contracts" (collectively, the "Assumed Contracts"), provided that, with respect to the Ramada Franchise Agreement, neither Seller nor Purchaser shall have elected to terminate this Agreement under Section 8(d) above. (b) Seller shall not permit any lease rights to extend beyond Closing and shall deliver exclusive possession of the Property to Purchaser at Closing, free of all tenancies, occupancy or possessory agreements or contracts (other than the Permitted Exceptions, including, without limitation, the Contracts) or arrangements, whether oral or written, including, without limitation, any transient hotel guests affecting the Property or any unfulfilled hotel or guest reservations affecting the Property, provided, however, that Purchaser agrees to honor any unfulfilled hotel or guest reservations affecting the Property which are made prior to the date of Closing at room rates consistent with Seller's current rates and where the reservation shall be entirely fulfilled by no later than October 15, 2003 (the "Permitted Outstanding Reservations"). With respect to any Permitted Outstanding Reservations, Purchaser shall be responsible for providing services to such guest and the costs of administering the reservation. Purchaser shall retain any revenue generated from the guests staying pursuant to Permitted Outstanding Reservations. Seller agrees to indemnify, defend and hold harmless the Purchaser (and its officers, directors, trustees, employees, agents, successors and assigns) from and against all liabilities, damages, claims, costs, fees and expenses whatsoever (including -19- reasonable attorney's fees and court costs at trial and all appellate levels) arising out of or resulting from Seller's accepting guest reservations either (i) at room rates which are inconsistent with Seller's current rates, or (ii) which extend beyond or are not fulfilled on or prior to October 15, 2003, including without limitation those arising out of Purchaser's refusal to honor such unpermitted guest reservations. Notwithstanding anything to the contrary, the provisions contained in Sections 9(a) and 9(b) shall survive indefinitely after Closing. (c) Except as otherwise disclosed herein to Purchaser, Seller has not received any notice of: (i) any pending improvement liens to be made by any governmental authority with respect to the Property; (ii) any violations of building codes and/or zoning ordinances or other governmental regulations with respect to the Property; (iii) any pending or threatened lawsuits with respect to the Property; (iv) any pending or threatened condemnation proceedings with respect to the Property; or (v) any defects or inadequacies in the Property which would adversely affect the insurability of the Property or increase the cost thereof. Seller has advised Purchaser of a "slip and fall" lawsuit pending against Seller in the Circuit Court for the Ninth Judicial Circuit in Orange County, Florida, Case No. B15OL 99-763909- 001, filed by Virginia Geiser and Terry Geiser. Seller is solely liable with regard to said lawsuit and agrees to indemnify, defend and hold harmless the Purchaser (and its officers, directors, trustees, employees, agents, successors and assigns) from and against all liabilities, damages, claims, costs, fees and expenses whatsoever (including reasonable attorneys' fees and court costs at trial and all appellate levels) arising out of or resulting from the foregoing lawsuit. The provisions contained in this Section shall survive indefinitely after Closing. (d) To the best of the actual knowledge of Seller, no fact or condition exists which would result in the termination or impairment of access to the Property or the discontinuation of necessary sewer, water, electric, gas, telephone or other utilities or services to the Property. (e) Seller has not received written notice from any applicable governmental entity or any insurance carrier of any material defect, latent or otherwise, in the Improvements on the Land, structural elements thereof, the mechanical systems (including, without limitation, all heating, ventilating, air conditioning, plumbing, electrical, utility and sprinkler systems) therein, the utility system servicing the Property and the roofs, which have not been disclosed to Purchaser in writing prior to the date of this Agreement. (f) To the best of Seller's actual knowledge, all Improvements on the Land were permitted conforming structures under applicable zoning and building laws and ordinances in effect when the Improvements were constructed and the present uses thereof are permitted uses under current and proposed applicable zoning and building laws and ordinances. -20- (g) During the period between the date of this Agreement and Closing, Seller shall continue to operate and manage the Property in a prudent, businesslike and responsible manner consistent with its operation and management prior to the date of this Agreement and keep same clear of accumulations of trash, debris or overgrowth of vegetation. Seller shall: (i) continue to maintain all of the present services to the Property, (ii) make all repairs and replacements in the ordinary course of business to the Property (excluding capital expenditures in excess of $100.00 per unit), and (iii) not remove any of the personal property from the Property except in replacement of same. In addition, Seller shall make all payments due prior to Closing in connection with the Property, including all utility payments and payments on any other obligations affecting the Property. Notwithstanding the foregoing, subject only to Permitted Outstanding Reservations, exclusive possession of the Property shall be conveyed to Purchaser at Closing, and, accordingly, Seller shall not accept any reservations for hotel or transient guests at the Property which would affect the Property after October 15, 2003 or at rates which are inconsistent with rates presently charged by Seller. (h) To the best of Seller's knowledge, Seller is vested with good, marketable and insurable fee simple title to the Realty subject only to the Permitted Exceptions as provided herein; and Seller is vested with good and marketable title, subject only to the Permitted Exceptions, to all fixtures, equipment, furnishings and items of personal property referred to in Section 1(b) above free of all financing and other liens or encumbrances (except only for mortgage and security interests to the extent that the same are applicable to the Property while owned by Seller, all of which are to be satisfied and released at Closing). (i) Seller shall comply prior to Closing with all applicable provisions of all laws, rules, regulations, and ordinances of all governmental authorities having jurisdiction over the Property, provided, only, however, that Seller shall have no obligation to adapt any units within the Property to comply with the requirements of the Americans with Disabilities Act. Seller shall be responsible for and shall promptly pay all amounts owed for labor, materials supplied, services rendered and/or any other bills or amounts related to Seller and Seller's ownership and/or operation of the Property prior to Closing. (j) Prior to Closing, no portion of the Property or any interest therein, beneficial or otherwise, shall be alienated, further encumbered, conveyed or otherwise transferred. In addition, Seller shall not discuss or negotiate any potential sale of the Property with any third party during the term hereof. (k) The execution, delivery and performance of this Agreement by Seller have been duly authorized and no consent of any other person or entity to such execution, delivery and performance is required to render this document a valid and binding instrument enforceable against Seller in accordance with its terms. Neither the execution of this Agreement or the consummation of the transactions -21- contemplated hereby will: (i) result in a breach of, or default under, any agreement to which Seller (or any of the entities or persons comprising Seller) is a party or by which the Property is bound, or (ii) violate any restrictions to which Seller is subject. (l) Seller is not a "foreign person" within the meaning of the United States tax laws and to which reference is made in Internal Revenue Code Section 1445(b)(2). At Closing, Seller shall deliver to Purchaser an affidavit to such effect, and also stating Seller's employer identification number and the state within the United States under which Seller was organized and exists. Seller acknowledges and agrees that Purchaser shall be entitled to fully comply with Internal Revenue Code Section 1445 and all related sections and regulations, as same may be modified and amended from time to time, and Seller shall act in accordance with all reasonable requirements of Purchaser to effect such full compliance by Purchaser. (m) To the best of Seller's actual knowledge, without any independent investigation or inquiry, there has not been and there is not now: (i) any Hazardous Substance (as hereinafter defined) present on the Realty, except for such materials as are normally and customarily used for household purposes or in the operation or maintenance or apartment complexes, and which are not in violation of any environmental law, (ii) any present or past generation, recycling, reuse, sale, storage, handling, transport and/or disposal of any Hazardous Substance on the Realty, except for such materials as are normally and customarily used for household purposes or in the operation or maintenance or apartment complexes, and which are not in violation of any environmental law,, or (iii) any failure to comply with any applicable local, state or federal environmental laws, regulations, ordinances or administrative or judicial orders relating to the generation, recycling, reuse, sale, storage, handling, transport and/or disposal of any Hazardous Substance. Seller has not received any notice from any governmental authority regarding the presence of any Hazardous Substance, any present or past generation, recycling, reuse, sale, storage, handling, transport and/or disposal of any Hazardous Substance or any failure to comply with any applicable local, state or federal environmental laws, regulations, ordinances or administrative or judicial orders relating to the generation, recycling, reuse, sale, storage, handling, transport and/or disposal of any Hazardous Substance. Seller shall at all times prior to Closing comply with all applicable local, state or federal environmental laws, regulations, ordinances or administrative or judicial orders relating to the generation, recycling, reuse, sale, storage, handling, transport and/or disposal of any Hazardous Substance and Seller shall not generate, recycle, reuse, sell, store, handle, transport and/or dispose of any Hazardous Substance on the Property without the prior written consent of Purchaser, except for such materials as are normally and customarily used for household purposes or in the operation or maintenance or apartment complexes, and which are not in violation of any environmental law. As used herein, the term "Hazardous Substance" means any substance or material defined or designated as a hazardous or toxic -22- waste material or substance, or other similar term by any federal, state or local environmental statute, regulation or ordinance presently or hereinafter in effect, as such statute, regulation or ordinance may be amended from time to time. (n) As of the Closing, except only for the Permitted Outstanding Reservations, there shall be no leases or other occupancy or possessory agreements or contracts affecting the Property, whether oral or written, including, without limitation, any hotel or transient guests on the Property or any unfulfilled hotel or guest reservations affecting the Property. The provisions of this Section shall survive the Closing for a period of one (1) year. 10. Purchaser's Representations. Purchaser represents to Seller as --------------------------- follows: (a) Purchaser has previously reviewed and considered the nature of this transaction and the Inspection Period will enable Purchaser to investigate the Property and all aspects of the transaction. In electing to proceed with this transaction, Purchaser shall have determined that the Property is satisfactory to Purchaser in all respects, and is purchasing the Property in "as is" physical condition, subject only to any representations of Seller expressly set forth in this Agreement. Purchaser has and will rely solely on Purchaser's own independent investigations and inspections, and Purchaser has not relied and will not rely on any representation of Seller other than as expressly set forth in this Agreement. It is expressly covenanted and agreed that, except as expressly provided in this Agreement, neither the Seller, nor any employee, agent, representative or any other person acting on behalf of the Seller has made or will make any representation or warranty of any kind or nature whatsoever, express or implied, concerning the physical condition of the Property, or any part or portion thereof, or its state of repair, or the presence or the absence of any latent or patent defects, or its income potential, expenses or uses, or its merchantability, or fitness for any use or purpose. Purchaser acknowledges and agrees that its agreement to accept the Property in "AS IS" condition, without representation or warranty, except as expressly provided in this Agreement, is a material part of the consideration being bargained for by Seller, without which consideration, Seller will not agree to sell the Property on the price and terms set forth herein. (b) The execution, delivery and performance of this Agreement by Purchaser have been duly authorized, and this Agreement is binding on Purchaser and enforceable against Purchaser in accordance with its terms. No consent of any other person or entity to such execution, delivery and performance is required. 11. Default Provisions. In the event of the failure or refusal of the ------------------ Purchaser to close this transaction, without fault on Seller's part and without failure of title or any conditions -23- precedent to Purchaser's obligations hereunder, Seller shall receive the Deposit together with all interest earned thereon as agreed and liquidated damages for said breach, and as Seller's sole and exclusive remedy for default of Purchaser, whereupon the parties shall be relieved of all further obligations hereunder, except those obligations which are specifically stated herein to survive the termination or Closing of this transaction. In the event of a default by Seller under this Agreement, Purchaser at its option shall have the right to: (i) receive the return of the Deposit together with interest earned thereon, whereupon the parties shall be released from all further obligations under this Agreement, except those obligations which are specifically stated herein to survive the termination or Closing, unless the default was caused by the willful act, omission, or intentional material misrepresentation of Seller in which event Seller shall continue to be liable for damages caused thereby, anything to the contrary notwithstanding, or, alternatively, (ii) seek specific performance of the Seller's obligations hereunder and/or any other equitable remedies, thereby waiving damages. Notwithstanding the foregoing, in the event of a default by either party of any obligations which specifically survive Closing, then the non-defaulting party shall be entitled to seek any legal redress permitted by law or equity. The provisions hereof shall survive Closing. 12. Prorations. Real estate and personal property taxes, utilities and ---------- all other proratable items (including without limitation room rentals paid or to be paid by guests of the Property covering periods of time both before and after Closing), shall be prorated as of the date of Closing. Purchaser shall receive a credit against the Purchase Price at Closing for all pre-paid room rentals. Seller shall be entitled to all room rentals with respect to periods on or before Closing, which are paid after Closing as to guests occupying any portion of the Property as of the Closing date. Seller and Purchaser shall adjust for such room rentals within sixty (60) days -24- following the Closing date. Seller shall pay all sales and/or use tax due on revenues received and purchases made prior to the Closing date and shall comply with all statutory provisions necessary for Purchaser to avoid transferee liability for same. In the event the taxes for the year of Closing are unknown, the tax proration will be based upon the taxes for the prior year, and at the request of either party, the taxes for the year of Closing shall be reprorated and adjusted when the tax bill for such year is received and the actual amount of taxes is known. If the net prorations under this Section result in a credit to Seller, Purchaser shall pay such credit in cash at Closing. If, however, the net prorations hereunder result in a credit to Purchaser, such credit shall be applied as a reduction in the Purchase Price and, correspondingly, the principal amount of the Purchase Money Note. The provisions of this Section shall survive the Closing. 13. Improvement Liens. Certified, confirmed or ratified liens for ----------------- governmental improvements as of the date of Closing, if any, shall be paid in full by Seller, and pending liens for governmental improvements as of the date of Closing shall be assumed by the Purchaser, provided that where the improvement has been substantially completed as of the date of Closing, such pending lien shall be considered certified. 14. Closing Costs. The parties shall bear the following costs: ------------- (a) The Purchaser shall be responsible for payment of the following: (i) the cost of examining the Commitment and Survey, (ii) the cost of the Survey, but only to the extent of its obligation for same pursuant to Section 6 above, (iii) any and all costs and expenses of architectural, engineering and other inspection and feasibility studies and reports incident to Purchaser's inspections, (iv) clerk's recordation fees for recording the warranty deed and the Purchase Money Mortgage, (v) the documentary stamps and intangible taxes due on the Purchase Money Note and Purchase Money Mortgage, and (vi) the costs of the simultaneous issue of a loan policy of title insurance in favor of Seller insuring the Purchase Money Mortgage, provided that the cost thereof shall not exceed $250.00. (b) The Seller shall be responsible for payment of the following: (i) any costs associated with issuance of the Commitment (including the premium for the -25- owner's policy issued pursuant thereto), (ii) the cost of the Survey, but only to the extent of its obligation for same pursuant to Section 6 above, (iii) any transfer taxes in connection with the delivery of the deed and bill of sale including documentary stamp tax and surtax, and (iv) recording costs on the Declaration Amendment, the termination of any other restrictive covenants and on any documents necessary to clear title. (c) Each party shall pay its own legal fees. 15. Closing. Subject to other provisions of this Agreement for extension, ------- the closing (the "Closing") shall be held on August 15, 2001 or such earlier date as Purchaser may request on not less than fourteen (14) days prior written notice to Seller. Closing shall be held at the office of Seller's counsel. At Closing, Seller shall execute and/or deliver to Purchaser the following documents: (a) a good and sufficient special warranty deed subject only to the Permitted Exceptions, (b) an appropriate mechanic's lien affidavit, sufficient in form and content for any title insurance company to delete the standard exceptions for mechanic's liens, and, to the extent of work performed in the ninety (90) days prior to Closing, appropriate releases and indemnities to allow Purchaser to obtain title insurance coverage over any unfiled liens, (c) an affidavit of exclusive possession, subject only to the Permitted Outstanding Reservations, (d) an appropriate bill of sale with warranty of title for claims by, through or under Seller for all tangible personal property included in this transaction, (e) a non-foreign affidavit and/or certificate pursuant to Section 9(l) above, (f) appropriate assignments of all licenses, easements, rights-of-way, contract rights, guarantees and warranties, and other property and rights included in this transaction, to the extent separable and transferable, (g) a consent and estoppel statement from Ramada confirming that, (i) Ramada consents to the transfer of Seller's interest in the Franchise Agreement to Purchaser, (ii) to the best of Ramada's knowledge, the Franchise Agreement is in full force and effect and free of any default by Seller, and (ii) to the best of Ramada's knowledge, Seller has paid all amounts due, and has complied with all of its obligations, under the Franchise Agreement up to the date of transfer, -26- (h) appropriate evidence of Seller's formation, existence and authority to sell and convey the Property, (i) an appropriate "gap" affidavit and/or indemnity as required by the title insurer, (j) assignment of all Licenses, to the extent separable and transferable, (k) with respect to the Contracts, (i) an appropriate assignment and assumption of the Assumed Contracts, (ii) satisfactory evidence that the Terminated Contracts have been terminated with all penalties and termination fees paid, and (iii) a copy of Seller's cancellation of the 30-Day Cancellation Contracts, and (l) a marked-up title insurance Commitment issued by a national title insurance company acceptable to Purchaser pursuant to Section 6 above. At Closing, Seller and Purchaser shall each execute counterpart closing statements, an appropriate assignment and assumption of the Assumed Contracts and such other documents as are reasonably necessary to consummate this transaction. Additionally, Purchaser and Seller shall execute the Declaration Amendment and releases of the other restrictive covenants referred to in Section 6 above. Finally, Escrow Agent shall deliver to Seller a loan policy of title insurance in the amount of the Purchase Money Note insuring the Purchase Money Mortgage. 16. Brokers. The parties each represent and warrant to the other that ------- there are no real estate brokers, salesmen or finders involved in this transaction. If a claim for brokerage in connection with the transaction is made by any broker, salesman or finder, claiming to have dealt through or on behalf of one of the parties hereto ("Indemnitor"), Indemnitor shall indemnify, defend and hold harmless the other party hereunder ("Indemnitee"), and Indemnitee's officers, directors, agents and representatives, from all liabilities, damages, claims, costs, fees and expenses whatsoever (including reasonable attorney's fees and court costs at trial and all appellate levels) with respect to said claim for brokerage. The provisions of this Section shall survive the Closing and any cancellation or termination of this Agreement. -27- 17. Assignability. Purchaser shall be entitled to assign its rights ------------- hereunder to any subsidiary or any other entity controlled by Purchaser. No other assignment of this Agreement shall be permitted without the prior written consent of Seller, which may be withheld or denied by Seller in its sole and absolute discretion. Notwithstanding the foregoing, no assignment shall be binding upon or effective against Seller unless such assignment is in writing, is executed by the assignor and assignee, with the assignor expressly acknowledging that the assignment in no way releases the assignor from any duties, liabilities or obligations under the Agreement, and with the assignee expressly assuming and agreeing to pay and perform all of the assignor's duties, liabilities or obligations under the Agreement, and a fully executed counterpart of the assignment delivered to Seller. In the event that Purchaser assigns its rights under this Agreement, Purchaser shall not be released from its obligations and liabilities hereunder, shall remain liable under the terms hereof, and shall be required to unconditionally and irrevocably guarantee payment and performance of the Purchase Money Note and Purchase Money Mortgage. 18. Inspections. Purchaser, and Purchaser's agents and contractors, shall ----------- have the right during the term of this Agreement to enter upon the Property at reasonable times and upon 24 hour advance notice by telephone or facsimile notice to Holly Caracciolo, Telephone No. (407) 396-9700 and Fax No. (407) 396- 9800, for purposes of inspection and making tests and studies thereon. Seller shall have the right to require Purchaser, and Purchaser's agents and contractors, to enter upon the Property only when accompanied by Seller or a representative of Seller. Throughout the term of this Agreement, Seller, its agents and employees shall at all times cooperate with Purchaser, its agents and contractors in connection with their performance of the inspections provided herein. All such inspections, tests and studies shall be undertaken by -28- Purchaser in a manner and at such times and places so as to not unreasonably disturb or interfere with the quiet enjoyment of the Property by Seller's guests and/or tenants. Purchaser agrees to indemnify, defend and hold harmless Seller from and against all liabilities, damages, claims, costs, fees and expenses whatsoever (including reasonable attorney's fees and court costs at trial and all appellate levels) arising out of or resulting from any physical damage to the Property caused by Purchaser, or Purchaser's agents, contractors or employees, in connection with such inspection or investigation. 19. Escrow Agent. The Escrow Agent shall not be liable for any actions -------------- taken in good faith, but only for its gross or willful negligence. The parties hereby indemnify and hold the Escrow Agent harmless from and against any loss, liability, claim or damage whatsoever (including reasonable attorney's fees and court costs at trial and all appellate levels) the Escrow Agent may incur or be exposed to in its capacity as escrow agent hereunder except for gross negligence or willful misconduct. If there be any dispute as to the disposition of the Deposit held by the Escrow Agent pursuant to the terms of this Agreement, the Escrow Agent is hereby authorized to interplead said amount with any court of competent jurisdiction and thereby be released from all obligations hereunder. The Escrow Agent shall not be liable for any failure of the depository. Purchaser acknowledges and agrees that Escrow Agent is acting as counsel to Seller in this transaction, and that this conflict of interest does not disqualify Escrow Agent from acting in such dual capacity. Purchaser further acknowledges and agrees that in the event of any dispute regarding this transaction or the Agreement (including, without limitation, a dispute regarding disbursement of amounts being held by Escrow Agent), Escrow Agent shall not be disqualified from representing Seller with regard to such dispute, notwithstanding its status as Escrow Agent. -29- 20. Notices. Any notices required or permitted to be given under this ------- Agreement shall be in writing and shall be deemed to have been given if delivered by hand, sent by recognized overnight courier (such as Federal Express), sent by facsimile transmission or mailed by certified or registered mail, return receipt requested, in a postage prepaid envelope, and addressed as follows: If to the Purchaser at: Mego Financial Corp. 4310 Paradise Road Las Vegas, NV 89109 Attn: Jerome J. Cohen, President Fax No. (702) 369-4398 With a copy to: Mego Financial Corp. 4310 Paradise Road Las Vegas, NV 89109 Attn: Jon A. Joseph, General Counsel Fax No. (702) 369-4398 and to: Greenberg Traurig, P.A. 1221 Brickell Avenue Miami, Florida 33131 Attn: Gary A. Saul, Esq. Fax No. (305) 579-0717 If to the Seller at: Marc Wilkow, President M&J Wilkow, Ltd. 180 North Michigan Avenue Chicago, Illinois 60601 Fax No. (312) 658-2467 With a copy to: James E. Slater, Esq. Broad and Cassel Suite 1100 390 North Orange Avenue Orlando, Florida 32801 Fax No. (407) 650-0941 -30- Notices personally delivered or sent by overnight courier shall be deemed given on the date of delivery, notices transmitted by facsimile shall be deemed given on the date sent provided that the transmitting machine confirms transmission in writing (or otherwise, upon actual receipt by the other party) and notices mailed in accordance with the foregoing shall be deemed given three (3) days after deposit in the U.S. mails. 21. Risk of Loss. The Property shall be conveyed to Purchaser in the same ------------ condition as on the date of this Agreement, ordinary wear and tear excepted, free of all tenancies or occupancies (other than the Permitted Outstanding Reservations), and Seller shall not remove any Personalty from the Property between now and Closing. In the event that the Property or any material portion thereof is taken by eminent domain prior to Closing, Purchaser shall have the option of either: (i) canceling this Agreement, and receiving a refund of the Deposit and all interest earned thereon, whereupon both parties shall be relieved of all further obligations under this Agreement, except those obligations which are specifically stated herein to survive the termination or Closing, or (ii) Purchaser may proceed with Closing in which case Purchaser shall be entitled to all condemnation awards and settlements. In the event that the Improvements are damaged or destroyed by fire or other casualty prior to Closing, Seller shall have the option to repair and restore the Property to the same condition as before the fire or casualty and Closing shall be deferred for up to sixty (60) days to permit such repair and restoration. If Seller elects not to repair and restore or if Seller is unable to repair and restore within such sixty (60) day period, then Purchaser shall have the option of either: (i) canceling this Agreement and receiving a refund of the Deposit and all interest earned thereon, whereupon both parties shall be released from all further obligations under this Agreement, except those obligations which are specifically stated herein to survive the termination or Closing, or (ii) proceeding with Closing without -31- reduction in the Purchase Price in which case Purchaser shall be entitled to all insurance proceeds allocable to the Property. 22. Indemnity. Seller shall indemnify and hold Purchaser harmless from --------- any and all liability, including costs and reasonable attorneys' fees (at trial and all appellate levels) for: (a) Any sales tax due on any rentals or sales prior to the Closing to the State of Florida under Florida Statutes Section 212.10. (b) Any contracts for services to the property existing now or at any time prior to Closing (other than obligations arising from the Permitted Exceptions or the Assumed Contracts, or the limited obligation to pay only the regular scheduled payments under the 30-Day Cancellation Contract for the 30-day period following Closing), and any obligation or matter arising or accruing, or resulting from or growing out of any of the Contracts which relates to an event or period of time prior to the Closing date. (c) Any security deposits of tenants received by Seller prior to Closing. (d) Any personal property taxes remaining unpaid for calendar years prior to the year of Closing. Purchaser shall indemnify and hold Seller harmless from any liability, including costs and reasonable attorneys' fees (at trial and all appellate levels) for (i) any matter occurring after the Closing under the Assumed Contracts, and (ii) any liability that may arise as a result of Purchaser's failure to meet its obligation under Section 9(a) to make the scheduled payments under the 30-Day Cancellation Contracts until the 30/th/ day following Closing. The provisions of this Section 22 shall survive the Closing. 23. Disclosures. Pursuant to the laws of the State of Florida, Seller is ----------- required to provide the following notice to Purchaser: (a) RADON GAS: Radon is a naturally occurring radioactive gas that, when it has accumulated in a building in sufficient quantities, may present health risks to persons who are exposed to it over time. Levels of radon that exceed federal and state guidelines have been found in buildings in Florida. Additional information regarding radon and radon testing may be obtained from your county public health unit. -32- (b) The prospective purchaser of real property with a building for occupancy located thereon is notified that the purchaser may have the building's energy efficiency rating determined. (c) Seller hereby represents and warrants that the Property is located in coastal areas partially or totally seaward of the coastal construction control line as defined in Chapters 161.053 of the Florida Statutes. Pursuant to Chapter 161.57 of the Florida Statutes, the Survey shall delineate the location of the coastal construction control line on the Property. 24. Miscellaneous. ------------- (a) This Agreement shall be construed and governed in accordance with the laws of the State of Florida. All of the parties to this Agreement have participated fully in the negotiation and preparation hereof; and, accordingly, this Agreement shall not be more strictly construed against any one of the parties hereto. (b) In the event any term or provision of this Agreement be determined by appropriate judicial authority to be illegal or otherwise invalid, such provision shall be given its nearest legal meaning or be construed as deleted as such authority determines, and the remainder of this Agreement shall be construed to be in full force and effect. (c) In the event of any litigation between the parties under this Agreement, the prevailing party shall be entitled to reasonable attorney's fees and court costs at all trial and appellate levels. The provisions of this subparagraph shall survive the closing coextensively with other surviving provisions of this Agreement. (d) If any date upon which, or by which, action required under this Agreement is a Saturday, Sunday or legal holiday recognized by the Federal government, then the date for such action shall be extended to the first day that is after such date and is not a Saturday, Sunday or legal holiday recognized by the Federal government. (e) In construing this Agreement, the singular shall be held to include the plural, the plural shall include the singular, the use of any gender shall include every other and all genders, and captions and paragraph headings shall be disregarded. (f) Time shall be of the essence for each and every provision of this Agreement. (g) All of the exhibits attached to this Agreement are incorporated in, and made a part of, this Agreement. 25. Entire Agreement. This Agreement constitutes the entire agreement ---------------- between the parties and there are no other agreements, representations or warranties other than as set forth -33- herein. This Agreement may not be changed, altered or modified except by an instrument in writing signed by the party against whom enforcement of such change would be sought. This Agreement shall be binding upon the parties hereto and their respective successors and assigns. 26. Assets of Riviera Management Corporation. Riviera Management ---------------------------------------- Corporation, an Illinois corporation ("Riviera") operates a gift shop/convenience store within one of the Buildings comprising the Property. Seller confirms that Riviera desires to sell to Purchaser, and Purchaser desires to purchase from Riviera, the following assets of Riviera: (a) that certain Beer and Wine Liquor License No. BEV-5307520, Series 2COP (the "Liquor License"), granted to Riviera by the Department of Business and Professional Regulation, Division of Alcoholic Beverages and Tobacco (the "Division"); and (b) the inventory of Riviera, if any, including all consumables, packaging materials, products, supplies, merchandise and other stock-in-trade inventory which, as of the date of Closing (as hereinafter defined), is located at the Property and/or used in connection with the shop (the "Inventory"). The following provisions shall govern the transfer of the Liquor License and Inventory from Riviera to Purchaser: (a) The purchase price to be paid by Purchaser for the Inventory shall be an amount equal to the amount paid by Riviera for the Inventory at cost (the "Inventory Cost"), evidenced by paid invoices, paid receipts and/or other satisfactory evidence of payment. The Inventory Cost shall be determined by Purchaser and Riviera at a mutually convenient time on the day prior to the date of Closing, and shall be adjusted, to the extent feasible, for sales made on the date of Closing. The parties agree to cooperate with each other and to act in good faith in determining the Inventory Cost. The Inventory Cost shall be paid by Purchaser to Riviera at Closing by cashier's check, attorney's trust account check or wire transfer of funds. (b) Seller shall cause Riviera to transfer the Inventory to Purchaser at closing by bill of sale. (c) Seller shall cause Riviera to cooperate with Purchaser, at no cost to Riviera, in effecting the transfer of the Liquor License to Purchaser (or its designee), and shall join in any applications that are required for that purpose. Purchaser (or its designee) shall be solely responsible for and shall pay all fees required to be paid by the Division in connection with the transfer contemplated hereunder. There shall be no separate charge for the transfer of the Liquor License to Purchaser (or its designee). The Closing shall not be conditioned upon the -34- transfer of the Liquor License; however, the terms hereof shall survive Closing until the Liquor License is transferred to Purchaser (or its designee) or such transfer is denied by the Division. (d) In the event that the Liquor License is not transferred by the Closing date, the Inventory shall exclude any beer and wine. In such event, the beer and wine shall be stored in a cool and secure location and transferred at the time the Liquor License is transferred to Purchaser, or removed from the Property by Riviera in the event the Division denies consent to the transfer. The provisions hereof shall survive Closing. EXECUTED as of the date first above written in several counterparts, each of which shall be deemed an original, but all constituting only one agreement. Witnessed by: SELLER: THE VILLAS AT MONTEREY LIMITED PARTNERSHIP, a Florida limited partnership By: M & J Wilkow of Florida, Inc., General Partner By: /s/ Marc Wilkow ---------------------------------- Marc Wilkow, President /s/ Jennifer L. Harshbarger - ---------------------------------------- Tax ID No. 36-4065854 -------------------------------- TANGO BAY OF ORLANDO, LC, a Florida limited liability company -35- By: Arlington Annex Corporation, a Florida corporation, its Manager By: /s/ Marc Wilkow ------------------------------- Marc Wilkow, President _____________________________ Tax ID No. _____________________________ PURCHASER: MEGO FINANCIAL CORP., a New York corporation By: /s/ Jerome J. Cohen ----------------------------------- Jerome J. Cohen, President S/s Jon A. Joseph - ------------------------ Tax ID No. 13-5629885 ---------- -36- RECEIPT ------- The undersigned Escrow Agent hereby acknowledges receipt of a check, subject to clearance, in the amount of Ten Thousand and No/100 Dollars ($10,000.00) from Purchaser to be held as the Deposit pursuant to the foregoing Agreement. ESCROW AGENT BROAD and CASSEL By: /s/ James E. Statler, P.A. ---------------------------------- -37- EXHIBIT "A" ----------- LEGAL DESCRIPTION OF REALTY --------------------------- [Precise legal to be determined pursuant to the survey to be delivered per Section 6 of this Agreement] Building H ---------- Building I ---------- Building K ---------- Building J ---------- Building D ---------- Buildings A, B and C -------------------- EXHIBIT "D" ----------- PERMITTED EXCEPTIONS -------------------- 1. Decree Incorporating Drainage District recorded May 27, 1970 in Official Records Book 1948, Page 639 of the Public Records of Orange County, Florida, and Notice of Lien recorded October 26, 1993 in Official Records Book 4640, Page 4288 of the Public Records of Orange County, Florida. 2. Notice of Restrictions on Real Estate recorded June 30, 1972 in Official Records Book 2244, Page 736 of the Public Records of Orange County, Florida, as partially terminated by Termination of Restrictions recorded August 14, 1985 in Official Records Book 3676, Page 1019 of the Public Records of Orange County, Florida. 3. Declaration of Covenants, Conditions and Restrictions for "Westwood Lakes Subdivision" recorded May 28, 1986 in Official Records Book 3790, Page 2732, as amended by Amendment to Declaration of Covenants, Conditions and Restrictions for "Westwood Lakes Subdivision" recorded in Official Records Book 3827, Page 1018, and Second Amendment recorded in Official Records Book 4115, Page 4648, all of the Public Records of Orange County, Florida. 4. Grant of Easement recorded September 10, 1986 in Official Records Book 3819, Page 0439 of the Public Records of Orange County, Florida. 