-----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, UFUJGQ7O4a1GQ86rlI1TipJxq2RH6zE5SCXI+b7kpP681Rz1KdUHFsCIFqxOk6Pp MysXAndqHczZK91Qjl7fZw== 0001177651-02-000455.txt : 20021119 0001177651-02-000455.hdr.sgml : 20021119 20021119145143 ACCESSION NUMBER: 0001177651-02-000455 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021119 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: 02832815 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 doc1.txt 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: SEPTEMBER 30, 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 (I. R. S. EMPLOYER (STATE OR OTHER JURISDICTION OF 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. [X] YES [ ] NO APPLICABLE ONLY TO CORPORATE ISSUERS: As of September 30, 2002, there were 6,591,393 shares of Common Stock, $.01 par value per share, of the Registrant outstanding.
MEGO FINANCIAL CORP. AND SUBSIDIARIES INDEX ----- Page ---- PART I FINANCIAL INFORMATION (unaudited) Item 1. Condensed Financial Statements Condensed Consolidated Balance Sheets at September 30, 2002, and December 31, 2001 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2002, and August 31, 2001 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002, and August 31, 2001 Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures PART II OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signatures Certifications i
PART I FINANCIAL INFORMATION ITEM 1. CONDENSED FINANCIAL STATEMENTS MEGO FINANCIAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (thousands of dollars) (unaudited)
ASSETS SEPTEMBER 30, DECEMBER 31, 2002 2001 ------------- -------------- Cash and cash equivalents $ 1,308 $ 1,271 Restricted cash 6,835 6,708 Notes receivable, net of allowance of $11,491 and $14,557 at September 30, 2002 and December 31, 2001, respectively 113,740 109,347 Retained interests in receivables sold 2,549 3,688 Vacation ownerships held for resale 22,470 17,865 Land and improvements inventory 6,312 2,757 Assets available for sale 3,499 3,468 Property and equipment, net 21,666 9,690 Deferred financing costs, net 2,516 2,071 Deferred selling costs 2,506 5,422 Other assets 13,921 15,409 Assets related to discontinued operations - 15,156 ------------- -------------- TOTAL ASSETS $197,322 $192,852 ============= ============== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Notes collateralized by receivables $ 98,564 $106,599 Notes related to inventory, working capital and personal property financing 48,127 24,931 Accounts payable 7,147 1,873 Accrued liabilities 14,212 12,274 Interest rate swap liabilities 4,981 2,251 Deferred income 2,917 2,097 Reserve for notes receivable sold with recourse 2,454 3,560 Customer deposits 1,412 2,831 Deferred income taxes - 1,289 Liabilities related to discontinued operations - 9,545 ------------- -------------- Total liabilities before subordinated debt 179,814 167,250 ------------- -------------- Subordinated debt - 4,211 Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value (5,000,000 shares authorized, none - - issued and outstanding) Common stock, $.01 par value (50,000,000 shares authorized; 6,591,393 and 3,500,557 shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively) 66 35 Additional paid-in capital 25,015 13,068 Retained earnings (accumulated deficit) (4,285) 9,773 Accumulated other comprehensive loss (3,288) (1,485) ------------- -------------- Total stockholders' equity 17,508 21,391 ------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $197,322 $192,852 ============= ==============
See notes to condensed consolidated financial statements. 1 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (thousands of dollars, except share and per share amounts) (unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------- ----------------------- SEPTEMBER 30, AUGUST 31, SEPTEMBER 30, AUGUST 31, 2002 2001 2002 2001 ---------- ---------- ----------------------- REVENUES Vacation ownership sales $ 5,759 $ 15,031 $ 23,344 $ 44,471 Land sales 4,301 5,839 17,264 17,570 Interest income 4,078 5,075 12,611 14,284 Travel income 235 - 235 - Resort income: Resort management fees 785 738 2,394 2,194 Golf course, shop and services 42 - 42 - Food and beverage 10 - 10 - Other 397 641 941 1,294 ----------- ----------- ----------- ----------- Total revenues 15,607 27,324 56,841 79,813 ----------- ----------- ----------- ----------- COSTS AND EXPENSES Direct cost of: Vacation ownership sales 1,183 2,205 4,004 7,729 Land sales 481 849 2,409 2,590 Golf course, shop and services 4 - 4 - Food and beverage 4 - 4 - Interest expense related to consumer financing 2,506 2,095 7,068 6,327 Interest expense related to inventory, working capital and personal property financing 1,732 941 3,356 2,843 Selling and operational expenses: Vacation ownership 1,958 4,755 7,850 14,511 Land sales 2,019 2,301 5,779 5,908 Travel related 69 - 69 - Golf course, shop and services 114 - 114 - Food and beverage 10 - 10 - Software related 34 - 34 - Marketing expenses 5,378 5,944 14,160 16,898 Portfolio and funding costs 812 1,061 2,724 2,878 General and administrative 5,590 1,793 14,209 10,559 Provision for cancellations 1,216 255 4,440 7,329 Depreciation 327 3,646 1,301 781 Maintenance fees 467 106 1,368 731 Hotel operations, net 75 (114) 67 (140) Restructuring charges - - 2,480 - ----------- ----------- ----------- ----------- Total costs and expenses 23,979 25,837 71,450 $ 78,944 ----------- ----------- ----------- ----------- (LOSS) INCOME FROM CONTINUING OPERATIONS (8,372) 1,487 (14,609) 869 BEFORE INCOME TAX (EXPENSE) BENEFIT INCOME TAX (EXPENSE) BENEFIT (559) 419 292 455 ----------- ----------- ----------- ----------- (LOSS) INCOME FROM CONTINUING OPERATIONS (8,931) 1,906 (14,317) 1,324 =========== =========== =========== =========== Discontinued operations Income (loss) from discontinued operations 17 24 392 (189) Income tax (expense) benefit (6) (8) (133) 64 ----------- ----------- ----------- ----------- INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX 11 16 259 (125) ----------- ----------- ----------- ----------- NET (LOSS) INCOME APPLICABLE TO COMMON STOCK $ (8,920) $ 1,922 $ (14,058) $ 1,199 =========== =========== =========== =========== NET (LOSS) INCOME PER COMMON SHARE Basic and diluted: From continuing operations $ (1.42) $ 0.54 $ (2.66) $ 0.38 From discontinued operations (0.00) 0.01 0.04 (0.04) ----------- ----------- ----------- ----------- Net (loss) income $ (1.42) $ 0.55 $ (2.62) $ 0.34 =========== =========== =========== =========== Weighted-average number of common shares 6,304,008 3,500,557 5,373,727 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) (unaudited)
NINE MONTHS ENDED -------------------------- SEPTEMBER 30, AUGUST 31, 2002 2001 ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income $(14,058) $ 1,199 ----------- ------------ Adjustments to reconcile net (loss) income to net cash used in operating activities: Charges to allowance for cancellations (7,516) (6,097) Provision for cancellations 4,440 7,329 Gain on sale of business (542) - Gain on sale of notes receivable - (376) Gain on sale of other investments and other assets - (83) Cost of vacation ownership interest and land sales 6,413 10,319 Depreciation 1,301 781 Repayments on notes receivable 29,779 36,628 Additions to notes receivable (32,032) (64,797) Purchase of land and vacation ownership interests (8,106) (7,025) Proceeds from the sale of notes receivable - 5,637 Changes in operating assets and liabilities: Restricted cash (127) (2,037) Retained interests in receivables sold 1,139 (791) Deferred financing costs (445) (256) Deferred selling costs 2,916 (228) Other assets 2,481 3,188 Accounts payable 4,928 (109) Accrued liabilities (105) 847 Interest rate swap liabilities 927 463 Deferred income 820 2,373 Customer deposits (1,419) 172 Deferred income taxes (1,289) (978) Assets related to discontinued operations 414 (72) Liabilities related to discontinued operations 25 80 ----------- ------------ Net cash used in operating activities (10,056) (13,833) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (1,725) (6,932) Proceeds from the disposition of business 5,714 70 Proceeds from the sale of other investments - 144 Acquisition of business (Note 6) 247 - ----------- ------------ Net cash provided by (used in) investing activities 3,742 (6,718) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings 34,245 61,234 Reduction of debt (33,649) (38,899) Payments on subordinated debt (4,211) (75) Proceeds from issuance of common stock 9,966 - ----------- ------------ Net cash provided by financing activities 6,351 22,260 NET INCREASE IN CASH AND CASH EQUIVALENTS 37 1,709 CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 1,271 15 ----------- ------------ CASH AND CASH EQUIVALENTS END OF PERIOD $ 1,308 $ 1,724 =========== ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest, net of amounts capitalized $ 10,535 $ 12,054 Non-cash investing and financing activities related to acquisitions: Fair value of assets acquired $ 14,624 $ - Issuance of common stock $ (1,907) $ - Liabilities assumed or incurred $(12,530) $ -
See notes to condensed consolidated financial statements. MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements present the results of operations, financial position and cash flows of Mego Financial Corp. (the "Company" or "LESR"). The accompanying condensed consolidated financial statements have not been audited. We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In February 2002, the Company changed its fiscal year end from August 31 to December 31 and filed a transition report on Form 10-KT for the four months ended December 31, 2001 in accordance with applicable requirements. Accordingly, the financial information for the three and nine months ending September 30, 2002 is based on the Company's new fiscal year. The information presented for the three and nine months ended August 31, 2001 is based on the Company's prior fiscal year and is considered to be comparable to the September 30, 2002 information for purposes of this quarterly report. The financial information furnished herein reflects adjustments of normal recurring entries that are necessary for a fair presentation of the results for the interim periods. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes to those financial statements included in our transition report on Form 10-KT for the transition period September 1, 2001 to December 31, 2001. The results of operations for the nine months ended September 30, 2002 are not necessarily indicative of the results to be expected for the year ending December 31, 2002. ORGANIZATION Mego Financial Corporation (dba Leisure Industries Corporation of America) (LESR) is a New York corporation formed in 1954 with headquarters in Las Vegas, Nevada. In 1969, it's wholly owned subsidiary, Leisure Homes Corporation (fka Preferred Equities Corporation (LHC) made its initial entry into the vacation interval ownership business and land sales. Today LESR is comprised of business units strategically aligned to provide a turnkey vacation solution for the travel and leisure markets. LESR executes its business activities through three primary subsidiaries: Leisure Homes Corporation (LHC), Leisure Services Corporation (LSC) Leisure Resorts Corporation (LRC). Leisure Services Corporation and Leisure Resorts Corporation are new corporations that commenced operations in this fiscal year. Leisure Industries had a management change of control on January 17, 2002. The Company, under new management, adopted a new business plan and has been in a rigorous turnaround process since that time. New management is leveraging the core businesses and customer base to reposition and expand the Company into a fully integrated, broad-based travel and leisure company. The Company is shifting its marketing efforts toward a higher-end, more profitable travel and leisure consumer market and is also creating additional revenue sources that incorporate travel-associated, transaction-based revenue streams. These fundamental changes in the overall structure and direction have resulted in the incurrence of non-recurring general and administrative costs resulting primarily from the turnaround effort. These costs are approximately $750,000 and $1.1 million for the three and nine months ended September 30, 2002. Turnaround expenses include a system-wide change of the Company's signage and other logo-related hard goods, financial restructuring, changes in the healthcare benefits package, relocation of the Company's operations offices and the creation of two new subsidiaries that expanded the base business of the Company. LESR's primary business has been conducted through its wholly owned subsidiary, LHC. LHC is engaged in the development, operation, sales and marketing of vacation interval resorts. LHC also develops and sells parcels of raw land to consumers primarily as sites for second home or vacation homes. Consumer financing is provided by LHC to both land and vacation interval buyers. The Company has an owner base of approximately 75,000 owners. LHC operated its vacation ownership resorts under the "Ramada Vacation Suites" name through a licensing agreement with Cendant prior to May 2002. Subsequent to the change in ownership, the Company terminated the licensing agreement and launched the re-branding of its properties under the Leisure Resorts name. These properties are sold as vacation intervals by LHC, but managed pursuant to management agreements with Home Owner Associations (HOA) by the Company's wholly owned subsidiary, LRC. LRC will also manage the two golf courses of Cimarron Golf Club, located near Palm Springs, California, that were acquired during the period. Management of these facilities is expected to commence in the fourth quarter of 2002. (See Note 6). LSC is responsible for the company's customer care initiatives, including central reservation services for the Company's vacation interval owners. Central reservations also makes reservations for interval owners from non-Leisure Resort properties that are eligible to stay at the Company's resorts by virtue of exchanges through Resort Condominiums International (RCI). Central reservations also reserves rooms for transient guests. Accountability for delivery of the Company's travel products such as discounted airfares, car rentals, cruises, excursions, etc. is also included in the operations of this subsidiary. LSC developed a retail brand during the period, Leisure Vacation Store (LVS). The Leisure Vacation Store, www.leisurevacationstore.com, is a portal through ---------------------------- which travel products are marketed. The portal also generates leads for LHC. The site was launched during the period. The retail extension of the Leisure Vacation Store was initiated during the period with the signing of a lease for retail space in a premier regional shopping mall (Fashion Show Mall) in Las Vegas. Subsequent to the close of the period, the Company opened the store, which offers full service travel products and services, concierge services and previews of our vacation interval offerings to potential buyers of vacation intervals. LSC began, during the prior period and extended its operations during the current period, to manage two travel consolidators, Adventure Bound Travel located in Tempe, AZ and Cheap Seats Travel, Inc. located in Los Angeles, California. The Company has an option to purchase either or both of these companies. As a result of the management agreements, the Company has reflected only the management fees as revenues during the period but has incurred all of the start-up cost related to establishing a complete travel operation during the prior period and the current period. The Company's call center operations are also executed by LSC. The call center, the Leisure Vacation Stores and travel services all generate leads for Leisure Homes Corporation in addition to their other services. Therefore, LHC participates in bearing a portion of the cost of these activities. PRINCIPLES OF CONSOLIDATION The condensed consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries, as required by Section 3A-03 of Regulation S-X. All significant inter-company balances and transactions have been eliminated. USE OF ESTIMATES The preparation of condensed consolidated 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 condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. EARNINGS (LOSS) PER COMMON SHARE Basic earnings (loss) per common share are computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share is computed in the same manner as basic earnings (loss) per share, but also gives effect to all dilutive stock options and warrants using the treasury stock method. As of September 30, 2002, and August 31, 2001, options to purchase 510,150 and 48,570 shares of common stock respectively, at prices ranging from $4.00 to $6.00 per share were outstanding. As of September 30, 2002, warrants to purchase 1,746,020 shares of common stock at prices ranging from $2.50 to $6.00 per share were outstanding. No warrants were outstanding at August 31, 2001. These options and warrants were not included in the computation of diluted earnings per share because they would be anti-dilutive as a result of losses from operations or application of the treasury stock method. The options, which expire beginning on September 22, 2003, through September 22, 2008, and the warrants, which expire beginning on April 20, 2003, through June 25, 2007 were still outstanding at September 30, 2002. REVENUE RECOGNITION LESR recognizes revenue primarily from the sales of vacation ownership interests and land parcels, interest income, interest income from retained interests in receivables sold, and management fees from operating and managing vacation ownership properties through LRC. The Company 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 six to ten months of closing, and sales of vacation ownership interests typically meet these requirements at the time of sale. The sales 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. SALES OF NOTES RECEIVABLE AND RELATED RETAINED INTEREST When the Company sells notes receivable, it retains a residual interest in the future cash flows from the portfolio sold and usually 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 notes receivable 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 the fair value of future credit losses to be incurred in connection with the recourse provisions of the sales agreements, based on historical static pool loss information accumulated by the Company and is shown separately as a liability in the Company's condensed consolidated balance sheets. Gain or loss on sale of the receivables depends in part on the previous carrying amount of the notes receivable sold, allocated between the notes sold and the retained interest based on their relative fair value at the date of transfer. The Company generally estimates fair value on the retained interests (both at the point of the related receivable sale and periodically thereafter), based on the present value of future expected cash flows using management's best estimates of the key assumptions including default rates, rates of prepayment, loss severity and discount rates commensurate with the risks involved. The Company's retained interests in receivables sold are carried at fair value as either derivatives or available-for-sale investments. Unrealized holding gains or losses on the retained interests in notes receivable sold are included in earnings for those transactions structured so that the Company, through its retained interest, receives fixed interest amounts and pays the buyer variable amounts based on a floating interest rate index, as the resulting financial interest meets the definition of a derivative in accordance with SFAS No. 133. Unrealized holding gains, or losses, on retained interests in receivables sold not meeting the definition of a derivative would be included in stockholders' equity, net of income taxes. Declines in fair value in such retained interests below amortized cost caused by changes in the amount or timing of cash flows to be received are reflected in earnings. RECLASSIFICATIONS Certain prior period amounts have been reclassified to conform to the current period presentation. 2. NEW ACCOUNTING STANDARDS The Accounting Standards Executive Committee ("AcSEC") of the American Institute of Certified Public Accountants ("AICPA") began a project to address the accounting for timeshare transactions in 1997. The proposed guidance is currently in the drafting stage of the promulgation process and no formal exposure draft has been issued to date; therefore, the Company is unable to assess the possible impact of this proposed guidance. Currently, these rules are not effective and there is no assurance they will become effective. In the event they are adopted, it is likely that a final pronouncement on timeshare transactions will not be effective until the Company's fiscal year ending December 31, 2005. In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Accounting for Goodwill and Other Intangible Assets." SFAS No. 141 eliminated the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001 and is effective for any business combination accounted for by the purchase method completed after June 30, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with SFAS No. 142. Effective for fiscal years beginning after December 15, 2001, other intangible assets will continue to be amortized over their useful lives. The provisions of SFAS No. 141 and No. 142 were adopted by the Company effective January 1, 2002. The adoption of SFAS No. 141 and No. 142 did not have an impact on the results of operations or financial position of the Company. The FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" in August 2001. This statement is effective for fiscal years beginning after December 15, 2003. This new statement is not expected to have any impact on the results of operations or financial position of the Company. In December 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" that is applicable to the Company's fiscal 2002 financial statements. The FASB's new rules on asset impairment supersede SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and provide a single accounting model for the disposition of long-lived assets. In the first quarter of 2002, the Company adopted SFAS No. 144, which resulted in the financial statement presentation of Central Nevada Utilities Corporation ("CNUC"), a wholly owned subsidiary of the Company and its operating results as discontinued operations. (See Note 4). In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections." For most companies, SFAS No. 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS No. 4. Extraordinary treatment will be required for certain extinguishments as provided in Accounting Principles Board Opinion No. 30. SFAS No. 145 also amends SFAS No. 13 to require certain modifications to capital leases be treated as a sale-leaseback and modifies the accounting for sub-leases when the original lessee remains a secondary obligor (or guarantor). SFAS No. 145 is effective for transactions occurring after May 15, 2002, and is not expected to have a material impact on the results of operations or financial position of the Company. FASB Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The principal difference between SFAS No.146 and Issue 94-3 relates to SFAS No. 146's requirements for recognition of a liability for a cost associated with an exit or disposal activity. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as generally defined in Issue 94-3 was recognized at the date of an entity's commitment to an exit plan. A fundamental conclusion reached by the FASB in this Statement is that an entity's commitment to a plan, by itself, does not create an obligation that meets the definition of a liability. Therefore, this SFAS No. 46 eliminates the definition and requirements for recognition of exit costs in Issue 94-3. This SFAS No. 46 also establishes that fair value is the objective for initial measurement of the liability. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, and is not expected to have a material impact on the results of operations or financial position of the Company. 3. INTEREST RATE SWAPS In August 2000, to manage its exposure to interest rate risk the Company's prior management entered into an interest rate swap agreement, with a notional amount of $25 million that expires in August 2005. The Company's prior management 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 effectively convert the floating interest rate on certain of the Company's long-term debt obligations into fixed interest rates. At September 30, 2002, and December 31, 2001, the fair value of the swap liabilities was approximately $5.0 million and $2.3 million, respectively. Changes in the fair value of the swaps are recorded in accumulated other comprehensive loss. (See Note 7). The Company accrued interest expense of $1.4 million for the nine months ended September 30, 2002 and $402,000 for the nine months ended August 31, 2001. Of the accrued amounts, the Company paid $686,000 and $402,000 for the respective periods. The remaining accrued balances are shown in accrued liabilities. Management has determined these agreements are not required based on the economic climate and its future operations. Management intends to seek ways to terminate or reduce the obligations of these agreements in the future. Such termination or elimination could have a negative effect on the Company's operating results. 4. DISCONTINUED OPERATIONS On October 2, 2001, Utilities Inc. agreed to acquire substantially all the assets of CNUC for $5.5 million ("Asset Sale"). The transaction was subject to the approval of the Nevada Public Utilities Commission ("PUC"), which gave its approval on April 9, 2002. On April 11, 2002, the Company consummated the sale. As a result, the Company has recognized a gain on the sale of CNUC's assets of approximately $542,000 in the accompanying statement of operations for the nine months ended September 30,2002. The net proceeds of $5.2 million from the sale were used to repay outstanding principal and interest on subordinated debt, accrued interest and the at-risk payment thereon. At December 31, 2001, significant assets included in discontinued operations consisted of cash of approximately $429,000, restricted cash of approximately $927,000, and property and equipment, net of accumulated depreciation, of approximately $12.0 million. At December 31, 2001 significant liabilities included in liabilities from discontinued operations consisted of accrued liabilities of approximately $9.4 million and deferred revenue of approximately $185,000. Discontinued operations for the nine months ended September 30, 2002 and August 31, 2001 included revenues of approximately $453,000 and $1.3 million, respectively. 5. VACATION OWNERSHIP INVENTORY Vacation ownership inventory consists of the following (in thousands)
September 30, December 31, 2002 2001 ------------- ------------ Vacation ownership interest $17,929 $13,771 Vacation ownership interests under development 4,541 4,094 ------------- ------------ $22,470 $17,865 ============= ============
6. ACQUISITIONS The Company accounts for its acquisitions using the purchase method as required by SFAS No. 141. Accordingly, the amounts assigned to the identifiable assets and liabilities acquired in connection with the acquisitions are based on estimated fair values as of the date of the acquisition, with the remainder recorded as goodwill. The fair values were determined by the Company's management, generally based upon information supplied by the management of the acquired entities and valuations prepared by independent appraisal experts. On August 15, 2002, the Company acquired all of the outstanding capital stock of Atlantic Development Corporation ("AD"). The principal asset of AD is 2,019 acres of land in northern Arizona. The Company plans to develop and market this land as second home and vacation home sites. The Company is required to construct approximately 50 miles of basic roadway as part of the acquisition. Construction of the infrastructure is underway and the sale of the parcels in one-acre increments is expected to begin 1st quarter 2003. Additionally, under the terms of the purchase agreement, the Company has an understanding with the owner to acquire an additional 20,000 acres of land adjacent to these lots. The aggregate purchase price was $1.7 million, including $247,000 of cash, the issuance of 540,416 shares of the Company's common stock valued at $2.47 per share ($1.3 million), which was the average quoted market price immediately before and after the acquisition, and acquisition costs of approximately $136,000. Under the terms of the purchase agreement, the Company may be required to issue an additional 558,735 shares of common stock to the sellers if shares of the Company's common stock are not traded at $6.00 or more for ten consecutive days within 24 months after the purchase. On September 10, 2002, the Company acquired all of the outstanding membership interests in Cimarron Golf Club, LLC ("CGC"). CGC includes two membership based courses and a 26,000 square foot clubhouse. The golf course is part of an amenities package offered to purchasers of vacation intervals at the adjacent Cimarron Resort. The aggregate purchase price of $12.4 million consisted of a $920,000 note, the incurrence of acquisition costs of approximately $976,000, and the assumption of debt of approximately $9.9 million and liabilities of approximately $620,000. The results of operations of each of the above described acquisitions have been included in the condensed consolidated results of operations and statements of cash flows of the Company since the date of acquisition. The following pro forma financial information presents the results of operations of the Company as though the acquisitions had been made as of December 1, 2001. Pro forma adjustments have been made to give effect to interest expense related to acquisition debt, the related tax effects and the effect upon basic and diluted earnings per share. (In thousands)
Three Months Ended Nine Months Ended ------------------------- ------------------------- September 30, August 31, September 30, August 31, 2002 2001 2002 2001 ------------- ---------- ------------- ---------- Total revenues 15,881 27,678 59,072 82,048 Net (loss) income applicable to common stock (9,601) 1,074 (15,922) (288) Net (loss) income per common share: Basic (1.52) 0.31 (2.96) (0.08) Diluted (1.52) 0.31 (2.96) (0.08)
The pro forma results in the preceding table are not necessarily indicative of what the actual condensed consolidated results of operations might have been if the acquisitions had been effective at the beginning of the periods presented or the results which may be achieved in the future. These pro forma results do not include increased revenue from sales of vacation ownership or land as a result of the Cimarron Resort purchase of unsold inventory or the Arizona land included in the purchase of Atlantic Development. On August 15, 2002, the Company acquired all of the assets of FareQuest, Inc. and 15,975 warrants to purchase the common stock of ARINC ("ARINC Warrants"). FareQuest is an application service provider that is designed to help travel agents and their clients to search for, compare, book, and report on web fares. It is available to corporate and leisure travelers, but only through a client relationship with a travel agent. This acquisition is expected to complement the Company's core business and allows the Company to expand the travel services it offers. Immediately after the acquisition, the Company formed FareQuest Acquisition Corporation, a wholly owned subsidiary of the Company (the "Corporation") and conveyed all assets, contracts and other rights, and properties previously held by FareQuest, Inc. to the Corporation. The aggregate purchase price of $305,001 was paid through the issuance of 41,667 shares of the Company's common stock at $2.52 per share ($105,001), which was the quoted market price on the acquisition date, and the issuance of a warrant to acquire a twenty percent interest, adjustable to seventeen and fifteen percent based on certain conditions as defined in the purchase agreement, in the Corporation for an exercise price of $10. The warrant expires on April 15, 2012. The Company has the option to repurchase the warrant at any point during the twenty-four months following the sixth month of the acquisition date at its then fair market value. The Company may also be required to repurchase the warrant for $200,000 payable in the Company's common stock or by surrendering the ARINC warrants. On September 10, 2002, the Company completed the acquisition of the remaining development rights and 256 developed vacation ownership intervals at Cimarron Resort. As a result of this transaction, the Company has increased its vacation ownership inventory held for sale by $4.6 million. Cimarron Resort is an upscale vacation interval resort located near Palm Springs, California. The property will be marketed as Cimarron Golf Resort, A Leisure Industries Company, and is approved for 242 villas, forty which are built, representing 2,080 vacation ownership intervals. The Company intends to develop the remaining 202 units, with construction of forty new villas expected to commence in November 2002. The aggregate purchase price of $4.6 million consisted of approximately $383,000 in cash, the assumption or incurrence of $3.7 million in debt, the assumption or incurrence of liabilities of approximately $385,000, and acquisition costs of approximately $427,000. 7. COMPREHENSIVE INCOME Total comprehensive loss was approximately $892,000 and $1.8 million for the three and nine months ended September 30, 2002. Total comprehensive loss was approximately $687,000 and $722,000 for the three and nine months ended August 31, 2001. In the respective periods for 2002 and 2001, the difference between net income (loss) and total comprehensive income (loss) was due to unrealized losses on interest rate swaps. (See Note 3, Interest Rate Swaps) 8. COMMITMENTS AND CONTINGENCIES In the ordinary course of its business, the Company from time to time becomes subject to claims or proceedings relating to the purchase, subdivision, sale and/or financing of real estate. Additionally, from time to time, the Company becomes involved in disputes with existing and former employees. The Company believes that substantially all of the claims and proceedings are incidental to its business. In addition to its other ordinary course litigation, on February 9, 2000, a class action complaint was filed in Nevada District Court, County of Clark, No. A 414827, by Robert and Jacqueline Henry, husband and wife, and Kenneth and Janet Shosted individually and on behalf of all others similarly situated against LHC and certain other defendants. The complaint 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 purchasers of land in the subdivisions commonly known as Calvada Valley North and Calvada Meadows located in Nye County, Nevada. On September 5, 2001, 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 to the certified class is for the construction of water and sewer facilities. In July 2002, the defendants filed a motion for Summary Judgment on which the court has not yet ruled. The case is scheduled for a jury trial on February 19, 2003. The Company does not believe that any likely outcome of this case will have a materially adverse effect on the Company's financial condition or results of operations. On March 22, 1999, an action was filed in Nevada District Court, County of Clark, No. A 400918, by Beatrice Marie Salvati, Gregory Salvati, Lisa Marie Mannon and Jewelene Nelson, as Special Administratrix of the Estate of Ernest Salvati, Jr. against LHC and the Company. The plaintiffs' complaint asked for damages based on the death of Ernest Salvati, Jr. while he was a guest at the Las Vegas resort managed by LHC. Mr. Salvati was walking to his room on a public street outside of the resort when he was shot and killed by an unknown assailant who was stealing his wife's purse. The plaintiffs' are alleging negligence and wrongful death against LHC and the Company and are seeking damages including pain and suffering. The defendants' have filed a motion for Summary Judgment. The plaintiffs' have filed a motion for a jury trial. The case is currently scheduled for a non-jury trial on January 21, 2003. The Company does not believe that any likely outcome of this case will have a materially adverse effect on the Company's financial condition or results of operations. During the period the Company was threatened with litigation by the former President of the Company for non-payment of the severance agreement between the parties. Subsequent to the end of the period, the Company suspended all related severance payments and notified the former President that the Company may have claims that exceed the amount due pursuant to the terms of that agreement. The Company has been unable to establish the total amount of the potential claims; therefore, it will continue to cause all payments to be suspended until the amount of the potential claims can be established. Such decision of Management may result in potential litigation with the Company's former President. At various times in the general course of business, the Company and LHC 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. In July 2002, the Company entered into an agreement to lease office space at 7700 Irvine Center Drive, Irvine, California for a period of seven years. The premises will be used as a sales office. The lease provides for a monthly base rent of $18,664. It is anticipated that occupancy will occur, and the lease will commence, in the fourth quarter of 2002. In accordance with the Company's new sales strategy, notices of intent to terminate leases at the following off property consumer ("OPC") locations were given during, or subsequent to, the reporting period. All locations will not be closed until the 4th quarter 2002. OPC LOCATION $RENT/QTR ---------------------------------- ------------ OPC - 42nd Street 60,000 OPC - Barbary Coast Hotel & Casino 165,000 OPC - Grand Ave. 180,000 OPC - Sahara Hotel & Casino 150,000 OPC - Showcase Mall 75,415 9. RESTRUCTURING COSTS AND OTHER CHARGES In January 2002, the Company's Board of Directors approved a business restructuring to be implemented by management. Among other things, this restructuring included: the reorganization of senior management including the elimination or termination of 10 positions; relocation of corporate office facilities from 1500 E. Tropicana Avenue and 4310 Paradise Road to more efficient office facilities; 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." During the quarter ended March 31, 2002, the Company recorded a non-recurring charge of approximately $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 for approximately $308,000. As of September 30, 2002, the Company has paid in cash approximately $1.4 million for charges related to these activities. The Company incurred in the prior period as well as this period, substantial non-recurring costs in eliminating the Ramada signage and brand identification at all of its resorts and within its operations. The Company continued through this period and expects to continue to incur substantial charges in re-branding the properties and the various service products. These charges include but are not limited to signage, sales materials, corporate identifiers and changes in state registrations and other public documents. 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. Management also discontinued the OPC marketing operation during the period. During the nine month period ended September 30, 2002, the Company had a net expense of $4.6 million for these activities. The Company will incur charges related to the OPC operations through the fourth quarter of 2002. The migration to a new financial system was completed in August. This system migration addressed the general ledger, accounts payable, cash management, purchasing, inventory, distribution and fixed assets. These software modules are fully integrated and provide functionality that enables the creation of integrated financial reporting without duplicate data entry or manual manipulation of the data. It also provides the ability to perform operational and cost analysis at various levels such as company, department, product line and project with simple query tools provided in the financial suite. The direct cost of the migration was $202,000 in software and implementation services. Additionally, there has been an increase in operational costs as processes and procedures have been modified to capture and leverage the data available in the financial suite. This increase in the operational cost will be short lived and it is anticipated that the operational costs will begin to decrease in 2003. In addition to the financial suite migration, the move to outsource loan servicing was completed subsequent to the period to Concord Servicing. The outsourcing of these services provides for more accurate and timely access to loan data combined with a decrease in operational labor costs. There were very few costs incurred in this migration, and all of the labor costs were covered by existing personnel. Management projects that outsourcing this non-core service will result in a more efficient and less costly operation. 10. NOTES PAYABLE On July 1, 2002, the Company issued $4 million in convertible debentures ("Ashford Debentures") to Ashford Capital Partners and affiliates ("Ashford"). The Ashford Debentures bear interest at a rate of 7.5% per annum and require quarterly interest payments of $37,500 commencing on October 1, 2002 through its maturity on June 30, 2006. The interest rate will be adjusted to 9.5% per annum in the Event of a Default, as defined in the Ashford Debenture agreements. The Ashford Debentures allow Ashford to convert any or all of the outstanding principal and interest into shares of the Company's common stock at a conversion price of $5.00 per share. Converted principal and interest are deemed fully paid. Additionally, in connection with the issuance of the Ashford Debentures, Ashford received 200,000 warrants that allow the holder to redeem each warrant for one share of the Company's common stock at a purchase price of $4.00 per share. The warrants generally expire forty-eight months from issuance. On September 5, 2002, the Company issued a $250,000 promissory note ("Crestview I Note") to Crestview Capital Fund I ("Crestview I"). The Crestview I Note bears interest at a rate of 12% per annum. The principal and interest are payable thirty days from the date of issuance. The Company and Crestview I intend, at the option of Crestview I, to replace the Crestview I Note with a convertible secured promissory note ("Crestview I Note Transfer"). If the Crestview I Note Transfer does not occur prior to the maturity date, the Company will issue 50,000 warrants to Crestview I. Each warrant allows Crestview I to purchase one share of the Company's common stock at a strike price of $2.50 and is callable at $7.00. Additionally, in connection with the issuance of the Crestview I Note, Crestview I received 12,500 warrants ("Crestview I Warrants"). The warrants entitle the holder to redeem each warrant for one share of the Company's common stock at a purchase price of $2.50 per share. The Crestview I Warrants expire on September 10, 2005. On September 5, 2002, the Company issued a $250,000 promissory note ("Crestview II Note") to Crestview Capital Fund II ("Crestview II"). The principal and interest of $15,000 are payable thirty days from the date of issuance. If the outstanding principal and interest are unpaid at the maturity date, the Company is required to pay $100,000 in penalties to Crestview II. The Company and Crestview II intend, at the option of Crestview II, to replace the Crestview II Note with a convertible secured promissory note ("Crestview II Note Transfer"). If the Crestview II Note Transfer does not occur prior to the maturity date, the Company will issue 50,000 warrants to Crestview II. Each warrant allows Crestview II to purchase one share of the Company's common stock at a strike price of $2.50 and is callable when the stock price of the Company's common stock trades at $7.00 or higher for five consecutive trading days. The Crestview II Note is secured by certain assets of the Company, as described in the Crestview II Note agreement. Additionally, in connection with the issuance of the Crestview II Note, Crestview II received 12,500 warrants ("Crestview II Warrants") allowing it to redeem each warrant for one share of the Company's common stock at a purchase price of $2.50 per share. The Crestview II Warrants expire on September 10, 2005. On September 12, 2002, the Company issued to Charles K. Stewart ("Stewart") a $1.0 million promissory note ("Stewart Note"). The Stewart Note provides for interest at 7.5 percent per annum. The outstanding principal and interest are due thirty days from the date of issuance. The Company and Stewart intend, at the option of Stewart, to replace the Stewart Note with a convertible secured promissory note ("Stewart Note Transfer"). The Stewart Note is secured by certain assets of the Company, as described in the Stewart Note agreement. Additionally, in connection with the issuance of the Stewart Note, Stewart received 200,000 warrants ("Stewart Warrants") allowing it to redeem each warrant for one share of the Company's common stock at a purchase price of $2.50 per share. The Stewart Warrants expire on September 11, 2007. Charles K. Stewart is a shareholder of the Company. Subsequent to the period this note was reduced by $500,000. On September 12, 2002, the Company issued to Castle Creek Technology Partners ("Castle") a $1.0 million promissory note ("Castle Note"). The Castle Note bears interest at a rate of 7.5 percent per annum. The outstanding principal and interest are due thirty days from the date of issuance. In the Event of a Default, as defined in the Castle Note agreement, and which includes the failure to pay the outstanding principal and interest by the maturity date, the interest rate will retroactively increase to 15%. The Castle Note is secured by certain assets and revenues of the Company, as described in the Castle Note agreement. On September 27, 2002, the Company issued to Troon and Co ("Troon") a secured promissory note in the amount of $750,000 ("Troon Note I"). The Troon Note I bears interest at a rate of 7.5 percent per annum. The principal and interest are payable on November 15, 2002. Subsequent to the period this note was increased by $1,250,000. In the event the outstanding principal and interest are not paid by December 15, 2002, the interest rate will increase to 12.5%. The Troon Note I is secured by certain receivables of the Company, as described in the Troon Note I agreement. Additionally, in connection with the issuance of the Troon Note I, Troon was granted 200,000 warrants ("Troon Warrants"). Each warrant is redeemable for one share of the Company's common stock at a purchase price of $2.50 per share. The Troon Warrants generally expire on September 27, 2007. Ross Mangano, a Trustee of Troon, is a Director of the Company. On June 4, 2002, Doerge Capital Collateralized Bridge Fund LP ("Doerge") agreed to advance the Company up to $2 million to fund its working capital. In return, the Company issued a secured promissory note to Doerge for an amount not to exceed $2 million ("Doerge Note"). The Doerge Note was amended and restated on August 16, 2002 to increase the borrowings under the Doerge Note to an amount not to exceed $3.5 million. The Doerge Note bears interest at a rate of 18 percent per annum. The principal and accrued interest are due on the earlier of the Company's receipt of amounts in excess of $1 million from any financing activities, as described in the Doerge Note agreement, or December 14, 2002. The Doerge Note is collateralized by certain assets of the Company, as described in the Doerge Note agreement. At September 30, 2002, the Company had exceeded the maximum allowable borrowings under the Doerge Note. Subsequent to the period the Doerge Note was amended to reflect the increased borrowings and extended the maturity date. The amendment is expected to occur in December 2002. At September 30, 2002, the outstanding balance on the Doerge Note was approximately $3,950,000. David Doerge and Doerge collateralized Bridge Fund LP are shareholders of the Company. Additionally, in connection with the issuance of the Doerge Note, Doerge was granted 150,000 warrants ("Doerge Warrants"). Each warrant is redeemable for one share of the Company's common stock at a purchase price of $4.00 per share. The Company may call the Doerge Warrants at certain purchase price, as described in the Doerge Warrant agreement. The Doerge Warrants generally expire on June 4, 2012. 11. INCOME TAXES Deferred income tax assets and liabilities are determined based upon differences between the financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The realization of deferred tax assets is based on historical tax positions and expectations about future taxable income. Valuation allowances are recorded related to deferred tax assets if their realization does not meet the "more likely than not" criteria of SFAS No. 109, "Accounting for Income Taxes."
Three Months Ended Nine Months Ended ------------------------- ------------------------- September 30, August 31, September 30, August 31, 2002 2001 2002 2001 ------------- ---------- ------------- ---------- (Loss) income before income taxes $ (8,372) $ 1,487 $(14,609) $ 869 Tax at the statutory federal rate (2,846) 506 (4,967) 295 (Decrease) Increase in income taxes resulting from: Changes in certain income tax liability reserves - (95) 5,126 224 Changes in certain income tax asset reserves 2,293 - - - ------------- ---------- ------------- ---------- Income tax (expense) benefit $ (553) $411 $ 159 $ 519 ============= ========== ============= ==========
12. RESTATEMENT - NINE MONTHS ENDED AUGUST 31, 2001 Certain amounts have been restated for the three and nine months ended August 31, 2001 in connection with adjustment of net gain on sale of two office buildings in accordance with SFAS No. 98, "Accounting for Leases", Sale - Leaseback Transactions Involving Real Estate. To restate the three and nine months ended August 31, 2001, the Company recorded amortization of the deferred gain of $41,000 and $122,000, respectively, as a reduction of interest expense, net of tax of $27,000 and $82,000, respectively. This resulted in net income applicable to common stock of $1.9 million and $1.2 million, respectively, and earnings per share of $0.55 and $0.34, respectively from net income applicable to common stock of $1.9 million and $1.1 million and earnings per share of $0.55 and $0.31, respectively. 13. SUBSEQUENT EVENTS Subsequent to the end of the period, on October 2002, the Company entered into an agreement to lease retail space in the Fashion Show Mall, located at 3200 South Las Vegas Boulevard, Las Vegas, Nevada for a period of five years. The Company commenced occupancy on November 1, 2002. The lease provides for a monthly base rent of $12,150 with an adjustment in the third year. The lease also provides for an annual percentage rent of 8% of the amount of annual gross sales generated by the location. On November 15, 2002, the Company completed the sale of approximately $30 million in notes receivable ("portfolio") secured by land to Land Finance Company, an affiliate of Textron Financial Corporation. Pursuant to the terms of the agreement, the Company will retain a residual interest in the future cash flows from the portfolio sold and will retain the associated servicing rights. The Company is obligated to replace or repurchase notes receivable that become more that 120 days contractually past due or are otherwise subject to replacement or repurchase in either cash or receivables up to a maximum of 15 percent of the portfolio. The Company is required to establish a 10 percent cash reserve to secure its repurchase and replacement agreement. Proceeds from the sale of the portfolio will be used to retire land receivable related hypothecated debt with Finova and Textron. The Company does not expect to receive any cash proceeds from the sale of the Portfolio. The Company has not determined whether it will recognize either a gain or a loss on the transaction. The Company has structured the transaction to qualify for sale accounting under SFAS 140. The funding of the transaction is scheduled for November 27, 2002. Upon funding, the Company will have additional land receivable lines available to it from Textron pursuant to its existing and new receivable lines. (See Note 14 Issues Affecting Liquidity). On October 1, 2002, the Company entered into a Securities Purchase Agreement ("Agreement") with Vestcap International Management, Ltd. and its affiliates ("VestCap"). Under the terms of the Agreement, Vestcap agreed to loan the Company an amount not to exceed $1 million. Borrowings under the Agreement would be evidenced by the issuance of convertible debentures by the Company to Vestcap. On October 2, 2002, the Company borrowed $700,000 under the Agreement and issued two convertible debentures in the amount of $250,000 each and one convertible debenture in the amount of $200,000 (collectively known hereafter as "Debentures"). The Debentures bear interest at a rate of 10% per annum. The principal and accrued interest are payable on September 30, 2003. In the Event of a Default, as defined in the Debentures, and which includes a failure to pay the outstanding principal and interest by the maturity date, the interest rate will increase to 25% per annum. Pursuant to the terms of the Agreement and the Debentures, Vestcap may convert all or any portion of the Debentures, including any accrued interest, into shares of the Company's common stock. The conversion may take place only on the conversion date and at the conversion price, as defined in the Debentures and Agreement. Converted principal and interest are deemed fully paid. Additionally, the Agreement provides for the issuance of warrants that allow the holder to redeem each warrant for one share of the Company's common stock. The Company is required to issue warrants on the conversion date, as defined in the Debentures and Agreement and on the day Vestcap has signified its intent to exercise the Put. The warrant redemption price and the number of warrants to be issued will be determined in a manner more fully described in the Agreement. The issued warrants are fully transferable, are exercisable immediately upon issuance, and expire on October 31, 2007. The Company may call the warrants provided that the closing price of the Company's common stock exceeds $7.00 per share for twenty consecutive trading days. The Agreement requires the Company to issue new debentures to Vestcap if the Company issues debentures or other debt obligation to other parties with terms more favorable than the terms in the Debentures. The Company is also required to issue new warrants to Vestcap if it issues warrants to other parties with redemption terms more favorable than the redemption terms in the warrant agreements. The Company also granted Vestcap a put option ("Put") whereby the Company is required to redeem all or a portion of the Debentures not converted into shares of the Company's common stock The redemption price will be 115 percent of the sum of the principal balance of the Debentures to be redeemed and the related accrued interest ("Put Price"). The Put Price will be payable in three consecutive monthly installments commencing on the date Vestcap has signified its intent to exercise the Put. The Company's obligation to pay the Put Price will be evidenced by the issuance of promissory notes to Vestcap. Interest on the promissory notes will accrue at 10% per annum beginning on the day after Vestcap has signified its intent to exercise the Put. Vestcap may exercise the Put only at certain times and under certain conditions, as described in the Debentures and the Agreement. On November 1, 2002, the Company issued a $500,000 secured promissory note to Troon ("Troon Note II"). The Troon Note II matures on November 8, 2002 and is secured by certain assets of the Company, as described in the Troon Note II agreement. In the event the Company does not pay the outstanding principal by November 8, 2002, the Troon Note II will retroactively accrue interest at a rate of 10 percent per annum. The Company is in default due to non-payment of the outstanding principal. On November 5, 2002, the Company issued to Katherine Buchanan ("Buchanan") a $500,000 promissory note ("Buchanan Note"). The Buchanan Note matures on November 30, 2002 and bears interest at a rate of 10 percent per annum. In the Event of a Default, as defined in the Buchanan Note agreement, and which includes a failure to pay the outstanding principal and interest by the maturity date, the interest rate will increase to 25 percent per annum. Subsequent to September 30, 2002, the Company was in default for non-payment of the following notes: Crestview I, Crestview II, Stewart Note, Troon Note and the Castle Note. The total amount of these borrowings is $2.0 million. The Company expects to pay the outstanding principal and accrued interest by December 15, 2002. 14. ISSUES AFFECTING LIQUIDITY AND MANAGEMENT'S PLANS The primary issues affecting the liquidity of the Company relates to the (a) amount and quality of its revenues; (b) the terms, conditions and status of the receivable lines of credit outstanding to LHC; (c) the collection of its notes receivables; and (d) its ability to obtain equity or working capital. During the period, the revenue of the Company's primary subsidiary, LHC, declined from $27.3 million to $15.6 million for the corresponding period. The decline in revenues resulted in fewer receivables being available to generate cash flow from its receivable lines. The reduction in revenues was due primarily to changes in sales practices, underwriting criteria for financing consumers and a lack of consumer acceptable inventory during the period. LHC is required to comply with certain financial and non-financial covenants under lines of credit agreements. The lines of credit are provided for vacation ownership and land separately. The Company's primary lender was previously FINOVA. At the end of 2001, the Company was notified that FINOVA would be phasing out of its commitments to the vacation ownership industry and that the Company's lines would be extended until December 31, 2002. During the prior period, LHC reached an agreement with FINOVA to discontinue advances pursuant to both its vacation ownership and land credit facilities. LHC also agreed to repay or restructure the outstanding amount of $52.0 million. The Company intends to sell approximately $20.0 million of its notes receivable pursuant to a note purchase agreement entered into on November 15, 2002, with another of the Company's lenders, Textron (see Subsequent Events) to reduce the outstanding amount that will be due to FINOVA on December 31, 2002. The inability of LHC to process its land receivables pursuant to the previously existing FINOVA receivable line caused the Company to fully utilize its other land receivables facilities during the period. As a result, the Company ended the period without adequate land receivable lines available to fund its operations. Pursuant to the terms of the agreement with Textron entered into subsequent to the period, the Company will have additional land receivable lines available. During the period, another lender of the Company, Capital Source, declared LHC and the Company in default pursuant to a non-financial covenant relating to the time to submit plans and commence construction on a Las Vegas property that was the subject of an acquisition and development loan. The Company paid the defaulted loan subsequent to the period. However, during a portion of the period, the Company was not permitted to process notes receivable to this lender pursuant to its receivable line. The result of the lender's failure to fund pursuant to the receivable line during this period directly affected the Company's liquidity. During the period, the Company effected the implementation of a new integrated financial reporting system and technology platform. The transition to the new system resulted in the Company experiencing certain recording and reporting problems that resulted in an increase in its accounts payable during the period. In periods prior to the change of management, the Company, through its subsidiary LHC, had generated sales for which it had not properly documented the respective sales. The result of these process failures caused the Company's escrow agent to hold approximately $2.8 million dollars due to the Company. During the period, the Company reorganized its finance division and implemented new process procedures that caused these funds to be released on a periodic basis. However, most of the funds were released subsequent to the end of the quarter. Pursuant to the Company's various lender agreements, the Company is required to replace delinquent notes receivables with either cash or replacement notes of an equal amount. During the nine months, the Company replaced an estimated $24.0 million of previously sold or pledged notes. The excessive amount of notes receivable that was required to be replaced due to a lack of underwriting criteria, sales practices and verification process caused the Company to experience an excessive loss of liquidity. Due to the various aforementioned issues, the Company, during the period, had to raise additional equity, issue new convertible debentures and incur expenses related to short term financing that increased the expenses of the Company and limited its current operations. The Company at the close of the period had $9.6 mm of unencumbered receivables that could not be applied to its receivable lines of credit due to title problems created by the sales closing, title transfer and recording practices of prior management. During the forthcoming 12 months, new Management believes it will be successful in obtaining financing from its existing receivable lines of credit to improve its liquidity. It is noted that certain of these receivables secures the repayment of the notes payable to Troon, Crestview, Castle Creek and Stewart (See Note 9). 15. STOCK OPTION PLAN The Company has two stock option plans, one adopted in 1993 and amended in 1997 (the "1993 Option Plan"), and one adopted on July 1, 2002 (the "2002 Option Plan"). The 1993 Option Plan provides for the granting of up to 170,833 options and the 2002 Option plan provides for granting up to 500,000 options. Both the 1993 and 2002 Option Plans provide for the granting of both incentive and non-qualified stock options to key personnel, including officers and directors of the company, at the discretion of the Compensation Committee. Each plan limits the exercise price of the options at no less than the quoted market price of the common stock on the date of grant. The option term is determined by the Board of Directors or the Compensation Committee, provided that no option may be exercisable more then 5 years after the date of its grant. Generally, under the 1993 and 2002 Option Plans options to employees vest over five years at 20% per annum. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 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. The general economic downturn has had a direct impact on the Company's operations in the marketplace, which has continued through the current quarter. While management believes this event will not have a material effect on the operations in the future, there can be no assurance that the travel and tourism industry will return to its pre-September 11 levels. The Company has customers who both fly and drive to the various resort locations. At this time, there can be no assurance that the economic downturn, due to a decrease in travel and anxiety about possible terrorist attacks, and the current economic uncertainty within the travel industry will not extend to future periods. Management has been engaged in acquiring new inventory for its vacation ownership and land sales division; a change of its sales and marketing operations; financial restructuring of its consumer finance portfolio; the implementation of new financing and technology systems and significant changes in its public reporting procedures. All of these changes were undertaken during the first three quarters of 2002 and come to completion in the current quarter. While many of these changes will not be reflected in the Company's operations until future quarters, major expenses were incurred in the last nine months that have had an adverse effect on the Company's financial results for the same period. While management believes the effect of its changes will result in improved operations in the coming quarters, there can be no assurance the operating results of the Company will improve. 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 transition period from September 1, 2001, to December 31, 2001, the Form 10-Q for the quarterly periods ending March 31, 2002, and June 30, 2002, the other public filings of the Company including all 8-K's and S-3 filings and the Condensed Consolidated Financial Statements, including the notes thereto, contained elsewhere herein. GENERAL DISCUSSION LESR's primary business is the development, operation, sales and marketing of vacation interval resorts. LHC also develops and sells parcels of raw land to consumers primarily as sites for second homes or vacation homes. Consumer financing is provided to both land and vacation interval buyers, however, the Company does not offer consumer finance to unrelated consumers. The Resorts are sold as vacation intervals by LHC, but managed pursuant to management agreements with Home Owner Associations (HOA) by the Company's wholly owned subsidiary, LRC. LRC will also manage the two golf courses, Cimarron Golf Club, located near Palm Springs, CA that were acquired during the period. Management of these facilities is expected to commence in the fourth quarter 2002. LRC does not currently but may in the future offer resort management services to unrelated parties. If such services are provided they will compete with numerous hospitality management entities some of whom would be more established and have greater resources than LRC. LSC is responsible for the company's customer care initiatives, including central reservation services for the Company's vacation interval owners. Central reservations also makes reservations for interval owners from non-Leisure Resort properties that are eligible to stay at the Company's resorts by virtue of exchanges through Resort Condominiums International (RCI). Central reservations also reserves rooms for transient guests. Accountability for delivery of the Company's travel products such as discounted airfares, car rentals, cruises, excursions, etc. is also included in the operations of this subsidiary. LSC developed a retail brand during the period, Leisure Vacation Store (LVS). The Leisure Vacation Store, www.leisurevacationstore.com, is a portal through which travel products are marketed. The portal also generates leads for LHC. The site was launched during the period. The retail extension of the Leisure Vacation Store was initiated during the period with the signing of a lease for retail space in a premier regional shopping mall (Fashion Show Mall) in Las Vegas. Subsequent to the close of the period, the Company opened the store, which offers full service travel products and services, concierge services and previews of our vacation interval offerings to potential buyers of vacation intervals. COMPETITION Vacation Ownership Industry ----------------------------- The interval ownership industry has been one of the fastest growing segments in the travel and leisure space with an historical annual growth rate of 16%. In 2001, the market's growth rate dropped to 8% as a result of September 11th, but still maintained positive momentum in part due to the entrance of branded developers as well as shifts in travel behavior and the evolution of the product. The entrance of branded interval developers such as Marriott, Disney and Hyatt has helped to sustain growth in the marketplace. The addition of Ritz-Carlton, Four Seasons and other luxury hotel owners to the market has also increased the acceptance of vacation ownership to a more economically secure customer. Many consumers already have an established relationship with these brands and a comfort level with known brand names has provided a level of trust and confidence in the vacation ownership product. The entrance of these companies has helped legitimize the industry and improve its reputation. They have also participated in the growth through the increase in market share by the brands. In addition to the internationally known brands, the industry has hundreds of independent operators that compete with the Company. Many of these have greater resources, better products, more locations and more efficient operations than the Company. All of the competitors in the vacation ownership industry offer or provide consumer financing to the consumer. Some have larger financing facilities and better financing agreements than does the Company. Land Sales ----------- Sales of second home and vacation homes composed an $11.5 billion industry in 2001. The Company has been selling land for future development since 1969. Historically, the Company has sold property in Colorado and Nevada. The Company normally competes with local real estate developers within the geographic area of its sales. During the past two years, the Company depleted its land inventory. During the period, management acquired 2,019 one acre lots in Mohave County, Arizona. This acquisition will provide the Company with land inventory to fulfill its immediate future land sales objectives. The Company has registered an initial 850 lots in Arizona and is in the process of registering this property for sale in other states. The Company expects to continue to be in the land sales business directed at the second and vacation home market. It will face competition from local developers, national auction companies and individual owners who seek to sell their properties. The Company does not know of another travel and leisure company competing in this market area. Travel Industry ---------------- One year later, the travel industry is still feeling the effects from September 11th. Many people who were hesitant to travel are even more so now. And if they do, they are staying closer to home. These travelers who are tending toward more regionally focused travel in drive-to destinations have affected the industry with a decrease in air travel purchase. As a result of these and other factors, many travel companies are reporting lower than expected earnings in both the provider and distribution arenas. The Company's travel operations were started in the second quarter of this year. The Company plans to utilize the travel operations to reduce long term marketing costs for its vacation ownership sales, to provide travel services to its clients and to utilize travel and other leisure services as additional benefits to our members. In these areas, management expects to realize cost savings. The operations have been hindered by traditional costs related to starting up a new business segment including, but not limited to, the recruitment and training of personnel; the establishment of an infrastructure to provide up to date technology to the marketplace; and the education of other segments of the Company. Management began the travel operation with management contracts for two air consolidators as a basis for its business. While the Company has entered into a Letter of Intent (LOI) to acquire these operations, it has not completed the transaction awaiting final due diligence and Board approval. The Company is exploring the possibility of acquiring one or both of these operations. The Company competes with existing travel operations, airlines, hotels, Internet travel sites such as Expedia, Travelocity and Orbitz; ticket distributors such as Ticketmaster; and air consolidators and wholesalers such as Cheap Tickets and Carlson Travel. Most of these companies have resources in excess of the Company's and compete in a larger marketplace. ORGANIZATION The Company was formed in 1954 as a New York corporation. Prior to January 17, 2002, the Company had operations in numerous subsidiaries with the primary operation conducted through a Nevada corporation established in 1969, Leisure Homes Corporation (fka Preferred Equities Corporation). In January 2002, the Company effected a change of its Board of Directors and senior management and the operations of the Company were restructured and reorganized during the subsequent period. The Company currently operates within five business segments. These business segments are Vacation Ownership (timeshare) Resorts; Land Sales and Development; Consumer Finance; Resort Management and Travel and Leisure services. The Company's Vacation Ownership, Land development and sales and consumer finance operations are performed through its wholly owned subsidiary, Leisure Homes Corporation ("LHC"). LHC develops and sells parcels of raw land to be used primarily as sites for second and/or vacation homes and originates consumer financing to the purchasers of the vacation ownership and land parcels. By providing financing to virtually all of its customers, LHC originates consumer receivables that it hypothecates, sells and services. Vacation Ownership, Land Sales and Consumer Finance --------------------------------------------------------- LHC acquires, develops and markets vacation ownership interests in resorts located in popular high volume vacation destinations such as Steamboat Springs, Colorado (two resort locations); Indian Shores and Orlando, Florida; Honolulu, Hawaii; Las Vegas and Reno, Nevada and Brigantine, New Jersey (adjacent to Atlantic City, New Jersey). During the past three months, the Company acquired Cimarron Golf Resort and the Cimarron Golf Club in Palm Springs, California. Prior to the Company completing the registration of Cimarron Golf Resort for public sale as a Vacation Ownership property, the Company has entered into a short term sales and marketing contract with Raintree Resorts International (Club Regina) to sell up to 100 intervals per month in Mexico on a short term basis. LHC develops and sells land for second or vacation homes. LHC also provides financing to the Company's customers. Resort Management ------------------ Leisure Resorts Corporation ("LRC"), a wholly owned subsidiary of the Company, manages each vacation ownership property and receives management income in connection therewith. LRC will begin managing the Cimarron Golf Resort in the first quarter of 2003. Until such time, the Cimarron Golf Resort will be managed pursuant to a contract with RCI Management. Travel ------ Leisure Services Corporation ("LSC"), a wholly owned subsidiary of the Company provides travel services to the leisure vacation ownership marketplace and customer service to the Company's existing owners. 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 name and corporate domicile from New York to Delaware. Management intends to file a proxy to accomplish this merger during the first quarter 2003. The Company has 1,611 units representing 82,201 vacation intervals, including Cimarron inventory, which was acquired during the period. At the end of the period, 10,127 intervals remained unsold. ASSOCIATIONS SUITES INTERVALS UNSOLD UNSOLD % ------------------ --------- ------------- ----------- ---------- GF TOWERS 93 4,743 334 7.04% GF VILLAS 94 4,794 339 7.07% GF TERRACES 50 2,550 313 12.27% GF SUITES 102 5,202 334 6.42% GF FOUNTAINS 48 2,448 71 2.90% GF WINNICK 12 612 16 2.61% GF TERRACES FOUR 68 3,468 67 1.93% GF PLAZA 22 1,122 201 17.91% LAS VEGAS SUB-TOTAL 489 24,939 1,675 6.72% BRIGANTINE INN 91 4,641 707 15.23% BRIGANTINE VILLAS 17 867 83 9.57% RENO 95 4,845 624 12.88% HONOLULU 80 4,080 669 16.40% STEAMBOAT SUITES 60 3,060 814 26.60% STEAMBOAT HILLTOP 56 2,856 1,305 45.69% ORLANDO I 120 6,120 235 3.84% ORLANDO II 42 2,142 2,013 93.98% INDIAN SHORES 32 1,632 71 4.35% CIMARRON RESORT 40 2,080 256 12.31% --------- ------------- ----------- ---------- GRAND TOTAL 1,611 82,201 10,127 12.32% Vacation ownership interests offered by Leisure Homes in its resorts (other than Hawaii) generally consist of undivided fee interest in a particular unit. The vacation owner acquires the perpetual right to weekly occupancy of a residence unit each year that is represented by a deed of trust. During the period, the Company's vacation ownership inventory did not consist of the quantity or the quality to allow it to compete in its respective markets and achieve future revenue growth. Management established the objective of acquiring existing inventory, converting existing developments into new inventory and renovating old inventory. The Company's primary focus is on its Las Vegas property. Management has established an objective to acquire existing developed property adjacent to or in proximity to its existing inventory. During the first quarter 2002, the Company acquired a 20 unit apartment complex that is being renovated and converted into 20 two bedroom units (1,040 intervals). The Company projects these units will be available for sale in the first quarter 2003. Management established the objective of acquiring existing properties in Southern California (see Acquisitions); New Jersey; Branson, Missouri; Hawaii, Texas and the Caribbean. During the period the Company began to perform due diligence on properties in each of these areas, however, the Company has not reached and does not know if it will reach any agreements on any of these potential opportunities. During the period, the Company completed due diligence and negotiations on a property in the Caribbean, deciding not to pursue the proposed acquisition as well as discontinuing negotiations with Raintree Resorts on all properties owned or managed by it except for Cimarron Golf Resort purchased by the Company during the period (see acquisitions). The Company incurred a one-time cost of approximately $500,000 conducting the due diligence on these properties during the nine month period. Management expects it will continue to incur additional due diligence charges, primarily consisting of professional or consulting fees during the next two quarters as it completes its review of potential properties. Land Sales ----------- The Company was engaged in the retail sale of undeveloped land in Nevada and Colorado through its wholly owned subsidiary LHC. Prior to the beginning of the period approximately 80,000 acres of recreational and retirement home lots were sold in subdivisions in the Pahrump Valley, Nevada; Huerfano County, Colorado; and Park County, Colorado. LHC has little land remaining for sale in these locations. Existing land inventory was not of the size, location or developed to the extent to permit sales that could comply with the new underwriting standards established by management for future consumers of second home or vacation properties. During the period, the Company purchased more than 2,000 acres in Mohave County, Arizona to replace the depleted land inventory in Nevada and Colorado (see Acquisitions) and installed the initial roads required for development and sales. Typically, the land is used by purchasers as sites for second homes or vacation homes. Residential lots generally range in size from one-quarter acre to five acres, while commercial and industrial lots have varied in size. Residential lots range in price from $17,000 to $39,000 per acre. Commercial and industrial lots range in price from $45,000 to $94,000. The Company has registered the land for sale in Arizona and is in the registration process in Nevada and California. Management projects sales will commence in the first quarter 2003. UNSOLD UNSOLD TOTAL INVENTORY INVENTORY LOCATION (LOTS) INVENTORY AS OF 6/28/02 AS OF 9/30/02 - -------------------- ------------- -------------- -------------- Pahrump Valley, NV 30,648 186 222 Huerfano County, CO 948 26 26 Park County, CO 4,173 121 94 The Company is required from time to time to cancel the sale of lots and parcels as a result of payment defaults or customer cancellations. Events that may cause a rise in unsold inventory include foreclosures, a release of a trust deed by the title company, outright purchase of additional land by the Company or cancelled sales. In such events, the Company places the returned inventory into its unsold category. LHC provides financing for land sales requiring a 20% down payment. The terms of loans offered to land purchasers are one, five, and ten years, similar to vacation interval credit policies. Interest rates are fixed based on the current financing grids for site products and vary between 13.5% and 15.5%. Credit approval or denial is determined according to standardized underwriting requirements. The owner's rescission period is limited to 180 days or such time as may be required by each state. The Company allows this period of time to enable purchasers to travel from where they live or made their purchase to the actual site of the land purchase to inspect the land they are buying. Management is improving the "quality" of the sale by instituting new underwriting criteria, eliminating exchanges. An effective collections program is being implemented and the Company is eliminating the use of non-recourse notes. Past practices are also being improved by allowing only solidified deals to be recorded or pledged to a lender. During the period, the Company acquired 2,019 lots of raw land of approximately one acre each in Northern Arizona. This acquisition was made through the issuance of 540,416 shares of the Company's common stock, priced at $2.47 and a cash payment of $200,000. The Company has reached an understanding with the owners of adjacent property, potentially providing a source of land inventory for future years. This property can be acquired on an as needed basis. Management initiated the steps required to register the land for sale with the appropriate regulatory agencies in preparation for sale. The Company has received approval to sell the property from the State of Arizona and is in the process of registering the property for sale in other states. Financial Services ------------------- Leisure Industries Corporation supports the sales of its land parcels and vacation intervals by providing financing services to purchasers through its subsidiary, Leisure Homes Corporation. Notes secured by deeds of trust and mortgages generally evidence this financing. These notes receivable are payable over a period up to twelve years and bear interest at rates ranging from 12.5 percent to 15.5 percent. 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 percent of the sales price for vacation ownership interests and 20 percent of the sales price for land parcels. 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 is recorded as expense in the period that revenue is recognized. When revenue related to land sales is recognized, the portion of the sales price attributable to uncompleted required improvements, if any, is deferred. Notes receivable with payment delinquencies of 90 days or more have been considered in determining the allowance for cancellations. Cancellations occur when the note receivable is determined to be uncollectible, and the related collateral, if any, has been recovered 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 gross 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 limited 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 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 stockholders' 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 that 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. 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. Costs to service notes receivable are recorded to expense as incurred. Interest earned 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. 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. Land sales as of September 30, 2002, exclude $9.2 million of sales not yet recognized under generally accepted accounting principles because the requisite payment amounts have not yet been received or the respective rescission periods have not yet expired. Of the $9.2 million unrecognized land sales, the Company estimates that it will ultimately recognize $7.8 million of revenues, which would be reduced by a related provision for cancellations of $1.2 million, estimated deferred selling costs of $2.2 million and cost of sales of $1.2 million, for an estimated net profit of $3.3 million. Resort Management and Operations - ----------------------------------- LRC conducts the day-to-day business of operating and maintaining 1,082 rooms in nine vacation interval resorts including the grounds and common areas. The Company commenced operations of LRC during the period; consolidated the resort management operations into this subsidiary; and commenced a change in the operations. During the period, a National Accounts Program was initiated to improve cost efficiencies and achieve economies of scale by centralizing the purchasing function. The use of certain products has been standardized across the system, and now every room has uniform soap products, coffee service, and small appliances. LRC is in the process of standardizing the uniforms of the resort personnel. The Company's new Leisure Care Program has been implemented system wide for achieving a higher standard in the maintenance of the rooms. Under this program each room will be inspected and repaired as necessary three times each year, instead of the former practice of performing maintenance once per year. In September a payroll forecasting and tracking system with an analysis of payroll by week, day or minutes by occupied room (POR) was implemented. A yield management team was created to drive transient traffic into the resorts for greater utilization of off-season or vacant rooms. An outline for the Leisure Resorts corporate structure for the resorts was prepared, key positions filled, and the Company instituted a food and beverage operation at Leisure Resorts Hilltop in Steamboat Springs, Colorado, and Leisure Resorts Orlando, Florida. These facilities are expected to become operational in the fourth quarter. The quality assurance program was established at the corporate level, and the Company decided to bring the security, housekeeping and grounds maintenance functions in-house, under the corporate umbrella. Two programmatic additions were evaluated for implementation in future quarters: a phone system with call accounting, and in-room movies and Internet. Both of these programs are guest conveniences as well as sources of future revenue. Management intends to implement these programs in the first quarter 2003. The Company fully implemented a customer service training program for 704 employees during the period. Leisure Industries also purchased the Cimarron Golf Club LLC from OB Sports LLC during the period. Two golf courses, a championship course and an executive course, were acquired in the purchase. Leisure Resorts Corporation is responsible for the operation of the golf courses and for integrating the operation of Cimarron Resort into Leisure Resorts Home Owner Association (HOA) Management Services ----------------------------------------------------- HOA Management Services, a division within Leisure Services Corporation, is responsible for the administration and execution of the Company's management agreements with the home owner's associations at the Company's various vacation interval ownership locations. In general, Leisure Resorts, through HOA Management Services provides all services and personnel required to administer the affairs of the associations it manages, according to established rules, regulations, bylaws, or Covenants, Conditions and Restrictions (CC&Rs). HOA Management Services prepares the annual budgets for each association and distributes them to all owners after board adoption. This division is also responsible for collecting assessment fees and enforcing payment of assessments to include periodic statements, delinquent notices, liens and foreclosures. The Company administers budgets of approximately $20 million per year and receives management fees of approximately $3.5 million annually. HOA Management Services maintains bank accounts for each association including an operational account, tax account and reserve account. HOA Management engages an independent auditor annually for the preparation of year end financial statements which are distributed to all owners. HOA Management Services also prepares the reserve analyses to ensure that proper funds are available for capital expenditures and replacements of furniture, fixtures and equipment. HOA Management Services also determines that insurance and/or bonds required for any purpose remain in force. A reservation system that efficiently meets the reservations rules or practices of the association is also a performance requirement. Leisure Industries currently has management agreements with the following Home Owner Associations: Brigantine Inn Resort Club Condominium Association Brigantine, NJ Brigantine Villas Condominium Association Brigantine, NJ Grand Flamingo Towers Owners Association Las Vegas, NV Grand Flamingo Villas Owners Association Las Vegas, NV Grand Flamingo Terraces Owners Association Las Vegas, NV Grand Flamingo Suites Owners Association Las Vegas, NV Grand Flamingo Fountains Owners Association Las Vegas, NV Grand Flamingo Winnick Owners Association Las Vegas, NV Grand Flamingo Terraces Four Owners Association Las Vegas, NV Grand Flamingo Plaza Owners Association Las Vegas, NV Reno Spa Resort Club Owners Association Reno, NV RVS-Orlando Owners Association Orlando, FL RVS-Orlando II Owners Association Orlando, FL Aloha Bay Condominium Association Indian Shores, FL Hilltop Resort Owners Association Steamboat Spgs, CO Suites at Steamboat Owners Association Steamboat Spgs, CO White Sands Waikiki Resort Club Owners Association Honolulu, HI The seventeen associations HOA Management Services currently administers represent 50,000 timeshare owners. Each management agreement has an initial term followed by automatically renewable terms with an annual review by the Board of Directors. All HOAs are non-profit associations with Articles of Incorporation filed in the states in which they are located. Each association is governed by a five-member Board of Directors or, in the case of RVS-Orlando II, Hilltop Resort and White Sands Waikiki Resort Club, a three-member board. In most instances, the Board of Directors has an owner majority. In all instances, Leisure Industries is represented on the Board. Board terms range from one to three years and there is a required meeting held for all owners annually with the primary action being the election of directors and the review of the year-end financial statements. HOME OWNER ASSOCIATION FACTS
ADMIN ANNUAL SUITES INTERVALS MGMT FEE FEE BUDGET MGMT FEE ADMIN FEE - ------ --------- -------- --------- -------- -------- --------- ---------- BRIGANTINE INN 91 4,641 15% No $1,444,290 $265,206 $ 0 BRIGANTINE VILLAS 17 867 15% No $ 409,998 $ 53,477 $ 0 GF TOWERS 93 4,743 10% Yes $1,058,683 $204,959 $ 95,000 GF VILLAS 94 4,794 10% Yes $1,050,636 $202,883 $ 95,000 GF TERRACES 50 2,550 10% Yes $1,255,866 $110,079 $ 54,475 GF SUITES 102 5,202 10% Yes $1,101,490 $171,626 $111,450 GF FOUNTAINS 48 2,448 10% Yes $ 749,311 $118,847 $ 48,960 GF WINNICK 12 612 10% Yes $ 289,491 $ 25,408 $ 12,243 GF TERRACES FOUR 68 3,468 10% Yes $1,622,944 $147,540 $ 69,360 GF PLAZA 22 1,122 10% Yes $ 669,583 $ 58,144 $ 22,440 RENO 95 4,845 10% Yes $1,832,453 $157,859 $ 96,900 ORLANDO I 120 6,120 15% No $2,455,554 $320,290 $ 0 ORLANDO II 42 2,142 15% No $1,011,931 $113,600 $ 0 INDIAN SHORES 32 1,632 15% No $ 705,963 $ 92,082 $ 0 STEAMBOAT SUITES 60 3,060 10% Yes $1,493,938 $135,813 $ 61,200 STEAMBOAT HILLTOP 56 2,856 10% Yes $1,429,187 $128,108 $ 62,832 HONOLULU 80 4,080 3% Yes $2,154,947 $ 60,477 $ 83,200 GRAND TOTAL 1,082 55,182 $20,736,265 $2,366,398 $813,060
NOTES: - - Effective January 1, 2003, pursuant to a majority membership vote of all Las Vegas associations, the eight Las Vegas HOAs will be combined into one association. This will result in the elimination of the administrative fee, an increase in the management fee from 10% to 15% and an increase in intervals of one per existing suite, or 489 in total. - - The management fee is calculated as an agreed percentage (10% or 15%) of all budgeted expenses, excluding the management fee itself and any deficit repayment. - - The administrative fee is payment by the home owner association to Leisure Industries Corporation for support services such as accounting, human resources, payroll, purchasing, collections, etc. By virtue of management expertise, shared technology or economy of scale, Leisure Industries Corporation, through its subsidiary, Leisure Resorts Corporation, offers the following to the home owner associations: o INTERNAL EXCHANGE PROGRAM. This allows owners at any resort to exchange to another Leisure resort, based on availability, at no additional cost. This creates a tremendous amount of value and options for the consumer. o CENTRALIZED PURCHASING. Leisure's central purchasing combines the purchasing power of all associations' contracts for services to benefit all HOAs. o CUSTOMER CARE. Through technology and the economy of combining the servicing needs of all associations, Leisure maintains ongoing customer services that include reservations, refinancing, collections, historical files and one-on-one contact. o ADMINISTRATIVE SUPPORT. Utilizing the entire resources available through Leisure Industries Corporation, the HOAs and each resort team has the day-to-day support of: Human Resources/Training, Payroll, Purchasing, Finance/Accounting, Deeds & Records, Resort Operations, Information Systems, Safety & Security, HOA Management, Advertising/Communications, and Legal Services. If an Association were to outsource each of these tasks, the burden would cause a substantial increase in annual assessments. o HOA MANAGEMENT. Proper and professional legal governance of each HOA. Leisure Resorts maintains informal Advisory Committees at each resort who correspond directly with the Board of Directors and meet on a quarterly basis. Along with the internal comment card program, employee and owner suggestion programs and a "best practices" approach, customer satisfaction levels at each Leisure Resort are over 90%. TRAVEL Travel services comprise an important segment of Leisure Industries' business strategy and activities. Travel, as positioned within the context of our overall operation, is a benefit of ownership of a Leisure vacation interval or a land parcel. It reduces marketing costs to the Company, provides additional lead generation, provides new owner benefits and creates an ongoing relationship with the buyer and potential buyers. Leisure's travel division executes travel services through management contracts with Cheapseats and Adventure Bound Tours. The Company is in the process of evaluating the purchase of these two entities. Adventure Bound Tours is an international airfare consolidator and Cheapseats is a domestic airfare consolidator. Air consolidators have contracted prices with the airlines and sell to the travel agency community for a set service fee or commission. They compete with purveyors of web-based fares. Consolidator agreements allow us to sell to other agencies and to provide our owner base with advantages. Through the travel division of the Company's subsidiary, Leisure Services Corporation, the Company begins the vacation interval sales process by conducting marketing programs to generate leads. The call center and telemarketing operations are used to generate interest in potential customers for visits to our resorts and attendance at a sales presentation. The Company is preparing to use travel incentives as the premium for attracting potential customers to our sales presentations. The travel division also generates interest in our "mini-vacations," in which our current owners may travel to other resorts for 3 days/2 nights, experience a different resort other than the one in which they currently own, and possibly purchase additional vacation intervals or upgrade their unit type to a more spacious unit. "Mini-vacations" are also offered to persons referred to the Company by our current owners as well as to persons who have previously toured our properties but haven't yet purchased. Our travel component then also has the opportunity to capture more of the sale by offering air travel and car rental services to the same customer. Once on property and having attended a sales presentation the Company is preparing to further incentivize the customer to buy by offering a free cruise, a free stay at one of our resorts or a two for one airline ticket. The encouragement to purchase travel, land or a vacation interval is further supported in this division by our central reservation services, a subset of our overarching Customer Care function. Central Reservations makes guest reservations, executes the trading of interval weeks for stays at other resorts in our system by current owners, facilitates trading to other timeshare resorts not owned by Leisure Industries, and assists by storing an owner's unused interval weeks for future use. Central Reservation also accepts the reservations of "transient guests" (people who stay at our resorts, but who are not owners) and tour wholesalers. Broader customer services issues arising throughout the Company are also handled through Customer Care. The Company brought our Leisure Vacation Store web site, www.leisurevacationstore.com, live during the period. Leisure Vacation Store is the Internet aspect of our travel service offerings. Customers can buy domestic airfares, international air travel, rental cars, and hotel accommodations over the web. Leisure Vacation Store offers three levels of participation. Discounted travel services may be purchased by any person visiting the web site. Deeper discounts are available to people who have attended an interval sales presentation but have not yet purchased. The deepest discounts of all are offered to our current owners. Leisure Vacation Store will also have a retail representation. During the period a lease was signed for a store within a mall in Las Vegas, through which the Company will offer full service travel agency products and services, concierge services and a preview of our vacation interval offerings. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2002, COMPARED TO THREE MONTHS ENDED AUGUST 31, 2001 Total revenues for the Company decreased 42.2 percent or $11.4 million to $15.6 million during the three months ended September 30, 2002 from $27.0 million during the three months ended August 31, 2001. The net decrease was primarily due to management decisions and changes implemented. Management began implementing decisions in the prior periods that continued in the current period that directly had an effect of reducing revenues. These decisions included but were not limited to (1) eliminating certain inventory from the sales process; (2) changing certain sales practices; (3) eliminating certain types of marketing programs; (4) introducing new sales commission programs; (5) establishing new underwriting criteria for consumer financing; and (6) re-organizing the sales, marketing and finance (consumer) departments. In addition to the internal changes made by management, the Company received a negative effect on revenues from a lingering reduction in consumer travel and the down turn in the overall economic climate in the market areas of Houston, Orlando and New Jersey. Gross sales of vacation ownership interests decreased to $5.8 million during the three months ended September 30, 2002, from $15.0 million during the three months ended August 31, 2001, a decrease of 61.7 percent. Gross sales of land decreased to $4.3 million during the three months ended September 30, 2002 from $5.8 million during the three months ended August 31, 2001, a decrease of 26.3 percent. The provision for cancellations represented 15.2 percent and 13.1 percent, respectively, of gross sales of land for the three months ended September 30, 2002, and August 31, 2001. The reasons for these reductions of revenues are reflected in the reasons stated for the overall decline in revenues for the nine month period. The provision for cancellations decreased to 15.0 percent of gross sales of vacation ownership interest for the three months ended September 30, 2002 from 16.4 percent for the three months ended August 31, 2001. Management periodically reviews its allowance for bad debts and makes appropriate adjustments to its provision expense to adjust for changes in its portfolio. Revenues related to the Management Fees charged by the Company for the Management and Operation of the Resorts increased during the three months ended September 30, 2002 to $785,000, up 6.4 percent from $738,000 three months ended August 31, 2001. The management fee is based on a certain percent of the Resort's operating budget, and this increase is the result of increases in those budgets. There was a decrease of $1.0 million in interest income to $4.1 million for the three months ended September 30, 2002 from $5.1 million for the three months ended August 31, 2001. This decrease was the result of a decrease in financial income, which is included in interest income and represents cash received on the interest spread related to the sold portfolio. During the three months ended August 31, 2001, there were interest rate drops of 50 basis points that resulted in valuation differences in the Retained Interest of Receivables Sold, which in turn resulted in additional financial income. For the three months ended September 30, 2002, there were no interest rate drops. Interest income related to the Company's owned portfolio remained at $4.2 million during the three months ended September 30, 2002, and for the three months ended August 31, 2001. Management began a reorganization of the consumer finance division of LHC during the prior periods. At the close of the period LHC held $125.3 million of consumer receivables and had issued $98.6 million of notes payable or had effected a 78.7 percent advance rate against its receivables. Management has established a reserve of $11.5 million (9.2 percent) for potential losses in this portfolio. Management has established an objective of selling its previously recorded portfolio of land and vacation ownership receivables. Subsequent to the period, management entered into an agreement to sell $29 million of its portfolio consisting of land receivables from its lenders FINOVA and Textron to Textron Financial Corporation. (See Subsequent Events, Note 13) Management intends to effect similar transactions during the coming quarters; however, there is no assurance that any such future sale may be concluded due to the quality of the remaining portfolio, current market conditions and investment opportunities for competing products. It should be noted that almost all of the revenues for this period were generated by the Company's wholly owned subsidiary, Leisure Homes Corporation (LHC). During the period management launched the new operations of Leisure Services Corporation (LSC) that recorded minimal revenues, as did Leisure Resorts Corporation (LRC). Total operating costs and expenses for the Company decreased to $24.0 million for the three months ended September 30, 2002 from $25.8 million for the three months ended August 31, 2001, a decrease of $1.9 million or 7.2 percent. The net decrease resulted primarily from a decrease in LHC's direct costs of vacation ownership interest sales to $1.2 million from $2.2 million, a decrease of 46.3 percent, and a decrease to $9.6 million from $13.0 million in marketing and sales expenses, a decrease of 26.2 percent. During the period the Company continued to incur costs from previous periods related to the launching of the travel and service subsidiary, LSC; due diligence and acquisition costs related to the acquisition of Cimarron Golf Resort, Cimarron Golf Club, Atlantic Development Corporation (Arizona land) and FareQuest; financing fees related to the debt, equity and financial restructuring; and consultants and temporary employees involved in the deployment of the Company's new financial and technology systems. A pretax loss of $8.4 million was recorded during the three months ended September 30, 2002 compared to pretax income of $1.5 million earned during the three months ended August 31, 2001. This loss is attributable to corporate actions related to its restructuring, new acquisitions, the re-branding of the properties, the development of new systems and infrastructure to support the growth of the Company and the launching of new initiatives related to the integrated travel and leisure services, in addition to the other reasons included in this document. Income tax expense of $565,000 was recorded for the three month period ended September 30, 2002, compared to an income tax benefit of $411,000 recorded for the three month period ended August 31, 2001. The income tax calculation for the period ended August 31, 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. The net loss applicable to common stock amounted to $8.9 million during the three month period ended September 30, 2002, compared to net income applicable to common stock of $1.9 million during the three month period ended August 31, 2001, primarily due to the foregoing. NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED AUGUST 31, 2001 The Company had several significant changes during the first nine months of the fiscal year. Assets ------ The Company's note receivables net of allowance for bad debt from consumers increased from $109.3 million to $113.7 million or an increase of 4.4 million or 4%, between December 31, 2001, to September 30, 2002. This increase is the result of sales made during the period offset by principal payments and cancellations. Vacation ownerships held for resale increased from $17.9 million on December 31,2001 to $22.5 million at September 30, 2002. Land inventory increased from $2.8 million to $6.3 million during the same period. This increase reflects Management's objective of acquiring new inventory as well as the acquisition of inventory through a new foreclosure policy. Property and Equipment increased from $9.7 million to $21.7 million during the nine month period. This increase reflects the acquisition of the Cimarron Golf Club near Palm Springs, CA and the development of its new technological infrastructure. The Company reduced deferred selling costs from $5.4 million to $2.5 million between December 31, 2001 and September 30, 2002. The reduction in deferred selling costs is directly related to a reduction of sales in LHC, the vacation ownership and land sales subsidiary, as well as the new sales commission structure, new selling procedures and the implementation of new consumer finance underwriting criteria. This really does not affect deferred selling cost but is directly related to unrecognized sales. Liabilities ----------- The Company reduced its consumer note payable from $106.6 million to $98.5 million. This reduction is due to the Company repayment of debt, the elimination of delinquent consumer notes that were not replaced with new consumer payable and the foreclosure policies implemented by the Company. Notes payable for inventory, equipment and working capital increased during the period from $21.9 million to $35.6 million. The increase was directly related to acquisitions and the lack of liquidity the Company experienced during this period. Accounts payable increased from $1.9 to $7.1 million during the nine months. The increase in accounts payable was the result of new operations that were launched during this period; the use of consultants and an increase in professional fees related to acquisitions and the restructuring; the failure of certain systems during this reporting period that prevented the Company from recording and as a result paying certain payables that normally would have been paid in the period; and the lack of liquidity the Company experienced during the restructuring. The Company increased its borrowing through the issuance of convertible debentures from $3 million to $5.5 million and its short term borrowings by $7.2 million during the nine month period. All of the increases were the result of a lack of liquidity as outlined herein. While the Company does not have any assurance that the holders of the convertible debentures will convert their debenture into equity and the conversion prices are in excess of the current market price of the Company's common stock, Management projects these debentures will be convertible pursuant to the terms of their agreements. (See Liquidity.) The Company increased its paid in capital from $13.0 million to $25.0 million during the nine month period. The increase in paid in capital reflects the sale of stock to offset losses and to finance growth. Management intends to continue to utilize the capital markets, when available, to finance its operations. Revenues -------- Total revenues for the Company decreased 28.4 percent, or $22.6 million, to $56.9 million during the nine months ended September 30, 2002 from $79.4 million during the nine months ended August 31, 2001. The decrease was primarily due to decrease in vacation ownership and land sales from $62.0 million during the nine months ended August 31, 2001 to $40.6 million during the nine months ended September 30, 2002. Specifically, vacation ownership sales decreased by $21.1 million (47.5 percent) and land sales decreased by $.3 million (1.7 percent), and interest income decreased to $12.6 million during the nine months ended September 30, 2002, from $14.3 million during the nine months ended August 31, 2001. The net decrease was primarily due to management decisions that began with the adoption of a new business plan, the restructuring of the overall operations, changes implemented in its primary subsidiary LHC and the start up operation of LSC and LRC. Management began implementing decisions in the prior periods that continued in the current period that had a direct effect of reducing revenues. These decisions included but were not limited to (1) eliminating certain inventory from the sales process; (2) changing certain sales practices; (3) eliminating certain types of marketing programs; (4) introducing new sales commission programs; (5) establishing new underwriting criteria for consumer financing; and (6) re-organizing the sales, marketing and finance (consumer) departments. In addition to the internal changes made by management, the Company received a negative effect on revenues from a lingering reduction in consumer travel and the downturn in the overall economic climate in the market areas of Houston, Orlando and New Jersey. Gross sales of vacation ownership interests decreased to $23.3 million during the nine months ended September 30, 2002 from $44.5 million during the nine months ended August 31, 2001, a decrease of $21.2 million, or 47.5 percent. The provision for cancellations remained at approximately 14.5 percent of gross sales of vacation ownership interests for the nine months ended September 30, 2002 and for the nine months ended August 31, 2001. At September 30, 2002, the allowance for bad debts was $11.5 million, or 9.2 percent of the portfolio balance, down from $14.6 million, or 11.7 percent of the portfolio balance at December 31, 2001. Gross sales of land decreased to $17.3 million during the nine months ended September 30, 2002 from $17.6 million during the nine months ended August 31, 2001, a decrease of $306,000, or 1.7 percent. The provision for cancellations increased to 12.4 percent of gross land sales for the nine months ended September 30, 2002 from 9.4 percent for the nine months ended August 31, 2001. Management continues to review its allowance for bad debts and periodically makes adjustments to its provision expense. During the nine months ended September 30, 2002, management increased its provision expense to account for inadequacies in the portfolio primarily due to the economic slowdown since August 2001. Management anticipates an improvement in its portfolio performance as a result of the sale of a portion of its land portfolio. (See Subsequent Events.) Interest income decreased to $12.6 million for the nine months ended September 30, 2002 from $14.2 million for the nine months ended August 31, 2001, a decrease of $1.7 million, or 11.7 percent, primarily due to a decrease in financial income, a component of interest income. An increase in the outstanding obligation to replace delinquencies has caused a reduction of the amount of financial income the Company would record from the sold portfolio. This decrease was partially offset by an increase in the spread on those sold portfolios with variable, pass-through interest rates. (See Liquidity.) During the nine months ended September 30, 2002, and the nine months ended August 31, 2001, other income increased $22,000, or 2.4 percent to $950,000 from $928,000, respectively. Other income is comprised of forfeiture income, late charges on its portfolio and other miscellaneous income earned by the Company. Expenses -------- Total operating costs and expenses for the Company decreased to $69.0 million for the nine months ended September 30, 2002 from $78.9 million for the nine months ended August 31, 2001, a decrease of $10.0 million or 12.6 percent. The decrease resulted primarily from a decrease in direct costs of vacation ownership and land sales to $6.4 million from $10.3 million, a decrease of $3.9 million or 37.9 percent; a decrease in marketing and sales expenses to $28.0 million from $37.3 million, a decrease of $9.3 million or 24.9 percent; and an increase in General and Administrative expenses to $14.2 million from $10.6 million, an increase of $3.6 million or 34.0 percent. The increase is General and Administrative expenses is due primarily to the following (1) the use of consultants and temporary employees to perform reorganization and new program implementations; (2) costs related to raising capital and short term financing: (3) the start up of two new subsidiaries; (4) the change of the corporate brand; (5) the development and implementation of a new technological infrastructure; and (6) costs related to due diligence of potential opportunities and cost related to completed acquisitions. The decrease in direct costs of vacation ownership and land sales is attributable to a decrease in net vacation ownership and land sales during the nine months ended September 30, 2002 compared to the nine month period ended August 31, 2001. As a percentage of gross sales of vacation ownership interests and land, marketing and sales expenses, reflected in the operations of LHC, decreased to 45.0 percent for the nine months ended September 30, 2002 from 60.1 percent for the nine months ended August 31, 2001. The overall increase in sales and marketing expense on a corporate basis increased to 68.4 percent of total revenues due primarily to the changes related to corporate branding; the launching of LSC and the initiation of several new programs; and the recruitment and training of new marketing personnel. Additionally, the marketing and sales divisions of the company include many fixed components, including salaries, wages and benefits, lease costs, guest promotional and advertising costs and other costs that are not directly incremental based on additional sales being made. Profit (Loss) -------------- Pre-tax loss of $14.2 million was earned during the nine months ended September 30, 2002 compared to pre-tax income of $700,000 during the nine months ended August 31, 2001. It should be noted that all of the losses for the nine month period were attributed to factors and changes that were related to changes in management, direction and to position the Company for future growth. An income tax benefit of $159,000 was recorded for the nine months ended September 30, 2002 compared to an income tax benefit of $519,000 recorded during the nine months ended August 31, 2001. The income tax calculation for the period ended August 31, 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, and the liability is adjusted, based on an ongoing review of related facts and circumstances. Net loss applicable to common stock was $14.0 million during the nine months ended September 30, 2002 compared to net income applicable to common stock of $1.2 million during the nine months ended August 31, 2001, primarily due to the foregoing. LIQUIDITY AND CAPITAL RESOURCES The following discussion relates to our financial position at September 30, 2002, and the results of our operations for the period then ended. In January 2002, the Company's new management adopted a business plan of reorganization and restructuring contemplating, among other things, the substantial expansion of our vacation resort business, and the initiation and acquisition of businesses that expand the core business into a travel and leisure entity. (See "Business - Recent Events" in Form 10-KT for the transition period from September 1, 2001, to December 31, 2001, 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 acquisitions and business expansion. 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 current operations and future financial results. At September 30, 2002, LHC 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 $150.0 million. Such lines of credit are secured by vacation ownership, land receivables and mortgages. At September 30, 2002, an aggregate of $98.6 million was outstanding under such lines of credit and $51.4 million was available for borrowing (subject to the availability of qualified collateral). Under the terms of these lines of credit, LHC may borrow 65 percent to 90 percent of the balances of the pledged vacation ownership and land receivables. 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 September 30, 2002, LHC's tangible net worth was $28.7 million. Summarized lines of credit information and accompanying notes relating to these lines of credit outstanding at September 30, 2002, consist of the following:
BALANCES AT SEPT 30, 2002 -------------------------- OUSTANDING MAXIMUM REVOLVING MATURITY LENDER BORROWINGS BORROWINGS EXPIRATION DATE (A) DATE (A) INTEREST RATE - ------- ----------- ----------- -------------------- --------- ------------- FINOVA $49,786 $ 0 December 31, 2002 Various Prime + 2.0% (Floor) 12.00% General Electric (GECC) 20,928 30,000 April 30, 2003 Various Libor + 4.0 - 4.25% 5.79% Textron 20,200 $ 35,000 December 1, 2002 Various Prime + 2.0 - 3.0% 6.25% Capital Source 7,512 15,000 August 8, 2004 August 8, 2004 Prime + 2.5% 7.25% HSBC 138 5,000 February 4, 2002 Prime + 1.0% 5.25% ------- -------- --------------------- $98,564 $ 85,000 ======= ========
(a) As it has typically done in the past, management expects to extend the Revolving Expiration Date and Maturity Date on similar terms. When the Revolving Expiration Date expires as shown, the loans convert to term loans with maturities as stated or extended. LHC is required to comply with certain financial and non-financial covenants under lines 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, maintain marketing and sales and general and administrative expenses, as defined, relative to net processed sales for each rolling 12-month period below a certain percentage and maintain certain interest coverage ratios for each rolling 12-month period. The maximum percentage related to costs and expenses referred to above has been exceeded in the last eight 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 six quarters. As a result, the lender has the right 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 advances to the Company. The Company has agreed with the lender that it will, as part of its financial restructuring, (1) not request additional advances pursuant to the terms of the line of credit; (2) effect a payment of the complete line on the earlier of the completion of the Company's financial restructuring or December 31, 2002; and (3) maintain an agreement to loan-to-value ratio with the existing line. While the Company believes that the financial restructuring initiated by management will result in repayment or satisfactory restructuring of this indebtedness, there can be no assurance such financial restructuring will be completed to the satisfaction of the lender. These covenants have been, from time to time, exceeded in the past with the various lenders forbearing from exercising any of these remedies. Management expects, but cannot assure, this practice to continue. Scheduled maturities of the Company's notes and contracts payable are as follows: YEARS ENDING DECEMBER 31, (thousands of dollars) - ---------------------------- 2002 $ 8,619 2003 6,089 2004 14,058 2005 15,757 2006 28,995 Thereafter 58,012 ---------- $ 131,530 ---------- Management believes that its borrowings related to FINOVA will be paid prior to December 31, 2002. The components of the Company's debt, including lines of credit consist of the following:
(thousands of dollars) September 30, December 31, 2002 2001 ---- ---- Notes collateralized by receivables $ 98,165 $106,599 Notes related to inventory, working capital and personal property financing 48,232 24,931 ------- -------- Total $146,397 $131,530 ======= ========
A schedule of the cash shortfall arising from recognized and unrecognized sales for the periods indicated is set forth below:
Nine Months Ended ---------------------------- (thousands of dollars) September 30, August 31, 2002 2001 ---- ---- Marketing and selling expenses attributable to recognized and unrecognized sales $26,144 $ 37,545 Less: Down payments (7,032) (10,665) -------- --------- Cash shortfall $19,112 $ 26,880 ======== =========
The Company sells notes receivable subject to recourse provisions as contained in each agreement. At September 30, 2002, 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 $35.0 million of sold notes receivable and cash payments for repurchases relating to $2.7 million of sold notes receivable at September 30, 2002. The discounted amounts of the recourse obligations on such notes receivable were $2.5 million and $3.6 million at September 30, 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. 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 nine months ended September 30, 2002, consisted of the following:
(thousands of dollars) Balance at December 31, 2001 $14,557 Provision for cancellations 4,440 Amounts charged to allowance for cancellations, net (7,516) -------- 11,481 Reserve for notes sold with recourse - -------- Allowance for cancellations $11,481 ========
September 30, 2002, Compared to December 31, 2001 Cash and cash equivalents increased to $8.1 million at September 30, 2002, from $8.0 million at December 31, 2001. Notes receivable, net, increased 3.9 percent to $113.6 million at June 30, 2002, from $109.3 million at December 31, 2001. Land and improvements inventory and vacation ownership interest held for sale increased to $28.0 million at September 30, 2002, from $20.6 million at December 31, 2001.
(thousands of dollars) September 30, December 31, 2002 2001 ----------- ------------ $17,929 $13,771 Vacation ownership interests 4,541 4,094 ----------- ----------- Vacation ownership interest in development $22,470 $17,865 ========== =========== Total
Notes and contracts payable increased 2.3 percent to $134.5 million at September 30, 2002 from $131.5 million at December 31, 2001. Stockholders' equity decreased 14 percent to $15.9 million at September 30, 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 September 30, 2002, in the information about the Company's "Quantitative and Qualitative Disclosures About Market Risk" as disclosed in its Transition Report on Form 10-KT for the transition period from September 1, 2001, to December 31, 2001. ITEM 4. CONTROLS AND PROCEDURES In November 2002, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Accounting Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 and 15d-14(c) Based upon that evaluation, the Chief Executive Officer and the Chief Accounting Officer concluded that our disclosure controls and procedures are effective to assure that the Company records, processes, summarizes and reports in a timely manner the material information that must be included in the Company's reports that are filed with or submitted to the Securities and Exchange Commission. In addition, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Reference is made to the description of legal proceedings in the Contingencies footnote in the financial statements set forth in Part I "Financial Information." In the ordinary course of its business, the Company from time to time becomes subject to claims or proceedings relating to the purchase, subdivision, sale and/or financing of real estate. Additionally, from time to time, the Company becomes involved in disputes with existing and former employees. The Company believes that substantially all of the claims and proceedings are incidental to its business. In addition to its other ordinary course litigation, on February 9, 2000, an action was filed in Nevada District Court, County of Clark, No. A 414827, by Robert and Jacqueline Henry, husband and wife, and Kenneth and Janet Shosted, individually and on behalf of all others similarly situated and certain other defendants. The plaintiffs' complaint asked for class action relief claiming that LHC and certain other defendants were guilty of collecting certain betterment fees and not providing associated sewer and water lines. The complaint 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 purchasers of land in the subdivisions commonly known as Calvada Valley North and Calvada Meadows located in Nye County, Nevada. On September 5, 2001, 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 to the certified class is for the construction of water and sewer facilities. In July of 2002, the defendants filed a motion for Summary Judgment on which the court has not yet ruled. The case is scheduled for a jury trial on February 19, 2003. The Company does not believe that any likely outcome of this case will have a materially adverse effect on the Company's financial condition or results of operations. At various times in the general course of business, the Company and LHC 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. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.255 - Lease between American Spectrum Realty Management, Inc., as Landlord, and Mego Financial Corp. as Tenant in 7700 Irvine Center Drive, Irvine California, dated July 2002. 10.256 - Lease between Fashion Show Expansion LLC, as Landlord, and Leisure Homes Corporation as Tenant in 3200 Las Vegas Boulevard, South, Las Vegas Nevada, dated October 2002. 10.257 - Asset and Warrant Agreement (FareQuest) between Eastern Air Lines, Inc. and Mego Financial Corp. dated August 2002. 10.258 - Atlantic Development Stock Purchase Agreement between Mego Financial Corp., and Susan R. Mardian, Lori A. Mardian and Atlantic Development Corporation, dated April, 2002. 10.259 - Purchase Agreement (Cimarron Golf) between OB Sports, LLC and Mego Financial Corp., dated April 2002. 10.260 - Promissory Note between OB Sports and Mego Financial Corp. dated August, 2002. 10.261 - Purchase Agreement among Raintree Resorts International, Inc., Raintree North America Resorts, Inc., and Mego Financial Corp., dated September 2002. 10.262 - Amendment No. 4 to Loan and Security Agreement between Textron Financial Corporation, Royale Mirage Partners, L.P., Raintree North America Resorts, Inc., Raintree Resorts International, Inc., and Mego Financial Corp., dated September 2002. (b) Reports on Form 8-K None. 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/ Floyd W. Kephart ----------------------- Floyd W. Kephart Chairman and CEO By: /s/ Chris D. Whetman ----------------------- Chris D. Whetman Chief Accounting Officer Date: November 19, 2002 CERTIFICATIONS I, Floyd W. Kephart, Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Mego Financial Corp. ("Mego"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of Mego Financial Corp. as of, and for, the periods presented in this quarterly report; 4. Mego's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Mego and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to Mego, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of Mego's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. Mego's other certifying officers and I have disclosed, based on our most recent evaluation, to Mego's auditors and the audit committee of it's board of directors: a) All significant deficiencies in the design or operation of internal controls which could adversely affect Mego's ability to record, process, summarize and report financial data and have identified for Mego's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in Mego's internal controls; and 6. Mego's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 19, 2002 /s/ Floyd W. Kephart --------------------------- Floyd W. Kephart Chief Executive Officer CERTIFICATIONS I, Chris D. Whetman, Chief Accounting Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Mego Financial Corp. ("Mego"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of Mego as of, and for, the periods presented in this quarterly report; 4. Mego's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Mego and we have: d) Designed such disclosure controls and procedures to ensure that material information relating to Mego, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; e) Evaluated the effectiveness of Mego's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and f) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. Mego's other certifying officers and I have disclosed, based on our most recent evaluation, to Mego's auditors and the audit committee of it's board of directors: c) All significant deficiencies in the design or operation of internal controls which could adversely affect Mego's ability to record, process, summarize and report financial data and have identified for Mego's auditors any material weaknesses in internal controls; and d) Any fraud, whether or not material, that involves management or other employees who have a significant role in Mego's internal controls; and 6. Mego's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 19, 2002 /s/ Chris D. Whetman --------------------------- Robert J. Kearns Chief Accounting Office CERTIFICATION OF CHIEF EXECUTIVE OFFICER Pursuant to Section 906 of the Sarbanes-Oxley Act 2002 (18 U.S.C. 1350), the undersigned, Floyd W. Kephart, Chief Executive Officer of Mego Financial Corp.("the Company") has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (the "Report"). The undersigned certifies that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. IN WITNESS WHEREOF, the undersigned has executed this certification as of the 19th day of November 2002. /s/ Floyd W. Kephart ________________________ Name: Floyd W. Kephart Title: Chief Executive Officer CERTIFICATION OF CHIEF ACCOUNTING OFFICER Pursuant to Section 906 of the Sarbanes-Oxley Act 2002 (18 U.S.C. 1350), the undersigned, Chris D. Whetman, Chief Accounting Officer of Mego Financial Corp. ("the Company") has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (the "Report"). The undersigned certifies that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. IN WITNESS WHEREOF, the undersigned has executed this certification as of the 19th day of November 2002. /s/ Chris D. Whetman ______________________ Name: Chris D. Whetman Title: Chief Accounting Officer EX-10.255 3 doc2.txt Exhibit 10.255 OFFICE LEASE ------------ This Office Lease, which includes the preceding Summary of Basic Lease Information (the "Summary") attached hereto as pages (ii) through (iv) and incorporated herein by this reference (the Office Lease and Summary to be known sometimes collectively hereafter as the "Lease"), dated as of the date set forth in Section 1 of the Summary, is made by and between "Landlord" and "Tenant" as ---------- those terms are defined in Sections 2 and 4 of the Summary, respectively. ------------------ ARTICLE 1 REAL PROPERTY, BUILDING AND PREMISES ------------------------------------- 1.1 Real Property, Building and Premises. Upon and subject to the terms set ------------------------------------ forth in this Lease, Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the premises set forth in Section 6.2 of the Summary (the ----------- "Premises"), which Premises are located in the building (the "Building") set forth in Section 6.1 of the Summary, reserving, however, to Landlord: (i) the ----------- sole and exclusive right to consent to the use or occupancy of the Premises by any person other than Tenant, whether by sublease, assignment or otherwise, and all right, title and interest in the economic value of the leasehold estate in the Premises for the Lease Term, all as more fully set forth in Article 14 of ---------- this Lease, (ii) all of the Building, except for the space within the inside surfaces bounding the Premises, and except as provided below in this Article 1, --------- and (iii) the rights, interests and estates reserved to Landlord by provisions of this Lease or operation of law. The outline of the Premises is set forth in Exhibit A attached hereto. The rentable square footage of the Premises is set - ---------- forth in Section 6 of the Summary. The Building, the parking area servicing the --------- Building, the land upon which the Building stands, and the land, improvements and other buildings surrounding the Building which are designated from time to time by Landlord as appurtenant to or servicing the Building, are herein sometimes collectively referred to herein as the "Real Property." Tenant acknowledges that Landlord has made no representation or warranty regarding the condition of the Real Property except as specifically set forth in this Lease. Tenant is hereby granted the right to the nonexclusive use of the common corridors and hallways, stairwells, elevators, restrooms and other public or common areas located on the Real Property; provided, however, that the manner in which such public and common areas are maintained and operated shall be at the sole discretion of Landlord and the use thereof shall be subject to the rules, regulations and restrictions attached hereto as Exhibit B (the "Rules and ---------- Regulations"). Landlord reserves the right to make alterations or additions to or to change the location of elements of the Real Property and the common areas thereof. 1.2 Condition of Premises. Except as expressly set forth in this Lease and ---------------------- in the Tenant Work Letter attached hereto as Exhibit D, Landlord shall not be --------- obligated to provide or pay for any improvements, work or services related to the improvement, remodeling or refurbishment of the Premises, and Tenant shall accept the Premises in its "AS IS" condition on the Lease Commencement Date. Notwithstanding the foregoing, Landlord agrees to use its commercially reasonable efforts to construct, at its sole cost and expense, both a men's and women's restroom on the first (1st) floor of the Building within thirty (30) days following the Lease Commencement Date, subject to Force Majeure Delays (defined in Section 27.13 below) and any delays caused by Tenant. 1.3 Verification of Rentable Square Feet of Premises and Building. For ------------------------------------------------------------------ purposes of this Lease, "rentable square feet" shall be calculated pursuant to Standard Method for Measuring Floor Area in Office Buildings, ANSI Z65.1 - 1996 ("BOMA"), provided that the rentable square footage of the Building shall, in any event, include all of, and the rentable square footage of the Premises therefore shall include a portion of, the square footage of the ground floor common areas located within the Building and the common area and occupied space of the portions of the Building or Real Property, dedicated to the service of the Building. The rentable square feet of the Premises and the Building are subject to verification from time to time by Landlord's planner/designer and such verification shall be made in accordance with the provisions of this Article 1. Tenant's architect may consult with Landlord's planner/designer ---- regarding such verification, except to the extent it relates to the rentable square footage of the Building; however, the determination of Landlord's planner/designer shall be conclusive and binding upon the parties. If Landlord's planner/designer determines that the amounts thereof shall be different from those set forth in this Lease, all amounts, percentages and figures appearing or referred to in this Lease based upon such incorrect amount (including, without limitation, the amount of the "Rent" and any "Security Deposit," as those terms are defined in Article 4 and Article 21 of this Lease, --------- ---------- respectively) shall be modified in accordance with such determination. If such determination is made, it will be confirmed in writing by Landlord to Tenant. ARTICLE 2 LEASE TERM ----------- 2.1 Initial Term. The terms and provisions of this Lease shall be effective ------------ as of the date of this Lease. The term of this Lease (the "Lease Term") shall be as set forth in Section 7.1 of the Summary and shall commence on the ----------- date (the "Lease Commencement Date") set forth in Section 8(a) of the Work ------------ Letter Agreement attached hereto as Exhibit "D", and shall terminate on the date ----------- (the "Lease Expiration Date") set forth in Section 7.3 of the Summary, unless ----------- this Lease is sooner terminated as hereinafter provided. For purposes of this Lease, the term "Lease Year" shall mean each consecutive twelve (12) month period during the Lease Term; provided, however, that the first Lease Year shall commence on the Lease Commencement Date and end on the last day of the eleventh month thereafter and the second and each succeeding Lease Year shall commence on the first day of the next calendar month; and further provided that the last Lease Year shall end on the Lease Expiration Date. At any time during the Lease Term, Landlord may deliver to Tenant a notice in the form as set forth in Exhibit C, attached hereto, which Tenant shall execute and return to Landlord ---- within five (5) days of receipt thereof. 2.2 Delivery of Possession. Landlord agrees to deliver possession of the ------------------------ Premises to Tenant when the Tenant Improvements have been substantially completed in accordance with Exhibit D to this Lease. The parties estimate that --------- Landlord will deliver possession of the Premises to Tenant and the Lease Term will commence on or before the anticipated Lease Commencement Date set forth in Section 7.2 of the Summary. Landlord agrees to use its commercially ------------ reasonable efforts to cause the Premises to be substantially completed on or before such anticipated Lease Commencement Date. Tenant agrees that if Landlord is unable to deliver possession of the Premises to Tenant on or prior to such anticipated Lease Commencement Date, the Lease will not be void or voidable, nor will Landlord be liable to Tenant for any loss or damage resulting therefrom, but if such late delivery is due to Landlord's negligence or willful misconduct, or due to any Force Majeure delays, then, as Tenant's sole remedy, the Lease Commencement Date will be extended one (1) day for each day Landlord is delayed in delivering possession of the Premises to Tenant. 2.3 Early Access Rights. Subject to Article 10 herein, and provided this --------------------- ---------- Lease has been fully executed and delivered between Landlord and Tenant, Tenant and Tenant's contractors may have rent-free access to the Premises up to fourteen (14) days prior to the anticipated Lease Commencement Date set forth in Section 7.2 of the Summary, for the sole purpose of installing Tenant's - ------------ furniture, computer cabling, telephone equipment, and other fixtures in the - -------- Premises; provided, however, such early access is granted under the condition that such access is coordinated with Landlord's representatives and that such Tenant's work causes no delays or inconvenience for Landlord's contractors. Any such delays or inconvenience shall be deemed a Tenant delay, as set forth in Section 5 of Exhibit D herein. ---------- ARTICLE 3 BASE RENT ---------- Tenant shall pay, without notice or demand, to Landlord at the management office of the Building, or at such other place as Landlord may from time to time designate in writing, in the form of a check (which is drawn upon a bank which is located in the State of California), base rent ("Base Rent") as set forth in Section 8 of the Summary, payable in equal monthly installments as set forth in - ---------- Section 8 of the Summary in advance on or before the first day of each and every - --------- calendar month during the Lease Term, without any setoff or deduction whatsoever. The Base Rent for the first (1st) full calendar month of the Lease Term, shall be paid at the time of Tenant's execution of this Lease. If any "Rent" (as that term is defined in Section 4.1, below) payment date (including ----------- the Lease Commencement Date) falls on a day of a calendar month other than the first day of such calendar month or if any Rent payment is for a period which is shorter than one calendar month such as during the last month of the Lease Term, the Rent for any fractional calendar month shall accrue on a daily basis for the period from the date such payment is due to the end of such calendar month or to the end of the Lease Term at a rate per day which is equal to 1/365 of the Rent. All other payments or adjustments required to be made under the terms of this Lease that require proration on a time basis shall be prorated on the same basis. ARTICLE 4 ADDITIONAL RENT ------------------- 4.1 Additional Rent. In addition to paying the Base Rent specified in ---------------- Article 3 of this Lease, Tenant shall pay as additional rent "Tenant's Share" of ---- the amount by which annual "Operating Expenses," "Insurance Expenses", "Tax Expenses" and "Utilities Expenses" (as those terms are defined in Sections -------- 4.2.2, 4.2.4, 4.2.5, 4.2.6 and 4.2.7 of this Lease, respectively), exceed the ---------------------------------- amount of "Operating Expenses," "Insurance Expenses", "Tax Expenses" and "Utilities Expenses", respectively, for the "Base Year," as that term is defined in Section 4.2.1 of this Lease; provided, however, Tenant shall not be -------------- responsible for any such excess during the first twelve (12) months of the Lease ------ Term. Such additional rent, together with any and all other amounts payable by Tenant to Landlord, as additional rent or otherwise, pursuant to the terms of this Lease, shall be hereinafter collectively referred to as the "Additional Rent." The Base Rent and Additional Rent are herein collectively referred to as the "Rent." All amounts due under this Article 4 as Additional Rent shall be --------- payable in the same manner, time and place as the Base Rent. Without limitation on other obligations of Tenant which shall survive the expiration of the Lease Term, the obligations of Tenant to pay the Additional Rent provided for in this Article 4 shall survive the expiration of the Lease Term. - ---------- 4.2 Definitions. As used in this Article 4, the following terms shall have ----------- --------- the meanings hereinafter set forth: 4.2.1 "Base Year" shall mean the period set forth in Section 9.1 of the ----------- Summary. 4.2.2 "Direct Expenses" shall mean "Operating Expenses", "Insurance Expenses", "Utilities Expenses" and "Tax Expenses," collectively. 4.2.3 "Expense Year" shall mean each calendar year in which any portion of the Lease Term falls, through and including the calendar year in which the Lease Term expires. 