5. The following matters set forth on the Plat of Orangewood Neighborhood-2 recorded in Plat Book 17, Page 81 of the Public Records of Orange County, Florida: (a) 10.00 foot Utility and Lake Maintenance Easement reserved along side parcel lines; (b) 10.00 foot Utility Easement reserved along rear parcel lines; 6. Distribution Easement in favor of Florida Power Corporation recorded June 26, 1987 in Official Records Book 3898, Page 3699 of the Public Records of Orange County, Florida. 7. Declaration of Restrictions and Protective Covenants for Tango Bay recorded April 9, 1996 in Official Records Book 5038, Page 3760 of the Public Records of Orange County, Florida 8. Perpetual Non-Exclusive Easement recorded April 9, 1996 in Official Records Book 5038, Page 3819 of the Public Records of Orange County, Florida 9. Non-Exclusive Easement recorded April 9, 1996 in Official Records Book 5038, Page 3833 of the Public Records of Orange County, Florida -39- 10. Notice of Easement to Time Warner Entertainment-Advance/Newhouse Partnership, through its Florida Division d/b/a Time Warner Cable recorded June 10, 1999 in Official Records Book 5770, Page 2062 of the Public Records of Orange County, Florida. -40- EXHIBIT "E" ----------- LIST OF CONTRACTS ----------------- Assumed Contracts - ----------------- 1. Lease dated March 29, 1996 by and between Seller and Preferred Equities Corporation, as amended by Amendment to Lease dated September 10, 1997. 2. Cable Television Installation and Service Agreement for Hotel dated _____________, 1998 with Time Warner Entertainment-Advance/Newhouse Partnership, Central Florida Division. 3. Laundry Space Lease dated March 1, 1993 with Amerivend Corporation. 4. Lease Agreement dated June 22, 2000 with Pitney Bowes Credit Corporation. 5. Property Management System Equipment Sales, Software License and Services Agreement dated July 10, 1997 with Multi-Systems Inc. 6. Customer Service Agreement dated November 7, 2000 with US LEC of Florida, Inc. 7. Contract dated June 6, 1992 with John P. MacManus/Safeguard Services Southeast, Inc. 8. Dispenser Bailment Agreement dated February 16, 1999 with SYSCO Food Services of Central Florida. 9. Maintenance Service Agreement dated January 1, 2001 with Pavarini Business Communications, a division of Property Technologies, Ltd. 10. Music Service Agreement dated November 11, 1997 with Muzak LLC. 11. Air conditioning/HVAC service agreement dated May 5, 2001 with Ferran Services & Contracting, Inc. 12. Landscaping Contract with Central Landscape Management, Inc. 13. Residential Installation and Monitoring Agreement dated September 22, 1999 with Security Link/Ameritech. 14. Advertising Contract with Cendant. 15. Wholesale Travel Agreements with Red Seal Tours, Americanada, T Pro Florida, New World Travel, North American Leisure Group (d/b/a Airtours Vacations, Inc. and The 41 Holiday Network), First Choice, Thomson Holidays Limited, PGA Merchandise Show 2002, Cellular Telecommunications Industry Association and World of Vacations. 16. Wood Destroying Organism Treatment Agreement dated June 11, 1999 with Truly Nolen. 17. The Ramada Franchise Agreement. Terminated Contracts - -------------------- 18. Service/Lease Agreement with PageNet. 19. Promotional Subscriber Agreement dated January 27, 2000 with Nextel. 20. Display Advertising Contract dated October 14, 1999 with Job Finder. 21. Equipment Agreement dated June 30, 1997 with Copytronics. 22. Travelers Discount Guide Advertising Agreement dated June 6, 2001. 23. Master License Agreement dated as of November 25, 1997, with Pizza Hut, Inc., as amended by letter dated December 2, 1997. 30-Day Cancellation Contracts - ----------------------------- 24. Service Contract No. 52000067 dated April 3, 2000 with Dunbar Armored, Inc. 25. Pest Prevention Service Agreement dated May 18, 2001 with The Steritech Group, Inc. 26. Equipment Rental and Service Agreement with Crystal Springs. 27. Pool Maintenance Contract dated March 30, 1998 with Poolworks. 42 ASSIGNMENT OF CONTRACTS AND ASSUMPTION AGREEMENT THIS ASSIGNMENT OF CONTRACTS AND ASSUMPTION AGREEMENT ("Assignment") is made and entered into as of the 15/th/ day of August, 2001, by and between THE VILLAS AT MONTEREY LIMITED PARTNERSHIP, a Florida limited partnership and TANGO BAY OF ORLANDO, LC, a Florida limited liability company (collectively, the "Assignor") and MEGO FINANCIAL CORP., a New York corporation ("Assignee"). W I T N E S S E T H: WHEREAS, Assignee is this day purchasing from Assignor and Assignor is conveying to Assignee or its designees the real property described on Exhibit ------- "A" attached hereto and by this reference made a part hereof, together with all - --- improvements and appurtenances thereto (the "Property"); and WHEREAS, as a part of such sale and purchase, Assignor has agreed to assign to Assignee, and Assignee has agreed to accept and assume those certain contracts listed on Exhibit "B", attached hereto and by this reference made a ----------- part hereof (the "Contracts"); and WHEREAS, Assignor desires to assign to Assignee all of its right, title and interest in and to the Service Contracts, and Assignee desires to accept such assignment and to assume all of Assignor's obligations to Assignee under the Contracts. NOW, THEREFORE, in consideration of the sum of Ten and No/100 Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Assignor hereby assigns, transfers, conveys and delegates to Assignee, and Assignee hereby accepts from Assignor, all of Assignor's right, title, interest, duties and obligations in, to and under the Contracts and all claims, rights, benefits and privileges, if any, that Assignor may have or to which Assignor may be entitled under or by virtue of the Contracts. It is the intention of the parties hereto that Assignee shall have and be vested with all of the same rights, benefits, risks and obligations conferred upon and undertaken by Assignor in the Contracts as though, and to the same extent as if, Assignee had been named as the original party in the Contracts rather than the Assignor. 2. Assignee hereby assumes and agrees to perform and observe all agreements, covenants and obligations to be performed and observed by Assignor only under those Contracts designated as "Assumed Contracts" on Exhibit "B". Assignee hereby agrees to indemnify and hold Assignor harmless from any and all obligations, liabilities, claims and causes of action, arising under the Assumed Contracts and the transactions contemplated therein arising from and after the date hereof. Assignee has not assumed and does not assume any of those Contracts designated on Exhibit "B" as "30 Day Termination Contracts", all of which have been terminated by Assignor as of the date 43 hereof, but which termination will not become effective until thirty (30) days hereafter. Assignee hereby agrees to indemnify and hold Assignor harmless from and against any regularly scheduled payments due under the 30 Day Termination Contracts which are payable within the 30 day period from and after the date hereof. 3. Assignor hereby agrees to indemnify and hold Assignee harmless from any and all obligations, liabilities, claims and causes of action, arising under the Assumed Contracts and the transactions contemplated therein prior to the date hereof. Assignor hereby agrees to indemnify and hold Assignee harmless from any and all obligations, liabilities, claims and causes of action arising under to 30 Day Termination Contracts and the transactions contemplated therein, whether accruing or occurring prior to or after the date hereof, other than regularly scheduled payments thereunder which become payable within 30 days from and after the date hereof. IN WITNESS WHEREOF, the parties hereto have executed this Assignment and Assumption of Contracts as of the date first above written. Signed, sealed and delivered ASSIGNOR: in the presence of: THE VILLAS AT MONTEREY LIMITED PARTNERSHIP, a Florida limited partnership By: M & J WILKOW OF FLORIDA, INC., a Florida corporation, its General Partner /s/ Danyelle M. Guna By: /s/ Marc R. WIlkow - -------------------------------------- ---------------------- Print Name: Danyelle M. Guna R. WILKOW ---------------- President /s/ Jennifer L . Harshbarger - -------------------------------------- Print Name: Jennifer L. Harshbarter {Corporate Seal ----------------------- AND TANGO BAY OF ORLANDO, L.C., a Florida limited liability company By: ARLINGTON ANNEX CORPORATION, an Illinois corporation, its Manager /s/ Danyelle M. Guna By: /s/ Marc R. Wilkow - -------------------------------------- ---------------------- Print Name: Danyelle M. Guna MARC R. WILKOW --------------------------- President /s/ Jennifer L. Harshbarger - -------------------------------------- Print Name: Jennifer L. Harshbarter Corporate Seal --------------------------- 44 ASSIGNEE: MEGO FINANCIAL CORP., a New York corporation ____________________________________ By:________________________________ Print Name:_________________________ Print Name:________________________ Title:_____________________________ ____________________________________ Print Name:_________________________ {Corporate Seal} 45 EXHIBIT "A" Legal Description ----------------- That part of Parcel 13, ORANGEWOOD NEIGHBORHOOD 2, according to the plat thereof, as recorded in Plat Book 17, Pages 81 through 87, of the Public Records of Orange County, Florida, described as follows: Commence at the Southwest corner of said Parcel 13; thence run N 00 (degrees)29'59" E along the West line of said Parcel 13 for a distance of 328.96 feet; thence run the following four (4) courses along the Northerly line of said Parcel 13: N 88 (degrees)44'43" E for a distance of 201.50 feet; thence run N 72(degrees)42'17" E for a distance of 236.31 feet to the POINT OF BEGINNING; thence continue N 72(degrees)42'17" E for a distance of 566.56 feet; thence run N 18(degrees)7'47" E for a distance of 738.22 feet to the Westerly right-of-way line of Villa De Costa Drive, as recorded in Official Records Book 5038, Page 3857, of said Public Records; thence run the following seventeen (17) courses along said Westerly right-of-way line: S 40(degrees)05'26" E for a distance of 96.77 feet; thence run S 49(degrees)54'33" W for a distance of 52.10 feet to the point of curvature of a curve concave Easterly having a radius of 69.50 feet; thence run Southerly along the arc of said curve through a central angle of 126(degrees)27'29" for a distance of 153.39 feet to a non-tangent line; thence run N 78(degrees)04'19" E for a distance of 17.79 feet; thence run S 11(degrees)55'41" E for a distance of 234.64 feet to the point of curvature of a curve concave Westerly having a radius of 151.33 feet; thence run Southerly along the arc of said curve through a central angle of 51(degrees)03'18" for a distance of 134.85 feet to a point of compound curvature of a curve concave Northwesterly having a radius of 88.30 feet; thence run Southwesterly along the arc of said curve through a central angle of 45(degrees)53'36" for a distance of 70.73 feet to the point of tangency; thence run S 85(degrees)01'14" W for a distance of 60.22 feet to the point of curvature of a curve concave Southeasterly having a radius of 237.64 feet; thence run Southwesterly along the arc of said curve through a central angle of 38(degrees)35'29" for a distance of 160.06 feet to a point of compound curvature of a curve concave Southeasterly having a radius of 203.93 feet; thence run Southwesterly along the arc of said curve through a central angle of 33(degrees)07'15" for a distance of 117.89 feet to the point of tangency; thence run S 13(degrees)18'30" W for a distance of 124.90 feet to the point of curvature of a curve concave Northwesterly having a radius of 170.57 feet; thence run Southwesterly along the arc of said curve through a central angle of 25(degrees)28'05" for a distance of 75.82 feet to a point of compound curvature of a curve concave Northwesterly having a radius of 83.01 feet; thence run Southwesterly along the arc of said curve through a central angle of 32(degrees)50'30" for a distance of 47.58 feet to the point of tangency; thence run S 71(degrees)37'05" W for a distance of 26.80 feet to the point of curvature of a curve concave Northwesterly having a radius of 386.54 feet; thence run Southwesterly along the arc of said curve through a central angle of 11(degrees)27'46" for a distance of 77.33 feet to the point of tangency; thence run S 83(degrees)04'51" W for a distance of 131.29 feet to the point of curvature of a curve concave Northerly having a radius of 20.00 feet; thence run Westerly along the arc of said curve through a central angle of 58(degrees)43'19" for a distance of 20.50 feet to a point of reverse curvature of a curve concave Southwesterly having a radius of 270.01 feet; thence run Northwesterly along the arc of said curve through a central angle of 19(degrees)10'48" for a distance of 90.39 feet to the point of tangency; thence run N 57(degrees)22'39" W for a distance of 88.16 feet to the point of curvature of a curve concave Southwesterly having a radius of 112.98 feet; thence run Northwesterly along the arc of said curve through a central angle of 21(degrees)39'29" for a distance of 42.71 feet to a radial line; thence run N 10(degrees)57'52" E along said radial line for a 46 distance of 14.40 feet; thence run N 17(degrees)17'43" W for a distance of 26.78 feet to the POINT OF BEGINNING. AND: That part of Parcel 13, ORANGEWOOD NEIGHBORHOOD 2, according to the plat thereof, as recorded in Plat Book 17, Pages 81 through 87, of the Public Records of Orange County, Florida, described as follows: Begin at the Northeast corner of said Parcel 13; thence run S 55(degrees)49'17" W along the Easterly line a said Parcel 13 for a distance of 52.86 feet; thence run S 19(degrees)30'50" W along said Easterly line for a distance of 96.73 feet; thence run S 05(degrees)12'49" E along said Easterly line for a distance of 184.17 feet; thence run S 20(degrees)45'59" W along said Easterly line for a distance of 129.97 feet; thence run N 79(degrees)01'17" W for a distance of 35.40 feet to the Easterly right-of-way line of Villa De Costa Drive as recorded in Official Records Book 5038, Page 3857, of said Public Records and a point on a non-tangent curve concave Westerly having a radius of 175.33 feet and a chord bearing of N 00(degrees)28'29" W; thence run Northerly along the arc of said curve through a central angle of 22(degrees)54'23" for a distance of 70.10 feet to the point of tangency; thence run N 11(degrees)55'41" W for a distance of 237.21 feet to the point of curvature of a curve concave Easterly having a radius of 15.00 feet; thence run Northeasterly along the arc of said curve through a central angle of 65(degrees)51'08" for a distance of 17.24 feet to a point of reverse curvature of a curve concave Northwesterly having a radius of 51.00 feet; thence run Northerly along the arc of said curve through a central angle of 47(degrees)24'58" for a distance of 42.21 feet a point of reverse curvature of a curve concave Southeasterly having a radius of 35.00 feet; thence run Northeasterly along the arc of said curve through a central angle of 48(degrees)07'13" for a distance of 29.40 feet to a point of compound curvature of a curve concave Southerly having a radius of 44.07 feet; thence run Northeasterly along the arc of said curve through a central angle of 36(degrees)24'18" for a distance of 28.00 feet to a point of reverse curvature of a curve concave Northerly having a radius of 150.00 feet; thence run Easterly along the arc of said curve through a central angle of 23(degrees)59'30" for a distance of 62.81 feet to a point of compound curvature of a curve concave Northwesterly having a radius of 160.60 feet; thence run Northeasterly along the arc of said curve through a central angle of 09(degrees)44'16" for a distance of 27.29 feet to the point of tangency; thence run N 57(degrees)18'15" E for a distance of 15.43 feet to the point of curvature of a curve concave Southerly having a radius of 35.00 feet; thence run Easterly along the arc of said curve through a central angle of 35(degrees)16'13" for a distance of 21.55 feet to a point on a non-tangent curve concave Southwesterly having a radius of 1387.40 feet and a chord bearing of S 39(degrees)24'28" E; thence run Southeasterly along the arc of said curve through a central angle of 00(degrees)14'16" for a distance of 5.76 feet to the POINT OF BEGINNING. 47 EXHIBIT "B" ----------- List of Contracts ----------------- Assumed Contracts - ----------------- 1. Lease dated March 29, 1996 by and between Seller and Preferred Equities Corporation, as amended by Amendment to Lease dated September 10, 1997. 2. Cable Television Installation and Service Agreement for Hotel with Time Warner Entertainment-Advance/Newhouse Partnership, Central Florida Division. 3. Laundry Space Lease dated March 1, 1993 with Amerivend Corporation. 4. Lease Agreement dated June 22, 2000 with Pitney Bowes Credit Corporation. 5. Property Management System Equipment Sales, Software License and Services Agreement dated July 10, 1997 with Multi-Systems Inc. 6. Customer Service Agreement dated November 7, 2000 with US LEC of Florida, Inc. 7. Contract dated June 6, 1992 with John P. MacManus/Safeguard Services Southeast, Inc. 8. Dispenser Bailment Agreement dated February 16, 1999 with SYSCO Food Services of Central Florida. 9. Maintenance Service Agreement dated January 1, 2001 with Pavarini Business Communications, a division of Property Technologies, Ltd. 10. Music Service Agreement dated November 11, 1997 with Muzak LLC. 11. Air conditioning/HVAC service agreement dated May 5, 2001 with Ferran Services & Contracting, Inc. 12. Landscaping Contract with Central Landscape Management, Inc. 13. Residential Installation and Monitoring Agreement dated September 22, 1999 with Security Link/Ameritech. 14. Advertising Contract with Cendant. 15. Wholesale Travel Agreements with Red Seal Tours, Americanada, T Pro Florida, New World Travel, North American Leisure Group (d/b/a Airtours Vacations, Inc. and The Holiday Network), First Choice, Thomson Holidays Limited, PGA Merchandise Show 2002, Cellular Telecommunications Industry Association and World of Vacations. 48 16. Wood Destroying Organism Treatment Agreement dated June 11, 1999 with Truly Nolen. 17. The Ramada Franchise Agreement. 30-Day Cancellation Contracts - ----------------------------- 18. Service Contract No. 52000067 dated April 3, 2000 with Dunbar Armored, Inc. 19. Pest Prevention Service Agreement dated May 18, 2001 with The Steritech Group, Inc. 20. Equipment Rental and Service Agreement with Crystal Springs. 21. Pool Maintenance Contract dated March 30, 1998 with Poolworks. 49 EX-10.242 7 dex10242.txt LETTER REGARDING LOAN & SECURITY AGREEMENT Exhibit No. 10.242 January 3, 2002 Preferred Equities Corporation MEGO Financial Corp. 4310 Paradise Road Las Vegas, Nevada 89109 Attention: Ms. Carol Sullivan Dear Ms. Sullivan: Reference is made to the provisions of that certain Second Amended and Restated and Consolidated Loan and Security Agreement (the "Original Loan ------------- Agreement") dated as of May 15, 1997, between Preferred Equities Corporation, a - --------- Nevada corporation, and FINOVA Capital Corporation, a Delaware corporation, (as amended up to the date hereof, the "Loan Agreement"). Unless otherwise defined -------------- herein, all capitalized terms used herein shall have the meanings set forth in the Loan Agreement. This letter supercedes in their entirety those Letter Agreements between Lender and Borrower dated each of October 5, 2001, October 19, 2001, November 5, 2001 and November 15, 2001 and November 28, 2001. 1.1 In the event the aggregate outstanding principal balance of the Receivables Loan exceeds the Borrowing Base, the Loan Agreement requires the Borrower to make an mandatory prepayment so as to reduce the outstanding principal balance of the Receivables Loan to the existing Borrowing Base or in lieu thereof to assign new Eligible Receivables to Lender so as to increase the Borrowing Base to the outstanding principal balance of Receivables Loan, all as more fully provided in Paragraph 7.2 of the Original Agreement. The aggregate ------------- outstanding principal balance of the Receivables Loan presently exceeds the Borrowing Base (such excess hereinafter the "Over Advance Amount") and the ------------------- Borrower has been unable to make the required mandatory prepayment and has further been unable to pledge additional Eligible Receivables, so as to eliminate the Borrowing Base deficiency. As a result, there presently exists the right of the Lender to declare an Event of Default (the foregoing right of the Lender to declare an Event of Default hereinafter the "LTV Default"). ----------- Subject to the conditions set forth in this Side Letter and the termination provisions of the following paragraph, during the period from the date of this Letter to and including July 31, 2002 (the "End Date"), Lender will forbear from -------- exercise any remedies under the Loan Agreement and other Documents (collectively, the "Loan Documents") as a result of the occurrence of the LTV Default, but not as a result of the occurrence of any other existing Events of Default or Incipient Default. 1.2 The Loan Agreement shall be amended by amending and restating the following capitalized terms notwithstanding any contrary definitions contained within the Loan Agreement: 1.2.1. "Receivables Borrowing Term" shall mean the period of time during which Lender is committed to make Advances of the Receivables Loan under this Agreement, which commitment shall terminate on February 28, 2002. 1.2.2. Winnick Building Addition Maturity Date" shall mean February 28, 2002. 1.3 Subject to full execution of this Letter Agreement, each of the Towers Note and the Biloxi Note shall be amended to provide that all amounts payable thereunder shall be due and payable in full on February 28, 2002. 1.4.1. At no time shall the Over Advance Amount exceed the following amounts as of the following dates: Determination Date Maximum Over Advance Amount ------------------ --------------------------- November 30, 2001 $3,900,000 December 31, 2001 $3,500,000 January 31, 2002 $3,000,000 February 28, 2002 $2,500,000 March 31, 2002 $2,000,000 April 30, 2002 $1,500,000 May 31, 2002 $1,000,000 June 30, 2002 $ 500,000 July 31, 2002 -0- 1.4.2. In the event the Over Advance Amount exceeds the foregoing amounts, then Borrower shall make a mandatory payment to Lender or, in lieu thereof, assign new Eligible Receivables to Lender, sufficient so that the Over Advance Amount is not in excess of the permitted amount set forth above, within thirty (30) days following the determination of the Over Advance Amount for the particular determination date. 1.5 In consideration of the agreements of Lender contained herein, Borrower hereby agrees to pay to Lender an extension fee (the "Extension Fee") ------------- in the 2 amount of $250,000 payable in weekly installments of $25,000 each, on the last Business Day of each week commencing on December 28, 2001. Lender will consider, on a case-by-case basis, deferring, in its sole and absolute discretion, Borrower's obligation to pay a particular weekly installment of the Extension Fee provided that within the consecutive four (4) calendar week period ending on the due date of such installment, the Extension Fee has been reduced by $100,000. Notwithstanding any such deferral, the Extension Fee shall be due and payable in full no later than February 28, 2002. The Extension Fee shall not accrue interest until it is due. However if the required installment of the Extension Fee is not paid when due, such delinquent installment shall thereafter accrue interest at the Overdue Rate (as that term is defined in the Receivables Note) until paid. 1.6 To the extent that on April 30, 2002 or on the last day of any month thereafter through and including the end of the month immediately prior to the payment in full of the Receivables Loan, there exists an Over Advance Amount in any amount, including an Over Advance Amount that is within the limits permitted under paragraph 1.4.1 hereof, then within forty-five (45) days --------------- thereafter, Borrower shall pay to Lender a fee (the "Over Advance Fee") in the ---------------- amount of five percent (5%) of the Over Advance Amount unless the Over Advance Amount has been reduced to zero on or before the due date of the Over Advance Fee. Lender's right to receive the Over Advance Fee is in addition to Lender's right to declare an Event of Default as a result of the existence of such Over Advance Amount. The Over Advance Fee shall not accrue interest until it is due. However if the required installment of the Over Advance Fee is not paid when due, such delinquent installment shall thereafter accrue interest at the Overdue Rate (as that term is defined in the Receivables Note) until paid. 1.7 Borrower shall cooperate with Lender in obtaining, on or before January 31, 2002 and at Borrower's sole cost and expense, title insurance policies insuring the amendments to those mortgages or deeds of trusts that were recorded in connection with the Fourteenth Amendment. 1.8 Lender shall have the right to withhold the Extension Fee and the Over Advance Fee from the proceeds of any Advance. 1.9 Lender's agreement to so forbear shall automatically terminate, without further act or instrument, upon the occurrence of any of the following events: (a) Borrower or Guarantor repudiates or asserts a defense to any obligation or liability under the Loan Documents or makes or pursues a claim against Lender; (b) Borrower fails to timely perform any of its obligations (other than the LTV Default) set forth in the Loan Documents (after giving effect to the then applicable provisions of this Side Letter), including, without limitation, Borrower's obligations contained in this Side Letter; 3 (c) Borrower or Guarantor makes an assignment for the benefit of creditors, or generally admits its inability to pay its obligations as they come due or files a petition in bankruptcy or an involuntary petition in bankruptcy is filed naming Borrower or Guarantor as debtor; (d) Lender hereafter becomes aware of (i) any fact or circumstance that Lender believes in good faith is reasonably likely to impair Lender's security (other than those described in this Side Letter) or (ii) any Incipient Defaults or Events of Default under the Loan Documents after giving effect to the then applicable provisions of this Side Letter and other than the LTV Default, whether now or existing or hereafter occurring, which would give rise to a right by Lender to exercise any rights or remedies under the Loan Documents; (e) Borrower is generally not paying its debts as they become due; or (f) The End Date occurs and the LTV Default has not been fully cured. 1.10 Upon termination of Lender's agreement to forbear, Lender shall have the right, in its discretion, to exercise all rights and remedies available to Lender under the Loan Documents with respect to any then existing Events of Default, including the LTV Default. 2. Lender's agreement to forbear, as set forth in this Side Letter, pertains only to the LTV Default that arose on August 31, 2001 and does not constitute a waiver of the obligation of the Borrower to fully comply with any payment or replacement obligations occurring by reason of any subsequently- arising Borrowing Base deficiencies. Furthermore, the making of the agreements in this Side Letter does not constitute a waiver of any Events of Default (including, without limitation, the LTV Default) or Incipient Defaults now in existence. 3. The Loan Documents shall be deemed amended by the provisions of this Side Letter, as and when applicable, and any conflict or inconsistency between this Side Letter and the Loan Documents shall be resolved in favor of this Side Letter. Except as so amended, all other consistent terms and conditions of the Loan Documents will remain in full force and effect. 4. Any further discussions by and among Borrower and Lender, if any, and all such discussions in the past, together with any other actions or inactions taken by and among Borrower and Lender, shall not cause a modification of the Loan Documents, establish a custom or waive (unless Lender made such express waiver in writing), limit or condition the rights and remedies of Lender under the Loan Documents, all of which rights and remedies are expressly reserved. All of the provisions of the Loan Documents, including, without limitation, the time of the essence 4 provision, are hereby reiterated and if ever previously waived are hereby reinstated. This Side Letter is not a novation, nor is it to be construed as a release, waiver, extension of forbearance or modification of any of the terms, conditions, representations, warranties, covenants, rights or remedies set forth in any of the Loan Documents, except as expressly stated herein. Neither the failure nor delay by Lender to exercise its remedies under (i) the Loan Documents (whether before or after the date of this Side Letter) or (ii) any provision of this Side Letter, shall be deemed to amend, modify, supplement, extend, delay, renew, terminate, waive, release or otherwise limit or prejudice Lender's rights and remedies or Borrower's obligations under the Loan Documents (after giving effect to the then applicable provisions of this Side Letter) including, but not limited to, Lender's right to receive full payment of principal and interest as well as late charges, delinquent interest, attorneys' fees and expenses and other charges to the extent provided in the Loan Documents, nor shall such failure or delay affect the relative priority of Lender's security interest in the collateral for the Obligations under the Loan Documents. Borrower understands that nothing referred to above shall operate to prohibit, restrict or to otherwise inhibit Lender from exercising any right or remedy it may have under the Loan Documents or constitute a cure of any Event of Default or Incipient Default and, without limitation, shall not extend any applicable reinstatement or redemption period. In the event that there is an Event of Default or Incipient Default now existing or hereafter arising, other than the LTV Default, Lender shall not be obligated to forbear and may immediately enforce any and all of its rights and remedies. 5. (i) Borrower hereby reaffirms, as if made as of the date hereof, all of Borrower's representations and warranties contained in the Loan Documents. Borrower furthermore reaffirms the validity, enforceability and legality of the Loan Documents, and all provisions of the Loan Documents, as modified, are hereby confirmed and ratified. Without limiting the generality of the foregoing, Borrower hereby reaffirms the validity and enforceability of the security interests granted to Lender in the collateral pledged to Lender. Borrower confirms that such security interests will continue to secure the timely and faithful performance of all Obligations, including, without limitation, the obligations under this Side Letter. (ii) Borrower and Guarantor acknowledge that Lender has performed, and is not in default of, its obligations under the Loan Documents; that there are no offsets, defenses or counterclaims with respect to any of Borrower's, Guarantor's or any other party's obligations under the Loan Documents; and that Lender has not directed Borrower to pay or not pay any of Borrower's payables. Neither Borrower nor Guarantor presently has any existing claims, defenses (personal or otherwise) or rights of setoff whatsoever with respect to the Obligations. Borrower and Guarantor furthermore agree that they have no defense, counterclaim, offset, cross- complaint, claim or demand of any nature whatsoever which can be asserted as a basis to seek affirmative relief or damages from Lender. 5 (iii) Borrower acknowledges that the indebtedness evidenced by the Loan Documents is just and owing and agrees to pay such indebtedness in accordance with the terms of the Loan Documents. Borrower further acknowledges and represents that no event has occurred and no condition presently exists that would constitute a default or event of default by Lender under the Loan Agreement or any of the other Loan Documents, with or without notice or lapse of time. Borrower hereby ratifies, reaffirms, acknowledges and agrees that the Loan Documents represent valid, enforceable and collectable obligations of Borrower. 6. Borrower and Guarantor represent and warrant that (i) they have the full power and authority to execute and deliver this Side Letter; (ii) all action necessary and required by Borrower's and Guarantor's articles of organization and all other legal requirements for Borrower and Guarantor to execute and deliver the this Side Letter have been duly and effectively taken; (iii) this Side Letter does not violate or constitute a default or result in the imposition of a lien under the terms or provisions of any agreement to which Borrower or Guarantor is a party; and (iv) no consent of any governmental agency or any other person not a party to this Side Letter is or will be required as a condition to the execution, delivery or enforceability of this Side Letter. 7. Guarantor acknowledges and agrees that the obligations of the Borrower under this Side Letter constitute additional obligations of the Borrower, the performance of which are guaranteed under the Guarantee signed by the Guarantor. 8. This Side Letter will not be binding upon Lender until, in the manner required below, it has been accepted by Borrower and Guarantor, and once so accepted and agreed to, this Side Letter shall be deemed to amend and supplement the Loan Agreement and the other Documents, constitute one of the Documents and the obligations of the Borrower under this Side Letter shall be deemed an Obligation. 9. Borrower shall pay to or reimburse Lender for all of Lender's out-of-pocket expenses incurred in connection with the preparation of this Side Letter, including without limitation, attorney's fees and costs. 10. This Side Letter may be executed in counterparts, each of which when taken together shall constitute one and the same instrument, notwithstanding the fact that all parties have not signed the same counterpart. In addition, this Side Letter may be executed by facsimile and such facsimile signatures shall be deemed original signatures for all purposes. 6 In the event the foregoing represents an accurate statement of the agreements that have been reached, please sign and return a copy of this Side Letter to the undersigned. Sincerely yours, FINOVA CAPITAL CORPORATION, a Delaware corporation By /s/ ROGER SCHROEDER ---------------------------- Name: Roger Schroeder Title: VP 7 Accepted this 3 day of January, 2002. BORROWER PREFERRED EQUITIES CORPORATION, a Nevada corporation By: /s/ CAROL W. SULLIVAN --------------------- Name: Carol W. Sullivan Title: Sr. Vice President Agreed to as to paragraphs 5(ii), 6 and 7, 8 and 10 and acknowledged as to the balance, this 3rd day of January, 2002 by the following Guarantor: MEGO FINANCIAL CORP., a New York corporation By: /s/ JON A. JOSEPH ----------------- Name: Jon A. Joseph Title: Vice President 8 AMENDMENT NO. 4 TO PROMISSORY NOTE [BILOXI PROPERTY] THIS AMENDMENT NO. 4 TO PROMISSORY NOTE [BILOXI PROPERTY] (this "Amendment") entered into as of this 3 day of January, 2002, between PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Maker"), and FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender"), is made with reference to the following: R E C I T A L S Maker previously executed and delivered to Lender a Promissory Note [Biloxi Property], dated March 20, 1998, in the original principal amount of $1,173,750.00, as amended by that certain Amendment No. 1 to Promissory Note [Biloxi Property] dated March 31, 2000, as further amended by that certain Amendment No. 2 to Promissory Note [Biloxi Property] dated December 29, 2000 and as further amended by that certain Amendment No. 3 to Promissory Note [Biloxi Property] dated April 6, 2001 (collectively the "Note") to evidence the Biloxi Advance (as defined in the Loan Agreement [hereinafter defined] made pursuant to the terms of that certain Second Amended and Restated Loan and Security Agreement dated May 15,1997, between Maker and Lender (the "Original Loan Agreement"). On even date herewith, the Maker and Lender have entered into a Letter Agreement (the "Loan Amendment"). The Loan Amendment provides, among other things, for an amendment to the maturity date of the Note and for an adjustment in the interest rate payable under the Note. The Original Loan Agreement, as amended by the Loan Amendment and all other amendments executed prior to the date hereof, and as the same may, in the future, be amended and restated, is called the "Loan Agreement". All capitalized terms used in this Amendment, which are defined in the Loan Agreement, shall have the same meaning and definition when used herein. The Maker and Lender desire to amend the Note. NOW, THEREFORE, in consideration of these Recitals, the covenants contained in this Amendment, and for other good and valuable consideration, the receipt and sufficiency of which consideration are hereby acknowledged, Lender and Maker agree as follows: 1. All references in the Note to the term "Maturity Date" shall now mean and refer to February 28, 2002. Maker shall have no right to further extend the Maturity Date. 2. Maker hereby ratifies and confirms the Note, as amended hereby, in all respects; and, as amended hereby, the terms thereof shall remain in full force and effect. This Amendment may be attached to and shall form a part of the Note for all purposes. [SIGNATURE PAGE FOLLOWS] 10 IN WITNESS WHEREOF, this instrument is executed as of the date and year first above written. PREFERRED EQUITIES CORPORATION, a Nevada corporation By: /s/ Carol W. Sullivan --------------------- Name: Carol W. Sullivan Title: Sr. Vice President "Maker" FINOVA CAPITAL CORPORATION, a Delaware corporation By: _____________________________ Name: Roger Schroeder Title: Vice President "Lender" 11 State of Nevada ) ) County of Clark ) This instrument was acknowledged before me on January 3, 2002, by Carol W. Sullivan, as Sr. V.P., of PREFERRED EQUITIES CORPORATION, a Nevada corporation, on behalf of the corporation. Syonja L. Garcia --------------------------------- Notary (My commission expires: 8-24-04) State of Arizona ) ) County of Maricopa ) This instrument was acknowledged before me on January 4, 2002, by Roger D. Schroeder as Vice President of FINOVA CAPITAL CORPORATION, a Delaware corporation, on behalf of the corporation. Bonnie J. Fenimore --------------------------------- Notary (My commission expires: January 12, 2005) 12 AMENDMENT NO. 6 TO PROMISSORY NOTE [TOWERS LOBBY] THIS AMENDMENT NO. 6 TO PROMISSORY NOTE [TOWERS LOBBY] (this "Amendment") entered into as of this 3 day of January, 2002, between PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Maker"), and FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender"), is made with reference to the following: R E C I T A L S Maker previously executed and delivered to Lender a Promissory Note dated December 13, 1995, in the original principal amount of $700,000.00 (the "Original Towers Note") to evidence the Loan (the "Towers Loan") made pursuant to the terms of that Amendment No. 13 to Amended and Restated Loan and Security Agreement dated December 13, 1995, between Maker and Lender (said Amended and Restated Loan and Security Agreement, as so amended, the "Original Loan Agreement"). Maker and Lender previously entered into an Amendment No. 1 to Promissory Note which, among other things, increased the principal amount of the Original Towers Note to $1,286,126.00. Maker and Lender previously entered into an Amendment No. 2 to Promissory Note which, among other things, provided for a reduction of the interest rate applicable to the unpaid principal balance under the note. Maker and Lender previously entered into an Amendment No. 3 to Promissory Note which extended the maturity date under the note. Maker and Lender previously entered into an Amendment No. 4 to Promissory Note which further extended the maturity date under the note. Maker and Lender previously entered into an Amendment No. 5 to Promissory Note which further extended the maturity date and increased the interest rate payable thereunder (said Original Towers Note, as so amended up to the date hereof and as hereinafter amended, the "Towers Note"). On even date herewith, the Maker and Lender have entered into a Letter Agreement (the "Loan Amendment"). The Loan Amendment provides, among other things, for an amendment to the maturity date of the Towers Note. The Original Loan Agreement, as amended by the Loan Amendment and all other amendments executed prior to the date hereof, and as the same may, in the future, be amended and restated, 13 is called the "Loan Agreement". All capitalized terms used in this Amendment, which are defined in the Loan Agreement, shall have the same meaning and definition when used herein. NOW, THEREFORE, in consideration of these Recitals, the covenants contained in this Amendment, and for other good and valuable consideration, the receipt and sufficiency of which consideration are hereby acknowledged, Lender and Maker agree as follows: 1. Notwithstanding anything to the contrary contained in the Towers Note, the Maker agrees that, if not sooner paid, the entire unpaid principal balance of the Towers Note, together with all accrued and unpaid interest and fees payable thereunder, shall be due and payable, in full, to the Lender on February 28, 2002 (the "Maturity Date"). 