4.2.4 "Operating Expenses" shall mean all expenses, costs and amounts of every kind and nature which Landlord shall pay or incur during any Expense Year because of or in connection with the ownership, management, maintenance, repair, replacement, restoration or operation of the Real Property, including, without limitation, any amounts paid or incurred for (i) the cost of maintaining, repairing, replacing, renovating and managing the utility systems, mechanical systems, sanitary and storm drainage systems, communication systems, and escalator and elevator systems, and the cost of supplies, tools, and equipment and maintenance and service contracts in connection therewith; (ii) the cost of licenses, certificates, permits and inspections and the cost of contesting the validity or applicability of any governmental enactments which may affect Operating Expenses, and the costs incurred in connection with the implementation and operation of a transportation system management program or similar program; (iii) fees, charges and other costs, including management fees (or amounts in lieu thereof), consulting fees (including but not limited to any consulting fees incurred in connection with the procurement of insurance), legal fees and accounting fees, of all persons engaged by Landlord or otherwise reasonably incurred by Landlord in connection with the management, operation, administration, maintenance and repair of the Real Property; (iv) the cost of parking area repair, restoration, and maintenance, including, but not limited to, resurfacing, repainting, restriping, and cleaning; (v) wages, salaries and other compensation and benefits of all persons engaged in the operation, maintenance or security of the Real Property, and employer's Social Security taxes, unemployment taxes or insurance, and any other taxes which may be levied on such wages, salaries, compensation and benefits; provided, that if any employees of Landlord or Landlord's agents provide services for more than one building, then a prorated portion of such employees' wages, benefits and taxes shall be included in Operating Expenses based on the portion of their working time devoted to the Real Property, and provided further, that no portion of any employee's wages, benefits, or taxes allocable to time spent on the development or marketing of the Real Property shall be included in Operating Expenses; (vi) payments under any easement, license, operating agreement, declaration, restrictive covenant, or instrument pertaining to the sharing of costs by the Building; (vii) amortization (including interest on the unamortized cost at a rate equal to the commercial loan rate announced by Bank of America, a national banking association, or its successor, as its prime rate, plus 2% per annum fixed at the time of the acquisition or rental of the personal property) of the cost of acquiring or the rental expense of personal property used in the maintenance, operation and repair of the Building and Real Property; (viii) the cost of Landlord's office and office operation for the Building and the Real Property and all supplies and materials used in connection therewith; and (ix) the cost of capital improvements or other costs incurred in connection with the Real Property (A) which relate to the operation, repair, maintenance and replacement of all systems, equipment or facilities which serve the Real Property in the whole or in part, (B) which are intended as a labor-saving device or to effect other economies in the operation or maintenance of the Real Property, or any portion thereof to the extent of cost savings reasonably anticipated by Landlord, or (C) that are required under any governmental law or regulation that is then being enforced by a federal, state or local governmental agency; provided, however, that each such permitted capital expenditure shall be amortized (including interest on the unamortized cost with the interest rate (the "Interest Rate") fixed at the time such expenditure is placed in service) over its useful life as Landlord shall reasonably determine. If Landlord is not furnishing any particular work or service (the cost of which, if performed by Landlord, would be included in Operating Expenses) to a tenant who has undertaken to perform such work or service in lieu of the performance thereof by Landlord, Operating Expenses shall be deemed to be increased by an amount equal to the additional Operating Expenses which would reasonably have been incurred during such period by Landlord if it had at its own expense furnished such work or service to such tenant. If the Building is not one hundred percent (100%) occupied during all or a portion of any Expense Year, Landlord shall make an appropriate adjustment to the variable components of Operating Expenses for such Expense Year as reasonably determined by Landlord employing sound accounting and management principles, to determine the amount of Operating Expenses that would have been paid had the Building been one hundred percent (100%) occupied, and the amount so determined shall be deemed to have been the amount of Operating Expenses for such Expense Year. Landlord shall have the right, from time to time, to equitably allocate some or all of the Operating Expenses among different tenants of the Building (the "Cost Pools"). Such Cost Pools may include, but shall not be limited to, the office space tenants of the Building and the retail space tenants of the Building. 4.2.5 "Tax Expenses" shall mean all federal, state, county, or local governmental or municipal taxes, fees, charges or other impositions of every kind and nature, whether general, special, ordinary or extraordinary (including, without limitation, real estate taxes, general and special assessments, transit taxes or charges, business or license taxes or fees, annual or periodic license or use fees, open space charges, housing fund assessments, leasehold taxes or taxes based upon the receipt of rent, including gross receipts or sales taxes applicable to the receipt of rent, unless required to be paid by Tenant, personal property taxes imposed upon the fixtures, machinery, equipment, apparatus, systems and equipment, appurtenances, furniture and other personal property used in connection with the Building), which Landlord shall pay or incur during any Expense Year (without regard to any different fiscal year used by such governmental or municipal authority) because of or in connection with the ownership, leasing and operation of the Real Property. For purposes of this Lease, Tax Expenses shall be calculated as if the tenant improvements in the Building were fully constructed and the Real Property, the Building, and all tenant improvements in the Building were fully assessed for real estate tax purposes, and accordingly, during the portion of any Expense Year occurring during the Base Year, Tax Expenses shall be deemed to be increased appropriately. 4.2.5.1 Tax Expenses shall include, without limitation: (i) Any assessment, tax, fee, levy or charge in addition to, or in substitution, partially or totally, of any assessment, tax, fee, levy or charge previously included within the definition of real property tax, it being acknowledged by Tenant and Landlord that Proposition 13 was adopted by the voters of the State of California in the June 1978 election ("Proposition 13") and that assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such services as fire protection, street, sidewalk and road maintenance, conservation, refuse removal and for other governmental services formerly provided without charge to property owners or occupants, and, in further recognition of the decrease in the level and quality of governmental services and amenities as a result of Proposition 13, Tax Expenses shall also include any governmental or private assessments or the Project's contribution towards a governmental or private cost-sharing agreement for the purpose of augmenting or improving the quality of services and amenities normally provided by governmental agencies. It is the intention of Tenant and Landlord that all such new and increased assessments, taxes, fees, levies, and charges and all similar assessments, taxes, fees, levies and charges be included within the definition of Tax Expenses for purposes of this Lease; (ii) Any assessment, tax, fee, levy, or charge allocable to or measured by the area of the Premises or the rent payable hereunder, including, without limitation, any gross income tax with respect to the receipt of such rent, or upon or with respect to the possession, leasing, operating, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises, or any portion thereof; (iii) Any assessment, tax, fee, levy or charge, upon this transaction or any document to which Tenant is a party, creating or transferring an interest or an estate in the Premises; and (iv) Any possessory taxes charged or levied in lieu of real estate taxes. 4.2.5.2 Any expenses incurred by Landlord in attempting to protest, reduce or minimize Tax Expenses shall be included in Operating Expenses in the Expense Year such expenses are paid. Tax refunds shall be deducted from Tax Expenses in the Expense Year they are received by Landlord. All special assessments which may be paid in installments shall be paid by Landlord in the maximum number of installments permitted by law and not included in Tax Expenses except in the year in which the assessment is actually paid; provided, however, that if the prevailing practice in comparable buildings located in the vicinity of the Building is to pay such assessments on an early basis, and Landlord pays the same on such basis, such assessments shall be included in Tax Expenses in the year paid by Landlord. The amount of Tax Expenses for the Base Year attributable to the valuation of the Real Property, inclusive of tenant improvements, shall be known as "Base Taxes". If in any comparison year subsequent to the Base Year, the amount of Base Taxes decreases, then for purposes of all subsequent comparison years, including the comparison year in which such decrease in Taxes occurred, the Base Year shall be decreased by an amount equal to the decrease in Base Taxes. 4.2.5.3 Notwithstanding anything to the contrary contained in this Section ------- 4.2.5 (except as set forth in Section 4.2.5.1 or levied in whole or part in lieu ---- --------------- of Tax Expenses), there shall be excluded from Tax Expenses (i) all excess profits taxes, franchise taxes, gift taxes, capital stock taxes, inheritance and succession taxes, estate taxes, federal and state income taxes, and other taxes to the extent applicable to Landlord's general or net income (as opposed to rents, receipts or income attributable to operations at the Building), (ii) any items included as Operating Expenses, and (iii) any items paid by Tenant under Section 4.5 of this Lease. ----------- 4.2.6 "Insurance Expenses" shall mean the costs of all insurance maintained by Landlord for the Real Property as determined annually by Landlord. 4.2.7 "Utilities Expenses" shall mean the cost of all utilities supplied for the Building and the Real Property (including, without limitation, water, sewer, electricity, telephone and HVAC), other than those utilities which are paid directly by Tenant and other tenants of the Building for excess consumption and after-hours HVAC pursuant to Section 6.2 of this Lease or similar provisions ----------- in other tenants' leases. Utilities Expenses shall include "Electrical Costs", i.e., (a) charges paid by Landlord for electricity; (b) costs incurred in connection with an energy management program for the Building or the Real Property; and (c) if and to the extent permitted by law, a fee for the services provided by Landlord in connection with the selection of utility companies and the negotiation and administration of contracts for electricity, provided, that such fee shall not exceed fifty percent (50%) of any savings obtained by Landlord for such utilities. The following shall be deducted from Electrical Costs: (i) amounts received by Landlord as reimbursement for above standard electrical consumption; (ii) the cost of electricity incurred to provide overtime HVAC to specific tenants (as reasonably estimated by Landlord); and (iii) if any tenant is billed directly for the cost of building standard electricity to the Premises as a separate charge in addition to Base Rent, the cost of electricity to individual tenant spaces in the Building. 4.2.8 "Tenant's Share" shall mean the percentage set forth in Section 9.2 of ----------- the Summary. Tenant's Share was calculated by multiplying the number of rentable square feet of the Premises by 100 and dividing the product by the total rentable square feet in the Building. If either the Premises and/or the Building is expanded or reduced, Tenant's Share shall be appropriately adjusted, and, as to the Expense Year in which such change occurs, Tenant's Share for such year shall be determined on the basis of the number of days during such Expense Year that each such Tenant's Share was in effect. 4.3 Calculation and Payment of Additional Rent. ----------------------------------------------- 4.3.1 Calculation of Excess. For each Expense Year ending or commencing ----------------------- within the Lease Term, Tenant shall pay to Landlord, in the manner set forth in Section 4.3.2, below, and as Additional Rent: (i) the amount by which Tenant's - -------------- Share of Operating Expenses for such Expense Year exceeds Tenant's Share of Operating Expenses for the Base Year; (ii) the amount by which Tenant's Share of Insurance Expenses for such Expense Year exceeds Tenant's Share of Insurance Expenses for the Base Year; (iii) the amount by which Tenant's Share of Tax Expenses for such Expense Year exceeds Tenant's Share of Tax Expenses for the Base Year; and (iv) the amount by which Tenant's Share of Utilities Expenses for such Expense Year exceeds Tenant's Share of Utilities Expenses for the Base Year (collectively, the "Excess Expenses"). 4.3.2 Statement of Actual Direct Expenses and Payment by Tenant. Following ---------------------------------------------------------- the end of each Expense Year, Landlord shall give to Tenant a statement (the "Statement"), which Statement shall state the Direct Expenses incurred or accrued for such preceding Expense Year broken down by category, and which shall indicate the amount, if any, of any Excess Expenses for any and all Direct Expense categories. Upon receipt of the Statement for each Expense Year ending during the Lease Term, if any Excess Expenses are present, Tenant shall pay, with its next installment of Base Rent due, but in no event longer than thirty (30) days after receipt of such Statement, the full amount of such Excess Expenses for such Expense Year, less the amounts, if any, paid during such Expense Year as "Estimated Excess Expenses," as that term is defined in Section ------- 4.3.3, below. The failure of Landlord to timely furnish the Statement for any - ----- Expense Year shall not prejudice Landlord from enforcing its rights under this Article 4. Even though the Lease Term has expired and Tenant has vacated the - ---------- Premises, when the final determination is made of Tenant's Share of the Direct Expenses for the Expense Year in which this Lease terminates, taking into consideration that the Lease Expiration Date may have occurred prior to the final day of the applicable Expense Year, if any Excess Expenses are owing, Tenant shall immediately pay to Landlord an amount as calculated pursuant to the provisions of Section 4.3.1 of this Lease. The provisions of this Section 4.3.2 ------------- ------------- shall survive the expiration or earlier termination of the Lease Term. 4.4 Extraordinary Base Year Expenses. Notwithstanding anything to the ----------------------------------- contrary set forth in this Article 4, when calculating any of the Direct ---------- Expenses for the Base Year, (i) Base Year Tax Expenses shall not include any increase in Tax Expenses occurring in the Base Year attributable to special assessments, charges, costs, or fees, or due to modifications or changes in governmental laws or regulations, including but not limited to the institution of a split tax roll, (ii) Base Year Operating Expenses shall not include costs resulting from market-wide labor-rate increases due to extraordinary circumstances, including, but not limited to, boycotts and strikes, or other shortages and amortized costs relating to capital improvements, and (iii) Base Year Utility Expenses shall not include extraordinary utility rate increases and other utility related costs and charges incurred in the Base Year due to extraordinary circumstances including, but not limited to, conservation surcharges, costs and expenses arising due to brown-outs, black-outs, shut downs or other government or utility service provider mandated service interruptions, boycotts, or embargoes, including costs of temporary, alternative or permanent replacement power services and equipment. 4.5 Taxes and Other Charges for Which Tenant Is Directly Responsible. ----------------------------------------------------------------------- Tenant shall reimburse Landlord, as Additional Rent, upon demand for any and all taxes required to be paid by Landlord (except to the extent included in Tax Expenses by Landlord), excluding state, local and federal personal or corporate income taxes measured by the net income of Landlord from all sources and estate and inheritance taxes, whether or not now customary or within the contemplation of the parties hereto, when: 4.5.1 Said taxes are measured by or reasonably attributable to the cost or value of Tenant's equipment, furniture, fixtures and other personal property located in the Premises, or by the cost or value of any leasehold improvements made in or to the Premises by or for Tenant, to the extent the cost or value of such leasehold improvements exceeds the cost or value of a building standard build-out as determined by Landlord regardless of whether title to such improvements shall be vested in Tenant or Landlord; 4.5.2 Said taxes are assessed upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises, any portion of the Real Property or the parking facility used by Tenant in connection with this Lease; or 4.5.3 Said taxes are assessed upon this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. 4.6 Landlord's Books and Records. Within ninety (90) days after receipt of ----------------------------- a Statement by Tenant, if Tenant disputes the amount of Additional Rent set forth in the Statement, an independent certified public accountant (which accountant is a member of a nationally recognized accounting firm), designated and paid for by Tenant, may, after reasonable notice to Landlord and at reasonable times, inspect Landlord's records at Landlord's offices, provided that Tenant is not then in default under this Lease and Tenant has paid all amounts required to be paid under the applicable Estimate Statement and Statement, as the case may be. Tenant's failure to dispute the amount of Additional Rent set forth in any Statement within ninety (90) days of Tenant's receipt of such Statement shall be deemed to be Tenant's approval of such Statement and Tenant, thereafter, waives the right or ability to dispute the amounts set forth in such Statement. If after such inspection, Tenant still disputes such Additional Rent, a determination as to the proper amount shall be made, at Tenant's expense, by an independent certified public accountant (the "Accountant") selected by Landlord and subject to Tenant's reasonable approval; provided that if such determination by the Accountant proves that Direct Expenses were overstated by more than five percent (5.0%), then the cost of the Accountant and the cost of such determination shall be paid for by Landlord. Landlord shall be required to maintain records of all Direct Expenses set forth in each Statement delivered to Tenant for two (2) years following Landlord's delivery of the applicable Statement. ARTICLE 5 USE OF PREMISES ------------------ 5.1 Use. Tenant shall use the Premises solely for the "Permitted Use", as --- that term is defined in Section 12 of the Summary, and Tenant shall not use or ---------- permit the Premises to be used for any other purpose or purposes whatsoever without the prior written consent of Landlord, which may be withheld in Landlord's sole discretion. The uses prohibited under this Lease shall include, without limitation, use of the Premises or a portion thereof for (i) offices of any agency or bureau of the United States or any state or political subdivision thereof; (ii) offices or agencies of any foreign governmental or political subdivision thereof; (iii) offices of any health care professionals or service organization; (iv) schools or other training facilities which are not ancillary to corporate, executive or professional office use; (v) retail or restaurant uses; or (vi) communications firms such as radio and/or television stations. Tenant shall not allow occupancy density of use of the Premises which is greater than the average density of the other tenants of the Building. Tenant further covenants and agrees that it shall not use, or suffer or permit any person or persons to use, the Premises or any part thereof for any use or purpose contrary to the Rules and Regulations, or in violation of the laws of the United States of America, the State of California, or the ordinances, regulations or requirements of the local municipal or county governing body or other lawful authorities having jurisdiction over the Building. Tenant shall faithfully observe and comply with the Rules and Regulations. Landlord shall not be responsible to Tenant for the nonperformance of any of such Rules and Regulations by or otherwise with respect to the acts or omissions of any other tenants or occupants of the Building. Tenant shall comply with all recorded covenants, conditions, and restrictions now or hereafter affecting the Real Property. Tenant shall not use or allow another person or entity to use any part of the Premises for the storage, use, treatment, manufacture or sale of hazardous materials or substances as defined pursuant to any applicable federal, state or local governmental or quasi-governmental law, code, ordinance, rule, or regulation. Landlord acknowledges, however, that Tenant will maintain products in the Premises which are incidental to the operation of its offices, such as photocopy supplies, secretarial supplies and limited janitorial supplies, which products contain chemicals which are categorized as hazardous materials. Landlord agrees that the use of such products in the Premises in compliance with all applicable laws and in the manner in which such products are designed to be used shall not be a violation by Tenant of this Article 5. ---------- 5.2 Hazardous Materials. -------------------- 5.2.1 Prohibition on Use. Tenant shall not use or allow another person or -------------------- entity to use any part of the Premises for the storage, use, treatment, manufacture or sale of Hazardous Materials. Landlord acknowledges, however, that Tenant will maintain products in the Premises which are incidental to the operation of its offices, such as photocopy supplies, secretarial supplies and limited janitorial supplies, which products contain chemicals which are categorized as Hazardous Materials. Landlord agrees that the use of such products in the Premises in compliance with all applicable laws and in the manner in which such products are designed to be used shall not be a violation by Tenant of this Section 5.2.1. -------------- 5.2.2 Indemnity. Tenant agrees to indemnify, defend, protect and hold --------- Landlord and the Landlord Parties (as defined in Section 10.1 below) harmless ------------ from and against any and all claims, actions, administrative proceedings (including informal proceedings), judgments, damages, punitive damages, penalties, fines, costs, liabilities, interest or losses, including reasonable attorneys' fees and expenses, consultant fees, and expert fees, together with all other costs and expenses of any kind or nature, that arise during or after the Lease Term directly or indirectly from or in connection with the presence, suspected presence, release or suspected release of any Hazardous Materials in or into the air, soil, surface water or groundwater at, on, about, under or within the Premises or Real Property or any portion thereof, to the extent caused by Tenant, its assignees or subtenants and/or their respective agents, employees, contractors, licensees or invitees (collectively, "Tenant Affiliates"). 5.2.3 Remedial Work. In the event any investigation or monitoring of site -------------- conditions or any clean-up, containment, restoration, removal or other remedial work (collectively, the "Remedial Work") is required under any applicable federal, state or local laws or by any judicial order, or by any governmental entity as the result of operations or activities upon, or any use or occupancy of any portion of the Premises by Tenant or Tenant Affiliates, Tenant shall perform or cause to be performed the Remedial Work in compliance with such laws or order. All Remedial Work shall be performed by one or more contractors, selected by Tenant and approved in advance in writing by Landlord. All costs and expenses of such Remedial Work shall be paid by Tenant, including, without limitation, the charges of such contractor(s), the consulting engineers, and Landlord's reasonable attorneys' fees and costs incurred in connection with monitoring or review of such Remedial Work. 5.2.4 Definition of Hazardous Materials. As used herein, the term ------------------------------------ "Hazardous Materials" means any hazardous or toxic substance, material or waste which is or becomes regulated by any local governmental authority, the State of California or the United States Government, including, without limitation, any material or substance which is (i) defined or listed as a "hazardous waste," "extremely hazardous waste," "restricted hazardous waste," "hazardous substance" or "hazardous material" under any applicable federal, state or local law or administrative code promulgated thereunder, (ii) petroleum, or (iii) asbestos. ARTICLE 6 SERVICES AND UTILITIES ------------------------- 6.1 Standard Tenant Services. Landlord shall provide the following services ------------------------ on all days during the Lease Term, unless otherwise stated below. 6.1.1 Subject to all governmental rules, regulations and guidelines applicable thereto, Landlord shall provide heating and air conditioning when necessary for normal comfort for normal office use in the Premises, from Monday through Friday, during the period from 8:00 a.m. to 6:00 p.m., and on Saturdays during the period from 8:00 a.m. to 1:00 p.m. (collectively, the "Building Hours"), except for Sundays and New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, Christmas Day and any other nationally and locally recognized holidays as designated by Landlord (collectively, the "Holidays"). 6.1.2 Landlord shall provide electrical wiring and facilities for connection to Tenant's lighting fixtures and incidental use equipment, provided that (i) the connected electrical load of the incidental use equipment does not exceed an average of two and one-half (2.5) watts per usable square foot of the Premises connected load during the Building Hours, and the electricity so furnished for incidental use equipment will be at a nominal one hundred twenty (120) volts and no electrical circuit for the supply of such incidental use equipment will require a current capacity exceeding twenty (20) amperes, and (ii) the connected electrical load of Tenant's lighting fixtures does not exceed an average of one and one-half (1.5) watts per usable square foot of the Premises connected load during the Building Hours, and the electricity so furnished for Tenant's lighting will be at a nominal one hundred twenty (120) volts. Tenant will design Tenant's electrical system serving any equipment producing nonlinear electrical loads to accommodate such nonlinear electrical loads, including, but not limited to, oversizing neutral conductors, derating transformers and/or providing power-line filters. Engineering plans shall include a calculation of Tenant's fully connected electrical design load with and without demand factors and shall indicate the number of watts of unmetered and submetered loads. Tenant shall bear the cost of replacement of lamps, starters and ballasts for non-Building standard lighting fixtures within the Premises. 6.1.3 Landlord shall provide city water from the regular Building outlets for drinking, lavatory and toilet purposes. 6.1.4 Landlord shall provide janitorial/cleanup services Monday through Friday except the date of observation of the Holidays, in and about the Premises in accordance with "Class A" building practices. 6.1.5 Landlord shall provide nonexclusive automatic elevator service at all times. 6.2 Overstandard Tenant Use. Tenant shall not, without Landlord's prior ------------------------- written consent, use heat-generating machines, machines other than normal fractional horsepower office machines, or equipment or lighting other than building standard lights in the Premises, which may affect the temperature otherwise maintained by the air conditioning system or increase the water normally furnished for the Premises by Landlord pursuant to the terms of Section 6.1 of this Lease. If such consent is given, Landlord shall have the right to install supplementary air conditioning units or other facilities in the Premises, including supplementary or additional metering devices, and the cost thereof, including the cost of installation, operation and maintenance, increased wear and tear on existing equipment and other similar charges, shall be paid by Tenant to Landlord upon billing by Landlord. If Tenant uses water, electricity, heat or air conditioning in excess of that supplied by Landlord pursuant to Section 6.1 of this Lease, Tenant shall pay to Landlord, upon ------------ billing, the cost of such excess consumption, the cost of the installation, operation, and maintenance of equipment which is installed in order to supply such excess consumption, and the cost of the increased wear and tear on existing equipment caused by such excess consumption; and Landlord may install devices to separately meter any increased use and in such event Tenant shall pay the increased cost directly to Landlord, on demand, including the cost of such additional metering devices. If Tenant desires to use heat, ventilation or air conditioning ("HVAC") during hours other than those for which Landlord is obligated to supply such utilities pursuant to the terms of Section 6.1 of this ----------- Lease, Tenant shall give Landlord such prior notice, as Landlord shall from time to time establish as appropriate, of Tenant's desired use and Landlord shall supply such utilities to Tenant at such hourly cost to Tenant as Landlord shall from time to time establish; provided, however, so long as Tenant is not in default under this Lease, Landlord shall provide up to fifty-five (55) hours of HVAC service per week to the Premises during the Lease Term at no additional charge to Tenant. Amounts payable by Tenant to Landlord for such use of additional utilities shall be deemed Additional Rent hereunder and shall be billed on a monthly basis. 6.3 Interruption of Use. Tenant agrees that Landlord shall not be liable --------------------- for damages, by abatement of Rent or otherwise, for failure to furnish or delay in furnishing any service (including electric power, telephone and telecommunication services), or for any diminution in the quality or quantity thereof, when such failure or delay or diminution is occasioned, in whole or in part, by repairs, replacements, or improvements, by any strike, lockout or other labor trouble, by inability to secure electricity, gas, water, or other fuel at the Building after reasonable effort to do so, including, without limitation, as a result of government or utility service provider mandated brown-outs, black-outs, shut downs or other service interruptions, by any accident or casualty whatsoever, by act or default of Tenant or other parties, or by any other cause beyond Landlord's reasonable control; and such failures or delays or diminution shall never be deemed to constitute an eviction or disturbance of Tenant's use and possession of the Premises or relieve Tenant from paying Rent or performing any of its obligations under this Lease. Furthermore, Landlord shall not be liable under any circumstances for a loss of, or injury to, property or for injury to, or interference with, Tenant's business, including, without limitation, loss of profits, however occurring, through or in connection with or incidental to a failure to furnish any of the services or utilities as set forth in this Article 6. Landlord may comply with --------- voluntary controls or guidelines promulgated by any governmental entity or utility service provider relating to the use or conservation of energy, water, gas, light or electricity or the reduction of automobile or other emissions without creating any liability of Landlord to Tenant under this Lease, provided commercially reasonable market services are provided. 6.4 Service Providers. Landlord shall have the right at any time and from ------------------ time-to-time during the Lease Term to contract for service from any company or companies providing electricity service ("Service Provider"). Tenant shall cooperate with Landlord and the Service Provider at all times and, as reasonably necessary, shall allow Landlord and Service Provider reasonable access to the Building's electric lines, feeders, risers, wiring, and any other machinery within the Premises. Landlord shall in no way be liable or responsible for any loss, damage, or expense that Tenant may sustain or incur by reason of any change, failure, interference, disruption, or defect in the supply or character of the electric energy furnished to the Premises, or if the quantity or character of the electric energy supplied by the Service Provider is no longer available or suitable for Tenant's requirements, no such change, failure, defect, unavailability, or unsuitability shall constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its obligations under the Lease. ARTICLE 7 REPAIRS ------------ 7.1 Landlord Repairs. Landlord shall repair and maintain the structural ----------------- portions of the Building, and the basic plumbing, heating, ventilating, air-conditioning and electrical systems installed or furnished by Landlord and not located within the Premises, unless such maintenance and repairs are caused in part or in whole by the act, neglect, fault or omission of any duty by Tenant or the "Tenant Parties," as that term is defined in Section 10.1, below, in ------------ which event Tenant shall pay to Landlord, as Additional Rent, the reasonable cost of such maintenance and repairs. Landlord may, but shall not be required to, enter the Premises at all reasonable times to make such repairs, alterations, improvements and additions to the Premises or to the Building or to any equipment located in the Building as Landlord shall desire or deem necessary or as Landlord may be required to do by governmental or quasi-governmental authority or court order or decree. Tenant hereby waives and releases its right to make repairs at Landlord's expense under Sections 1941 and 1942 of the California Civil Code or under any similar law, statute, or ordinance now or hereafter in effect. 7.2 Tenant Repairs. Tenant shall, at Tenant's own expense, pursuant to the --------------- terms of this Lease including, without limitation, Article 8 hereof, keep the --------- Premises, including all improvements, fixtures and furnishings therein, in good order, repair and condition at all times during the Lease Term. In addition, Tenant shall, at Tenant's own expense but under the supervision and subject to the prior approval of Landlord, and within any reasonable period of time specified by Landlord, pursuant to the terms of this Lease including, without limitation, Article 8 hereof, promptly and adequately repair all damage to the ---------- Premises and replace or repair all damaged or broken fixtures and appurtenances; provided however, that, at Landlord's option, or if Tenant fails to make such repairs, Landlord may, but need not, make such repairs and replacements, and Tenant shall pay Landlord the cost thereof, including a percentage of the cost thereof (to be uniformly established for the Building) sufficient to reimburse Landlord for all overhead, general conditions, fees and other costs or expenses arising from Landlord's involvement with such repairs and replacements forthwith upon being billed for same. ARTICLE 8 ADDITIONS AND ALTERATIONS ----------------------------- 8.1 Landlord's Consent to Alterations. Tenant may not make any ------------------------------------ improvements, alterations, additions or changes to the Premises (collectively, the "Alterations") without first procuring the prior written consent of Landlord to such Alterations, which consent shall be requested by Tenant not less than thirty (30) days prior to the commencement thereof, and which consent shall not be unreasonably withheld by Landlord, provided that such Alterations (i) comply with all applicable laws, ordinances, rules and regulations; (ii) are compatible with the Building and its mechanical, electrical, heating, ventilating, air-conditioning, and life safety systems; (iii) will not interfere with the use and occupancy of any other portion of the Building by any other tenant or their invitees; (iv) are not visible from the exterior of the Building; and (v) do not affect the structural portions of the Building. The construction of the initial improvements to the Premises shall be governed by the terms of the Tenant Work Letter, attached hereto as Exhibit D, and not the --------- terms of this Article 8. ---------- 8.2 Manner of Construction. Landlord may impose, as a condition of its ------------------------ consent to all Alterations or repairs of the Premises or about the Premises, such requirements as Landlord in its sole discretion may deem desirable including, but not limited to, the requirement that upon Landlord's request, Tenant shall, at Tenant's expense, remove such Alterations upon the expiration or any early termination of the Lease Term, and/or the requirement that Tenant utilize for such purposes only contractors, materials, mechanics and materialmen selected by Landlord. If such Alterations will involve the use of or disturb hazardous materials or substances existing in the Premises, Tenant shall comply with Landlord's rules and regulations concerning such hazardous materials or substances. Tenant shall construct such Alterations and perform such repairs in conformance with any and all applicable rules and regulations of any federal, state, county or municipal code or ordinance and pursuant to a valid building permit, issued by the applicable municipality, in conformance with Landlord's construction rules and regulations. All work with respect to any Alterations must be done in a good and workmanlike manner and diligently prosecuted to completion to the end that the Premises shall at all times be a complete unit except during the period of work. In performing the work of any such Alterations, Tenant shall have the work performed in such manner as not to obstruct access to the Building or the common areas for any other tenant of the Building, and as not to obstruct the business of Landlord or other tenants in the Building, or interfere with the labor force working in the Building. Upon completion of any Alterations, Tenant agrees to (i) cause a timely Notice of Completion to be recorded in the office of the Recorder of the local county in accordance with the terms of Section 3093 of the Civil Code of the State of California or any successor statute, (ii) deliver to the Building management office a reproducible copy of the "as built" drawings of the Alterations, and (iii) deliver to Landlord evidence of payment, contractors' affidavits and full and final waivers of all liens for labor, services or materials. 8.3 Payment for Improvements. If Tenant orders any Alteration or repair -------------------------- work directly from Landlord, or from a contractor selected by Landlord, the charges for such work shall be deemed Additional Rent under this Lease, payable upon billing therefor, either periodically during construction or upon the substantial completion of such work, at Landlord's option. Upon completion of such work, Tenant shall deliver to Landlord, if payment is made directly to contractors, evidence of payment, contractors' affidavits and full and final waivers of all liens for labor, services or materials. If Tenant orders any work directly from Landlord, Tenant shall pay to Landlord a percentage of the cost of such work (such percentage to be established on a uniform basis for the Building) sufficient to compensate Landlord for all overhead, general conditions, fees and other costs and expenses arising from Landlord's involvement with such work, and if Tenant does not order any work directly from Landlord, Tenant shall reimburse Landlord for Landlord's reasonable out-of-pocket costs and expenses reasonably incurred in connection with Landlord's review of such work. 8.4 Construction Insurance. If that Tenant makes any Alterations, Tenant ----------------------- agrees to carry "Builder's All Risk" insurance in an amount approved by Landlord covering the construction of such Alterations, and such other insurance as Landlord may require, it being understood and agreed that all of such Alterations shall be insured by Tenant pursuant to Article 10 of this Lease ---------- immediately upon completion thereof. In addition, Landlord may, in its discretion, require Tenant to obtain a lien and completion bond or some alternate form of security satisfactory to Landlord in an amount sufficient to ensure the lien-free completion of such Alterations and naming Landlord as a co-obligee. 8.5 Landlord's Property. All Alterations, improvements, fixtures and/or -------------------- equipment which may be installed or placed in or about the Premises, and all signs installed in, on or about the Premises, from time to time, shall be at the sole cost of Tenant and shall be and become the property of Landlord, except that Tenant may remove any Alterations, improvements, fixtures and/or equipment which Tenant can substantiate to Landlord have not been paid for with any tenant improvement allowance funds provided to Tenant by Landlord, provided Tenant repairs any damage to the Premises and Building caused by such removal. Furthermore, if Landlord, as a condition to Landlord's consent to any Alteration, requires that Tenant remove any Alteration upon the expiration or early termination of the Lease Term, Landlord may, by written notice to Tenant prior to the end of the Lease Term, or given upon any earlier termination of this Lease, require Tenant at Tenant's expense to remove such Alterations and to repair any damage to the Premises and Building caused by such removal. If Tenant fails to complete such removal and/or to repair any damage caused by the removal of any Alterations, Landlord may do so and may charge the cost thereof to Tenant. ARTICLE 9 COVENANT AGAINST LIENS ------------------------- Tenant has no authority or power to cause or permit any lien or encumbrance of any kind whatsoever, whether created by act of Tenant, operation of law or otherwise, to attach to or be placed upon the Real Property, Building or Premises, and any and all liens and encumbrances created by Tenant shall attach to Tenant's interest only. Landlord shall have the right at all times to post and keep posted on the Premises any notice which it deems necessary for protection from such liens. Tenant covenants and agrees not to suffer or permit any lien of mechanics or materialmen or others to be placed against the Real Property, the Building or the Premises with respect to work or services claimed to have been performed for or materials claimed to have been furnished to Tenant or the Premises, and, in case of any such lien attaching or notice of any lien, Tenant covenants and agrees to cause it to be immediately released and removed of record. Notwithstanding anything to the contrary set forth in this Lease, in the event that such lien is not released and removed on or before the date occurring five (5) days after notice of such lien is delivered by Landlord to Tenant, Landlord, at its sole option, may immediately take all action necessary to release and remove such lien, without any duty to investigate the validity thereof, and all sums, costs and expenses, including reasonable attorneys' fees and costs, incurred by Landlord in connection with such lien shall be deemed Additional Rent under this Lease and shall immediately be due and payable by Tenant. ARTICLE 10 INSURANCE -------------- 10.1 Indemnification and Waiver. To the extent not prohibited by law, ---------------------------- Landlord, its partners, trustees, ancillary trustees and their respective officers, directors, shareholders, beneficiaries, agents, servants, employees, and independent contractors (collectively, the "Landlord Parties") shall not be liable for any damage either to person or property or resulting from the loss of use thereof, which damage is sustained by Tenant or by other persons claiming through Tenant. Tenant shall indemnify, defend, protect, and hold harmless Landlord Parties from any and all loss, cost, damage, expense and liability (including without limitation court costs and reasonable attorneys' fees) incurred in connection with or arising from any cause in, on or about the Premises or any acts, omissions or negligence of Tenant or of any person claiming by, through or under Tenant, its partners, and their respective officers, agents, servants, employees, and independent contractors (collectively, the "Tenant Parties"), in, on or about the Real Property, either prior to, during, or after the expiration of the Lease Term, provided that the terms of the foregoing indemnity shall not apply to the gross negligence or willful misconduct of Landlord or the Landlord Parties. Should Landlord be named as a defendant in any suit brought against Tenant in connection with or arising out of an event covered by the foregoing indemnity, Tenant shall pay to Landlord its costs and expenses incurred in such suit, including without limitation, its actual professional fees such as appraisers', accountants' and attorneys' fees. Further, Tenant's agreement to indemnify Landlord pursuant to this Section 10.1 is not intended and shall not relieve any insurance carrier of ------------ its obligations under policies required to be carried by Tenant pursuant to the provision of this Lease, to the extent such policies cover the matters subject to Tenant's indemnification obligations; nor shall they supersede any inconsistent agreement of the parties set forth in any other provision of this Lease. The provisions of this Section 10.1 shall survive the expiration or ------------- sooner termination of this Lease with respect to any claims or liability occurring prior to such expiration or termination. 10.2 Tenant's Compliance with Landlord's Fire and Casualty Insurance. The ----------------------------------------------------------------- coverage and amounts of insurance carried by Landlord in connection with the Building shall at a minimum be comparable to the coverage and amounts of insurance which are carried by reasonably prudent landlords of comparable buildings located in the vicinity of the Building. Tenant shall, at Tenant's expense, comply with all insurance company requirements pertaining to the use of the Premises. If Tenant's conduct or use of the Premises causes any increase in the premium for any insurance policies carried by Landlord, then Tenant shall reimburse Landlord for any such increase. Tenant, at Tenant's expense, shall comply with all rules, orders, regulations or requirements of the American Insurance Association (formerly the National Board of Fire Underwriters) and with any similar body. 10.3 Tenant's Insurance. Tenant shall maintain the following coverages in ------------------- the following amounts. 10.3.1 Commercial General Liability Insurance covering the insured against claims of bodily injury, personal injury and property damage arising out of Tenant's operations, assumed liabilities or use of the Premises, including a Commercial General Liability endorsement covering the insuring provisions of this Lease and the performance by Tenant of the indemnity agreements set forth in Section 10.1 of this Lease, for limits of liability not less than: (i) Bodily ------------ Injury and Property Damage Liability - $3,000,000 each occurrence and $3,000,000 annual aggregate, and (ii) Personal Injury Liability - $3,000,000 each occurrence and $3,000,000 annual aggregate. 10.3.2 Physical Damage Insurance covering (i) all office furniture, trade fixtures, office equipment, merchandise and all other items of Tenant's property on the Premises installed by, for, or at the expense of Tenant, (ii) the "Tenant Improvements," as that term is defined in the Tenant Work Letter, and (iii) all other improvements, alterations and additions to the Premises. Such insurance shall be written on an "all risks" of physical loss or damage basis, for the guaranteed replacement cost value new without deduction for depreciation of the covered items and in amounts that meet any co-insurance clauses of the policies of insurance and shall include a vandalism and malicious mischief endorsement, sprinkler leakage coverage and earthquake sprinkler leakage coverage. 10.3.3 Business Interruption, loss-of-income and extra-expense insurance in such amounts as will reimburse Tenant for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent tenants or attributable to prevention of access to the Premises or to the Building as a result of such perils. 10.3.4 Form of Policies. The minimum limits of policies of insurance ------------------ required of Tenant under this Lease shall in no event limit the liability of Tenant under this Lease. Such insurance shall (i) name Landlord, and any other party it so specifies, as an additional insured; (ii) specifically cover the liability assumed by Tenant under this Lease, including, but not limited to, Tenant's obligations under Section 10.1 of this Lease; (iii) be issued by an ------------- insurance company having a rating of not less than A-XII in Best's Insurance Guide or which is otherwise acceptable to Landlord and licensed to do business in the State of California; (iv) be primary insurance as to all claims thereunder and provide that any insurance carried by Landlord is excess and is non-contributing with any insurance requirement of Tenant; (v) provide that said insurance shall not be canceled or coverage changed unless thirty (30) days' prior written notice shall have been given to Landlord and any mortgagee of Landlord; and (vi) contain a cross-liability endorsement or severability of interest clause acceptable to Landlord. Tenant shall deliver said policy or policies or certificates thereof to Landlord on or before the Lease Commencement Date and at least thirty (30) days before the expiration dates thereof. 10.4 Waiver of Claims; Waiver of Subrogation. -------------------------------------------- 10.4.1 Mutual Waiver of Parties. Landlord and Tenant hereby waive their rights against each other with respect to any claims or damages or losses which are caused by or result from (a) damage to property or loss of income insured against under any insurance policy carried by Landlord or Tenant (as the case may be) pursuant to the provisions of this Lease and enforceable at the time of such damage or loss, or (b) damage to property or loss of income which would have been covered under any insurance required to be obtained and maintained by Landlord or Tenant (as the case may be) under this Lease (as applicable) had such insurance been obtained and maintained as required therein. The foregoing waivers shall be in addition to, and not a limitation of, any other waivers or releases contained in this Lease. 10.4.2 Waiver of Insurers. Each party shall cause each property and loss of income insurance policy required to be obtained by it pursuant to this Lease to provide that the insurer waives all rights of recovery by way of subrogation against either Landlord or Tenant, as the case may be, in connection with any claims, losses and damages covered by such policy. If either party fails to maintain property or loss of income insurance required hereunder, such insurance shall be deemed to be self-insured with a deemed full waiver of subrogation as set forth in the immediately preceding sentence. 10.5 Additional Insurance Obligations. Tenant shall carry and maintain ---------------------------------- during the entire Lease Term, at Tenant's sole cost and expense, increased amounts of the insurance required to be carried by Tenant pursuant to this Article 10, and such other reasonable types of insurance coverage and in such ------ reasonable amounts covering the Premises and Tenant's operations therein, as may be reasonably requested by Landlord, but in no event shall such increased amounts of insurance or such other reasonable types of insurance be in excess of that required by landlords of comparable buildings located in the vicinity of the Building. Notwithstanding anything to the contrary contained in this Lease, in the event of any termination of this Lease pursuant to Article 11 or Article ---------- ------- 13 below, Tenant shall assign and deliver to Landlord (or to any party designated by Landlord) all insurance proceeds payable to Tenant under Tenant's insurance required under Section 10.3 of this Lease. ------------- ARTICLE 11 DAMAGE AND DESTRUCTION ------------------------ 11.1 Repair of Damage to Premises by Landlord. Tenant shall promptly notify ---------------------------------------- Landlord of any damage to the Premises resulting from fire or any other casualty or any condition existing in the Premises as a result of a fire or other casualty that would give rise to the terms of this Article 11. If the ---------- Premises or any common areas of the Building serving or providing access to the Premises shall be damaged by fire or other casualty or be subject to a condition existing as a result of a fire or other casualty, Landlord shall promptly and diligently, subject to reasonable delays for insurance adjustment or other matters beyond Landlord's reasonable control, and subject to all other terms of this Article 11, restore the base, shell, and core of the Premises and such ----------- common areas to substantially the same condition as existed prior to the casualty, except for modifications required by zoning and building codes and other laws or by the holder of a mortgage on the Building or any other modifications to the common areas deemed desirable by Landlord, provided access to the Premises and any common restrooms serving the Premises shall not be materially impaired. Notwithstanding any other provision of this Lease, upon the occurrence of any damage to the Premises, Tenant shall assign to Landlord (or to any party designated by Landlord) all insurance proceeds payable to Tenant under Tenant's insurance required under Section 10.3 of this Lease, and ------------ Landlord shall repair any injury or damage to the Tenant Improvements installed in the Premises and shall return such Tenant Improvements to their original condition; provided that if the cost of such repair by Landlord exceeds the amount of insurance proceeds received by Landlord from Tenant's insurance carrier, as assigned by Tenant, the cost of such repairs shall be paid by Tenant to Landlord prior to Landlord's repair of the damage. In connection with such repairs and replacements, Tenant shall, prior to the commencement of construction, submit to Landlord, for Landlord's review and approval, all plans, specifications and working drawings relating thereto, and Landlord shall select the contractors to perform such improvement work. Such submittal of plans and construction of improvements shall be performed in substantial compliance with the terms of the Tenant Work Letter as though such construction of improvements were the initial construction of the Tenant Improvements. Landlord shall not be liable for any inconvenience or annoyance to Tenant or its visitors, or injury to Tenant's business resulting in any way from such damage or the repair thereof; provided however, that if such fire or other casualty shall have damaged the Premises or common areas necessary to Tenant's occupancy, and if such damage is not the result of the negligence or willful misconduct of Tenant or Tenant's employees, contractors, licensees, or invitees, Landlord shall allow Tenant a proportionate abatement of Rent, during the time and to the extent the Premises are unfit for occupancy for the purposes permitted under this Lease, and not occupied by Tenant as a result thereof; provided, further, if the Premises is damaged such that the remaining portion thereof is not sufficient to allow Tenant to conduct its business operations from such remaining portion and Tenant does not conduct its business operations therefrom, and if such damage is not the result of the negligence or willful misconduct of Tenant or any of the Tenant Parties, Landlord shall allow Tenant a total abatement of Rent during the time and to the extent the Premises are unfit for occupancy for the purposes permitted under this Lease, and not occupied by Tenant as a result of the subject damage. 11.2 Landlord's Option to Repair. Notwithstanding the terms of Section 11.1 --------------------------- ------------ of this Lease, Landlord may elect not to rebuild and/or restore the Premises and/or Building and instead terminate this Lease by notifying Tenant in writing of such termination within sixty (60) days after the date of damage, such notice to include a termination date giving Tenant ninety (90) days to vacate the Premises, but Landlord may so elect only if the Building shall be damaged by fire or other casualty or cause or be subject to a condition existing as a result of such a fire or other casualty or cause, whether or not the Premises are affected, and one or more of the following conditions is present: (i) repairs cannot reasonably be completed within one hundred eighty (180) days of the date of damage (when such repairs are made without the payment of overtime or other premiums); (ii) the holder of any mortgage on the Building or ground lessor with respect to the Real Property shall require that the insurance proceeds or any portion thereof be used to retire the mortgage debt, or shall terminate the ground lease, as the case may be; or (iii) the damage or condition arising as a result of such damage is not fully covered, except for deductible amounts, by Landlord's insurance policies; provided, however, that if Landlord does not elect to terminate this Lease pursuant to Landlord's termination right as provided above, and the repairs cannot, in the reasonable judgment of Landlord, be completed within two hundred ten (210) days after being commenced, Tenant may elect, no earlier than sixty (60) days after the date of the damage and not later than ninety (90) days after the date of such damage, to terminate this Lease by written notice to Landlord effective as of the date specified in the notice, which date shall not be less than thirty (30) days nor more than sixty (60) days after the date such notice is given by Tenant. Furthermore, if neither Landlord nor Tenant have terminated this Lease, and the repairs are not actually completed within such two hundred ten (210) day period, Tenant shall have the right to terminate this Lease during the first five (5) business days of each calendar month following the end of such period until such time as the repairs are complete, by notice to Landlord (the "Damage Termination Notice"), effective as of a date set forth in the Damage Termination Notice (the "Damage Termination Date"), which Damage Termination Date shall not be less than ten (10) business days following the end of each such month. Notwithstanding the foregoing, if Tenant delivers a Damage Termination Notice to Landlord, then Landlord shall have the right to suspend the occurrence of the Damage Termination Date for a period ending thirty (30) days after the Damage Termination Date set forth in the Damage Termination Notice by delivering to Tenant, within five (5) business days of Landlord's receipt of the Damage Termination Notice, a certificate of Landlord's contractor responsible for the repair of the damage certifying that it is such contractor's good faith judgment that the repairs shall be substantially completed within thirty (30) days after the Damage Termination Date. If repairs shall be substantially completed prior to the expiration of such thirty-day period, then the Damage Termination Notice shall be of no force or effect, but if the repairs shall not be substantially completed within such thirty-day period, then this Lease shall terminate upon the expiration of such thirty-day period. At any time, from time to time, after the date occurring sixty (60) days after the date of the damage, Tenant may request that Landlord inform Tenant of Landlord's reasonable opinion of the date of completion of the repairs and Landlord shall respond to such request within five (5) business days. 11.3 Waiver of Statutory Provisions. The provisions of this Lease, --------------------------------- including this Article 11, constitute an express agreement between Landlord and ---------- Tenant with respect to any and all damage to, or destruction of, all or any part of the Premises, the Building or any other portion of the Real Property, and any statute or regulation of the State of California, including, without limitation, Sections 1932(2) and 1933(4) of the California Civil Code, with respect to any rights or obligations concerning damage or destruction in the absence of an express agreement between the parties, and any other statute or regulation, now or hereafter in effect, shall have no application to this Lease or any damage or destruction to all or any part of the Premises, the Building or any other portion of the Real Property. 11.4 Damage Near End of Term. If the Premises or the Building is destroyed ------------------------ or damaged to any substantial extent during the last eighteen (18) months of the Lease Term and, in the reasonable judgment of Landlord, the damage or destruction to the Premises or Building cannot be repaired by the date which is six (6) months prior to the Lease Expiration Date, then notwithstanding anything contained in this Article 11, either Landlord or Tenant shall have the option ---------- to terminate this Lease by giving written notice to the other party of the exercise of such option within thirty (30) days after such damage or destruction, in which event this Lease shall cease and terminate as of the date of such notice, Tenant shall pay the Base Rent and Additional Rent, properly apportioned up to such date of damage, and both parties hereto shall thereafter be freed and discharged of all further obligations hereunder, except as provided for in provisions of this Lease which by their terms survive the expiration or earlier termination of the Lease Term. ARTICLE 12 NONWAIVER ------------ No waiver of any provision of this Lease shall be implied by any failure of Landlord to enforce any remedy on account of the violation of such provision, even if such violation shall continue or be repeated subsequently, any waiver by Landlord of any provision of this Lease may only be in writing, and no express waiver shall affect any provision other than the one specified in such waiver and that one only for the time and in the manner specifically stated. No receipt of monies by Landlord from Tenant after the termination of this Lease shall in any way alter the length of the Lease Term or of Tenant's right of possession hereunder or after the giving of any notice shall reinstate, continue or extend the Lease Term or affect any notice given Tenant prior to the receipt of such monies, it being agreed that after the service of notice or the commencement of a suit or after final judgment for possession of the Premises, Landlord may receive and collect any Rent due, and the payment of said Rent shall not waive or affect said notice, suit or judgment. No payment by Tenant or receipt or acceptance by Landlord of a lesser amount than the correct Rent due shall be deemed to be other than a payment on account, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance, treat such partial payment as a default or pursue any other remedy provided in this Lease or at law. ARTICLE 13 CONDEMNATION ------------- If ten percent (10%) or more of the Premises or Building shall be taken by power of eminent domain or condemned by any competent authority for any public or quasi-public use or purpose, or if Landlord shall grant a deed or other instrument in lieu of such taking by eminent domain or condemnation, Landlord shall have the option to terminate this Lease upon ninety (90) days' notice, provided such notice is given no later than one hundred eighty (180) days after the date of such taking, condemnation, reconfiguration, vacation, deed or other instrument. If more than twenty-five percent (25%) of the rentable square feet of the Premises is taken, or if access to the Premises is substantially and permanently impaired, Tenant shall have the option to terminate this Lease upon ninety (90) days' notice, provided such notice is given no later than one hundred eighty (180) days after the date of such taking. Landlord shall be entitled to receive the entire award or payment in connection therewith, except that Tenant shall have the right to file any separate claim available to Tenant for any taking of Tenant's personal property and fixtures belonging to Tenant and removable by Tenant upon expiration of the Lease Term pursuant to the terms of this Lease, and for moving expenses, so long as such claim does not diminish the award available to Landlord, its ground lessor with respect to the Real Property or its mortgagee, and such claim is payable separately to Tenant. All Rent shall be apportioned as of the date of such termination, or the date of such taking, whichever shall first occur. If any part of the Premises shall be taken, and this Lease shall not be so terminated, the Rent shall be proportionately abated. Tenant hereby waives any and all rights it might otherwise have pursuant to Section 1265.130 of the California Code of Civil Procedure. ARTICLE 14 ASSIGNMENT AND SUBLETTING ---------------------------- 14.1 Transfers. Tenant shall not, without the prior written consent of --------- Landlord, assign, mortgage, pledge, hypothecate, encumber, or permit any lien to attach to, or otherwise transfer, this Lease or any interest hereunder, permit any assignment or other such foregoing transfer of this Lease or any interest hereunder by operation of law, sublet the Premises or any part thereof, or permit the use of the Premises by any persons other than Tenant and its employees (all of the foregoing are hereinafter sometimes referred to collectively as "Transfers" and any person to whom any Transfer is made or sought to be made is hereinafter sometimes referred to as a "Transferee"). If Tenant shall desire Landlord's consent to any Transfer, Tenant shall notify Landlord in writing, which notice (the "Transfer Notice") shall include (i) the proposed effective date of the Transfer, which shall not be less than forty-five (45) days nor more than one hundred eighty (180) days after the date of delivery of the Transfer Notice, (ii) a description of the portion of the Premises to be transferred (the "Subject Space"), (iii) all of the terms of the proposed Transfer and the consideration therefor, including a calculation of the "Transfer Premium," as that term is defined in Section 14.3, below, in ------------- connection with such Transfer, the name and address of the proposed Transferee, and a copy of all existing and/or proposed documentation pertaining to the proposed Transfer, including all existing operative documents to be executed to evidence such Transfer or the agreements incidental or related to such Transfer, (iv) current financial statements of the proposed Transferee certified by an officer, partner or owner thereof, and any other information required by Landlord, which will enable Landlord to determine the financial responsibility, character, and reputation of the proposed Transferee, nature of such Transferee's business and proposed use of the Subject Space, (v) an executed estoppel certificate from Tenant in the form attached hereto as Exhibit E, and --------- (vi) such other information as Landlord may reasonably require. Any Transfer made without Landlord's prior written consent shall, at Landlord's option, be null, void and of no effect, and shall, at Landlord's option, constitute a default by Tenant under Section 19.1.2 of this Lease. Whether or not Landlord -------------- shall grant consent, Tenant shall pay Landlord's review and processing fees, as well as any reasonable legal fees incurred by Landlord, within thirty (30) days after written request by Landlord. 14.2 Landlord's Consent. Landlord shall not unreasonably withhold its ------------------- consent to any proposed Transfer of the Subject Space to the Transferee on the terms specified in the Transfer Notice. The parties hereby agree that it shall be deemed to be reasonable under this Lease and under any applicable law for Landlord to withhold consent to any proposed Transfer where one or more of the following apply, without limitation as to other reasonable grounds for withholding consent: 14.2.1 The Transferee is of a character or reputation or engaged in a business which is not consistent with the quality of the Building; 14.2.2 The Transferee is either a governmental agency or instrumentality thereof (i) which is that of a foreign country, (ii) which is of a character or reputation, is engaged in a business, or is of, or is associated with, a political orientation or faction, which is inconsistent with the quality of the Building, or which would otherwise reasonably offend a landlord of a comparable building located in the vicinity of the Building, (iii) which is capable of exercising the power of eminent domain or condemnation, or (iv) which would significantly increase the human traffic in the Premises or Building; 14.2.3 The Transferee's intended use of the Premises is inconsistent with the Permitted Use; 14.2.4 The Transfer occurs during the period from the Lease Commencement Date until the earlier of (i) the fourth anniversary of the Lease Commencement Date or (ii) the date at least ninety-five percent (95%) of the rentable square feet of the Building is leased, and the rent charged by Tenant to such Transferee during the term of such Transfer (the "Transferee's Rent"), calculated using a present value analysis, is less than ninety-five percent (95%) of the rent being quoted by Landlord at the time of such Transfer for comparable space in the Building for a comparable term (the "Quoted Rent"), calculated using a present value analysis; 14.2.5 The Transferee is not a party of reasonable financial worth and/or financial stability in light of the responsibilities involved under the Lease on the date consent is requested; 14.2.6 The proposed Transfer would cause Landlord to be in violation of another lease or agreement to which Landlord is a party, or would give an occupant of the Building a right to cancel its lease; 14.2.7 The terms of the proposed Transfer will allow the Transferee to exercise a right of renewal, right of expansion, right of first offer, or other similar right held by Tenant (or will allow the Transferee to occupy space leased by Tenant pursuant to any such right); 14.2.8 Either the proposed Transferee, or any person or entity which directly or indirectly, controls, is controlled by, or is under common control with, the proposed Transferee, (i) occupies space in the Building at the time of the request for consent, (ii) is negotiating with Landlord to lease space in the Building at such time, or (iii) has negotiated with Landlord during the twelve (12)-month period immediately preceding the Transfer Notice; or 14.2.9 The Transferee does not intend to occupy the entire Premises and conduct its business therefrom for a substantial portion of the term of the Transfer. Notwithstanding anything to the contrary in this Lease, if Tenant or any proposed Transferee claims that Landlord has unreasonably withheld or delayed its consent under Section 14.2 or otherwise has breached or acted unreasonably ------------ under this Article 14, their sole remedies shall be declaratory judgment and an ---------- injunction for the relief sought without any monetary damages, and Tenant hereby waives all other remedies, including, without limitation, any right at law or equity to terminate this Lease, on its own behalf and, to the extent permitted under all applicable laws, on behalf of the proposed Transferee. Tenant shall indemnify, defend and hold harmless Landlord from any and all liability, losses, claims, damages, costs, expenses, causes of action and proceedings involving any third party or parties (including without limitation Tenant's proposed subtenant or assignee) who claim they were damaged by Landlord's wrongful withholding or conditioning of Landlord's consent. If Landlord consents to any Transfer pursuant to the terms of this Section 14.2 (and does not exercise any recapture ------------ rights Landlord may have under Section 14.4 of this Lease), Tenant may within ------------ six (6) months after Landlord's consent, but not later than the expiration of said six-month period, enter into such Transfer of the Premises or portion thereof, upon substantially the same terms and conditions as are set forth in the Transfer Notice furnished by Tenant to Landlord pursuant to Section 14.1 of ------------ this Lease, provided that if there are any changes in the terms and conditions from those specified in the Transfer Notice (i) such that Landlord would initially have been entitled to refuse its consent to such Transfer under this Section 14.2, or (ii) which would cause the proposed Transfer to be more ------------ favorable to the Transferee than the terms set forth in Tenant's original Transfer Notice, Tenant shall again submit the Transfer to Landlord for its approval and other action under this Article 14 (including Landlord's right of ---------- recapture, if any, under Section 14.4 of this Lease). ------------- 14.3 Transfer Premium. If Landlord consents to a Transfer, Landlord shall ----------------- be entitled to one hundred percent (100%) of any "Transfer Premium," as that term is defined in this Section 14.3, received by Tenant from such Transferee. ------------ "Transfer Premium" shall mean all rent, additional rent or other consideration payable by such Transferee in excess of the Rent and Additional Rent payable by Tenant under this Lease, on a per rentable square foot basis if less than all of the Premises is transferred, after deducting the reasonable expenses incurred by Tenant for (i) any changes, alterations and improvements to the Premises in connection with the Transfer, (ii) any brokerage commissions in connection with the Transfer, and (iii) any costs to buy-out or takeover the previous lease of a Transferee. "Transfer Premium" shall also include, but not be limited to, key money and bonus money paid by Transferee to Tenant in connection with such Transfer, and any payment in excess of fair market value for services rendered by Tenant to Transferee or for assets, fixtures, inventory, equipment, or furniture transferred by Tenant to Transferee in connection with such Transfer. 