2. Maker hereby ratifies and confirms the Towers Note, as amended hereby, in all respects; and, as amended hereby, the terms thereof shall remain in full force and effect. This Amendment may be attached to and shall form a part of the Towers Note for all purposes. IN WITNESS WHEREOF, this instrument is executed as of the date and year first above written. PREFERRED EQUITIES CORPORATION, a Nevada corporation By: /s/ Carol W. Sullivan ------------------------------ Name: Carol W. Sullivan Title: Sr. Vice President "Maker" FINOVA CAPITAL CORPORATION, a Delaware corporation By: /s/ Roger Schroeder ------------------------------ Name: Roger Schroeder Title: VP "Lender" 14 State of Nevada ) ) County of Clark ) This instrument was acknowledged before me on January 3, 2002 by Carol W. Sullivan, as Sr. V.P., of PREFERRED EQUITIES CORPORATION, a Nevada corporation, on behalf of the corporation. Syonja L. Garcia ---------------------------------- Notary (My commission expires: 8-24-04) State of Arizona ) ) County of Maricopa ) This instrument was acknowledged before me on January 4, 2002 by Roger D. Schroeder, as Vice President of FINOVA CAPITAL CORPORATION, a Delaware corporation, on behalf of the corporation. Bonnie L. Fenimore ---------------------------------- Notary (My commission expires: Jan 12, 2005) 15 EX-10.243 8 dex10243.txt LETTER DATED JANUARY 23, 2002 Exhibit No. 10.243 January 23, 2002 Preferred Equities Corporation MEGO Financial Corp. 4310 Paradise Road Las Vegas, Nevada 89109 Attention: Ms. Carol Sullivan Dear Ms. Sullivan: Reference is made to the provisions of that certain Side Letter between FINOVA Capital Corporation ("Lender") and Preferred Equities Corporation ("Borrower"), dated January 3, 2002 (the "January Side Letter"), wherein, among other things, and in consideration of the agreements set forth therein, the Borrower agreed to pay to Lender an Extension Fee in the amount of Two Hundred Fifty Thousand Dollars ($250,000), payable in weekly installments of Twenty Five Thousand Dollars ($25,000) each, on the last Business Day of each week commencing December 28, 2001. Following the preparation and execution of the January Side Letter, the Borrower expressed an interest in making an offer to purchase from Lender the Great Vacations Resort of Hershey presently owned by Lender. In consideration of the Borrower's agreement to make a good faith offer to purchase the Great Vacations Resort of Hershey from Lender, Lender agrees that the Extension Fee shall be due and payable in its entirety on February 28, 2002, rather than in weekly installments as contemplated in the January Side Letter. The Extension Fee may be withheld from the proceeds of any loan advance made by Lender to Borrower. In addition, the Extension Fee will not accrue interest until due. However, if the Extension Fee is not paid in its entirety when due, the entire amount of such fee shall accrue interest at the Overdue Rate referenced in the January Side Letter. This Side Letter may be executed in counterparts, each of which when taken together shall constitute one and the same instrument, notwithstanding the fact that all parties have not signed the same counterpart. In addition, this Side Letter may be executed by facsimile and such facsimile signatures shall be deemed original signatures for all purposes. Preferred Equities Corporation January 23, 2002 Page 2 In the event the foregoing represents an accurate statement of the agreements that have been reached, please sign and return a copy of this Side Letter to the undersigned. Sincerely yours, FINOVA CAPITAL CORPORATION, a Delaware corporation By: /s/ ROGER SCHROEDER --------------------- Name: Roger Schroeder Title: VP Accepted this 28 day of January, 2002 BORROWER PREFERRED EQUITIES CORPORATION, a Nevada corporation By: /s/ CAROL W. SULLIVAN ---------------------- Name: Carol W. Sullivan Title: Sr. Vice President Acknowledged this 28 day of January, 2002 by -- the following Guarantor: MEGO FINANICAL CORP., a New York corporation By: /s/ FLOYD B KEPHART ---------------------- Name: Floyd W. Kephart Title: Chairman & CEO EX-10.244 9 dex10244.txt LOAN & SECURITY AGREEMENT LOAN AND SECURITY AGREEMENT --------------------------- THIS LOAN AND SECURITY AGREEMENT ("Agreement") dated effective as of March --------- 11, 2002, is made by and between PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Borrower"), whose address is 4310 Paradise Road, Las Vegas, Nevada -------- 89109, CAPITALSOURCE FINANCE LLC, a Delaware limited liability company ("Lender"), whose address is 4445 Willard Avenue, 12/th/ Floor, Chevy Chase, MD ------ 20815 and MEGO FINANCIAL CORP., a New York corporation ("Guarantor"), whose --------- address is 4310 Paradise Road, Las Vegas, Nevada 89109. RECITALS: -------- WHEREAS, Borrower has asked Lender to make Borrower a secured acquisition and development loan, of which up to $4,600,000 will be used by Borrower to pay costs incurred in acquiring the Land and Existing Improvements, demolishing the Existing Improvements on the Land, and constructing thereon the Resort Improvements made or to be made a part of the Project, and the remainder withheld and not funded by Lender unless and until Lender approves the uses for such funds proposed by Borrower; and WHEREAS, Borrower anticipates that the Resort Improvements will be used to accommodate guests at the Project on a daily or weekly basis and ultimately to sell Intervals to such guests; and WHEREAS, Borrower's obligations under the Loan will be evidenced and secured by the Loan Documents as hereinafter provided; and WHEREAS, Guarantor will guaranty all of Borrower's obligations hereunder. NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, Borrower, Guarantor and Lender agree as follows: ARTICLE 1 --------- DEFINITION OF TERMS ------------------- 1.1 Terms Defined. The following terms used in this Agreement shall have ------------- the following meanings: Adjusted Committed Sum. As of any date, the maximum amount of the Loan (eg., $7,000,000) reduced by the amount of any permanent reduction in the Loan agreed to in writing by Borrower and Lender, if any, which relieves Lender of its obligation to make further Advances hereunder. Advance. Proceeds of the Loan advanced by Lender to Borrower in accordance with this Agreement including the Initial Advance, each Interim Advance and each Construction Advance. LOAN AND SECURITY AGREEMENT - Page 1 - --------------------------- Affiliate. (a) Any Person who has a financial interest in Borrower or Guarantor; (b) any Person under common ownership with Borrower or Guarantor; (c) any Person in which Borrower or Guarantor has a financial interest (any of (a), (b) or (c) are referred to as a "Related Party"); (d) any Person who has a ------------- financial interest in any Related Party; (e) any trust for the benefit of Borrower or Guarantor or any Related Party; or (f) any Person in which any Related Party has a financial interest. Applicable Laws. Any and all federal, state, and local statutes, ordinances, rules, regulations, court orders and decrees, administrative orders and decrees, and other legal requirements of any and every conceivable type applicable to Borrower, Guarantor, the Project or any portion thereof, or all or any portion of the Collateral including, without limitation, (i) the Consumer Credit Protection Act, the Federal Trade Commission Act, the Federal Interstate Land Sales Full Disclosure Act, any applicable condominium act, and all other applicable federal statutes, each as amended, and all rules and regulations promulgated under any of the foregoing, and (ii) all of the applicable provisions of any law of any state in which Borrower is selling Units (and the rules and regulations promulgated thereunder) relating to the sale, offering for sale or financing of Units or Intervals. Approved Costs. Shall have the meaning set forth in Schedule 4.1 hereof. ------------ Architect. Any licensed architect in the State of Nevada who is acceptable to Lender, in its sole discretion. Biennial Interval(s). 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 every other year, together with all appurtenant rights and interests as more particularly described in the Timeshare Documentation. Budget. The preliminary budget affixed hereto as Schedule 2.1, relating to ------------ the costs of the Project, as amended or modified with the approval of Lender, in its sole discretion. The Budget affixed hereto will be amended, with Lender's sole consent, to provide a more detailed cost breakdown of the costs of the Project prior to the making of any Construction Advance. Business Day. Any day which is not a Saturday or Sunday or a legal holiday under the laws of either the State of New York or the State of Nevada, or the United States. Collateral. Any and all collateral granted by Borrower to secure the payment by Borrower of all principal, interest, and other amounts owed to Lender in connection with the Loan and the performance of Borrower's Obligations under the Loan Documents, including but not limited to the following (to the extent applicable): (a) The Deed of Trust; (b) First priority Liens in and to any and all Units and FF&E, together with the cash and non-cash proceeds thereof; LOAN AND SECURITY AGREEMENT - Page 2 - --------------------------- (c) Absolute and unconditional first assignments of any and all leases, subleases, licenses, concessions, entry fees, and other agreements that grant a possessory interest in and to, or the right to use, any Units and FF&E, Intervals, or any portion thereof (collectively, the "Resort ------ Leases"); ------ (d) Absolute and unconditional first assignments of all of the rents, revenues, income, proceeds, royalties, profits, and other amounts payable for using, leasing, licensing, possessing, operating from or in, or otherwise enjoying all or any portion of any Units or Intervals, including, without limitation, damages received upon the occurrence of a default under any of the Resort Leases and all proceeds payable under any policy of insurance covering loss of rents with respect thereto (collectively, the "Resort Income"); ------------- (e) Absolute and unconditional first assignments of all other agreements to which Borrower is or becomes a party or holds any interest and which in any way relate to the use, occupancy, maintenance, or enjoyment of any Units or Intervals, including but not limited to utility contracts, maintenance agreements, management agreements, service contracts, and any agreement guaranteeing the performance of the obligations contained in any of the foregoing agreements; (f) First priority assignments of all of Borrower's rights in and to all Plans, all agreements for the furnishing of architectural, engineering, and/or design services, and all construction contracts and other agreements for the furnishing of labor and/or materials in connection with the development and construction of the Resort Improvements; (g) First priority assignments of all of Borrower's rights in and to any and all easements, contracts, leasehold interests (whether as lessor or lessee), permits, licenses, and approvals in respect of all or any portion of the Project; (h) First priority Liens in all inventory, supplies, accounts, chattel paper, and general intangibles owned or hereafter acquired by Borrower, used or useful in connection with the Units and the Intervals, together with the cash and non-cash proceeds thereof; (i) First priority Liens in and to all books, records, reports, computer tapes, computer disks, and software relating to all or any portion of the Project Improvements; (j) Extensions, additions, improvements, betterments, renewals, substitutions, and replacements of, for, or to any of the Land and Resort Improvements, wherever located, together with the products, proceeds, issues, rents, and profits thereof and any replacements, additions, or accessions thereto or substitutions thereof, and all rights in or under insurance policies and to the proceeds of any insurance policies covering any of the Resort Improvements, all rights to unearned or refunded insurance premiums, and the proceeds of any condemnation awards or any claims regarding any of the Land and Resort Improvements; and LOAN AND SECURITY AGREEMENT - Page 3 - --------------------------- (k) All now owned or hereafter acquired right, title, and interest of Lender in and to any and all collateral for the Revolving Receivables Loan. Commitment Fee. A non-refundable loan commitment fee with respect to the Loan equal to $87,500 which is payable as follows: (i) $18,750 shall be paid to Lender at the Closing from the proceeds of the Initial Advance, (ii) $18,750 shall be paid to Lender on or before May 31, 2002, and (iii) the remaining $50,000 shall be paid by Borrower to Lender simultaneously with the making of the first two Construction Advances hereunder (in equal parts of $25,000 each for each Construction Advance), but in no event later than September 1, 2002. So long as Borrower is not in default of its obligations under the documents evidencing the Revolving Receivables Loan, the referenced commitment fee may be funded from proceeds of the Revolving Receivables Loan. Alternatively, so long as Borrower is not in default of its obligations hereunder and the conditions precedent to the making of Construction Advances hereunder have been satisfied, the remaining portion of the referenced commitment fee may be paid from proceeds of the first two Construction Advances. If, however, Borrower is in default hereunder or the conditions precedent hereunder for the making of Construction Advances have not been satisfied on or before September 1, 2002, then Borrower and Guarantor shall pay to Lender the remainder of the commitment fee from its own funds. Common Elements. The common areas and facilities as shown on the Plans for the Resort Improvements, as defined or provided for in the Timeshare Documentation, including, without limitation, the Land and all improvements thereto except for any limited common elements, if any, identified in the Timeshare Documentation. Completion Date. September 30, 2003. Construction Advance. Each Advance made by Lender hereunder following satisfaction of the conditions precedent set forth in Section 2 of Schedule 4.1 ------------ hereof. Construction Contract. Shall have the meaning ascribed to such term in Schedule 4.1 hereof. - ------------ Construction Schedule. The schedule relating to the time frame for construction of the Resort Improvements approved by Lender. The preliminary Construction Schedule for the Project is attached hereto as Exhibit D, which --------- Construction Schedule is subject to Lender's further review, verification and approval in accordance with Schedule 4.1 hereof. ------------ Deed of Trust. That certain Deed of Trust, Assignment and Security Agreement from Borrower, as grantor, to the Trustee named therein, in trust, for the benefit of Lender, as same may from time to time be renewed, amended, restated or replaced. Default Rate. A per annum rate of interest equal to the Interest Rate plus four percent (4%). Disclosure Statement. A statement given to Purchasers describing the Timeshare LOAN AND SECURITY AGREEMENT - Page 4 - --------------------------- Program. Draw Request. Shall have the meaning ascribed to such term in Section 4.1 ----------- hereof. Employee Benefit Plan. An employee benefit plan as defined in Section 3(3) of ERISA (including a Multi-employer Plan) pursuant to which any employees of Borrower or Guarantor participate. Environmental Certificate. An environmental certificate executed by Borrower, and such other persons or parties as required by Lender, in form and substance satisfactory to Lender, as it may be from time to time renewed, amended, restated or replaced. Environmental Laws. The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended from time to time ("CERCLA"), the Resource ------ Conservation and Recovery Act of 1976, as amended from time to time ("RCRA"), ---- the Superfund Amendments and Reauthorization Act of 1986, as amended, the federal Clean Air Act, the federal Clean Water Act, the federal Safe Drinking Water Act, the federal Toxic Substances Control Act, the federal Hazardous Materials Transportation Act, the federal Emergency Planning and Community Right to Know Act of 1986, the federal Endangered Species Act, the federal Occupational Safety and Health Act of 1970, the federal Water Pollution Control Act, and any and all comparable statutes or ordinances enacted in the State of Nevada, all of the foregoing laws may be amended from time to time, and any rules or regulations promulgated pursuant to the foregoing; together with any similar local, state or federal statutes, ordinances, rules, or regulations, either in existence as of the date hereof or enacted or promulgated after the date of this Agreement, that concern the management, control, storage, discharge, treatment, containment, removal, and/or transport of Hazardous Materials or other substances that are or may become a threat to public health or the environment; together with any common law theory involving Hazardous Materials or substances that are (or alleged to be) hazardous to human health or the environment, based on nuisance, trespass, negligence, strict liability, or other tortious conduct, or any other federal, state, or local statute, ordinance, regulation, rule, policy, or determination pertaining to health, hygiene, the environment, or environmental conditions. ERISA. The Employee Retirement Income Security Act of 1974, as amended from time to time, and any regulation promulgated thereunder. Event of Default. Has the meaning set forth in Article 8 of this --------- Agreement. Execution Date. The date this Agreement is executed and delivered by Borrower, Lender and Guarantor. Existing Improvements. All buildings and other improvements located on the Land as of the Execution Date. FF&E. All furniture, fixtures and equipment whether now owned or hereafter acquired by Borrower in respect of the Resort Improvements and the Project and any and all additions LOAN AND SECURITY AGREEMENT - Page 5 - --------------------------- thereto, substitutions and replacements or any of the foregoing, wherever located. Funding Term. The period of 18 months after the Execution Date during which Advances may be made under the terms of this Agreement. 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. General Contractor. Shall have the meaning ascribed to such term in Schedule 4.1 hereof. - ------------ Guarantor. MEGO Financial Corp., a New York corporation, and its proposed successor by merger or consolidation, Leisure Industries Corporation of America, Inc., a Delaware corporation. Guaranty. A guaranty agreement on Lender's form, executed by Guarantor guaranteeing the payment and performance of all Obligations by Borrower under the Loan Documents. Hard Costs. The direct costs of constructing the Resort Improvements, as identified as Hard Costs in the Budget hereafter approved by Lender. Hazardous Materials. "Hazardous substances," "hazardous waste," "hazardous constituents," "toxic substances," or "solid waste," as defined in the Environmental Laws, and any other contaminant or any material, waste, or substance that is petroleum or petroleum based, asbestos, polychlorinated biphenyls, flammable explosives, or radioactive materials. Incipient Event of Default. An event which would be an Event of Default but for the delivery of notice or the passage of time. Indemnified Parties. Shall have the meaning assigned to such term in Section 10.7 hereof. - ------------ Initial Advance. The first Advance made by Lender hereunder. Inspecting Engineer. Shall have the meaning assigned to such term in Section 6.14(d) hereof. - --------------- Interim Advance. Each Advance made by Lender hereunder after the Initial Advance prior to satisfaction of all conditions precedent set forth in Schedule -------- 4.1 hereof related to the Construction Advances; provided, however, that the - --- -------- ------- aggregate amount of the Initial Advance LOAN AND SECURITY AGREEMENT - Page 6 - --------------------------- and all Interim Advances shall not exceed $1,770,000. Interest Rate. A floating rate per annum equal to the greater of (i) the Prime Rate plus two and one-half percent (2.50%), or (ii) ten percent (10%) (the aggregate rate referred to as the "Interest Rate"). The term "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 thirty (30) largest banks organized under the laws of the United States of America or any state thereof. Interest shall be calculated based on a 360 day year and charged for the actual number of days elapsed. Interval(s). 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, (or one week every other year in the case of any Biennial Interval(s)) together with all appurtenant rights and interests as more particularly described in the Timeshare Documentation. Land. The real property more particularly identified on Exhibit A attached --------- hereto. Lien. Any mortgage, security interest, pledge, assignment or other interest in property securing an obligation owed to, or valid claim by, a Person other than the owner of such property, whether such interest arises in equity or is based on common law, statute, or contract. Lender. CapitalSource Finance LLC, a Delaware limited liability company. Loan. The Seven Million and 00/100 Dollars ($7,000,000.00) loan described in this Agreement and evidenced by the Note. Loan Documents. Collectively, this Agreement, the Note, the Deed of Trust, the Guaranty, the Environmental Certificate, 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 making of the first Construction Advance hereunder. Mandatory Prepayment. Any prepayment required by Section 2.6(b) of this -------------- Agreement. Material Subcontractor. Shall have the meaning ascribed to such term in Schedule 4.1 hereof. - ------------ Material Subcontracts. Shall mean each subcontract executed by Borrower or a General Contractor with a Material Subcontractor. Maturity Date. March 11, 2005, or any earlier date on which the Loan shall be LOAN AND SECURITY AGREEMENT - Page 7 - --------------------------- required to be paid in full, whether by acceleration or otherwise. Maximum Loan Amount. Seven Million and 00/100 United States Dollars ($7,000,000.00). Note. The promissory note evidencing the Loan in the original principal amount of Seven Million and 00/100 Dollars ($7,000,000.00) executed and delivered by Borrower to Lender concurrently herewith, as same may from time to time be renewed, amended, restated, or replaced. Obligations. All present and future indebtedness, liabilities, obligations, and responsibilities, both financial and otherwise, to which Borrower is subject under any of the Loan Documents, whether direct or indirect, absolute or contingent, including but not limited to all amounts due or becoming due to Lender in respect of (i) the Loan or any of the Loan Documents, (ii) the Revolving Receivables Loan from Lender to Borrower, and (iii) any and all other indebtedness of Borrower to Lender now existing or hereafter arising, including principal, interest, prepayment premiums, contributions, taxes, insurance premiums, loan charges, custodial fees, attorneys' and paralegals' fees and expenses and other fees or expenses incurred by Lender (including attorneys' fees for Lender's in-house counsel based upon the amount Lender would pay if Lender were to obtain outside counsel) or advanced to or on behalf of Borrower by Lender, pursuant to any of the Loan Documents or in connection with Lender's enforcement of the prompt and complete payment and performance by Borrower and Guarantor of all indebtedness, liabilities, obligations, and responsibilities owed by Borrower, pursuant to this Agreement, any of the other Loan Documents, the Revolving Receivables Loan, or otherwise. Permitted Exceptions. The exceptions to title listed on Exhibit B. --------- 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; provided, however, that when used in the -------- ------- definition of "Affiliate" hereunder, the term "Person" shall not include natural persons. Plans. All plans and specifications for the development and construction of the Resort Improvements hereafter approved by Lender, together with all specifications and drawings in respect thereof and all modifications, amendments, additions, and supplements thereto made in accordance with the requirements of this Agreement. Said Plans, which shall be prepared by an Architect, shall indicate the location of the Resort Improvements, the configuration and dimensions of the Project and each Unit thereof, the means of access thereto, street lines, easements, the Common Elements, and other relevant details required under Applicable Laws. Prepayment Premium. The percentage set forth below multiplied by the amount prepaid, together with any other amounts due and owing to Lender hereunder (excluding interest) as of the date of such prepayment, payable in connection with a voluntary prepayment of the Loan in accordance with the provisions of Section 2.6(a) of this Agreement: - -------------- LOAN AND SECURITY AGREEMENT - Page 8 - --------------------------- Loan Year Percentage --------- ---------- First Loan Year Two percent (2%) After First Loan Year NONE Project. The acquisition of the Land, the construction of the Resort Improvements, the operation and management of the Resort Improvements, and the marketing and sale of Units and/or Intervals. Project Association. Shall have the meaning ascribed to such term in Section 6.2 hereof. - ----------- Property. All of the Land, Resort Improvements and Units (including Intervals) owned by Borrower. Purchase and Sale Agreement. The agreement between Borrower, as the buyer, and Sebastian and Sandra Mary Sanders, as the seller, of the Resort dated January 10, 2002, as amended. Purchaser. Any Person who purchases one or more Intervals in a Unit. Release. A partial release of the lien of the Deed of Trust regarding an Interval sold to a Purchaser in accordance with Section 2.7 hereof. ----------- Release Price. With respect to each Interval sold, an amount per Interval hereafter determined by Lender to be sufficient to fully repay the Loan in full upon the sale from Borrower to Purchasers of not less than eighty-five percent (85%) of all Intervals. The Release Price for an Interval sold as a Biennial Interval shall be one-half of the Release Price. Resort. The real property and all improvements thereon and thereto acquired by Borrower or to be acquired by Borrower pursuant to the Purchase and Sale Agreement and commonly known as 158 Ida Avenue, Las Vegas, Nevada. Resort Improvements. All on-site and off-site improvements now or hereafter constructed on the Land (currently contemplated to include twenty-nine (29) 2-bedroom Units and two (2) 1-bedroom Units), as approved by Lender hereunder, together with all FF&E and appurtenances now or later to be located on the Land and/or in such improvements. Retainage. An amount equal to a minimum of ten percent (10%) of (a) the amounts due a General Contractor under a Construction Contract for Hard Costs of construction of the Resort Improvements (excluding costs of Stored Materials and other materials purchased directly by General Contractor for incorporation into the Resort Improvements); and/or (b) the amounts due to any subcontractor, materialman, or other Person under any and all subcontracts or other agreements entered into in connection with the construction of the Resort Improvements, which amount shall be held and disbursed in accordance with Section 4.2 hereof. ----------- LOAN AND SECURITY AGREEMENT - Page 9 - --------------------------- Revolving Receivables Loan. The $20,000,000 loan from Lender to Borrower, as the same may be amended, modified, increased and extended hereafter. Revolving Receivables Loan Agreement. The Loan and Security Agreement executed by Borrower and Lender, dated as of August 8, 2001, as modified by the First Amendment to Loan and Security Agreement dated as of March 11, 2002, executed by Borrower, Lender and Guarantor, in respect of the Revolving Receivables Loan, as the same may be hereafter amended, modified or supplemented. Soft Costs. All costs of the Project, including interest, but excluding Hard Costs, as identified as Soft Costs in the Budget hereafter approved by Lender. Stored Materials. All building materials, furnishings and other items of construction work in the form of tangible property supplied for, or intended to be utilized in, the construction of the Resort Improvements, but which are not yet affixed to or incorporated into the Resort Improvements. Survey. An ALTA land survey of the Land prepared in accordance with the ALTA/ACSM 1988 Minimum Survey Requirements by a licensed surveyor and certified by the surveyor to Borrower, Lender and the Title Insurer. Timeshare Documentation. The declaration of covenants, conditions, and restrictions, master deed, or similar document, together with any amendments or restatements thereof, that establishes the underlying form of ownership of the Project recorded/or to be recorded in the real estate records where the Project is located for the purpose of creating a Timeshare Program, as it may be in effect from time to time, together with any other documents and instruments relating to the Project and/or the Units, Common Elements and Intervals, including but not limited to the marketing, sale, and financing of such Intervals. Timeshare Program. The program in which Purchasers may purchase Intervals; owners of Intervals have the right to use and enjoy their respective Intervals on a recurring basis; and owners of Intervals share the expenses associated with the operation and management of the Project and Intervals. Title Insurer. First American Title Insurance Company, its successors and assigns or such other title insurer as has been approved in writing by Lender. Title Insurance Policy. Has the meaning ascribed to such term in Schedule -------- 4.1 hereof. - --- UCC. The Uniform Commercial Code as adopted and in force in the State of New York, the State of Nevada, and any other state, to the extent the same is Applicable Law, as the same may be amended from time to time. Unit. An apartment, condominium unit, or other structure that is affixed to real property and designed and available, pursuant to the Timeshare Documentation, for use and occupancy LOAN AND SECURITY AGREEMENT - Page 10 - --------------------------- as a vacation residence by one or more individuals, on a daily or weekly basis, together with all related Common Elements, easements, and other appurtenances thereto. Up-Front Equity. An amount payable by Borrower and Guarantor toward costs of the Project, in cash, equal to ten percent (10%) of the Approved Costs of the Project, which amount shall be payable by Borrower or Guarantor as follows: (i) $150,000 of such amount shall be paid to the Title Insurer and applied by the Title Insurer to pay costs incurred in connection with the acquisition of the Land and the closing of the Loan, and (ii) the remaining amount shall be paid by Borrower toward costs of the Project prior to the making by Lender of any Construction Advance hereunder. ARTICLE 2 --------- THE LOAN -------- 2.1 Loan; Purpose. Advances of up to $4,600,000 of the Loan shall be made ------------- by Lender to Borrower to finance the acquisition of the Land, the demolition of the Existing Improvements and the costs of construction of the Resort Improvements (including FF&E), as set forth in the Budget attached hereto as Schedule 2.1, or as amended with Lender's consent, subject to the provisions - ------------ contained in this Agreement and the other Loan Documents. No Advances in excess of $4,600,000 of the Loan will be made by Lender unless and until Lender has approved, in its sole and absolute discretion, the purpose for which Borrower proposes or intends to use such funds. In no event shall (i) the Loan at any time exceed the Maximum Loan Amount or (ii) an Advance be made after the Funding Term. In the event that the proceeds of the Loan and any other amounts required to be paid by Borrower hereunder are insufficient to pay all costs to which it is contemplated hereunder that such proceeds will be applied, or if the use of the Loan proceeds varies materially (as determined reasonably and in good faith by Lender) from the uses described herein, then Lender shall have no obligation to fund (or continue funding) the Loan or any portion thereof. The proceeds of the Loan will be disbursed by Lender solely for the purposes set forth in this Agreement. 2.2 Budget; Approved Costs. The Loan funds are allocated for the costs of ---------------------- the Project shown in the Budget. Lender shall not be required to make any Advance (a) for any cost or purpose not set forth in the Budget hereafter approved by Lender; or (b) for any line item in the Budget that, when added to all prior Advances for that line item, exceeds the lesser of (i) the actual cost incurred by Borrower for such line item, or (ii) the amount of Loan funds allocated in the Budget for that line item. Borrower shall (a) not reallocate Loan funds from one Budget line item to another or otherwise amend the Budget without the prior written consent of Lender; and (b) notify Lender promptly whenever Borrower becomes aware that the Budget is, or might be, inaccurate in any material respect. 2.3 Term of Loan . The Loan shall be for a term of thirty-six (36) ------------- months. 2.4 Interest Rate. The outstanding principal balance of all Advances ------------- together with all other outstanding obligations of Borrower arising hereunder or under the Loan Documents shall bear interest at the Interest Rate. After the occurrence of an Event of Default and after the LOAN AND SECURITY AGREEMENT - Page 11 - --------------------------- Maturity Date, the Loan will bear interest at the Default Rate. 2.5 Payments. -------- (a) Monthly Interest Payments. Commencing on the first day of the ------------------------- month after the Initial Advance, Borrower shall pay interest computed at the Interest Rate in arrears on the first day of each month. Interest shall be calculated based on a 360 day year and charged for the actual number of days elapsed. (b) Final Payment. The entire outstanding amount of the Obligations ------------- shall be payable on the Maturity Date. (c) Minimum Amortization. Beginning on the earliest to occur of (i) -------------------- -------- the commencement of the sale of Units, (ii) the completion of construction of the Resort Improvements, or (iii) October 1, 2003 ("Start Date"), ---------- Borrower shall make additional payments of principal in the amount of the Release Price applicable to each Interval sold, as and when such Intervals are sold to Purchasers. On each Test Date thereafter, Borrower shall make an additional payment to Lender equal to the positive difference, if any, between (i) the total of all Release Prices paid to Lender as of such Test Date, and (ii) the Minimum Amortization Amount payable as of such Test Date. As used herein, "Test Period" means the six (6) most-recent full ----------- calendar months preceding the applicable Test Date and the term "Test Date" --------- means last day of the sixth consecutive calendar month immediately following the Start Date and the last day of every consecutive sixth calendar month period thereafter during the term of the Loan; provided, -------- however, that if less than 3 months remain between the 3/rd/ Test Date and ------- the Maturity Date of the Loan, the 3/rd/ Test Date shall be deemed to be the Maturity Date, or if more than 3 months remain between the 3/rd/ Test Date and the Maturity Date of the Loan, then Lender shall have the right, at any time, to adjust the Test Date or the Minimum Amortization Amount to ensure that the Loan amortizes fully by the Maturity Date. As used herein, the term "Minimum Amortization Amount" means an amount equal to the --------------------------- following: Period Minimum Amortization ------ -------------------- Amount* ------ Execution Date to 1/st/ Test Date 33% of Adjusted Committed Sum Execution Date to 2/nd/ Test Date 66% of Adjusted Committed Sum Execution Date to 3/rd/ Test Date 100% of Adjusted Committed Sum * Amounts shown are cumulative amounts payable to and including the noted Test Date 2.6 Prepayments. ----------- (a) Voluntary Prepayments. Prepayments of the Loan may be made in --------------------- whole, but not in part, upon thirty (30) 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, -------- ------- LOAN AND SECURITY AGREEMENT - Page 12 - --------------------------- that no Prepayment Premium shall be payable as a result of any such payment pursuant to the release provisions set forth in Section 2.7 hereof. ----------- (b) Mandatory Prepayments. Subject to the terms of any Timeshare --------------------- Documentation hereafter approved by Lender, If Borrower receives any payment with respect to any insurance award or the condemnation or lease of the Collateral (other than rental payments and expense reimbursements) including, without limitation, lease termination, cancellation or similar fees, Borrower shall immediately prepay the principal balance of the Loan in an amount equal to such payment. No Prepayment Premium will be due with respect to any such prepayments. Any Mandatory Prepayment shall be accompanied by an amount equal to the interest accrued thereon to the date of receipt of such prepayment in collected funds. 2.7 Releases of Collateral. Provided that no Event of Default shall ---------------------- have occurred and be continuing, Lender agrees to release each Interval of a Unit to be conveyed to a prospective Purchaser and its appurtenant interests in the Common Elements from the Lien of the Deed of Trust, in accordance with and subject to all of the following terms, provisions and conditions: (a) Borrower shall request Releases in writing not less than five (5) Business Days prior to the date the Release is needed. Each request for Release shall be submitted no more frequently than four (4) times per calendar month. (b) Lender shall have received, with respect to each Interval to be released: (i) a Release prepared by Borrower at Borrower's expense in form and content satisfactory to Lender; (ii) a schedule containing a list of the Units and Intervals previously released by Lender and the Units and Intervals remaining to be released; and (iii) all other data reasonably necessary to support the Borrower's being entitled to the Release, including, without limitation, such other documents, certificates and assurances as Lender may reasonably request, together with the legal fees and disbursements of Lender's counsel incurred in connection with the issuance of each such Release. (c) At the time of request for Release, Borrower shall pay to Lender, in cash or immediately available funds, the Release Price for such Interval. (d) Releases of Intervals shall not affect or impair the Lien of the Deed of Trust (or the Liens created by the other Loan Documents) as to other Collateral not theretofore released, and said Liens shall continue in full force and effect as to the unreleased Collateral. ARTICLE 3 --------- COLLATERAL ---------- 3.1 Grant of Security Interest. To secure the payment and performance of -------------------------- the LOAN AND SECURITY AGREEMENT - Page 13 - --------------------------- Obligations, Borrower shall unconditionally and irrevocably assign, pledge and grant to Lender a first priority continuing Lien in and to the right, title and interest of Borrower in the Collateral. 3.2 Financing Statements. Borrower agrees, at its own expense, to execute -------------------- UCC-1 and UCC-3 financing statements provided for by the UCC, together with any and all other appropriate instruments and documents, and to take such other action as may be required to perfect and to continue the perfection of Lender's first priority Liens in the Collateral. In addition, unless prohibited by Applicable Laws, Borrower hereby authorizes Lender to execute and file any such financing statements on Borrower's behalf. 3.3 Location of Collateral. Except for FF&E that is replaced in the ---------------------- ordinary course of business, all tangible Collateral shall remain at all times at the Project and Borrower may not transfer or cause the transfer of any such Collateral from the Project without the prior written approval of Lender. 3.4 Cross-Collateralization and Cross-Default. The Collateral shall secure ----------------------------------------- the payment and performance of the Obligations arising under this Agreement and the other Loan Documents, the Revolving Receivables Loan, and all Liens, pledges, assignments, mortgages, security interests, and collateral granted to or for the benefit of Lender pursuant thereto or any other related documents or instruments also shall secure the Revolving Receivables Loan. In addition, the Loan and the Revolving Receivables Loan shall be cross-defaulted such that any event of default with respect to the Revolving Receivables Loan shall constitute an Event of Default hereunder, and vice versa. ARTICLE 4 --------- ADVANCE PROCEDURES ------------------ 4.1 Draw Requests. From time to time during the Funding Term, Borrower may ------------- submit to Lender a written request for an Advance hereunder (hereinafter sometimes called a "Draw Request") substantially in the form of Exhibit C ------------ --------- attached hereto and incorporated herein by this reference. Provided that no Event of Default hereunder then exists, each Advance approved by Lender shall be made within ten (10) Business Days following the last to occur of Lender's receipt of the applicable Draw Request and all items required to be submitted to Lender hereunder, including but not limited to those items referenced in this Article 4 (to the extent applicable). At least ten (10) Business Days before - --------- the requested date of each Advance, Borrower shall deliver a Draw Request to Lender. Borrower shall be entitled to an Advance only in an amount approved by Lender in accordance with the terms of this Agreement. Lender shall not be required to make Advances more frequently than once each calendar month. Each Draw Request, and Borrower's acceptance of any Advance, shall be deemed to ratify and confirm that all representations and warranties in the Loan Documents remain true and correct as of the date of the Draw Request and the Advance, respectively. 4.2 Amount of Advances; Retainage. Borrower shall disburse all Advances ----------------------------- made to Borrower, for payments of the Approved Costs of the Project incurred by Borrower through LOAN AND SECURITY AGREEMENT - Page 14 - --------------------------- the end of the period covered by such Draw Request, not to exceed the value of the work or material in place, less (1) Retainage; (2) all prior Advances; (3) the amount of any costs (A) not certified or verified in accordance with this Agreement, (B) covered by a previous Draw Request for which Lender has not received lien waivers and subordinations, evidence and verification required by this Agreement or copies of paid invoices, canceled checks, receipts or other proof of payment satisfactory to Lender, or (C) applicable to work that does not substantially comply with the Plans or the Loan Documents; and (4) any amount required to be withheld by the owner of the Property under Applicable Law. All Retainage shall be retained by Lender as a holdback until such time as the Resort Improvements have been one hundred percent (100%) completed in accordance with the Plans and all Applicable Laws, and all other conditions set forth in Exhibit D hereof have been fully satisfied Notwithstanding the foregoing, upon - --------- compliance with the requirements regarding Advances hereunder, Retainage previously withheld from prior Advances in respect of each subcontract executed by or on behalf of any General Contractor (each, a "Subcontract") shall be ----------- released, at the request of Borrower, if the following conditions have been satisfied: (i) no less than 90 calendar days shall have elapsed since the date of substantial completion of all work under such Subcontract, (ii) Lender shall have received and approved all final lien waivers and other evidence of proof of payment satisfactory to Lender to establish that all subcontractors and materialmen performing work or providing materials in connection with such Subcontract have been paid, and (iii) Lender shall have received an endorsement to the Title Insurance Policy reflecting no liens or claims of liens have been filed against the Property and neither Lender nor Borrower shall have received a stop notice or other similar notice of non-payment in connection with such Subcontract. 4.3 Advances for Stored Materials. Advances will not be made for Stored ----------------------------- Materials unless (i) Borrower has good title to the Stored Materials and the Stored Materials are components in a form ready for incorporation into the Resort Improvements, (ii) the Stored Materials are in Borrower's possession and satisfactorily stored on the Land or in a bonded warehouse or at such other site as Lender may approve, (iii) the Stored Materials are protected and insured against theft and damage in a manner and amount satisfactory to Lender, (iv) the Stored Materials have been paid for in full or will be paid for with the proceeds of an Advance and all lien rights and claims of the supplier have been released or will be released upon payment with such proceeds, and (v) Lender has or will have upon payment with such proceeds a perfected, first priority security interest in the Stored Materials. Notwithstanding the foregoing, the aggregate amount of advances for Stored Materials that have not yet been incorporated into the Resort Improvements shall not exceed $100,000 unless otherwise approved by Lender. 4.4 Conditions to the Initial Advance and Interim Advances. ------------------------------------------------------ (a) Borrower and Lender acknowledge and agree that, notwithstanding anything to the contrary herein, Lender intends to make an initial Advance hereunder to be used by Borrower to pay (i) the fees and costs of Lender's attorneys (including up to $5,000 of Lender's inside counsel attorneys fees) in connection with the documentation of the Loan and the due diligence review of Borrower's deliveries; (ii) costs related to the acquisition of the Land approved by Lender, and (iii) all applicable title, filing and LOAN AND SECURITY AGREEMENT - Page 15 - --------------------------- recording fees and other closing costs related to the closing of the Loan (including any required payment of the Commitment Fee or part thereof). Thereafter, subject to compliance by Borrower with the other provisions of this Agreement, Lender shall make additional Interim Advances to Borrower for the purpose of funding the costs of demolition of the Existing Improvements and the payment of interest on the Loan; provided, however, -------- ------- that the sum total of the Initial Advance and all Interim Advances shall not exceed $1,770,000. As conditions precedent to the Initial Advance hereunder, Borrower must have satisfied the conditions required under this Agreement, including all of those conditions set forth in Section 1 of Schedule 4.1 attached hereto. ------------ (b) Lender shall have no obligation to make any Advance hereunder which would cause the sum total of the Initial Advance and all Interim Advances to exceed, in the aggregate, $1,770,000, unless and until Borrower shall have received and delivered to Lender (and Lender shall have approved) the documents, certificates, agreements and other items identified in Section 2 of Schedule 4.1attached hereto. IF BORROWER FAILS ------------ TO SATISFY ANY OF THE CONDITIONS PRECEDENT TO FURTHER FUNDING SET FORTH IN SECTION 2 OF SCHEDULE 4.1 HEREOF ON OR BEFORE AUGUST 15, 2002, (i) BORROWER SHALL BE IN DEFAULT HEREUNDER, (ii) LENDER SHALL HAVE THE RIGHT TO TERMINATE, IMMEDIATELY, ITS OBLIGATION HEREUNDER TO MAKE FURHTER ADVANCES OF THE LOAN AND (iii) THE ENTIRE LOAN MAY, AT LENDER'S DISCRETION, BE DEEMED DUE AND PAYABLE IMMEDIATELY. (c) BORROWER RECOGNIZES THAT THE DELIVERY TO LENDER AND APPROVAL BY LENDER OF THE ITEMS MORE PARTICULARLY IDENTIFIED IN SECTION 2 OF SCHEDULE 4.1 ATTACHED HERETO, AMONG OTHER THINGS, IS A CONDITION PRECEDENT TO LENDER'S OBLIGATION TO MAKE ANY ADVANCE FOR THE PAYMENT OF COSTS OF CONSTRUCTION OF THE RESORT IMPROVEMENTS OR OTHER BUDGETED COSTS OF THE PROJECT (OTHER THAN THOSE PAID BY THE INITIAL ADVANCE AND INTERIM ADVANCES), AND BORROWER AND GUARANTOR ASSUMES ALL RISK ASSOCIATED WITH THE TERMINATION OF LENDER'S OBLIGATIONS TO FUND ADVANCES IN RESPECT OF ANY COSTS RELATED TO THE CONSTRUCTION OF THE RESORT IMPROVEMENTS OR OTHER BUDGETED COSTS OF THE PROJECT (OTHER THAN THOSE PAID BY THE INITIAL ADVANCE AND INTERIM ADVANCES), OR ANY DELAYS IN FUNDING DUE TO BORROWER'S INABILITY (REGARDLESS OF THE REASONS THEREFOR, OTHER THAN THE NEGLIGENCE OR MISCONDUCT OF LENDER) TO SATISFY SUCH CONDITIONS PRECEDENT, AS AND WHEN REQUIRED BY THIS AGREEMENT. LOAN AND SECURITY AGREEMENT - Page 16 - --------------------------- 4.5 Conditions to All Advances. As conditions precedent to each Advance -------------------------- made pursuant to a Draw Request, in addition to all other requirements contained in this Agreement, Borrower must satisfy the following conditions, and deliver to Lender evidence of such satisfaction: a. Borrower must have delivered to Lender a properly executed and completed Draw Request. b. No Event of Default or Incipient Event of Default shall then exist. c Borrower shall have demonstrated to Lender's reasonable satisfaction that all of the Up-Front Equity has been contributed to the costs of the Project, as reflected in the final Budget for the Project hereafter approved by Lender. d. The representations and warranties made in the Loan Documents must be true and correct in all material aspects on and as of the date of each Advance and no event shall have occurred or condition or circumstance shall exist which, if known to Borrower, would render any such representation or warranty incorrect or misleading. e. Each Construction Contract or Material Subcontract for labor, materials, services and/or other work included in a Draw Request shall have been duly executed and delivered by all parties thereto and shall be effective, and Lender shall have received a true and complete copy of a fully executed copy of each such Construction Contract or Material Subcontract as Lender may have requested. f. No mechanic's or materialmen's lien or other encumbrance shall have been filed and remain in effect against the Property, and no stop notices shall have been served on Lender that have not been bonded by Borrower in a manner and amount satisfactory to Lender. g. The Title Insurance Policy shall have been endorsed and brought to date in a manner satisfactory to Lender to increase the coverage by the amount of each Advance through the date of each such Advance with no additional title change or exception not approved by Lender and Borrower shall have provided to the Title Insurer such items as the Title Insurer may require with respect to insuring the continuing priority of the Deed of Trust over any filed mechanics' or materialmen's liens. h. With respect to any Advance for Hard Costs, Lender shall have received an AIA Document G-702 and G-703 (1983 Edition) completed by the General Contractor and certified by the Architect ("Hard Cost Certificate") --------------------- from the General Contractor and Borrower's Architect; and the Inspecting Engineer's observation report that verifies the progress of construction. i. As of the date of making such Advance, no event shall have occurred, nor shall any condition exist, that could have an adverse effect on the enforceability of LOAN AND SECURITY AGREEMENT - Page 17 - --------------------------- the Loan Documents, be materially adverse to the financial condition of Borrower or Guarantor, impair the ability of Borrower or Guarantor to fulfill its or their material obligations under the Loan Documents, or otherwise have any adverse effect whatsoever on the Project. j. The Resort Improvements shall not have been damaged and not repaired and shall not be the subject of any pending or threatened condemnation or adverse zoning proceeding. k. Borrower shall have submitted copies of notarized partial lien waiver forms in form approved by Lender, executed by each contractor and each appropriate subcontractor, supplier and materialman, including, without limitation, from all parties sending statutory notices to contractors, notices to owners, or notices of nonpayment, specifying in such partial lien waivers the amount paid in consideration of such partial releases. l. Borrower shall have delivered to Lender such other information, documents legal opinions, schedules, affidavits, statements, invoices, bills and other supporting documentation and material required by this Agreement, necessary for the Inspecting Engineer to verify the progress of construction, or required by Lender to substantiate any of the matters necessary to qualify for the Advance. m. With respect to the first Advance after the laying of the foundation of each building or structure, Lender shall have received a foundation survey showing no encroachment of the Improvements on any boundary line, easement, building setback line or other restricted area and the Title Insurance Policy shall be endorsed to affirmatively insure against any encroachments of the foundation over any building or other setback lines. 4.6 Final Advance for Resort Improvements. The final Advance for the ------------------------------------- Resort Improvements (including Retainage) shall not be made until ninety (90) days after the date on which the Resort Improvements have been "completed," as defined by Applicable Law. In the case of each such Draw Request, Lender shall have received the following as additional conditions precedent to the requested Advance: a. Certificates from the Architect and each General Contractor in form approved by Lender, certifying that the Resort Improvements (including any off-site improvements) have been completed in accordance with, and as completed comply with, the Plans and all Applicable Laws. b. Final affidavits and lien releases or waivers in form approved by Lender, from the Architect, each General Contractor and every other architect, engineer, and contractor who might be entitled to claim a contractual, statutory or constitutional lien against the Property, certifying that each of them and their subcontractors, laborers, and materialmen has been paid in full for all labor and materials for construction of the Resort Improvements. LOAN AND SECURITY AGREEMENT - Page 18 - --------------------------- c. The Title Insurance Policy shall be endorsed to remove any exception for mechanics' or materialmen's liens or pending disbursements, with no additional title change or exception objectionable to Lender, and with such other endorsements required by Lender. d. Evidence satisfactory to Lender that all Applicable Laws have been satisfied, including receipt by Borrower of all necessary governmental licenses, certificates and permits (including certificates of occupancy) with respect to the completion, use, occupancy and operation of the Resort Improvements, together with evidence satisfactory to Lender that all such licenses, certificates, and permits are in full force and effect and have not been revoked, canceled or modified. e. A copy of a final as-built survey of the Resort Improvements satisfactory to Lender. 4.7 Direct Advances. Borrower hereby irrevocably authorizes Lender (but --------------- Lender shall have no obligation) to (i) advance Loan funds directly to itself to pay interest due on the Loan, (ii) advance Loan funds directly to itself to pay fees payable to Lender as set forth in the Budget, and (iii) advance and directly apply the proceeds of any Advance to the satisfaction of any of the Obligations, even though Borrower did not include that amount in a Draw Request and/or no Event of Default exists. Each such direct Advance shall be added to the outstanding principal balance of the Loan and shall be secured by the Loan Documents. Unless Borrower pays such interest from other resources, Lender may advance Loan funds pursuant to this Section for interest payments as and when due. Nothing contained in this Agreement shall be construed to permit Borrower to defer payment of interest on the Loan beyond the date(s) due. The allocation of Loan funds in the Budget for interest shall not affect Borrower's absolute obligation to pay the same in accordance with the Loan Documents. Advances may also be made, in addition to other methods contemplated in this Agreement, from time to time at Lender's option, in whole or in part by direct or joint check payment to any or all Persons entitled to payment for construction work in connection with the Project or the Loan, or by having the proceeds thereof made available to the Title Insurer for disbursement. Lender shall not be required to segregate undisbursed funds in any manner for the purposes of this Agreement nor to supervise the proper application or distribution of funds to third parties. 4.8 Conditions and Waivers. All conditions precedent to the obligation of ---------------------- Lender to make any Advance are imposed hereby solely for the benefit of Lender, and no other party may require satisfaction of any such condition precedent or be entitled to assume that Lender will refuse to make any Advance in the absence of strict compliance with such conditions precedent. Any requirement of this Agreement may be waived, in whole or in part, in a specific written waiver intended for that purpose and signed by Lender. Lender shall have the right to approve and verify the periodic progress of, costs incurred by Borrower for, and the estimated costs remaining to be incurred for the construction of the Resort Improvements. No Advance shall constitute a waiver of any condition precedent to any further Advance. No waiver by Lender of any condition precedent or obligation shall preclude Lender from requiring such condition or obligation to be met prior to making any other Advance. LOAN AND SECURITY AGREEMENT - Page 19 - --------------------------- ARTICLE 5 --------- GENERAL REPRESENTATIONS AND WARRANTIES -------------------------------------- Borrower and Guarantor hereby severally represent and warrant to Lender as follows, which representations and warranties shall remain true throughout the term of this Agreement: 5.1 Organization, Standing, Qualification. Borrower Existence. Borrower --------------------------------------------------------- is, and will remain at all times, 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. Guarantor is a corporation duly formed, validly existing and in good standing under the laws of the State of New York. Attached hereto as Schedule 5.1 is a correct and ------------ complete list of all Affiliates of Borrower and Guarantor. 5.2 Authorization and Enforceability. -------------------------------- (a) Execution and Delivery. The execution, delivery and performance ---------------------- by Borrower and Guarantor of the Loan Documents has been duly authorized by all necessary corporate action of Borrower and Guarantor, and does not and will not (i) violate any provision of Borrower's or Guarantor's Articles of Incorporation or Bylaws or any agreement, law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect to which Borrower or Guarantor is a party or is subject; (ii) result in, or require the creation or imposition of, any Lien upon or with respect to any asset of Borrower or Guarantor other than Liens in favor of Lender; or (iii) result in a breach of, or constitute a default by Borrower or Guarantor under, any indenture, loan or credit agreement or any other agreement, document, instrument or certificate to which Borrower or Guarantor is a party or by which it or any of its assets are bound or affected. (b) No Other Approvals. 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 or Guarantor of any of the Loan Documents, except for such filings as are contemplated by the Loan Documents. (c) Validity of Documents. The Loan Documents have been duly --------------------- authorized and, 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, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other similar laws now or hereafter in effect which relate to or affect the enforceability of creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law). 5.3 Intentionally omitted. --------------------- 5.4 Litigation and Proceedings. There are no actions, suits, proceedings, -------------------------- orders or LOAN AND SECURITY AGREEMENT - Page 20 - --------------------------- injunctions pending or, to the best of Borrower's or Guarantor's knowledge, threatened against or affecting Borrower, Guarantor or the Land, at law or in equity, or before or by any governmental authority, which could have a material adverse effect on Borrower or Guarantor or the Project. Borrower has received no notice from any court or governmental authority alleging that Borrower has violated any applicable condominium act, any of the rules or regulations thereunder, or any other Applicable Laws. 5.5 Licenses and Permits. Borrower and Guarantor 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. 5.6 Environmental Matters. Neither Borrower nor any Affiliate of Borrower --------------------- or Guarantor have received notice from any governmental agency, entity or other person with regard to Hazardous Materials on or affecting any of the Existing Improvements. 5.7 Full Disclosure. No information, exhibit or written report furnished --------------- by or on behalf of Borrower or 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 Units to Purchasers. 5.8 Margin Regulations. The proceeds from the Loan to be evidenced by the ------------------ Note will be used to finance the Project. 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. 5.9 No Defaults. No default exists, and there is no violation in any ----------- material respect of any term of any agreement, partnership agreement, charter instrument, bylaw or other instrument to which Borrower or Guarantor is a party or by which either may be bound. No default exists with regard to any obligations under the Purchase and Sale Agreement. 5.10 Compliance with Applicable Laws. Borrower: ------------------------------- (a) is not in violation of any material Applicable Laws to which it is subject; and (b) has not failed, or will not fail, to make or cause to be made any registrations or declarations with any government or agency or department thereof, necessary to the ownership of the Project or to the conduct of its business including, without limitation, the operation of the Project and the sale, or offering for sale, of Units or Intervals therein; which violation or failure to obtain or register 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 LOAN AND SECURITY AGREEMENT - Page 21 - --------------------------- complied with (i) all of the applicable provisions of (A) the Consumer Credit Protection Act, as amended; (B) the Federal Trade Commission Act, as amended; (C) the Federal Interstate Land Sales Full Disclosure Act, as amended; (D) any applicable condominium act; (E) all other applicable federal statutes; and (F) all rules and regulations promulgated under any of the foregoing; and (ii) all of the applicable provisions of any law of any state in which Borrower is selling Units (and the rules and regulations promulgated thereunder) relating to the sale, offering for sale or financing of Units or Intervals. 5.11 Employee Benefit Plans. Borrower and Guarantor each is in compliance ---------------------- in all material respects with all applicable provisions of ERISA, the Internal Revenue Code of 1986, as amended from time to time (herein, 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 or Guarantor which remains unsatisfied for any funding obligation, taxes or penalties with respect to any Employee Benefit Plan. 5.12 Representations as to the Land and Project. ------------------------------------------ (a) Access. The Land has direct access to a publicly dedicated road. ------ (b) Utilities. Electric, gas, sewer, water facilities and other --------- necessary utilities are lawfully available in sufficient capacity to service the Land and the contemplated Resort Improvements, including each of the Units to be constructed on the Land, and any easements necessary to the furnishing of such utility service have been obtained and duly recorded. (c) Amenities; Common Elements. All amenities and other Common -------------------------- Elements described in the sales prospectus and the Disclosure Statement for the Timeshare Program and the Project shall be completed in accordance with the Plans. Each Purchaser of an Interval will have access to and the use of all of the amenities and other Common Elements of the Project as and to the extent provided in the Timeshare Documentation and the Disclosure Statement. (d) Construction. All costs arising from the construction of any of ------------ the Resort Improvements and the purchase of any equipment, inventory, or furnishings located in or on each of the Units at the Project have been paid or will be paid in the ordinary course of business but no later than thirty (30) days after invoices for the work or equipment have been received by Borrower unless Borrower contests such payment in accordance with the requirements of Section 6.5 hereof. ----------- (e) Sale of Intervals. The sale, offering of sale, and financing of ----------------- Intervals: (i) do not (and will 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; and (ii) do not (and will not) violate any Applicable Law including, without limitation, any applicable timesharing law, statute, or regulation. LOAN AND SECURITY AGREEMENT - Page 22 - --------------------------- 5.13 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 the security interest created by the Deed of Trust, this Agreement, or otherwise created in favor of Lender. 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. (b) Power. Borrower has the lawful right, power and authority to ----- grant a security interest in the Collateral. The Deed of Trust, this Agreement and all filings and other actions necessary or desirable to perfect and protect such security interest, create a valid and perfected first priority security interest in the Collateral securing the payment and performance of the Obligations. (c) Taxes and Liens. Borrower has paid all taxes, levies and other --------------- charges upon the Collateral. 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. (d) Deed of Trust. The Deed of Trust will, when recorded, constitute ------------- a valid and enforceable first and prior Lien on the properties and interests covered thereby, including, but not limited to, the Land, the Resort Improvements, Units, Intervals, Common Elements, all improvements to same, and all FF&E of completed Units. 5.14 Financial Statements and Business Condition. The financial statements ------------------------------------------- of Borrower and Guarantor fairly present the respective financial conditions and results of operations of Borrower and Guarantor, respectively, as of the date or dates thereof and for the periods covered thereby. There are no material liabilities, direct or indirect, fixed or contingent, of Borrower or Guarantor as of the dates of such financial statements that are not reflected therein or in the notes thereto that have not otherwise been disclosed to Lender in writing. Except for any such changes heretofore expressly disclosed in writing to Lender, there have been no material adverse changes in the respective financial conditions of Borrower or Guarantor from the financial conditions shown in their respective financial statements, nor have Borrower or Guarantor incurred any material liabilities, direct or indirect, fixed or contingent, that are not shown in their respective financial statements. Borrower and Guarantor are able to pay all of their respective debts as they become due, and Borrower and Guarantor, as the case may be, will maintain such solvent financial condition, giving effect to the Obligations, as long as Borrower or Guarantor are obligated to Lender under this Agreement or any of the other Loan Documents. Neither Borrower's nor Guarantor's obligations under this Agreement and the other Loan Documents will render Borrower or Guarantor unable to pay their respective debts as they become due. 5.15 Tax Identification Numbers. Borrower's and Guarantor's respective -------------------------- federal taxpayer identification numbers are as follows: Borrower: 88-0106662, and Guarantor: 13-5629885. LOAN AND SECURITY AGREEMENT - Page 23 - --------------------------- ARTICLE 6 --------- AFFIRMATIVE COVENANTS --------------------- So long as any portion of the Obligations remains unpaid or unperformed or Lender is committed to make further Advances hereunder, Borrower and, as applicable, Guarantor agree with Lender as follows: 6.1 Payment and Performance of Obligations. Borrower shall repay all of -------------------------------------- the Loan and all related amounts when and as the same become due and payable, and Borrower shall strictly observe and perform all of the Obligations, including, without limitation, all covenants, agreements, terms, conditions, and limitations contained in the Loan Documents, and will do all things necessary that are not prohibited by Applicable Law to prevent the occurrence of any Event of Default hereunder. 6.2 Insurance. Borrower agrees that: --------- (a) Policies. The Project shall 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. During the construction of the Resort Improvements, Borrower shall obtain and maintain All-Risk Builder's Risk insurance in an amount equal to 100% of the replacement cost of the Resort Improvements, providing all-risk coverage on the Resort Improvements and Stored Materials, including collapse, damage resulting from error in design or faulty workmanship or materials, water damage, and permission to occupy, for the benefit of Borrower and Lender as named insured and/or loss payees. Upon completion of construction of the Resort Improvements, all required insurance may be maintained by the applicable owner's association for the Project (the "Project Association") as required by the Timeshare ------------------- Documentation, provided that in the event the Project Association fails to maintain any insurance required under this Section 6.2(a), then Borrower -------------- shall be required to obtain and maintain such insurance. If and to the extent any of the Resort Improvements are located in a flood hazard area, Borrower shall obtain and maintain a federal flood insurance policy in amounts satisfactory to comply with the requirements of the National Flood Insurance Program applicable to federally-insured lending institutions. (b) 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. LOAN AND SECURITY AGREEMENT-Page 24 - --------------------------- (c) Loss or Casualty. ---------------- (i) 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 Improvements if (i) in Lender's reasonable judgment: (A) restoration or repair and the continued operation of the Resort Improvements 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 Inspecting Engineer certifies that the restoration of the Resort Improvements 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, if pursuant to the Timeshare Documentation a trustee shall otherwise be appointed for such purpose, such trustee), all in the discretion of Lender. (ii) 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 by reason thereof, and in compliance with all Applicable Laws. At Lender's option, the net insurance proceeds shall be disbursed subject to the requirements of the Timeshare Documentation. 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. 6.3 Casualty and Condemnation. The proceeds of any award, payment or claim ------------------------- for damages, direct or consequential, in connection with any condemnation or other taking of any of the Collateral 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 Documentation. Notwithstanding anything to the contrary contained herein, for so long as any part of the Project is subject to the Timeshare Documentation, any and all awards and payment received by Lender arising from any condemnation or conveyances in lieu thereof relating to the Project shall be delivered and paid out by Lender (or, if pursuant to the Timeshare Documentation a trustee shall otherwise be appointed for such purpose, such trustee), to be distributed and used in accordance with the provisions of the Timeshare Documentation. LOAN AND SECURITY AGREEMENT-Page 25 - --------------------------- 6.4 Financial Covenants. ------------------- (a) Minimum Liquidity. Borrower agrees that during the term of the ----------------- Loan, as of any date, Borrower shall maintain minimum liquidity of $5,000,000 which shall be defined for purposes of this Agreement as unrestricted cash, plus unpledged Eligible Note Receivables. As used herein, the term "Eligible Note Receivables" shall have the meaning ------------------------- assigned to such term in the Revolving Receivables Loan Agreement. (b) Leverage. As of the last day of each fiscal quarter of Borrower -------- and for so long as the Loan is outstanding or the Lender is obligated to make Advances, Borrower and Guarantor each agree to maintain a Adjusted Liabilities to Adjusted Net Worth ratio of 4.5:1, as shown on the balance sheet of Borrower and Guarantor prepared in accordance with GAAP. (c) Interest Coverage. As of the last day of each fiscal quarter of ----------------- Borrower and for so long as Loan 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. (d) 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 times during which the Loan is outstanding, or Lender is obligated to make Advances hereunder. (e) Defined Terms. For purposes of this Agreement, the following ------------- shall have the meaning ascribed to the same below: "Adjusted Liabilities" means, as of any date of determination and -------------------- without duplication, all current liabilities of Borrower, as determined in accordance with GAAP, less all Subordinated Debt owed (but not paid) by ---- Borrower to its parent corporation. "Adjusted Net Worth" means, as of any date of determination and ------------------ without duplication, total assets of Borrower minus total liabilities of Borrower, as determined in accordance with GAAP, plus all Subordinated Debt ---- payable (but not paid) from Borrower's parent corporation to Borrower (to the extent not already included in the calculation of Borrower's assets). "Debt" means, with respect to any Person, without duplication, (a) all ---- obligations for borrowed money, (b) all obligations evidenced by bonds, debentures, notes or similar instruments, (c) all obligations under conditional sale or other title retention agreements relating to property or assets purchased by such Person, (d) all obligations issued or assumed as the deferred purchase price of property or services (excluding trade accounts payable and accrued obligations incurred in the ordinary course of business), (e) all obligations secured by any Lien on any property or asset owned by such Person (other than accounts payable arising in the ordinary course of business), whether or not the obligation secured thereby shall have been assumed LOAN AND SECURITY AGREEMENT-Page 26 - --------------------------- (provided that, unless such obligations shall have been assumed, for purposes of this definition the amount of such Debt at any time shall be deemed to equal the fair market value of such property or asset at such time), and (f) any guaranty of such Person of any obligation of another Person constituting obligations of a type set forth above. "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 Borrower) (such amounts of interest 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 Debt" means any Debt of any Person having maturities and ----------------- terms, and which is subordinated to payment of the Obligations in a manner approved in writing by Lender. "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. 6.5 Claims and Liens. The Collateral is and shall remain free of all ---------------- Liens whatsoever (including, without limitation, claims for labor, services, materials and supplies) except for the Permitted Exceptions. In the event any Lien attaches to any Collateral, Borrower shall, within thirty (30) days after such attachment, either (i) cause such Lien to be released of record, or (ii) provide Lender with a bond in accordance with the Applicable Laws of the state where the subject Collateral is located, issued by a corporate surety acceptable to Lender, in an amount acceptable to Lender and in form acceptable to Lender and in form otherwise acceptable to the Title Insurer to "insure around" such Lien by endorsement to the Title Insurance Policy. LOAN AND SECURITY AGREEMENT-Page 27 - --------------------------- 6.6 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. 6.7 Subordinated Obligations. Borrower will not, directly or indirectly, ------------------------ (i) 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, (ii) permit the amendment, rescission or other modification of any such subordination provisions of any of Borrower's subordinated obligations in such a manner as to affect adversely Lender's lien or the prior position of the Note, or (iii) permit the prepayment or redemption, except for mandatory prepayments, of all or any part of any subordinated obligations of Borrower except in accordance with the terms any intercreditor agreement. 6.8 Further Assurances. Borrower will execute and deliver, or cause to be ------------------ 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 Obligations 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 require to evidence Borrower's compliance with its representations, warranties and covenants. 6.9 Affirmative Covenants in Other Documents. Borrower shall duly and ---------------------------------------- promptly comply with and perform, or cause to be complied with and performed, all of the affirmative covenants set forth (a) in the Deed of Trust or in any other Loan Document, (b) in any document or instrument evidencing, securing, or executed in connection with the Revolving Receivables Loan, or (c) in any other document or instrument evidencing, securing, or executed in connection with any other Obligations. 6.10 Payment of Taxes. Borrower agrees to use its best efforts to cause to ---------------- be paid, when due, all taxes and assessments of any kind imposed on or with respect to the Loan or any of the Loan Documents or the Collateral. Borrower shall immediately notify Lender in writing of any failure to timely pay all taxes and assessments due. In the event that Lender determines (through notice from Borrower or otherwise) that any such taxes or assessments have not been paid when due, Borrower shall have thirty (30) days from receipt of a written request for payment from Lender to cause the required taxes to be paid. If such required taxes (and any applicable late charges, etc.) are not paid within such thirty (30) day period, Lender may, in its sole discretion, without any obligation to do so, choose to pay such taxes on behalf of Borrower, in which case Borrower shall pay Lender interest at the Default Rate on any amounts so advanced from the date advanced by Lender until repaid by Borrower. In the event Lender elects not to pay the required taxes and the required taxes are not paid as set forth above, such failure shall constitute an Event of Default hereunder. LOAN AND SECURITY AGREEMENT-Page 28 - --------------------------- 6.11 Inspection of Records. Borrower and Guarantor shall, at any time and --------------------- from time to time, upon reasonable notice and at the expense of Borrower, permit Lender or its agents or representatives to inspect any the financial or operating records relating to the Project, or any of Borrower's or Guarantor's assets, including but not limited to all documents, bank statements, and other records within Borrower's and Guarantor's possession, custody, or control, and to examine and make copies and abstracts thereof; and to discuss its affairs, finances and accounts with any of its officers, employees, Affiliates, contractors or independent certified public accountants (and by this provision, Borrower and Guarantor authorize said accountants to discuss with Lender, its agents or representatives, the affairs, finances, and accounts of Borrower and Guarantor). Lender agrees to use reasonable efforts not to interfere unreasonably with Borrower's or Guarantor's business operations in connection with any such inspections. Without limiting Section 10.3 hereof, for up to two ------------ (2) such inspections per year and for any inspections made after an Event of Default, Borrower agrees to pay, on demand, 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. 