14.4 Landlord's Option as to Subject Space. Notwithstanding anything to the ------------------------------------- contrary contained in this Article 14, Landlord shall have the option, by ---------- giving written notice to Tenant within thirty (30) days after receipt of any Transfer Notice, to (i) recapture the Subject Space, or (ii) take an assignment or sublease of the Subject Space from Tenant. Such recapture, or sublease or assignment notice shall cancel and terminate this Lease, or create a sublease or assignment, as the case may be, with respect to the Subject Space as of the date stated in the Transfer Notice as the effective date of the proposed Transfer until the last day of the term of the Transfer as set forth in the Transfer Notice. In the event of a recapture by Landlord, if this Lease shall be canceled with respect to less than the entire Premises, the Rent reserved herein shall be prorated on the basis of the number of rentable square feet retained by Tenant in proportion to the number of rentable square feet contained in the Premises, and this Lease as so amended shall continue thereafter in full force and effect, and upon request of either party, the parties shall execute written confirmation of the same. If Landlord declines, or fails to elect in a timely manner to recapture, sublease or take an assignment of the Subject Space under this Section 14.4, then, provided Landlord has consented to the proposed ------------- Transfer, Tenant shall be entitled to proceed to transfer the Subject Space to the proposed Transferee, subject to provisions of the last paragraph of Section ------- 14.2 of this Lease. - ---- 14.5 Effect of Transfer. If Landlord consents to a Transfer, (i) the terms ------------------- and conditions of this Lease shall in no way be deemed to have been waived or modified, (ii) such consent shall not be deemed consent to any further Transfer by either Tenant or a Transferee, (iii) Tenant shall deliver to Landlord, promptly after execution, an original executed copy of all documentation pertaining to the Transfer in form reasonably acceptable to Landlord, (iv) Tenant shall furnish upon Landlord's request a complete statement, certified by an independent certified public accountant, or Tenant's chief financial officer, setting forth in detail the computation of any Transfer Premium Tenant has derived and shall derive from such Transfer, and (v) no Transfer relating to this Lease or agreement entered into with respect thereto, whether with or without Landlord's consent, shall relieve Tenant or any guarantor of the Lease from liability under this Lease. Landlord or its authorized representatives shall have the right at all reasonable times to audit the books, records and papers of Tenant relating to any Transfer, and shall have the right to make copies thereof. If the Transfer Premium respecting any Transfer shall be found understated, Tenant shall, within thirty (30) days after demand, pay the deficiency and Landlord's costs of such audit, and if understated by more than ten percent (10%), Landlord shall have the right to cancel this Lease upon thirty (30) days' notice to Tenant. 14.6 Additional Transfers. For purposes of this Lease, the term "Transfer" --------------------- shall also include (i) if Tenant is a partnership, the withdrawal or change, voluntary, involuntary or by operation of law, of twenty-five percent (25%) or more of the partners, or transfer of twenty-five percent or more of partnership interests, within a twelve (12) month period, or the dissolution of the partnership without immediate reconstitution thereof, and (ii) if Tenant is a closely held corporation (i.e., whose stock is not publicly held and not traded through an exchange or over the counter), (A) the dissolution, merger, consolidation or other reorganization of Tenant, the sale or other transfer of more than an aggregate of twenty-five percent (25%) of the voting shares of Tenant (other than to immediate family members by reason of gift or death), within a twelve (12) month period, or (B) the sale, mortgage, hypothecation or pledge of more than an aggregate of twenty-five percent (25%) of the value of the unencumbered assets of Tenant within a twelve (12) month period. 14.7 Non-Transfers. Notwithstanding anything to the contrary contained in ------------- this Lease, provided the use of the Premises remains a "Permitted Use", neither (i) an assignment to a transferee of all or substantially all of the assets of Tenant, (ii) an assignment of the Premises to a transferee which is the resulting entity of a merger or consolidation of Tenant with another entity, nor (iii) an assignment or subletting of all or a portion of the Premises to an affiliate of Tenant (an entity which is controlled by, controls, or is under common control with, Tenant), shall be deemed a Transfer under Article 14 of ---------- this Lease, provided that Tenant notifies Landlord of any such assignment or sublease and promptly supplies Landlord with any documents or information reasonably requested by Landlord regarding such transfer or transferee as set forth in items (i) through (iii) above, that such assignment or sublease is not a subterfuge by Tenant to avoid its obligations under this Lease, and that such transferee or affiliate shall have a net worth (not including goodwill as an asset) computed in accordance with generally accepted accounting principles (the "Net Worth") at least equal to the greater of (A) the Net Worth of Tenant immediately prior to such assignment or sublease, or (B) the Net Worth on the date of this Lease of the original named Tenant. "Control," as used in this Section 14.7, shall mean the ownership, directly or indirectly, of at least ---------- fifty-one percent (51%) of the voting securities of, or possession of the right to vote, in the ordinary direction of its affairs, of at least fifty-one percent (51%) of the voting interest in, any person or entity. ARTICLE 15 SURRENDER OF PREMISES; --------------------------- REMOVAL OF TRADE FIXTURES ----------------------------- 15.1 Surrender of Premises. No act or thing done by Landlord or any agent ----------------------- or employee of Landlord during the Lease Term shall be deemed to constitute an acceptance by Landlord of a surrender of the Premises unless such intent is specifically acknowledged in a writing signed by Landlord. The delivery of keys to the Premises to Landlord or any agent or employee of Landlord shall not constitute a surrender of the Premises or effect a termination of this Lease, whether or not the keys are thereafter retained by Landlord, and notwithstanding such delivery Tenant shall be entitled to the return of such keys at any reasonable time upon request until this Lease shall have been terminated. The voluntary or other surrender of this Lease by Tenant, whether accepted by Landlord or not, or a mutual termination hereof, shall not work a merger, and at the option of Landlord shall operate as an assignment to Landlord of all subleases or subtenancies affecting the Premises. 15.2 Removal of Tenant Property by Tenant. All articles of personal ----------------------------------------- property and all business and trade fixtures, machinery and equipment, furniture and movable partitions owned by Tenant or installed by Tenant at its expense in the Premises, which items are not a part of the tenant improvements installed in the Premises, shall remain the property of Tenant, and may be removed by Tenant at any time during the Lease Term as long as Tenant is not in default under this Lease with any applicable cure period having expired. Upon the expiration of the Lease Term, or upon any earlier termination of this Lease, Tenant shall, subject to the provisions of this Article 15, quit and surrender ---------- possession of the Premises to Landlord in as good order and condition as when Tenant took possession and as thereafter improved by Landlord and/or Tenant, reasonable wear and tear and repairs which are specifically made the responsibility of Landlord hereunder excepted. Upon such expiration or termination, Tenant shall, without expense to Landlord, remove or cause to be removed from the Premises all debris and rubbish, and such items of furniture, equipment, free-standing cabinet work, and other articles of personal property owned by Tenant or installed or placed by Tenant at its expense in the Premises, and such similar articles of any other persons claiming under Tenant, as Landlord may, in its sole discretion, require to be removed, and Tenant shall repair at its own expense all damage to the Premises and Building resulting from such removal. ARTICLE 16 HOLDING OVER ---------------- If Tenant holds over after the expiration of the Lease Term hereof, with or without the express or implied consent of Landlord, such tenancy shall be from month-to-month only, and shall not constitute a renewal hereof or an extension for any further term, and in such case Rent shall be payable at a monthly rate equal to two hundred percent (200%) of the Rent applicable during the last rental period of the Lease Term under this Lease. Such month-to-month tenancy shall be subject to every other term, covenant and agreement contained herein. Nothing contained in this Article 16 shall be construed as consent by Landlord ---------- to any holding over by Tenant, and Landlord expressly reserves the right to require Tenant to surrender possession of the Premises to Landlord as provided in this Lease upon the expiration or other termination of this Lease. The provisions of this Article 16 shall not be deemed to limit or constitute a ----------- waiver of any other rights or remedies of Landlord provided herein or at law. Tenant acknowledges that if Tenant holds over without Landlord's consent, such holding over may compromise or otherwise affect Landlord's ability to enter into new leases with prospective tenants regarding the Premises. Therefore, if Tenant fails to surrender the Premises upon the termination or expiration of this Lease, in addition to any other liabilities to Landlord accruing therefrom, Tenant shall protect, defend, indemnify and hold Landlord harmless from all loss, costs (including reasonable attorneys' fees) and liability resulting from such failure, including, without limiting the generality of the foregoing, any claims made by any succeeding tenant founded upon such failure to surrender, and any losses suffered by Landlord, including lost profits, resulting from such failure to surrender. ARTICLE 17 ESTOPPEL CERTIFICATES ------------------------ Within ten (10) days following a request in writing by Landlord, Tenant shall execute and deliver to Landlord an estoppel certificate, which shall be substantially in the form of Exhibit E, attached hereto, (or such other form as --------- may be required by any prospective mortgagee or purchaser of the Building, or any portion thereof), indicating therein any exceptions thereto that may exist at that time, and shall also contain any other information reasonably requested by Landlord or Landlord's mortgagee or prospective mortgagee or purchasers. Tenant shall execute and deliver whatever other instruments may be reasonably required for such purposes. At any time during the Lease Term, Landlord may require Tenant to provide Landlord with a current financial statement and financial statements of the two (2) years prior to the current financial statement year. Such statements shall be prepared in accordance with generally accepted accounting principles and, if such is the normal practice of Tenant, shall be audited by an independent certified public accountant. Failure of Tenant to timely execute and deliver such estoppel certificate or other instruments shall constitute an acceptance of the Premises and an acknowledgment by Tenant that statements included in the estoppel certificate are true and correct, without exception. ARTICLE 18 SUBORDINATION --------------- This Lease is subject and subordinate to all present and future ground or underlying leases of the Real Property and to the lien of any mortgages or trust deeds, now or hereafter in force against the Real Property and the Building, if any, and to all renewals, extensions, modifications, consolidations and replacements thereof, and to all advances made or hereafter to be made upon the security of such mortgages or trust deeds, unless the holders of such mortgages or trust deeds, or the lessors under such ground lease or underlying leases, require in writing that this Lease be superior thereto. In consideration of, and as a condition precedent to, Tenant's agreement to permit its interest pursuant to this Lease to be subordinated to any particular future ground or underlying lease of the Building or the Real Property or to the lien of any first mortgage or trust deed, hereafter enforced against the Building or the Real Property and to any renewals, extensions, modifications, consolidations and replacements thereof, Landlord shall deliver to Tenant a commercially reasonable non-disturbance agreement executed by the landlord under such ground lease or underlying lease or the holder of such mortgage or trust deed. Tenant covenants and agrees in the event any proceedings are brought for the foreclosure of any such mortgage, to attorn, without any deductions or set-offs whatsoever, to the purchaser upon any such foreclosure sale if so requested to do so by such purchaser, and to recognize such purchaser as the lessor under this Lease. Tenant shall, within five (5) days of request by Landlord, execute such further instruments or assurances as Landlord may reasonably deem necessary to evidence or confirm the subordination or superiority of this Lease to any such mortgages, trust deeds, ground leases or underlying leases. ARTICLE 19 DEFAULTS; REMEDIES -------------------- 19.1 Defaults. The occurrence of any of the following shall constitute a -------- default of this Lease by Tenant: 19.1.1 Any failure by Tenant to pay any Rent or any other charge required to be paid under this Lease, or any part thereof, within three (3) business days of notice that the same is due, which notice shall be in lieu of any notice required under California Code of Civil Procedure Section 1161 or any similar or successor law; or 19.1.2 Any failure by Tenant to observe or perform any other provision, covenant or condition of this Lease to be observed or performed by Tenant where such failure continues for thirty (30) days after written notice thereof from Landlord to Tenant; provided however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161 or any similar or successor law; and provided further that if the nature of such default is such that the same cannot reasonably be cured within a thirty (30) day period, Tenant shall not be deemed to be in default if it diligently commences such cure within such period and thereafter diligently proceeds to rectify and cure said default, as soon as possible; or 19.1.3 To the extent permitted by law, a general assignment by Tenant or any guarantor of the Lease for the benefit of creditors, or the taking of any corporate action in furtherance of bankruptcy or dissolution whether or not there exists any proceeding under an insolvency or bankruptcy law, or the filing by or against Tenant or any guarantor of any proceeding under an insolvency or bankruptcy law, unless in the case of a proceeding filed against Tenant or any guarantor the same is dismissed within sixty (60) days, or the appointment of a trustee or receiver to take possession of all or substantially all of the assets of Tenant or any guarantor, unless possession is restored to Tenant or such guarantor within thirty (30) days, or any execution or other judicially authorized seizure of all or substantially all of Tenant's assets located upon the Premises or of Tenant's interest in this Lease, unless such seizure is discharged within thirty (30) days; or 19.1.4 Abandonment or vacation of the Premises by Tenant; Abandonment is herein defined to include, but is not limited to, any absence by Tenant from the Premises for three (3) business days or longer while in default of any provision of this Lease; or 19.1.5 Tenant's failure to occupy the Premises within ten (10) business days after the Premises are Ready for Occupancy. 19.2 Remedies Upon Default. Upon the occurrence of a default by Tenant, ----------------------- Landlord shall have, in addition to any other remedies available to Landlord at law or in equity, the option to pursue any one or more of the following remedies, each and all of which shall be cumulative and nonexclusive, without any notice or demand whatsoever. 19.2.1 Terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which it may have for possession or arrearages in rent, enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying the Premises or any part thereof, without being liable for prosecution or any claim or damages therefor; and Landlord may recover from Tenant the following: (i) The worth at the time of award of any unpaid rent which has been earned at the time of such termination; plus (ii) The worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus (iii) The worth at the time of award of the amount by which the unpaid rent for the balance of the Lease Term after the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus (iv) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, specifically including but not limited to, brokerage commissions and advertising expenses incurred, expenses of remodeling the Premises or any portion thereof for a new tenant, whether for the same or a different use, and any special concessions made to obtain a new tenant; and (v) At Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law. The term "rent" as used in this Section 19.2 shall be deemed to be and to ------------ mean all sums of every nature required to be paid by Tenant pursuant to the terms of this Lease, whether to Landlord or to others. As used in Paragraphs 19.2.1(i) and (ii), above, the "worth at the time of award" shall be computed by allowing interest at the rate set forth in Article 25 of this Lease, but in no ---------- case greater than the maximum amount of such interest permitted by law. As used in Paragraph 19.2.1(iii) above, the "worth at the time of award" shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). 19.2.2 Landlord shall have the remedy described in California Civil Code Section 1951.4 (lessor may continue lease in effect after lessee's breach and abandonment and recover Rent as it becomes due, if lessee has the right to sublet or assign, subject only to reasonable limitations). Accordingly, if Landlord does not elect to terminate this Lease on account of any default by Tenant, Landlord may, from time to time, without terminating this Lease, enforce all of its rights and remedies under this Lease, including the right to recover all rent as it becomes due. 19.2.3 Landlord may, but shall not be obligated to, make any such payment or perform or otherwise cure any such obligation, provision, covenant or condition on Tenant's part to be observed or performed (and may enter the Premises for such purposes). In the event of Tenant's failure to perform any of its obligations or covenants under this Lease, and such failure to perform poses a material risk of injury or harm to persons or damage to or loss of property, then Landlord shall have the right to cure or otherwise perform such covenant or obligation at any time after such failure to perform by Tenant, whether or not any such notice or cure period set forth in Section 19.1 above has expired. Any ------------ such actions undertaken by Landlord pursuant to the foregoing provisions of this Section 19.2.3 shall not be deemed a waiver of Landlord's rights and remedies as - -------------- a result of Tenant's failure to perform and shall not release Tenant from any of its obligations under this Lease. 19.3 Payment by Tenant. Tenant shall pay to Landlord, within fifteen (15) ------------------- days after delivery by Landlord to Tenant of statements therefor: (i) sums equal to expenditures reasonably made and obligations incurred by Landlord in connection with Landlord's performance or cure of any of Tenant's obligations pursuant to the provisions of Section 19.2.3 above; and (ii) sums equal to all -------------- expenditures made and obligations incurred by Landlord in collecting or attempting to collect the Rent or in enforcing or attempting to enforce any rights of Landlord under this Lease or pursuant to law, including, without limitation, all legal fees and other amounts so expended. Tenant's obligations under this Section 19.3 shall survive the expiration or sooner termination of ------------- the Lease Term. 19.4 Subleases of Tenant. Whether or not Landlord elects to terminate this -------------------- Lease on account of any default by Tenant, as set forth in this Article 19, ---------- Landlord shall have the right to terminate any and all subleases, licenses, concessions or other consensual arrangements for possession entered into by Tenant and affecting the Premises or may, in Landlord's sole discretion, succeed to Tenant's interest in such subleases, licenses, concessions or arrangements. If Landlord elects to succeed to Tenant's interest in any such subleases, licenses, concessions or arrangements, Tenant shall, as of the date of notice by Landlord of such election, have no further right to or interest in the rent or other consideration receivable thereunder. 19.5 Form of Payment After Default. Following the occurrence of a default ------------------------------- by Tenant, Landlord shall have the right to require that any or all subsequent amounts paid by Tenant to Landlord hereunder, whether in the cure of the default in question or otherwise, be paid in the form of money order, cashier's or certified check drawn on an institution acceptable to Landlord, or by other means approved by Landlord, notwithstanding any prior practice of accepting payments in any different form. 19.6 Efforts to Relet. For the purposes of this Article 19, Tenant's right ----------------- ---------- to possession shall not be deemed to have been terminated by efforts of Landlord to relet the Premises, by its acts of maintenance or preservation with respect to the Premises, or by appointment of a receiver to protect Landlord's interests hereunder. The foregoing enumeration is not exhaustive, but merely illustrative of acts which may be performed by Landlord without terminating Tenant's right to possession. 19.7 Late Charges; Interest. If any installment of Rent or any other sum ------------------------ due from Tenant shall not be received by Landlord or Landlord's designee within five (5) days after said amount is due, then Tenant shall pay to Landlord a late charge equal to five percent (5%) of the overdue amount, plus any attorneys' fees incurred by Landlord by reason of Tenant's failure to pay Rent and/or other charges when due hereunder. The late charge shall be deemed Additional Rent and the right to require it shall be in addition to all of Landlord's other rights and remedies hereunder or at law and shall not be construed as liquidated damages or as limiting Landlord's remedies in any manner. In addition to the late charge described above, any Rent or other amounts owing hereunder which are not paid on or before the date they are due shall thereafter bear interest until paid at a rate per annum equal to four percent (4%) above the prime lending rate from time to time charged by Wells Fargo Bank per annum, provided that in no case shall such rate be higher than the highest rate permitted by applicable law. ARTICLE 20 ATTORNEYS' FEES ----------------- If either party commences litigation against the other for the specific performance of this Lease, for damages for the breach hereof or otherwise for enforcement of any remedy hereunder, the parties hereto agree to and hereby do waive any right to a trial by jury and, in the event of any such commencement of litigation, the prevailing party shall be entitled to recover from the other party such costs and reasonable attorneys' fees as may have been incurred. ARTICLE 21 SECURITY DEPOSIT ------------------ Concurrent with Tenant's execution of this Lease, Tenant shall deposit with Landlord a security deposit (the "Security Deposit") in the amount set forth in Section 10 of the Summary. The Security Deposit shall be held by Landlord as - ----------- security for the faithful performance by Tenant of all the terms, covenants, and conditions of this Lease to be kept and performed by Tenant during the Lease Term. If Tenant defaults with respect to any provisions of this Lease, including, but not limited to, the provisions relating to the payment of Rent, Landlord may, but shall not be required to, use, apply or retain all or any part of the Security Deposit for the payment of any Rent or any other sum in default, or for the payment of any amount that Landlord may spend or become obligated to spend by reason of Tenant's default, or to compensate Landlord for any other loss or damage that Landlord may suffer by reason of Tenant's default. If any portion of the Security Deposit is so used or applied, Tenant shall, within five (5) days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount, and Tenant's failure to do so shall be a default under this Lease. If Tenant shall fully and faithfully perform every provision of this Lease to be performed by it, the Security Deposit, or any balance thereof, shall be returned to Tenant, or, at Landlord's option, to the last assignee of Tenant's interest hereunder, within sixty (60) days following the expiration of the Lease Term. Tenant shall not be entitled to any interest on the Security Deposit. Tenant hereby waives the provisions of Section 1950.7 of the California Civil Code, and all other provisions of law, now or hereafter in force, which provide that Landlord may claim from a security deposit only those sums reasonably necessary to remedy defaults in the payment of rent, to repair damage caused by Tenant or to clean the Premises, it being agreed that Landlord may, in addition, claim those sums reasonably necessary to compensate Landlord for any other loss or damage, foreseeable or unforeseeable, caused by the act or omission of Tenant or any officer, employee, agent or invitee of Tenant. ARTICLE 22 SUBSTITUTION OF OTHER PREMISES ---------------------------------- If Landlord requires the Premises for use by another tenant or for other reasons connected with the Building planning program, then Landlord shall have the right, upon sixty (60) days' prior written notice to Tenant, to relocate the Premises to other space in the Building of substantially similar size as the Premises, and with tenant improvements of substantially similar age, quality and layout as then existing in the Premises. In the event of any such relocation, Landlord shall pay for the cost of providing such substantially similar tenant improvements (but not any furniture or personal property), and Landlord shall reimburse Tenant, within thirty (30) days after Landlord's receipt of invoices and paid receipts, for the reasonable moving, telephone installation and stationery reprinting costs actually paid for by Tenant in connection with such relocation. If Landlord so relocates Tenant, the terms and conditions of this Lease shall remain in full force and effect and apply to the new space, except that (a) a revised Exhibit A shall become part of this Lease and shall reflect --------- the location of the new space, (b) the Summary of Basic Lease Information of this Lease shall be amended to include and state all correct data as to the new space, and (c) such new space shall thereafter be deemed to be the "Premises". Notwithstanding the foregoing provisions of this Article 22 to the contrary, if ---------- the new space contains more rentable square feet than the original Premises, Tenant shall not be obligated to pay any more Base Rent or Direct Expenses than otherwise applicable to the original Premises. Landlord and Tenant agree to cooperate fully in order to minimize the inconvenience of Tenant resulting from such relocation. ARTICLE 23 SIGNS ---------- 23.1 Full Floor Tenants. Subject to Landlord's prior written approval, in -------------------- its sole discretion, and provided all signs are in keeping with the quality, design and style of the Building, Tenant, if the Premises comprise an entire floor of the Building, at its sole cost and expense, may install identification signage anywhere in the Premises including in the elevator lobby of the Premises, provided that such signs must not be visible from the exterior of the Building. 23.2 Multi-Tenant Floor Tenants. If Tenant occupies less than the entire ---------------------------- floor on which the Premises is located, Tenant's identifying signage shall be provided by Landlord and such signage shall be comparable to that used by Landlord for other similar floors in the Building and shall comply with Landlord's Building standard signage program. Any additions, deletions or modifications to such Building standard signage shall be at Tenant's sole expense and shall be subject to the prior written approval of Landlord in its sole discretion. 23.3 Prohibited Signage and Other Items. Any signs, notices, logos, -------------------------------------- pictures, names or advertisements which are installed and that have not been individually approved by Landlord may be removed without notice by Landlord at the sole expense of Tenant. Tenant may not install any signs on the roof of the Building or on the Real Property. Any signs, window coverings, or blinds (even if the same are located behind the Landlord approved window coverings for the Building), or other items visible from the exterior of the Premises or Building are subject to the prior written approval of Landlord in its sole discretion. 23.4 Eyebrow Sign. Subject to approval by all applicable governmental ------------- authorities, Landlord hereby grants Tenant the non-exclusive right to have one (1) exterior "eyebrow" sign (the "Eyebrow Sign") installed on the front of the Building in a location approved by Landlord in its reasonable discretion to contain the name "Leisure Industries." Tenant shall be solely responsible for all costs incurred by Landlord in connection with the installation, maintenance and eventual removal of the Eyebrow Sign, all of which shall be performed by contractors selected or approved by Landlord. The sign rights granted herein are personal to the original Tenant executing this Lease and may not be assigned, voluntarily or involuntarily, to any person or entity except to a successor by merger or reorganization. The sign rights granted to the original Tenant hereunder are not assignable separate and apart from this Lease, nor may any right granted herein be separated from this Lease in any manner, either by reservation or otherwise. ARTICLE 24 COMPLIANCE WITH LAW ---------------------- Tenant shall not do anything or suffer anything to be done in or about the Premises which will in any way conflict with any law, statute, ordinance or other governmental rule, regulation or requirement now in force or which may hereafter be enacted or promulgated. Should any standard or regulation now or hereafter be imposed on Landlord or Tenant by a state, federal or local governmental body charged with the establishment, regulation and enforcement of occupational, health or safety standards for employers, employees, landlords or tenants, then Tenant agrees, at its sole cost and expense, to comply promptly with such standards or regulations. Tenant shall be responsible, at its sole cost and expense, to make all alterations to the Premises as are required to comply with the governmental rules, regulations, requirements or standards described in this Article 24. The judgment of any court of competent ----------- jurisdiction or the admission of Tenant in any judicial action, regardless of whether Landlord is a party thereto, that Tenant has violated any of said governmental measures, shall be conclusive of that fact as between Landlord and Tenant. ARTICLE 25 ENTRY BY LANDLORD ------------------- Landlord reserves the right at all reasonable times and upon reasonable notice to the Tenant to enter the Premises to (i) inspect them; (ii) show the Premises to prospective purchasers, mortgagees or ground or underlying lessors, or, during the last twelve (12) months of the Lease Term, prospective tenants; (iii) post notices of nonresponsibility; or (iv) alter, improve or repair the Premises or the Building if necessary to comply with current building codes or other applicable laws, or for structural alterations, repairs or improvements to the Building. Notwithstanding anything to the contrary contained in this Article 25, Landlord may enter the Premises at any time to (A) perform services ----- required of Landlord; (B) take possession due to any breach of this Lease in the manner provided herein; and (C) perform any covenants of Tenant which Tenant fails to perform. Landlord may make any such entries without the abatement of Rent and may take such steps as required to accomplish the stated purposes; provided, however, that any such entry shall be accomplished as expeditiously as reasonably possible and in a manner so as to cause as little interference to Tenant as reasonably possible. Tenant hereby waives any claims for damages or for any injuries or inconvenience to or interference with Tenant's business, lost profits, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned thereby. For each of the above purposes, Landlord shall at all times have a key with which to unlock all the doors in the Premises, excluding Tenant's vaults, safes and special security areas designated in advance by Tenant. In an emergency, Landlord shall have the right to use any means that Landlord may deem proper to open the doors in and to the Premises. Any entry into the Premises by Landlord in the manner hereinbefore described shall not be deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an actual or constructive eviction of Tenant from any portion of the Premises. ARTICLE 26 TENANT PARKING ---------------- Tenant shall have the right to use the parking area servicing the Building on a non-exclusive basis. Tenant's continued right to use the parking area is conditioned upon Tenant abiding by all rules and regulations which are prescribed from time to time for the orderly operation and use of the parking area and upon Tenant's cooperation in seeing that Tenant's employees and visitors also comply with such rules and regulations. Landlord specifically reserves the right to change the location, size, configuration, design, layout and all other aspects of the parking area in question, including the discontinuance of any reserved parking spaces, at any time and Tenant acknowledges and agrees that Landlord may, without incurring any liability to Tenant and without any abatement of Rent under this Lease, from time to time, close-off or restrict access to the parking area in question for purposes of permitting or facilitating any such construction, alteration or improvements. Landlord may totally or partially delegate its responsibilities hereunder to a parking operator in which case such parking operator shall have all the rights of control delegated by Landlord. Landlord shall provide Tenant with Twenty-Seven (27) unreserved employee parking spaces (of which Tenant may elect, subject to availability and upon thirty (30) days prior written notice to Landlord, to convert up to three (3) of such unreserved spaces to reserved employee parking spaces at Landlord's then current rates for such reserved spaces, provided such rates shall not exceed $75.00 per reserved space per month during the first five (5) years of the initial Lease Term) within the parking area servicing the Building. Provided Tenant is not in default under this Lease, unreserved employee parking spaces shall be provided at no charge to the Tenant for the first five (5) years of the initial Lease Term. Subject to the terms of this Article 26, Landlord reserves the right to institute at any time during the Term hereof, a controlled parking operation ("Controlled Parking") for the Building and/or any adjoining property of Landlord, which may include monthly parking charges. If Landlord implements Controlled Parking, Tenant shall pay the then current monthly parking charges established by Landlord for unreserved and reserved parking spaces at the Building, and Tenant shall be obligated to pay said monthly fees for each of the parking spaces granted to Tenant hereunder, whether or not Tenant elects to use all of its parking spaces. ARTICLE 27 MISCELLANEOUS PROVISIONS ------------------------- 27.1 Binding Effect. Each of the provisions of this Lease shall extend to --------------- and shall, as the case may require, bind or inure to the benefit not only of Landlord and of Tenant, but also of their respective successors or assigns, provided this clause shall not permit any assignment by Tenant contrary to the provisions of Article 14 of this Lease. ----------- 27.2 No Air Rights. No rights to any view or to light or air over any --------------- property, whether belonging to Landlord or any other person, are granted to Tenant by this Lease. If at any time any windows of the Premises are temporarily darkened or the light or view therefrom is obstructed by reason of any repairs, improvements, maintenance or cleaning in or about the Building, the same shall be without liability to Landlord and without any reduction or diminution of Tenant's obligations under this Lease. 27.3 Modification of Lease. Should any current or prospective mortgagee or ---------------------- ground lessor for the Building require a modification or modifications of this Lease, which modification or modifications will not cause an increased cost or expense to Tenant or in any other way materially and adversely change the rights and obligations of Tenant hereunder, then and in such event, Tenant agrees that this Lease may be so modified and agrees to execute whatever documents are required therefor and deliver the same to Landlord within ten (10) days following the request therefor. Should Landlord or any such prospective mortgagee or ground lessor require execution of a short form of Lease for recording, containing, among other customary provisions, the names of the parties, a description of the Premises and the Lease Term, Tenant agrees to execute such short form of Lease and to deliver the same to Landlord within ten (10) days following the request therefor. 27.4 Transfer of Landlord's Interest. Tenant acknowledges that Landlord has ------------------------------- the right to transfer all or any portion of its interest in the Real Property and Building and in this Lease, and Tenant agrees that in the event of any such transfer and a transfer of the Security Deposit, Landlord shall automatically be released from all liability under this Lease and Tenant agrees to look solely to such transferee for the performance of Landlord's obligations hereunder after the date of transfer. Tenant further acknowledges that Landlord may assign its interest in this Lease to a mortgage lender as additional security and agrees that such an assignment shall not release Landlord from its obligations hereunder and that Tenant shall continue to look to Landlord for the performance of its obligations hereunder. 27.5 Prohibition Against Recording. Except as provided in Section 27.3 of ------------------------------- ------------ this Lease, neither this Lease, nor any memorandum, affidavit or other writing with respect thereto, shall be recorded by Tenant or by anyone acting through, under or on behalf of Tenant, and the recording thereof in violation of this provision shall make this Lease null and void at Landlord's election. 27.6 Captions. The captions of Articles and Sections are for convenience -------- only and shall not be deemed to limit, construe, affect or alter the meaning of such Articles and Sections. 27.7 Relationship of Parties. Nothing contained in this Lease shall be ------------------------- deemed or construed by the parties hereto or by any third party to create the relationship of principal and agent, partnership, joint venturer or any association between Landlord and Tenant, it being expressly understood and agreed that neither the method of computation of Rent nor any act of the parties hereto shall be deemed to create any relationship between Landlord and Tenant other than the relationship of landlord and tenant. 27.8 Time of Essence. Time is of the essence of this Lease and each of its ---------------- provisions. 27.9 Partial Invalidity. If any term, provision or condition contained in ------------------- this Lease shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, provision or condition to persons or circumstances other than those with respect to which it is invalid or unenforceable, shall not be affected thereby, and each and every other term, provision and condition of this Lease shall be valid and enforceable to the fullest extent possible permitted by law. 27.10 Landlord Exculpation. It is expressly understood and agreed that --------------------- notwithstanding anything in this Lease to the contrary, and notwithstanding any applicable law to the contrary, the liability of Landlord and the Landlord Parties hereunder (including any successor landlord) and any recourse by Tenant against Landlord or the Landlord Parties shall be limited solely and exclusively to an amount which is equal to the interest of Landlord in the Building, and neither Landlord, nor any of the Landlord Parties shall have any personal liability therefor, and Tenant hereby expressly waives and releases such personal liability on behalf of itself and all persons claiming by, through or under Tenant. 27.11 Entire Agreement. It is understood and acknowledged that there are no ---------------- oral agreements between the parties hereto affecting this Lease and this Lease supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements and understandings, if any, between the parties hereto or displayed by Landlord to Tenant with respect to the subject matter thereof, and none thereof shall be used to interpret or construe this Lease. This Lease, the exhibits and schedules attached hereto, and any side letter or separate agreement executed by Landlord and Tenant in connection with this Lease and dated of even date herewith contain all of the terms, covenants, conditions, warranties and agreements of the parties relating in any manner to the rental, use and occupancy of the Premises, shall be considered to be the only agreement between the parties hereto and their representatives and agents, and none of the terms, covenants, conditions or provisions of this Lease can be modified, deleted or added to except in writing signed by the parties hereto. 27.12 Right to Lease. Landlord reserves the absolute right to effect such ---------------- other tenancies in the Building as Landlord in the exercise of its sole business judgment shall determine to best promote the interests of the Building. Tenant does not rely on the fact, nor does Landlord represent, that any specific tenant or type or number of tenants shall, during the Lease Term, occupy any space in the Building. 27.13 Force Majeure. Any prevention, delay or stoppage due to strikes, -------------- lockouts, labor disputes, acts of God, inability to obtain services, labor, or materials or reasonable substitutes therefor, governmental actions, civil commotions, fire or other casualty, and other causes beyond the reasonable control of the party obligated to perform (collectively, the "Force Majeure"), except with respect to the obligations imposed with regard to Rent and other charges to be paid by Tenant pursuant to this Lease, and except as to Tenant's obligations under Articles 5 and 24 of this Lease notwithstanding anything to ------------------ the contrary contained in this Lease, shall excuse the performance of such party for a period equal to any such prevention, delay or stoppage and, therefore, if this Lease specifies a time period for performance of an obligation of either party, that time period shall be extended by the period of any delay in such party's performance caused by a Force Majeure. 27.14 Notices. All notices, demands, statements, approvals or ------- communications (collectively, "Notices") given or required to be given by either --- party to the other hereunder shall be in writing, shall be sent by United States certified or registered mail, postage prepaid, return receipt requested, or delivered personally (i) to Tenant at the appropriate address set forth in Section 5 of the Summary, or to such other place as Tenant may from time to time -- designate in a Notice to Landlord; or (ii) to Landlord at the addresses set forth in Section 3 of the Summary, or to such other firm or to such other place --------- as Landlord may from time to time designate in a Notice to Tenant. Any Notice will be deemed given on the date it is mailed as provided in this Section 27.14 ------------- or upon the date personal delivery is made or attempted to be made. If Tenant is notified of the identity and address of Landlord's mortgagee or ground or underlying lessor, Tenant shall give to such mortgagee or ground or underlying lessor written notice of any default by Landlord under the terms of this Lease by registered or certified mail, and such mortgagee or ground or underlying lessor shall be given a reasonable opportunity to cure such default prior to Tenant's exercising any remedy available to Tenant. 27.15 Joint and Several. If there is more than one Tenant, the obligations ------------------ imposed upon Tenant under this Lease shall be joint and several. 27.16 Authority. If Tenant is a corporation or partnership, each individual --------- executing this Lease on behalf of Tenant hereby represents and warrants that Tenant is a duly formed and existing entity qualified to do business in California and that Tenant has full right and authority to execute and deliver this Lease and that each person signing on behalf of Tenant is authorized to do so. 27.17 Governing Law. This Lease shall be construed and enforced in -------------- accordance with the laws of the State of California. 27.18 Submission of Lease. Submission of this instrument for examination or ------------------- signature by Tenant does not constitute a reservation of or an option for lease, and it is not effective as a lease or otherwise until execution and delivery by both Landlord and Tenant. 27.19 Brokers. Landlord and Tenant hereby warrant to each other that they ------- have had no dealings with any real estate broker or agent in connection with the negotiation of this Lease, excepting only the real estate brokers or agents specified in Section 12 of the Summary and Landlord's designated representative ---------- (the "Brokers"), and that they know of no other real estate broker or agent who is entitled to a commission in connection with this Lease. Landlord shall pay the brokerage commissions owing to the Brokers in connection with the transaction contemplated by this Lease pursuant to the terms of a separate written agreement between Landlord and the Brokers. Each party agrees to indemnify and defend the other party against and hold the other party harmless from any and all claims, demands, losses, liabilities, lawsuits, judgments, and costs and expenses (including without limitation reasonable attorneys' fees) with respect to any leasing commission or equivalent compensation alleged to be owing on account of the indemnifying party's dealings with any real estate broker or agent other than the Brokers. The terms of this Section 27.19 shall ------------- survive the expiration or earlier termination of the Lease Term. 27.20 Independent Covenants. This Lease shall be construed as though the ---------------------- covenants herein between Landlord and Tenant are independent and not dependent and Tenant hereby expressly waives the benefit of any statute to the contrary and agrees that if Landlord fails to perform its obligations set forth herein, Tenant shall not be entitled to make any repairs or perform any acts hereunder at Landlord's expense or to any setoff of the Rent or other amounts owing hereunder against Landlord; provided, however, that the foregoing shall in no way impair the right of Tenant to commence a separate action against Landlord for any violation by Landlord of the provisions hereof so long as notice is first given to Landlord and any holder of a mortgage or deed of trust covering the Building, Real Property or any portion thereof, of whose address Tenant has theretofore been notified, and an opportunity is granted to Landlord and such holder to correct such violations as provided above. 27.21 Building Name and Signage. Landlord shall have the right at any time -------------------------- to change the name of the Building and to install, affix and maintain any and all signs on the exterior and on the interior of the Building as Landlord may, in Landlord's sole discretion, desire. Tenant shall not use the name of the Building or use pictures or illustrations of the Building in advertising or other publicity, without the prior written consent of Landlord. 27.22 Transportation Management. Tenant shall fully comply with all present ------------------------- or future programs intended to manage parking, transportation or traffic in and around the Building, and in connection therewith, Tenant shall take responsible action for the transportation planning and management of all employees located at the Premises by working directly with Landlord, any governmental transportation management organization or any other transportation-related committees or entities. 27.23 Successors. Except as otherwise expressly provided herein, the ---------- obligations of this Lease shall bind and benefit the successors and assigns of the parties hereto; provided, however, that no assignment, sublease or other transfer in violation of the provisions of Article 14 shall operate to vest any ---------- rights in any putative assignee, subtenant or transferee of Tenant. 27.24 Landlord Renovations. It is specifically understood and agreed that --------------------- Landlord has made no representation or warranty to Tenant and has no obligation to alter, remodel, improve, renovate, repair or decorate the Premises, Building, or any part thereof and that no representations respecting the condition of the Premises or the Building have been made by Landlord to Tenant except as specifically set forth herein or in the Tenant Work Letter. However, Tenant acknowledges that Landlord may during the Lease Term renovate, improve, alter, or modify (collectively, the "Renovations") the Building, Premises, and/or Real Property, including without limitation the parking structure, common areas, systems and equipment, roof, and structural portions of the same, which Renovations may include, without limitation, (i) installing sprinklers in the Building common areas and tenant spaces, (ii) modifying the common areas and tenant spaces to comply with applicable laws and regulations, including regulations relating to the physically disabled, seismic conditions, and building safety and security, and (iii) installing new floor covering, lighting, and wall coverings in the Building common areas, and in connection with any Renovations, Landlord may, among other things, erect scaffolding or other necessary structures in the Building, limit or eliminate access to portions of the Real Property, including portions of the common areas, or perform work in the Building, which work may create noise, dust or leave debris in the Building. Tenant hereby agrees that such Renovations and Landlord's actions in connection with such Renovations shall in no way constitute a constructive eviction of Tenant nor entitle Tenant to any abatement of Rent. Landlord shall have no responsibility or for any reason be liable to Tenant for any direct or indirect injury to or interference with Tenant's business arising from the Renovations, nor shall Tenant be entitled to any compensation or damages from Landlord for loss of the use of the whole or any part of the Premises or of Tenant's personal property or improvements resulting from the Renovations or Landlord's actions in connection with such Renovations, or for any inconvenience or annoyance occasioned by such Renovations or Landlord's actions in connection with such Renovations. 27.25 Covenant of Quiet Enjoyment. Landlord's title is and always shall be ---------------------------- paramount to the title of Tenant. Nothing herein contained shall empower Tenant to do any act which can, shall or may encumber the title of Landlord. Landlord covenants that Tenant, on paying the Rent, charges for services and other payments herein reserved and on keeping, observing and performing all the other terms, covenants, conditions, provisions and agreements herein contained on the part of Tenant to be kept, observed and performed, shall, during the Lease Term, peaceably and quietly have, hold and enjoy the Premises subject to the terms, covenants, conditions, provisions and agreements hereof without interference by any persons lawfully claiming by or through Landlord. The foregoing covenant is in lieu of any other covenant express or implied. 27.26 Confidentiality. Tenant acknowledges that the content of this Lease --------------- and any related documents are confidential information. Tenant shall keep such confidential information strictly confidential and shall not disclose such confidential information to any person or entity other than Tenant's financial, legal, accounting, real estate and space planning consultants, respectively, or as otherwise required by law. 27.27 No Waiver. No waiver of any provision of this Lease shall be implied ---------- by any failure of a party to enforce any remedy on account of the violation of such provision, even if such violation shall continue or be repeated subsequently, any waiver by a party of any provision of this Lease may only be in writing, and no express waiver shall affect any provision other than the one specified in such waiver and that one only for the time and in the manner specifically stated. No receipt of monies by Landlord from Tenant after the termination of this Lease shall in any way alter the length of the Lease Term or of Tenant's right of possession hereunder or after the giving of any notice shall reinstate, continue or extend the Lease Term or affect any notice given Tenant prior to the receipt of such monies, it being agreed that after the service of notice or the commencement of a suit or after final judgment for possession of the Premises, Landlord may receive and collect any Rent due, and the payment of said Rent shall not waive or affect said notice, suit or judgment. 27.28 Jury Trial; Attorneys' Fees. IF EITHER PARTY COMMENCES LITIGATION ------------------------------ AGAINST THE OTHER FOR THE SPECIFIC PERFORMANCE OF THIS LEASE, FOR DAMAGES FOR THE BREACH HEREOF OR OTHERWISE FOR ENFORCEMENT OF ANY REMEDY HEREUNDER, THE PARTIES HERETO AGREE TO AND HEREBY DO WAIVE ANY RIGHT TO A TRIAL BY JURY. In the event of any such commencement of litigation, the prevailing party shall be entitled to recover from the other party such costs and reasonable attorneys' fees as may have been incurred, including any and all costs incurred in enforcing, perfecting and executing such judgment. 27.29 AIRCRAFT NOISE DISCLOSURES. TENANT ACKNOWLEDGES THAT IT HAS READ AND --------------------------- UNDERSTANDS THE AIRCRAFT NOTIFICATION WHICH IS ATTACHED HERETO AS EXHIBIT F. SUCH INSTRUMENT CONTAINS CERTAIN IMPORTANT DISCLOSURES RESPECTING THE PREMISES TENANT IS LEASING. THE DESCRIPTION OF THE OPERATIONS SET FORTH IN THE ATTACHED AIRCRAFT NOTIFICATION HAVE BEEN PROVIDED BY USMCAS-EL TORO AND MAY BE SUBJECT TO CHANGE FROM TIME TO TIME WITHOUT NOTICE. LANDLORD MAKES NO REPRESENTATIONS AND DISCLAIMS ANY RESPONSIBILITY FOR THE ACCURACY OF ANY SUCH INFORMATION. TENANT SHALL BE RESPONSIBLE FOR INSPECTION OF THE PREMISES AND THE COMMON AREA BEING LEASED IN ORDER TO SPECIFICALLY CONSIDER THE EXPOSURE OF SUCH PREMISES AND COMMON AREA TO NOISE THAT MAY OCCUR ON, ABOUT OR IN THE VICINITY OF THE PREMISES AND COMMON AREA, INCLUDING BUT NOT LIMITED TO FLIGHT ACTIVITY TO AND FROM MCAS-EL TORO WHICH IS IN CLOSE PROXIMITY TO THE PREMISES AND COMMON AREA. IN ADDITION, TENANT SHALL BE RESPONSIBLE FOR CONSIDERING ANY AND ALL POTENTIAL HAZARDS CAUSED BY THE OVER-FLIGHT OF AIRCRAFT AND HELICOPTER ACTIVITY WHICH MAY OCCUR ON, ABOUT OR IN THE VICINITY OF THE PREMISES AND COMMON AREA INCLUDING, BUT NOT LIMITED TO, OVER-FLIGHTS TO AND FROM MCAS-EL TORO. IN LEASING THE PREMISES, TENANT IS NOT RELYING UPON ANY REPRESENTATION BY LANDLORD RESPECTING THE POTENTIAL HAZARD TO THE PREMISES AND COMMON AREA FROM ANY AND ALL SUCH AIRCRAFT ACTIVITY OR NOISES, AND LANDLORD DISCLAIMS ANY AND ALL RESPONSIBILITY FOR PROTECTING THE PREMISES AND COMMON AREA FROM, AND ANY REPRESENTATION RESPECTING ANY REAL OR POTENTIAL EXPOSURE OF, THE PREMISES AND COMMON AREA TO SUCH NOISE OR POTENTIAL HAZARDS FROM ANY SUCH AIRCRAFT ACTIVITY. IN WITNESS WHEREOF, Landlord and Tenant have caused their duly authorized representatives to execute this Lease as of the day and date first above written. "Landlord" AMERICAN SPECTRUM REALTY MANAGEMENT, INC., a Delaware corporation, as agent for owner By: ______________________________________ Name: Patricia A. Nooney Its: Vice President "Tenant" LEISURE INDUSTRIES CORPORATION OF AMERICA, a Delaware corporation By: _______________________________________ Print Name: _____________________________ Its: ______________________________________ By: _______________________________________ Print Name: ______________________________ Its: ______________________________________ EXHIBIT A --------- OUTLINE OF PREMISES ------------------- EXHIBIT B --------- RULES AND REGULATIONS --------------------- Tenant shall faithfully observe and comply with the following Rules and Regulations. Landlord shall not be responsible to Tenant for the nonperformance of any of said Rules and Regulations by or otherwise with respect to the acts or omissions of any other tenants or occupants of the Real Property. 1. Tenant shall not alter any lock or install any new or additional locks or bolts on any doors or windows of the Premises without obtaining Landlord's prior written consent. Tenant shall bear the cost of any lock changes or repairs required by Tenant. Two keys will be furnished by Landlord for the Premises, and any additional keys required by Tenant must be obtained from Landlord at a reasonable cost to be established by Landlord. 2. All doors opening to public corridors shall be kept closed at all times except for normal ingress and egress to the Premises. 3. Landlord reserves the right to close and keep locked all entrance and exit doors of the Building during such hours as are customary for comparable buildings in the greater Los Angeles area. Tenant, its employees and agents must be sure that the doors to the Building are securely closed and locked when leaving the Premises if it is after the normal hours of business for the Building. Any tenant, its employees, agents or any other persons entering or leaving the Building at any time when it is so locked, or any time when it is considered to be after normal business hours for the Building, may be required to sign the Building register. Access to the Building may be refused unless the person seeking access has proper identification or has a previously arranged pass for access to the Building. Landlord and his agents shall in no case be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. In case of invasion, mob, riot, public excitement, or other commotion, Landlord reserves the right to prevent access to the Building or the Real Property during the continuance thereof by any means it deems appropriate for the safety and protection of life and property. 4. No furniture, freight or equipment of any kind shall be brought into the Building without prior notice to Landlord. All moving activity into or out of the Building shall be scheduled with Landlord and done only at such time and in such manner as Landlord designates. Landlord shall have the right to prescribe the weight, size and position of all safes and other heavy property brought into the Building and also the times and manner of moving the same in and out of the Building. Safes and other heavy objects shall, if considered necessary by Landlord, stand on supports of such thickness as is necessary to properly distribute the weight. Landlord will not be responsible for loss of or damage to any such safe or property in any case. Any damage to any part of the Building, its contents, occupants or visitors by moving or maintaining any such safe or other property shall be the sole responsibility and expense of Tenant. 5. No furniture, packages, supplies, equipment or merchandise will be received in the Building or carried up or down in the elevators, except between such hours and in such specific elevator as shall be designated by Landlord. 6. The requirements of Tenant will be attended to only upon application at the management office for the Real Property or at such office location designated by Landlord. Employees of Landlord shall not perform any work or do anything outside their regular duties unless under special instructions from Landlord. 7. Tenant shall not disturb, solicit, or canvass any occupant of the Real Property and shall cooperate with Landlord and its agents of Landlord to prevent the same. 8. The toilet rooms, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed, and no foreign substance of any kind whatsoever shall be thrown therein. The expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the tenant who, or whose employees or agents, shall have caused it. 9. Tenant shall not overload the floor of the Premises, nor mark, drive nails or screws, or drill into the partitions, woodwork or plaster or in any way deface the Premises or any part thereof without Landlord's prior written consent. 10. Except for vending machines intended for the sole use of Tenant's employees and invitees, no vending machine or machines other than fractional horsepower office machines shall be installed, maintained or operated upon the Premises without the written consent of Landlord. 11. Tenant shall not use or keep in or on the Premises, the Building, or the Real Property any kerosene, gasoline, explosive material, corrosive material, material capable of emitting toxic fumes, or other inflammable or combustible fluid or material. Tenant shall provide material safety data sheets for any Hazardous Material used or kept on the Premises. 12. Tenant shall not without the prior written consent of Landlord use any method of heating or air conditioning other than that supplied by Landlord. 13. Tenant shall not use, keep or permit to be used or kept, any foul or noxious gas or substance in or on the Premises, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Real Property by reason of noise, odors, or vibrations, or interfere in any way with other tenants or those having business therein. 14. Tenant shall not bring into or keep within the Real Property, the Building or the Premises any animals, birds, bicycles or other vehicles. 15. No cooking shall be done or permitted on the Premises, nor shall the Premises be used for the storage of merchandise, for lodging or for any improper, objectionable or immoral purposes. Notwithstanding the foregoing, Underwriters' laboratory-approved equipment and microwave ovens may be used in the Premises for heating food and brewing coffee, tea, hot chocolate and similar beverages for employees and visitors, provided that such use is in accordance with all applicable federal, state and city laws, codes, ordinances, rules and regulations. 16. Landlord will approve where and how telephone and telegraph wires are to be introduced to the Premises. No boring or cutting for wires shall be allowed without the consent of Landlord. The location of telephone, call boxes and other office equipment affixed to the Premises shall be subject to the approval of Landlord. 17. Landlord reserves the right to exclude or expel from the Real Property any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of any of these Rules and Regulations. 18. Tenant, its employees and agents shall not loiter in or on the entrances, corridors, sidewalks, lobbies, halls, stairways, elevators, or any common areas of the Building for the purpose of smoking tobacco products or for any other purpose, nor in any way obstruct such areas, and shall use them only as a means of ingress and egress for the Premises. 19. Tenant shall not waste electricity, water or air conditioning and agrees to cooperate fully with Landlord to ensure the most effective operation of the Building's heating and air conditioning system, and shall refrain from attempting to adjust any controls. Tenant shall participate in recycling programs undertaken by Landlord. 20. Tenant shall store all its trash and garbage within the interior of the Premises. No material shall be placed in the trash boxes or receptacles if such material is of such nature that it may not be disposed of in the ordinary and customary manner of removing and disposing of trash in the vicinity of the Building without violation of any law or ordinance governing such disposal. All trash, garbage and refuse disposal shall be made only through entry-ways and elevators provided for such purposes at such times as Landlord shall designate. If the Premises is or becomes infested with vermin as a result of the use or any misuse or neglect of the Premises by Tenant, its agents, servants, employees, contractors, visitors or licensees, Tenant shall forthwith, at Tenant's expense, cause the Premises to be exterminated from time to time to the satisfaction of Landlord and shall employ such licensed exterminators as shall be approved in writing in advance by Landlord. 21. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency. 22. Tenant shall assume any and all responsibility for protecting the Premises from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Premises closed. 23. No awnings or other projection shall be attached to the outside walls of the Building without the prior written consent of Landlord. No curtains, blinds, shades or screens shall be attached to or hung in, or used in connection with, any window or door of the Premises without the prior written consent of Landlord. Tenant shall be responsible for any damage to the window film on the exterior windows of the Premises and shall promptly repair any such damage at Tenant's sole cost and expense. Tenant shall keep its window coverings closed during any period of the day when the sun is shining directly on the windows of the Premises. Prior to leaving the Premises for the day, Tenant shall draw or lower window coverings and extinguish all lights. All electrical ceiling fixtures hung in offices or spaces along the perimeter of the Building must be fluorescent and/or of a quality, type, design and bulb color approved by Landlord. 24. The sashes, sash doors, skylights, windows, and doors that reflect or admit light and air into the halls, passageways or other public places in the Building shall not be covered or obstructed by Tenant, nor shall any bottles, parcels or other articles be placed on the windowsills. 25. Tenant must comply with requests by Landlord concerning the informing of their employees of items of importance to Landlord. 26. Tenant shall not use in any space or in the public halls of the Building any hand trucks except those equipped with rubber tires and side guards or such other material-handling equipment as Landlord may approve. Tenant shall not bring any other vehicles of any kind into the Building. 27. Without the written consent of Landlord, Tenant shall not use the name of the Building in connection with or in promoting or advertising the business of Tenant except as Tenant's address. 28. Tenant shall not purchase spring water, towels, janitorial or maintenance or other similar services from any company or persons not approved by Landlord. Landlord shall approve a sufficient number of sources of such services to provide Tenant with a reasonable selection, but only in such instances and to such extent as Landlord in its judgment shall consider consistent with the security and proper operation of the Building. 29. Tenant shall install and maintain, at Tenant's sole cost and expense, an adequate, visibly marked and properly operational fire extinguisher next to any duplicating or photocopying machines or similar heat producing equipment, which may or may not contain combustible material, in the Premises. 30. Landlord reserves the right at any time to change or rescind any one or more of these Rules and Regulations, or to make such other and further reasonable Rules and Regulations as in Landlord's judgment may from time to time be necessary for the management, safety, care and cleanliness of the Premises, Building, and the Real Property, and for the preservation of good order therein, as well as for the convenience of other occupants and tenants therein. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular tenants, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other tenant, nor prevent Landlord from thereafter enforcing any such Rules or Regulations against any or all tenants of the Real Property. Tenant shall be deemed to have read these Rules and Regulations and to have agreed to abide by them as a condition of its occupancy of the Premises. EXHIBIT C --------- NOTICE OF LEASE TERM DATES -------------------------- To: ____________________ Date: ___________________________ ________________________ ________________________ Re: Office Lease dated ____________, 2002, between AMERICAN SPECTRUM REALTY MANAGEMENT, INC., a Delaware corporation, as agent for the owner of the Property (said owner being referred to herein as "Landlord"), and LEISURE INDUSTRIES CORPORATION OF AMERICA, a Delaware corporation, ("Tenant"), concerning Suite 100 on the first (1st) floor of the office building located at 7700 Irvine Center Drive, Irvine, California 92618. Gentlemen: In accordance with the Office Lease (the "Lease"), we wish to advise you and/or confirm as follows: 1. The Premises are Ready For Occupancy, and the Lease Term shall commence on or has commenced on _________________________ for a term of _______ years ending on __________________. 