6.12 Reporting Requirements. For so long as any of the Obligations remain ---------------------- unsatisfied, Borrower and Guarantor shall furnish (or cause to be furnished, as the case may be) to Lender, certified in writing by Borrower and Guarantor as true and correct, the following: (a) Sales and Inventory Reports. Upon completion of construction of --------------------------- the Resort Improvements and within fifteen (15) days after the end of each month thereafter, 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 calendar year, an annual sales and inventory report for the Project detailing the sales of all Intervals during such calendar 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. (b) Monthly Financial Reports. Within forty-five (45) days after the ------------------------- end of each month, unaudited financial statements of Borrower, Guarantor the Project Association, if any, certified by the chief financial officer of the subject thereof. (c) Year-End Financial Reports. As soon as available and in any -------------------------- event within one hundred and twenty (120) days after the end of each calendar year: (i) the balance sheet[s] of Borrower, Guarantor and, upon completion of the Resort Improvements, the Project Association, as of the end of such year and the related statements of income and cash flow for such calendar 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 Project 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, LOAN AND SECURITY AGREEMENT-Page 29 - --------------------------- Guarantor and the Project Association as of the dates indicated and the results of its operations and cash flow for the periods indicated in conformity with GAAP. (d) 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. (e) Other Reports. Such other reports, statements, notices or ------------- written communications relating to the Borrower, Guarantor, the Project Association, or the Project as Lender may require in its reasonable discretion. (f) 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. (g) Notice of Default or Event of Default. Promptly upon becoming ------------------------------------- aware of the existence of any condition or event that constitutes an Event of Default hereunder or any of the other Loan Documents, a written notice specifying the nature and period of existence thereof and what action Borrower is taking or proposes to take with respect thereto. (h) Notice of Claimed Default. Promptly upon becoming aware that the ------------------------- holder of any material obligation of Borrower or Guarantor has given notice or taken any other action with respect to a claimed default or event of default with respect thereto, 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 or Guarantor is taking or proposes to take with respect thereto. (i) Material Adverse Developments. Promptly upon becoming aware of ----------------------------- any pending or threatened claim, action, proceeding, litigation, development, or any other information that could materially and adversely affect Borrower, Guarantor, or all or any portion of the Collateral, including but not limited to the ability of Borrower to perform its Obligations hereunder, Borrower shall provide Lender with telephonic notice thereof, immediately followed by telecopied and mailed written confirmation, specifying the nature of such development or information and the anticipated effect thereof. (j) Other Information. Borrower shall promptly deliver to Lender any ----------------- other available information related to the Loan, the Collateral, Borrower, Guarantor, and the Project, as Lender may in good faith request. LOAN AND SECURITY AGREEMENT-Page 30 - --------------------------- 6.13 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. 6.14 Construction Covenants. Borrower and Guarantor hereby covenant and ---------------------- agree with Lender as follows: (a) Construction Contract and Subcontracts. With respect to each -------------------------------------- Construction Contract, Borrower shall not: (i) take any action that could result in a default under the terms of the Construction Contract; (ii) waive any of the General Contractor's obligations thereunder; (iii) take any action that could relieve the General Contractor from its obligations to construct the Resort Improvements according to the Plans and Construction Schedule; or (iv) consent to any amendment, other than change orders as may be permitted hereunder and under the Construction Contract, without Lender's prior written approval. With respect to any applicable subcontracts, Borrower agrees not to: (1) take any action that could result in any material default under the terms of the subcontracts; (2) waive any subcontractor's material obligations thereunder; (3) take any action that could relieve any subcontractor of its obligations to construct the Resort Improvements according to the Plans and Construction Schedule; or (4) consent to any material amendments, other than change orders permitted by this Agreement or as Lender may approve in writing, to any of the subcontracts without Lender's prior written consent. (b) Additional Equity. Lender reserves the right to require, at any ----------------- time and from time to time, at Borrower's expense, a construction cost analysis by an expert in the construction cost field selected by Lender. Any such construction cost analysis shall be delivered to Lender promptly upon its completion. If Lender reasonably estimates, at any time and from time to time, that the amount necessary to assure final completion of construction of any of the Resort Improvements in accordance with the Plans and all Applicable Laws, including but not limited to interest and other soft or non-construction budget items during the term of the Loan, exceeds the amount of the undisbursed proceeds of the Loan plus the total amount of all Up-Front Equity or other equity funds contributed by Borrower with respect to such Resort Improvements, then the party making such determination shall so notify the other parties hereto in writing, whereupon Lender shall have the option of requiring Borrower (i) to immediately deposit with Lender, to be held by Lender in a non-interest bearing, non-escrow account, the amount of any such difference, in cash, which amount shall be disbursed and applied toward the costs set forth in the Budget prior to any further Advance by Lender in respect of the Loan; or (ii) to expend the amount of any such difference for items included in the Budget, with satisfactory evidence of such expenditure being provided to Lender prior to any Advance by Lender in respect of the Loan. Lender shall be assured at all times, to its complete satisfaction, that the undisbursed proceeds of the Loan are sufficient to complete the Resort Improvements in accordance with the Plans and all Applicable Laws. Lender reserves the right of continual verification of adequate contributions by Borrower of the Up-Front Equity, to the extent required hereby. Each such deposit shall LOAN AND SECURITY AGREEMENT-Page 31 - --------------------------- be expended before any or any other Advances of the Loan in respect thereof shall be made, and such deposit shall be advanced as construction progresses. (c) Commencement and Completion of Construction. Borrower shall ------------------------------------------- diligently pursue the construction of the Resort Improvements to completion utilizing good workmanship and quality materials. Quality of construction is of the essence, and each Draw Request shall be subject to verification by Lender of the satisfactory quality and completion of work in place. Borrower shall supply such sums of money and performs such duties as may be necessary to complete the construction of the Resort Improvements pursuant to the Plans and in full compliance with all terms and conditions of the Loan Documents and all Applicable Laws, all of which shall be accomplished prior to the Completion Date, and without any Lien, claim, or assessment (actual or contingent) asserted against all or any portion of the Collateral for any material, labor, or other items furnished in connection therewith, and all in full compliance with all applicable construction, use, building, zoning, and other Applicable Laws. Borrower shall provide to Lender evidence of satisfactory compliance with all of such requirements upon request therefor by Lender and shall provide Lender with true and correct copies of all certificates of occupancy issued by Clark County, Nevada or other applicable governmental entities immediately upon the issuance thereof. Completion of construction shall include but not be limited to grading, landscaping, adequate sewer, water, electrical, gas, telephone and other utility facilities, completed streets, sidewalks, drainage and curbs, both on-site and off-site, public and private. The construction and development of the Resort Improvements described herein shall be completed in accordance with the Construction Schedule. "Substantial Completion" shall be deemed to have occurred when Borrower has ----------------------- obtained a certificate of completion issued by the Architect (or if more than one Architect has been engaged by Borrower, by the primary, supervising Architect for the Project) and General Contractor and approved by Lender stating that the Resort Improvements are substantially complete, subject only to a "punch list" designating any minor incomplete work or other performance remaining to be done under the Construction Contract to accomplish final completion of the Resort Improvements (hereinafter defined) and stating the amounts necessary to accomplish final completion of the Resort Improvements. (d) Right of Lender to Inspect Project and Review Plans. Lender, at --------------------------------------------------- any reasonable time and from time to time, shall be entitled to enter upon the Land and to inspect the Resort Improvements and all materials to be used in the construction thereof, and Borrower shall cooperate and use its good faith commercially reasonable efforts to cause each General Contractor to cooperate with Lender during such inspections (including making available to Lender working copies of the Plans, together with all related supplementary materials); provided, however, that this provision shall not -------- ------- be deemed to impose upon Lender any obligation to undertake such inspections. Borrower acknowledges that Lender may retain a licensed architect or engineer satisfactory to Lender (the "Inspecting Engineer"), ------------------- at Borrower's sole cost and expense, for the purpose of performing inspections as work progresses, certifying that each Draw Request is not in excess of the work completed, less Retainage, certifying that the committed and undisbursed Loan proceeds are sufficient to complete the Resort Improvements, and LOAN AND SECURITY AGREEMENT-Page 32 - --------------------------- covering such other matters as Lender shall reasonably require. Any such inspections shall be for Lender's sole benefit and shall not be relied upon by any other Person. In accordance with the provisions hereof, the services to be performed by Inspecting Engineer may include but not be limited to (i) a review of the Plans, any and all Construction Contracts and subcontracts, any and all other documents in the possession or control of Borrower or a General Contractor relating to the construction of Resort Improvements and all proposed changes to them; (ii) an analysis of the foregoing to ensure conformity of the Resort Improvements with the approved Plans and all Applicable Laws; and (iii) approval of Draw Requests in respect of the Loan. (e) Changes to Plans. Without Lender's prior written consent, ---------------- Borrower shall not change or modify the Plans, agree to any change order, or allow any extras to any contractor, except that Borrower may make or allow such changes or extras without Lender's prior consent if: (i) Borrower notifies Lender in writing in advance of the change or extra with appropriate supporting documentation and information; (ii) Borrower obtains the approval of all applicable contractors, the Architect, and all sureties and insurers whose approval is required; (iii) the structural integrity, quality and standard of workmanship of the Resort Improvements is not materially impaired or diminished; (iv) no substantial change in architectural appearance is effected; (v) no Event of Default or Incipient Event of Default and no default in any obligation to any other Person or violation of any Laws would result from such change or extra; (vi) to the extent that such change will result in an increase in the costs of the Project not reflected in the Budget, Borrower takes appropriate action under Section 6.14(b) above to provide additional equity funds (in addition --------------- to the Up-Front Equity) to pay for such increased costs; (vii) the increase or reduction in cost resulting from any single change or extra does not exceed $25,000 and the aggregate amount of all such increases and/or reductions does not exceed $50,000; and (viii) completion of the Resort Improvements by the Completion Date will not be affected or delayed. (f) Notification of Claims by Subcontractors and Materialmen. -------------------------------------------------------- Borrower shall advise Lender promptly in writing if Borrower receives any notice, written or oral, of any claim filed or asserted by any laborer, subcontractor, or materialman in connection with any labor or materials furnished in the construction of the Resort Improvements. (g) Demolition of Existing Improvements. Borrower shall cause the ----------------------------------- Existing Improvements to be demolished and all debris removed from the Land in compliance with all Applicable Laws, including Environmental Laws. To the extent the Existing Improvements contain friable asbestos or other Hazardous Materials, Borrower shall engage a licensed abatement contractor to remove the same in strict compliance with Applicable Laws and Environmental Laws. (h) Up-Front Equity. Borrower agrees that Borrower or Guarantor will --------------- contribute an amount of equity proceeds equal to not less than ten percent (10%) of the total Approved Costs of the Project. LOAN AND SECURITY AGREEMENT-Page 33 - --------------------------- 6.15 Timeshare Documentation; Compliance with Applicable Laws.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. 6.16 Environmental Matters .Borrower will comply, and will cause the Project to comply, in all material respects with all applicable Environmental Laws. Borrower will not cause, commit, permit or allow to continue (i) any violation of any Environmental Law by (A) Borrower or any contractor or subcontractor, or (B) by or with respect to the Project or any use of or condition or activity on the Land, or (ii) the attachment of any environmental lien to the Land. Borrower will not place, install, dispose of or release, or cause, permit, or allow the placing, installation, disposal, spilling, leaking, dumping or release of, any Hazardous Material or storage tank (or similar vessel) on the Land and will keep the Project free of Hazardous Material. If any Hazardous Material is discovered on the Property at any time and regardless of the cause, Borrower shall promptly at Borrower's sole risk and expense remove, treat, and dispose of the Hazardous Material in compliance with all applicable Environmental Laws and solely under Borrower's name (or if removal is prohibited by any Environmental Laws, take whatever action is required by any Environmental Law), in addition to taking such other action as is necessary to have the full use and benefit of the Property as contemplated by the Loan Documents, and provide Lender with satisfactory evidence thereof. 6.17 First Right for Receivables Financing . Subject to the terms and conditions of this paragraph, Borrower hereby agrees that Lender shall have an exclusive right to provide timeshare receivables financing for the Project and each Unit thereof, on the same terms as set forth in the Revolving Receivables Loan and for an amount not to exceed $20,000,000. Borrower agrees that it will not solicit any financing proposals until such time as it has requested or obtained from Lender recognition in writing that Lender has advanced at least $20,000,000 in respect of the Revolving Receivables Loan or that Borrower has no more availability for further funding under the Revolving Receivables Loan. Therefore, Borrower will not solicit proposals or commitments for such receivables financing from other lenders without first requesting a proposal or commitment from Lender. Borrower will permit Lender to provide such receivables financing so long as Lender's proposal or commitment for the same is based on the same terms as set forth in the Revolving Receivables Loan. If Lender is unable or unwilling for any reason to provide such receivables financing on such terms, Borrower may solicit proposals or commitments from other lenders. If Borrower wishes to have a third party process an application from it for such receivables financing (including a purchase of receivables) or any such entity wishes to accept a third party's financing proposal or a third party's commitment for such receivables financing, Borrower must give Lender notice of its desire to do so, together with (a) a written copy of the application for the subject financing or a copy of the commitment for the subject financing from the third party lender, as the case may be; and (b) all information and other materials delivered to such prospective lender in connection with the proposed financing. The term "financing proposal" means a proposal made by a third party to provide financing, which proposal is an expression of intent by a third party to further consider providing financing and must be accepted by the offeree as a condition precedent to the third party's further consideration to providing the financing, but does not constitute a firm and binding offer to provide financing; and the term "commitment" means a LOAN AND SECURITY AGREEMENT-Page 34 - --------------------------- firm and binding offer by a third party to provide financing, subject only to approval by Borrower and the completion of due diligence and closing conditions which do not involve further approval of the type or amount of investment or the type or quantity of collateral or credit enhancements by the third party's credit approval authorities. Lender shall have twenty (20) days from receipt of the required written notice with regard to the subject financing and the items required to be given to it with such written notice (a) to issue a financing proposal to extend financing to the entity securing such financing upon terms financially equivalent to the terms of the loan or credit agreement governing the Revolving Receivables Loan or the third party offer (in Lender's sole discretion); or (b) to refuse to do so. Issuance of such a conditional financing proposal in a timely manner shall constitute adequate exercise (albeit conditional) of Lender's right of first refusal. Failure to issue such a conditional financing proposal in a timely manner shall be deemed to be an election by Lender to refuse to make the newly requested financing. Lender's election not to make any newly requested financing shall not be deemed a waiver of any of the terms and conditions of the Loan Documents. ARTICLE 7 --------- NEGATIVE COVENANTS ------------------ So long as any portion of the Obligations remains unpaid or unperformed or Lender is committed to make further Advances hereunder, unless Lender otherwise consents in writing, Borrower and, as applicable, Guarantor hereby covenants and agrees with Lender as follows: 7.1 Negative Covenants in Other Documents. Borrower shall not violate or ------------------------------------- permit to be violated any of the negative covenants set forth (a) in the Deed of Trust or in any other Loan Document, (b) in any document or instrument evidencing, securing, or executed in connection with the Revolving Receivables Loan, or (c) in any other document or instrument evidencing, securing, or executed in connection with any other Obligations. 7.2 Use of Lender Name. Borrower shall not, and shall 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. 7.3 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 Improvements 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; (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 Project) 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 LOAN AND SECURITY AGREEMENT-Page 35 - --------------------------- 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. 7.4 Name Change. Borrower shall not change its name, its place of ----------- incorporation or organization, as applicable, or the locations at which any of the Collateral is located without providing Lender at least thirty (30) days' prior written notice thereof and executing, at Borrower's sole expense, such UCC-3 amendments and all other documents and instruments as Lender, in its sole discretion, deems reasonably necessary or appropriate in order to continue the perfection of its Lien in and to all of the Collateral. 7.5 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. 7.6 Timeshare Program. Without Lender's prior written consent, Borrower ----------------- shall not adopt, amend, modify or terminate any Timeshare Documentation or submit the Project or Resort Improvements to any Timeshare Program, except that if any amendment or modification is required by Applicable Law, Borrower shall implement the same and give prompt written notice thereof to Lender. Borrower shall (i) submit all Timeshare Documentation to Lender for its prior approval, (ii) ensure that all Timeshare Documentation complies with all Applicable Laws and (iii) prior to the marketing or sale of any Units or Intervals at the Project, comply with all rules, regulations and restrictions of state, local and federal Applicable Laws, including the laws of any jurisdiction in which Borrower markets or sells (or intends to market or sell) any Intervals or Units to any Purchaser. ARTICLE 8 --------- EVENTS OF DEFAULT ------------------ An "Event of Default" shall exist if any of the following shall occur: ---------------- 8.1 Payments. Failure of Lender to receive from Borrower, within five (5) -------- days of the date written notice has been sent to Borrower after the due date: (a) any amount payable under the Note, or (b) any other payment due under the Loan Documents, except for the Note payment due at the Maturity Date for which no notice and grace period shall apply. 8.2 Covenant Defaults. Borrower shall fail to perform or observe any ----------------- covenant, agreement, obligation, representation or warranty contained in this Agreement or in any of the Loan Documents (other than any covenant or agreement obligating Borrower to pay the Loan or any other amounts to Lender), and such failure shall continue for fifteen (15) days after Lender delivers written notice thereof to Borrower, provided, however, if the failure is incapable of -------- ------- cure within such fifteen (15) day period and Borrower shall be diligently pursuing a cure, such fifteen (15) day cure period shall be extended by an additional period not to exceed fifteen (15) days. 8.3 Warranties or Representations. Any representation or other statement ----------------------------- made LOAN AND SECURITY AGREEMENT-Page 36 - --------------------------- by or on behalf of Borrower in this Agreement, in any of the Loan Documents or in any instrument furnished in compliance with or in reference to the Loan Documents, shall be materially false, misleading or incorrect in any material respect as of the date made. 8.4 Involuntary Proceedings. If a case is commenced or a petition is ----------------------- filed and not dismissed within sixty (60) days against Borrower or Guarantor under any applicable liquidation, conservatorship, bankruptcy, moratorium, insolvency, reorganization or similar law providing for the relief of debtors and generally affecting the rights of creditors; a receiver, liquidator or trustee of Borrower or Guarantor or of any material asset of Borrower or Guarantor is appointed by court order and such order remains in effect for more than sixty (60) days; or if any material asset of Borrower or Guarantor is sequestered by court order and such order remains in effect for more than sixty (60) days. 8.5 Proceedings. Either Borrower or Guarantor voluntarily seeks, consents ----------- to or acquiesces in the benefit of any provision of any applicable liquidation, conservatorship, bankruptcy, moratorium, insolvency, reorganization or similar law providing for the relief of debtors and generally affecting the rights of creditors, whether now or hereafter in effect; consents to the filing of any petition against it under such law; makes an assignment for the benefit of its creditors; admits 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. 8.6 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. 8.7 Insolvency. Either Borrower or Guarantor shall become insolvent or ---------- otherwise generally be unable to pay its debts when due. 8.8 Material Adverse Change. Any material adverse change in the financial ----------------------- condition of Borrower or Guarantor (which is not otherwise specifically described in this Article 8 as an Event of Default) which Lender in good faith --------- believes impairs or may impair Borrower's or Guarantor's ability to duly and promptly perform all of its obligations under this Agreement and the other Loan Documents. A change shall not be deemed material and adverse until it results in cumulative damages of at least $250,000 or is not subject to quantification in Lender's reasonable opinion. 8.9 Default Under Other Agreements. Any default by Borrower or Guarantor ------------------------------ in the payment of Obligations for borrowed money in excess of $100,000 in the aggregate (including the Revolving Receivables Loan) after the expiration of any applicable grace or cure period; any other default under such Obligations which accelerates or permits the acceleration (after the giving of notice or passage of time, or both) of the maturity of such Obligations; or any default which permits the holders of such Obligations to control Borrower or Guarantor. LOAN AND SECURITY AGREEMENT-Page 37 - --------------------------- 8.10 Construction Related Defaults. The cessation of construction of the ----------------------------- Resort Improvements for more than twenty (20) days (whether or not consecutive), except for events of force majeure; a reasonable determination by Lender that the Resort Improvements will not be completed on or before the Completion Date; the failure of Borrower to complete the Resort Improvements on or before the Completion Date; any failure of Borrower to provide additional equity funds within ten (10) days after demand therefor by Lender pursuant to Section 6.14(b) --------------- hereof; or any court enjoins or prohibits construction, occupancy, maintenance or operation of any of the Resort Improvements, or Borrower or Lender from performing the Loan Documents, and such proceeding is not properly contested and such injunction or order is not vacated within forty-five (45) days after the granting thereof. 8.11 Default Under Deed of Trust. If a default or Event of Default occurs --------------------------- under the Deed of Trust or any other Loan Document and such default or event of default is not cured within the applicable grace period (if any), provided therein. 8.12 Default Under Other Loans. If a default or Event of Default occurs ------------------------- under (a) any document or instrument evidencing, securing or executed in connection with the Revolving Receivables Loan, or (b) any document or instrument evidencing, securing, or executed in connection with any other Obligations, and any such default or event of default (as described in (a) or (b) above) is not cured within the applicable grace period (if any) provided therein. ARTICLE 9 --------- REMEDIES -------- 9.1 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 Loan and other ------------ Obligations, or any part thereof, immediately due and payable, whereupon the same shall be due and payable. (b) Termination of Obligation to Advance. Terminate any commitment of ------------------------------------ Lender to make further Advances under this Agreement in its entirety, or any portion of any such commitment, to the extent Lender shall deem appropriate. (c) Termination of Obligation to Grant Partial Releases. Cease --------------------------------------------------- granting partial releases from the Lien of the Deed of Trust. (d) Completion of Construction. In its own name or in the name of -------------------------- Borrower, enter into possession of the Property, perform all work necessary to complete construction of the Resort Improvements substantially in accordance with the Plans (as modified as deemed necessary by Lender), the Loan Documents, and all Applicable Laws and continue to employ each Architect, each General Contractor and/or any contractor pursuant to the applicable contracts or otherwise. Borrower hereby appoints Lender as Borrower's attorney-in-fact, which power of attorney is irrevocable and LOAN AND SECURITY AGREEMENT-Page 38 - --------------------------- coupled with an interest, with full power of substitution, to do any of the following in Borrower's name upon the occurrence of an Event of Default: (i) use such sums as are necessary, including any proceeds of the Loan, make such changes or corrections in the Plans, and employ such architects, engineers, and contractors as may be required, or as Lender may otherwise consider desirable, for the purpose of completing construction of the Resort Improvements substantially in accordance with the Plans (as modified as deemed necessary by Lender), the Loan Documents, and all Applicable Laws; (ii) execute all applications and certificates in the name of Borrower which may be required for completion of construction of the Resort Improvements; (iii) endorse the name of Borrower on any checks or drafts representing proceeds of any insurance policies, or other checks or instruments payable to Borrower with respect to the Property; (iv) do every act with respect to the construction of the Resort Improvements that Borrower may do; (v) prosecute or defend any action or proceeding incident to the Property; (vi) pay, settle, or compromise all bills and claims so as to clear title to the Property; and (vii) take over and use all or any part of the labor, materials, supplies and equipment contracted for, owned by, or under the control of Borrower, whether or not previously incorporated into the Resort Improvements. Lender shall have no liability to Borrower for the sufficiency or adequacy of any such actions taken by Lender. (e) Judgment. Reduce Lender's claim to judgment, foreclose, or -------- otherwise enforce any Lien in all or any part of the Collateral by any available judicial or other procedure under Applicable Law. Lender's right to sue and recover a judgment, either before, after, or during the pendency of any proceeding for the enforcement of the Deed of Trust, and the right of Lender to recover such judgment shall not be affected by any taking, possession, or foreclosure sale hereunder or by the exercise of any other right, power, or remedy for the enforcement of the terms of the Deed of Trust or the foreclosure of the Lien thereof. (f) Sale of Collateral. Exercise all the rights and remedies of a ------------------ secured party under the UCC, 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 that 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 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 commercially reasonable. Borrower agrees that, to the extent notice of sale shall be required by Applicable 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 Applicable 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 Applicable Law, Borrower hereby LOAN AND SECURITY AGREEMENT-Page 39 - --------------------------- specifically waives all rights of redemption, stay, or appraisal that it has or may have under any Applicable Law now existing or hereafter enacted. (g) Retention of Collateral. At its discretion, retain such portion ----------------------- of the Collateral as shall aggregate in value to an amount equal to the total amount owed by the Borrower pursuant to the Loan Documents, in satisfaction of the Obligations, whenever the circumstances are such that Lender is entitled and elects to do so under Applicable Law. (h) Purchase of Collateral. Buy all or any part of the Collateral at ---------------------- any public or private sale. (i) 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 Application of Collateral; Termination of Agreements. Upon the ---------------------------------------------------- occurrence of an Event of Default, Lender may apply against the Obligations 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. 9.3 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 each and every surety, endorser, guarantor and other party liable for the payment or performance of all or any portion of the Obligations, 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 Obligations, or by any release or change in any security for the payment or performance of the Obligations, regardless of the number of such renewals, extensions, releases or changes. 9.4 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 Obligations 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. 9.5 Expenditures by Lender. Any sums expended by or on behalf of Lender ---------------------- LOAN AND SECURITY AGREEMENT-Page 40 - --------------------------- pursuant to the exercise of any right or remedy provided herein (including amounts expended by Lender to construct or complete the Resort Improvements) shall become part of the Obligations (regardless of whether such amounts exceed the Maximum Loan Amount) and shall bear interest at the Default Rate, from the date of such expenditure until the date repaid. 9.6 Delegation of Duties and Rights. Lender may perform 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. To the maximum extent practicable in light of all relevant facts and circumstances, Lender will attempt to avoid any duplication of effort and cost to Borrower in connection with any such delegation on Lender's part. 9.7 Lender Not in Control. None of the covenants or other provisions --------------------- contained in this Agreement or in any other Loan Document shall give or be interpreted as giving Lender the right or power to exercise control over the affairs and/or management of Borrower or Guarantor. 9.8 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 contributing cause of any damage. ARTICLE 10 ---------- CERTAIN RIGHTS OF LENDER ------------------------ 10.1 Confidentiality. Borrower agrees, and agrees to cause each of its --------------- affiliates, not to transmit or disclose provision of any Loan Document to any Person (other than as may be required to comply with applicable laws including Securities and Exchange Commission rules and regulations or to Borrower's advisors and officers on a need-to-know basis) without Lender's prior written consent. Lender reserves the right to review and approve all materials that Borrower or any of its affiliates prepares that contain Lender's name or describe or refer to any Loan Document, any of the terms thereof or any of the transactions contemplated thereby. Borrower shall not, and shall not permit any of its affiliates to, use Lender's name (or the name of any of Lender's affiliates) in connection with any of its business operations. Nothing contained in any Loan Document is intended to permit or authorize Borrower or any of its affiliates to contract on behalf of Lender. 10.2 Performance by Lender. Lender may, at any time and from time to time, --------------------- take such actions as Lender deems necessary or appropriate to protect Lender's Liens in and to preserve the Collateral, and to establish, maintain, and protect the enforceability of Lender's rights with respect thereto, 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 will take such actions to preserve the Collateral and Lender's Liens as Lender may direct, including, without limitation, by promptly paying, upon Lender's demand therefor, all documentary stamp taxes or other taxes that may be or may become due in respect of any of the Collateral. All of Lender's expenses of preserving the Collateral and its Liens therein shall be payable by Borrower LOAN AND SECURITY AGREEMENT-Page 41 - --------------------------- pursuant to Section 10.3 below. ------------ 10.3 Fees and Expenses. Borrower shall pay to or reimburse Lender for 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. Costs payable on the date of the Initial Advance shall include (i) the fees and costs of Lender's attorneys (including fees of Lender's inside counsel) in connection with the documentation of the Loan and all other expenses incurred by Lender in connection with the due diligence review of Borrower's deliveries including travel costs incurred by Lender to make such review; and (ii) all applicable title, filing and recording fees and other closing costs. 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 Trustee under the Deed of Trust; all costs and expenses incurred in connection with any of the foregoing; outlays for documentary and expert evidence; stenographers' charges; stamp taxes; inspection costs as set forth in Sections 6.11 and 6.14 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. With respect to fees of Lender's in-house counsel, Borrower expressly agrees that its obligation hereunder to reimburse Lender shall include reasonable charges for legal work commensurate with the fees that would otherwise be charged by outside legal counsel selected by Lender in its sole discretion for the legal work performed. If not paid by the Initial Advance or when requested by Lender, all such costs shall be included as additional Obligations bearing interest at the Default Rate set forth in the Note until paid. 10.4 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 Obligations without first resorting to the security hereunder and without prejudice to any other rights or remedies of Lender or its security interest herein. 10.5 Assignment of Lender's Interest. This Agreement shall inure to the ------------------------------- benefit of Lender, all future holders of the Note, any of the Obligations or any of the Collateral and all Transferees (as defined below), and each of their respective successors and permitted assigns. BORROWER ACKNOWLEDGES THAT LENDER MAY AT ANY TIME AND FROM TIME TO TIME MAY SELL, ASSIGN OR GRANT PARTICIPATING INTERESTS IN OR TRANSFER ALL OR ANY PART OF ITS RIGHTS OR OBLIGATIONS UNDER THIS AGREEMENT, THE NOTE, THE OBLIGATIONS, THE COLLATERAL AND/OR THE OTHER LOAN DOCUMENTS TO OTHER PERSONS, INCLUDING, WITHOUT LIMITATION, FINANCIAL INSTITUTIONS (EACH SUCH TRANSFEREE, ASSIGNEE OR PURCHASER, A "TRANSFEREE"). In ---------- such case, the Transferee shall have all of the rights and benefits with respect to the portion of such Obligations, the Note, the Collateral, this LOAN AND SECURITY AGREEMENT-Page 42 - --------------------------- Agreement and the other Loan Documents held by it as fully as if such Transferee were the original holder thereof (including without limitation rights of set-off and recoupment), and either Lender or any Transferee may be designated as the sole agent to manage the transactions and obligations contemplated herein; provided that, notwithstanding anything to the contrary herein or in any Loan - ------------- Document, Borrower shall not be obligated to pay under this Agreement to any Transferee any sum in excess of the sum which Borrower would have been obligated to pay to the Lender had such participation not been effected. Notwithstanding any other provision of any Loan Document, Lender may disclose to any Transferee all information, and furnish to such Transferee copies of reports, financial statements, certificates, and documents obtained under any provision of this Agreement or any other Loan Document. 10.6 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, (i) from time to time 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 satisfied. 10.7 Indemnification of Lender. In addition to (and not in lieu of) any ------------------------- other provisions hereof or of any other Loan Document providing for indemnification in favor of Lender, Borrower and Guarantor hereby defends, indemnifies, and holds harmless Lender, its subsidiaries, other affiliates, officers, directors, agents, employees, representatives, consultants, contractors, servants, and attorneys, as well as the respective heirs, personal representatives, successors, and assigns of any or all of them (hereinafter collectively referred to as the "Indemnified Parties"), from and against, and ------------------- agrees promptly to pay on demand or reimburse each of them with respect to, 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 any of them, in any way relating to or arising out of or in any way, directly or indirectly, related or attributable to: (i) this Agreement, the other Loan Documents or the Collateral; (ii) the transactions contemplated under any of the Loan Documents including, without limitation, those in any way relating to or arising out of the violation of any Applicable Laws; (iii) any breach of any covenant or agreement or the incorrectness or inaccuracy of any representation or warranty of Borrower or Guarantor contained in this Agreement or any of the other Loan Documents including, without limitation, any certification of Borrower or Guarantor delivered to Lender; (iv) any and all taxes, including real estate, personal property, sales, mortgage, excise, intangible, or transfer taxes, and any and all fees or charges that may at any time arise or become due prior to the payment, performance, and discharge in full of the Obligations; (v) the breach of any representation or warranty as set forth herein regarding any Environmental Laws; (vi) the LOAN AND SECURITY AGREEMENT-Page 43 - --------------------------- failure of Borrower to perform any obligation or covenant herein required to be performed pursuant to any Environmental Laws; (vii) the use, generation, storage, release, threatened release, discharge, disposal, or presence on, under, or about the Project of any Hazardous Materials (except to the extent that liability of the Indemnified Party with respect to such matter would not exist but for the acts or omissions of such Indemnified Party as determined in a final, non-appealable adjudication by a court of competent jurisdiction); (viii) the removal or remediation of any Hazardous Materials from the Project required to be performed pursuant to any Environmental Laws or as a result of recommendations of any environmental consultant or as required by Lender; (ix) claims asserted by any Person (including, without limitation, any governmental or quasi-governmental agency, commission, department, instrumentality or body, court, arbitrator, or administrative board in connection with or any in any way arising out of the presence, use, storage, disposal, generation, transportation, release, or treatment of any Hazardous Materials on, in, under, or affecting the Project; (x) the violation or claimed violation of any Environmental Laws in regard to the Project; (xi) the preparation of an environmental audit or report on the Project not to exceed one per calendar year and premised upon the Lender's reasonable belief of the existence of a violation of Environmental Laws, whether conducted by Lender, Borrower, or another Person; (xii) the breach or violation by Borrower of any Applicable Laws; or (xiii) the exercise by Lender of any rights or remedies under this Agreement or any of the other Loan Documents. 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, Lender 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. IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT THE INDEMNITY PROVIDED FOR HEREIN IS INTENDED TO AND SHALL PROTECT AND INDEMNIFY LENDER FROM THE CONSEQUENCES OF LENDER'S OWN NEGLIGENCE (BUT NOT GROSS NEGLIGENCE OR WILLFUL MISCONDUCT), 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. The provisions of this Section shall survive the full payment, performance, and discharge of the Obligations and the termination of this Agreement, and shall continue thereafter in full force and effect. 10.8 No Liability of Lender. Lender is obligated to perform all covenants ---------------------- and obligations of Lender hereunder, including but not limited to making Advances to Borrower, subject to all of the terms, provisions, and conditions hereof and of the other Loan Documents. However, 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 Project, all or any portion of the Collateral, under any Timeshare Documentation, or under any Applicable Laws, or in connection with any other business of Borrower or the Collateral, nor shall it otherwise bind Lender to the performance of any obligations with respect to the Project or the Collateral, it being expressly understood that Lender shall not be obligated to perform, observe, LOAN AND SECURITY AGREEMENT-Page 44 - --------------------------- or discharge any obligation, responsibility, duty, or liability of Borrower with respect to the Project, any of the Collateral, or under any of the Timeshare Documentation, or under any Applicable Laws, including but not limited to appearing in or defending any action, expending any money, or incurring any expense in connection therewith. Without limiting the foregoing, neither this Agreement, any action or actions on the part of Lender taken hereunder nor the acquisition of the Collateral by Lender prior to or following the occurrence of an Event of Default shall constitute an assumption by Lender of any obligations of Borrower with respect to the Project or such Collateral, or any documents or instruments executed in connection therewith and Borrower shall continue to be liable for all of its obligations thereunder or with respect thereto. 10.9 Right of Lender to Extend Time of Payment, Substitute, Release -------------------------------------------------------------- Security, Etc. Without affecting the liability of any Person or entity for the - -------------- payment of any of the Obligations and without affecting or impairing Lender's Liens in and to the Collateral, or the remainder thereof, as security for the full amount of the Loan unpaid and the other Obligations, Lender may from time to time, without notice: (a) release any Person liable for the payment of the Loan; (b) extend the time or otherwise alter the terms of payment of the Loan; (c) accept additional security for the Obligations of any kind, including deeds of trust or mortgages and security agreements; (d) alter, substitute, or release any property securing the Obligations; (e) realize upon any Collateral for the payment of all or any portion of the Loan in such order and manner as it may deem fit; and/or (f) join in any subordination or other agreement affecting this Agreement or the lien or charge thereof. 10.10 Verification of Use. Lender shall be under no duty or obligation to ------------------- ascertain the manner in which Borrower has used or will use the proceeds of the Loan. Lender's sole obligation shall be to advance the proceeds of the Loan subject to, and in accordance with, the terms, provisions, and conditions of this Agreement and the other Loan Documents. Lender's obligation to fund the Loan is limited to the Maximum Loan Amount. Borrower is solely responsible for obtaining any other financing that may be necessary in order to fund costs of the Project that are in excess of those budgeted or the Maximum Loan Amount. It is expressly understood that Lender has no responsibility or obligation whatsoever to provide to Borrower any further financing. ARTICLE 11 ---------- MISCELLANEOUS ------------- 11.1 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 if before 3:00 p.m. (New York 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 LOAN AND SECURITY AGREEMENT-Page 45 - --------------------------- (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: CapitalSource Finance LLC Attn: Structured Finance Group Re: Preferred Equities Corp (Inventory) 4445 Willard Avenue, 12/th/ Floor Chevy Chase, MD 20815 Facsimile: 301/841-2370 With a copy to: Patton Boggs LLP 2001 Ross Avenue, Suite 3000 Dallas, Texas 75201 Attn: James C. Chadwick, Esq. Facsimile: 214/758-1550 11.2 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 Obligations (and each part thereof), regardless of any investigation made by or on behalf of Lender. 11.3 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 APPLICABLE LAWS OF THE STATE OF NEW YORK AND APPLICABLE LAWS OF THE UNITED STATES. LOAN AND SECURITY AGREEMENT-Page 46 - --------------------------- 11.4 Limitation on Interest. Lender and Borrower intend to comply at all ---------------------- times with all applicable usury laws. 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 highest lawful rate permissible under Applicable Laws. If, from any circumstance whatsoever, fulfillment of any provision hereof, of the Note, or of any other Loan Documents shall involve transcending the limit of such validity prescribed by any Applicable 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 Lender shall ever receive anything of value deemed interest by Applicable Law that would exceed the highest lawful rate, such amount which would be 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 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 Loan for such full period shall not exceed the highest lawful rate. Borrower agrees that in determining whether or not any interest payment under the Loan Documents exceeds the highest lawful rate, any non-principal payment (except payments specifically described in the Loan Documents as "interest"), including without limitation, prepayment fees and late charges, shall, to the maximum extent not prohibited by Applicable Law, be deemed an expense, fee, premium, or penalty rather than interest. Lender hereby expressly disclaims any intent to contract for, charge, or receive interest in an amount that exceeds the highest lawful rate. The provisions of the Note, this Agreement, and all other Loan Documents are hereby modified to the extent necessary to conform with the limitations and provisions of this Section, and this Section shall govern over all other provisions in any document or agreement now or hereafter existing. This Section shall never be superseded or waived unless there is a written document executed by Lender and Borrower expressly declaring the usury limitation of this Section to be null and void, and no other method or language shall be effective to supersede or waive this Section. 11.5 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 and 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. 11.6 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. 11.7 No Duty. All attorneys, accountants, appraisers, consultants, ------- custodians and other professional persons retained by Lender shall have the right to act exclusively in the LOAN AND SECURITY AGREEMENT-Page 47 - --------------------------- 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 Guarantor or any of their officers, directors or shareholders or to any Person. 11.8 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. 11.9 Successors and Assigns. This Agreement and the other Loan Documents ---------------------- shall be binding upon and inure to the benefit of Borrower, Guarantor, and Lender and their respective successors and assigns; provided, however, that -------- ------- neither Borrower nor Guarantor may transfer or assign any of its rights or obligations under this Agreement or the other Loan Documents without the prior written consent of Lender, which consent may be granted or withheld in Lender's sole and absolute discretion. This Agreement and the transactions provided for or contemplated hereunder or under any of the other Loan Documents are intended solely for the benefit of the parties hereto. No third party shall have any rights or derive any benefits under or with respect to this Agreement or the other Loan Documents except as specifically set forth herein or otherwise provided in a written document signed by Borrower and Lender. No Person other than Borrower shall have standing to require satisfaction of such conditions in accordance with their terms or be entitled to assume that Lender will refuse to make Advances in the absence of strict compliance with any or all thereof, and no other Person, other than Borrower, under any circumstances whatsoever, shall be deemed to be a beneficiary of such conditions, any or all of which Lender freely may waive, in whole or in part, at any time if, in its sole discretion, it deems it desirable to do so. In particular, Lender makes no representation and assumes no obligation as to third parties concerning the quality of the construction of the Resort Improvements by Borrower or the absence therefrom of defects. 11.10 Amendment. This Agreement (including all exhibits and schedules --------- hereto) may not be amended or modified, and no term, provision, or condition hereof may be waived, except by a written instrument that is signed by all of the parties hereto. 11.11 Entire Agreement. This Agreement, including the Schedules and ---------------- Exhibits hereto and to the 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, Guarantor, or between any two or more of them. ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBT ARE NOT ENFORCEABLE. TO PROTECT BORROWER. GUARANTOR AND LENDER FROM LOAN AND SECURITY AGREEMENT-Page 48 - --------------------------- MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS REACHED COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING WHICH IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES, EXCEPT AS THEY MAY LATER AGREE IN WRITING TO MODIFY IT. 11.12 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 CT CORPORATION SYSTEMS, 111 EIGHTH AVENUE, NEW YORK, NEW YORK 10011, 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 BORROWER. 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 CT CORPORATION SYSTEMS, 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 11.1 OF THIS AGREEMENT. ------------ Initial on behalf of Borrower: ___________________ LOAN AND SECURITY AGREEMENT-Page 49 - --------------------------- 11.13 Jury Trial Waiver. BORROWER, GUARANTOR 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, GUARANTOR AND LENDER, AND BORROWER AND GUARANTOR ACKNOWLEDGE 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, GUARANTOR 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, GUARANTOR 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. Initial on behalf of Borrower: ______________________ 11.14 Directly or Indirectly. Where any provision in the 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. 11.15 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. 11.16 Broker's Fees. There are no brokers or other similar fees or ------------- commitments due with respect to the transactions described in the Agreement. Borrower shall defend and indemnify Lender and save and hold Lender harmless from all claims of any Persons for any such fees, which indemnity shall include reasonable attorneys' fees and legal expenses. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] LOAN AND SECURITY AGREEMENT - Page 50 - --------------------------- IN WITNESS WHEREOF, Borrower, Guarantor and Lender have caused this Agreement to be executed and delivered by their duly authorized officers effective as of the date first above written. BORROWER: -------- PREFERRED EQUITIES CORPORATION, a Nevada corporation By:_____________________________ Name:___________________________ Its:____________________________ GUARANTOR: --------- MEGO FINANCIAL CORP, a New York corporation By:_____________________________ Name:___________________________ Its:____________________________ LENDER: ------ CAPITALSOURCE FINANCE LLC, a Delaware limited liability company By:_____________________________ Name: Michael C. Szwajkowski Its: Managing Director LOAN AND SECURITY AGREEMENT - Page 51 - --------------------------- SCHEDULE 2.1 ------------ Preliminary Budget ------------------ COSTS RELATED TO PROJECT: $4,600,000 Land Acquisition Costs $1,500,000 Hard and Soft Costs of Project $3,100,000 - ------------------------------------------------- TOTAL PROJECT COSTS $4,600,000 EXCESS LOAN PROCEEDS /1/ $2,400,000 - ----------------------------------------------------------------- TOTAL LOAN AMOUNT $7,000,000 _____________ /1/ Borrower acknowledges that Lender has agreed to fund up to $4,600,000, the estimated costs of the Project. No other loan funds will be advanced by Lender to Borrower hereunder unless and until Lender has approved, in its sole and absolute discretion, the proposed or intended use of such funds by Borrower Schedule 2.1 -- Page 1 of 1 - ------------ SCHEDULE 4.1 ------------ Closing Deliveries ------------------ Section 1. Initial and Interim Advance Requirements. The obligation of ---------------------------------------- Lender to enter into this Agreement and to make the Initial Advance of the Loan and any Interim Advances thereafter shall be subject to the complete satisfaction of each of the conditions precedent set forth herein, in addition to all of the conditions precedent set forth elsewhere in the Loan Documents: (a) Execution and Delivery. Borrower and Guarantor shall execute and ---------------------- cause to be notarized, witnessed, and attested, as appropriate, and delivered to Lender the Loan Documents, together with such additional documents and certifications as Lender and its counsel may reasonably require in order to ensure that all conditions precedent to the closing of the Loan and the making of the Initial Advance hereunder have been satisfied in all respects. (b) Opinion of Counsel(s). An opinion of Borrower's and Guarantor's --------------------- counsel stating: (i) that the Loan is not usurious under Applicable Laws; (ii) that the Loan Documents are validly executed, duly authorized and binding and enforceable in accordance with their terms; (iii) that the execution and delivery of the Loan Documents and the performance of the transactions contemplated thereby do not violate or contravene any law, court order, judgment or contract to which Borrower is a party and grant to Lender the security interests set forth in this Agreement; and (iv) such further opinions as Lender shall require. (c) Representations, Warranties, Covenants, and Agreements. The ------------------------------------------------------ representations and warranties contained in the Loan Documents and in any certificates delivered to Lender in connection with the closing shall be true and correct in all material respects, and all covenants and agreements required to have been complied with and performed by Borrower shall have been fully complied with and performed to the satisfaction of Lender. (d) Borrower's and Guarantor's Corporate Documents. Borrower shall ---------------------------------------------- have delivered to Lender, and Lender shall have approved each of the following: (i) Borrower's and Guarantor's Organizational Documents. --------------------------------------------------- Copies of Borrower's and Guarantor's organizational documents, including but not limited to their respective articles of incorporation and bylaws, together with any amendments thereto, certified to be true and complete by Borrower's and Guarantor's Secretaries, respectively. (ii) Good Standing Certificates. Current good standing -------------------------- certificates issued by the Secretary of State of Nevada and New York for Borrower and Guarantor, respectively. (iii) Resolutions. Certified resolutions of Borrower's and ----------- Guarantor's boards of directors authorizing the execution by each of the applicable Loan Schedule 4.1 -- Page 1 of 8 - ------------ Documents and the performance of all obligations of Borrower and Guarantor thereunder. (e) Proceedings Satisfactory. All actions taken in connection with ------------------------ the execution and delivery of the Loan Documents, and all documents and papers related thereto, shall be completely satisfactory to Lender and its counsel. Lender and its counsel shall have received copies of all such documents and papers as Lender or its counsel may reasonably request in connection therewith, all in form and substance satisfactory to Lender and its counsel, in their sole discretion. (f) Expenses. Borrower shall have paid all fees, expenses, and other -------- amounts required to be paid prior to or on the Execution Date, pursuant to this Agreement, including but not limited to the Commitment Fee (or portion thereof) the due and payable. (g) Title. Borrower shall have delivered to Lender (and Lender shall ----- have approved) a commitment to issue an ALTA extended coverage lender's policy of title insurance insuring in favor of Lender, together with its successors and assigns, the first priority of the Lien of the Deed of Trust, without exception for filed or unfiled mechanics' liens or claims or for matters that an accurate survey would disclose, subject only to such exceptions and conditions to title as Lender shall have approved in writing and such affirmative coverage as Lender deems reasonably necessary (the "Title Insurance Policy"). The Title Insurance Policy shall be in an amount ---------------------- not less than the original principal amount of the Note and be issued by the Title Insurer. The Title Insurance Policy shall contain such affirmative coverage as Lender deems reasonably necessary, including but not limited to an affirmative statement that the Title Insurance Policy insures Lender, together with its successors and assigns, including but not limited to Lender, against all mechanics' and materialmen's liens arising from or out of construction of the Resort Improvements and, to the extent available and commonly required by lenders in the State of Nevada, shall contain endorsements in form and content acceptable to Lender: (A) insuring against matters that would be disclosed on an accurate survey of the Land; (B) insuring that no building restriction or similar exception to title disclosed on the Title Insurance Policy has been violated and that any violation thereof would not create or result in any reversion, reverter, or forfeiture of title; (C) a zoning endorsement in the form typically issued in the State of Nevada; and (D) insuring over any environmental superlien or similar lien upon all or any portion of the Land. Such Title Insurance Policy shall provide that Borrower shall receive an endorsement to the Title Insurance Policy on the date of each Advance of the Loan: (i) indicating that since the date of the immediately preceding Advance, there has been no change in the state of title and no mechanics' or materialmen's lien, claim, or lien or similar notice has been filed against any of the Collateral; (ii) updating the Title Insurance Policy to the date of such Advance; and (iii) increasing the coverage of the Title Insurance Policy by an amount equal to the amount of such Advance if the Title Insurance Policy does not by its own terms provide for such an increase. (h) Evidence of Insurance. Lender shall have received and approved --------------------- evidence of policies of insurance as required hereby. Schedule 4.1 -- Page 2 of 8 - ------------ (i) UCC Searches. Lender shall have received such searches of the ------------ applicable public records as it deems necessary under Applicable Law to verify that it has a first and prior perfected lien and security interest covering all of the Collateral. (j) Taxes and Assessments. Lender shall have received copies of the --------------------- most current tax bills related to the Project, together with evidence satisfactory to it that all taxes and assessments owed by or for which Borrower or an owners' association is responsible for collection have been paid, which taxes and assessments include, without limitation, sales taxes, room occupancy taxes, payroll taxes, personal property taxes, excise taxes, intangible taxes, real property taxes, income taxes, and any assessments related to the Project. Lender shall also have received information satisfactory to Lender disclosing the tax identification numbers, tax rates, estimated tax values, assessment ratios, and estimated assessment values or amounts with respect to the Land and the identities of the taxing authorities having jurisdiction over the Land as well as the instrumentalities and entities having the power and jurisdiction to impose assessments against the Land or the Resort Improvements. (k) Commitment Fee. Lender shall have received the Commitment Fee (or -------------- portion thereof) payable upon execution of this Agreement. (l) Equity Contribution by Borrower. Lender shall have received ------------------------------- evidence satisfactory to Lender that Borrower has contributed not less than $150,000 of its own funds to pay costs and expenses of the Project approved by Lender. (m) Other Items. Lender shall have received such other agreements, ----------- documents, instruments and certificates as Lender may request to evidence the Obligations and to evidence and perfect the liens and security interests contemplated by the Loan Documents. ANY WAIVER OF ANY OF THE AFORESAID CONDITIONS PRECEDENT MUST BE IN WRITING, SPECIFY THE CONDITION AND BE SIGNED BY AN AUTHORIZED OFFICER OF LENDER. ANY WAIVER, IF ANY, SHALL ONLY WAIVE THE SPECIFIED CONDITION AND NO OTHER, AND SHALL NOT BE DEEMED OR CONSTRUED TO BE A SUBSEQUENT WAIVER. NEITHER THE CLOSING OF THE LOAN NOR THE DISBURSEMENT OF ANY LOAN PROCEEDS SHALL BE DEEMED A WAIVER OF ANY OF THE AFORESAID CONDITIONS PRECEDENT. Section 2. Requirements for Construction Advances. The obligation of -------------------------------------- Lender to make any Advance of the Loan which would cause the aggregate amount advanced by Lender to Borrower hereunder to exceed $1,770,000, shall be subject to the complete satisfaction of each of the conditions precedent set forth herein, in addition to all of the conditions precedent set forth elsewhere in the Loan Documents: (a) Title. The Title Insurer shall have issued to Lender the Title ----- Insurance Policy and a downdate endorsement thereto, in form satisfactory to Lender's counsel, without any exceptions from coverage other than the Permitted Exceptions allowed by Lender prior to the Advance. If required by Lender, the Title Insurer shall issue to Lender an endorsement to the Title Insurance Policy deleting the standard, pre-printed Schedule 4.1 -- Page 3 of 8 - ------------ exception for matters disclosed by a survey of the Land. (b) Survey. Lender shall have received and approved a survey, dated ------ within ninety (90) days prior to the requested Advance, satisfactory to Lender and prepared by a licensed surveyor satisfactory to Lender and the Title Insurer in accordance with Lender's requirements, of the Land, reflecting the completion of demolition of the Existing Improvements and the location and dimensions of any other improvements remaining thereon and indicating the routes of ingress and egress for public access to the Land, all utility lines, walks, drives, recorded or visible easements and rights- of-way on such Land, and showing that there are no encroachments, improvements, projections, or easements (recorded or unrecorded) on the property lines. Foundation perimeters are to be added to the survey by the surveyor as soon as they are in place for all buildings comprising a part of the Resort Improvements. The survey shall indicate whether the Land is located within any flood hazard area. The survey must be prepared in accordance with the standards set forth by ALTA/ACSM and those of any and all surveyors' bureaus or associations of the State of Nevada as well as any and all Applicable Laws and must be certified to Borrower, Lender and the Title Insurer. The surveyor's certificate placed on the survey shall include a statement that said survey locates any and all such items set forth as exceptions in the Title Insurance Policy as Lender may require, shall include a legal description of the Land, and otherwise satisfy all of Lender's survey requirements, and shall include any other information required by Lender, Borrower, or the Title Insurer. If the Survey discloses the existence of utilities or easements that must be removed or relocated to construct the Resort Improvements, Borrower shall provide Lender with evidence satisfactory to Lender that such utilities and easements can and will be relocated prior to the completion of all site and grading work for the Resort Improvements. (c) Environmental Report. Lender shall have received and approved an -------------------- updated environmental report or reports covering the Land, confirming (to the extent relevant, in Lender's reasonable discretion): (i) The removal and disposal of the Existing Improvements (including all friable asbestos within the Existing Improvements) in compliance with the requirements of all Applicable Laws and the absence of Hazardous Materials on, under, or affecting the Land; (ii) That the engineering or environmental consulting 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 Borrower or Lender may reasonably require, including, without limitation, a Phase I Environmental Inspection, all of which information shall confirm that there are no known or suspected Hazardous Materials located at, used or stored on, or transported to or from the Land or in such proximity thereto as to create a material risk of contamination of any the Collateral; and (iii) The absence of radon gas at the Land or, if radon gas is found to be present in any part of the Land, that such presence is of a nature or magnitude so Schedule 4.1 -- Page 4 of 8 - ------------ as to be fully in compliance with applicable standards under the Environmental Laws and all other Applicable Laws. The removal and disposal of any friable asbestos or other Hazardous Materials must be accomplished by a licensed removal contractor for a guaranteed maximum sum satisfactory to Borrower and Lender and included in the Budget. In addition, the environmental consultant shall deliver to Lender results of soils testing taken prior to the commencement of grading or excavation work, confirming the absence of Hazardous Materials in the soil that does or may require the implementation of special procedures to ensure the health and safety of all workers at the Project. (d) Soil Tests. Lender shall have received a report as to soil and ---------- compaction condition and analysis made at the Land by a soil testing firm satisfactory to Borrower and Lender. The number and location of such borings shall be in accordance with the recommendations of the soil testing firm and must also be satisfactory to Lender and also shall include a sinkhole analysis of the Land. The report shall include the recommendations of the soil testing firm as to the preparation of the soil needed in order to adequately support the Resort Improvements. During the course of construction, Borrower shall also provide to Lender such reports as to concrete tests and such additional soil tests as are required by the Architect, General Contractor or contemplated by the Plans. (e) Applicable Laws. Borrower has received evidence satisfactory to --------------- Borrower and Lender that all contemplated Resort Improvements are and will be in compliance with all applicable zoning, building, and other Applicable Laws in connection with the construction, development, establishment, and operation of the Project and the sale, use, marketing, and occupancy of all Units and Intervals. (f) Construction Contract. Lender shall have received and approved --------------------- each general construction contract (the "Construction Contract"), executed --------------------- or to be executed by and between Borrower and a general contractor acceptable to Lender (the "General Contractor"), to construct the Resort ------------------ Improvements in accordance with the Plans therefor and all Applicable Laws. The Construction Contract shall contain, in addition to any other provisions relating to construction of the Resort Improvements that Lender may reasonably require, the following provisions: (i) An agreement to supply and/or furnish all labor, supervision, materials, supplies, and equipment necessary to complete the construction of the Resort Improvements, on or before the Completion Date, for not more than a guaranteed maximum fixed price acceptable to Lender; (ii) A provision that the General Contractor and each subcontractor and materialman shall, as a precondition to the making of any Advance hereunder (including the final Advance for Retainage) execute and deliver to Borrower and Lender conditional or unconditional lien waivers (as required by this Agreement) in any form and substance approved by Lender; (iii) A provision for such Retainage of 10% of the Hard Costs payable Schedule 4.1 -- Page 5 of 8 - ------------ thereunder or a lesser amount, if any, as Lender may consider appropriate under the circumstances, which Retainage shall be released in the manner set forth in herein; (iv) A provision that prior to final payment under the Construction Contract (including Retainage), the General Contractor shall deliver to Borrower and Lender (A) a final and complete release of Liens signed by the General Contractor and all subcontractors and materialmen performing work or supplying materials; and (B) a certificate of substantial completion or its legal equivalent with a punch list executed by Borrower, the General Contractor, and the Architect; (v) A provision that the Construction Contract may not be terminated by the General Contractor unless Borrower's default thereunder continues for a period of thirty (30) days after delivery of a written notice of Borrower's default to Lender (or such longer period after said delivery as may be reasonably necessary to cure a default thereunder) and may not be terminated by the General Contractor by reason of the bankruptcy or insolvency of Borrower; (vi) A provision that, upon the occurrence of a default or an event of default under the Construction Contract, the General Contractor will, at the request of Lender, continue to perform thereunder until construction of the Resort Improvements have been completed; and (vii) Such other commercially reasonable provisions as Lender shall require. (g) Budget. Lender shall have received and approved the Budget ------ consisting of a breakdown certified by Borrower and the General Contractor, in form, scope, and content acceptable to Lender, setting forth all acquisition, construction, and other costs of developing the Resort Improvements, including, without limitation, financing costs, costs of acquisition of the Land, costs of construction of the Resort Improvements, and other costs incidental to the construction of the Resort Improvements and the development of the Project and specifying which items are to be funded from sources other than the proceeds of the Loan. The Budget shall serve as the basis upon which advances of the Loan are made on account of each of the categories set forth therein (the costs disclosed on the Budget and approved in writing by Lender shall hereinafter be referred to as the "Approved Costs"). If, pursuant to Section 6.14(b) hereof and in the -------------- --------------- judgment of Lender, the total estimated costs of constructing the Resort Improvements and developing the Project exceed the Maximum Loan Amount, plus any equity contributions by Borrower as required by this Agreement, then Borrower shall contribute toward the payment of Approved Costs the amount of the difference prior to the making of any Construction Advance hereunder. (h) Bonds. Lender shall have received and approved (i) a performance ----- bond for the General Contractor in a penal sum equal to the full contract amount and in form and content satisfactory to Lender including, without limitation, provisions naming Lender as an obligee, consenting to changes in the Construction Contract without notice Schedule 4.1 -- Page 6 of 8 - ------------ to the surety, and allowing Lender a reasonable time after notice by the surety in which to cure (without any obligation to do so) any breach or default which could release the surety; and (ii) a payment bond for the General Contractor, in form and content satisfactory to Lender. Each bond shall be issued by a corporate surety authorized and admitted to do business in Nevada and licensed by the State of Nevada to execute and issue bonds as surety in Nevada. (i) Architect's Contract. Lender shall have received and approved a -------------------- copy of each contract by and between Borrower and each Architect, including contracts for the services of an engineer retained by the Architect in connection with and as part of Architect's work under such contract. Each such contract shall be in form and content acceptable to Lender and provide that the Architect shall submit to Borrower all certificates, as-built plans, specifications, and other information as a prerequisite to the making of any Advance by Lender hereunder, including the final Advance. Among other provisions, said Architect's contract shall prohibit Borrower from agreeing to or permitting any material amendment, modification, waiver, or other material change to the Plans or the Architect's contract without the prior written consent of Lender. Lender shall also have received from Borrower a written certificate from the Architect covering such matters as may be required by Lender and stating that the proposed Resort Improvements, when completed in accordance with the Plans, will comply with all Applicable Laws, together with an agreement by the Architect, in form and content acceptable to Borrower and Lender, that (i) upon the occurrence of an Event of Default under the Loan Documents, the Architect will, at Lender's request continue performance pursuant to its agreement with Borrower until the completion of construction of the Resort Improvements, and (ii) evidences the Architect consent to (A) the assignment by Borrower all of Borrower's right, title, and interest in the Architect's contract and the Plans in respect of the Resort Improvements, and (B) permits Lender to use the Plans and any materials obtained by the Architect from any other architect or engineer retained by the Architect at no cost to Lender. (j) Subcontracts. If requested by Lender, Lender shall have received ------------ copies of each contract that has been executed by and between the General Contractor and a construction manager, subcontractor, materialman, or supplier that is to provide labor and/or materials in connection with the development and construction of the Resort Improvements in accordance with the Plans with a value of $100,000 or more (a "Material Subcontractor") ---------------------- contains the agreement of the Material Subcontractor to perform its respective contract for Lender following the occurrence of an event of default pursuant to the Loan Documents. Furthermore, Lender shall have received from Borrower or the General Contractor a current list of all Material Subcontractors working on the Resort Improvements, showing the name, address, and telephone number of each Material Subcontractor, the work or material performed or supplied thereby, and the total amount of each relevant contract and subcontract and amounts paid through the date upon which such list was completed. (k) Plan and Cost Review. If required by Lender, Lender shall have -------------------- obtained a written plan and cost review covering such matters as may be required by Lender and confirming that the proposed Resort Improvements can feasibly be constructed within the cost limitations set forth in the Budget and that the proposed Resort Improvements, when Schedule 4.1 -- Page 7 of 8 - ------------ completed in accordance with the Plans, will comply with all Applicable Laws. (l) Permits and Approvals. Lender shall have received copies of --------------------- building permit(s) and other satisfactory evidence that the Land and the Resort Improvements and the intended uses of the Land are in compliance with all Applicable Laws, including, without limitation: (i) Environmental Laws; (ii) erosion control ordinances; (iii) doing-business and/or licensing laws; (iv) laws protecting disabled or handicapped persons; and (v) zoning laws. All permits and approvals granted to Borrower shall continue to be legally valid and shall remain in full force and effect for so long as the Loan is outstanding. (m) Plans. Lender shall have received and approved complete and ----- detailed Plans which shall be satisfactory to Lender, including any changes or modifications thereto and including Plans for architectural, structural, mechanical, plumbing, electrical, and site development (including storm drainage, utility lines, erosion control, and landscaping) work. All Plans must be stamped with all required approvals from all applicable governmental authorities, certified under seal by the Architect, and signed by Borrower and the General Contractor to be true copies of the Plans architecturally and structurally approved by all authorities and agencies having jurisdiction over such Plans. (n) Certificate of Architect. Lender shall have received a ------------------------ Certificate of Architect from each Architect who prepared any of the Plans addressed to Borrower and Lender and stating that (i) any necessary soil testing has been performed, and soil conditions are satisfactory for the structural support of the Resort Improvements; (ii) that there is adequate ingress and egress to the Land and Resort Improvements; (iii) that the Plans have been approved by all applicable governmental authorities, meet all state construction and energy conservation laws and comply with all federal laws and regulations adopted pursuant to the Fair Housing Act of 1968 (as amended), the Americans with Disabilities Act of 1990, and all other Applicable Laws; (iv) that provisions have been made for the handicapped in accordance with all state and local ordinances, rules, and regulations; (v) that the zoning is proper; (vi) that all utilities necessary to service the Resort Improvements are available with adequate capacity; and (vii) that all required governmental permits and approvals have been obtained; and such additional items as may reasonably be required by Lender. (o) Appraisal. Lender shall have received and approved an MAI --------- appraisal of the Land (exclusive of the Existing Improvements) and the proposed Resort Improvements, prepared by a nationally recognized appraisal firm, and in form and content acceptable to Lender in its sole and absolute discretion. Schedule 4.1 -- Page 8 of 8 - ------------ SCHEDULE 5.1 ------------ List of Affiliates ------------------