2. Rent commenced to accrue on ______________________, in the amount of ___________________. 3. If the Lease Commencement Date is other than the first day of the month, the first billing will contain a pro rata adjustment. Each billing thereafter, with the exception of the final billing, shall be for the full amount of the monthly installment as provided for in the Lease. 4. Your rent checks should be made payable to at . 5. The exact number of rentable square feet within the Premises is _____ square feet. 6. Tenant's Share as adjusted based upon the exact number of rentable square feet within the Premises is _________%. 7. By taking of possession of the Premises, Tenant accepts the improvement work constructed therein, excepting only _________________________________. "Landlord" AMERICAN SPECTRUM REALTY MANAGEMENT, INC., a Delaware corporation, agent for owner By: ________________________________________ Name: Patricia A. Nooney Its: Vice President Agreed to and Accepted as of _______________, _______. , a By: Its: EXHIBIT D --------- 7700 IRVINE CENTER DRIVE ------------------------ WORK LETTER AGREEMENT --------------------- [ALLOWANCE] ----------- 1. TENANT IMPROVEMENTS. As used in the Lease and this Work Letter -------------------- Agreement, the term "Tenant Improvements" or "Tenant Improvement Work" means those items of general tenant improvement construction shown on the Final Plans (described in Section 4 below), more particularly described in Section 5 below. 2. WORK SCHEDULE. Within a reasonable period of time following the mutual -------------- execution of this Lease, Landlord will deliver to Tenant, for Tenant's review and approval, a schedule ("Work Schedule") which will set forth the timetable for the planning and completion of the installation of the Tenant Improvements and the Lease Commencement Date. The Work Schedule will set forth each of the various items of work to be done or approval to be given by Landlord and Tenant in connection with the completion of the Tenant Improvements. The Work Schedule will be submitted to Tenant for its approval, which approval Tenant agrees not to unreasonably withhold, condition or delay, and, once approved by both Landlord and Tenant, the Work Schedule will become the basis for completing the Tenant Improvements. All plans and drawings required by this Work Letter Agreement and all work performed pursuant thereto are to be prepared and performed in accordance with the Work Schedule. Landlord may, from time to time during construction of the Tenant Improvements, modify the Work Schedule as Landlord deems appropriate. If Tenant fails to approve the Work Schedule, as it may be modified after discussions between Landlord and Tenant within five (5) business days after the date the Work Schedule is first received by Tenant, the Work Schedule shall be deemed to be approved by Tenant as submitted or Landlord may, at its option, terminate the Lease upon written notice to Tenant. 3. CONSTRUCTION REPRESENTATIVES. Landlord hereby appoints the following ----------------------------- person(s) as Landlord's representative ("Landlord's Representative") to act for Landlord in all matters covered by this Work Letter Agreement: Peter Kroosz. Tenant hereby appoints the following person(s) as Tenant's representative ("Tenant's Representative") to act for Tenant in all matters covered by this Work Letter Agreement: ________________ . All communications with respect to the matters covered by this Work Letter Agreement are to made to Landlord's Representative or Tenant's Representative, as the case may be, in writing in compliance with the notice provisions of the Lease. Either party may change its representative under this Work Letter Agreement at any time by written notice to the other party in compliance with the notice provisions of the Lease. 4. TENANT IMPROVEMENT PLANS. -------------------------- (a) Preparation of Space Plans. In accordance with the Work Schedule, ----------------------------- Tenant agrees to meet with Landlord's architect and/or space planner for the purpose of promptly preparing preliminary space plans for the layout of Premises ("Space Plans"). The Space Plans are to be sufficient to convey the architectural design of the Premises and layout of the Tenant Improvements therein and are to be submitted to Landlord in accordance with the Work Schedule for Landlord's approval. If Landlord reasonably disapproves any aspect of the Space Plans, Landlord will advise Tenant in writing of such disapproval and the reasons therefor in accordance with the Work Schedule. Tenant will then submit to Landlord for Landlord's approval, in accordance with the Work Schedule, a redesign of the Space Plans incorporating the revisions reasonably required by Landlord. (b) Preparation of Final Plans. Based on the approved Space Plans, and in ---------------------------- accordance with the Work Schedule, Landlord's architect will prepare complete architectural plans, drawings and specifications and complete engineered mechanical, structural and electrical working drawings for all of the Tenant Improvements for the Premises (collectively, the "Final Plans"). The Final Plans will be submitted to Tenant for signature to confirm that they are consistent with the Space Plans. If Tenant reasonably disapproves any aspect of the Final Plans based on any inconsistency with the Space Plans, Tenant agrees to advise Landlord in writing of such disapproval and the reasons therefor within the time frame set forth in the Work Schedule. In accordance with the Work Schedule, Landlord will, subject to Section 4(c) below, then cause Landlord's architect to redesign the Final Plans incorporating the revisions reasonably requested by Tenant so as to make the Final Plans consistent with the Space Plans. (c) Requirements of Tenant's Final Plans. Landlord will not unreasonably --------------------------------------- withhold its consent to changes in the Final Plans proposed by Tenant provided the Final Plans, as revised, will: (i) be compatible with the Building shell and with the design, construction and equipment of the Building; (ii) if not comprised of the Building standards set forth in the written description thereof (the "Standards"), then compatible with and of at least equal quality as the Standards and approved by Landlord; (iii) comply with all applicable laws, ordinances, rules and regulations of all governmental authorities having jurisdiction, and all applicable insurance regulations; (iv) not require Building service beyond the level normally provided to other tenants in the Building and will not overload the Building floors; and (v) be of a nature and quality consistent with the overall objectives of Landlord for the Building, as determined by Landlord in its reasonable but subjective discretion. (d) Submittal of Final Plans. Once approved by Landlord and Tenant, --------------------------- Landlord's architect will submit the Final Plans to the appropriate governmental agencies for plan checking and the issuance of a building permit. Landlord's architect, with Tenant's cooperation, will make any changes to the Final Plans which are requested by the applicable governmental authorities to obtain the building permit. After approval of the Final Plans no further changes may be made without the prior written approval of both Landlord and Tenant, and then only after agreement by Tenant to pay any costs resulting from the design and/or construction of such changes in excess of the Allowance. Tenant hereby acknowledges that any such changes will be subject to the terms of Section 9 below. Landlord's approval of the Final Plans shall create no liability or responsibility on the part of Landlord for the completeness of such plans or their design sufficiency or compliance with laws. (e) Changes to Shell of Building. If the Final Plans or any amendment -------------------------------- thereof or supplement thereto shall require changes in the Building shell, the increased cost of the Building shell work caused by such changes will be paid for by Tenant or charged against the "Allowance" described in Section 5 below. (f) Work Cost Estimate and Statement. Prior to the commencement of ------------------------------------ construction of any of the Tenant Improvements shown on the Final Plans, Landlord will competitively bid the Tenant Improvement Work to a minimum of three (3) general contractors approved by Landlord, in Landlord's sole and absolute discretion. Landlord shall select the lowest qualified bid and shall submit to Tenant a written estimate of the cost (the "Work Cost") to complete the Tenant Improvement Work, which written estimate will be based on the Final Plans taking into account any modifications which may be required to reflect changes in the Final Plans required by the City or County in which the Premises is located (the "Work Cost Estimate"). Tenant will either approve the Work Cost Estimate or disapprove specific items and submit to Landlord revisions to the Final Plans to reflect deletions of and/or substitutions for such disapproved items. Submission and approval of the Work Cost Estimate will proceed in accordance with the Work Schedule. Upon Tenant's approval of the Work Cost Estimate (such approved Work Cost Estimate to be hereinafter known as the "Work Cost Statement"), Landlord will have the right to purchase materials and to commence the construction of the items included in the Work Cost Statement pursuant to Section 6 hereof. If the total costs reflected in the Work Cost Statement exceed the Allowance described in Section 5 below, Tenant agrees to pay such excess, as additional rent, within five (5) business days after Tenant's approval of the Work Cost Estimate. Throughout the course of construction, any differences between the estimated Work Cost in the Work Cost Statement and the actual Work Cost will be determined by Landlord and appropriate adjustments and payments by Landlord or Tenant, as the case may be, will be made within five (5) business days thereafter. 5. PAYMENT FOR THE TENANT IMPROVEMENTS. --------------------------------------- (a) Allowance. Landlord hereby grants to Tenant a tenant improvement allowance of $23.00 per usable square foot of the Premises, i.e., One Hundred Sixty Thousand Eighty and No/100 Dollars ($160,080.00) (the "Allowance"). The Allowance is to be used only for: (i) Payment of the cost of preparing the Space Plans and the Final Plans, including mechanical, electrical, plumbing and structural drawings and of all other aspects necessary to complete the Final Plans. Except as otherwise provided herein, the Allowance will not be used for the payment of extraordinary design work not consistent with the scope of the Standards (i.e., above-standard design work) or for payments to any other consultants, designers or architects other than Landlord's architect. (ii) The payment of plan check, permit and license fees relating to construction of the Tenant Improvements. (iii) Construction of the Tenant Improvements, including, without limitation, the following: (aa) Installation within the Premises of all partitioning, doors, floor coverings, ceilings, wall coverings and painting, millwork and similar items; (bb) All electrical wiring, lighting fixtures, outlets and switches, and other electrical work necessary for the Premises; (cc) The furnishing and installation of all duct work, terminal boxes, diffusers and accessories necessary for the heating, ventilation and air conditioning systems within the Premises, including the cost of meter and key control for after-hour air conditioning; (dd) Any additional improvements to the Premises required for Tenant's use of the Premises including, but not limited to, odor control, special heating, ventilation and air conditioning, noise or vibration control or other special systems or improvements; (ee) All fire and life safety control systems such as fire walls, sprinklers, halon, fire alarms, including piping, wiring and accessories, necessary for the Premises; (ff) All plumbing, fixtures, pipes and accessories necessary for the Premises; (gg) Testing and inspection costs; and (hh) Fees for the contractor and tenant improvement coordinator including, but not limited to, fees and costs attributable to general conditions associated with the construction of the Tenant Improvements and a three percent (3%) construction administration fee for the services of Landlord's tenant improvement coordinator. (iv) All other costs to be expended by Landlord in the construction of the Tenant Improvements, including those costs incurred by Landlord for construction of elements of the Tenant Improvements in the Premises, which construction was performed by Landlord prior to the execution of this Lease by Landlord and Tenant and which construction is for the benefit of tenants and is customarily performed by Landlord prior the execution of leases for space in the Building for reasons of economics (examples of such construction would include, but not be limited to, the extension of mechanical [including heating, ventilating and air conditioning systems] and electrical distribution systems outside of the core of the Building, wall construction, column enclosures and painting outside of the core of the Building, ceiling hanger wires and window treatment). (b) Excess Costs. The cost of each item referenced in Section 5(a) above ------------- shall be charged against the Allowance. If the Work Cost exceeds the Allowance, Tenant agrees to pay to Landlord such excess including a three percent (3%) fee for Landlord's tenant improvement coordinator associated with the supervision of such excess work prior to the commencement of construction within five (5) business days after invoice therefor (less any sums previously paid by Tenant for such excess pursuant to the Work Cost Estimate). Except as otherwise provided herein, in no event will the Allowance be used to pay for Tenant's furniture, artifacts, equipment, telephone systems or any other item of personal property which is not affixed to the Premises. (c) Changes. If, after the Final Plans have been prepared and the Work Cost ------- Statement has been established, Tenant requires any changes or substitutions to the Final Plans, any additional costs related thereto including a three percent (3%) fee for Landlord's tenant improvement coordinator associated with the supervision of such changes or substitutions are to be paid by Tenant to Landlord within five (5) business days after invoice therefor. Any changes to the Final Plans will be approved by Landlord and Tenant in the manner set forth in Section 4 above and will, if necessary, require the Work Cost Statement to be revised and agreed upon between Landlord and Tenant in the manner set forth in Section 4(f) above. Landlord will have the right to decline Tenant's request for a change to the Final Plans if such changes are inconsistent with the provisions of Section 4 above, or if the change would unreasonably delay construction of the Tenant Improvements and the Lease Commencement Date. (d) Governmental Cost Increases. If increases in the cost of the Tenant ----------------------------- Improvements as set forth in the Work Cost Statement are due to requirements of any governmental agency, Tenant agrees to pay Landlord the amount of such increase including a three percent (3%) fee for Landlord's tenant improvement coordinator associated with the supervision of such additional work within five (5) business days of Landlord's written notice; provided, however, that Landlord will first apply toward any such increase any remaining balance of the Allowance. (e) Unused Allowance Amounts. Any unused portion of the Allowance upon -------------------------- completion of the Tenant Improvements will not be refunded to Tenant or be available to Tenant as a credit against any obligations of Tenant under the Lease unless Tenant has paid for excess costs as described in Sections 5(b), 5(c) or 5(d). Provided Tenant has paid for such excess costs and is not otherwise in default under the Lease, Tenant may use up to (i) $3.00 per usable square foot of the Premises, i.e., $20,880.00 of the unused Allowance, to pay Tenant's actual and reasonable (A) consultants' fees, (B) costs incurred by Tenant in connection with Tenant's installation of its voice and data wiring, a security system, its signage or built-in furniture (provided Landlord approves such installations), or (C) costs incurred by Tenant in connection to its relocation to the Premises, or (ii) fifty percent (50%) of such excess as a credit against Base Rent. 6. CONSTRUCTION OF TENANT IMPROVEMENTS. Until Tenant approves the Final -------------------------------------- Plans and Work Cost Statement, Landlord will be under no obligation to cause the construction of any of the Tenant Improvements. Following Tenant's approval of the Work Cost Statement described in Section 4(f) above and upon Tenant's payment of the total amount by which such Work Cost Statement exceeds the Allowance, if any, Landlord's contractor will commence and diligently proceed with the construction of the Tenant Improvements, subject to Tenant Delays (as described in Section 9 below) and Force Majeure Delays (as described in Section 10 below). 7. FREIGHT/CONSTRUCTION ELEVATOR. Landlord will, consistent with its ------------------------------ obligation to other tenants in the Building, if appropriate and necessary, make the freight/construction elevator reasonably available to Tenant in connection with initial decorating, furnishing and moving into the Premises. Tenant agrees to pay for any after-hours staffing of the freight/construction elevator, if needed. 8. COMMENCEMENT DATE AND SUBSTANTIAL COMPLETION. ------------------------------------------------ (a) Lease Commencement Date. The Lease Term will commence on the date (the ------------------------ "Lease Commencement Date") which is the earlier of: (i) the date Tenant moves into the Premises to commence operation of its business in all or any portion of the Premises; or (ii) the date the Tenant Improvements have been "substantially completed" (as defined below); provided, however, that if substantial completion of the Tenant Improvements is delayed as a result of any Tenant Delays described in Section 9 below, then the Lease Commencement Date as would otherwise have been established pursuant to this Section 8(a)(ii) will be accelerated by the number of days of such Tenant Delays. (b) Substantial Completion; Punch-List. For purposes of Section 8(a)(ii) ------------------------------------ above, the Tenant Improvements will be deemed to be "substantially completed" and the Premises shall be deemed "Ready for Occupancy" when Landlord: (a) is able to provide Tenant with reasonable access to the Premises; (b) has substantially performed all of the Tenant Improvement Work required to be performed by Landlord under this Work Letter Agreement, other than minor "punch-list" type items and adjustments which do not materially interfere with Tenant's access to or use of the Premises. Within ten (10) days after delivery of the Premises to Tenant, Tenant and Landlord will conduct a walk-through inspection of the Premises and prepare a written punch-list specifying those punch-list items which require completion, which items Landlord will thereafter diligently complete. (c) Delivery of Possession. Landlord agrees to deliver possession of the ------------------------ Premises to Tenant when the Tenant Improvements have been substantially completed in accordance with Section (b) above. 9. TENANT DELAYS. For purposes of this Work Letter Agreement, "Tenant -------------- Delays" means any delay in the completion of the Tenant Improvements resulting from any or all of the following: (a) Tenant's failure to timely perform any of its obligations pursuant to this Work Letter Agreement, including any failure to complete, on or before the due date therefor, any action item which is Tenant's responsibility pursuant to the Work Schedule delivered by Landlord to Tenant pursuant to this Work Letter Agreement; (b) Tenant's changes to Space Plans or Final Plans after Landlord's approval thereof; (c) Tenant's request for materials, finishes, or installations which are not readily available or which are incompatible with the Standards; (d) any delay of Tenant in making payment to Landlord for Tenant's share of the Work Cost; or (e) any other act or failure to act by Tenant, Tenant's employees, agents, architects, independent contractors, consultants and/or any other person performing or required to perform services on behalf of Tenant. 10. FORCE MAJEURE DELAYS. For purposes of this Work Letter, "Force ---------------------- Majeure Delays" means any actual delay in the construction of the Tenant Improvements, which is beyond the reasonable control of Landlord or Tenant, as the case may be, as described in Section 27.13 of the Lease. EXHIBIT E --------- ESTOPPEL CERTIFICATE -------------------- TO: _______________ _______________ _______________ Attn: _____________ ______________ ("Tenant") hereby certifies as follows: 1. The undersigned is the Tenant under that certain Office Lease dated ______________, _____ (the "Lease"), executed by AMERICAN SPECTRUM REALTY MANAGEMENT, INC., a Delaware corporation, as agent for the owner of the Property (said owner being referred to herein as the "Landlord") as Landlord and the undersigned as Tenant, covering a portion of the property located at 7700 Irvine Center Drive, Irvine, California (the "Property"). 2. Pursuant to the Lease, Tenant has leased approximately ______ square feet of space (the "Premises") at the Property and has paid to Landlord a security deposit of $________. The term of the Lease commenced on __________, ______ and the expiration date of the Lease is ________________, ______. Tenant has paid rent through _________________, ______. The next rental payment in the amount of $____________ is due on ________________, ______. Tenant is required to pay ____ percent (___%) of all annual operating expenses for the Property in excess of _____________. 3. Tenant is entitled to _______ parking spaces at a charge of $__________ per month per space. 4. Except as expressly provided in the Lease, and other documents attached hereto, Tenant does not have any right or option to renew or extend the term of the Lease, to lease other space at the Property, nor any preferential right to purchase all or any part of the Premises or the Property. 5. True, correct and complete copies of the Lease and all amendments, modifications and supplements thereto are attached hereto and the Lease, as so amended, modified and supplemented, is in full force and effect, and represents the entire agreement between Tenant and Landlord with respect to the Premises and the Property. There are no amendments, modifications or supplements to the Lease, whether oral or written, except as follows (include the date of such amendment, modification or supplement): 6. All space and improvements leased by Tenant have been completed and furnished in accordance with the provisions of the Lease, and Tenant has accepted and taken possession of the Premises. 7. Landlord is not in any respect in default in the performance of the terms and provisions of the Lease. Tenant is not in any respect in default under the Lease and has not assigned, transferred or hypothecated the Lease or any interest therein or subleased all or any portion of the Premises. 8. There are no offsets or credits against rentals payable under the Lease and no free periods or rental concessions have been granted to Tenant, except as follows: 9. Tenant has no actual or constructive knowledge of any processing, use, storage, disposal, release or treatment of any explosive, corrosive, hazardous or toxic materials or substances, or materials capable of emitting toxic fumes, on the Premises or the Property except as follows (if none, state "none"): _________________________________________________________________________ . This Certificate is given to ___________________________________ with the understanding that ________ will rely hereon in connection with the conveyance of the Property of which the Premises constitute a part to _______. Following any such conveyance, Tenant agrees that the Lease shall remain in full force and effect and shall bind and inure to the benefit of the _________ and its successor in interest as if no purchase had occurred. DATED: ______________, ______ "TENANT" Leisure Industries Corporation of America, a Delaware corporation By: _________________ Its: ________________ [ATTACH LEASE AND AMENDMENTS TO THIS CERTIFICATE] EXHIBIT F --------- AIRCRAFT NOISE DISCLOSURE ------------------------- [TO BE SUPPLIED] RIDER NO. 1 ----------- 1. TEMPORARY SPACE. Landlord and Tenant acknowledge and agree that, subject --------------- to Tenant obtaining all necessary and required government approvals at its sole cost and expense, while the "Tenant Improvements" (as defined in Exhibit "D") ----------- are being constructed, Landlord shall lease to Tenant and Tenant shall lease from Landlord on a temporary basis, that certain portion of the parking area servicing the Building more particularly depicted on Schedule "1" attached to ------------ this Rider No. 1 (the "Temporary Space"), upon which Tenant intends to place, at its sole cost and expense, a temporary modular trailer (the "Trailer") for the sole purpose of conducting employee meetings and presentations. Tenant acknowledges and agrees that Landlord shall have the right to approve the type and condition of the Trailer Tenant intends to place within the Temporary Space. Tenant's leasing and occupancy of the Temporary Space and use of the Trailer shall be subject to all of the terms, conditions and limitations set forth in this Lease regarding the Premises (including, without limitation, Tenant's indemnification, repair obligations (as such repair obligations reasonably apply to the Temporary Space and the Trailer) and its obligation to obtain and maintain insurance as required under the Lease), except as follows: (a) Tenant's leasing and occupancy of the Temporary Space shall be for a term commencing upon delivery of the Temporary Space to Tenant and expiring upon substantial completion of the Tenant Improvements in the Premises as contemplated in Section 8(a)(ii) of Exhibit "D". Tenant acknowledges that, to ----------- the extent it delays completion of the Tenant Improvements in the Premises and continues to occupy the Temporary Space, Tenant will find itself liable for Base Rent on both the Temporary Space (at a rate to be determined by Landlord) and the Premises for the same period of time. That is because Exhibit "D" provides ----------- that the Lease Commencement Date of the Term of this Lease with respect to the Premises will be advanced by the number of days of Tenant Delays (as defined in Exhibit "D") and thus, due to Tenant Delays, the Lease Commencement Date could - ------------ occur even though the Tenant Improvements are not completed. Upon substantial completion of the Tenant Improvements, Tenant immediately remove the Trailer and shall surrender the Temporary Space to Landlord in the condition received by Tenant (ordinary wear and tear excepted) and in accordance with all of the provisions of this Lease regarding surrender of the Premises. The Temporary Space upon surrender shall be neat and clean and all damage occurring in connection with Tenant's occupancy and/or Tenant's placement and/or removal of the Trailer during Tenant's occupancy thereof shall be repaired by Tenant at its sole cost and expense. (b) Tenant agrees that Tenant shall accept the Temporary Space in its existing "AS IS" condition and that Landlord shall not be required to construct any improvements in the Temporary Space. Tenant further acknowledges that neither Landlord nor any agent, employee or contractor of Landlord has made any representation or warranty with respect to the Temporary Space or its suitability for the conduct of Tenant's business. The taking possession of the Temporary Space by Tenant shall conclusively establish that the Temporary Space was at such time in satisfactory condition. (d) Prior to occupancy of the Temporary Space, Tenant shall provide Landlord with certificates of insurance evidencing its compliance with the insurance provisions of this Lease as applied to the Temporary Space. SUMMARY OF BASIC LEASE INFORMATION ---------------------------------- This Summary of Basic Lease Information (the "Summary") is hereby incorporated into and made a part of the attached Office Lease (this Summary and the Office Lease to be known collectively as the "Lease") which pertains to the office building described in Section 6.1 below (the "Building"). Each reference ----------- in the Office Lease to any term of this Summary shall have the meaning as set forth in this Summary for such term. In the event of a conflict between the terms of this Summary and the Office Lease, the terms of the Office Lease shall prevail. Any initially capitalized terms used herein and not otherwise defined herein shall have the meaning as set forth in the Office Lease. TERMS OF LEASE (References are to the Office Lease) DESCRIPTION ------------------- ----------- 1. Dated as of: ____________, 2002. AMERICAAN SPECTRUM REALTY MANAGEMENT, INC., a Delaware corporation 2. Landlord: as agent for the owner of the Building 3. Address of Landlord (Section 29.14): For Notices: ------------ --------------- 7700 Irvine Center Drive Suite 555 Irvine, California 92618 Attention: Regional Asset Manager For Payment of Rent: ---------------------- American Spectrum Realty, Inc. P.O. Box 3074-18 Houston, Texas 77253 -------------- 4. Tenant: Leisure Industries Corporation of America, a Delaware corporation 5. Address of Tenant (Section 29.14): Leisure Industries Corporation of America [TENANT TO PROVIDE] Attention: _________________ (Prior To Lease Commencement Date) and 7700 Irvine Center Drive Suite 100 Irvine, California 92618 Attention: _______________ (After Lease Commencement Date) ------------- 6. Premises (Article 1) ---------- 7700 Irvine Center Drive; containing approximately 6.1 Building: 207,314 rentable square feet of space. 6.2 Premises: Approximately Eight Thousand Forty (8,040) rentable square feet (Six Thousand Nine Hundred Sixty [6,960] usable square feet) of space located on the first (1st) floor of the Building, as set forth in Exhibit A attached hereto, known as Suite 100. 7. Term (Article 2). ---------- 7.1 Lease Term: Seven (7) years. 7.2 Lease Commencement Date: The earlier of (i) the date Tenant occupies all or a portion of the Premises (other than in connection with the construction of the same), and (ii) the date that the Premises are Ready For Occupancy, which Lease Commencement Date is anticipated to be October 1, 2002. 7.3 Lease Expiration Date: The last day of the month in which the seventh (7th) anniversary of the Lease Commencement Date occurs. 8. Base Rent (Article 3): ---------- Monthly Annual Months Base Rent Base Rent ------ ----------- ---------------- 1-12* $16,080.00 $192,960.00 13-24 $16,884.00 $202,608.00 25-36 $17,688.00 $212,256.00 37-48 $18,492.00 $221,904.00 49-60 $19,296.00 $231,552.00 61-72 $20,502.00 $246,024.00 73-84 $21,708.00 $260,496.00 * Provided Tenant is not in default under the Lease, Base Rent shall abate during Month 2 of the Lease Term.
9. Additional Rent (Article 4). ---------- 9.1 Base Year: The calendar year of 2002. 9.2 Tenant's Share of Operating Expenses, Insurance Expenses, Utilities Expenses and Tax Expenses: 3.88% 10. Security Deposit (Article 21): Twenty-Three Thousand Eight-Hundred ---------- Seventy-Eight and 80/100 Dollars ($23,878.80) 11. Brokers (Section 29.19): Orion Property Partners, Inc., representing both Landlord and Tenant. 12. Permitted Use (Section 5): General Office Use. ---------- 13. Parking Spaces (Article 26): Twenty-Seven (27) unreserved and zero (0) reserved ----------- parking spaces
7700 IRVINE CENTER DRIVE OFFICE LEASE AMERICAN SPECTRUM REALTY MANAGEMENT, INC., A DELAWARE CORPORATION, AS AGENT FOR THE OWNER OF THE BUILDING, AND LEISURE INDUSTRIES CORPORATION OF AMERICA, A DELAWARE CORPORATION, AS TENANT. TABLE OF CONTENTS ----------------- Page ---- ARTICLE 1 REAL PROPERTY, BUILDING AND PREMISES . . . . . . . . 1 ARTICLE 2 LEASE TERM . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE 3 BASE RENT . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE 4 ADDITIONAL RENT . . . . . . . . . . . . . . . . . . . 3 ARTICLE 5 USE OF PREMISES . . . . . . . . . . . . . . . . . . 7 ARTICLE 6 SERVICES AND UTILITIES . . . . . . . . . . . . . . . 9 ARTICLE 7 REPAIRS . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE 8 ADDITIONS AND ALTERATIONS . . . . . . . . . . . . . . 11 ARTICLE 9 COVENANT AGAINST LIENS . . . . . . . . . . . . . . 12 ARTICLE 10 INSURANCE . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE 11 DAMAGE AND DESTRUCTION . . . . . . . . . . . . . . . 14 ARTICLE 12 NONWAIVER . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE 13 CONDEMNATION . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE 14 ASSIGNMENT AND SUBLETTING . . . . . . . . . . . . . 17 ARTICLE 15 SURRENDER OF PREMISES; REMOVAL OF TRADE FIXTURES. . 20 ARTICLE 16 HOLDING OVER . . . . . . . . . . . . . . . . . . . . 20 ARTICLE 17 ESTOPPEL CERTIFICATES . . . . . . . . . . . . . . . . 20 ARTICLE 18 SUBORDINATION . . . . . . . . . . . . . . . . . . . . . 21 ARTICLE 19 DEFAULTS; REMEDIES . . . . . . . . . . . . . . . . . . 21 ARTICLE 20 ATTORNEYS' FEES . . . . . . . . . . . . . . . . . . . .24 ARTICLE 21 SECURITY DEPOSIT . . . . . . . . . . . . . . . . . . . 24 ARTICLE 22 SUBSTITUTION OF OTHER PREMISES . . . . . . . . . . 24 ARTICLE 23 SIGNS . . . . . . . . . . . . . . . . . . . . . . . . . 25 ARTICLE 24 COMPLIANCE WITH LAW . . . . . . . . . . . . . . . . . 25 ARTICLE 25 ENTRY BY LANDLORD . . . . . . . . . . . . . . . . . .25 ARTICLE 26 TENANT PARKING . . . . . . . . . . . . . . . . . . . .26 ARTICLE 27 MISCELLANEOUS PROVISIONS . . . . . . . . . . . .. . . 26 EXHIBITS - -------- A OUTLINE OF PREMISES B RULES AND REGULATIONS C NOTICE OF LEASE TERM DATES D TENANT WORK LETTER E FORM OF TENANT'S ESTOPPEL CERTIFICATE F AIRCRAFT NOISE DISCLOSURE RIDER NO. 1 INDEX OF MAJOR DEFINED TERMS ---------------------------- LOCATION OF DEFINITION DEFINED TERMS IN OFFICE LEASE - ------------- --------------- Additional Rent Section 4.1 Base Rent Article 3 Base Year Section 4.2.1 Building Article 1 Estimate Section 4.3.3 Estimated Excess Section 4.3.3 Estimate Statement Section 4.3.3 Excess Section 4.3.1 Expense Year Section 4.2.3 Force Majeure Section 279.13 Holidays Section 6.1.1 Lease Commencement Date Article 2 Lease Expiration Date Article 2 Lease Term Article 2 Lease Year Article 2 Notices Section 279.14 Operating Expenses Section 4.2.4 Premises Article 1 Real Property Article 1 Rent Section 4.1 Security Deposit Article 21 Statement Section 4.3.2 Tax Expenses Section 4.2.5 Tenant's Share Section 4.2.6 Transfer Notice Section 14.1 Transfer Premium Section 14.3 Transferee Section 14.1 Transfers Section 14.1 EX-10.256 4 doc3.txt Exhibit 10.256 _______________________________________________________________ LEASE AGREEMENT by and between FASHION SHOW EXPANSION LLC (Landlord) and LEISURE HOMES CORPORATION t/a LEISURE, LEISURE RESORTS, LEISURE VACATIONS or LEISURE VACATION STORE (Tenant) _______________________________________________________________ LEASE AGREEMENT ---------------- THIS LEASE AGREEMENT ("Lease") dated October 18, 2002 by and between FASHION SHOW EXPANSION LLC, a Nevada limited liability company ("Landlord"), and LEISURE HOMES CORPORATION, a Nevada corporation, t/a LEISURE, LEISURE RESORTS, LEISURE VACATIONS or LEISURE VACATION STORE ("Tenant"). For purposes of Sections 6.1., 9.4., 10.1., 10.2., 13.1., 13.2., 13.5., 13.6., 20.17., and 20.19., and Schedule D only, the term "Landlord" shall include Rouse F.S., LLC, a Maryland limited liability company, its successors and assigns. W I T N E S S E T H: FOR VALUABLE CONSIDERATION Landlord and Tenant agree as follows: ARTICLE I DEFINITIONS AND ATTACHMENTSI ----------------------------- Section 1.1. Certain Defined Terms.1.1. ----------------------- As used herein, the term: A. "Landlord's Property" means the certain parcel or parcels of land owned, leased or controlled by Landlord or by Rouse F.S., LLC, a Maryland limited liability company, located in Clark County, Nevada which property comprises all or a portion of the Shopping Center and upon the opening for business with the public, any additional property used for expansion or addition. B. "Shopping Center" means (i) Landlord's Property, (ii) the adjacent parcel or parcels of land not owned, leased or controlled by Landlord but which are operated as an integral part of the shopping center known as Fashion Show, and, (iii) upon the opening for business with the public, any additional property used for expansion or addition. C. "Landlord's Building" means the improvements constituting the main mall building constructed or to be constructed by Landlord or others on Landlord's Property, intended to be leased to retail tenants as the same may be altered, reduced, expanded or replaced from time to time. "Landlord's Expansion" means that portion of Landlord's Building constructed or to be constructed by Fashion Show Expansion LLC. D. "Premises" means Tenant's portion of Landlord's Building shown on Schedule "A" having the following area: 1,458 square feet. 1 E. "Term" means a period of five (5) years plus the part of a month mentioned in Section 3.1., commencing and ending as provided in Section 3.1. "Grand Opening Date" means the date and time designated by Landlord as the grand opening of Landlord's Expansion. "Grand Opening Contribution" means the product of the following figure multiplied by Tenant's Floor Area: $3.00. See Article XI. F. "Permitted Use" means the operation of the Premises as a preview center for products marketed to vacation, hospitality and travel consumers, the primary products to be marketed from the store to include (i) vacation interval units at Tenant's resort properties located throughout the United States and the Caribbean, (ii) land sales in various states, and (iii) a full range of travel services including air, car rental, hotel reservations, tours, and cruises. Tenant may operate within the Premises a lounge area for shoppers to rest, browse, view video/television screens that include the foregoing products and destinations, and purchase the said products. G. "Annual Basic Rental" means an amount equal to the product of the following applicable figure multiplied by Tenant's Floor Area: Rental Years 1 - 2: $100.00 Rental Years 3 - Termination Date: $110.00 H. "Annual Percentage Rental" means a sum equal to eight percent (8%) of the amount by which annual Gross Sales exceed the product of the following applicable figure multiplied by Tenant's Floor Area (the "Breakpoint"), subject to adjustment as provided in Section 5.1; provided, however, that in the event during the first or last Rental Year Tenant is not open for business for twelve (12) full months, the Breakpoint shall be an amount equal to the Breakpoint specified herein multiplied by a fraction, the numerator of which shall be the actual number of complete months during which Tenant was open for business during the Rental Year and the denominator of which shall be twelve (12): Rental Years 1 - 2: $1,250.00 Rental Years 3 - Termination Date: $1,375.00 I. "Tenant's Occupancy Charge" means an annual amount equal to the product of the following figure multiplied by Tenant's Floor Area: $24.18, as adjusted pursuant to Section 5.1. J. "Tenant Notice Address" means Gregg McMurtrie Leisure Homes Corporation 4310 Paradise Road Las Vegas, NV 89109 2 K. "Tenant Trade Name" means LEISURE, LEISURE RESORTS, LEISURE VACATIONS or LEISURE VACATION STORE which Tenant represents it is entitled to use pursuant to all applicable laws. L. "Store Hours" means Monday through Friday 10:00 a.m. to 9:00 p.m.; Saturday 10:00 a.m. to 7:00 p.m.; and Sunday 12:00 Noon to 6:00 p.m. M. "Restriction Area" means None. N. "Landlord's Floor Area" means the aggregate number of square feet of leasable floor area in Landlord's Building (exclusive of Anchors and exclusive of any floor area not structurally connected to Landlord's Building or not having an opening into the enclosed mall) which, with respect to any such floor area which has been leased to any rent-paying tenant, shall be determined in accordance with the provisions of any lease applicable thereto and which, with respect to any such floor area not so leased, shall consist of all such leasable floor area in Landlord's Building designed for the exclusive use and occupancy of rent-paying tenants, which shall exclude Common Areas, storage areas leased separately from retail areas, mezzanine areas and areas used for Landlord's management and promotion offices. O. "Tenant's Floor Area" means the number of square feet contained in that portion of Landlord's Floor Area constituting the Premises which shall be measured (a) with respect to the front and rear width thereof, from the exterior face of the adjacent exterior or corridor wall or, if none, from the center of the demising partition, to the opposite exterior face of the adjacent exterior or corridor wall or, if none, to the center of the opposite demising partition, and (b) with respect to the depth thereof, from the front lease line (as designated on the Lease Outline Drawings to be prepared by Landlord pursuant to Schedule B hereof with respect to the Premises, or pursuant to other leases, with respect to premises other than the Premises) to the exterior face of the rear exterior wall, or corridor wall, or, if neither, to the center of the rear demising partition; and in no case shall there be any deduction for columns or other structural elements within any tenant's premises. P. "Common Areas" means those areas and facilities which may be furnished from time to time by Landlord or others in or near Landlord's Property for the non-exclusive general common use of tenants, Anchors and other occupants of the Shopping Center and their agents, employees and customers. Q. "Default Rate" means an annual rate of interest equal to 2% above the "prime rate". The "prime rate" is an annual percentage rate published by The Wall Street Journal in its Money Rates as of the first business day in January of the year(s) for which the Default Rate applies. R. "Anchor" means any tenant or other occupant of the Shopping Center which either (i) occupies a floor area in excess of 50,000 square feet in the Shopping Center, or (ii) occupies a floor area in excess of 25,000 square feet and is designated an Anchor in a notice to that effect given by Landlord to Tenant. "Major Tenant" means any tenant or other occupant of the Shopping Center which occupies a floor area of at least 20,000 square feet in the Shopping Center. S. "Landlord's Leased Floor Area" means the monthly average of the aggregate number of square feet of Landlord's Floor Area leased to tenants (including the Premises) as of the first day of each calendar month during the billing period in question. (If used, this term appears only in Schedule D.) 3 Section 1.2. Additional Defined Terms1.2. ------------------------ The following additional terms are defined in the places in this Lease noted below: Term Section - ---- ------- "Additional Rental" 5.1 "Casualty" 14.1 "Commencement Date" 3.1 "CPI" 5.1 "Electricity Component" Schedule C (if applicable) "Electricity Factor" Schedule C (if applicable) "Environmental Laws" 8.4 "Event of Default" 17.1 "Expansion" 5.6 "Fiscal Year" Schedule D (if applicable) "Force Majeure" 3.1 "Future Rental Damages" 17.3 "Gross Sales" 5.2 "Hazardous Material(s)" 8.4 "HVAC Factor" Schedule D (if applicable) "Mortgage" 18.1 "Mortgagee" 18.1 "Qualified Rental" 5.5 "Ready for Occupancy" 7.5 "Rental" 5.1 "Rental Year" 5.1 "Taxes" 6.1 "Tax Year" 6.1 "Tenant's HVAC Charge" Schedule D (if applicable) "Tenant's V/CW Charge" Schedule D (if applicable) "Term" 3.1 "Termination Damages" 17.3 "Termination Date" 3.1 "Transfer" 16.1 "Transferee" 16.1 "Umpire" Schedule C (if applicable) "V/CW Factor" Schedule D (if applicable) Section 1.3. Attachments1.3. --------------- The following documents are attached hereto, and such documents, as well as all drawings and documents prepared pursuant thereto, shall be deemed to be a part hereof: Schedule "A" - Drawing of Landlord's Property including Landlord's Building and Tenant's Premises Schedule "B" - Tenant Design and Construction Criteria (Description of Landlord's Work and Tenant's Work) Schedule "C" - Utility Consumption and Payment Schedule Schedule "D" - Tenant Heating, Ventilating and Air-Conditioning Schedule Schedule "E" - Estoppel Certificate Subordination, Non-Disturbance and Attornment Agreement 4 ARTICLE II PREMISES -------- Section 2.1. Demise. ------- Landlord hereby leases to Tenant and Tenant hereby rents from Landlord, the Premises having the floor area set forth in Section 1.1.D. Landlord warrants that it has the right to lease the Premises hereby demised, and that so long as Tenant is not in default hereunder, Tenant shall have peaceful and quiet use and possession of the Premises, subject to any Mortgage, and all matters of record or other agreements to which this Lease is or may hereafter be subordinated. Upon the election of either Landlord or Tenant upon delivery of the Premises to Tenant, but prior to Tenant's installation of its improvements, the Premises shall be remeasured by Landlord, at the sole cost and expense of the party electing such measurement, using the formula set forth in Section 1.1.O. hereof. If the total area of the Premises is found to be less than or greater than the area as set forth in Section 1.1.D., then Landlord and Tenant shall execute an amendment to this Lease to correct the discrepancy in the total area of the Premises, for all purposes of this Lease. If neither party elects a remeasurement upon delivery of the Premises to Tenant, the floor area stated in Section 1.1.D. shall be deemed accepted by the parties hereto for all purposes of this Lease. ARTICLE III TERM ---- Section 3.1. Term. ---- The Term shall commence on that date (the "Commencement Date") which shall be the earlier to occur of (a) the first day on which the Premises are "Ready for Occupancy" (as defined in Section 7.5.), or (b) Tenant's opening of its business in the Premises. If the Premises are Ready for Occupancy prior to the Grand Opening Date, Landlord may require Tenant to defer its opening for business until the Grand Opening Date. The Term shall be for the number of years and months set forth in Section 1.1.E., plus the part of a month, if any, from the Commencement Date through the last day of the month immediately prior to the first full calendar month in the Term and shall terminate at the end of the Term (the "Termination Date"). If Tenant's alterations are delayed by Force Majeure (as hereinafter defined), then the date on which Tenant is required to open for business shall be extended for the period of such delay, not to exceed thirty (30) days, provided (i) Tenant provides prompt notice to Landlord of such Force Majeure, (ii) Tenant uses its diligent efforts to complete said alterations, and (iii) Tenant has otherwise complied with this Lease. "Force Majeure" shall be failure of power, restrictive governmental law or regulations, riots, insurrection or war, Acts of God, Casualty, strikes or lockouts (provided, however, financial inability shall not constitute a Force Majeure). Landlord and Tenant agree, upon demand of the other, to execute a declaration setting forth the Commencement Date and Termination Date as soon as the Commencement Date and Termination Date have been determined. Section 3.2. Termination; Holding --------------------- Tenant shall vacate the Premises upon the expiration or earlier termination of this Lease and no notice to quit shall be necessary. Tenant shall reimburse Landlord for and indemnify and hold Landlord harmless against all damages, claims, losses or expenses incurred by Landlord resulting from delay by Tenant in vacating the Premises. In addition to such reimbursement and indemnification, if Tenant fails to vacate the Premises as required, the tenancy under this Lease shall be a tenancy at sufferance, subject to all of the terms of this Lease applicable to a tenancy at sufferance, except that (a) the Annual Basic Rental payable hereunder during said holdover period shall be equal to twice the Annual Basic Rental last payable during the Term and (b) Annual Percentage Rental payable hereunder shall be equal to the highest Annual Percentage Rental payable hereunder for any of the last three (3) Rental Years of the Term, on a prorated basis during such holdover period. For the period of three (3) months prior to the expiration of 5 the Term, Landlord may show the Premises to prospective tenants during normal business hours provided Landlord does not interfere with Tenant's use of the Premises. ARTICLE IV USE --- Section 4.1. Prompt Occupancy and Use; Store Hours.4.1. ----------------------------------------------- Tenant shall occupy the Premises upon the Commencement Date and thereafter will continuously use the Premises for the Permitted Use and for no other use whatsoever, provided that Tenant may use minor portions of the Premises for storage and office purposes as are reasonably required for the operation of its business in the Premises. Without limiting the general prohibition contained in the preceding sentence (except as expressly permitted in Tenant's Permitted Use), Tenant will not, within the Premises, (a) install an automated teller machine; (b) make any vending machine available for use by Tenant's invitees; (c) make available for use by its invitees any facility or device for the transmission or receipt of information, data, sound, images, services or goods, including, but not limited to telephones and computers, (d) place, permit or operate any gaming device in the Premises or use the Premises or any part thereof for gaming or bookmaking purposes, or (e) provide any service which is provided to patrons of the Shopping Center from time to time by Landlord, directly or through third parties, as tenants of the Shopping Center or otherwise. Tenant shall cause its business to be conducted in good faith so as to transact the maximum volume of business in and at the Premises and shall keep the Premises open for business at least during the Store Hours or such other hours as shall be established by Landlord. If Tenant shall fail to keep its business open during the required hours and such failure is not due to a Force Majeure, then, in addition to any other remedy available to Landlord under this Lease, Tenant shall pay to Landlord, as Additional Rental for such breach, a sum equal to One Hundred Dollars ($100.00) for each hour or portion thereof during which Tenant shall fail to so operate. Tenant may operate its business during additional hours with Landlord's prior approval provided Tenant shall pay for its proportionate share of any and all additional costs incurred by Landlord as a result thereof. Section 4.2. Tenant Trade Name. ------------------- Tenant shall conduct business in the Premises only in the Tenant Trade Name; provided, however, upon prior notice to Landlord, Tenant may change its trade name if substantially all of Tenant's and Tenant's affiliates' stores operating under the same Tenant Trade Name also change their trade name to such new trade name, and such other trade name will not conflict with, and in Landlord's reasonable judgment is not likely to confuse the public regarding, the trade names of other tenants in the Shopping Center. Within thirty (30) days of a permitted change in Tenant Trade Name, Tenant agrees, at its sole cost and expense, to replace its storefront sign to reflect the new Tenant Trade Name. Plans and specifications for such storefront sign must be set forth in detail and submitted to Landlord for approval prior to installation of said sign. ARTICLE V RENTAL ------ Section 5.1. Rental. ------- Tenant agrees to pay to Landlord as rental ("Rental") for the Premises (a) the Annual Basic Rental specified in clause G of Section 1.1; plus (b) the Annual Percentage Rental specified in clause H of Section 1.1; plus (c) Tenant's Occupancy Charge specified in clause I of Section 1.1; plus (d) all additional sums, charges or amounts due under this Lease, whether or not such sums, charges 6 or amounts are referred to as additional rental (collectively referred to as "Additional Rental"). Annual Basic Rental shall be paid by Tenant in equal monthly installments in advance on the first day of each full calendar month during the Term, the first such payment to include any prorated Annual Basic Rental for the period from the Commencement Date to the first day of the first full calendar month in the Term. Annual Percentage Rental shall be paid by Tenant monthly during each Rental Year on or before the fifteenth (15th) day following the close of each calendar month commencing with the first month during each Rental Year that Tenant's aggregate Gross Sales for such Rental Year exceed the Breakpoint for such Rental Year. Monthly payments of Annual Percentage Rental shall be calculated by multiplying the amount of Gross Sales for the month in question by the percentage specified in Section 1.1.H., with appropriate adjustment for the month in which the Breakpoint is achieved. As soon as practicable after the end of each Rental Year, the Annual Percentage Rental shall be finally determined and any necessary payment or refund shall be promptly made. Tenant's Occupancy Charge shall be paid by Tenant in equal monthly installments in advance on the first day of each calendar month during the Term, the first such payment to include any prorated Tenant's Occupancy Charge for the period from the Commencement Date to the first day of the first full calendar month in the Term. Tenant's Occupancy Charge shall be increased as of January 1st of each year during the Term by an amount equal to the greater of three percent (3%) or the percentage increase in the CPI multiplied by Tenant's Occupancy Charge for the prior calendar year. "CPI" shall mean the Consumer Price Index for All Urban Consumers (U. S. City Average) published by the Bureau of Labor Statistics of the United States Department of Labor. The percentage increase in the CPI shall be determined by (a) taking the September CPI most recently reported prior to the calendar year for which the increase is effective and subtracting the September CPI reported one year earlier (the "Prior Period CPI") and (b) dividing the result by the Prior Period CPI. If during the Term the CPI is changed or discontinued, Landlord shall choose a comparable index, formula or other means of measurement of the relative purchasing power of the dollar and such substitute index, formula or other means of measurement shall be utilized in place of the CPI as if it had been originally designated in this Lease. Unless the time for payment is otherwise expressly stated in this Lease, Additional Rental shall be paid by Tenant on or before the tenth (10th) day following Landlord's billing Tenant therefor. The first "Rental Year" shall commence on the Commencement Date and shall end at the close of the twelfth full calendar month following the Commencement Date; thereafter each Rental Year shall consist of successive periods of twelve calendar months. Any portion of the Term remaining at the end of the last full Rental Year shall constitute the final Rental Year and all Rental shall be apportioned therefor. The Annual Basic Rental and the Breakpoint shall be adjusted proportionately for any Rental Year of more or less than twelve (12) calendar months. Section 5.2. "Gross Sales" Defined ----------------------- "Gross Sales" means the actual sales prices or rentals of all goods and merchandise sold, leased, licensed or delivered, and the actual charges for all services performed by Tenant, or by any subtenant, licensee or concessionaire in, at, from, or arising out of the use of the Premises, whether for wholesale, retail, cash, credit, trade-in or otherwise, without reserve or deduction for inability or failure to collect except as set forth below. Gross Sales shall include, without limitation, sales and services (a) whether delivery or performance is made from the Premises or from some other place, (b) made or 7 performed by mail, telephone, telefax, e-mail, Internet or any other communications medium to, at or from the Premises, (c) made or performed by means of mechanical or other vending devices in the Premises, or (d) which Tenant or any subtenant, licensee, concessionaire or other person in the normal and customary course of its business would credit or attribute to its operations in any part of the Premises. No franchise, occupancy or capital stock tax and no income or similar tax based on income or profits shall be deducted from Gross Sales. The following shall not be included in Gross Sales: (i) any exchange of merchandise between stores of Tenant where such exchange is made solely for the convenient operation of Tenant's business, (ii) sales of trade fixtures, machinery and equipment not part of Tenant's inventory, (iii) sales, use, luxury or excise taxes separately stated from the sales price, (iv) charges for alterations and/or repairs made at no profit to Tenant, (v) sales to employees at discount to the extent that such sales do not exceed one percent (1%) of the Gross Sales during any Rental Year and are at no profit to Tenant, (vi) receipts from vending machines and pay telephones located in non-sales areas, (vii) insurance proceeds, (viii) sales in bulk to manufacturers and jobbers, (ix) service charges payable to Tenant on accounts receivable, (x) all travel related revenue (including airline tickets, cruise vacations, hotel reservations and car rentals); and (xi) charges made for delivery at no profit to Tenant which shall be shown as a separate charge. The following may be deducted from Gross Sales: (a) cash or credit refunds to customers on transactions previously reported in Gross Sales and (b) to the extent that any purchase was previously included in Gross Sales, bad debts not in excess of one percent (1%) of Gross Sales in any one Rental Year (provided, however, that if Tenant subsequently receives payment on any account theretofore excluded, such payment shall be included in Gross Sales for the Rental Year in which received). Tenant shall not deduct from Gross Sales cash or credit refunds to customers on transactions which were catalog, electronic or Internet sales not included in Gross Sales. Those items which Tenant is permitted to exclude or deduct from Gross Sales may only be so excluded or deducted if complete, accurate and separate records relating thereto are maintained and preserved by Tenant and made available to Landlord. Deposits or payments on layaway merchandise sales (provided the customer has not taken delivery of the merchandise) shall be included in Gross Sales at the time such sale is final and shall be included as part of the overall sale. A "final" sale shall occur at the time a customer takes delivery of the merchandise. In the event that an order is canceled for which Tenant has received a deposit or partial payment which is not refunded, such deposit or partial payment shall be included in Gross Sales. Sales of gift certificates shall not be included in Gross Sales but the redemption of gift certificates at the Premises shall be included in Gross Sales, whether or not purchased at the Premises. Section 5.3. Statements of Gross Sales. ---------------------------- Tenant shall deliver to Landlord: (a) within fifteen (15) days after the close of each calendar month of the Term, a written report signed by Tenant or by an authorized officer or agent of Tenant, showing the Gross Sales made in the preceding calendar month and (b) within sixty (60) days after the close of each Rental Year, a statement of Gross Sales (prior to excluding and deducting those items enumerated in the second paragraph of Section 5.2) and an itemization of any exclusions and deductions made by Tenant as permitted by Section 5.2 for the preceding Rental Year which shall conform to and be in accordance with generally accepted accounting principles and Section 5.2. The annual statement shall be accompanied by the signed certificate of an independent Certified Public Accountant or the chief financial officer of Tenant stating specifically that he has examined the report of Gross Sales for the preceding Rental Year, and the calculation of Gross Sales has been made in accordance with the definition of Gross Sales contained in this Lease. If Tenant shall fail to deliver such annual statement and certificate to Landlord within said sixty (60) day period, Landlord shall have the right, after ten (10) days notice to Tenant, to employ its authorized representative to examine such books and records, including without limitation all records required by Section 5.4, as may be necessary to certify the amount of Tenant's Gross Sales for such Rental Year, and Tenant shall pay to Landlord the reasonable cost thereof as Additional Rental. If such audit shall disclose that Tenant's records, in the opinion of such independent Certified Public Accountant, are inadequate to disclose such Gross 8 Sales, Landlord shall be entitled to collect, as Additional Rental, an equitable sum determined by such independent Certified Public Accountant but not exceeding fifty percent (50%) of the Annual Basic Rental payable by Tenant during the period in question. Section 5.4. Tenant's Records. ----------------- In order for Landlord to verify Gross Sales, Tenant will use and retain magnetic computer tapes (including tapes for its point of sale registers in the Premises), or such other device for recording sales as Landlord approves, which will disclose each sale or transaction. Tenant will preserve for at least three (3) years, and during the Term shall keep at the Tenant Notice Address or the Premises, original or duplicate books and records, which shall disclose all information required to determine Tenant's Gross Sales and which shall conform to and be in accordance with generally accepted accounting principles. Not more than once in any Rental Year upon ten (10) days' prior written notice, Landlord or any Mortgagee, their agents and accountants, shall have the right during business hours to make any examination or audit of such books and records which Landlord or such Mortgagee may desire. If such audit shall disclose a liability in any Rental Year for Rental in excess of the Rental theretofore paid by Tenant for such period, Tenant shall promptly pay such liability. If Tenant fails to provide adequate records or such audit shall disclose that Tenant has underreported Gross Sales by five percent (5%) or more during any Rental Year, (a) Tenant shall promptly pay the reasonable cost of audit and interest at the Default Rate on all additional Annual Percentage Rental then payable, accruing from the date such additional Annual Percentage Rental was due and payable, and (b) an Event of Default shall be deemed to exist unless, within ten (10) days, Tenant shall furnish Landlord with adequate records or evidence satisfactorily demonstrating to Landlord that such inadequate records or underreporting of Gross Sales was the result of good faith error on Tenant's part. If such audit shall disclose an overpayment of Rental by Tenant, Landlord shall promptly credit Tenant the amount of any overpayment. Section 5.5. Payment of Rental; Qualified Rental. ------------------------------------- Tenant shall pay all Rental when due, without any setoff, deduction or prior demand therefor. Except as provided herein, Tenant shall not pay any Rental earlier than one (1) month in advance of the date on which it is due. If Tenant shall fail to pay any Rental within ten (10) days after the same is due, Tenant shall pay Additional Rental equal to the greater of One Hundred Dollars ($100.00) or ten percent (10%) of any Rental payment not paid when due to reimburse Landlord for its additional administrative costs. In addition, any Rental which is not paid within ten (10) days after the same is due shall bear interest at the Default Rate from the first day due until paid. Rental shall be paid and statements of Gross Sales delivered or mailed at such place as Landlord may from time to time designate. Any payment by Tenant or acceptance by Landlord of a lesser amount than shall be due from Tenant to Landlord shall be treated as a payment on account. The acceptance by Landlord of a check for a lesser amount with an endorsement or statement that such lesser amount is payment in full shall be given no effect, and Landlord may accept such check without prejudice to any other rights or remedies which Landlord may have against Tenant. Landlord and Tenant intend that all Rental paid to Landlord under this Lease will qualify as rents from real property within the meaning of Section 856(d) of the Internal Revenue Code of 1986, as amended and as further defined in Treasury Regulation Section 1.856-4 ("Qualified Rental"). If Landlord advises Tenant that, in Landlord's sole discretion, there is any risk that all or part of any payments made by Tenant under this Lease will not qualify as Qualified Rental, Tenant agrees to cooperate with Landlord to restructure this Lease in such manner as may be necessary to enable such payments to be treated as Qualified Rental, provided such restructuring will not have a material adverse economic impact on Tenant. Section 5.6. Future Expansion/Renovation. ---------------------------- In the event that during the Term (a) one or more additional Anchors are constructed in the Shopping Center, or (b) one or more expansions of the Shopping Center, involving the addition of at least 50,000 square feet of floor area occurs, or (c) the Common Areas are expanded or renovated by the construction of capital improvements which have an aggregate cost equal to or 9 greater than an amount equal to $20.00 multiplied by Landlord's Floor Area (any of the foregoing being an "Expansion"), then, upon the opening for business of each Expansion, the Annual Basic Rental shall be increased by ten percent (10%) for each such Expansion and the Breakpoint shall be increased by a like percentage. ARTICLE VI TAXES ----- Section 6.1. Tenant to Pay Proportionate Share of Taxes. ------------------------------------------- Tenant shall pay in each Tax Year during the Term, as Additional Rental, a proportionate share of all amounts payable by Landlord with respect to real estate taxes, ad valorem taxes and assessments, general and special, taxes on real estate rental receipts, taxes on Landlord's gross receipts, or any other tax imposed upon or levied against real estate, or upon owners of real estate as such rather than persons generally, extraordinary as well as ordinary, foreseeable and unforeseeable, including taxes imposed on leasehold improvements which are assessed against Landlord, payable with respect to or allocable to Landlord's Property, including all land, Landlord's Building and all other buildings and improvements situated thereon, together with the reasonable cost (including fees of attorneys, consultants and appraisers) of any negotiation, contest or appeal pursued by Landlord in an effort to reduce any such tax, assessment or charge, and all of Landlord's reasonable administrative costs in relation to the foregoing, all of the above being collectively referred to herein as "Taxes." Tenant's proportionate share of Taxes shall be computed by multiplying the amount of such Taxes (less any contributions by Anchors and Major Tenants) by a fraction, the numerator of which shall be Tenant's Floor Area and the denominator of which shall be Landlord's Floor Area less the floor area of any Major Tenants. Landlord, at its option, from time to time, may exclude from Landlord's Floor Area any Landlord's Floor Area not existing as of the date of execution of this Lease, provided the Taxes associated therewith are excluded from Taxes. For the Tax Year in which the Term commences or terminates, the provisions of this Section shall apply, but Tenant's liability for its proportionate share of any Taxes for such year shall be subject to a pro rata adjustment based upon the number of days of such Tax Year falling within the Term. As used herein, "Tax Year" means each yearly period established by the appropriate taxing authorities as the tax year. If an assessment is payable in installments, Tenant's proportionate share of such assessment shall be computed as though Landlord had elected to pay the same in the maximum number of installments permitted by law without additional costs, penalties or interest being assessed by reason of such installments, provided the Term has not expired or this Lease has not terminated. Tenant shall not have any liability with respect to installments which are attributable to the period after the expiration of the Term. So long as Tenant is not in default of the requirement to pay its Taxes, Tenant shall not be required to pay any interest or penalties imposed for non-payment of Taxes. Taxes shall not include any general income, franchise, corporate transfer, estate or gift tax imposed upon Landlord generally rather than as owner and/or lessee of Landlord's Property. Section 6.2. Payment of Proportionate Share of Taxes. ---------------------------------------- Tenant's proportionate share of Taxes shall be paid by Tenant in monthly installments in such amounts as are reasonably estimated and billed for each Tax Year during the Term by Landlord, each such installment being due on the first day of each calendar month. At any time during a Tax Year, Landlord may reestimate Tenant's proportionate share of Taxes and thereafter adjust Tenant's monthly installments payable during the Tax Year to reflect more accurately Tenant's proportionate share of Taxes. Within one hundred twenty (120) days after Landlord's receipt of tax bills for each Tax Year, or such reasonable (in Landlord's determination) time thereafter, Landlord will notify Tenant of the amount of Taxes for the Tax Year in question and the amount of Tenant's proportionate share thereof. Any overpayment or deficiency in Tenant's payment 10 of its proportionate share of Taxes for each Tax Year shall be paid promptly. Failure of Landlord to provide such notice within the time prescribed shall not relieve Tenant of its obligations hereunder. Notwithstanding the foregoing, if Landlord is required under law to pay Taxes in advance, Tenant agrees to pay Landlord, upon Commencement Date, an amount equal to Tenant's share of Taxes for the entire Tax Year in which the Term of this Lease commences, and in such event, at the termination of this Lease, Tenant shall be entitled to a refund of Taxes paid which are attributable to a period after this Lease expires. Section 6.3. Taxes on Rental; Tenant's Taxes. ------------------------------- Tenant shall also pay any sales, excise and other taxes (not including, however, Landlord's income taxes) levied by any taxing authority upon any Rental payable hereunder. Tenant shall also pay, prior to the time the same shall become delinquent or payable with penalty, all taxes imposed on its inventory, furniture, trade fixtures, apparatus, equipment, leasehold improvements installed by Tenant or by Landlord on behalf of Tenant (except to the extent such leasehold improvements shall be covered by Taxes referred to in Section 6.1), and any other property of Tenant. Landlord may require that Tenant's leasehold improvements be separately assessed by the taxing authority. ARTICLE VII IMPROVEMENTS ------------ Section 7.1. Tenant's Improvements.7.1. --------------------------- Prior to the commencement of the Term, Tenant shall, at its sole cost and expense, (a) promptly initiate and diligently pursue the design of all leasehold improvements and other work to be performed by it pursuant to Schedule B on a schedule which in Landlord's reasonable