State of Date of Tax ID Company Name Incorporation Incorporation Number ============================================== ================= ================= ============== Mego Financial Corp. New York 2/23/54 13-5629885 Preferred Equities Corporation Nevada 11/6/69 88-0106662 (NOTE: THE FOLLOWING ARE SUBSIDIARIES OF PREFERRED EQUITIES CORPORATION) AB Preferred Holdings, Inc. Florida 8/14/01 59-3736610 Calvada Springs Corporation Nevada 10/6/69 34-1041076 Central Nevada Realty Co. Nevada 6/16/72 88-0121466 Central Nevada Utilities Company Nevada 5/18/70 95-2677808 Colorado Land and Grazing Corp. Colorado 5/16/84 88-0219260 First Corporation of Nevada Nevada 6/4/76 88-0165802 First National Equity Corp. Nevada 10/18/83 88-0192380 Overlook Food and Beverage Company Colorado 10/7/96 88-0000020 Preferred Colorado Land Co. Colorado 10/13/92 84-1216123 Preferred Equities Insurance Agency, Inc. Nevada 1/7/92 88-0279891 Preferred Vacation Resorts, Inc. Nevada 4/8/85 88-0216259 Resort Properties Advertising, Inc. Nevada 5/16/86 88-0399266 RVS Marketing, Inc. Texas 11/29/95 88-0362127 Southern Colorado Properties, Inc. Colorado 6/4/81 88-0178190 Steamboat Suites, Inc. Colorado 9/21/94 88-0325374 Brigantine Preferred Properties, Inc. Nevada 2/7/90 93-1039448 (NOTE: THE FOLLOWING ARE SUBSIDIARIES OF BRIGANTINE PREFERRED PROPERTIES, INC.) Brigantine Inn Management, Inc. New Jersey 4/19/84 22-2615046 Brigantine Inn Marketing, Inc. New Jersey 4/19/84 22-2541270 The Brig Inc. New Jersey 9/13/83 22-2473166
Schedule 5.1 -- Page 1 of 1 - ------------ EXHIBIT A --------- Legal Description ----------------- Lots Twenty-Five (25) and Twenty-Six (26), Block Two (2), Flamingo Estates, Clark County, Nevada, as shown by map thereof on file in Book 5 of Plats, Page 22, in the Office of the County Recorder of Clark County, Nevada. EXHIBIT A -- Page 1 of 1 - --------- EXHIBIT B --------- Permitted Exceptions -------------------- 1. Reservations and provisions as contained in the Patent from the State of Nevada, recorded January 27, 1921, in Book 7 of Deeds, Page 269, as Instrument No. 14991. 2. All oil, gas, coal and other hydrocarbon substances as conveyed to Harry Cobb in a document recorded March 25, 1957, in Book 124, of Official Records, as Instrument No. 102052. 3. Covenants, conditions restrictions and easements in the document recorded December 24, 1957 in Book No. 148 as Instrument No. 121291 of Official Records, which provide that a violation thereof shall not defeat or render invalid the lien of any first mortgage or deed of trust made in good faith and for value, but deleting any covenant, condition or restriction indicating a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status, or national origin, to the extent such covenants, conditions or restrictions violate Title 42, Section 3604(C), of the United States Codes. Documents declaring modifications thereof recorded October 17, 1972 in Book No. 272 as Instrument Nos. 231058 through 231080 of Official Records. Documents declaring modifications thereof recorded March 24, 1983 in Book No. 1708 as Instrument Nos. 1667267 through 1667279 of Official Records. Documents declaring modifications thereof recorded March 25, 1983 in Book No. 1709 as Instrument Nos. 1668380 through 1668384 of Official Records. Documents declaring modifications thereof recorded March 25, 1983 in Book No. 1712 as Instrument Nos. 1671034 through 1671036 of Official Records. 4. Easements as shown and/or dedicated upon the final map of Flamingo Estates, on file in Book 5 of plats, Page 22, of Official Records. EXHIBIT B -- Page 1 of 1 - --------- EXHIBIT C --------- Form of Request For Advance --------------------------- DATE:___________________________ CapitalSource Finance LLC 4445 Willard Avenue, 12/th/ Floor Chevy Chase, MD 20815 Attn: _________________________ Re: $7,000,000 Loan described in that certain Loan and Security Agreement (the "Loan Agreement") between CapitalSource Finance LLC ("Lender") and -------------- ------ Preferred Equities Corporation ("Borrower") -------- Loan Number:______________________________ Borrower: Preferred Equities Corporation Project: 158 Ida Avenue, Las Vegas, Nevada Advance Request No.:______________________ Amount of Request:________________________ Period Covered: ___________, 20__ through: ________, 20__ BEFORE ME, the undersigned authority, on this day personally appeared the person executing this affidavit, who, being by me first duly sworn, deposed and said: 1. I am an officer of Borrower and duly authorized to make this affidavit and to execute and deliver the related request for payment. 2. If any portion of the requested Advance is to be used to pay for construction costs under any Construction Contract, attached are AIA Document G- 702 and G-703 (1983 Edition) forms executed by the General Contractor and approved by the Architect, all completed for the above amount and period, together with all supporting documentation required by the Loan Agreement for the Project, all of which are true and correct and in all respects what they purport and appear to be. 3. Borrower has not been served with any written notice that a lien will be claimed for any amount unpaid for materials delivered, labor performed, or services provided in connection with the properties, or any part thereof, and, to the Borrower's knowledge, no valid basis exists for the filing of any mechanic's or materialmen's liens or claims with respect to all or any part of the Project. 4. I understand that this affidavit is made for the purpose of inducing Lender to advance funds to Borrower and for Borrower to make payments of such funds as appropriate under the loan documents and that, in so lending funds or making payment, Lender and Borrower will rely upon the accuracy of matters stated in this affidavit. EXHIBIT C -- Page 1 of 3 - --------- 5. All representations and warranties contained in the Agreement and the other Loan Documents are true and accurate in all material respects as of the date of this Draw Request, except as follows (if any): _________________________ ________________________________________________________________________________ 6. No Event of Default exists (or would result from the Advance herein requested), except as follows (if any): ________________________________________ ________________________________________________________________________________ 7. No part of the Property has been taken by eminent domain proceedings, and Borrower has not received written notice of any proceedings or negotiations therefor which are pending, except as follows (if any): ________________________ ________________________________________________________________________________ 8. All previously disbursed Loan funds have been expended, or are being held in trust, for the sole purpose of paying Project costs included in the Budget and previously incurred by Borrower as set forth in previous Draw Requests. 9. Borrower has previously or concurrently disclosed to Lender all matters known to Borrower that are required to be so disclosed under the Loan Documents. 10. All conditions precedent to Borrower's right to receive the requested Advance have been met in accordance with the terms of the Loan Documents, except as follows (if any): ___________________________________________________________ ________________________________________________________________________________ 11. To the knowledge of the undersigned, the amounts and percentages set forth in this Draw Request (including any AIA Document G-702 and G-703 submitted in connection herewith) are true and correct. 12. The aggregate sum of (i) Loan funds previously disbursed to Borrower, plus (ii) the Loan funds included in this Draw Request, plus (iii) the existing Retainage, does not exceed the aggregate amount incurred and/or expended to date for construction work incorporated into the Resort Improvements. 13. Upon disbursement by Borrower of the funds advanced by Lender as requested in this Draw Request, all obligations for work and other costs heretofore incurred by Borrower in connection with the Project and which are due and payable will be fully paid and satisfied. 14. All lien waivers or payment receipts required under the terms of the Loan Documents for this Draw Request have been submitted to Lender. 15. Borrower agrees to notify Lender in writing immediately if the matters certified herein will not be true and correct as of the time of the requested advance, and the foregoing certifications shall be deemed made and ratified as of the time of the advance unless Borrower so notifies Lender in writing before that time. EXHIBIT C -- Page 2 of 3 - --------- 16. Capitalized terms used herein but not otherwise defined herein shall have the meaning ascribed thereto in the Loan Agreement. EXECUTED as of the date first written above. AFFIANT: ------- ________________________________ STATE OF NEVADA (S) (S) COUNTY OF _________ (S) SUBSCRIBED AND SWORN BEFORE ME, on this ______ day of ______________ 20__. ________________________________ Notary Public Printed Name: My Commission Expires: EXHIBIT D --------- Preliminary Construction Schedule --------------------------------- None EXHIBIT C -- Page 3 of 3 - --------- FIRST MODIFICATION OF LOAN AND SECURITY AGREEMENT ------------------------------------------------- THIS FIRST MODIFICATION OF LOAN AND SECURITY AGREEMENT (this "Agreement") --------- is made and entered into effective as of March 11, 2002, by and between CAPTIALSOURCE FINANCE LLC, a Delaware limited liability company ("Lender"), ------ PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Borrower"), and MEGO -------- FINANCIAL CORP., a New York corporation ("Guarantor"). Unless otherwise defined --------- herein, capitalized terms shall have the meaning given such terms in the Receivables Loan Agreement (defined below). RECITALS -------- A. Lender previously agreed to make a loan (the "Original Receivables -------------------- Loan") to Borrower. The Receivables Loan is evidenced by a certain Promissory - ---- Note dated as of August 8, 2001 (the "Original Receivables Note"), from Borrower ------------------------- to Lender in the stated principal amount of $15,000,000. In connection with the Receivables Loan, Borrower and Lender executed that certain Loan and Security Agreement dated August 8, 2001 (the "Original Receivables Loan Agreement"). ----------------------------------- The obligations of Borrower under the Original Receivables Loan Agreement are guaranteed pursuant to a Guaranty, executed by Guarantor to and for the benefit of Lender (the "Guaranty"). -------- FIRST MODIFICATION OF LOAN AND SECURITY AGREEMENT - Page 4 - ------------------------------------------------- B. Borrower has requested that Lender agree to increase the amount of the Original Receivables Loan from $15,000,000 to $20,000,000 and, in connection therewith, Borrower is executing and delivering to Lender two Promissory Notes, each dated of even date herewith and each in the maximum principal amount of $10,000,000 (together, the "Restated Notes")(the Original Receivables Note, as -------------- amended and restated by the Restated Notes, is hereafter referred to as the "Receivables Note;" and the Original Receivables Loan, as so increased, is ---------------- hereafter referred to as the "Receivables Loan"). ---------------- C. Borrower also has requested that Lender make a Construction Loan (defined below) to Borrower to provide financing for the acquisition and development of certain property located at 158 Ida Avenue, Las Vegas, Nevada. D. As an inducement to Lender to make the Construction Loan to Borrower, Borrower has agreed to modify the Original Receivables Loan Agreement (the Original Receivables Loan Agreement, as modified by this Agreement is hereinafter referred to as the, "Receivables Loan Agreement") and the other Loan -------------------------- Documents referenced therein to cross-collateralize and cross-default the Receivables Loan and the Construction Loan. NOW, THEREFORE, for and in consideration of the premises, the sum of Ten Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged and confessed, Lender, Borrower and Guarantor hereby agree as follows: 1. Amendments to the Original Receivables Loan Agreement. The parties ----------------------------------------------------- hereto agree that the Original Receivables Loan Agreement shall be amended as follows: (a) All terms referenced on Exhibit A of this Amendment are hereby --------- added to the Appendix of the Original Receivables Loan Agreement and to the extent the terms set forth on Exhibit A differ from those terms set forth in the --------- Original Receivables Loan Agreement, the terms set forth on Exhibit A shall --------- govern and control. (b) Section 1.2 of the Original Receivables Loan Agreement is hereby amended and restated in its entirety as follows: 1.2 Maturity. The Loan shall be payable in full, together with -------- all other amounts due and obligations owe under the Loan Documents, on March 11, 2005. The Loan, the Revolving Period and the Maturity Date may be extended for a period of two years if, and only if: (a) Borrower provides Lender with written notice (the "Extension Notice") of the ---------------- exercise of its desire and election to extend the same not less than ten (10) days prior to the initial Maturity Date; (b) Borrower has paid or caused to be paid to Lender, not less than ten (10) days prior to the applicable Maturity Date an extension fee of $200,000; and (c) Borrower is not in default under the terms of any of the Loan Documents at the time of delivery of, or at any time after delivery of, the Extension Notice. (c) Section 1.6 of the Original Receivables Loan Agreement is hereby amended and restated in its entirety as follows: FIRST MODIFICATION OF LOAN AND SECURITY AGREEMENT - Page 5 - ------------------------------------------------- 1.6 Commitment Fee. Borrower shall pay to Lender a commitment -------------- fee equal to $250,000. As of the date of the Amendment, a portion of the Commitment Fee equal to $187,500 was paid by Borrower and the remaining $62,500 shall be due and payable simultaneously with the execution of the Amendment. (d) Section 7 of the Original Receivables Loan Agreement is hereby further amended to add the following thereto: "7.9 Cross Default. The occurrence of a "Default" (as defined ------------- therein) under the Construction Loan Agreement, or the occurrence of a default or event of default (however defined) under the Construction Note or any other Construction Loan Documents." (e) Section 8.1(f) of the Original Receivables Loan Agreement is hereby amended and restated in its entirety as follows: (f) Exercise of Other Rights. Exercise any and all other rights ------------------------ or remedies afforded by law, in equity, or by the Loan Documents or the Construction Loan Documents, as Lender may 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 and/or the Construction Loan Documents or in aid of the exercise of any right or remedy granted to Lender in the Loan Documents and/or the Construction Loan Documents. 2. Representations and Warranties of Borrower. Borrower hereby ------------------------------------------ represents and warrants to Lender that (a) to the best of Borrower's knowledge, the execution and delivery of this Agreement does not contravene, result in the breach of or constitute a default under any deed of trust, loan agreement, indenture or other contract or agreement to which Borrower is a party or by which Borrower or any of its properties may be bound; (b) this Agreement constitutes the legal, valid and binding obligations of Borrower enforceable in accordance with its terms, subject to the limitations of equitable principles and bankruptcy, insolvency, debtor relief or other similar laws affecting generally the enforcement of creditors' rights; (c) the execution and delivery of, and performance under this Agreement are within Borrower's authority without the joinder or consent of any other party; (d) there exists no Default or Incipient Default under the Receivables Loan Documents; and (e) all of the representations and warranties of Borrower under the Receivables Loan Documents are true and correct in all material respects on the date hereof (all of which are hereby ratified and reaffirmed for all purposes). Borrower agrees to indemnify and hold Lender harmless against any loss, claim, damage, liability or expense (including without limitation reasonable attorneys' fees) incurred as a result of any representation or warranty made by Borrower herein proving to be untrue or inaccurate in any material respect. 3. Consent and Ratification. Guarantor hereby unconditionally and ------------------------ irrevocably consents to (i) the execution and delivery by Borrower of this Agreement, and (ii) the consummation of the transactions contemplated by this Agreement. Guarantor hereby unconditionally and irrevocably acknowledges and agrees that the Guaranty, and its obligations, FIRST MODIFICATION OF LOAN AND SECURITY AGREEMENT - Page 6 - ------------------------------------------------- covenants, agreements and duties thereunder, remain in full force and effect, notwithstanding the execution and delivery of the Construction Loan Documents, this Amendment and the Restated Notes, and the consummation of the transactions contemplated hereby and thereby. Guarantor further acknowledges and agrees that the "Obligations" (as defined in the Guaranty) shall hereinafter include and also refer to the indebtedness evidenced by the Restated Notes. Guarantor hereby unconditionally ratifies, reaffirms and confirms its Guaranty. 4. Ratification of Obligations. Borrower hereby ratifies and reaffirms --------------------------- all of the obligations of Borrower set forth in the Receivables Loan Documents. The liens, security interests, collateral assignments and financing statements in respect of the Original Receivables Loan are hereby ratified and confirmed as valid, subsisting and continuing to secure the Receivables Note and the Receivables Loan Documents. Nothing herein shall in any manner diminish, impair or extinguish the Receivables Note or any other obligations of Borrower under the Receivables Loan Documents. Borrower ratifies and acknowledges that the Receivables Loan Documents are valid, subsisting and enforceable and agrees and warrants that there are no offsets, claims or defenses with respect to any of the indebtedness evidenced by the Receivables Note. Borrower acknowledges that the foregoing representations are given to induce Lender to modify the Receivables Loan, make the Construction Loan and otherwise modify the Receivables Loan Agreement as described above and but for such representations and warranties, Lender would not so modify the Receivables Loan or make the Construction Loan. 5. Release of Usury Claims. Borrower hereby releases Lender, its ----------------------- successors and assigns, from all claims, demands, liabilities, penalties, defenses or causes of action which Borrower may be entitled to assert (although no such claims are known to exist) against Lender by reason of Lender's contracting for, charging, or receiving interest on the Original Receivables Loan prior to the execution of this Agreement in excess of that permitted under applicable law. 6. Sale of Receivables Loan; Cooperation of Borrower. Borrower ------------------------------------------------- acknowledges and agrees that Lender may, from time to time, sell or offer to sell the Receivables Loan or undivided ownership or participation interests in the Receivables Loan to one or more assignees or participants ("Participating ------------- Lenders") and, in connection with such sale, Lender and the Participating - ------- Lenders, may elect to appoint Lender or another Person to administer the Receivables Loan and the disbursement by Lender and each of the Participating Lenders of their respective pro rata shares of each Advance made under the Receivables Loan Agreement. Borrower shall execute, acknowledge and deliver any estoppel certificates or other instruments requested by Lender to satisfy a purchaser or participant that the Receivables Loan is outstanding in accordance with the terms contained in the Receivables Loan Documents. Borrower shall execute, acknowledge and deliver any estoppel certificates or other instruments requested by Lender to satisfy a Participating Lender that the Receivables Loan is outstanding in accordance with the terms contained in the Receivables Loan Documents. Borrower will, at the request and direction of Lender, (a) at the election of Lender, modify the Receivables Loan Documents (including issue additional or replacement promissory notes evidencing the Receivables Loan and the interest of Lender and each Participating Lender therein) or enter into an intercreditor agreement with Lender and each of the Participating Lenders which will, among other things so long as the duties and obligations of Borrower under the Receivables Loan Documents do not materially change, (i) appoint an agent ("Agent") to act on behalf of Lender and each of the ----- FIRST MODIFICATION OF LOAN AND SECURITY AGREEMENT - Page 7 - ------------------------------------------------- Participating Lenders in connection with the administration of the Receivables Loan and the making of Advances hereunder by Lender and each of the Participating Lenders, (ii) set forth the proportionate share of the Receivables Loan owned by Lender and each of the Participating Lenders and the obligations of Lender and each of the Participating Lenders to disburse to Agent for delivery to Borrower their proportionate share of any Advances made hereunder, and (iii) identify the rights, powers, duties and liabilities of the Agent, Lender and the Participating Lenders and Borrower in connection with the Receivables Loan, and (b) execute, acknowledge, deliver, procure and record and/or file such further instruments (including, without limitation, further deeds of trust, security agreements, financing statements, continuation statements, and assignments of rents or leases, but excluding any additional or replacement promissory notes) and do such further acts as, in Lender's opinion, are necessary to carry out more effectively the purposes of this Section. Borrower authorizes Lender to disseminate any information it has pertaining to the Receivables Loan, including, without limitation, credit and financial information on, the Property, Borrower and Guarantor, to any such participant, assignee or prospective participant or assignee, and to any other parties as necessary or appropriate in Lender's reasonable judgment. 7. Miscellaneous. This Agreement may be executed in any number of ------------- counterparts with the same effect as if all parties hereto had signed the same document. All such counterparts shall be construed together and shall constitute one instrument, but in making proof hereof it shall only be necessary to produce one such counterpart. The terms and provisions hereof shall be binding upon and inure to the benefit of the parties hereto, their representatives, successors and assigns. The Receivables Loan Documents, as modified hereby, shall be construed in accordance with the laws of the State of New York and the laws of the United States applicable to transactions in the State of New York. EXECUTED as of the date and year first above written. LENDER: ------ CAPITALSOURCE FINANCE LLC, a Delaware limited liability company By:___________________________________ Name:_________________________________ Title:________________________________ BORROWER: -------- PREFERRED EQUITIES CORPORATION, a Nevada corporation By:___________________________________ FIRST MODIFICATION OF LOAN AND SECURITY AGREEMENT - Page 8 - ------------------------------------------------- Name:_________________________________ Title:________________________________ GUARANTOR: --------- MEGO FINANCIAL CORP., a New York corporation By:___________________________________ Name:_________________________________ Title:________________________________ FIRST MODIFICATION OF LOAN AND SECURITY AGREEMENT - Page 9 - ------------------------------------------------- EXHIBIT A --------- DEFINITIONS ----------- Agreement. This Loan and Security Agreement dated as of August 8, 2001, executed by Borrower and Lender, as amended by the Amendment. Amendment. The First Amendment to Loan and Security Agreement dated effective as of March 11, 2002, executed by Borrower, Lender and Guarantor. Availability. At all times during the Revolving Period, the lesser of (A) the remainder of [i] $20,000,000 minus [ii] the principal balance of all Advances then outstanding (without giving effect to the currently requested Advance); or (b) the remainder of (i) $20,000,000 minus (a) the sum of eighty- five percent (85%) of the principal balance of the New Eligible Notes Receivables and (b) ninety percent (90%) of the principal balance of all Mature Eligible Notes Receivables. Commitment Fee. A non-refundable loan commitment fee with respect to the making of the Loan in an amount equal to $250,000, which amount is payable in accordance with Section 1.6 hereof. Construction Loan. That certain $7,000,000 acquisition and development loan from Lender to Borrower, as evidenced, in part, by the Construction Note, as the same may be hereafter amended, modified, supplemented, increased or extended with the consent of Lender. Construction Loan Documents. Collectively, the Construction Note, that certain Loan and Security Agreement dated of even date herewith, executed by Lender and Borrower ("Construction Loan Agreement"), and any and all other --------------------------- agreements, documents, instruments and certificates delivered or contemplated to be delivered in connection with the Construction Loan Agreement, as such may be amended, renewed, extended, restated or supplemented from time to time with the consent of Lender. Construction Note. That certain $7,000,000 Promissory Note dated of even date herewith, executed by Borrower to the order of Lender and all other notes given in substitution therefor or in modification, supplement, increase, renewal or extension thereof, in whole or in part. Indebtedness. All payment obligations of Borrower to Lender arising under the Loan Documents or the Construction Loan Documents. Loan. The $20,000,000 credit facility described in this Agreement. Loan Year. Each successive twelve (12) month period commencing on March 11, 2002. Maturity Date. March 11, 2005 unless extended pursuant to Section 1.2 above. Maximum Exposure. The lesser of (a) $20,000,000; 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. Note. Together, a Promissory Note dated as of March 11, 2003, executed by Borrower to and for the benefit of Lender, in the maximum amount of $10,000,000, and a Promissory Note dated as of March 11, 2003, executed by Borrower to and for the benefit of Lender, in the maximum amount of $10,000,000, which notes, together, amend and restate in its entirety the indebtedness evidenced by a Promissory Note dated as of August 8, 2001, executed by Borrower to Lender in the amount of $15,000,000. Revolving Period. The period commencing on the date hereof and ending on March 11, 2005. PROMISSORY NOTE --------------- [158 Ida Avenue, Las Vegas, Nevada - Note A-1] $3,000,000.00 As of March 15, 2002 1. Promise to Pay. -------------- FOR VALUE RECEIVED, PREFERRED EQUITIES CORPORATION, a Nevada corporation, ("Maker"), whose address is 4310 Paradise Road, Las Vegas, Nevada 89109, ----- promises to pay to the order of CAPITALSOURCE FINANCE LLC, a Delaware limited liability company, and its successors and assigns ("Holder") the sum of THREE ------ MILLION AND NO/100 DOLLARS ($3,000,000.00), together with all other amounts added thereto pursuant to this Note or otherwise payable to Holder (the "Loan") ---- (or so much thereof as may from time to time be outstanding), together with interest thereon as hereinafter set forth, payable in lawful money of the United States of America. Payments shall be made to Holder at 4445 Willard Avenue, 12/th/ Floor, Chevy Chase, Maryland 20815 (or such other address as Holder may hereafter designate in writing to Maker). This Note, along with that certain Note A-2 dated as of the date hereof executed and delivered by the Maker, is given in replacement, but not in extinguishment or novation, of that certain Note A dated March 11, 2002 in the original principal amount of $10,000,000 executed by the Maker and payable to Holder which, along with that certain Note B dated March 11, 2002 and executed and delivered by Maker, amended and restated that certain Promissory Note dated as of August 8, 2001, executed by Maker payable to the order of Holder in the original principal sum of $15,000,000.00. The repayment of the Loan evidenced by this Note is secured by that certain Loan and Security Agreement dated as of August 8, 2001 as amended by that certain First Modification of Loan and Security Agreement dated March 11, 2002 (as amended, the "Loan Agreement"), the Assignment of Deed(s) of Trust and -------------- Purchase Documents ("Assignment") dated as of August 8, 2001, and any other ---------- documents evidencing or securing the Loan or executed in connection therewith, and any modification, renewal or extension of any of the foregoing are collectively called the "Loan Documents". All capitalized terms not otherwise -------------- defined herein shall have the meanings ascribed for them in the Loan Agreement. 2. Principal and Interest. ---------------------- So long as no Event of Default exists, interest shall accrue on the principal balance hereof from time to time outstanding and Maker shall pay interest thereon at a floating rate per annum equal to the Prime Rate plus two and one-half percent (2.50%) (the aggregate rate referred to as the "Interest -------- Rate"). The term "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. 3. Payment. ------- Commencing on the 1st day of April, 2002, Maker shall pay interest computed at the Interest Rate monthly in arrears on the first day of each month. Interest shall be calculated based on a 360 day year and charged for the actual number of days elapsed. The Loan shall be due and payable on or before March 11, 2005, or any earlier date on which the Loan shall be required to be paid in full, whether by acceleration or otherwise (the "Maturity Date"). ------------- 4. Prepayments. ----------- (a) Voluntary Prepayments. Prepayments of the Loan (i) are permitted --------------------- during the Revolving Period, and (ii) 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 4(a), and no Prepayment Premium shall be payable as a result of any such payment by Purchasers. The term "Prepayment Premium" ------------------ means 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 this Section: Loan Year Percentage First Loan Year Two percent (2%) Second Loan Year One percent (1%) Thereafter None (b) Payment After Default. In the event Holder declares the Loan --------------------- immediately due and payable at a time when a Prepayment Premium would be due, such Prepayment Premium shall be paid upon any tender of payment at any time or upon foreclosure of the Mortgage. 5. Default. ------- 5.1 Events of Default. Any of the following shall constitute an "Event of ----------------- -------- Default" under this Note: (a) failure to pay any amounts owed pursuant to this - ------- Note on the due date; or (b) the occurrence of any default under any of the other Loan Documents, after giving effect to any applicable grace or cure period. 5.2 Remedies. So long as an Event of Default remains outstanding: (a) -------- interest shall accrue at a rate equal to the Interest Rate plus four percent (4%) per annum (the "Default Rate"); (b) Holder may, at its option and without ------------ notice (such notice being expressly waived), declare the Loan immediately due and payable; and (c) Holder may pursue all rights and remedies available under the Loan Agreement or any other Loan Documents. Holder's rights, remedies and powers, as provided in this Note and the other Loan Documents, are cumulative and concurrent, and may be pursued singly, successively or together against Maker, any guarantor of the Loan, the security described in the Loan Documents, and any other security given at any time to secure the payment hereof, all at the sole discretion of Holder. Additionally, Holder may resort to every other right or remedy available at law or in equity without first exhausting the rights and remedies contained herein, all in Holder's sole discretion. Failure of Holder, for any period of time or on more than one occasion, to exercise its option to accelerate the Maturity Date shall not constitute a waiver of the right to exercise the same at any time during the continued existence of any Event of Default or any subsequent Event of Default. If any attorney is engaged: (i) to collect the Loan or any sums due under the Loan Documents, whether or not legal proceedings are thereafter instituted by Holder; (ii) to represent Holder in any bankruptcy, reorganization, receivership or other proceedings affecting creditors' rights and involving a claim under this Note; (iii) to protect the liens of the Purchaser Deeds of Trust or any of the Loan Documents; (iv) to represent Holder in any other proceedings whatsoever in connection with the Purchaser Deeds of Trust or any of the Loan Documents including post judgment proceedings to enforce any judgment related to the Loan Documents; or (v) in connection with seeking an out-of-court workout or settlement of any of the foregoing, then Maker shall pay to Holder all costs, attorneys' fees and expenses in connection therewith, in addition to all other amounts due hereunder. 6. Late Charge. ----------- If payments of principal and/or interest, or any other amounts under the other Loan Documents are not timely made or remain overdue for a period of five (5) days, Maker, without notice or demand by Holder, promptly shall pay an amount ("Late Charge") equal to four percent (4%) of each delinquent payment. ----------- 7. Governing Law: Severability. --------------------------- This Note shall be governed by and construed in accordance with the internal laws of the State of New York. The invalidity, illegality or unenforceability of any provision of this Note shall not affect or impair the validity, legality or enforceability of the remainder of this Note, and to this end, the provisions of this Note are declared to be severable. 8. Waiver. ------ Maker, for itself and all endorsers, guarantors and sureties of this Note, and their heirs, successors and assigns, legal representatives, hereby waives presentment for payment, demand, notice of nonpayment, notice of dishonor, protest of any dishonor, notice of protest and protest of this Note, and all other notices in connection with the delivery, acceptance, performance, default or enforcement of the payment of this Note, and agrees that their respective liability shall be unconditional and without regard to the liability of any other party and shall not be in any manner affected by any indulgence, extension of time, renewal, waiver or modification granted or consented to by Holder. Maker, for itself and all endorsers, guarantors and sureties of this Note, and their heirs, legal representatives, successors and assigns, hereby consents to every extension of time, renewal, waiver or modification that may be granted by Holder with respect to the payment or other provisions of this Note, and to the release of any makers, endorsers, guarantors or sureties, and of any collateral given to secure the payment hereof, or any part hereof, with or without substitution, and agrees that additional makers, endorsers, guarantors or sureties may become parties hereto without notice to Maker or to any endorser, guarantor or surety and without affecting the liability of any of them. 9. Security, Application of Payments. --------------------------------- This Note is secured by the liens, encumbrances and obligations created hereby and by the other Loan Documents and the terms and provisions of the other Loan Documents are hereby incorporated herein. Payments will be applied, at Holder's option, first to any fees, expenses or other costs Maker is obligated to pay under this Note or the other Loan Documents, second to interest due on the Loan and third to the outstanding principal balance of the Loan. 10. Miscellaneous. ------------- 10.1 Amendments. This Note may not be terminated or amended orally, but ---------- only by a termination or amendment in writing signed by Holder. 10.2 Lawful Rate of Interest. In no event whatsoever shall the amount of ----------------------- interest paid or agreed to be paid to Holder pursuant to this Note or any of the Loan Documents exceed the highest lawful rate of interest permissible under applicable law. If, from any circumstances whatsoever, fulfillment of any provision of this Note and the other Loan Documents shall involve exceeding the lawful rate of interest which a court of competent jurisdiction may deem applicable hereto ("Excess Interest"), then ipso facto, the obligation to be --------------- ---------- fulfilled shall be reduced to the highest lawful rate of interest permissible under such law and if, for any reason whatsoever, Holder shall receive, as interest, an amount which would be deemed unlawful under such applicable law, such interest shall be applied to the Loan (whether or not due and payable), and not to the payment of interest, or refunded to Maker if such Loan has been paid in full. Neither Maker nor any guarantor or endorser shall have any action against Holder for any damages whatsoever arising out of the payment or collection of any such Excess Interest. 10.3 Captions. The captions of the Paragraphs of this Note are for -------- convenience of reference only and shall not be deemed to modify, explain, enlarge or restrict any of the provisions hereof. 10.4 Notices. Notices shall be given under this Note in conformity with the ------- terms and conditions of the Loan Agreement. 10.5 Joint and Several. The obligations of Maker under this Note shall be ----------------- joint and several obligations of each Maker, if more than one, and of each Maker's heirs, personal representatives, successors and assigns. 10.6 Time of Essence. Time is of the essence of this Note and the --------------- performance of each of the covenants and agreements contained herein. 11. Sale of Loan. ------------ Holder, at any time and without the consent of Maker, may grant participations in or sell, transfer, assign and convey all or any portion of its right, title and interest in and to the Loan, this Note and the other Loan Documents, any guaranties given in connection with the Loan and any collateral given to secure the Loan. 12. Venue. ----- MAKER AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING DIRECTLY, INDIRECTLY OR OTHERWISE IN CONNECTION WITH, OUT OF, RELATED TO OR FROM THIS NOTE SHALL BE LITIGATED, AT HOLDER'S SOLE DISCRETION AND ELECTION, ONLY IN COURTS HAVING A SITUS WITHIN THE STATE OF NEW YORK. MAKER HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN SAID COUNTY AND STATE. MAKER HEREBY IRREVOCABLY APPOINTS AND DESIGNATES CT CORPORATION SYSTEMS, 111 EIGHTH AVENUE, NEW YORK, NEW YORK 10011, AS ITS DULY AUTHORIZED AGENT FOR SERVICE OF LEGAL PROCESS AND AGREES THAT SERVICE OF SUCH PROCESS UPON SUCH PARTY SHALL CONSTITUTE PERSONAL SERVICE OF PROCESS UPON MAKER. IN THE EVENT SERVICE IS UNDELIVERABLE BECAUSE SUCH AGENT MOVES OR CEASES TO DO BUSINESS IN NEW YORK, NEW YORK, MAKER SHALL, WITHIN TEN (10) DAYS AFTER HOLDER'S REQUEST, APPOINT A SUBSTITUTE AGENT (IN NEW YORK CITY) ON ITS BEHALF AND WITHIN SUCH PERIOD NOTIFY HOLDER OF SUCH APPOINTMENT. IF SUCH SUBSTITUTE AGENT IS NOT TIMELY APPOINTED, HOLDER SHALL, IN ITS SOLE DISCRETION, HAVE THE RIGHT TO DESIGNATE A SUBSTITUTE AGENT UPON FIVE (5) DAYS NOTICE TO MAKER. MAKER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO TRANSFER OR CHANGE THE VENUE OF ANY LITIGATION BROUGHT AGAINST IT BY HOLDER ON THE LOAN DOCUMENTS IN ACCORDANCE WITH THIS PARAGRAPH. 