judgment will permit Tenant to complete such leasehold improvements not later than ten (10) days prior to the Grand Opening Date with respect to the exterior of the Premises and not later than seven (7) days prior to the Grand Opening Date with respect to the interior of the Premises, and (b) promptly commence and diligently pursue the construction and completion of the Premises. Tenant will be permitted by Landlord to enter the Premises in accordance with Schedule B for the purpose of performing its obligations under Schedule B and for the purpose of installing its fixtures and other equipment, provided (i) Tenant shall have obtained Landlord's approval of the plans and specifications for such work, (ii) Tenant shall have obtained a valid building permit for construction of its leasehold improvements, (iii) Tenant shall have deposited with Landlord the policies or certificates of insurance required in Article XIII and (iv) Landlord shall have received full payment from Tenant for the Grand Opening Contribution and for those items set forth in Schedule B. Tenant's activities shall be conducted so as not to unreasonably interfere with Landlord's construction activities. Tenant shall maintain the Premises in a clean and orderly condition during construction and merchandising. All trash which may accumulate in connection with Tenant's construction and merchandising activities shall be deposited daily in dumpsters, provided by or for Landlord in the Shopping Center as more particularly described in Schedule B. During such construction and merchandising period, Tenant shall perform all duties and obligations imposed by this Lease, including, without limitation, those provisions relating to insurance and indemnification, saving and excepting only the obligation to pay Rental (other than any Additional Rental due Landlord by reason of Tenant's failure to perform any of its obligations hereunder), which obligation shall commence when the Term commences. Landlord's work is limited to that work specified in Schedule B and Tenant shall be required to make all leasehold improvements to the Premises in accordance with Tenant's approved plans, except those which Landlord is specifically required to make under Schedule B. Section 7.2. Effect of Opening for Business. ------------------------------ By opening the Premises for business, Tenant shall be deemed to have (a) accepted the Premises, (b) acknowledged that the same are in the condition called for hereunder, and (c) agreed that the obligations of Landlord under Schedule B have been fully performed, except Landlord shall repair (i) any apparent defect in work performed by Landlord of which Tenant notifies Landlord 11 within thirty (30) days after Tenant takes possession of the Premises, and (ii) any latent defect in work performed by Landlord of which Tenant notifies Landlord within six (6) months after Tenant takes possession of the Premises. Section 7.3. Mechanic's Liens. ----------------- No work performed by Tenant pursuant to this Lease shall be deemed to be for the immediate use and benefit of Landlord so that no mechanic's or other lien shall be allowed against the estate of Landlord by reason of any consent given by Landlord to Tenant to improve the Premises. Tenant shall pay promptly all persons furnishing labor or materials with respect to any work performed by Tenant or its contractors on or about the Premises. If any mechanic's or other liens shall at any time be filed against the Premises or any part of the Shopping Center by reason of work, labor, services or materials performed or furnished, or alleged to have been performed or furnished, to Tenant or to anyone holding the Premises through or under Tenant, and regardless of whether any such lien is asserted against the interest of Landlord or Tenant, Tenant shall forthwith cause the same to be discharged of record or bonded to the satisfaction of Landlord. If Tenant shall fail to cause such lien to be so discharged or bonded within thirty (30) days (or such shorter period required under any Mortgage) after being notified of the filing thereof, then, in addition to any other right or remedy of Landlord, Landlord may bond or discharge the same by paying the amount claimed to be due, and the amount so paid by Landlord, including reasonable attorneys' fees incurred by Landlord either in defending against such lien or in procuring the bonding or discharge of such lien, together with interest thereon at the Default Rate, shall be due and payable by Tenant to Landlord as Additional Rental. Section 7.4. Tenant's Leasehold Improvements and Trade Fixtures. ----------------------------------------------------- No leasehold improvements (as distinguished from trade fixtures and apparatus) installed in the Premises whether by Tenant, Landlord or others, shall be removed by Tenant from the Premises at any time, without Landlord's prior written consent. At the termination of this Lease, all leasehold improvements shall be deemed to be part of the Premises, and title thereto shall vest solely in Landlord without payment owing to Tenant. All trade fixtures and apparatus owned by Tenant shall remain the property of Tenant and may be removed from the Premises unless Tenant shall then be in default of any terms or covenants of this Lease. Tenant shall repair any damage to the Premises caused by the removal of said trade fixtures and apparatus and shall restore the Premises to substantially the same condition as existed prior to the installation of said trade fixtures and apparatus, ordinary wear and tear excepted. If Tenant is in default, Landlord shall have the benefit of any applicable lien on Tenant's property (specifically excluding Tenant's merchandise) located in or on the Premises as may be permitted under the laws of the state in which the Shopping Center is located and in the event such lien is asserted by Landlord in any manner or by operation of law, Tenant shall not remove or permit the removal of said property until the lien has been removed and all defaults have been cured. Section 7.5. "Ready for Occupancy" Defined. ------------------------------- The Premises shall be "Ready for Occupancy" as of the date on which the last of the following shall have occurred: (a) Landlord shall have substantially completed all work to be performed by it pursuant to Schedule B which is necessary to permit Tenant to commence the work to be performed by it under Schedule B. For the purpose of this clause (a) of Section 7.5., the term "substantially completed" shall mean the date upon which Landlord has completed its work as set forth in Schedule B to the extent, as determined by Landlord, that Tenant's contractor may commence the construction of Tenant's work as specified in Schedule B. Landlord will not be required to complete the balance of its work in the Premises until Tenant has commenced construction of Tenant's work and completed certain portions of said work designated by Landlord, Landlord will then reenter the Premises and complete its work; (b) Sixty (60) calendar days shall have passed from the date Tenant shall have received Landlord's authorization to enter the Premises to complete the work to be performed by it pursuant to Schedule B and to fixture the Premises and otherwise make the Premises ready for opening for business; (c) At least sixty-five percent (65%) of Landlord's Floor Area in Landlord's Expansion, including the Premises, shall have been substantially completed and turned over to tenants for finishing; (d) At least 4,000 automobile parking spaces shall be available in the Shopping Center; and (e) Any one (1) of the following Anchors in Landlord's Expansion shall have been substantially completed and open or ready to open for business: Dillard's, Nordstrom, Saks, or Bloomingdales Homestore. ARTICLE VIII OPERATIONS ---------- Section 8.1. Operations by Tenant. ----------------------- Tenant will at its expense: (a) keep all exterior store surfaces including the inside and outside of all glass in the doors and windows of the Premises clean; (b) replace promptly any cracked or broken glass of the Premises; (c) maintain the Premises in a clean, orderly and sanitary condition and free of insects, rodents, vermin and other pests; (d) keep any garbage, trash, rubbish or other refuse in rat-proof containers within the interior of the Premises until removed and dispose same in designated receptacles provided by Landlord; (e) keep all mechanical apparatus reasonably free of vibration and noise which may be transmitted beyond the Premises; (f) light the show windows of the Premises and exterior signs and turn the same off to the extent reasonably required by Landlord; (g) comply and cause the Premises to comply with all applicable governmental statutes, laws, rules, orders, regulations and ordinances affecting the Premises or the use thereof; (h) comply with all rules and regulations established by Landlord from time to time which apply generally to all retail tenants in Landlord's Property; and (i) maintain sufficient and seasonal inventory and have sufficient number of personnel to maximize sales volume in the Premises. Tenant will not: (j) place anything on, or otherwise obstruct, any portion of the Common Areas or entrance to the Premises; (k) use any objectionable advertising medium such as loudspeakers, phonographs, public address systems, sound amplifiers, reception of radio or television broadcasts within the Shopping Center, which is in any manner audible or visible outside of the Premises; (l) cause or permit objectionable odors (in Landlord's opinion) to emanate from the Premises; (m) solicit business or distribute handbills or other advertising matter in any Common Areas (including placing any of the same in or upon any automobiles parked in the parking areas); (n) permit the parking of vehicles so as to interfere with the use of any driveway, corridor, footwalk, parking area, mall or other Common Areas; (o) receive or ship articles of any kind outside the designated loading areas for the Premises; (p) use the mall, corridor or any other Common Areas adjacent to the Premises for the sale or display of any merchandise or for any other business, occupation or undertaking; 12 (q) conduct or permit to be conducted any auction, fictitious fire sale, going out of business sale, bankruptcy sale (unless directed by court order), or other similar type sale in or connected with the Premises (but this provision shall not restrict the absolute freedom of Tenant in determining its own selling prices, nor shall it preclude the conduct of periodic seasonal, promotional or clearance sales); (r) use the Premises or otherwise operate in a manner which will be in violation of law or which would violate Landlord's insurance policies or cause an increase in the cost of Landlord's insurance; (s) place a load upon any floor which exceeds the floor load which the floor was designed to carry; (t) operate its heating or air-conditioning in such a manner as to drain heat or air-conditioning from the Common Areas or from the premises of any other tenant of the Shopping Center; (u) use the Premises for any unlawful or illegal business, use or purpose, or for any business, use or purpose which is immoral or disreputable (including without limitation "adult entertainment establishments" and "adult bookstores"), or which is hazardous, or in such manner as to constitute a nuisance of any kind (public or private), or for any purpose or in any way in violation of the certificates of occupancy (or other similar approvals of applicable governmental authorities); or (v) park or permit its employees to park in areas other than those designated by Landlord, if any, for employee parking. Section 8.2. Exterior of Premises. ---------------------- Tenant shall not maintain within or on the exterior of the Premises any sign, banner, decoration or any other thing which is visible outside the Premises, nor paint the exterior of the Premises, without the prior written approval of Landlord, which approval shall not be unreasonably withheld or delayed if in accordance with Landlord's then-current design criteria. Section 8.3. Trash Removal Service8. ----------------------- At its option, Landlord may furnish (or authorize others to furnish) a service for the removal of trash from receptacles designated by Landlord for the regular deposit by Tenant of its garbage, trash, rubbish or other refuse, and, if it shall do so, then in each Rental Year, at Landlord's election, Tenant shall either (i) reimburse Landlord monthly, as Additional Rental, for all costs incurred by Landlord in furnishing such service, or (ii) pay directly such person, firm or corporation authorized by Landlord to provide such trash removal services. Section 8.4. Hazardous Materials. -------------------- (a) "Hazardous Material(s)" means any substance that, by itself or in combination with other materials, is either (i) potentially injurious to public health, safety, or the environment; or (ii) now or in the future regulated by any federal, state, or local governmental authority as potentially injurious to public health, safety, or the environment. (b) With the exception of minor amounts of Hazardous Materials customarily and lawfully used in conjunction with the Permitted Use, Tenant, its employees, contractors, agents, and any party acting on behalf of Tenant, shall not store, use, treat, generate, or dispose of Hazardous Materials at the Shopping Center. (c) Tenant, its employees, contractors, agents, and any party acting on behalf of Tenant shall comply, and shall keep the Premises in compliance, with all laws and regulations relating to Hazardous Materials ("Environmental Laws"); and in addition Tenant shall: (i) Promptly provide Landlord with copies of any document, correspondence, report or communication, written or oral, relating to Hazardous Materials at or affecting the Shopping Center (x) to or from any regulatory body, or (y) stating a basis for any potential liability or responsibility of Tenant, Landlord, or the Shopping Center; including all such documents, correspondence, reports or communications prepared by or on behalf of Tenant. In addition to the above, at Landlord's request, Tenant shall provide copies of any and all records and communications whatsoever relating to Hazardous Materials at or affecting the Shopping Center. (ii) Immediately notify Landlord in the event of a suspected or confirmed release of a Hazardous Material or violation of Environmental Laws at or affecting the Shopping Center and caused by or related to the operations of Tenant, its employees, contractors, agents, or any party acting on behalf of Tenant and, 13 at Landlord's sole option, either promptly remediate or correct such release or violation to Landlord's satisfaction or reimburse Landlord's cost of remediation (including reasonable attorneys' and consultants' fees); and compensate Landlord and/or third parties for all resultant damage. (iii) Permit Landlord reasonable access to the Premises for the purpose of conducting an environmental audit or testing, the cost of which shall be borne by Landlord unless the results indicate activity prohibited by Environmental Laws or hereunder. (iv) Upon expiration or other termination of this Lease, remove all Hazardous Materials from the Premises, and at Landlord's option cause to be performed and provided to Landlord an environmental audit of the Premises, using a consultant reasonably acceptable to Landlord, and correct, at its expense, any deficiencies noted by the audit. (d) Landlord shall comply with all Environmental Laws regarding its storage, use, treatment, generation, and disposal of Hazardous Materials, and, if required by law, shall promptly remediate any release of Hazardous Materials or correct any violation of Environmental Laws at or affecting the Shopping Center and resulting from such storage, use, treatment, generation or release. (e) This Section 8.4 shall survive the expiration or other termination of this Lease. ARTICLE IX REPAIRS AND ALTERATIONS ------------------------- Section 9.1. Repairs to be Made by Landlord.9.1. --------------------------------------- In addition to Landlord's obligations under Section 14.1, Landlord, at its expense, will make, or cause to be made in a reasonably prompt and diligent manner (a) structural repairs to exterior walls, structural columns, roof and structural floors which collectively enclose the Premises (excluding, however, all doors, door frames, storefronts, windows and glass); (b) repairs to plumbing, electrical or other mechanical installations which pass over and/or beneath the Premises and service any other tenant's premises (whether individually or together with other premises, including the Premises) but are not servicing solely the Premises; and (c) such repairs as are specifically set forth as Landlord's responsibility under Section 12.1 hereof. Any repairs made by Landlord shall be performed so as to minimize disruptions to Tenant's use of the Premises. Section 9.2. Repairs to be Made by Tenant. ----------------------------- All repairs to the Premises or any installations, equipment or facilities therein (or located outside of the Premises but serving only the Premises), other than those repairs required to be made by Landlord pursuant to Section 9.1, shall be made by Tenant at its expense. Tenant will keep the interior of the Premises, together with all electrical, plumbing and other mechanical 14 installations therein (or located outside of the Premises but serving only the Premises) and (if and to the extent provided in Schedule D) the heating, ventilating and air-conditioning system in the Premises, in good order and repair and will make all necessary replacements. Tenant will surrender the Premises at the expiration of the Term in as good condition as when received, damage by Casualty, unavoidable accident or Act of God and ordinary wear and tear excepted. Tenant will not overburden or exceed the capacity of any utility serving the Premises or within the Premises, and at its expense, subject to the provisions of Section 9.3, will make any additional installation which may be required in connection with Tenant's apparatus. Any damage or injury sustained by any person because of Tenant's failure to repair the Premises as required herein, shall be paid for by Tenant. Section 9.3. Alterations by Tenant. ----------------------- Tenant will not make any alterations, renovations, improvements or other installations in, on or to any part of the Premises (including, without limitation, any alterations of the storefront, signs, structural alterations, or any cutting or drilling into any part of the Premises or any securing of any fixture, apparatus, or equipment of any kind to any part of the Premises) unless and until Tenant shall have caused plans and specifications therefor to have been prepared, at Tenant's expense, by an architect or other duly qualified person and shall have obtained Landlord's approval (not to be unreasonably withheld or delayed) thereof. If such approval is granted, Tenant shall cause the work described in such plans and specifications to be performed, at its expense, promptly, efficiently, competently and in a good and workmanlike manner by duly qualified and licensed persons or entities, using first grade materials, without disruption to the operations of tenants or other occupants of the Shopping Center. All such work shall comply with all applicable codes, rules, regulations and ordinances. Notwithstanding the foregoing, Tenant shall have the right to make interior repairs or replacements which do not require any structural alteration or impose any greater load on any structural portion of the Premises, and are in accordance with Tenant's originally approved plans and are in conformance with Landlord's most current design criteria. Section 9.4. Changes and Additions to Shopping Center. ---------------------------------------- Landlord reserves the right at any time and from time to time to (a) make or permit changes to the Shopping Center including additions to, subtractions from, rearrangements of, alterations of, modifications of, or supplements to, the building areas, walkways, driveways, parking areas, or other Common Areas, and (b) construct improvements in Landlord's Building and the Shopping Center and to make alterations thereof or additions thereto and to build additional stories on or in any such building(s) and build adjoining same, including (without limitation) kiosks, pushcarts and other displays in the Common Areas; provided, however, that no such changes, rearrangements or other construction shall reduce the parking areas below the number of parking spaces required by law. Any changes or additions by Landlord to Landlord's Property shall be performed in such a manner so as not to unreasonably interfere with Tenant's use of the Premises and shall not change in a material, adverse way the access to the Premises from the Common Areas immediately in front of and adjacent to the Premises. Section 9.5. Roof and Walls. ---------------- Landlord shall have the exclusive right to use any part of the roof of the Premises for any purpose; to erect additional stories or other structures over all or any part of the Premises; to erect temporary scaffolds and other aids to construction on the exterior of the Premises, provided that access to the Premises shall not be denied; and to install, maintain, use, repair and replace within the Premises pipes, ducts, conduits, wires and all other mechanical equipment serving other parts of Landlord's Property, the same to be in locations within the Premises as will not unreasonably deny Tenant's use thereof. Landlord may make any use it desires of the side or rear walls of the Premises or other structural elements of the Premises (including, without limitation, free-standing columns and footings for all columns), provided that such use shall not encroach on the interior of the Premises unless (a) all work 15 carried on by Landlord with respect to such encroachment shall be done during hours when the Premises are not open for business and otherwise shall be carried out in such a manner as not to unreasonably interfere with Tenant's operations in the Premises, (b) Landlord, at its expense, shall provide any security services to the Premises required by such work, and (c) Landlord, at its expense, shall repair all damage to the Premises resulting from such work. Landlord agrees that any such uses contemplated hereunder shall not decrease the size of the Premises nor materially interfere with Tenant's use of or access to the Premises from the Common Areas immediately in front of and adjacent to the Premises, and any such pipes or conduits shall be concealed along the walls and ceilings of the Premises. ARTICLE X COMMON AREAS ------------- Section 10.1. Use of Common Areas. -------------------- Landlord grants to Tenant and its agents, employees and customers a non-exclusive license to use the Common Areas in common with others during the Term, subject to the exclusive control and management thereof at all times by Landlord or others and subject, further, to the rights of Landlord set forth in Sections 9.4 and 10.2. Section 10.2. Management and Operation of Common Areas. --------------------------------------------- Landlord will operate and maintain the Common Areas in a commercially reasonable and appropriate manner consistent with the operation of a first class shopping center. Landlord will have the right (a) to establish, modify and enforce reasonable and non-discriminatory rules and regulations with respect to the Common Areas; (b) to enter into, modify and terminate easement and other agreements pertaining to the use and maintenance of the Common Areas; (c) to close all or any portion of the Common Areas to such extent as may, in the opinion of Landlord, be necessary to prevent a dedication thereof or the accrual of any rights to any person or to the public therein; (d) to close temporarily any portions of the Common Areas; (e) to discourage non-customer parking; and (f) to do and perform such other acts in and to said areas and improvements as, in the exercise of good business judgment, Landlord shall determine to be advisable. ARTICLE XI PROMOTION OF THE SHOPPING CENTER ------------------------------------ Landlord shall formulate and carry out an ongoing program for the promotion of the Shopping Center, which program may include, without limitation, special events, shows, displays, signs, marquees, decor, seasonal events, institutional advertising for the Shopping Center, promotional literature to be distributed within Landlord's Property and other activities within the Shopping Center designed to attract customers. In marketing the Shopping Center, Landlord shall have the right to name Tenant's store in the Shopping Center. Prior to the date on which Tenant commences construction in the Premises, Tenant shall pay Landlord the Grand Opening Contribution set forth in Section 1.1.E. The Grand Opening Contribution shall be used to promote and advertise the opening of the Landlord's Expansion. ARTICLE XII UTILITIES --------- Section 12.1. Utility Services. ----------------- Landlord shall provide the facilities for supplying heating, ventilating and air-conditioning, water, sanitary sewer, telephone and electricity to the Premises as follows: 16 (a) Electricity. Set forth in Schedule C, attached hereto, are the terms ----------- and conditions under which Landlord shall supply or Tenant shall obtain electricity for use in the Premises; (b) HVAC. Set forth in Schedule D attached hereto, are the terms and ---- conditions under which heating, ventilating and air-conditioning will be provided to the Premises; (c) Fire Protection Sprinkler System. Landlord shall provide ordinary ----------------------------------- repair and maintenance for the fire protection sprinkler system in the Premises, which system shall remain the property of Landlord; and (d) Water and Sewer. Tenant shall pay all charges for water and sewer used --------------- by it and supplied by a public utility or public authority, or any other person, firm or corporation. If Landlord supplies such service, there shall be no separate charge therefor, and Landlord shall continue to supply such service throughout the Term. Unless otherwise provided in this Lease, including the schedules attached hereto, Landlord shall not be responsible for providing any utility service to the Premises, nor for providing meters or other devices for the measurement of utilities supplied to the Premises, and Tenant shall arrange for the furnishing to the Premises of such utility services as it may require. Tenant shall be solely responsible for and shall promptly pay, as and when the same become due and payable, all charges for electricity, gas, telephone and any other utility used or consumed in the Premises and supplied by a public utility or public authority or any other person, firm or corporation, including Landlord, supplying the same. Section 12.2. Discontinuances and Interruptions of Utility Services. ------------------------------------------------------- Landlord shall not be liable to Tenant in damages or otherwise (a) if any utility shall become unavailable from any public utility company or any other person or entity (including Landlord) supplying or distributing such utility, or (b) for any interruption in any utility service caused by the making of any necessary repairs or improvements or by any cause beyond Landlord's reasonable control, and the same shall not constitute a termination of this Lease or an eviction of Tenant. Notwithstanding the foregoing, if any utility to the Premises should become unavailable for a period in excess of seventy-two (72) consecutive hours, and if, as a result of such unavailability, Tenant is unable to operate its business in the Premises, and if such unavailability is directly caused by the willful act or gross negligence of Landlord, as Tenant's sole and exclusive remedy all Rental shall abate until utility service to the Premises is restored. ARTICLE XIII INDEMNITY AND INSURANCE ----------------------- Section 13.1. Indemnities.13.1 ------------------ To the extent permitted by law, Tenant shall and does hereby indemnify Landlord, any general or limited partner of Landlord or any general or limited partner of any partner of Landlord, or any shareholder of any corporate partner of any partner of Landlord, or any other holder of any equity interest in Landlord, or in any entity comprising Landlord or its partners and agrees to save each of them harmless and, at Landlord's option, defend each of them from and against any and all claims, actions, damages, liabilities and expenses (including reasonable attorneys' and other professional fees) judgments, settlement payments, and fines paid, incurred or suffered by any of them in connection with loss of life, personal injury and/or damage to property or the environment suffered by third parties arising from or out of the occupancy or use by Tenant of the Premises or any part thereof or any other part of the Shopping Center, to the extent occasioned by any act or omission of Tenant, its officers, agents, contractors, employees or (while in the Premises) invitees, or arising, directly or indirectly, wholly or in part, from any conduct, activity, act, omission, or operation involving the use, handling, generation, treatment, 17 storage, disposal or other management of any Hazardous Material(s) in, from or to the Premises, whether or not Tenant may have acted negligently with respect to such Hazardous Materials. To the extent permitted by law, Landlord shall and does hereby indemnify Tenant and agrees to save it harmless from and against any and all claims, actions, damages, liabilities and expenses (including reasonable attorneys' and other professional fees), judgments, settlement payments, and fines paid, incurred or suffered by Tenant in connection with loss of life, personal injury and/or damage to property suffered by third parties arising from or out of the use of any portion of the Common Areas by Landlord, to the extent occasioned by any act or omission of Landlord, its officers, agents, contractors or employees. Landlord shall indemnify, hold harmless and defend Tenant, its agents, servants and employees from and against all claims, actions, losses and expenses made by third parties (including reasonable attorneys' and other professional fees) arising from any conduct, activity, act, omission or operation involving the use, handling, generation, treatment, storage, disposal or release of any Hazardous Material(s) in, from or to the Premises or the Shopping Center, to the extent caused directly by the actions of Landlord, its agents, servants and employees, and not arising solely out of Landlord's position as an owner/operator of the Shopping Center. The obligations of the parties pursuant to this Section 13.1 shall survive any termination of this Lease with respect to any act, omission or occurrence which took place prior to such termination. Section 13.2. Landlord Not Responsible for Acts of Others. ------------------------------------------------- Landlord shall not be liable to Tenant, or to those claiming, through Tenant, for any loss or damage which may result from (a) the acts or omissions of persons occupying space in any part of the Shopping Center, or their agents, employees, contractors or invitees or (b) from the breaking, bursting, stoppage or leaking of electrical cable and wires, or water, gas, sewer or steam pipes. Tenant acknowledges that its use of the Premises and Shopping Center is at its own risk. Section 13.3. Tenant's Insurance. ------------------- At all times on and after delivery of the Premises to Tenant, Tenant will carry and maintain, at its expense: (a) a non-deductible commercial general liability insurance policy, including (but not limited to) insurance against assumed or contractual liability under this Lease, with respect to liability arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto, to afford protection with respect to personal injury, death or property damage of not less than Two Million Dollars ($2,000,000) per occurrence combined single limit/Four Million Dollars ($4,000,000) general aggregate (but not less than $2,000,000 per location aggregate); and (b) special form property and casualty insurance policy, including theft coverage, written at not less than eighty percent (80%) replacement cost value covering all of Tenant's personal property in the Premises (including, without limitation, inventory, trade fixtures, furniture and other property removable by Tenant under the provisions of this Lease) and all leasehold improvements installed in the Premises by or on behalf of Tenant, which policy may have a deductible of not more than $25,000; and (c) comprehensive boiler and machinery equipment policy, including electrical apparatus, if applicable, which policy may have a deductible of not more than $25,000; and (d) if and to the extent required by law, worker's compensation insurance policy, or similar insurance in form and amounts required by law. 18 Tenant may maintain the required liability and special form property and casualty insurance in the form of a blanket policy covering other locations of Tenant in addition to the Premises; provided, however, that Tenant shall provide Landlord with a certificate of insurance specifically naming the location of the Premises, the limits of which coverage are to be at least in the amounts set forth in this Section 13.3. Notwithstanding the foregoing, Tenant may carry the required special form property and casualty insurance in a deductible form and may elect to self-insure such deductible, so long as the amount of such deductible does not exceed Five Thousand and 00/100 Dollars ($5,000.00) and Tenant agrees not to hold Landlord, its officers, agents, contractors or employees liable for any losses which would otherwise be covered by such deductible. Tenant hereby expressly waives all right of recovery against Landlord, its officers, agents, employees or contractors for damage which would otherwise be covered by any deductible contained in Tenant's insurance policies covering the Premises. Section 13.4. Tenant's Contractor's Insurance. --------------------------------- Tenant shall require any contractor of Tenant performing work on the Premises to carry and maintain, at no expense to Landlord, a non-deductible: (a) commercial general liability insurance policy, including (but not limited to) contractor's liability coverage, contractual liability coverage, completed operations coverage, broad form property damage endorsement and contractor's protective liability coverage, to afford protection, with respect to personal injury, death or property damage of not less than Three Million Dollars ($3,000,000) per occurrence combined single limit/Five Million Dollars ($5,000,000) general aggregate (but not less than $3,000,000 per location aggregate); (b) comprehensive automobile liability insurance policy with a combined single limit for each occurrence of not less than One Million Dollars ($1,000,000) with respect to personal injury or death and property damage; and (c) worker's compensation insurance policy or similar insurance in form and amounts required by law. Section 13.5. Policy Requirements. -------------------- The companies writing any insurance which Tenant is required to carry and maintain pursuant to Sections 13.3 and 13.4, shall maintain a rating from A.M. Best Company, Inc. of at least A-IX, or a comparable rating if the current rating system is changed. The commercial general liability policies shall name Landlord and/or its designee(s) as additional insured and casualty insurance policies, shall name Landlord and/or its designee(s) as loss payee. All policies shall be primary and non-contributory with respect to Landlord's liability arising out of the act or omission of Tenant, its officers, agents, contractors, employees or (while in the Premises) invitees, and shall also contain a provision by which the insurer agrees that such policy shall not be cancelled, materially changed or not renewed without at least thirty (30) days' advance notice to Landlord, c/o The Rouse Company, 10275 Little Patuxent Parkway, Columbia, Maryland 21044, Attention: Risk Manager, by certified mail, return receipt requested, or to such other party or address as may be designated by Landlord or its designee. Each such policy, or a certificate thereof, shall be deposited with Landlord by Tenant promptly upon commencement of Tenant's obligation to procure the same. Section 13.6. Waiver of Right of Recovery. --------------------------- Except for the indemnification contained in Section 13.1 with respect to Hazardous Materials, neither Landlord nor Tenant shall be liable to the other or to any insurance company (by way of subrogation or otherwise) insuring the other party for any loss or damage to any building, structure or other tangible property, or any resulting loss of income, or losses under worker's compensation 19 laws and benefits, even though such loss or damage might have been occasioned by the negligence of such party, its agents or employees. The provisions of this Section 13.6 shall not limit the indemnification for liability to third parties pursuant to Section 13.1. In the event of a permitted sublease or other occupancy agreement for all or a portion of the Premises, the subtenant or occupant shall expressly agree in writing to be bound by the provisions of this Section 13.6 (as if such subtenant or occupant were Tenant hereunder) for the benefit of Landlord. The owner or occupant of any Anchor within the Shopping Center shall have the benefit of this Section 13.6. and none of them shall be liable to Tenant or Tenant's insurance company for any loss or damage. ARTICLE XIV DAMAGE AND DESTRUCTION ------------------------ Section 14.1. Landlord's Obligation to Repair and Reconstruct. --------------------------------------------------- If the Premises shall be damaged by fire, the elements, accident or other casualty (any of such causes being referred to herein as a "Casualty"), then, subject to the provisions of Section 14.2, Landlord shall in a reasonably prompt manner cause such damage to be repaired. All such repairs shall be made at the expense of Landlord; but Landlord shall not be required to perform any work beyond that described in Schedule B. Landlord shall not be liable for interruption to Tenant's business or for damage to or replacement or repair of Tenant's personal property (including, without limitation, inventory, trade fixtures, furniture and other property removable by Tenant under the provisions of this Lease) or to any leasehold improvements installed in the Premises by or on behalf of Tenant, all of which damage, replacement or repair shall be undertaken and completed by Tenant promptly. If, as the result of Casualty, the Premises are rendered partially or totally untenantable, Annual Basic Rental, Tenant's Occupancy Charge and Additional Rental shall be abated proportionately as to the portion of the Premises rendered untenantable and continuing to be untenantable, and the Breakpoint shall be proportionately reduced until the Premises are tenantable. Section 14.2. Landlord's and Tenant's Option to Terminate Lease. --------------------------------------------------- Landlord may elect to terminate this Lease if the Premises are (a) rendered wholly untenantable, or (b) damaged as a result of any cause which is not covered by Landlord's insurance or (c) damaged or destroyed in whole or in part during the last three (3) years of the Term, or if Landlord's Building or the individual building in which Tenant is located is damaged to the extent of fifty percent (50%) or more of the leasable floor area contained therein, by giving to Tenant notice of such election within ninety (90) days after the occurrence of such event; provided, however, that Landlord shall only exercise such right in the event that (i) Landlord elects not to rebuild the Premises and does not commence rebuilding of the Premises within one (1) year after the date of such Casualty, and (ii) Landlord terminates the leases of all other retail tenants in Landlord's Building or the individual building in which Tenant is located similarly affected by such Casualty. Tenant may elect to terminate this Lease if (x) the Premises are damaged in whole or in part and are thereby rendered wholly untenantable for a period of time exceeding twenty (20) days during the last three (3) years of the Term, by giving Landlord written notice of such termination within thirty (30) days after the date of such Casualty, or (y) Landlord does not commence to repair, restore or rebuild the Premises within eighteen (18) months after the occurrence of any such Casualty, by giving Landlord written notice of such termination within thirty (30) days after the expiration of said period and provided Landlord does not commence to repair the Premises within thirty (30) days of said notice. 20 In the event this Lease is terminated pursuant to the foregoing, both parties, subject to Section 20.21 hereof, will be relieved of all obligations under this Lease except those obligations occurring or accruing prior to the date of such termination, and Rental shall be adjusted as of such termination date. Section 14.3. Demolition of Landlord's Building. --------------------------------- In addition to Landlord's termination rights described in Section 14.2, if Landlord's Building or the individual building in which the Premises are located shall be so substantially damaged that it is reasonably necessary, in Landlord's sole judgment, to demolish same for the purpose of reconstruction, Landlord may demolish the same, in which event the Rental shall be abated to the same extent as if the Premises were rendered untenantable by a Casualty . Section 14.4. Insurance Proceeds. ------------------- If Landlord does not elect to terminate this Lease pursuant to Section 14.2, Landlord shall, subject to the prior rights of any Mortgagee, disburse and apply any insurance proceeds received by Landlord to the restoration and rebuilding of Landlord's Building in accordance with Section 14.1 hereof. All insurance proceeds payable with respect to the Premises (excluding proceeds payable to Tenant pursuant to Section 13.3) shall belong to and shall be payable to Landlord and shall be applied toward the restoration of the Premises to substantially the same condition as existed prior to such damage. ARTICLE XV CONDEMNATION ------------ Section 15.1. Effect of Taking. ------------------ If any part of the Premises shall be taken under the power of eminent domain, this Lease shall terminate on the date Tenant is required to yield possession thereof. If twenty percent (20%) or more of the leasable floor area contained in Landlord's Building or the individual building in which the Premises are located is so taken, or if parking spaces in the Shopping Center are so taken thereby reducing the number of parking spaces to less than the number required by law and Landlord does not deem it reasonably feasible to replace such parking spaces with other parking spaces on the portion of the Shopping Center not taken, then Landlord may elect to terminate this Lease as of the date on which possession thereof is required to be yielded to the condemning authority, by giving notice of such election within ninety (90) days after such date. If any notice of termination is given pursuant to this Section, this Lease and the rights and obligations of the parties hereunder shall cease as of the date of such notice and Rental shall be adjusted as of the date of such termination. Section 15.2. Condemnation Awards. -------------------- All compensation awarded for any taking of the Premises, Landlord's Building, Landlord's Property, or any interest in any of the same, shall belong to and be the property of Landlord, Tenant hereby assigning to Landlord all rights with respect thereto; provided, however, nothing contained herein shall prevent Tenant from applying for reimbursement from the condemning authority (if permitted by law) for moving expenses, or the expense of removal of Tenant's trade fixtures, or loss of Tenant's business good will, but only if such action shall not reduce the amount of the award or other compensation otherwise recoverable from the condemning authority by Landlord or the owner of the fee simple estate in Landlord's Property. Notwithstanding the foregoing, Landlord shall pay Tenant that portion of any net (of collection expenses) award or payment received by Landlord attributable to the unamortized value of Tenant's leasehold improvements, erected at Tenant's expense in the Premises, if permitted by Landlord's Mortgagee, any ground lease and law, based on straight-line depreciation from installation until the Termination Date, to the extent such funds are so permitted to be paid. In order to give effect to the immediately preceding sentence, Tenant shall, within sixty (60) days after 22 21 23 21 opening for business in the Premises, notify Landlord in writing as to the value of its leasehold improvements (excluding any cash allowances or monies contributed by Landlord to Tenant). ARTICLE XVI ASSIGNMENT AND SUBLETTING --------------------------- Section 16.1. Landlord's Consent Required. ----------------------------- (a) Except as provided in Section 17.4 with respect to assignment of this Lease following Tenant's bankruptcy, Tenant will not assign this Lease, in whole or in part, nor sublet all or any part of the Premises, nor license concessions or lease departments therein, nor pledge or encumber by mortgage or other instruments its interest in this Lease (each individually and collectively referred to in this Article as a "Transfer") without first obtaining the consent of Landlord, which consent Landlord may withhold in its sole and absolute discretion. This prohibition includes, without limitation, any Transfer which would otherwise occur by operation of law, merger, consolidation, reorganization, transfer or other change of Tenant's corporate, partnership or proprietary structure or ownership. Any Transfer to or by a receiver or trustee in any federal or state bankruptcy, insolvency, or similar proceeding shall be subject to, and in accordance with, the provisions of Section 17.4. Consent by Landlord to any Transfer shall not constitute a waiver of the requirement for such consent to any subsequent Transfer. Notwithstanding the foregoing, sale of stock over a nationally recognized security exchange shall not be deemed a Transfer for the purposes of this Lease. (b) Notwithstanding the general prohibition against Transfer contained in Section 16.1(a), provided Tenant is not in default under any of the terms and conditions of this Lease, and further provided that Tenant has fully and faithfully performed all of the terms and conditions of this Lease, (i) Tenant shall have the right, without Landlord's consent but with written notice to Landlord at least thirty (30) days prior to such assignment, to assign this Lease to any parent, subsidiary or affiliate entity of Tenant, or to the surviving entity in connection with a merger, consolidation or acquisition between Tenant and its parent or any of its subsidiaries for any of the then remaining portion of the unexpired Term, and (ii) Landlord will not unreasonably withhold consent to any other Transfer; provided, in each instance of (i) or (ii): (A) the net worth of the assignee, licensee, sublessee or other transferee (each a "Transferee") immediately prior to the Transfer shall not be less than the greater of the net worth of Tenant immediately prior to the Transfer or the net worth of Tenant at the time of the signing of this Lease, as evidenced by audited financial statements; (B) such Transferee shall continue to operate the business conducted in the Premises under the same Tenant Trade Name, in the same manner as Tenant and pursuant to all of the provisions of this Lease; (C) such Transferee shall assume in writing, in a form acceptable to Landlord, all of Tenant's obligations hereunder and Tenant shall provide Landlord with a copy of such assumption/transfer document; (D) Tenant to which the Premises were initially leased shall continue to remain liable under this Lease for the performance of all terms, including, but not limited to, payment of Rental due under this Lease; and (E) Tenant's guarantor, if any, shall continue to remain liable under the terms of the Guaranty of this Lease and, if Landlord deems it necessary, such guarantor shall execute such documents necessary to insure the continuation of its guaranty. If the proposed Transfer is a Transfer under (i) above, if at any time following the Transfer the parent, subsidiary or affiliate of Tenant to which this Lease was assigned ceases to be a parent, subsidiary or affiliate of Tenant, such event shall constitute a Transfer requiring Landlord's consent hereunder. If the proposed Transfer is a Transfer under (ii) above, the following additional conditions shall apply: (F) such Transfer shall involve all or substantially all of Tenant or its assets; (G) such Transfer shall not adversely affect the quality and type of business operation which Tenant has conducted theretofore; (H) such Transferee shall possess qualifications to conduct the Tenant business substantially equivalent to those of Tenant and shall have demonstrated recognized experience in successfully operating such a business, including, without limitation, experience in successfully operating a similar quality business in first-class shopping centers; (I) Tenant shall pay to Landlord Additional Rental of One Thousand Dollars ($1,000.00) prior to the effective date of the Transfer in order to reimburse Landlord for all of its internal costs and expenses incurred with respect to the Transfer; (J) as of the effective date of the Transfer and continuing throughout the remainder of the Term, the Annual Basic Rental shall be the greater of (x) the Annual Basic Rental set forth in Section 1.1.G hereof, or (y) the sum of all Annual Basic Rental and all Annual Percentage Rental payable by Tenant during the twelve calendar months preceding the transfer; (K) Landlord shall receive upon execution of its consent (i) the repayment of any construction or other allowances given to the original Tenant as provided elsewhere in this Lease; (ii) any due but unpaid Rental; and (iii) an amount equal to seven percent (7%) any and all consideration paid or agreed to be paid, directly or indirectly, to Tenant for such Transfer with respect to Tenant's store in the Premises (or for the sale of Tenant's business in the Premises in connection with which any such Transfer is made); and (L) if such consent is required, Landlord's Mortgagee(s) shall have consented in writing to such Transfer. Section 16.2. Acceptance of Rent from Transferee. ----------------------------------- The acceptance by Landlord of the payment of Rental following any Transfer prohibited by Section 16.1 shall not be deemed to be a consent by Landlord to any such Transfer nor shall the same be deemed to be a waiver of any right or remedy of Landlord hereunder. Section 16.3. Additional Provisions Respecting Transfers. --------------------------------------------- Without limiting Landlord's right to withhold its consent to any Transfer by Tenant, and regardless of whether Landlord shall have consented to any such Transfer, neither Tenant nor any other person having an interest in the possession, use or occupancy of the Premises or any part thereof shall enter into any lease, sublease, license, concession, assignment or other transfer or 22 agreement for possession, use or occupancy of all or any portion of the Premises which provides for rental or other payment for such use, occupancy or utilization based, in whole or in part, on the net income or profits derived by any person or entity from the space so leased, used or occupied, and any such purported lease, sublease, license, concession, assignment or other transfer or agreement shall be absolutely void and ineffective as a conveyance of any right or interest in the possession, use or occupancy of all or any part of the Premises. There shall be no deduction from the rental payable under any sublease or other transfer nor from the amount thereof passed on to any person or entity, for any expenses or costs related in any way to the subleasing or transfer of such space. If Tenant shall make or suffer any such Transfer without first obtaining any consent of Landlord required by Section 16.1, any and all amounts received as a result of such Transfer shall be the property of Landlord to the extent the same (determined on a square foot basis) is greater than the Annual Basic Rental (on a square foot basis) payable under this Lease, it being the parties' intent that any profit resulting from such Transfer shall belong to Landlord, but the same shall not be deemed to be a consent by Landlord to any such Transfer or a waiver of any right or remedy of Landlord hereunder. ARTICLE XVII DEFAULT ------- Section 17.1. "Event of Default" Defined ----------------------------- Any one or more of the following events shall constitute an "Event of Default": (a) The failure of Tenant to pay any Rental or other sum of money within ten (10) days after the same is due hereunder; provided, however, Landlord shall give Tenant ten (10) days' notice of late payment of Rental once only in any Rental Year during the Term before such late payment shall constitute an Event of Default hereunder. Upon the second and subsequent such occurrence in any Rental Year, Landlord shall have the right to proceed against Tenant and the Premises without such notice. (b) Default by Tenant in the performance or observance of any covenant or agreement of this Lease (other than a default involving the payment of money), which default is not cured within fifteen (15) days after the giving of notice thereof by Landlord, unless such default is of such nature that it cannot be cured within such fifteen (15) day period, in which case no Event of Default shall occur so long as Tenant shall, with notice to Landlord, commence the curing of the default within such fifteen (15) day period and shall thereafter diligently prosecute the curing of same; provided, however, if Tenant shall default in the performance of any such covenant or agreement of this Lease two (2) or more times in any twelve (12) month period, then notwithstanding that each of such defaults shall have been cured by Tenant, any further similar default shall be deemed an Event of Default without the ability for cure. (c) The vacation or abandonment of the Premises by Tenant at any time following delivery of possession of the Premises to Tenant. (d) The sale of Tenant's interest in the Premises under attachment, execution or similar legal process, or the admission in writing by Tenant of its inability to pay its debts when due or the making by Tenant of an assignment for the benefit of creditors, or the appointment of a receiver or Trustee for the business or property of Tenant, unless such appointment shall be vacated within thirty (30) days of its entry. 23 (e) The commencement of a case under the Federal Bankruptcy Code by or against Tenant or any guarantor of Tenant's obligations hereunder, or the filing of a voluntary or involuntary petition proposing the adjudication of Tenant or any such guarantor as bankrupt or insolvent under any state or federal bankruptcy or insolvency law, or an arrangement by Tenant or any such guarantor with its creditors, unless the petition is filed by a party other than Tenant or any guarantor and is withdrawn or dismissed within sixty (60) days after the date of its filing. (f) The occurrence of any other event described elsewhere in this Lease as constituting an "Event of Default". Section 17.2. Remedies. -------- Upon the occurrence of an Event of Default, Landlord, may do any one or more of the following: (a) Enter the Premises and take possession of any and all personal property of Tenant, whether exempt or not from sale under execution or attachment (it being agreed that said property shall at all times be bound with a lien in favor of Landlord and shall be chargeable for all Rental and for the fulfillment of the other covenants and agreements herein contained), and Landlord may sell all or any part thereof at public or private sale. Tenant agrees that five (5) days prior notice of any public or private sale shall constitute reasonable notice. The proceeds of any such sale shall be applied, first, to the payment of all costs and expenses of conducting the sale or storing said property; second, toward the payment of any Rental, which may be or may become due from Tenant to Landlord; and third, to pay Tenant, on demand, any surplus remaining after all Rental has been fully paid. (b) Perform, on behalf and at the expense of Tenant, any obligation of Tenant under this Lease which Tenant has failed to perform and of which Landlord shall have given Tenant notice, the cost of which performance by Landlord, together with interest thereon at the Default Rate from the date of such expenditure, shall be deemed Additional Rental and shall be payable by Tenant to Landlord upon demand. (c) Elect to terminate this Lease and the tenancy created hereby by giving notice of such election to Tenant, and reenter the Premises, in accordance with applicable law, and remove Tenant and all other persons and property from the Premises, and may store such property in a public warehouse or elsewhere at the cost of and for the account of Tenant and without Landlord being deemed guilty of trespass or becoming liable for any loss or damage occasioned thereby. (d) Exercise any other legal or equitable right or remedy which it may have. Any costs and expenses incurred by Landlord (including reasonable attorneys' fees) in enforcing any of its rights or remedies under this Lease shall be deemed to be Additional Rental and shall be repaid to Landlord by Tenant upon demand. Section 17.3. Damages. ------- If this Lease is terminated by Landlord pursuant to Section 17.2., Tenant nevertheless shall remain liable for (a) any Rental and damages which may be due or sustained prior to such termination, (b) all reasonable costs, fees and expenses including, but not limited to, reasonable attorneys' fees incurred by Landlord in pursuit of its remedies hereunder, or in renting the Premises to others from time to time and (c) additional damages (the "Future Rental Damages"), which, at the election of Landlord shall be either: 24 (i) an amount equal to the Rental which, but for termination of this Lease, would have become due during the remainder of the Term, less the amount of Rental, if any, which Landlord shall receive during such period from others to whom the Premises may be rented (other than any Additional Rental received by Landlord as a result of any failure of such other person to perform any of its obligations to Landlord), in which case such Future Rental Damages shall be computed and payable in monthly installments, in advance, on the first day of each calendar month following termination of this Lease and continuing until the date on which the Term would have expired but for such termination, and any suit or action brought to collect any such Future Rental Damages for any month shall not in any manner prejudice the right of Landlord to collect any Future Rental Damages for any subsequent month by a similar proceeding; or (ii) an amount equal to the present worth (as of the date of such termination) of Rental which, but for termination of this Lease, would have become due during the remainder of the Term, less the fair rental value of the Premises, as determined by Landlord in its commercially reasonable judgment, in which case such Future Rental Damages shall be payable to Landlord in one lump sum on demand and shall bear interest at the Default Rate until paid. For purposes of this clause (ii), "present worth" shall be computed by discounting such amount to present worth at a discount rate equal to one percentage point above the discount rate then in effect at the Federal Reserve Bank nearest to the location of the Shopping Center. For purposes of computing the Future Rental Damages, the Annual Percentage Rental payable with respect to each Rental Year following termination (including the Rental Year in which such termination shall take place) shall be presumed to be equal to the average Annual Percentage Rental payable with respect to each Rental Year preceding termination and Gross Sales shall be extrapolated for any partial Rental Year. If this Lease is terminated pursuant to Section 17.2, Landlord shall use reasonable efforts to relet the Premises so as to mitigate damages provided any such reletting shall be on terms acceptable to Landlord, and if there is other vacant space in the Shopping Center, Landlord may give priority to the leasing of such vacant space instead of the Premises. Landlord shall not be obligated to incur any out-of-pocket expense in connection with its efforts to relet the Premises. Nothing contained in this Lease shall limit or prejudice the right of Landlord to prove for and obtain, in proceedings for the termination of this Lease by reason of bankruptcy or insolvency, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, the damages are to be proved, whether or not the amount be greater, equal to, or less than the amount of the loss or damages referred to above. The failure or refusal of Landlord to relet the Premises or any part or parts thereof shall not release or affect Tenant's liability for damages. Section 17.4. Remedies in Event of Bankruptcy or Other Proceeding. --------------------------------------------------- In addition to Landlord's rights and remedies established by law or set forth elsewhere in this Lease, including without limitation Section 17.1, upon the occurrence of any event described in Sections 17.1(d) or (e), Landlord shall have the following rights and remedies with respect to Tenant or Tenant as debtor-in-possession or the trustee appointed in any such proceeding (being collectively referred to as "Tenant" only for the purposes of this Section 17.4): (a) Within twenty (20) days of the occurrence of any event described in Sections 17.1(d) and (e), Tenant shall deposit with Landlord or a financial institution reasonably acceptable to Landlord, a sum equal to three (3) months' Rental for the Premises, to be utilized by Landlord as partial adequate assurance of the complete and continuous future performance of Tenant's obligations under this Lease; 25 (b) All provisions of this Lease governing the payment of interest and late charges are fully applicable to all Rental accruing during any event described in Sections 17.1 (d) and (e); (c) If Tenant assumes this Lease and proposes to assign the same (pursuant to Title 11 U.S.C. 365, or as the same may be amended) then notice of such proposed assignment, setting forth (x) the name and address of such person, (y) all of the terms and conditions of such offer, and (z) the adequate assurance to be provided to Landlord including, without limitation, the assurances referred to in Title 11 U.S.C. 365(b)(3), as it may be amended, must be provided to Landlord no later than thirty (30) days prior to the date that Tenant shall make application to such court for approval to enter into such assignment and assumption, and Landlord shall thereupon have the prior right and option, to be exercised by notice to Tenant given at any time prior to the effective date of such proposed assignment, to accept, or to cause Landlord's designee to accept, an assignment of this Lease upon the same terms and conditions and for the same consideration, if any, as the bona fide offer made by such person less any brokerage commissions which may be payable out of the consideration to be paid by such person for the assignment of this Lease. (d) If Tenant assumes this Lease and proposes to assign the same, and Landlord does not exercise its option pursuant to paragraph (c) of this Section 17.4, in addition to all of Landlord's rights and remedies established by law or set forth elsewhere in this Lease, Tenant hereby agrees that: (i) such assignee shall assume in writing on Landlord's standard form all of the terms, covenants and conditions of this Lease and such assignee shall provide Landlord with assurances satisfactory to Landlord that it has the experience in operating stores having the same or substantially similar uses as the Permitted Use, in similar number of total stores and in the same general geographic area as Tenant prior to the commencement of any event described in Sections 17.1(d) and (e), in first-class shopping centers, sufficient to enable it so to comply with the terms, covenants and conditions of this Lease and successfully operate the Premises without diminution in Gross Sales; (ii) such assignee shall, at Landlord's discretion, pay to Landlord or post to Landlord's benefit an unconditional letter of credit in an amount equal to six (6) months' Rental under this Lease; and (iii)if such assignee makes any payment to Tenant, or for Tenant's account, for the right to assume this Lease (including, without limitation, any lump sum payment, installment payment or payment in the nature of rent over and above the Rental payable under this Lease), Tenant shall pay over to Landlord one-half (1/2) of any such payment. (e) All Rental shall be deemed "rent reserved" under this Lease for purposes of any claim made by Landlord, including without limitation, claims pursuant to Section 502(b)(6) of the Bankruptcy Code; and (f) All reasonable costs and fees of attorneys and other professionals expended by Landlord as a result of any of the events described in Sections 17.1(d) and (e) or in this Section shall be repaid to Landlord by Tenant upon demand. ARTICLE XVIII SUBORDINATION AND ATTORNMENT ---------------------------- 26 Section 18.1. Subordination. ------------- Unless a Mortgagee (as hereinafter defined) shall otherwise elect as provided in Section 18.2, Tenant's rights under this Lease are and shall remain subject and subordinate to the operation and effect of any mortgage, deed of trust or other security instrument constituting a lien upon the Premises or Landlord's interest therein, or any lease of land and/or building(s) to Landlord involving the Premises, whether the same shall be in existence at the date hereof or created hereafter, any such lease, mortgage, deed of trust or other security instrument being referred to herein as a "Mortgage", and the party or parties having the benefit of the same, whether as lessor, mortgagee, trustee or noteholder, being referred to herein as a "Mortgagee". Tenant's acknowledgment and agreement of subordination provided for in this Section are self-operative; however, Tenant shall execute the Subordination, Non-Disturbance and Attornment Agreement attached to this Lease at the same time that it executes this Lease, and any such further assurances as may, during the Term of this Lease, be requested by Landlord or any Mortgagee. Section 18.2. Mortgagee's Unilateral Subordination. -------------------------------------- If a Mortgagee shall so elect by notice to Tenant or by the recording of a unilateral declaration of subordination, this Lease and Tenant's rights hereunder shall be superior and prior in right to the Mortgage of which such Mortgagee has the benefit, with the same force and effect as if this Lease had been executed, delivered and recorded prior to the execution, delivery and recording of such Mortgage, subject, nevertheless, to such conditions as may be set forth in any such notice or declaration. Section 18.3. Attornment. ---------- If any person shall succeed to all or part of Landlord's interest in the Premises, whether by purchase, foreclosure, deed in lieu of foreclosure, power of sale, termination of lease or otherwise, and if so requested or required by such successor in interest, Tenant shall attorn to such successor in interest and shall execute such agreement in confirmation of such attornment as such successor in interest shall reasonably request, provided such successor-in-interest agrees to assume all of Landlord's obligations under this Lease occurring subsequent to its succession. If such successor-in-interest is the holder or former holder of a Mortgage, Tenant agrees that any claim it may have against Landlord relating to any event occurring before the date of attornment may not be asserted against the successor-in-interest nor may Tenant offset the amount of any such claim against Rental payable hereunder; provided that the successor-in-interest will be obligated to correct any conditions that existed as of the date of attornment which violate the successor-in-interest's obligations as landlord under this Lease. ARTICLE XIX NOTICES ------- Section 19.1. Sending of Notices. -------------------- Any notice, request, demand, approval or consent given or required to be given under this Lease shall be in writing and shall be deemed to have been given on the earlier to occur of: (a) the date of actual delivery; or (b) the third day following the day on which the same shall have been (i) mailed by United States registered or certified mail or express mail, return receipt requested, with all postage charges prepaid or (ii) deposited with a recognized delivery service. 27 Any notice to Tenant shall be addressed to the Tenant Notice Address and any notice to Landlord (but not the payment of Rental or delivery of sales reports) shall be addressed to Landlord, Attention: General Counsel, c/o The Rouse Company, 10275 Little Patuxent Parkway, Columbia, Maryland 21044, with a copy to Landlord's management office in the Shopping Center. Either party may, at any time, change its address for the above purposes by sending a notice to the other party stating the change and setting forth the new address. Section 19.2. Notice to Mortgagees. ---------------------- If any Mortgagee or Landlord on behalf of any Mortgagee shall notify Tenant that it is the holder of a Mortgage affecting the Premises, no notice, request or demand thereafter sent by Tenant to Landlord shall be effective against such Mortgagee unless and until a copy of the same shall also be sent to such Mortgagee in the manner prescribed in Section 19.1 and to such address as such Mortgagee or Landlord shall designate. ARTICLE XX MISCELLANEOUS ------------- Section 20.1. Radius Restriction. ------------------- Section 20.2. Estoppel Certificates. ---------------------- At any time and from time to time, within fifteen (15) days after Landlord shall request the same, Tenant will execute, acknowledge and deliver to Landlord and to such Mortgagee or other party as may be designated by Landlord, a certificate in a form reasonably acceptable to the requesting party with respect to the matters required by such party (or in the form requested by Landlord and attached hereto as Schedule E) and such other matters relating to this Lease or the status of performance of obligations of the parties hereunder as may be reasonably requested by such party. If Tenant fails to provide such certificate within fifteen (15) days after request by Landlord, Tenant shall be deemed to have approved the contents of any such certificate submitted to Tenant by Landlord and Landlord is hereby authorized to so certify. At any time and from time to time, within fifteen (15) days after Tenant shall request the same, Landlord will execute, acknowledge and deliver to Tenant, or such other party as may be designated by Tenant, a certificate setting forth the commencement and termination dates of this Lease, the amount of Rental payable by Tenant hereunder and the nature, if any, of any Event of Default existing as of the date of such certificate. Section 20.3. Inspections and Access by Landlord. ---------------------------------- Tenant will permit Landlord, its agents, employees and contractors to enter all parts of the Premises during Tenant's business hours to inspect the same and to enforce or carry out any provision of this Lease, including, without limitation, any access necessary for the making of any repairs which are Landlord's obligation hereunder; provided, however, that, in the event of an emergency, Landlord may enter the Premises for such purposes at any time. Any such entry shall be upon such notice, if any, as shall be feasible under the circumstances and shall be made so as to reasonably minimize the disruption of Tenant's use of the Premises. Section 20.4. Memorandum of Lease. --------------------- Neither this Lease nor a short form or memorandum thereof shall be recorded in the public records. 28 Section 20.5. Remedies Cumulative. -------------------- No reference to any specific right or remedy shall preclude either party from exercising any other right or from having any other remedy or from maintaining any action to which it may otherwise be entitled at law or in equity. No failure by either party to insist upon the strict performance of any agreement, term, covenant or condition hereof, or to exercise any right or remedy consequent upon a breach thereof, and no acceptance of full or partial rent during the continuance of any such breach, shall constitute a waiver of any such breach, agreement, term, covenant or condition. No waiver by either party of any breach by Tenant under this Lease or of any breach by any other tenant under any other lease of any portion of the Shopping Center shall affect this Lease in any way whatsoever. Section 20.6. Successors and Assigns. ---------------------- This Lease and the covenants and conditions herein contained shall inure to the benefit of and be binding upon Landlord, its successors and assigns, and shall be binding upon Tenant, its successors and assigns and shall inure to the benefit of Tenant and its permitted assigns and subtenants. Upon any sale or other transfer by Landlord of its interest in the Premises and in this Lease, and the assumption by Landlord's transferee of the obligations of Landlord hereunder, Landlord shall be relieved of any obligations under this Lease accruing thereafter. Section 20.7. Captions and Headings. ----------------------- The table of contents and the Article and Section captions and headings are for convenience of reference only and in no way shall be used to construe or modify the provisions set forth in this Lease. Section 20.8. Joint and Several Liability. ---------------------------- If two or more individuals, corporations, partnerships or other business associations (or any combination of two or more thereof) shall sign this Lease as Tenant, the liability of each such individual, corporation, partnership or other business association to pay rent and perform all other obligations hereunder shall be deemed to be joint and several and all notices, payments and agreements given or made by, with or to any one of such individuals, corporations, partnerships or other business associations shall be deemed to have been given or made by, with or to all of them. In like manner, if Tenant shall be a partnership or other business association, the members of which are, by virtue of statute or federal law, subject to personal liability, the liability of each such member shall be joint and several. Section 20.9. Broker's Commission. -------------------- Each of the parties represents and warrants that there are no claims for brokerage commissions or finders' fees in connection with the execution of this Lease, and agrees to indemnify the other against, and hold it harmless from, all liability arising from any such claim including, without limitation, the cost of counsel fees in connection therewith. Section 20.10. No Discrimination. ------------------ It is Landlord's policy to comply with all applicable state and federal laws prohibiting discrimination in employment based on race, age, color, sex, national origin, disability, religion, or other protected classification. It is further intended that the Shopping Center shall be developed and operated so that all prospective tenants thereof, and all customers, employees, licensees and invitees of all tenants shall have equal opportunity to obtain all the goods, services, accommodations, advantages, facilities and privileges of the Shopping Center without discrimination because of race, age, color, sex, national origin, disability, or religion. To that end, Tenant shall not discriminate in the conduct and operation of its business in the Premises against any person or group of persons because of the race, age, color, sex, religion, national origin or other protected classification of such person or group of persons. Section 20.11. No Joint Venture. ------------------ Any intention to create a joint venture or partnership relation between the parties hereto is hereby expressly disclaimed. The provisions of this Lease in regard to the payment by Tenant and the acceptance by Landlord of a percentage of Gross Sales of Tenant and others is a reservation for rent for the use of the Premises. Section 20.12. No Option. ---------- The submission of this Lease for examination does not constitute a reservation of or option for the Premises, and this Lease shall become effective only upon execution and delivery thereof by both parties. Execution by signature of an authorized officer of Landlord or any corporate entity acting on behalf of Landlord shall be effective only upon attestation thereof by a corporate Secretary or Assistant Secretary of Landlord. Section 20.13. No Modification. ---------------- This writing is intended by the parties as a final expression of their agreement and as a complete and exclusive statement of the terms thereof, all negotiations, considerations and representations between the parties having been incorporated herein. No course of prior dealings between the parties or their officers, employees, agents or affiliates shall be relevant or admissible to supplement, explain or vary any of the terms of this Lease. Acceptance of, or acquiescence in, a course of performance rendered under this or any prior agreement between the parties or their affiliates shall not be relevant or admissible to determine the meaning of any of the terms of this Lease. No representations, understandings or agreements have been made or relied upon in the making of this Lease other than those specifically set forth herein. This Lease can be modified only by a writing signed by the party against whom the modification is enforceable. Section 20.14. Severability. ------------ If any portion of any term or provision of this Lease, or the application thereof to any person or circumstances shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law. Section 20.15. Third Party Beneficiary. ------------------------- Nothing contained in this Lease shall be construed so as to confer upon any other party the rights of a third party beneficiary except rights contained herein for the benefit of a Mortgagee. Section 20.16. Applicable Law. --------------- This Lease and the rights and obligations of the parties hereunder shall be construed in accordance with the laws of the State in which the Shopping Center is located. Section 20.17. Performance of Landlord's Obligations by Mortgagee. ------------------------------------------------------- Tenant shall accept performance of any of Landlord's obligations hereunder by any Mortgagee of Landlord. 29 Section 20.18. Waiver of Certain Rights. -------------------------- Landlord and Tenant hereby mutually waive any and all rights which either may have to request a jury trial in any action, proceeding or counterclaim (except for those involving personal injury or property damage suffered by third parties) arising out of this Lease or Tenant's occupancy of or right to occupy the Premises. Tenant further agrees that in the event Landlord commences any summary proceeding for non-payment of rent or possession of the Premises, Tenant will not interpose and hereby waives all right to interpose any non-compulsory counterclaim of whatever nature in any such proceeding. Tenant further waives any right to remove said summary proceeding to any other court or to consolidate said summary proceeding with any other action, whether brought prior or subsequent to the summary proceeding. Section 20.19. Limitation on Right of Recovery Against Landlord. ------------------------------------------------ Tenant acknowledges and agrees that the liability of Landlord under this Lease shall be limited to its interest in Landlord's Property and any judgments rendered against Landlord shall be satisfied solely out of the proceeds of sale of its interest in Landlord's Property. No personal judgment shall lie against Landlord upon extinguishment of its rights in Landlord's Property and any judgment so rendered shall not give rise to any right of execution or levy against Landlord's assets. The provisions hereof shall inure to Landlord's successors and assigns including any Mortgagee. The foregoing provisions are not intended to relieve Landlord from the performance of any of Landlord's obligations under this Lease, but only to limit the personal liability of Landlord in case of recovery of a judgment against Landlord; nor shall the foregoing be deemed to limit Tenant's rights to obtain injunctive relief or specific performance or to avail itself of any other right or remedy which may be awarded Tenant by law or under this Lease. Section 20.20. Relocation or Termination. ---------------------------- If in connection with Landlord's expansion or renovation of existing improvements or construction of new improvements (in each instance, "Landlord's Construction"), Landlord determines that it is necessary that Tenant vacate the Premises or that the Premises be altered, Landlord may require that Tenant surrender possession of all or a portion of the Premises temporarily or permanently. In such event, Landlord, in its sole and absolute discretion, may either (a) offer to amend this Lease to (i) make the changes associated with the change in Tenant's Floor Area caused by an alteration and/or (ii) lease Tenant other comparable premises within the Shopping Center on the same terms and conditions as those contained in this Lease either on a temporary basis or for the balance of the remaining Term, or (b) terminate this Lease and pay Tenant an amount equal to the yet unamortized net cost to Tenant of its leasehold improvements in the Premises, calculated using a straight-line amortization schedule and an amortization period equal to the Lease Term. If Landlord offers to amend this Lease in accordance with (a), Landlord shall present a proposed amendment to Tenant reflecting the change in the Tenant's Floor Area and/or the relocated Premises. If the proposed amendment is not executed by Tenant and delivered to Landlord within fifteen (15) days following its presentation to Tenant, Landlord shall have the right at any time thereafter to terminate this Lease in accordance with (b). If Landlord elects to terminate this Lease pursuant to (b), Landlord shall do so by notifying Tenant in writing of its election to terminate, which notice shall specify the date as of which this Lease shall terminate, which date will be no earlier than ninety (90) days from the date of the notice. The amendment of this Lease in accordance with (a) herein or the payment of the consideration in accordance with (b) herein shall be Tenant's sole remedy in the event Tenant is required to surrender possession of the Premises as provided in this Section 20.20. Any alteration to the Premises necessitated by Landlord's Construction will be performed by Landlord at its expense. If Tenant occupies relocated Premises in accordance with the preceding paragraph, Landlord will cause improvements to be made to such relocated Premises at Landlord's expense so that the relocated Premises will be reasonably comparable to the original Premises as they existed immediately prior to Tenant's surrender of possession thereof. Landlord will 31 30 32 30 reimburse Tenant for reasonable moving expenses incurred by Tenant in moving from the original Premises to the relocated Premises (and returning to the original Premises, if applicable) within forty-five (45) days following Tenant's submission of Tenant's documented moving expenses. Rental shall be abated on a proportionate basis for any period of time that Tenant is required to surrender possession of a portion of the Premises but is able to operate in the remainder of the Premises. Section 20.21. Survival. --------- All representations, warranties, covenants, conditions and agreements contained herein which either are expressed as surviving the expiration or termination of this Lease or, by their nature, are to be performed or observed, in whole or in part, after the termination of expiration of this Lease, shall survive the termination or expiration of this Lease. Section 20.22. Landlord's Option to Terminate Lease. ----------------------------------------- Intentionally omitted. IN WITNESS WHEREOF, the parties hereto intending to be legally bound hereby have executed this Lease as of the day and year first above written. ATTEST: FASHION SHOW EXPANSION LLC, Landlord By: Rouse Property Management, Inc., Property Manager and agent for Landlord _______________________ By: _______________________ Assistant Secretary Vice-President Rouse F.S., LLC joins in the execution of this Lease for the sole and limited purpose of confirming that it shall be bound by the obligations of Landlord set forth in Sections 10.1., 10.2. and 13.1. with respect to those portions of Landlord's Property and Landlord's Building owned by it. ATTEST: ROUSE F.S., LLC By: Rouse Property Management, Inc., Property Manager and agent for Landlord _______________________ By: _______________________ Assistant Secretary Vice-President ATTEST: LEISURE HOMES CORPORATION, Tenant _______________________ By: _______________________ Secretary President 31 SCHEDULE A-1 A parcel of land situated in the City of Las Vegas, County of Clark, State of Nevada, described as follows: Lots One (1) through Seven (7) of the FASHION SHOW, as shown by map thereof on file in Book 26 of Plats, page 80, in the Office of the County Recorder of Clark County, Nevada. 32 SCHEDULE B RESPONSIBILITIES OF LANDLORD AND TENANT (If the Premises is located in an expansion or renovation of Landlord's Building or a new Project, then this Schedule B also serves as Section III of the Retail/Restaurant Design and Construction Manual.) This document sets forth the obligations of Landlord and Tenant in the design and construction of the Premises. Landlord's work will be limited to the work described herein. Tenant's work described herein is intended to provide for Premises finished in accordance with Tenant's drawings as approved in writing by Landlord. Landlord and Tenant have a common interest in opening the Premises on the Commencement Date. To this end, Landlord will coordinate its work with Tenant's work insofar as the schedule for such Commencement Date and prudent construction practice will allow and will assign one or more Tenant Project Managers to Landlord's Building to function as a liaison between tenants and Landlord. Further to this end, Tenant and Tenant's contractors agree to abide by Landlord's Construction Rules and Regulations, issued at the time of the preconstruction meeting held by and between Tenant's Contractor and Landlord. Tenant shall not employ any unfit person or anyone not skilled in the work he or she is performing, or any workman who is incompatible with the balance of the work force, or who will cause labor disputes or work stoppages. In performing Tenant's work, Tenant shall retain, employ or engage only those contractors who are signatory to collective bargaining agreements with one or more building trade unions in the metropolitan Las Vegas, Nevada area. All design and construction shall be in accordance with the requirements of all applicable codes, ordinances, rules and regulations and all authorities having jurisdiction over the work and Landlord's Insurance carrier. Tenant shall give Landlord copies of all inspection reports, certificates, and other documents as required by authorities having jurisdiction over Landlord's Building or as required by Landlord. Tenant shall be responsible for coordinating all Tenant work with Landlord's work and construction. In the event that Tenant shall require any modifications to Landlord's work or construction, Tenant shall reimburse Landlord accordingly as described herein. The responsibilities of Landlord and Tenant stated herein pertain to the following: RETAIL TENANTS: West Wing Center East Wing 33 RESTAURANT/FOOD TENANTS: West Wing Center East Wing Food Court A. TENANT DRAWING SUBMITTALS TO LANDLORD Upon receipt of Landlord's lease outline drawing ("LOD") showing the Premises, along with a copy of the Retail/Restaurant Design and Construction Manual (the "Design Package"), Tenant shall make the following submissions: 1. PRELIMINARY SUBMISSION Within thirty calendar days of receipt of the above-mentioned items, Tenant shall submit to Landlord one set of reproducible prints and four sets of prints and material sample boards of its preliminary design ("Submission I") including: (a) Floor plan (b) Reflected ceiling plan (c) Color rendered storefront elevation (inclusive of signage) (d) Stamped engineered calculations showing reactions and design analysis of all proposed mezzanines for review by landlord for loads imposed on base building. Loads/reactions shall be referenced on plans/elevations for review. All drawings shall be prepared under the supervision of a registered architect and/or engineer. Within ten calendar days thereafter, Landlord shall return to Tenant one set of drawings which shall be approved, approved as noted, or disapproved. Tenant and/or Tenant's architect shall work with Landlord to revise any drawings to achieve a set of drawings that have been approved by Landlord. 2. FINAL SUBMISSION Within thirty calendar days thereafter, Tenant shall submit to Landlord, for Landlord's approval, one set of vellum prints and seven sets of prints and specifications of Tenant's final design ("Submission II"). Submission II will include: (a) Complete contract documents at 1/4" scale and specifications for Landlord's approval. (b) Plan, elevation and section views of the storefront at 1/4" scale. Details of the storefront including signage shop drawings at 1/2" scale or larger. (c) Overall store sections at 1/4" scale or larger. (d) Door schedule with jamb details. (e) Finish and color schedule. (f) Display Zone fixturization plans and schedule. (g) Locations of fixtures and heavy weights or equipment, safes, refrigeration and any masonry facing materials. 34 (h) DFX/DWG files of Tenant's final contract documents for Landlord's records. (i) ELECTRICAL SUBMISSION will include: 1. Electrical floor plan at 1/4" scale or larger. 2. Reflected ceiling/lighting plan at 1/4" scale or larger. 3. Electrical riser diagram, which shall include without limitation, the size of Landlord provided main service switch, conduit size from main service switch and wire size and type from main service switch, and size and location of meters and transformers. 4. Electrical panel schedule, including circuit breaker size and all connected loads. 5. Lighting fixture schedule, which shall include fixture types, lamps, wattage, quantities and manufacturer's catalog numbers. Submittal shall also include catalog cut sheets of light fixtures in Tenant's retail area. 6. HVAC control diagrams and schematics. 7. Tenant Electrical Load Calculation form, which shall include all connected and demand load calculations (see Section VI-4). 8. Equipment and material specifications. 9. All forms and required calculations for compliance with the energy conservation requirements. (j) PLUMBING SUBMISSION will include: 1. Floor plan at 1/4" scale or larger that shows all fixtures and piping and all connections to Landlord's utility systems, locations of all coring cuts and detail references. 2. Schematic diagram of water service within the Premises. 3. Schematic diagram of gas service, if applicable. 4. Completed Gas Load Summary and Equipment Schedule, if required (included with Tenant's Design Package). 5. Details of floor drains, clean-outs, fixtures, etc. 6. Material and fixture specifications. 7. Structural details of all coring cuts. 8. Waterproofing and sealant details and cuts. See waterproof specifications under Tenant's Work - Plumbing. (k) MECHANICAL SUBMISSION shall include: 1. Air distribution ductwork plan at 1/4" scale or larger. 2. Equipment schedule with manufacturer specifications and heights. 3. Control wiring 4. Roof curb and other penetration details. 5. Cooling Load Calculations: Tenant shall submit three (3) completed copies of Landlord's "Tenant Cooling Load Calculation" form in Section VI, stamped by a registered professional engineer licensed in the State of Nevada. 35 6. Air handling unit schedule noting make, model, unit options, chilled water coil airside and waterside performance, and fan motor performance. 7. Air handling unit controls schematic noting controller, end-devices, wiring and sequence of operation. 8. Chilled water piping schematic: Tenant shall submit the chilled water piping schematic, noting make and model of valves and appurtenances, to ensure compliance with Tenant Handbook requirements. 9. Three copies of all necessary calculations and all applicable forms for compliance with energy conservation requirements. (l) FIRE PROTECTION (sprinkler) SUBMISSION will include: three (3) sets of installation drawings and specifications from Statewide Fire Protection. Within ten calendar days thereafter, Landlord will return to Tenant one set of drawings and specifications with approval and/or comments. Tenant will promptly make any requested changes or, as the case may be, promptly obtain Landlord's written approval for alternate solutions. LANDLORD'S "APPROVAL" AS USED HEREIN SHALL NOT BE CONSTRUED TO MEAN THAT LANDLORD HAS AGREED OR WARRANTED THAT THE ITEM APPROVED IS IN COMPLIANCE WITH ANY CODES, ORDINANCES OR OTHER REQUIREMENTS PLACED UPON TENANT BY ANY PUBLIC OR PRIVATE ENTITY OR AGENCY OTHER THAN LANDLORD. IN ADDITION, LANDLORD'S APPROVAL SHALL NOT RELIEVE TENANT OF THE RESPONSIBILITY TO VERIFY ALL FIELD CONDITIONS INCLUDING, WITHOUT LIMITATION, DIMENSIONS, LOCATIONS, LEASE LINES, EXPANSION JOINTS, CLEARANCES AND PROPERTY/LEASE LINES. 3. CONSTRUCTION COMMENCEMENT Tenant shall commence construction within ten days after written notification that the Premises is available to Tenant for construction. Within this period, Tenant or Tenant's contractor will participate in a preconstruction meeting with Landlord's representative. At this meeting Tenant will provide all documentation to satisfy Landlord's requirements per construction rules and regulations. This will include but is not limited to permits, Certificates of Insurance, licenses, schedules, contacts, fees and deposits. Tenant shall diligently pursue completion of its improvements in the Premises on a schedule which shall insure Tenant's opening by the Commencement Date. Tenant shall commence and complete all work within the Premises as expeditiously as possible. When the Commencement Date is also the Grand Opening Date, Tenant's work shall be completed no later than ten days prior to the Grand Opening Date. Any work, such as a temporary storefront closure, performed by Landlord, which is made necessary as a result of Tenant's failure to complete its work in time for the Grand Opening Date or specified completion date, shall be payable to Landlord, at Landlord's cost plus a 15% administration fee. Landlord's work is limited to that work specified in the following Schedule B and Tenant shall be required to make all improvements to the Premises in accordance with Tenant's approved plans, except those which Landlord is specifically required to make hereunder. 37 36 38 36 B. RETAIL 1. DESCRIPTION OF LANDLORD WORK Except when noted in the Lease, Landlord shall perform the work described below in accordance with the following specifications. (A) FRAME: A noncombustible shell consisting of concrete, masonry or steel. (B) ROOF: A roof. (C) EXTERIOR WALLS: Exterior walls shall be of noncombustible construction. EAST WING: Exterior storefronts shall be designed and constructed by Tenant. (D) FLOOR SYSTEM: A concrete floor system at one elevation unless otherwise indicated on Tenant's LOD. The floor system is designed to support a live load of 100 pounds per square foot. WEST WING: Lower Level: 10" cast in place slab with two layers of rebar on opposing 12" grids Upper Level: 4" concrete on metal deck with 6"x6" wire mesh reinforcement CENTER: Lower Level: 10" pre-cast plank slab and a 4" concrete topping slab with rebar reinforcement Upper Level: 4" concrete slab on metal deck with iron grid. EAST WING: Lower Level: Existing 10" pre-cast plank slab and a 4" concrete topping slab with rebar reinforcement and 2" to 6" architectural topping slab where required to eliminate slope of existing structure Upper Level: 4" concrete slab on metal deck with 6"x6" wire mesh reinforcement NOTE: All levels are suspended over either sublevel garage (Lower Levels) or other retail space (Upper Level). (E) DEMISING PARTITIONS: Demising Partitions are provided between Tenant and other tenants and/or exits or service corridors of the partition type indicated on Tenant's LOD. For partitions dividing the Premises from adjacent tenants, Landlord will provide stud 38 37 39 37 framing or masonry as determined by Landlord and indicated on Tenant's LOD. Studs shall extend from the floor slab to the underside of the structure above. Partitions dividing the Premises from adjacent service corridors, if stud construction, shall be surfaced on the service corridor side only by Landlord. Tenant to provide and install gypsum wall board, tape and finish to stud walls. (F) DEMISING END-CAP/NEUTRAL PIER: Demising end-cap(s). (G) MECHANICAL SYSTEM: A mechanical system designed to meet the following specifications: Outside air condition: 108 deg. F Drybulb/68 deg. F Wetbulb Indoor design condition: Setpoint: 73 deg. F Drybulb, Retail; 75 deg. F Drybulb, others Deadband: +/-2 deg. F Drybulb Chilled water: Landlord shall provide a chilled water circulating loop for use by the tenants. Tenant spaces will be provided with one (1) 2" nominal piping tap set, one on the chilled water supply header and one on the return header, for connection by the Tenant to the Tenant supplied HVAC system. CHILLED WATER USE BY TENANT FOR APPLICATIONS OTHER THAN COMFORT COOLING SHALL BE CONSIDERED ON A CASE-BY-CASE BASIS. TENANT MUST SUBMIT A WRITTEN REQUEST TO LANDLORD AS PART OF SUBMISSION I SO THAT THE APPLICATION MAY BE APPROPRIATELY COORDINATED. 38 CENTER: The existing supply equipment within the space is a variable air volume system (VAV), controlled by a constant volume fan powered terminal. As existing spaces change to new tenancies, these systems must be removed and converted to the two pipe chilled water central plant system by the new Tenant after June 2002. Landlord-provided cooling capacity: (5) tons/ksf or (7.5) gpm/ksf. Chilled water: Entering Water Temperature: 42 deg. F Leaving Water Temperature: 58 deg. F Lighting & Miscellaneous Load: Dry Retail: 10 w/sq. ft. Restaurant - kitchen: 15 w/sq. ft. Restaurant - seating area: 3 w/sq. ft. Common Area - East/West Exp: 5 w/sq. ft. Common Area - Center: 5 w/sq. ft. Common Area - Great Hall: 5 w/sq. ft. Food Court - tenant area: 30 w/sq. ft. Food Court - seating area: 3 w/sq. ft. Banquet Hall - kitchen: 15 w/sq. ft. Banquet Hall - seating area: 3 w/sq. ft. Office Space: 3 w/sq. ft. Ventilation/outside air: 0.35 cfm/sq. ft./exhaust 0.30 cfm/sq. ft./fresh air per ASHRAE62/1989 If Tenant's internal loading or other requirements exceed the maximum design load as listed above, Landlord may, at its option, provide additional capacity. All costs associated with the additional capacity shall be at Tenant's expense. Fresh air: Landlord will furnish and install a master fresh air duct to one point within or adjacent to the Premises to which each tenant will be required to make final connections of its fresh air ductwork. The equipment is based on 0.35 cubic feet per minute (cfm) per sq. ft. of area for the exhaust system and 0.30 cfm per sq. ft. for the fresh air system. CENTER AND WEST WING, SECOND LEVEL, AND FOOD COURT: Tenant to draw fresh air directly in through penetration in roof performed by Landlord's roofing contractor at Tenant's expense. Master exhaust: Each tenant shall receive an exhaust vent including ductwork stubbed into the demised premises and a damper. Exhaust shall not exceed 0.35 cfm/sq. ft. of gross floor area. Tenant to connect their toilet exhaust and (with Landlord's permission) other exhaust to the system. Total volume of air exhausted from the tenant's space through landlord exhaust system shall not exceed 0.35 cfm/sq. ft. 39 CENTER AND WEST WING, SECOND LEVEL, AND FOOD COURT: Tenant to duct directly through penetration in roof performed by Landlord's roofing contractor at Tenant's expense. (H) ELECTRICAL SERVICE Provide a 120/208 volt or 480/277 volt, 3 phase, 4 wire service within Landlord's electrical metering room with a main electrical switch for Tenant's connection. Tenant shall provide all electrical gear required to transform the provided voltage to any other voltage required by Tenant. Tenant's maximum design load shall not exceed 12 watts per sq. ft. If Tenant's electrical requirements exceed 12 watts per sq. ft., additional service may be provided by Landlord at Tenant's expense. WEST WING: A 480/277 volt, 3 phase, 4 wire service, with one (1) empty conduit, with pull string. CENTER: A 120/208 volt, 3 phase, 4 wire service, as existing. EAST WING: A 480/277 volt, 3 phase, 4 wire service, with one empty conduit, with pull string. FOOD COURT: A 480/277 volt, 3 phase, 4 wire service, with one empty conduit, with pull string. (I) PLUMBING SERVICE Water Service: One (1) 3/4" domestic water service tap brought to a point within, above or adjacent to the Premises. Approximate location as indicated on Tenant's LOD. Sewer Service: One (1) 4" sanitary sewer line stubbed within, below or adjacent to the Premises. One (1) 2" vent installed either within or adjacent to the Premises. Approximate location as indicated on Tenant's LOD. (J) FIRE PROTECTION: A valved fire protection sprinkler main shall be provided to a point within, above, or adjacent to the Premises. (K) TELEPHONE SERVICE: One (1) 1" empty conduit from Landlord's telephone panel to a point within, above, or adjacent to the Premises. (L) AUDIO: Landlord will arrange with the utility company to provide service at one or more locations within Landlord's Building for Tenants' use. 2. DESCRIPTION OF TENANT WORK (A) DESIGN AND CONSTRUCTION OF PREMISES Tenant shall be responsible for the payment of all applicable fees and associated costs related to the design and construction of Tenant's Premises, including but not limited to permits and licensing fees including Certificate of Occupancy. Tenant is responsible for execution of all the construction work in the space, except that work outlined in Schedule B B.1 herein. All Tenant construction must be noncombustible including any materials used above the ceiling or concealed in the walls of the Premises. (B) STOREFRONTS Storefront construction must be of 1-hour construction with unprotected openings unless otherwise noted on LOD and extend from the floor slab to the bulkhead. All lease lines facing on walkways, courts, arcades, or common areas as indicated on Tenant's LOD shall be considered Tenant's storefront. The entire area within these boundaries cannot be reduced by furring in or framing down and will be counted into the space calculated against the requirement of 80% open glazing area at the storefront. (C) EGRESS/EXIT DOORS All interior and exit doors, frames, and hardware servicing the Premises are to be furnished and installed by Tenant. Front and rear exit doors must be recessed, swing with the path of exiting and conform to all requirements of the Landlord and local jurisdiction. All exit doors will have a printed placard indicating Tenant's name and space number per local code, to be provided by Landlord at Tenant's expense. (D) FLOORS & CEILINGS It is the Tenant's responsibility to verify that the ceiling height selected by Tenant is not in conflict with Landlord's work including, but not limited to, base building structure, ductwork, chilled water piping, mains, etc. The structure of Landlord's Building has been designed to accept a superimposed loading of 7 lbs./sq. ft. for overhead installation of Tenant's ceiling and equipment. Tenant shall provide access (such as access panels) where Landlord and/or jurisdictional authorities designate. In all cases, tenants' finished ceiling in the sales area will be a minimum of 12'-0" H for the Lower Level and 22'-0" H for the Upper Level, West Wing. Landlord will install the project floor finish to Tenant's lease line. Tenant shall install the project floor finish from the lease line to Tenant's storefront and point of closure. Tenant is responsible for purchasing the project floor finish from Landlord @ $18 per sq. ft. of tile installed, plus 15% Landlord administration fee. 40 All proposed coring of the concrete slab floors must be submitted to the Landlord, for review by Landlord's Structural Engineer, a minimum of 30 days before the proposed coring date. Submittal requests shall be in sketch form showing framing in the general areas, gridlines, existing penetrations and proposed penetrations for all trades. In addition, a large scale drawing (1:5) of the existing reinforcement in the area of proposed penetrations, based on pacometer or X-ray investigation must be included. Cutting of the reinforcement must be avoided during coring. Columns shall not be cored under any circumstances. Moment frame beams and shear wall link beams shall not be cored. Penetrations may only be proposed for floor beams, walls and slabs. If resizing or repositioning of the proposed openings are not possible in order to avoid a loss of structural integrity, remedial work may need to be developed by Landlord's Structural Engineer. The costs of testing, Engineering review, remedial work, if required, and any delays to Tenant's project are at Tenant's sole cost. Coring shall not be performed without Landlord's written approval to Tenant. All penetrations must be made waterproof and must conform to the fire rating of the floor slab penetrated. Spaces over the garage level require a 3-hour fire rating at each penetration. Waterproof Membrane: All toilet rooms or premises where water usage extends beyond toilet rooms must have an epoxy membrane equal to STONHARD (800.257.7953) or better. Complete membranes with a minimum 4" perimeter return are required. If an alternative floor material is desired, Laticrete 9325 (203.393.0010) must be used underneath the finished floor. Cast iron sleeves must be installed around all pipe penetrations, except for water closets or floor sinks and must extend at least 2" above the finished floor. Store Fixture Supports: All Tenant improvements, exclusive of ceilings, HVAC systems and light fixtures shall be floor-mounted and self-supporting. Mezzanines are permitted in certain areas to the extent allowed by local jurisdiction. The written approval of Landlord and structural engineering, at Tenant's expense, will be required for permit. See LOD for specific areas capable of supporting a mezzanine structure. (E) PARTITIONS 1. Common demising walls, framed by Landlord, between the tenants shall be finished by the Tenant with 5/8" type "X" gypsum board to the underside of the deck above. Security, burglar bars, chicken wire, etc., are the responsibility of the Tenant. 41 2. Cutting of existing gypsum board within the Tenant's demised premises or relocation of any existing metal studs (demising or service corridor walls) shall be done at the Tenant's request and only with the Landlord's written approval. 3. All interior partitions shall be metal stud construction with taped and spackled 5/8" Type "X" gypsum board finish on all sides. 4. Retail operations such as music stores, arcades or any Tenant who shall produce above normal noise, etc., will be required by the Landlord to provide sound insulation on the ceiling and in demising walls, achieving a minimum STC rating of 50, to protect neighboring tenants from above normal noises. All such insulation shall be noncombustible as approved by the governing agencies. 5. All toilet room partitions shall have water resistant gypsum board in addition to required wainscots. (F) TENANT MECHANICAL SYSTEM Tenant shall provide an engineered HVAC design, stamped by a registered professional engineer licensed in the State of Nevada for approval by Landlord's engineer. Landlord may provide modifications to the base building system to accommodate Tenant's needs at the expense of the Tenant. Tenant shall provide all components required (such as air handling unit(s), chilled water piping and appurtenances, air distribution system, electrical connections, controls, etc.) for a properly operating HVAC system that meets the Tenant's needs, and connecting to the Landlord provided chilled water distribution system. The Tenant HVAC design must comply with the system requirements described herein in order to ensure compatibility with the Landlord provided chilled water system, and consequently Tenant comfort. The Tenant's HVAC system shall be designed based on the following criteria: Outdoor air conditions: 108 deg. F Drybulb and 68 deg. F Wetbulb Indoor design temperature: 73-75 deg. F Drybulb (for cooling) Chilled water temperature: 42 deg. F supply and 58 deg. F return. Tenant requiring after hour cooling and/or chilled water use for any application other than comfort cooling must submit a request in writing to Landlord as part of Submission I. Upon review, Landlord will advise Tenant whether capacity is available. All costs associated with the additional hours of after -hour cooling will be at Tenant's expense. Tenant's cooling load calculations shall be performed by a registered professional engineer licensed in the State of Nevada, using an industry-standard computer-based cooling load calculation program, such as Carrier Hourly Analysis Program, in compliance with all ASHRAE standards. Load calculation information shall be indicated on Tenant's HVAC drawings. Drawings will also include all information necessary for air and water balancing. 42 Air Handling Units (AHUs): Tenant to supply and install AHUs per the following requirements. AHUs are to be connected to the Landlord's two pipe chilled water system by Tenant and shall be designed for 42 deg. F chilled water supply temperature and a 58 deg. F chilled water return temperature. The AHUs shall be M-Series Climate Changers as manufactured by TRANE and shall meet with following specifications in addition to the standard manufacturer unit specifications. a. The unit shall consist of, at minimum, a mixing module with filters for return and outdoor air, coil module and fan module. All modules shall be factory insulated. The unit shall be constructed of a complete frame with removable panels such that removal of the panels will not affect the structural integrity of the unit. The panels shall be constructed of G90 galvanized. All modules shall have access panels on each side of the unit. b. Installed per manufacturer requirements with manufacturer recommended service clearances. c. IAQ-type (sloped in two planes) drain pans constructed of stainless steel. d. Factory-mounted marine light in all access and fan modules. e. Variable pitch fan drives selected at a minimum of 1.5 service factor. f. Certified ARI Standard 430-89 fan performance. g. Grease line extended to the outside of the unit terminated with standard grease fitting for any bearing requiring relubrication. h. Chilled water-type coil module for conditioning the air with seamless copper tubes equipped with "Turbulators" for improved heat transfer capabilities and aluminum fins, certified in accordance with ARI 410. The coil casing shall be constructed of stainless steel. All connections (chilled water supply and return, vent and drain) shall be clearly labeled and extend to the outside of the unit casing. The coil(s) shall be removable from the unit by removing the wall panels. i. Tenant's mechanical designer shall select a chilled water coil such that the chilled water velocity is at a minimum of 120 feet per minute at design condition. j. The mixing module shall adequately blend return air stream with outdoor air stream. The air streams shall be regulated by multi-leaf, low-leak, opposing blade dampers with edge and jam seals. The dampers shall be Ruskin CD60 double-skin airfoil design, or equivalent. The filters shall be angled 2-inch throwaway media. k. The unit shall be equipped with NEMA rated combination starter/disconnect, factory mounted and wired, to include at minimum, fused disconnect switch, HOA selector switch, control transformer, and auxiliary contacts. l. The unit shall be factory painted with epoxy prime coat and acrylic polyurethane finish coat at least 2.5 mils thick. The finished unit shall exceed 500-hour 5% salt spray solution, in accordance with ASTM B-117. m. The unit manufacturer shall warranty the unit for, at minimum, 12 months after commissioning. 44 43 45 43 In order to facilitate the selection and Landlord review process, sample air handling unit selections are provided in SECTION V. The selections are organized by required supply airflow, in cubic feet per minute, and supply air temperature. For assistance on AHU selection, please contact: TRANE-Baltimore 9603 Deereco Road Suite 400 Timonium, MD 21093-6920 Phone: (410) 252-8100 Fax: (410) 252-7330 Project Reference: Fashion Show Mall Tenant AHU The Landlord and its consultant and contractors do not warrant or guarantee the performance of any selection as it pertains to Tenant comfort. The Tenant is soley responsible for designing and selecting an appropriate system that meets the individual Tenant's unique needs. AHU Controls ------------- The Tenant shall provide the individual AHU controls for maintaining space temperature setpoint by modulating the two-way chilled water control valve(s). Cycling, or On/Off, control is not permitted. The chilled water control valve shall be a Siemens Flowrite VF 599 series with a Flowrite EA 599 series SKB electronic valve actuator. This is a normally closed two-way modulating control valve with equal percentage valve characteristic, sized for a differential pressure of no less than five (5) psi and no more than ten (10) psi across the valve at design flow rate. The valve maintains Class IV leakage rating up to 100-psi pressure differential across the valve. Follow manufacturer's requirements for proper installation. The Landlord furnished fresh air system is sized to provide the minimum required fresh air. Consequently, air-side economizing is not recommended. For AHUs larger than 2,000 cfm, also include smoke detector installed on the supply-side of the AHU for AHU shutdown upon activation. AHU Chilled water cooling coil piping: ------------------------------------------ The piping, fittings, control valve, coil and balancing valve shall be sized for a 16 deg. F delta T. Refer to SECTION V for an AHU chilled water cooling coil piping schematic. The chilled water piping system shall meet the following requirements. a. ANSI Rating 200 psig, hydrostatically pressure tested at 200 psig, 4-hour minimum. b. Pipe: schedule 40 seamless or ERW steel pipe (ASTM A106 Grade B/A53B). c. Joints: threaded. d. Fittings: Class threaded 44 e. Unions: threaded f. Insulation: 1" fiberglass with vapor-barrier and jacket. The jacket to be all-purpose, factory applied, laminated glass-fiver reinforced flame-retardant kraft paper and aluminum foil having self-sealing lap. All fittings and valves to be performed with factory-fabricated PVC jacket. g. Ball valves: full-port, bronze-body with stainless steel ball, RTFE seats and seals, blow-out proof stem, 600 psi WOG, as manufactured by Crane or Nibco. h. Balancing Valve: Model CBV-T, as manufactured by Armstrong with position locking device. Install in accordance with manufacturer's published instructions i. Temperature gauge: industrial-grade, red-mercury filled glass thermometer with adjustable angle stems and 9" scale from 0 deg. F to 100 deg. F and accurate to 1% of range. Gauge to be installed in 3/4" diameter stainless steel thermowell on thread-o-let, 1-1/2" stem and 2" extension. j. Pressure gauge: Grade A phosphor bronze Bourdon-tube pressure gage, with bottom connection. The case shall have a 5" lens and scaled from 0 psig to 200 psig. The gauge shall be installed with 1/2" gauge cock, ball valve. k. Pressure/Temperature (P/T) Plugs: on each CHW coil water inlet and outlet. In order to facilitate the selection and Landlord review process, sample chilled water piping and control valve selections are provided in SECTION V ("Tenant AHU Chilled Water Coil Piping Reference Table"). The selections are organized by required chilled water coil load, in mBtu per hour (1,000 Btu per hour). The Landlord and its consultant and contractors do not warrant or guarantee the performance of any selection as it pertains to Tenant comfort. The Tenant is solely responsible for designing and selecting an appropriate system that meets the individual Tenant's unique needs. (G) TENANT ELECTRICAL SYSTEM Complete plans and specifications must be submitted by Tenant for Landlord's approval for all electrical work, including a breakdown of the lighting in kilowatts, receptacle, motors, heating, air conditioning, water heater, miscellaneous and space circuits, per the Tenant Electrical Load Calculation form. 1. The design of a retail tenant electrical system shall not exceed 12 watts per sq. ft. of Tenant's floor area. 46 45 47 45 2. Additional or other related electrical service required by the specifics of Tenant's use or design will be provided by Landlord at Tenant's expense. Tenant shall install or cause to be installed, its electrical meter as soon as possible, as Tenant will not be allowed to use Landlord's temporary power unless paid for by Tenant. Tenant shall provide to the Landlord for installation, at Tenant's expense, a circuit breaker sized to meet the Tenant's needs. The circuit breaker shall match Landlord's equipment in all respects (manufacturer, AIC rating, etc.). Tenant shall furnish and install or cause to be installed, the electrical meter, all wire from the circuit breaker to Tenant's electrical equipment, and extend the conduit from its stub out to Tenant's electrical equipment. Tenant's electrical system shall include, but is not necessarily limited to, the following: 1. Tenant is to install an electrical meter and all conductors to get electric service to the Premises. Tenant will install feeder from Landlord's Tenant distribution panel to Tenant's Premises. 2. Termination of wires at Landlord's Tenant distribution panel or switchboard using Landlord's electrical contractor at Tenant's expense. 3. Tenant to furnish and install conduit and feeder from Tenant's electrical panel to Tenant's mechanical system. 4. All required electrical connections to Landlord's fire alarm system. Note: No PVC conduit will be permitted. (H) TENANT'S PLUMBING DESIGN CRITERIA All piping systems must be compatible with the type of materials used by Landlord, and shall comply with the following requirements: Drainage, vent pipe and fittings for above grade use shall 46 be service weight, hubless cast iron with sealing sleeve and stainless steel coupling joints with stainless steel clamps and bolts. For piping below grade, Tenant shall use service weight, bell and spigot cast iron with lead and oakum or gasketed joints. No PVC is permitted. 2. Water piping for above grade use shall be Type "L" copper tubing, seamless drawn, hard copper with plain ends ASTM B88. Fittings shall be wrought or cast copper with socket ends for lead-free solder. 3. Pipes supported from steel structure shall be supported from steel beams and joists with approved clamps and other structural attachments. Self-drilling anchors or power-driven anchors are permitted in areas with concrete flat slabs and concrete on metal deck inserts. No pipe hangers will be supported from metal roof deck. Hangers shall not pierce piping insulation vapor barrier. Hardware must have a smooth finished appearance, and exposed hangers shall be the clevis or trapeze type, complete with bolts, rods and nuts. Tenant will provide cast brass or chrome escutcheons with setscrew, deep type, to cover sleeves and exposed piping through walls, floors or ceiling. Valves: All valves for domestic water are to be 125-psi test type, all bronze wedge gate valves as manufactured by NIBCO, Watts, Crane or an approved equivalent. Valves for the gas piping system shall be bronze ball valves with threaded or welded ends as manufactured by Crane or an approved equivalent. All valves shall be accessible for ease of operations. Tenant shall be responsible for installation of a backflow preventer on Tenant's water service where required by local code. Tenant shall be responsible for installation of a water meter with a direct read gauge in US gallons. (I) FIRE PROTECTION A complete fire sprinkler system including sprinkler pipes and heads required by Tenant's design, shall be by Landlord's approved sprinkler contractor under contract with Tenant, at Tenant's expense. Tenant shall submit complete automatic sprinkler shop drawings (plans, specification, and hydraulic calculations) to Landlord, Landlord's insurance carrier, and the authority having jurisdiction for approval prior to any installation by the Tenant within the Premises. Tenant's sprinkler contractor shall coordinate its work with Landlord and request shut downs and draining of Landlord's system in advance. CENTER: Clark County Fire Department requires, as part of any renovation of existing space, that the existing supply line into the space be removed and rerouted to the new tenant supply lines coming from different sources. As a part of the required Fire Protection report, Tenant will be required to detail the reconnection work scope to the Clark County Fire Department. 47 Tenants will be required by Clark County to comply with the Fire Protection Report. This may include installing equipment which is connected to the Landlord's Building's fire alarm/smoke evacuation system. This may include speakers and strobes in individual tenant spaces. The central fire alarm system shall be a digital addressable type. If required, Tenant's devices shall be provided and installed by the Landlord's fire alarm contractor at Tenant's expense. Tenant's final plans must be reviewed at Tenant's expense, by Rolf-Jensen & Associates prior to submittal to Clark County for permit. A written report from Rolf-Jensen & Associates, acknowledging that the final plans conform to the Fire Protection Report, must accompany the final plans to be accepted by the County for the permit application process. Tenant shall patch and repair all disturbed fireproofing using Landlord's contractor. (J) UTILITIES BY TENANT Telephone Service: Tenants must make direct arrangements for telephone service with Sprint. Tenant is responsible for service between the primary telephone service point within Landlord's Building and Tenant's Premises. Exposed wire(s) will not be permitted. Tenant shall install conduit and wire. Roof Top Antennas & Satellite Dishes: Any rooftop equipment, including antennas and satellite dishes, will require Landlord's written approval and must be submitted at least 45 days prior to installation. 3. DESCRIPTION OF LANDLORD WORK AT TENANT'S EXPENSE The following work by Landlord shall be reimbursed to Landlord by Tenant: 1. Water and Sewer Connection: Tenant shall reimburse Landlord for any water and sewer connection fees for the Premises required by Local authorities and paid by Landlord. 2. Utility Design Review: Tenant shall reimburse Landlord for any applicable utility design review fees and associated costs for the Premises required by Local authorities or others and paid by Landlord. The following work in the Premises may be performed by Landlord at Landlord's actual cost, plus a 15% administration fee, only upon receipt of a signed work order from Tenant authorizing such work and receipt of payment in full of the amount agreed upon in advance of the performance of the work. 1. Temporary work required by local authorities. 2. Temporary storefront work in the event Tenant's construction is not complete for the scheduled Grand Opening Date. 3. Furnish and install Landlord's Building Standard storefront system. 4. Modified water service or relocation of water service. 49 48 50 48 5. Modified electric service or relocation of electric service, provided such service is available. 6. Modifications to the HVAC system, including additional capacity of the system provided by Landlord. Landlord reserves the right to refuse to perform any such modifications. 7. The addition or relocation of other utility services. 8. Roof, floor, partition and wall openings for any purpose including exterior egress doors and framing. Such openings shall include supporting structures, curbs, flashings, ducts, vents and grilles. Landlord reserves the right to refuse to permit any openings which exceed the capability of the structural system or which in Landlord's opinion would be detrimental to the appearance of Landlord's Building. 9. Architectural or engineering fees incurred by Landlord as a result of Tenant's requesting any of the items specified above or any other items of a special nature. 10. Air handling unit chilled water piping water balancing. VIOLATIONS: In the event Tenant is notified of any violation(s) of codes, ordinances or regulations, either by the jurisdictional authorities or by the Landlord, Tenant shall correct such violations within 7 calendar days from such date of notification, or such time as required by the local jurisdiction. Should Tenant fail to correct such violations within seven calendar days, Landlord will have the right to correct such violations at Landlord's cost plus a 15% administration fee. Tenant shall grant entrance into the Premises for corrective work by others. 49 C. FOOD/RESTAURANT 1. DESCRIPTION OF LANDLORD WORK Except when noted in the Lease, Landlord shall perform the work described below in accordance with the following specifications. (A) FRAME: A noncombustible shell consisting of concrete, masonry or steel. (B) ROOF: A roof. (C) EXTERIOR WALLS: Exterior walls shall be of noncombustible construction. EAST WING: Exterior storefronts designed and constructed by Tenant. (D) FLOOR SYSTEM: A concrete floor system at one elevation unless otherwise indicated on Tenant's LOD. The floor system is designed to support a live load of 100 pounds per sq. ft WEST WING: Lower Level: 10" cast in place slab with two layers of rebar on opposing 12" grids Upper Level: 4" concrete on metal deck with 6"x6" wire mesh reinforcement CENTER: Lower Level: 10" Pre-cast plank slab and a 4" concrete topping slab with rebar reinforcement Upper Level: 4" concrete slab on metal deck with iron grid EAST WING: Lower Level: Existing 10" Pre-cast plank slab and a 4" concrete topping slab with rebar reinforcement and 2" to 6" architectural topping slab where required to eliminate slope of existing structure Upper Level: 4" concrete slab on metal deck with 6"x6" wire mesh reinforcement FOOD COURT: TBD NOTE: All levels are suspended over either sublevel garage (Lower Levels) or other Retail space (Upper Level). (E) DEMISING PARTITIONS 50 Demising partitions are provided between Tenant and other tenants and/or exits or service corridors of the partition type indicated on Tenant's LOD. Landlord will provide partitions dividing the Premises from adjacent tenants and stud framing or masonry as determined by Landlord and as indicated on Tenant's LOD. Studs shall extend from the floor slab to the underside of the structure above. Partitions dividing the Premises from adjacent service corridors, if stud construction, shall be surfaced on the service corridor side only by Landlord. Tenant to provide and install gypsum wall board, tape and finish to wall studs. (F) DEMISING END-CAP/NEUTRAL PIER Demising end-cap(s). (G) MECHANICAL SYSTEM A mechanical system designed to meet the following specifications: Outside air condition: 108 deg. F Drybulb/68 deg. F Wetbulb Indoor design condition: Setpoint: 75 deg. F Drybulb Deadband: +/- 2 deg. F Drybulb Chilled water: Landlord shall provide a chilled water circulating loop for connection by tenants. Tenant spaces will be provided with one (1) 2" nominal piping tap set, one on the chilled water supply header and one on the return header for connection by the Tenant to the Tenant supplied HVAC system. CHILLED WATER USE BY TENANT FOR APPLICATIONS OTHER THAN COMFORT COOLING SHALL BE CONSIDERED ON A CASE-BY-CASE BASIS. TENANT MUST SUBMIT A WRITTEN REQUEST TO LANDLORD AS PART OF SUBMISSION I SO THAT THE APPLICATION MAY BE APPROPRIATELY COORDINATED. CENTER: The supply equipment within existing spaces is a variable air volume system (VAV), controlled by a constant volume fan powered terminal. As existing spaces change to new tenancies, these systems must be removed and converted to the two pipe chilled water central plant system by the new Tenant after June 2002. Landlord provided cooling capacity: Restaurant - (6) tons/ksf or (9) gpm/ksf Food Court - (9) tons/ksf or (13.5) gpm/ksf 51 Chilled water: Entering Water Temperature: 42 deg. F Leaving Water Temperature: 58 deg. F Lighting & Miscellaneous Load: Dry Retail: 10 w/sq. ft. Restaurant - kitchen: 15 w/sq. ft. Restaurant - seating area: 3 w/sq. ft. Common Area - East/West Exp.: 5 w/sq. ft. Common Area - Center: 5 w/sq. ft. Common Area - Great Hall: 5 w/sq. ft. Food Court - tenant area: 30 w/sq. ft. Food Court - seating area: 3 w/sq. ft. Banquet Hall - kitchen 15 w/sq. ft. Banquet Hall - seating area: 3 w/sq. ft. Office Space: 3 w/sq. ft. Ventilation/outside air: 0.35 cfm/sq. ft./exhaust 0.30 cfm/sq. ft./fresh air per ASHRAE62/1989 Restaurant and food users are required to install a digital, remote readable meter on the supply line of the chilled water loop. If Tenant's internal loading or other requirements exceed the maximum design load, Landlord may, at its option, provide additional capacity. All costs associated with the additional capacity shall be at Tenant's expense. Fresh air: Landlord will furnish and install a fresh air duct for Tenants' air handling units to one point within or adjacent to the Premises to which each tenant will be required to make final connections of its fresh air ductwork. The equipment is based on 0.35 cubic feet per minute (cfm) per sq. ft. of area for the fresh air system. CENTER AND WEST WING, SECOND LEVEL, AND FOOD COURT: Tenant is to draw fresh air directly in through penetration in roof performed by Landlord's roofing contractor at Tenant's expense. Master exhaust: Landlord will furnish and install an exhaust duct for Tenants' air handling units to one point within or adjacent to the Premises to which each tenant will be required to make final connections of its exhaust air ductwork. The equipment is based on 0.35 cubic feet per minute (cfm) per sq. ft CENTER AND WEST WING, SECOND LEVEL, AND FOOD COURT: Tenant is to duct directly through penetration in roof performed by Landlord's roofing contractor at Tenant's expense. Kitchen hood exhaust/make-up air: 52 WEST WING LOWER LEVEL AND EAST WING, ALL LEVELS: Landlord shall provide at Tenant's expense a floor opening to route kitchen exhaust and make-up air ductwork. The ductwork shall follow the paths generally outlined by Landlord. The roof penetration will be performed by Landlord's approved roofing contractor at Tenant's expense. WEST WING UPPER LEVEL AND FOOD COURT: Tenant to duct directly through penetration in roof performed by Landlord's roofing contractor at Tenant's expense. (H) ELECTRICAL SERVICE Provide a 120/208 volt or 480/277 volt, 3 phase, 4 wire service within Landlord's electrical metering room with a main electrical switch for Tenant's connection. Tenant shall provide all electrical gear required to transform the provided voltage to any other voltage required by Tenant. Tenant's maximum design load shall not exceed 30 watts per sq. ft. Additional service may be provided by Landlord at Tenant's expense. WEST WING: A 480/277 volt, 3 phase, 4 wire service, with one or more empty conduit(s) with pull string(s). CENTER: A 120/208 volt, 3 phase, 4 wire service. EAST WING: A 480/277 volt, 3 phase, 4 wire service, with one or more empty conduit(s) with pull string(s). FOOD COURT: A 480/277 volt, 3 phase, 4 wire service, with one or more empty conduit(s) with pull string(s). (I) PLUMBING SERVICE Water Service: One (1) 2" domestic water service will be brought to a point within, above or adjacent to the Premises designed to provide the range of 20 to 80 psi. The domestic water will terminate in a valve for future extension by Tenant. Sewer Service: One (1) 4" sanitary sewer line will be stubbed within, below or adjacent to the Premises. Landlord will also provide a 2" vent line stubbed within, above, or adjacent to the Premises. Natural Gas Service: The utility provider will run 16 psi gas piping with a valve to a manifold at an exterior location designated by Landlord. Tenant is responsible for extending the line, in a routing approved by the Landlord, to the Premises. Tenant is responsible for reducing the pressure of the service to suit Tenant's needs. Grease Waste: 53 FOOD COURT AND RESTAURANTS: One (1) 4" grease waste stub below the area within or adjacent to the Premises. Grease trap stubs will tie into a Landlord-provided (at Tenant's expense) common grease interceptor located at a remote location. Tenant is responsible for the connection to the stub. (J) FIRE PROTECTION A valved fire protection sprinkler main will be provided to a point within, above, or adjacent to the Premises. Tenant to design and install a complete system connecting to Landlord's main line using Landlord's approved fire protection contractor(s). (K) TELEPHONE SERVICE One (1) 1" empty conduit from Landlord's telephone panel to the Premises. (L) AUDIO Landlord will arrange with the utility company to provide service at one or more locations within Landlord's Building for Tenant use. 2. DESCRIPTION OF TENANT WORK (A) DESIGN AND CONSTRUCTION OF PREMISES Tenant shall be responsible for the payment of all applicable fees and associated costs related to the design and construction of Tenant's Premises, including but not limited to permits and licensing fees including Certificate of Occupancy. Tenant is responsible for execution of all the construction work in the space, except that work outlined in Schedule B C.1 herein. All Tenant construction must be noncombustible including any materials used above the ceiling or concealed in the walls of the Premises. (B) STOREFRONTS Storefront construction must be of 1-hour construction and extend from the floor slab to the bulkhead. All lease lines facing walkways, courts, arcades, or common areas as indicated on Tenant's LOD should be considered Tenant's storefront. The entire area within these boundaries cannot be reduced by furring in or framing down and will be counted into the space calculated against the requirement of 80% open glazing area at the storefront. (C) EGRESS/EXIT DOORS All interior and exit doors, frames, and hardware servicing the Premises are to be furnished and installed by Tenant. Rear exit doors 55 54 56 54 must be recessed and conform to all requirements of the Landlord and local jurisdiction. Rear exit door to be a 3'-0" x 7'-0" 60-minute UL rated hollow metal door with a welded steel jamb and steel hinges, all primed for painting. All exit doors will have a printed placard indicating Tenant's name and space number per local code, to be provided by Landlord at Tenant's expense. (D) FLOORS & CEILINGS It is the Tenant's responsibility to verify that the ceiling height selected by Tenant is not in conflict with Landlord's work including but not limited to base building structure, ductwork, chilled water piping mains, etc. The structure of Landlord's Building has been designed to accept a superimposed loading of 7 lbs per sq. ft. for overhead installation of Tenant's ceiling and equipment. Tenant will provide access (such as access panels) where Landlord and/or jurisdiction authorities designate. Landlord will install the project floor finish to Tenant's lease line. Tenant shall install the project floor finish from the lease line to Tenant's storefront and point of closure. Tenant is responsible for purchasing the project floor finish from Landlord. All proposed coring of the concrete slab floors must be submitted to the Landlord, for review by Landlord's Structural Engineer, a minimum of 30 days before the proposed coring date. Submital requests shall be in sketch form showing framing in the general areas, gridlines, existing penetrations and proposed penetrations for all trades. In addition, a large scale drawing (1:5) of the existing reinforcement in the area of proposed penetrations, based on a pacometer or X-ray investigation must be included. Cutting of the reinforcement must be avoided during coring. Columns shall not be cored under any circumstances. Moment frame beams and shear wall link beams shall not be cored. Penetrations may only be proposed for floor beams, wall and slabs. If resizing or repositioning of the proposed openings are not possible in order to avoid a loss of structural integrity, remedial work may need to be developed by Landlord's Structural Engineer. The costs of testing, Engineering review, remedial work, if required, and any delays to Tenant's project are at Tenant's sole cost. Coring shall not be performed without Landlord's written approval to Tenant. All penetrations must be made waterproof and must conform to the fire rating of the floor slabs penetrated. Waterproof Membrane: Restaurant food prep areas and toilet rooms must have an epoxy membrane equal to STONHARD (800.257.7953) or better. Complete membranes with a minimum 4" perimeter return are required. If an alternative floor material is desired, Laticrete 9325 (203.393.0010) must be used underneath the finished floor material. Cast iron sleeves must be installed around all pipe penetrations, except for water closets or floor sinks and must extend at least 2" above the finished floor. Equipment Supports: All Tenant improvements, exclusive of ceilings, HVAC system and light fixtures shall be floor -mounted unless written approval is obtained from Landlord to support improvements otherwise. Recessed wall standards for shelving systems are acceptable for sales areas. 55 Mezzanines are permitted in certain areas to the extent allowed by local jurisdiction. The written approval of the Landlord and structural engineering, at Tenant's expense, will be required for permit. See LOD for specific areas capable of supporting a mezzanine structure. All walk-in coolers, refrigerators or freezer boxes, if allowed, shall be provided with the insulated floor systems recommended by the equipment manufacturer. Tenant will install a waterproof membrane over all kitchen, food preparation, and toilet areas, including the floor area underneath coolers. Sealed concrete floors will not be permitted in the coolers or refrigerators. Landlord must approve the loads imposed on the structure. All refrigeration equipment must be air-cooled. (E) PARTITIONS 1. Common demising walls between the tenants shall be finished by the Tenant with 5/8" type "X" gypsum board to the underside of the deck. Security, burglar bars, chicken wire, etc., are the responsibility of the Tenant. 2. Cutting of existing gypsum board within the Tenant's demised premises or relocation of any existing metal studs (demising or service corridor walls) shall be done at the Tenant's request and only with the Landlord's written approval. 3. All interior partitions shall be metal stud construction with taped and spackled 5/8" Type "X" gypsum board finish on all sides. 4. All Tenants who produce above normal noise or vibrations will be required by the Landlord to provide sound insulation on the ceiling and in demising walls, achieving a minimum STC rating of 50, to protect neighboring tenants from above normal noises. All such insulation shall be noncombustible as approved by the governing agencies. 5. All toilet room partitions shall have water resistant gypsum board in addition to required wainscots. (F) TENANT MECHANICAL SYSTEM Tenant shall provide an engineered HVAC design, stamped by a registered professional engineer licensed in the State of Nevada, for approval by Landlord's engineer. Landlord may provide modifications to the base building system to accommodate Tenant's needs at the expense of the Tenant. Tenant shall provide all components required (such as air handling unit(s), chilled water piping and appurtenances, air distribution system, electrical connections, controls, etc.) for a properly operating HVAC system that meets the Tenant's needs, and connecting to the Landlord provided chilled water distribution system. The Tenant HVAC design must comply with the system requirements described herein in order to ensure compatibility with the Landlord provided chilled water system, and consequently Tenant comfort. The Tenant's HVAC system shall be designed based on the following criteria: Outdoor air conditions: 108 deg. F Drybulb and 68 deg. F Wetbulb Indoor design temperature: 75 deg. F Drybulb (for cooling) Chilled water temperature: 42 deg. F supply and 58 deg. F return (16 deg. F T). 56 Tenant requiring after hour cooling and/or chilled water use for any application other than comfort cooling must submit a request in writing to Landlord as part of Submission I. Upon review, Landlord will advise Tenant whether capacity is available. All costs associated with additional equipment or hours of after-hour cooling will be at Tenant's expense. Tenant's cooling load calculations shall be performed by a registered professional engineer licensed in the State of Nevada, using an industry-standard computer-based cooling load calculation program, such as Carrier Hourly analysis Program, in compliance with all ASHRAE standards. Load calculation information shall be indicated on Tenant's HVAC drawings. Drawings will also include all information necessary for air and water balancing. Air Handling Units (AHUs) Tenant to supply and install AHUs per the following requirements. AHUs are to be connected to the Landlord's two pie chilled water system by Tenant and shall be designed for 42 deg. F chilled water supply temperature and a 58 deg. F chilled water return temperature. The AHUs shall be M-Series Climate Changers as manufactured by TRANE and shall meet the following specifications in addition to the standard manufacturer unit specifications: a. The unit shall consist of, at minimum, a mixing module with filters for return and outdoor air, coil module, and fan module. All modules shall be factory insulated. The unit shall be constructed of a complete frame with removable panels such that removal of the panels will not affect the structural integrity of the unit. The panels shall be constructed of G90 galvanized. All modules shall have access panels on each side of the unit. b. Installed per manufacturer requirements with manufacturer recommended service clearances. c. IAQ-type (sloped in two planes) drain pans constructed of stainless steel. d. Factory-mounted marine light in all access and fan modules. e. Variable pitch fan drives selected at a minimum of 1.5 service factor. f. Certified ARI Standard 430-89 fan performance. g. Grease line extended to the outside of the unit terminated with standard grease fitting for any bearing requiring relubrication. h. Chilled water-type coil module for conditioning the air with seamless copper tubes equipped with "Turbulators" for improved heat transfer capabilities and aluminum fins, certified in accordance with ARI 410. The coil casing shall be constructed of stainless steel. All connections (chilled water supply and return, vent and drain) shall be clearly labeled and extend to the outside of the unit casing. The coil(s) shall be removable from the unit by removing the wall panels. 