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 THE LOAN AGREEMENT FOR PREFERRED EQUITIES CORPORATION. Initial on behalf of Maker:_____________________ 13. Jury Trial Waiver. ----------------- MAKER, AND HOLDER BY ITS ACCEPTANCE OF THIS NOTE, HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS NOTE AND THE BUSINESS RELATIONSHIP THAT IS BEING ESTABLISHED. THIS WAIVER IS KNOWINGLY, INTENTIONALLY AND VOLUNTARILY MADE BY MAKER AND BY HOLDER, AND MAKER ACKNOWLEDGES THAT NEITHER HOLDER NOR ANY PERSON ACTING ON BEHALF OF HOLDER HAS MADE ANY REPRESENTATIONS OF FACT TO INCLUDE THIS WAIVER OF TRIAL BY JURY OR HAS TAKEN ANY ACTIONS WHICH IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. MAKER AND HOLDER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT MAKER AND HOLDER HAVE ALREADY RELIED ON THIS WAIVER IN EXECUTING THIS NOTE AND THE OTHER LOAN DOCUMENTS AND THAT EACH OF THEM WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. MAKER AND HOLDER FURTHER ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED (OR HAVE HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS NOTE AND THE OTHER LOAN DOCUMENTS AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL. Initial on behalf of Maker:_____________________ REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK IN WITNESS WHEREOF, Maker has executed this Note or has caused the same to be executed by its duly authorized representatives as of the date set first forth above. MAKER: PREFERRED EQUITIES CORPORATION, a Nevada corporation By:__________________________ Name:________________________ PROMISSORY NOTE --------------- [158 Ida Avenue, Las Vegas, Nevada - Note A-2] $7,000,000.00 As of March 15, 2002 1. Promise to Pay. -------------- FOR VALUE RECEIVED, PREFERRED EQUITIES CORPORATION, a Nevada corporation, ("Maker"), whose address is 4310 Paradise Road, Las Vegas, Nevada 89109, - ------- promises to pay to the order of CAPITALSOURCE FINANCE LLC, a Delaware limited liability company, and its successors and assigns ("Holder") the sum of SEVEN ------ MILLION AND NO/100 DOLLARS ($7,000,000.00), together with all other amounts added thereto pursuant to this Note or otherwise payable to Holder (the "Loan") ---- (or so much thereof as may from time to time be outstanding), together with interest thereon as hereinafter set forth, payable in lawful money of the United States of America. Payments shall be made to Holder at 4445 Willard Avenue, 12/th/ Floor, Chevy Chase, Maryland 20815 (or such other address as Holder may hereafter designate in writing to Maker). This Note, along with that certain Note A-1 dated as of the date hereof executed and delivered by the Maker, is given in replacement, but not in extinguishment or novation, of that certain Note A dated March 11, 2002 in the original principal amount of $10,000,000 executed by the Maker and payable to Holder which, along with that certain Note B dated March 11, 2002 and executed and delivered by Maker, amended and restated that certain Promissory Note dated as of August 8, 2001, executed by Maker payable to the order of Holder in the original principal sum of $15,000,000.00. The repayment of the Loan evidenced by this Note is secured by that certain Loan and Security Agreement dated as of August 8, 2001 as amended by that certain First Modification of Loan and Security Agreement dated March 11, 2002 (as amended, the "Loan Agreement"), the Assignment of Deed(s) of Trust and -------------- Purchase Documents ("Assignment") dated as of August 8, 2001, and any other ---------- documents evidencing or securing the Loan or executed in connection therewith, and any modification, renewal or extension of any of the foregoing are collectively called the "Loan Documents". All capitalized terms not otherwise -------------- defined herein shall have the meanings ascribed for them in the Loan Agreement. 2. Principal and Interest. ---------------------- So long as no Event of Default exists, interest shall accrue on the principal balance hereof from time to time outstanding and Maker shall pay interest thereon at a floating rate per annum equal to the Prime Rate plus two and one-half percent (2.50%) (the aggregate rate referred to as the "Interest -------- Rate"). The term "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. 3. Payment. ------- Commencing on the 1st day of April, 2002, Maker shall pay interest computed at the Interest Rate monthly in arrears on the first day of each month. Interest shall be calculated based on a 360 day year and charged for the actual number of days elapsed. The Loan shall be due and payable on or before March 11, 2005, or any earlier date on which the Loan shall be required to be paid in full, whether by acceleration or otherwise (the "Maturity Date"). ------------- 4. Prepayments. ----------- (a) Voluntary Prepayments. Prepayments of the Loan (i) are permitted during --------------------- the Revolving Period, and (ii) 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 4(a), and no Prepayment Premium shall be payable as a result of any such payment by Purchasers. The term "Prepayment Premium" means ------------------ 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 this Section: Loan Year Percentage First Loan Year Two percent (2%) Second Loan Year One percent (1%) Thereafter None (b) Payment After Default. In the event Holder declares the Loan --------------------- immediately due and payable at a time when a Prepayment Premium would be due, such Prepayment Premium shall be paid upon any tender of payment at any time or upon foreclosure of the Mortgage. 5. Default. ------- 5.1 Events of Default. Any of the following shall constitute an "Event of ----------------- -------- Default" under this Note: (a) failure to pay any amounts owed pursuant to this - ------- Note on the due date; or (b) the occurrence of any default under any of the other Loan Documents, after giving effect to any applicable grace or cure period. 5.2 Remedies. So long as an Event of Default remains outstanding: (a) -------- interest shall accrue at a rate equal to the Interest Rate plus four percent (4%) per annum (the "Default Rate"); (b) Holder may, at its option and without ------------ notice (such notice being expressly waived), declare the Loan immediately due and payable; and (c) Holder may pursue all rights and remedies available under the Loan Agreement or any other Loan Documents. Holder's rights, remedies and powers, as provided in this Note and the other Loan Documents, are cumulative and concurrent, and may be pursued singly, successively or together against Maker, any guarantor of the Loan, the security described in the Loan Documents, and any other security given at any time to secure the payment hereof, all at the sole discretion of Holder. Additionally, Holder may resort to every other right or remedy available at law or in equity without first exhausting the rights and remedies contained herein, all in Holder's sole discretion. Failure of Holder, for any period of time or on more than one occasion, to exercise its option to accelerate the Maturity Date shall not constitute a waiver of the right to exercise the same at any time during the continued existence of any Event of Default or any subsequent Event of Default. If any attorney is engaged: (i) to collect the Loan or any sums due under the Loan Documents, whether or not legal proceedings are thereafter instituted by Holder; (ii) to represent Holder in any bankruptcy, reorganization, receivership or other proceedings affecting creditors' rights and involving a claim under this Note; (iii) to protect the liens of the Purchaser Deeds of Trust or any of the Loan Documents; (iv) to represent Holder in any other proceedings whatsoever in connection with the Purchaser Deeds of Trust or any of the Loan Documents including post judgment proceedings to enforce any judgment related to the Loan Documents; or (v) in connection with seeking an out-of-court workout or settlement of any of the foregoing, then Maker shall pay to Holder all costs, attorneys' fees and expenses in connection therewith, in addition to all other amounts due hereunder. 6. Late Charge. ----------- If payments of principal and/or interest, or any other amounts under the other Loan Documents are not timely made or remain overdue for a period of five (5) days, Maker, without notice or demand by Holder, promptly shall pay an amount ("Late Charge") equal to four percent (4%) of each delinquent payment. ----------- 7. Governing Law: Severability. --------------------------- This Note shall be governed by and construed in accordance with the internal laws of the State of New York. The invalidity, illegality or unenforceability of any provision of this Note shall not affect or impair the validity, legality or enforceability of the remainder of this Note, and to this end, the provisions of this Note are declared to be severable. 8. Waiver. ------ Maker, for itself and all endorsers, guarantors and sureties of this Note, and their heirs, successors and assigns, legal representatives, hereby waives presentment for payment, demand, notice of nonpayment, notice of dishonor, protest of any dishonor, notice of protest and protest of this Note, and all other notices in connection with the delivery, acceptance, performance, default or enforcement of the payment of this Note, and agrees that their respective liability shall be unconditional and without regard to the liability of any other party and shall not be in any manner affected by any indulgence, extension of time, renewal, waiver or modification granted or consented to by Holder. Maker, for itself and all endorsers, guarantors and sureties of this Note, and their heirs, legal representatives, successors and assigns, hereby consents to every extension of time, renewal, waiver or modification that may be granted by Holder with respect to the payment or other provisions of this Note, and to the release of any makers, endorsers, guarantors or sureties, and of any collateral given to secure the payment hereof, or any part hereof, with or without substitution, and agrees that additional makers, endorsers, guarantors or sureties may become parties hereto without notice to Maker or to any endorser, guarantor or surety and without affecting the liability of any of them. 9. Security, Application of Payments. --------------------------------- This Note is secured by the liens, encumbrances and obligations created hereby and by the other Loan Documents and the terms and provisions of the other Loan Documents are hereby incorporated herein. Payments will be applied, at Holder's option, first to any fees, expenses or other costs Maker is obligated to pay under this Note or the other Loan Documents, second to interest due on the Loan and third to the outstanding principal balance of the Loan. 10. Miscellaneous. ------------- 10.1 Amendments. This Note may not be terminated or amended orally, but ---------- only by a termination or amendment in writing signed by Holder. 10.2 Lawful Rate of Interest. In no event whatsoever shall the amount of ----------------------- interest paid or agreed to be paid to Holder pursuant to this Note or any of the Loan Documents exceed the highest lawful rate of interest permissible under applicable law. If, from any circumstances whatsoever, fulfillment of any provision of this Note and the other Loan Documents shall involve exceeding the lawful rate of interest which a court of competent jurisdiction may deem applicable hereto ("Excess Interest"), then ipso facto, the obligation to be --------------- ---------- fulfilled shall be reduced to the highest lawful rate of interest permissible under such law and if, for any reason whatsoever, Holder shall receive, as interest, an amount which would be deemed unlawful under such applicable law, such interest shall be applied to the Loan (whether or not due and payable), and not to the payment of interest, or refunded to Maker if such Loan has been paid in full. Neither Maker nor any guarantor or endorser shall have any action against Holder for any damages whatsoever arising out of the payment or collection of any such Excess Interest. 10.3 Captions. The captions of the Paragraphs of this Note are for -------- convenience of reference only and shall not be deemed to modify, explain, enlarge or restrict any of the provisions hereof. 10.4 Notices. Notices shall be given under this Note in conformity with the ------- terms and conditions of the Loan Agreement. 10.5 Joint and Several. The obligations of Maker under this Note shall be ----------------- joint and several obligations of each Maker, if more than one, and of each Maker's heirs, personal representatives, successors and assigns. 10.6 Time of Essence. Time is of the essence of this Note and the --------------- performance of each of the covenants and agreements contained herein. 11. Sale of Loan. ------------ Holder, at any time and without the consent of Maker, may grant participations in or sell, transfer, assign and convey all or any portion of its right, title and interest in and to the Loan, this Note and the other Loan Documents, any guaranties given in connection with the Loan and any collateral given to secure the Loan. 12. Venue. ----- MAKER AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING DIRECTLY, INDIRECTLY OR OTHERWISE IN CONNECTION WITH, OUT OF, RELATED TO OR FROM THIS NOTE SHALL BE LITIGATED, AT HOLDER'S SOLE DISCRETION AND ELECTION, ONLY IN COURTS HAVING A SITUS WITHIN THE STATE OF NEW YORK. MAKER HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN SAID COUNTY AND STATE. MAKER HEREBY IRREVOCABLY APPOINTS AND DESIGNATES CT CORPORATION SYSTEMS, 111 EIGHTH AVENUE, NEW YORK, NEW YORK 10011, AS ITS DULY AUTHORIZED AGENT FOR SERVICE OF LEGAL PROCESS AND AGREES THAT SERVICE OF SUCH PROCESS UPON SUCH PARTY SHALL CONSTITUTE PERSONAL SERVICE OF PROCESS UPON MAKER. IN THE EVENT SERVICE IS UNDELIVERABLE BECAUSE SUCH AGENT MOVES OR CEASES TO DO BUSINESS IN NEW YORK, NEW YORK, MAKER SHALL, WITHIN TEN (10) DAYS AFTER HOLDER'S REQUEST, APPOINT A SUBSTITUTE AGENT (IN NEW YORK CITY) ON ITS BEHALF AND WITHIN SUCH PERIOD NOTIFY HOLDER OF SUCH APPOINTMENT. IF SUCH SUBSTITUTE AGENT IS NOT TIMELY APPOINTED, HOLDER SHALL, IN ITS SOLE DISCRETION, HAVE THE RIGHT TO DESIGNATE A SUBSTITUTE AGENT UPON FIVE (5) DAYS NOTICE TO MAKER. MAKER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO TRANSFER OR CHANGE THE VENUE OF ANY LITIGATION BROUGHT AGAINST IT BY HOLDER ON THE LOAN DOCUMENTS IN ACCORDANCE WITH THIS PARAGRAPH. 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 THE LOAN AGREEMENT FOR PREFERRED EQUITIES CORPORATION. Initial on behalf of Maker: _______________ 13. Jury Trial Waiver. ----------------- MAKER, AND HOLDER BY ITS ACCEPTANCE OF THIS NOTE, HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS NOTE AND THE BUSINESS RELATIONSHIP THAT IS BEING ESTABLISHED. THIS WAIVER IS KNOWINGLY, INTENTIONALLY AND VOLUNTARILY MADE BY MAKER AND BY HOLDER, AND MAKER ACKNOWLEDGES THAT NEITHER HOLDER NOR ANY PERSON ACTING ON BEHALF OF HOLDER HAS MADE ANY REPRESENTATIONS OF FACT TO INCLUDE THIS WAIVER OF TRIAL BY JURY OR HAS TAKEN ANY ACTIONS WHICH IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. MAKER AND HOLDER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT MAKER AND HOLDER HAVE ALREADY RELIED ON THIS WAIVER IN EXECUTING THIS NOTE AND THE OTHER LOAN DOCUMENTS AND THAT EACH OF THEM WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. MAKER AND HOLDER FURTHER ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED (OR HAVE HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS NOTE AND THE OTHER LOAN DOCUMENTS AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL. Initial on behalf of Maker: ________________ REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK IN WITNESS WHEREOF, Maker has executed this Note or has caused the same to be executed by its duly authorized representatives as of the date set first forth above. MAKER: PREFERRED EQUITIES CORPORATION, a Nevada corporation By:____________________________________ Name:__________________________________ PROMISSORY NOTE --------------- [158 Ida Avenue, Las Vegas, Nevada - Note B] $10,000,000.00 As of March 11, 2002 1. Promise to Pay. -------------- FOR VALUE RECEIVED, PREFERRED EQUITIES CORPORATION, a Nevada corporation, ("Maker"), whose address is 4310 Paradise Road, Las Vegas, Nevada 89109, - ------- promises to pay to the order of CAPITALSOURCE FINANCE LLC, a Delaware limited liability company, and its successors and assigns ("Holder") the sum of TEN ------ MILLION AND NO/100 DOLLARS ($10,000,000.00), together with all other amounts added thereto pursuant to this Note or otherwise payable to Holder (the "Loan") ---- (or so much thereof as may from time to time be outstanding), together with interest thereon as hereinafter set forth, payable in lawful money of the United States of America. Payments shall be made to Holder at 4445 Willard Avenue, 12/th/ Floor, Chevy Chase, Maryland 20815 (or such other address as Holder may hereafter designate in writing to Maker). This Note is executed and delivered by Borrower in connection with that certain Promissory Note dated of even date herewith in the amount of $10,000,000 issued by Borrower to and for the benefit of Holder (the "Other Note"). This ---------- Note and the Other Note are intended to amend, restate and further evidence the indebtedness evidenced by that certain Promissory Note dated as of August 8, 2001, executed by Maker payable to the order of Holder in the original principal sum of $15,000,000.00 (the "Original Note"). This Note and the Other Note, ------------- together, shall constitute a renewal, amendment and restatement of the Original Note. This Note and the Other Note do not constitute a novation or payment of any part of the indebtedness evidenced by the Original Note. The repayment of the Loan evidenced by this Note is secured by that certain Loan and Security Agreement of even date with the Original Note as amended by that certain First Modification of Loan and Security Agreement dated of even date herewith (as amended, the "Loan Agreement"), the Assignment of Deed(s) of -------------- Trust and Purchase Documents ("Assignment") of even date with the Original Note, ---------- and any other documents evidencing or securing the Loan or executed in connection therewith, and any modification, renewal or extension of any of the foregoing are collectively called the "Loan Documents". All capitalized terms -------------- not otherwise defined herein shall have the meanings ascribed for them in the Loan Agreement. 2. Principal and Interest. ---------------------- So long as no Event of Default exists, interest shall accrue on the principal balance hereof from time to time outstanding and Maker shall pay interest thereon at a floating rate per annum equal to the Prime Rate plus two and one-half percent (2.50%) (the aggregate rate referred to as the "Interest -------- Rate"). The term "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. 3. Payment. ------- Commencing on the 1st day of April, 2002, Maker shall pay interest computed at the Interest Rate monthly in arrears on the first day of each month. Interest shall be calculated based on a 360 day year and charged for the actual number of days elapsed. The Loan shall be due and payable on or before March 11, 2005, or any earlier date on which the Loan shall be required to be paid in full, whether by acceleration or otherwise (the "Maturity Date"). ------------- 4. Prepayments. ----------- (a) Voluntary Prepayments. Prepayments of the Loan (i) are permitted during --------------------- the Revolving Period, and (ii) 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 4(a), and no Prepayment Premium shall be payable as a result of any such payment by Purchasers. The term "Prepayment Premium" means ------------------ 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 this Section: Loan Year Percentage First Loan Year Two percent (2%) Second Loan Year One percent (1%) Thereafter None (b) Payment After Default. In the event Holder declares the Loan --------------------- immediately due and payable at a time when a Prepayment Premium would be due, such Prepayment Premium shall be paid upon any tender of payment at any time or upon foreclosure of the Mortgage. 5. Default. ------- 5.1 Events of Default. Any of the following shall constitute an "Event of ----------------- -------- Default" under this Note: (a) failure to pay any amounts owed pursuant to this - ------- Note on the due date; or (b) the occurrence of any default under any of the other Loan Documents, after giving effect to any applicable grace or cure period. 5.2 Remedies. So long as an Event of Default remains outstanding: (a) -------- interest shall accrue at a rate equal to the Interest Rate plus four percent (4%) per annum (the "Default Rate"); (b) Holder may, at its option and without ------------ notice (such notice being expressly waived), declare the Loan immediately due and payable; and (c) Holder may pursue all rights and remedies available under the Loan Agreement or any other Loan Documents. Holder's rights, remedies and powers, as provided in this Note and the other Loan Documents, are cumulative and concurrent, and may be pursued singly, successively or together against Maker, any guarantor of the Loan, the security described in the Loan Documents, and any other security given at any time to secure the payment hereof, all at the sole discretion of Holder. Additionally, Holder may resort to every other right or remedy available at law or in equity without first exhausting the rights and remedies contained herein, all in Holder's sole discretion. Failure of Holder, for any period of time or on more than one occasion, to exercise its option to accelerate the Maturity Date shall not constitute a waiver of the right to exercise the same at any time during the continued existence of any Event of Default or any subsequent Event of Default. If any attorney is engaged: (i) to collect the Loan or any sums due under the Loan Documents, whether or not legal proceedings are thereafter instituted by Holder; (ii) to represent Holder in any bankruptcy, reorganization, receivership or other proceedings affecting creditors' rights and involving a claim under this Note; (iii) to protect the liens of the Purchaser Deeds of Trust or any of the Loan Documents; (iv) to represent Holder in any other proceedings whatsoever in connection with the Purchaser Deeds of Trust or any of the Loan Documents including post judgment proceedings to enforce any judgment related to the Loan Documents; or (v) in connection with seeking an out-of-court workout or settlement of any of the foregoing, then Maker shall pay to Holder all costs, attorneys' fees and expenses in connection therewith, in addition to all other amounts due hereunder. 6. Late Charge. ----------- If payments of principal and/or interest, or any other amounts under the other Loan Documents are not timely made or remain overdue for a period of five (5) days, Maker, without notice or demand by Holder, promptly shall pay an amount ("Late Charge") equal to four percent (4%) of each delinquent payment. ----------- 7. Governing Law: Severability. --------------------------- This Note shall be governed by and construed in accordance with the internal laws of the State of New York. The invalidity, illegality or unenforceability of any provision of this Note shall not affect or impair the validity, legality or enforceability of the remainder of this Note, and to this end, the provisions of this Note are declared to be severable. 8. Waiver. ------ Maker, for itself and all endorsers, guarantors and sureties of this Note, and their heirs, successors and assigns, legal representatives, hereby waives presentment for payment, demand, notice of nonpayment, notice of dishonor, protest of any dishonor, notice of protest and protest of this Note, and all other notices in connection with the delivery, acceptance, performance, default or enforcement of the payment of this Note, and agrees that their respective liability shall be unconditional and without regard to the liability of any other party and shall not be in any manner affected by any indulgence, extension of time, renewal, waiver or modification granted or consented to by Holder. Maker, for itself and all endorsers, guarantors and sureties of this Note, and their heirs, legal representatives, successors and assigns, hereby consents to every extension of time, renewal, waiver or modification that may be granted by Holder with respect to the payment or other provisions of this Note, and to the release of any makers, endorsers, guarantors or sureties, and of any collateral given to secure the payment hereof, or any part hereof, with or without substitution, and agrees that additional makers, endorsers, guarantors or sureties may become parties hereto without notice to Maker or to any endorser, guarantor or surety and without affecting the liability of any of them. 9. Security, Application of Payments. --------------------------------- This Note is secured by the liens, encumbrances and obligations created hereby and by the other Loan Documents and the terms and provisions of the other Loan Documents are hereby incorporated herein. Payments will be applied, at Holder's option, first to any fees, expenses or other costs Maker is obligated to pay under this Note or the other Loan Documents, second to interest due on the Loan and third to the outstanding principal balance of the Loan. 10. Miscellaneous. ------------- 10.1 Amendments. This Note may not be terminated or amended orally, but ---------- only by a termination or amendment in writing signed by Holder. 10.2 Lawful Rate of Interest. In no event whatsoever shall the amount of ----------------------- interest paid or agreed to be paid to Holder pursuant to this Note or any of the Loan Documents exceed the highest lawful rate of interest permissible under applicable law. If, from any circumstances whatsoever, fulfillment of any provision of this Note and the other Loan Documents shall involve exceeding the lawful rate of interest which a court of competent jurisdiction may deem applicable hereto ("Excess Interest"), then ipso facto, the obligation to be --------------- ---------- fulfilled shall be reduced to the highest lawful rate of interest permissible under such law and if, for any reason whatsoever, Holder shall receive, as interest, an amount which would be deemed unlawful under such applicable law, such interest shall be applied to the Loan (whether or not due and payable), and not to the payment of interest, or refunded to Maker if such Loan has been paid in full. Neither Maker nor any guarantor or endorser shall have any action against Holder for any damages whatsoever arising out of the payment or collection of any such Excess Interest. 10.3 Captions. The captions of the Paragraphs of this Note are for -------- convenience of reference only and shall not be deemed to modify, explain, enlarge or restrict any of the provisions hereof. 10.4 Notices. Notices shall be given under this Note in conformity with the ------- terms and conditions of the Loan Agreement. 10.5 Joint and Several. The obligations of Maker under this Note shall be ----------------- joint and several obligations of each Maker, if more than one, and of each Maker's heirs, personal representatives, successors and assigns. 10.6 Time of Essence. Time is of the essence of this Note and the --------------- performance of each of the covenants and agreements contained herein. 11. Sale of Loan. ------------ Holder, at any time and without the consent of Maker, may grant participations in or sell, transfer, assign and convey all or any portion of its right, title and interest in and to the Loan, this Note and the other Loan Documents, any guaranties given in connection with the Loan and any collateral given to secure the Loan. 12. Venue. ----- MAKER AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING DIRECTLY, INDIRECTLY OR OTHERWISE IN CONNECTION WITH, OUT OF, RELATED TO OR FROM THIS NOTE SHALL BE LITIGATED, AT HOLDER'S SOLE DISCRETION AND ELECTION, ONLY IN COURTS HAVING A SITUS WITHIN THE STATE OF NEW YORK. MAKER HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN SAID COUNTY AND STATE. MAKER HEREBY IRREVOCABLY APPOINTS AND DESIGNATES CT CORPORATION SYSTEMS, 111 EIGHTH AVENUE, NEW YORK, NEW YORK 10011, AS ITS DULY AUTHORIZED AGENT FOR SERVICE OF LEGAL PROCESS AND AGREES THAT SERVICE OF SUCH PROCESS UPON SUCH PARTY SHALL CONSTITUTE PERSONAL SERVICE OF PROCESS UPON MAKER. IN THE EVENT SERVICE IS UNDELIVERABLE BECAUSE SUCH AGENT MOVES OR CEASES TO DO BUSINESS IN NEW YORK, NEW YORK, MAKER SHALL, WITHIN TEN (10) DAYS AFTER HOLDER'S REQUEST, APPOINT A SUBSTITUTE AGENT (IN NEW YORK CITY) ON ITS BEHALF AND WITHIN SUCH PERIOD NOTIFY HOLDER OF SUCH APPOINTMENT. IF SUCH SUBSTITUTE AGENT IS NOT TIMELY APPOINTED, HOLDER SHALL, IN ITS SOLE DISCRETION, HAVE THE RIGHT TO DESIGNATE A SUBSTITUTE AGENT UPON FIVE (5) DAYS NOTICE TO MAKER. MAKER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO TRANSFER OR CHANGE THE VENUE OF ANY LITIGATION BROUGHT AGAINST IT BY HOLDER ON THE LOAN DOCUMENTS IN ACCORDANCE WITH THIS PARAGRAPH. 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 THE LOAN AGREEMENT FOR PREFERRED EQUITIES CORPORATION. Initial on behalf of Maker: _________________ 13. Jury Trial Waiver. ----------------- MAKER, AND HOLDER BY ITS ACCEPTANCE OF THIS NOTE, HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS NOTE AND THE BUSINESS RELATIONSHIP THAT IS BEING ESTABLISHED. THIS WAIVER IS KNOWINGLY, INTENTIONALLY AND VOLUNTARILY MADE BY MAKER AND BY HOLDER, AND MAKER ACKNOWLEDGES THAT NEITHER HOLDER NOR ANY PERSON ACTING ON BEHALF OF HOLDER HAS MADE ANY REPRESENTATIONS OF FACT TO INCLUDE THIS WAIVER OF TRIAL BY JURY OR HAS TAKEN ANY ACTIONS WHICH IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. MAKER AND HOLDER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT MAKER AND HOLDER HAVE ALREADY RELIED ON THIS WAIVER IN EXECUTING THIS NOTE AND THE OTHER LOAN DOCUMENTS AND THAT EACH OF THEM WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. MAKER AND HOLDER FURTHER ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED (OR HAVE HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS NOTE AND THE OTHER LOAN DOCUMENTS AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL. Initial on behalf of Maker: _________________ REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK IN WITNESS WHEREOF, Maker has executed this Note or has caused the same to be executed by its duly authorized representatives as of the date set first forth above. MAKER: PREFERRED EQUITIES CORPORATION, a Nevada corporation By:__________________________________ Name:________________________________ EX-10.245 10 dex10245.txt EMPLOYMENT AGREEMENT Exhibit No. 10.245 EMPLOYMENT CONTRACT THIS EMPLOYMENT CONTRACT ("Agreement") is entered into as of January 21, 2002 by and between MEGO FINANCIAL CORPORATION, a New York corporation with its principal office located at 4310 Paradise Road, Las Vegas, Nevada 89109 (the "Company") and JON ARLINGTON JOSEPH, an individual residing at 5009 Shoal Creek Circle, Las Vegas, Nevada 89113 ("Employee"). RECITAL Employee is currently employed by the Company as Senior Vice President, General Counsel and Secretary and by the Company's wholly owned subsidiary, Preferred Equities Corporation ("PEC") as Senior Vice President, General Counsel and Secretary. The Company desires to retain Employee in said positions pursuant to the terms and conditions of this Agreement which supersedes and replaces all prior employment agreements entered into between the Employee and the Company and all amendments thereto. The Employee desires to retain his employment in said positions pursuant to the terms and conditions of this Agreement. Now, therefore, in consideration of this RECITAL and other good and valuable consideration, the parties hereto hereby agree as follows. AGREEMENT 1. Recital - The above Recital is incorporated into the terms of this ------- Agreement. 2. Employment - The Company hereby employs the Employee, and the Employee ---------- hereby accepts such employment, to serve as an executive officer of the Company on the terms and conditions provided in this Agreement. 3. Duties and Performance - The Employee shall serve as Senior Vice President, ---------------------- General Counsel and Secretary of the Company and Senior Vice President, General Counsel and Secretary of PEC, and shall perform such legal, executive and administrative services as are generally expected of a Senior Vice President, General Counsel and Secretary, or as may be reasonably assigned to him from time to time by the Chairman of the Board, President, or by the Board of Directors of the Company ("Board"). The Employee agrees to devote his full time, attention, energy and skill to the Company's business and good will. The Employee shall be headquartered in the offices of the Company in Las Vegas, but shall be available to travel to other offices of the Company or its subsidiaries, or elsewhere, in the performance of his duties. 4. Term - This Agreement shall commence on January 21, 2002 and terminate on ---- December 31, 2003, unless sooner terminated or extended as provided in this Agreement. 1. 5. Compensation ------------ (a) Unless otherwise agreed in writing by the Company and Employee, the Company shall pay to Employee, in partial compensation of his services, a salary of $224,000.00 per annum for each year of this Agreement (Base Compensation). The Base Compensation shall be payable in equal installments, the frequency of which shall be determined by the Company, but in no event less frequently than monthly. The Company shall withhold and pay over to the appropriate governmental agency all payroll taxes (including income, social security and unemployment compensation taxes) required by federal, state and local governments having jurisdiction over the Company. (b) In addition to his Base Compensation due under this Agreement, Employee shall be paid an annual bonus at the discretion of the Board. 6. Stock Options - Employee shall receive stock options, in addition to those ------------- already held by the Employee, at the discretion of the Board. 7. Travel and Business Expense - Employee shall be reimbursed for usual --------------------------- business and travel expenses. Employee shall be entitled to fly business class or first class if business class is unavailable on any flight or combination of flights longer than two (2) hours in scheduled duration. 8. Benefits - Employee shall be eligible for all benefits afforded to Company -------- and PEC executives from time to time provided Employee meets any eligibility requirements set forth for employees participating therein. 9. Vacation - Employee shall have four (4) weeks paid vacation during each -------- fiscal year. 10. Club Membership - The Company will pay all dues and assessments associated --------------- with Employee's membership at Spanish Trail Golf and Country Club in Las Vegas, Nevada and Employee will pay for Employee's non-business related charges. 11. Change In Control - At any time during the term of this Agreement and any ----------------- extension hereof, in the event of a Change of Control of the Company (as hereinafter defined), Employee shall have thirty (30) days from the date of said Change of Control to determine at Employee's sole election to either (i) continue his employment pursuant to the terms and conditions of this Agreement (ii) enter into a new employment agreement or understanding with the Purchaser or (iii) to terminate his employment in consideration of the payment of two hundred thousand U.S. dollars ($200,000.00) and such other amounts as may then be due Employee pursuant to the terms and conditions of this Agreement including any remaining Base Compensation payable to the date of termination. In the event Employee elects to terminate employment pursuant to (iii) above, the two hundred thousand dollar ($200,000.00) consideration shall be paid in a lump sum within five (5) business days of Employee's election of such payment. 2. As used herein, "Change of Control" means a direct or indirect acquisition by any person or business entity of any nature whatsoever of forty percent (40%) or more of Company's issued and outstanding shares of stock by a tender offer, merger or any other for of business combination or arrangement and / or an acquisition of substantially all of PEC's assets. 12. Termination of Employment ------------------------- (a) The Company may terminate the Employee's employment only for Cause upon the giving of written notice of such involuntary termination to the Employee. "Cause" shall mean any one of the following acts of, or omissions by, or actions of others relating to, the Employee, as set forth below: (i) The Employee's conviction of a felony, whether or not such conviction is appealed; (ii) Deliberate and premeditated acts by the Employee against the best interests of the company; (iii) Material breach of the terms of this Agreement; (iv) The Employee is found guilty of or is enjoined from violation of any state or federal securities laws, or state or federal laws governing the business of the Company, or rules and regulations of any state or federal agency regulating any of the business of the Company; (v) Misappropriation of the Company's funds or property; and (vi) Habitual use of alcohol or drugs to a degree that such uses substantially interferes with Employee's performance of his duties. (b) In the event the Employee's employment shall be terminated for Cause prior to the expiration of the term of this Agreement, the Employee shall be entitled only to his Base Compensation prorated to the effective date of such termination. (c) This agreement shall terminate immediately upon the Employee's death or total and permanent disability. For the purpose of this Agreement, total and permanent disability shall mean the Employee's inability to adequately perform his duties on behalf of the Company, as reasonably determined by the Board, for a period of ninety (90) consecutive days due to an illness or injury. In the event of such termination, the Employee shall be entitled to his Base Compensation prorated to the end of the month of his death or the date of the determination of Employee's total and permanent disability by the Board. The portion of any stock option granted by the Company to the Employee which has vested pursuant to the terms of such option at the time of the termination of this Agreement due to the Employee's death or total and permanent disability shall remain exercisable as set forth in such option relating to such a termination event. 3. 13. Renewal of Agreement - This Agreement shall be automatically extended from -------------------- year to year unless either or both parties give written notice to the other on or before November 1st of 2003 and each year thereafter, as may be appropriate, that either or both parties intend to terminate the employment relationship created by this Agreement. For example, if neither party gives such notice prior to November 1, 2003, this Agreement will automatically extend to December 31, 2004 and if neither party gives such notice prior to November 1, 2004, this Agreement will automatically extend to December 31, 2005 and so on. This Agreement shall continue on the same terms and conditions hereof unless otherwise modified in a writing signed by the Company and the Employee. 14. Covenant Not to Solicit - The following provisions shall hereinafter be ----------------------- referred to as the "Covenant Not to Solicit": (a) The Employee agrees that during the term of this Agreement and any renewal thereof, and for a period of one (1) year after the expiration or termination of this Agreement with or without Cause, the Employee will not without authorization from the Company, in any capacity, directly or indirectly solicit or encourage other employees or officers of the Company to terminate their employment by the Company for any purpose whatsoever. (b) The Employee acknowledges and agrees that: (i) the foregoing restriction is reasonable for the protection of the goodwill and business of the Company against irreparable injury; (ii) the foregoing restriction does not place an undue hardship on the Employee; and (iii) the Employee agrees that the Company will be irreparably damaged by a breach of this Covenant Not to Solicit and that damage at law will be an insufficient remedy for the Company. The Employee also agrees that the Company shall be entitled, upon application to a court of competent jurisdiction, to obtain injunctive relief to enforce the provisions of this Covenant Not to Solicit, which injunctive relief shall be in addition to any other rights or remedies available to the Company. 15. Confidentiality - The Employee recognizes and acknowledges that the --------------- services which he will perform for the Company and the knowledge which he will obtain of the Company's proprietary information such as trade secrets, processes, business practices, strategic plans and financial data through his close relationship with the Company, are confidential, proprietary and valuable in nature. The Employee therefore agrees that, other than in the regular and proper course of business of the Company, he will not divulge to others or use for his own benefit, or the benefit of any person, firm, corporation or other entity, other than the Company, at any time during or subsequent to this employment, any information obtained in the course of his employment, concerning such proprietary information, without first obtaining the Company's written permission, 4. unless such information has become public knowledge by a means other than a breach of the provisions of this Agreement. 16. Modification - No change or modification of this Agreement shall be valid ------------- unless made in writing and signed by both of the parties hereto. 17. Applicable Law - This Agreement shall be governed by and construed in -------------- accordance with the laws of the State of Nevada. 18. Successors and Assigns - The duties under this Agreement are personal to ---------------------- Employee and may not be assigned by Employee. This Agreement is binding upon the Company's successors and assigns. 19. Headings - Headings to sections of this Agreement are for convenience of -------- reference only and are not to be considered in the interpretation of this Agreement. 20. Entire Agreement - This Agreement incorporates the entire agreement between ---------------- the parties and supersedes all other prior contemporaneous agreements, amendments to such agreements, negotiations or discussions between the Employee and the Company. 21. Authorization - Floyd Kephart, President, has been duly authorized by the ------------- Board to execute this Agreement on behalf of the Company. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first appearing herein. COMPANY: MEGO FINANCIAL By: s/s Floyd W. Kephart ----------------------------- Floyd W. Kephart, President EMPLOYEE: By: s/s Jon A. Joseph ----------------------------- Jon A. Joseph 5. -----END PRIVACY-ENHANCED MESSAGE-----