57 i. Tenant's mechanical designer shall select a chilled water coil such that the chilled water velocity is at a minimum of 120 feet per minute at design condition. j. The mixing module shall adequately blend return air stream with outdoor air stream. The air streams shall be regulated by multi-leaf, low-leak, opposing blade dampers with edge and jam seals. The dampers shall be Ruskin CD60 double-skin airfoil design, or equivalent. The filters shall be angled 2-inch throwaway media. k. The unit shall be equipped with NEMA rated combination starter/disconnect, factory mounted and wired, to include at minimum, fused disconnect switch, HOA selector switch, control transformer, and auxiliary contacts. l. The unit shall be factory painted with epoxy prime coat and acrylic polyurethane finish coat at least 2.5 mils thick. The finished unit shall exceed 500-hour 5% salt spray solution, in accordance with ASTM B-117. m. The unit manufacturer shall warranty the unit for, at minimum, 12 months after commissioning. In order to facilitate the selection and Landlord review process, sample air handling unit selections are provided in SECTION V. The selections are organized by required supply airflow, in cubic feet per minute, and supply air temperature. For assistance on AHU selection, please contact: TRANE-Baltimore 9603 Deereco Road Suite 400 Timonium, MD 21093-6920 Phone: (410) 252-8100 Fax: (410) 252-7330 Project Reference: Fashion Show Mall Tenant AHU The Landlord and its consultant and contractors do not warrant or guarantee the performance of any selection as it pertains to Tenant comfort. The Tenant is soley responsible for designing and selecting an appropriate system that meets the individual Tenant's unique needs. AHU Controls ------------- The Tenant shall provide the individual AHU controls for maintaining space temperature setpoint by modulating the two-way chilled water control valve(s). Cycling, or On/Off, control is not permitted. The chilled water control valve shall be a Siemens Flowrite VF 599 series with a Flowrite EA 599 series SKB electronic valve actuator. This is a normally closed two-way modulating control valve with equal percentage valve characteristic, sized for a differential pressure of no less than five (5) psi and no more than ten (10) psi across the valve at design flow rate. The valve maintains Class IV leakage rating up to 100-psi pressure differential across the valve. Follow manufacturer's requirements for proper installation. The Landlord furnished fresh air system is sized to provide the minimum required fresh air. Consequently, air-side economizing is not recommended. For AHUs larger than 2,000 cfm, also include smoke detector installed on the supply-side of the AHU for AHU shutdown upon activation. AHU Chilled water cooling coil piping: ------------------------------------------ The piping, fittings, control valve, coil and balancing valve shall be sized for a 16 deg. F delta T. Refer to SECTION V for an AHU chilled water cooling coil piping schematic. The chilled water piping system shall meet the following requirements. a. ANSI Rating 200 psig, hydrostatically pressure tested at 200 psig, 4-hour minimum. b. Pipe: schedule 40 seamless or ERW steel pipe (ASTM A106 Grade B/A53B). c. Joints: threaded. d. Fittings: Class threaded e. Unions: threaded f. Insulation: 1" fiberglass with vapor-barrier and jacket. The jacket to be all-purpose, factory applied, laminated glass-fiver reinforced flame-retardant kraft paper and aluminum foil having self-sealing lap. All fittings and valves to be performed with factory-fabricated PVC jacket. g. Ball valves: full-port, bronze-body with stainless steel ball, RTFE seats and seals, blow-out proof stem, 600 psi WOG, as manufactured by Crane or Nibco. h. Balancing Valve: Model CBV-T, as manufactured by Armstrong with position locking device. Install in accordance with manufacturer's published instructions i. Temperature gauge: industrial-grade, red-mercury filled glass thermometer with adjustable angle stems and 9" scale from 0 deg. F to 100 deg. F and accurate to 1% of range. Gauge to be installed in 3/4" diameter stainless steel thermowell on thread-o-let, 1-1/2" stem and 2" extension. j. Pressure gauge: Grade A phosphor bronze Bourdon-tube pressure gage, with bottom connection. The case shall have a 5" lens and scaled from 0 psig to 200 psig. The gauge shall be installed with 1/2" gauge cock, ball valve. k. Pressure/Temperature (P/T) Plugs: on each CHW coil water inlet and outlet. In order to facilitate the selection and Landlord review process, sample chilled water piping and control valve selections are provided in SECTION V ("Tenant AHU Chilled Water Coil Piping Reference Table"). The selections are organized by required chilled water coil load, in mBtu per hour (1,000 Btu per hour). 58 The Landlord and its consultant and contractors do not warrant or guarantee the performance of any selection as it pertains to Tenant comfort. The Tenant is solely responsible for designing and selecting an appropriate system that meets the individual Tenant's unique needs. (G) TENANT ELECTRICAL SYSTEM Complete plans and specifications must be submitted by Tenant for Landlord's approval for all electrical work, including a breakdown of the lighting in kilowatts, receptacle, motors, heating, air conditioning, water heater, miscellaneous and space circuits, per the Tenant Electrical Load Calculation form. 1. The design of Tenant's electrical system shall not exceed 30 watts per sq. ft. of Tenant's floor area. 2. Additional or other related electrical service required by the specifics of Tenant's use or design will be provided by Landlord at Tenant's expense. Tenant shall provide to the Landlord for installation, a circuit breaker sized to meet the Tenant's needs. The circuit breaker shall match Landlord's equipment in all respects (manufacturer, AIC rating, etc.). Tenant shall furnish and install, or cause to be installed, the electrical meter, all wire from the circuit breaker to the Tenant's electrical equipment, and extend the conduit from its stub to the Tenant's electrical equipment. Tenant shall furnish and install all electrical facilities required for the Premises for the appropriate tenant distribution panel or switchboard. Tenant shall install or cause to be installed, its electrical meter as soon as possible, as Tenant will not be allowed to use Landlord's temporary power unless paid for by Tenant. Tenant's electrical system shall include, but is not necessarily limited to, the following: 1. An electrical meter and all conductors to get electric service to the Premises. See the LOD for the location of Landlord's tenant distribution panel. 2. Termination of wires at Landlord's tenant distribution panel or switchboard using Landlord's electrical contractor at Tenant's expense. 3. Conduit and feeder from Tenant's electrical panel to Tenant's mechanical system. 4. All required electrical connections to Landlord fire alarm system. 59 Note: No PVC conduit will be permitted. (H) TENANT'S PLUMBING DESIGN CRITERIA Tenant will connect to one (1) 4" grease waste stub below the area within or adjacent to the Premises. Grease waste stubs will tie to Landlord's provided (at Tenant's expense) common grease interceptor located at a remote location. All piping systems must be compatible with the type of materials used by Landlord, and shall comply with the following requirements: 1. Drainage, vent pipe and fittings for above grade use shall be service weight, hubless cast iron with sealing sleeve and stainless steel coupling joints with stainless steel clamps and bolts. For piping below grade, Tenant shall use service weight, bell and spigot cast iron with lead and oakum or gasketed joints. No PVC is permitted. 2. Water piping for above grade use shall be Type "L" copper tubing, seamless drawn, hard copper with plain ends ASTM B88. Fittings shall be wrought or cast copper with socket ends for lead-free solder. 3. Pipes supported from steel structure shall be supported from steel beams and joists with approved clamps and other structural attachments. Self-drilling anchors or power-driven anchors are permitted in areas with concrete flat slabs and concrete on metal deck inserts. No pipe hangers will be supported from metal roof deck. Hangers shall not pierce piping insulation vapor barrier. Hardware must have a smooth finished appearance, and exposed hangers shall be the clevis or trapeze type, complete with bolts, rods and nuts. Tenant will provide cast brass or chrome escutcheons with setscrew, deep type, to cover sleeves and exposed piping through walls, floors or ceiling. Valves: All valves for domestic water are to be 125-psi test type and all bronze wedge gate valves as manufactured by NIBCO, Watts, Crane or an approved equivalent. Valves for the gas piping system shall be bronze ball valves with threaded or welded ends as manufactured by Crane or an approved equivalent. All valves shall be accessible for ease of operations. Tenant shall be responsible for installation of a backflow preventer for Tenant's water service where required by local code. Tenant shall be responsible for installation of a water meter and digital remote read-out. 60 (I) FIRE PROTECTION Extensions and modifications to Landlord's system and the installation of sprinkler pipes and heads required by Tenant's design, shall be designed and installed by Landlord's approved sprinkler contractor, under contract with Tenant, at Tenant's expense. CENTER: Clark County Fire Department requires, as part of any renovation of existing space, that the existing supply line into the space be removed and rerouted to the new tenant supply lines coming from different sources. As a part of the required Fire-life safety report, Tenant will be required to detail the reconnection work scope to the Clark County Fire Department. Tenants will be required by Clark County to comply with the Fire Protection Report. This may include installing equipment connected to the Landlord's Building's fire alarm evacuation system. This may include speakers and strobes in each tenant space. The central fire alarm system is a digital addressable type. Tenant's devices shall be provided and installed by the Landlord's fire alarm contractor(s) at Tenant's expense. Tenants' final plans must be reviewed, at Tenant's expense, by Rolf-Jensen & Associates prior to submittal to Clark County for permit. A written report from Rolf-Jensen & Associates, acknowledging that the final plans conform to the Fire Protection Report, must accompany the final plans to be accepted by the County for the permit application process. Tenant shall patch and repair all disturbed fireproofing using Landlord's contractor. (J) UTILITIES BY TENANT Telephone service: Tenants must make direct arrangements for telephone service with Sprint. Tenant is responsible for service between the telephone service point within Landlord's building and Tenant's Premises. Exposed wire(s) will not be permitted by code. Tenant shall install conduit and wire. Roof Top Antennas & Satellite Dishes: Any rooftop equipment, including antennas and satellite dishes, will require Landlord's written approval prior to installation. (K) TRASH REMOVAL Tenant to provide and install a trash compactor as specified by Landlord for the compaction and packaging of all wet and dry trash before removal from the Premises. 3. DESCRIPTION OF LANDLORDS WORK AT TENANT'S EXPENSE 61 The following work by Landlord shall be reimbursed to Landlord by Tenant: 1. Water and Sewer Connection: Tenant shall reimburse Landlord for any water and sewer connection fees for the Premises required by Local authorities and paid by Landlord. 2. Utility Design Review: Tenant shall reimburse Landlord for any applicable utility design review fees and associated costs for the Premises required by Local authorities or others and paid by Landlord. The following work in the Premises may be performed by Landlord at Landlord's cost, plus a 15% administration fee, only upon receipt of a signed work order from Tenant authorizing such work and receipt of payment in full of the amount agreed upon in advance of the performance of the work. 1. Temporary work required by local authorities. 2. Temporary storefront work or barricades @ $50 per linear foot of 14' high wall in the event Tenant's construction is not complete for the scheduled Grand Opening Date. 3. Furnish and install Landlord's Building Standard storefront system. 4. Modified water service or relocation of water service. 5. Modified electric service or relocation of electric service, provided such service is available. 6. Modifications to the HVAC system, including additional capacity of the system provided by Landlord. Landlord reserves the right to refuse to perform any such modifications. 7. The addition or relocation of other utility services. 8. Roof, floor, partition and wall openings for any purpose including exterior egress doors and framing. Such openings shall include supporting structures, curbs, flashings, ducts, vents and grilles. Landlord reserves the right to refuse to permit any openings which exceed the capability of the structural system or which in Landlord's opinion would be detrimental to the appearance of Landlord's Building. 9. Architectural or engineering fees incurred by Landlord as a result of Tenant's requesting any of the items specified above or any other items of a special nature. 10. Individual and/or shared grease trap(s) and all associated piping. 11. Air handling unit chilled water piping water balancing. VIOLATIONS: In the event Tenant is notified of any violation(s) of codes, ordinances or regulations, either by the jurisdictional authorities or by the Landlord, Tenant shall correct such violations within seven calendar days from such date of notification, or such time as required by the local jurisdiction. Should Tenant fail to correct such violations within seven calendar days, Landlord will have the right to correct such violations at Landlord's cost plus a 15% administration fee. Tenant shall grant entrance into the Premises for corrective work by others. 62 SCHEDULE "C" UTILITY CONSUMPTION AND PAYMENT SCHEDULE -------------------------------------------- ANNEXED TO and forming part of the Lease by and between FASHION SHOW EXPANSION LLC, ("Landlord") and LEISURE HOMES CORPORATION, a Nevada corporation, t/a LEISURE, LEISURE RESORTS, LEISURE VACATIONS or LEISURE VACATION STORE, ("Tenant"). Section 12.1. of the above mentioned Lease Agreement provides for the inclusion of this Schedule to set forth the terms and conditions under which Landlord shall supply or Tenant shall obtain electricity for use in the Premises. Landlord will provide and maintain the necessary empty conduits to bring electricity to the Premises. Electrical energy used by Tenant shall be measured by separate meter and Tenant shall pay all charges for such electrical energy to the public utility, public authority, or any other person, firm or authority supplying the same. Landlord shall have the option to supply electricity to the Premises. If Landlord shall elect to supply electricity to the Premises, Tenant will pay all charges for its requirements for such service tendered by Landlord, and Tenant will pay Landlord within ten (10) days after mailing by Landlord to Tenant of statements therefor at the applicable rates determined by Landlord from time to time which Landlord agrees shall be reasonable and not in excess of the public utility rates for the same service, if applicable, but in no event less than Landlord's actual cost. If Landlord so elects to supply electricity, Tenant shall execute and deliver to Landlord, within ten (10) days after request therefor, any documentation reasonably required by Landlord to effect such change in the method of furnishing electricity. 63 SCHEDULE "D" TENANT HEATING, VENTILATING AND AIR-CONDITIONING SCHEDULE ANNEXED TO and forming part of the Lease by and between FASHION SHOW EXPANSION LLC, ("Landlord") and LEISURE HOMES CORPORATION, a Nevada corporation, t/a LEISURE, LEISURE RESORTS, LEISURE VACATIONS or LEISURE VACATION STORE, ("Tenant"). Section 12.1. of the above mentioned Lease provides for the inclusion of this Schedule to set forth the terms and conditions under which heating, ventilation and air-conditioning will be provided to the Premises. A. V/CW System ------------ Landlord has installed or caused the installation of a chilled or condenser water loop serving the Premises and Landlord's Building and providing chilled or condenser water for air-conditioning purposes. Tenant shall install heating equipment, air-handling units, and a sheet metal duct system in the Premises, as approved by Landlord. Landlord and Tenant each shall be responsible for the operation, repair and maintenance of their respective portions of the facilities for heating, ventilating and air-conditioning the Premises (collectively, the "HVAC System"), except that upon notification to Tenant by Landlord, and at Landlord's sole cost and expense, Landlord or Landlord's contractor shall have the right from time to time to assume responsibility for the preventive maintenance (i.e. filter changes, lubrication and minor incidental maintenance as needed) of Tenant's portion of the HVAC System. Tenant shall remain solely responsible for all other maintenance of its portion of the HVAC System. Upon the expiration or termination of the Lease, title to that portion of the HVAC System installed by Tenant, and any additions or replacements thereto, shall remain in and vest solely in Landlord. B. Tenant's V/CW Charge ---------------------- In each calendar month of Landlord's fiscal year (the "Fiscal Year") Tenant shall pay Landlord as Additional Rental, Tenant's proportionate share of Landlord's cost of (1) the energy and utilities used in the ventilation of Landlord's Floor Area, and (2) obtaining and providing chilled or condenser water to Landlord's Floor Area ("Tenant's V/CW Charge") which shall be determined as follows: (a) Landlord, or a heating, ventilating and air-conditioning consultant designated by Landlord, will review such data and information regarding the mechanical capacity of that portion of the HVAC System serving the Premises as shall be deemed relevant and, based on such data and information, Landlord or such consultant shall assign to Tenant a "V/CW Factor" which shall fairly represent the relationship between (x) the mechanical capacity of that portion of the HVAC System serving the Premises and (y) the total mechanical capacity of the HVAC System; and (b) in each Fiscal Year, the aggregate actual cost to Landlord of (x) the energy and utilities used in the ventilation of Landlord's Floor Area, (y) obtaining and furnishing chilled or condenser water to Landlord's Floor Area, and (z) the services of Landlord's consultant (if any) in recalculating V/CW Factors of Tenant and other tenants of Landlord's Building from time to time ("Landlord's V/CW Cost"), shall be multiplied by a fraction, the numerator of which is Tenant's V/CW Factor and the denominator of which is the total of all V/CW Factors assigned to Landlord's Leased Floor Area. The product thus obtained shall be Tenant's V/CW Charge for such Fiscal Year. Tenant's V/CW Charge for each calendar month shall be paid by Tenant in such amounts as are estimated and billed by Landlord, each such charge being estimated and billed as of the first day of each Fiscal Year. At any time during each Fiscal Year, Landlord may reestimate Tenant's V/CW Charge and adjust Tenant's monthly installments payable during such Fiscal Year to reflect more accurately Tenant's V/CW Charge. Within one hundred twenty (120) days after the 64 termination of each Fiscal Year, Landlord will send Tenant a notice which shall: (c) set forth the amount of Tenant's V/CW Charge based upon Landlord's energy, utility, and chilled or condenser water service bills; and (d) state that the aggregate of all tenant V/CW charges paid or payable by all tenants of Landlord's Leased Floor Area with respect to such Fiscal Year, as adjusted, does not exceed Landlord's V/CW Cost for the same Fiscal Year. Tenant's V/CW Charge paid for such Fiscal Year shall be adjusted between Landlord and Tenant, the parties hereby agreeing that Tenant shall pay Landlord or Landlord shall credit to Tenant's account (or if such adjustment is at the end of the Term, Landlord shall pay Tenant), as the case may be, within thirty (30) days of such notification to Tenant, the amounts necessary to effect such adjustment. Failure of Landlord to provide the notification called for hereunder within the time prescribed shall not relieve Tenant of its obligations hereunder. 65 SCHEDULE "E" ESTOPPEL CERTIFICATE Bank of America, N.A., as Administrative Agent for Itself and the Lenders 231 South LaSalle Street 12th Floor Chicago, Illinois 60697 Rouse F.S., LLC and Fashion Show Expansion LLC c/o The Rouse Company 10275 Little Patuxent Parkway Columbia, Maryland 21044 RE: That certain lease dated __________________, _____, by and between FASHION SHOW EXPANSION LLC, a Nevada limited liability company, as "Landlord", and ____________________________, a _______________________corporation, as "Tenant", for a lease term which commenced on _____________________, _____, and will terminate on ___________________, _____ (the "Lease"), of the premises described in the Lease containing ___________ square feet (the "Leased Premises") of the shopping center commonly known as "Fashion Show" located in Las Vegas, Nevada (the "Project"). Gentlemen: Tenant hereby certifies that the above description of the Lease and the Leased Premises therein demised is a true and correct description of the same and that the Lease constitutes the only agreement between Landlord and Tenant with respect to the Leased Premises, except as otherwise provided in paragraph 12 below. Tenant hereby certifies, acknowledges and agrees as follows: 1. The Lease is in full force and effect and has not been modified or amended by any document or agreement to which the undersigned is a party, except as otherwise provided in paragraph 12 below. Tenant has accepted the Leased Premises and presently occupies the same. Tenant has no set-offs, claims, or defenses to the enforcement of the Lease; and there are no periods of free rental applicable to the term of the Lease. 2. Tenant's current Annual Basic Rental under the Lease is $________ per square foot per annum, and is payable in equal monthly installments of $_______________. 3. Tenant's current Annual Percentage Rental under the Lease is _______ percent (__%) of Gross Sales in excess of $___________ per square foot per annum. 4. The most recent payment of current Annual Basic Rental was for the payment due on _____________, 200__, and all Annual Basic Rental and Additional Rental payable pursuant to the terms of the Lease have been paid up to said date except $______________. 5. No Rental has been paid by Tenant more than thirty (30) days in advance of the due date under the Lease. 6. A security deposit of $__________ has been made with Landlord. 66 7. Tenant is entitled to the following renewal options under the Lease: None or ______________________________. 8. All required contributions by Landlord to Tenant on account of Tenant's improvements have been received except for $_________________. 9. Tenant hereby represents and warrants to Lender that, other than those contained in writing in the Lease, there have been no representations, warranties or covenants made by Landlord to Tenant, either oral or in writing. 10. Tenant is not in default in the performance of the Lease, has not committed any breach of the Lease, no notice of default has been given to Tenant, and Tenant is not the subject of any federal or state, bankruptcy, insolvency or liquidation proceeding. 11. Landlord is not in default in the performance of the Lease, has not committed any breach of the Lease, no notice of default has been given to Landlord, and Landlord has fulfilled all representations and warranties and all finish work on the Leased Premises required of Landlord. 12. There have been no amendments, modifications or extensions of the Lease except as follows: None or ______________________________. 13. To the best of Tenant's knowledge, its use of the Leased Premises during its lease term has complied and will continue to comply with all applicable federal, state, county and local laws, rules and regulations, including environmental laws, rules and regulations. 14. Tenant hereby acknowledges, to the best of its knowledge, that none of the current uses of existing tenants in the Project are in violation of any restrictive covenant or exclusive use provision of its Lease. 67 Dated this ____ day of _________________, 200___. Very truly yours, [Name of Tenant], Tenant ________________________ By: ________________________ Its: ________________________ EX-10.257 5 doc4.txt Exhibit 10.257 ASSET AND WARRANT PURCHASE AGREEMENT THIS ASEET AND WARRANT PURCHASE AGREEMENT (the "Agreement") is made and entered into this ___ day of August, 2002, by and between EASTERN AIR LINES, INC., a Delaware corporation ("Eastern") and MEGO FINANCIAL CORP., a New York ------- corporation ("Mego"). ---- RECITALS: --------- WHEREAS, Eastern is the owner of 100% of the common stock of FareQuest; WHEREAS, Eastern desires to sell, and Mego desires to purchase all of the assets of FareQuest (the "FareQuest Assets"), pursuant to the terms and conditions of this Agreement; WHEREAS, Eastern desires to retain a twenty percent (20%) interest in the future business opportunities of FareQuest, and Mego desires to grant Eastern such an interest; WHEREAS, Eastern is the owner of 1,065,000 warrants on a split-adjusted basis in ARINC Incorporated, pursuant to a Warrant Agreement dated April 13, 1999 (the "ARINC Warrant Agreement"); WHEREAS, the warrants held by Eastern in ARINC are subject to all rights, benefits and interests granted to Eastern pursuant to that Registration Rights Agreement dated April 13, 1999 (the "ARINC Registration Rights Agreement"); and WHEREAS, Eastern desires to sell, and Mego desires to purchase one and one-half percent (1.5%) of Eastern's interest in the ARINC Warrants (the "ARINC Warrants"), pursuant to the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, Eastern and Mego agree as follows: 1. Sale of the FareQuest Assets and Warrants. Subject to the terms and ----------------------------------------------- conditions of this Agreement, at the Closing (as defined below), Eastern will sell, transfer, convey and deliver to Mego, and Mego will purchase from Eastern, the FareQuest Assets and the ARINC Warrants. (a) Such sale of the FareQuest Assets shall include all of the following: i. All rights to the ATS license dated March 29, 2002 and license payments due thereunder (Exhibit 1); ii. All definitive agreements and letters of intent by and between FareQuest and travel agents or other travel providers (Exhibit 2); iii. The URLs for FareQuest.com, FareQuest.net, FareQuest.biz and FareQuest.us (Exhibit 3); iv. All of FareQuest's furniture, fixtures and equipment (Exhibit 4); v. Software, copyrights, trademarks, or any other intellectual property (Exhibit 5); vi. Such lease or contractual obligations as Mego determines to assume or acquire (Exhibit 6). (b) Such sale of the ARINC Warrants shall include the sale, conveyance, transfer and delivery to Mego of all right, title, interest and ownership of 15,975 ARINC Warrants. The ARINC Warrants shall be subject to all terms conditions and restrictions set forth in the ARINC Warrant Agreement, which is attached hereto as Exhibit 7, and the ARINC Registration Rights Agreement, which is attached hereto as Exhibit 8, the terms of which are incorporated by reference herein. Specifically, Mego agrees to accept the assignment of the ARINC Warrants and agrees to be bound by Eastern's benefits and obligations under the ARINC Warrant Agreement pursuant to Section 12(h) thereof as reflected in the attached Exhibit 9. In addition, Mego agrees to accept the assignment of all rights, benefits and obligations of the ARINC Registration Rights Agreement and shall become a party to such Agreement pursuant to Section 3.6(c) thereof, as reflected in the attached Exhibit 9. 2. Purchase Price. The purchase price for the FareQuest Assets and ARINC ---------------- Warrants (the "Purchase Price") shall consist of the following: (a) Mego Shares. At the Closing, Mego shall issue to Eastern 41,667 shares ------------- of the common stock of Mego (the "Mego Shares"). Mego shall have the obligation, under certain circumstances, to cause the registration under the Securities Act of the shares received by Eastern, pursuant to the terms and conditions of a registration rights agreement in the form of Exhibit 10 to this Agreement (the "EAL Registration Rights Agreement"), for the stock to be registered on or before December 31, 2002. (b) Carried Interest. Mego agrees to grant Eastern a twenty percent (20%) ------------------ carried interest in the results of FareQuest's operations and/or the consummation of any subsequent disposition of the FareQuest business or assets to an unrelated third party (the "Carried Interest"). The Carried Interest will be represented by a warrant exercisable immediately by Eastern for 20% of the Mego-FareQuest shares (the "Mego-FareQuest Warrant"), in the form set forth in the attached Exhibit 11. The Carried Interest and representative Mego-FareQuest Warrant may be adjusted in the following circumstances: i. The Carried Interest will be reduced to seventeen percent (17%) in the event that Mego expends $400,000 or more to complete the technology development of FareQuest. ii. The Carried Interest will be further reduced to fifteen percent (15%) in the event that Mego expends $800,000 or more to complete the technology development of FareQuest. 3. Repurchase of Carried Interest. ---------------------------------- (a) Mego may acquire the Carried Interest at any time during the 24 months immediately following the sixth month after the Closing, at the then fair market value, as determined by a mutually agreed third party appraiser, or as otherwise determined to the satisfaction of both parties. The fair market value may be satisfied through delivery of an equivalent value in number of Mego common stock, as determined based upon the 10 day average of Mego common stock during the 10 days prior to the notice of Mego's intent to acquire the carried interest (the "Carried Interest Repurchase Shares"). (b) In the event Mego elects to acquire the Carried Interest utilizing Mego common equity, Mego shall register such shares within ninety (90) days from the date of the election. The Carried Interest Repurchase Shares shall be subject to the same Registration Rights Agreement governing the Mego Shares and appended hereto as Exhibit 9. 4. Eastern Put Option. --------------------- (a) Eastern may require Mego to acquire the Carried Interest at any time after six months from the Closing of the Agreement, for an exercise price of $200,000 (the "Put Option"). Eastern shall receive Mego common stock, the number of shares of which is based upon the 10 day moving average stock price for the 10 days immediately preceding Eastern's notice of intent to exercise the Put Option (the "Put Option Shares"). Alternatively, Mego may elect to satisfy the Put Option by surrendering its ARINC Warrant Interest to Eastern, unless the Warrant has been previously exercised, in place of the Put Option Shares. (b) In the event Mego elects to satisfy the Put Option utilizing Mego common equity, Mego shall register such shares within ninety (90) days from the date of the election. The Put Option Shares shall be subject to the same Registration Rights Agreement governing the Mego Shares and appended hereto as Exhibit 9. 5. Closing. The closing of the transactions contemplated by this Agreement -------- (the "Closing") will occur at the offices of Eastern in Miami on August __, ------- 2002, or such other time, place and date which are mutually acceptable to the parties (the "Closing Date"). At the Closing, Eastern will deliver to Mego the ------------ FareQuest Assets as well as all financial books and records of FareQuest, and Mego shall execute and deliver to Eastern the certificates evidencing the Mego Shares and the Mego Registration Rights Agreement. 6. Representations, Warranties and Covenants of Eastern. Eastern ---------------------------------------------------------- represents, warrants and covenants to Mego as follows: (a) Corporate Organization. Eastern is a corporation duly organized, ------------------------ validly existing and in good standing under the laws of the State of Delaware, with the corporate power to own its properties and to conduct its business as presently conducted. (b) Authorization. Eastern has full legal right, power and authority to -------------- enter into and perform this Agreement, and the execution and delivery hereof by Eastern and the consummation of the transactions contemplated hereby have been duly authorized by all required corporate action of Eastern. This Agreement has been duly executed and delivered on behalf of Eastern and constitutes a valid and binding agreement of Eastern, enforceable against Eastern in accordance with its terms, subject to applicable bankruptcy, insolvency and other laws affecting the enforceability of creditors rights generally. (c) Approvals. No governmental or other authorization, approval, order, ---------- license, permit, franchise or consent, and no registration, declaration, notice or filing by Eastern with any governmental authority (including the bankruptcy court with jurisdiction over the estate of Eastern) is required in connection with the execution, delivery and performance of this Agreement by Eastern. (d) Absence of Conflicting Agreements, Etc. Neither the execution and ------------------------------------------- delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will conflict with or result in a breach of any of the terms, conditions or provisions of the Certificate of Incorporation or By-laws of Eastern or of any agreement or instrument to, which Eastern is a party or by which Eastern or any of its property is bound, or constitute a default under any of the foregoing, or violate any law, rule, regulation, judgment or decree by which Eastern or any of its property is bound. (e) Ownership of Assets. Eastern is the sole and exclusive legal and ---------------------- equitable owner of and has good and marketable title to the ARINC Warrants described in Exhibit 7 to this Agreement and such Warrants are free and clear of all encumbrances unless otherwise indicated herein. No Person or Entity has an option to purchase, right of first refusal or other similar right with respect to all or any part of the ARINC Warrants. (f) Litigation. There is no action, suit, proceeding or investigation ----------- pending or, to the knowledge of Eastern currently threatened against Eastern that questions the validity of this Agreement or any other agreement contemplated by this Agreement, or the right of Eastern to enter into such agreements or to consummate the transactions contemplated hereby. (g) Audit. The FareQuest operating results for 2001 were subject to audit ------ as part of the audit of Eastern's consolidated 2001 operating results, and to the best of Eastern's knowledge the audit determined that FareQuest's operating results were fairly stated in all material respects. 7. Representations, Warranties and Covenants of FareQuest. FareQuest ------------------------------------------------------------ represents, warrants and covenants to Mego as follows: (a) Corporate Organization. FareQuest is a corporation duly organized, ------------------------ validly existing and in good standing under the laws of the State of Delaware, with the corporate power to own its properties and to conduct its business as presently conducted. (b) Authorization. FareQuest has full legal right, power and authority to -------------- enter into and perform this Agreement, and the execution and delivery hereof by FareQuest and the consummation of the transactions contemplated hereby have been duly authorized by all required corporate action of FareQuest. This Agreement has been duly executed and delivered on behalf of FareQuest and constitutes a valid and binding agreement of FareQuest, enforceable against FareQuest in accordance with its terms, subject to applicable bankruptcy, insolvency and other laws affecting the enforceability of creditors rights generally. (c) Approvals. No governmental or other authorization, approval, order, ---------- license, permit, franchise or consent, and no registration, declaration, notice or filing by FareQuest with any governmental authority is required in connection with the execution, delivery and performance of this Agreement by FareQuest. (d) Absence of Conflicting Agreements, Etc. Neither the execution and ------------------------------------------- delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will conflict with or result in a breach of any of the terms, conditions or provisions of the Certificate of Incorporation or By-laws of FareQuest or of any agreement or instrument to, which FareQuest is a party or by which FareQuest or any of its property is bound, or constitute a default under any of the foregoing, or violate any law, rule, regulation, judgment or decree by which FareQuest or any of its property is bound. (e) Ownership of Assets. FareQuest is the sole and exclusive legal and ---------------------- equitable owner of and has good and marketable title to the assets described in Section 1(a) and Exhibits 1-6 to this Agreement and such Warrants are free and clear of all encumbrances unless otherwise indicated herein. No Person or Entity has an option to purchase, right of first refusal or other similar right with respect to all or any part of the FareQuest Assets. All of the personal property of FareQuest used in the operation of its business is in good working order and repair, ordinary wear and tear excepted, and is suitable and adequate for the uses for which it is intended or is being used. (f) Litigation. There is no action, suit, proceeding or investigation ----------- pending or, to the knowledge of FareQuest currently threatened against FareQuest that questions the validity of this Agreement or any other agreement contemplated by this Agreement, or the right of FareQuest to enter into such agreements or to consummate the transactions contemplated hereby. (g) Audit. The FareQuest operating results for 2001 were subject to audit ------ as part of the audit of Eastern's consolidated 2001 operating results, and to the best of FareQuest's knowledge the audit determined that FareQuest's operating results were fairly stated in all material respects. 8. Representations, Warranties and Covenants of Mego. Mego represents, ------------------------------------------------------- warrants and covenants to Eastern as follows: (a) Corporate Organization. Mego is a corporation duly organized, validly ------------------------ existing and in good standing under the laws of the State of New York, with the corporate power to own its properties and to conduct its business as presently conducted. (b) Authorization. Mego has full legal right, power and authority to enter -------------- into and perform this Agreement and each of the Exhibits to this Agreement (collectively, the "Transaction Documents"), and the execution and delivery ---------------------- thereof by Mego and the consummation of the transactions contemplated thereby have been duly authorized by all required corporate action of Mego. This Agreement has been duly executed on behalf of Mego and constitutes a valid and binding agreement of Mego, enforceable against Mego in accordance with its terms, subject to applicable bankruptcy insolvency and other laws affecting the enforceability of creditors rights generally. (c) Approvals. No governmental or other authorization, approval, order, ---------- license, permit, franchise or consent, and no registration, declaration, notice of filing by Mego with any governmental authority is required in connection with the execution, delivery and performance of this Agreement and the other Transaction Documents (except as specified in the Registration Rights Agreement). (d) Absence of Conflicting Agreements, Etc. Neither the execution and ------------------------------------------- delivery of this Agreement and the other Transaction Documents, nor the consummation of the transactions contemplated hereby and thereby, will conflict with or result in a breach of any of the terms, conditions or provisions of the Certificate of Incorporation or By-laws of Mego or of any agreement or instrument to which Mego is a party or by which Mego or any of its property is bound, or constitute a default under any of the foregoing, or violate any law, rule, regulation, judgment of decree by which Mego or any of its property is bound. (e) Litigation. There is no action, suit, proceeding or investigation ----------- pending or to the knowledge of Mego, currently threatened against Mego that questions the validity of this Agreement or any other agreements contemplated by this Agreement, or the right of Mego to enter into such agreements or to consummate the transactions contemplated hereby or thereby. 9. Conditions to Closing. ------------------------ (a) The obligation of Mego to consummate the transactions contemplated by this Agreement is subject to the fulfillment and satisfaction of each and every one of the following conditions on or prior to the Closing, any or all which may be waived in whole or in part by Mego: (1) The representations and warranties of both Eastern and FareQuest contained in this Agreement shall be true and correct in all material respects as of the date when made and shall be deemed to be made again at and as of the Closing Date and shall be true at and as of such time in all material respects. (2) Eastern and FareQuest shall have performed and complied, in all material respects, with all agreements and conditions required by this Agreement to be performed and complied with by it prior to or on the Closing Date. (3) Eastern and FareQuest shall have delivered the FareQuest Assets. (4) Eastern shall have delivered documents evidencing the ARINC Warrants. (b) The obligation of Eastern to consummate the transactions contemplated by this Agreement are subject to the fulfillment and satisfaction of each and every one of the following conditions on or prior to the Closing, any or all of which may be waived, in whole or in part, by Eastern: (1) The representations and warranties of Mego contained in this Agreement shall be true and correct in all material respects when made and shall be deemed to be made again at and as of the Closing Date and shall be true at and as of such time in all material respects. (2) Mego shall have performed and complied with all agreements and conditions required by this Agreement to be performed or complied with by Mego prior to or on the Closing Date. (3) Mego shall have executed and delivered the stock certificates evidencing the Mego Shares, the EAL Registration Rights Agreement and the Mego-FareQuest Warrants. 10. Termination. ------------ (a) This Agreement may be terminated at any time on or prior to the Closing: (1) by mutual consent of Eastern and Mego; or (2) at the election of Mego if: (aa) Eastern or FareQuest has materially breached or failed to perform or comply with any of its representations, warranties, covenants or obligations under this Agreement, or (bb) any of the conditions set forth in Section 9(a) is not satisfied as and when required by this Agreement. (3) at the election of Eastern, if (aa) Mego has materially breached or failed to perform or comply with any of its representations, warranties, covenants and obligations under this Agreement or (bb) any of the conditions and proceedings set forth in Section 9(b) is not satisfied as and when required by this Agreement. or (cc) if the Closing has not been consummated by August ___, 2002. (b) Written notice of any termination pursuant to this Section 10 shall be given by the party electing termination of this Agreement to the other party and such notice shall state the reason for the termination. Upon the termination of this Agreement prior to the consummation of the Closing in accordance with the terms hereof, this Agreement shall become null and void and have no effect, and none of the parties shall have any liability to the other except that: (1) if Eastern refuses to close, or otherwise intentionally breaches any of its representations, warranties and covenants hereunder, then Mego shall have the right to pursue any and all remedies available at law and equity, including the remedy of specific performance; and (2) if Mego refuses to close, or otherwise intentionally breaches any of its representations, warranties or covenants under this Agreement, then Eastern shall have the right to pursue any and all remedies available at law and equity, including the remedy of specific performance. 11. Break-Up fee. If this agreement shall be Terminated due to another -------------- offer received by Eastern under which Eastern shall receive consideration greater than the Purchase Price, upon subsequent execution of the agreement made by the competing purchaser, Eastern shall become obligated to pay Mego the sum of $50,000 in immediately available funds. Such payment shall be made no later than three days after such transaction's consummation, in consideration of the time and expense incurred by Mego in association with this proposed transaction. 12. Miscellaneous. -------------- (a) Expenses. Each of the parties hereto shall bear and pay all costs and --------- expenses incurred by it or on its behalf in connection with the transactions contemplated hereunder, including fees and expenses of its own financial consultants, investment bankers, accountants and counsel. (b) Waiver and Amendment. Any provision of this Agreement may be waived at ---------------------- any time by the party that is entitled to the benefits of such provision. This Agreement may not be modified, amended, altered or supplemented except upon the execution and delivery of a written agreement executed by the parties hereto. (c) Entire Agreement: Severability. This Agreement and the exhibits hereto -------------------------------- constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or a federal or state regulatory agency to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. (d) Governing Law. This Agreement shall be governed and construed in --------------- accordance with the laws of the State of New York without regard to any applicable conflicts of law rules. (e) Descriptive Headings. The descriptive headings contained herein are for --------------------- convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. (f) Notices. All notices and other communications hereunder shall be in -------- writing and shall be deemed given if delivered personally, telecopied (with confirmation) or mailed by registered or certified mall (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): If to Mego to: - ----------------- Mego Financial Corp. 4310 Paradise Road Las Vegas, Nevada 89109 Attn: Edward J. Wegel Facsimile: (702) 369-4398 With a copy to: - ------------------ Jon A. Joseph 3960 Howard Hughes Center Suite 850 Las Vegas, NV 89109 If to Eastern to: - -------------------- 1221 Brickell Avenue Suite 1780 Miami, Florida 33131 Attn: John Sicilian, Esq. Facsimile: (305) 536-2243 With a copy to: - ------------------ 1221 Brickell Avenue Suite 1780 Miami, Florida 33131 Attn: Ronald T. Bevans Jr., Esq. Facsimile: (305) 536-1018 (g) Counterparts. This Agreement and any amendments hereto may be executed ------------- in counterparts, each of which shall be considered one and the same agreement and shall become effective when both counterparts have been signed by each of the parties and delivered to the other party, it being understood that both parties need not sign the same counterpart. (h) Further Assurances. The parties shall execute and deliver all other -------------------- documents and instruments and take all other action that may be reasonably necessary in order to consummate the transactions contemplated by this Agreement. (i) Specific Performance. The parties hereto agree that this Agreement may ---------------------- be enforced by either party through specific performance, injunctive relief and other equitable relief. Both parties further agree to waive any requirement for the securing or posting of any bond in connection with the obtaining of any such equitable relief and that this provision is without prejudice to any other rights that the parties hereto may have for any failure to perform this Agreement. (j) Successors and Assigns. This Agreement shall be binding upon and shall ------------------------ inure to the benefit of and be enforceable by and against the successors and assigns of the parties hereto. (k) Survival of Representations, Warranties and Agreements. All ------------------------------------------------------------ representations, warranties, covenants and agreements made herein shall survive the Closing. (l) Brokers and Finders. Neither Mego nor Eastern has engaged or otherwise --------------------- dealt with any person or entity in any manner which might give rise to a claim against the other party hereto for any commission, fee or payment of any kind to any broker, finder or other agent and each party hereto shall indemnify the other against any such claim or expense associated therewith, including attorneys' fees. (m) Public Announcements. Other than as may be required by law, no party to --------------------- this Agreement will make any public announcements regarding the execution of this Agreement or its terms without the prior written approval of the other party. IN WITNESS WHEREOF, Eastern and Mego have caused this Agreement to be duly executed as of the day and year first above written. EASTERN AIR LINES, INC. By: _________________________________ Name: _______________________________ Its: ________________________________ FAREQUEST, INC. By: _________________________________ Name: _______________________________ Its: ________________________________ MEGO FINANCIAL CORP. By: _________________________________ Name: _______________________________ Its: ________________________________ EX-10.258 6 doc5.txt Exhibit 10.258 SALE AGREEMENT BY THIS AGREEMENT made this 18th day of April, 2002, MEGO FINANCIAL CORP., a New York corporation ("MEGO") having an address of 4310 Paradise Road, Las Vegas, Nevada 89409, SUSAN R. MARDIAN and LORI A. MARDIAN (the "Mardians"), having an address of 4132 S. Rainbow Blvd., PMB 324, Las Vegas, Nevada 89103, ATLANTIC DEVELOPMENT CORPORATION, a Nevada corporation ("AD"), having an address of 4132 S. Rainbow Blvd., PMB 324, Las Vegas, Nevada 89103, state, confirm and agree as follows: 1. Recitals. -------- 1.1 Purchase of One Acre Lots. ----------------------------- 1.1.1 The Mardians are the sole shareholders of AD. 1.1.2 AD owns, as its sole assets, 1,510 duly platted, one acre, approximate, lots known as Units 5, 6 and 7 of Lake Mead Ranchos and 509 duly platted one acre, approximate, lots known as Sunny Lake Ranchos Unit 1, each more particularly described on Exhibit "A" attached hereto (collectively, the "One Acre Lots"). 1.1.3 The One Acre Lots in Unit 6 of Lake Mead Ranchos and the Sunny Lake Ranchos Unit 1 One Acre Lots do not have permanent, insurable, legal access ("Access") as required by the Arizona Department of Real Estate ("ADRE") for registration thereof and the issuance of a Public Report necessary for the sale thereof to the general public pursuant to, and in compliance with local, state and federal law including the Interstate Land Sales Full Disclosure Act (a "Public Report"). For the purposes hereof, the term "Public Report" shall mean a Public Report in form and content satisfactory to MEGO, in MEGO's reasonable discretion. 1.1.4 Lake Mead Ranchos Units 5 and 7 have Access and AD, through Preferred Equities Corporation, a Nevada corporation ("PEC"), is in the process of registering these One Acre Lots and securing Public Reports. 1.1.5 The Mardians are in the process of obtaining Access for Lake Mead Ranchos Unit 6 One Acre Lots and the Sunny Lakes Ranchos Unit 1 One Acre Lots. Upon obtaining Access, MEGO will apply for Public Reports for such One Acre Lots. 1.1.6 MEGO desires to acquire the One Acre Lots by acquisition of all issued and outstanding stock of AD ("AD Stock") on the terms and conditions set forth herein. 2. Purchase of AD Stock. ----------------------- 2.1 On and subject to the terms and conditions set forth herein, MEGO agrees to acquire, through an exchange of stock pursuant to the terms and conditions of this Agreement and Mardians agree to sell, through an exchange of stock pursuant to the terms and conditions of this Agreement all right, title and interest in the One Acre Lots. 1 2.2 The purchase price for the AD Stock shall be paid by delivery to the Shareholders of shares of MEGO Stock ("MEGO Stock") at a value of $6.00 per share as follows : (i) For those One Acre Lots in Lake Mead Ranchos Units 5 and 7 which currently have Access, a total of 169,800 shares of MEGO Stock restricted as set forth below. (ii) For the One Acre Lots in Lake Mead Rancho Unit 6 and Sunny Lake Ranchos Unit 1, a total of 370,616 shares of Mego Stock restricted as set forth below. If, however, shares of MEGO Stock are not traded at $6.00 or more for ten (10) consecutive days during which the MEGO Stock is traded within 24 months after the Stock Closing, MEGO will issue additional MEGO Stock to the Mardians in an amount determined by the market value of MEGO's common stock at the closing of NASDAQ trading on the day prior to the Stock Closing divided into $3,242,496 minus 540,416. 2.3 (a) The MEGO Stock issued pursuant to Section 2.2(i) above shall be subject to the following restrictions: THE SHARES REPRESENTED BY THIS CERTIFICATE ARE RESTRICTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, ( THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE DISPOSED OF UNLESS AND UNTIL REGISTERED UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL TO THE HOLDER OF THESE SHARES IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER, THAT SUCH OFFER, SALE, TRANSFER OR OTHER DISPOSITION IS EXEMPT FROM REGISTRATION OR IS OTHERWISE IN COMPLIANCE WITH THE ACT AND SUCH LAWS. (b) The Mego Stock issued pursuant to Section 2.2(ii) above shall be restricted as shown in Section 2.3(a) above and as follows: THE SHARES REPRESENTED BY THIS CERTIFICATE ARE RESTRICTED PURSUANT TO THE TERMS AND CONDITIONS OF THAT CERTAIN SALE AGREEMENT DATED April 18, 2002. A COPY OF THE AGREEMENT MAY BE OBTAINED FROM THE SECRETARY OF THE ISSUER. The foregoing legend in this Section 2.3(b) shall be removed from time to time when the Mardians have provided Access to one or more One Acre Lots in Lake Mead Ranchos Unit 6 and Sunny Lake Ranchos Unit 1 over a route satisfactory to MEGO. For each One Acre Lot in Ranchos Unit 6 and Sunny Lake Ranchos Unit 1 for which Access is obtained, 411 shares of Mego Stock shall be released from the restriction set forth in this Section 2.3(b) with the balance 2 of the shares to be released from said restriction as such time as all One Acre Lots have Access. Mardians shall obtain such Access not later than 18 months after the Stock Closing. In the event said Access is not obtained for some or all of the One Acre Lots within this period, Mardians shall reconvey all shares restricted as set forth in this Section 2.3(b) to Mego and Mego shall convey all One Acre Lots without Access to the Mardians or their assigns. 2.4 MEGO shall use reasonably diligent efforts to register the shares of MEGO Stock issued pursuant hereto with the Securities Exchange Commission within 120 days after the Stock Closing. Registration will be done under THE ACT in accordance with federal and applicable state law. MEGO shall indemnify and hold the Mardians harmless against any claim or loss suffered or incurred by the Mardians as a result of MEGO's errors or omissions in such registration. The registration shall be completed at MEGO's sole cost and expense. The registration shall be kept current by MEGO until all of the MEGO Stock is sold or otherwise transferred by the Mardians in conformance with this Agreement. 2.5 The consummation of the purchase of the AD Stock as contemplated herein (the "Stock Closing"), shall occur on or before May 1, 2002, provided, however, if the Public Reports have not been issued for the Lake Mead Ranchos Units 5 and 7 One Acre Lots by such date, the Stock Closing may be extended by MEGO from day to day, at MEGO's option, until the Public Reports are issued. 2.6 MEGO shall be deemed to have extended the Stock Closing each day unless MEGO gives the Mardians written notice of termination hereof, in which event the parties shall be under no further obligation to each other. This Agreement shall expire automatically if the Public Reports for Lake Mead Ranchos Units 5 and 7 are not issued to MEGO's reasonable satisfaction on or before July 15, 2002, and the parties shall have no further obligations or liabilities hereunder. 2.7 At the Stock Closing, the certificates represented by the AD Stock shall be endorsed in blank, or accompanied by stock powers duly executed in blank by the Mardians transferring all of the AD Stock owned by the Mardians to MEGO or its assigns. At the Stock Closing, Mardians shall deliver to MEGO originals of the Articles of Incorporation, Bylaws, Minute Books, Stock Records, and all other documents pertaining to AD. 2.8 At the Stock Closing, Mardians shall deliver to MEGO, at Mardians cost, an extended coverage title insurance policy issued by a title company satisfactory to MEGO in the amount of $3,242,496 insuring that AD holds fee title to the One Acre Lots free and clear of all matters except those matters set forth on Exhibit "B" (the "Permitted Exceptions") and permanent, legal access over a route satisfactory to MEGO. 2.9 Mardians shall not sell any shares of the MEGO Stock without first offering such shares to MEGO at the then public market price of the stock and the failure of MEGO to accept such offer at the then public market price of the 3 MEGO shares, in writing within 10 days thereafter. Mardians may gift up to 100,000 shares of the MEGO Stock without first offering same to MEGO for acquisition, subject to all donees accepting the MEGO stock as then restricted. 2.10 MEGO acknowledges that the One Acre Lots are subject to a lien ("Lien") pursuant to which the One Acre Lots may be released for $200,000. At the Stock Closing, MEGO shall pay to Mardians $200,000 and simultaneously therewith Mardians shall cause the One Acre Lots to be released from such lien. 3. Access. 3.1 Mardians shall use their best efforts to obtain Access for those One Acre Lots without required Access, as soon as possible after the Stock Closing. Access shall be obtained at the Mardians sole cost and expense. All information and filings submitted by Mardians in connection therewith shall be true, complete and in compliance with applicable law and regulatory procedures and policies sufficient to obtain a Public Report. 4. INTENTIONALY OMITTED. ---------------------- 5. Representations and Warranties. -------------------------------- AD and the Mardians, jointly and severally, represent and warrant as of the date hereof and as of Stock Closing, as follows: 5.1 This Agreement is valid and binding against the Mardians and AD and neither the execution nor delivery of this Agreement by such parties will constitute a material default under any contract, decree or obligation to which any of them is bound. This Agreement is enforceable severally against the Mardians and AD in accordance with its terms. 5.2 AD is a corporation duly organized and existing, in good standing under the applicable laws of the state of formation. AD has the full corporate power and authority to carry on its business as now conducted and to own and operate the properties and assets now owned or leased by it. AD is duly qualified to transact business in those states where in which the business or ownership of property makes it necessary so to qualify. 5.3 Each of the Mardians has the full right and title to the AD Stock to be sold pursuant hereto and the AD Stock constitutes all the AD Stock which each of the Mardians own. Each of the Mardians holds its AD Stock free and clear of all liens, encumbrances, restrictions and claims of every kind. Each of the Mardians has the legal right, power and authority to enter into this Agreement and to sell, assign, transfer and convey the AD Stock owned by her and to sell, assign, transfer and convey the AD Stock by her and the delivery to MEGO of the AD Stock pursuant hereto will transfer to MEGO valid title thereto, free and clear of all liens, encumbrances, restrictions and claims of every kind. There are no outstanding options, warrants, rights, calls, commitments, conversion rights, rights of exchange, plans or other agreements of any character providing for the purchase and sale of any AD Stock by any of the Shareholders. 5.4 The AD Stock transferred pursuant hereto to MEGO constitutes the only outstanding shares of the stock of AD of any nature whatsoever, voting and non-voting. The AD Stock is fully paid and assessable and validly issued. All AD 4 Stock is certificated and AD has executed and delivered no certificates for shares in excess of the number of shares of AD Stock transferred pursuant hereto. There are no treasury shares. 5.5 The execution, delivery and performance of this Agreement by AD has been duly authorized by the Board of Directors and all other corporate approvals have been obtained. The execution, delivery and performance by the Mardians and AD will not result in the violation or breach of any term or provisions of charter instruments or constitute a default under any indenture, mortgage, deed of trust or other contract and will not cause the creation of a lien or encumbrance on any properties owned by or leased to or by AD. 5.6 AD has no liabilities or obligations of any nature (whether accrued, contingent or otherwise). 5.7 The only assets of AD are the One Acre Lots and such lots are free and clear of all matters except the Lien and Permitted Exceptions. 5.8 In all material respects, financial statements, if any, submitted to MEGO are true, complete and correct and fairly and accurately present the financial condition of AD. 5.9 AD (and any transferee and successor) has timely filed all federal, state, or local tax returns, reports and forms, has followed in the preparation of such returns, methods of accounting accepted by law and paid all taxes owing and there are no deficiencies, fines, penalties or interest owing thereon. The Mardians have paid or will pay by the date of the Stock Closing, any property taxes or assessments on the One Acre Lots. No examinations, audit or inquiry of any tax return, federal, state, local or otherwise is in progress nor has AD or the Mardians received any notice of such inquiry, audit or examination. There are no outstanding agreements or waivers extending the statutory period of limitation applicable to any tax return of AD. 5.10 There are no accounts receivable, unbilled invoices and other debts due AD. 5.11 AD is not a party to any agreements, contracts or understandings oral or written. 5.12 There are no lawsuits, arbitration actions or other proceedings (equitable, legal, administrative or otherwise) pending or threatened and there are no investigations pending or threatened. 5.13 Except as set forth below, AD and Mardians owe no fees or commissions or other compensation or payments to any broker, finder, financial consultant or similar person claiming to have been employed or retained by or on behalf of AD or Mardians in connection with this Agreement or transactions completed hereby. 5.14 The Company has no employees or former employees. 5.15 To the best of Mardians' knowledge, AD has conducted and continues to conduct its business in compliance with all applicable statutes, orders, rules and regulations including, without limitation, air, water, toxic, 5 hazardous or toxic substances, noise or solid gaseous or liquid waste generation handling storage or transportation and any laws, rules and regulations governing the sale of property or marketing thereof. 5.16 AD has not directly or indirectly engaged in or been a party to bribes, kickbacks or gratuities to secure favorable treatment or made any contribution to a political party, candidate of office holder, receiving or disbursing monies, the actual nature of which has been improperly disguised or intentionally misrecorded or improperly omitted. 5.17 AD has no insurance policies. 5.18 AD has delivered to MEGO true, accurate and complete copies of the Articles of Incorporation and Bylaws of AD together with all amendments thereto. 5.19 The Minute books of AD provided to MEGO at Closing are the correct and only such minute books and do and will contain complete and accurate records of all proceedings and actions at all meetings, including written consent in lieu of meetings. The stock records of AD delivered to MEGO at the Stock Closing are the current and only such stock records and accurately reflects all issues and transfers of AD. 5.20 No consent, approval or authorization of, or notification to or registration with any governmental authority is required in connection with the execution, delivery and performance of this Agreement by Mardians or AD. 5.21 Except for the issuance of a Public Report, AD has all required licenses, certifications, approvals, authorizations and permits necessary to conduct its business and has been in full compliance therewith. 5.22 Mardians represent and warrant that they are in receipt of and have carefully read and understand the following offering material ("Offering Material"): (a) MEGO's Annual Report on Form 10-K for the year ended August 31, 2001; (b) MEGO's Quarterly Report on Form 10-Q for the quarter ending November 30, 2001; and (c) Such other information as they have requested in order to evaluate their investment in MEGO. 5.23 Mardians acknowledge that they have had the opportunity to obtain additional information beyond the Offering Material in order to verify the information contained in the Offering Material and to evaluate the risks of an investment in the MEGO Stock. With respect to individual or partnership tax and other economic considerations involved in this investment, Mardians are not relying on MEGO (or any agent or representative of MEGO). Mardians have carefully considered and have to the extent Mardians believe such discussion necessary, discussed with Mardians' legal, tax, accounting and financial advisers the suitability of an investment in the MEGO Stock for Mardians' particular tax and financial information. 6 5.24 Mardians acknowledges that they have had the opportunity to ask questions of and receive answers from qualified representatives of MEGO concerning the terms and conditions of this Agreement and of the MEGO Stock to be issued hereunder, as well as the information contained in the Offering Material, and it has been granted access, prior to subscribing to the MEGO Stock and prior to the purchase thereof, to all books, records and documents of MEGO and it subsidiaries. 5.25 Mardians acknowledge that they are sophisticated investors familiar with the type of risks inherent in the acquisition of securities such as the MEGO Stock and that, by reason of their knowledge and experience in financial and business matters in general, and investments of this type in particular, and the knowledge and experience in financial and business matters of their representatives and agents, it is capable of evaluating the merits and risks of an investment by them in the MEGO Stock. 5.26 Mardians' financial condition is such that they are under no present need, in order to satisfy any existing or contemplated understanding or indebtedness, to dispose of any portion of the MEGO Stock which it is purchasing hereunder. Mardians are able to bear the economic risk of an investment in the MEGO Stock, including, without limiting the generality of the foregoing, the risk of losing part or all of its investment in the MEGO Stock and its probable inability to sell or transfer the MEGO Stock for an indefinite period of time. 5.27 Mardians are not acquiring the MEGO Stock for the purpose of or in connection with any distribution within the meaning of the Securities Act of 1933 (the "Act") or other securities laws in violation of the Act or other securities laws. 5.28 Mardians understand that, because the MEGO Stock has not been registered under the Act or other securities laws, the MEGO Stock therefor must be held indefinitely unless the MEGO Stock is subsequently registered under the Act and other securities laws or until an exemption from such registration thereunder is available. 5.29 Mardians are aware that any sales which may be made in reliance upon Rule 144 promulgated under the Act, may be made only if MEGO is in compliance with the reporting and other requirements under Rule 144, and then only in limited amounts, after the required holding periods, and otherwise in accordance with the terms and conditions of Rule 144. 5.30 Mardians acknowledge that they are each an "accredited investor" within the meaning of Rule 501(a) of Regulation D promulgated under the Act. 5.31 Mardians recognize that investment in the MEGO Stock involves substantial risks. Mardians further recognize that no federal or state agencies have passed upon this offering of the MEGO Stock or made any findings or determinations to the fairness of this investment. 5.32 Mardians are not subscribing for the MEGO Stock as a result of or subsequent to any advertisement, article, notice of other communication published in any newspaper, magazine, or similar media or broadcast over television or radio or presented at any seminar. 5.33 Mardians acknowledge that MEGO has relied on the representations contained herein and that the statutory basis for exemption from the requirements of Section 5 of the Act may not be present if, notwithstanding such representations, Mardians were acquiring the MEGO Stock for resale or distribution upon the occurrence or non-occurrence of some predetermined event. 7 5.34 Other than as stated in this Agreement, neither Mardians nor any of their affiliates (as such term is defined in Rule 12b-2 of the Securities Exchange Act of 1934 (the "Exchange Act")) ("Affiliates") or representatives are party to, or are bound by any contract, agreement, arrangement or understanding (whether written or not) with respect to MEGO or any of its subsidiaries or any securities of MEGO or any of its subsidiaries, including without limitation, any (i) contract, agreement, arrangement or understanding (whether written or not) which requires such party to (x) repurchase, redeem or otherwise acquire any shares of capital stock of, or other equity or voting interest in, MEGO or any of its subsidiaries or (y) vote or dispose of any shares of capital stock of, or other equity or voting interest in MEGO or any of its subsidiaries or (ii) irrevocable proxy, voting agreement or similar agreement, arrangement or understanding (whether written nor not) with respect to any shares of capital stock of MEGO or any of its subsidiaries. 5.35 The execution, delivery and performance of this Agreement by the Mardians, and the taking of all action contemplated hereby and the other ancillary agreements contemplated hereby, will not result in any violation of or conflict with or constitute a default under any term of any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to it (which violation or conflict would materially and adversely affect the property, business, operations or financial condition of Mardians), or result in the creation of any mortgage, lien, charge or encumbrance upon any of the properties or assets of Mardians pursuant to any such term. 5.36 To the best of the Mardians' knowledge, neither Mardians nor AD has placed, stored, discharged or otherwise released, nor to the best of Mardians' knowledge, has any other party placed, stored, discharged or otherwise released, nor are there present, upon or under the One Acre Lots, any asbestos containing materials, asbestos fibers, urea formaldehyde, VXKV biphenyls ("PCBs), petroleum, its derivatives, by-products or other hydrocarbons, explosives, radioactive materials, hazardous wastes, toxic or dangerous materials or substances including without limitation, substances defined as "hazardous substances," "hazardous wastes," "hazardous materials," toxic substances" or "solid waste" in any federal state or local statute, law, ordinance, code, rule, regulation or decree, relating to imposing liability or standards of conduct concerning hazardous, dangerous or toxic materials waste or substances. 5.37 Mardians agree that their representations and warranties contained in this Agreement shall survive the Stock Closing for the respective periods shown in 13.17 of this Agreement. 6. Indemnity. --------- 6.1 Each of the Mardians, and Leonard Mardian jointly and severally, hereby defend, indemnify and hold MEGO, its directors, officers, employees, agents and contractors harmless from any breach of the representations, warranties and covenants herein or any other liability, obligation, loss, claim, demand, costs, 8 expenses and fees (including reasonable attorneys' fees) arising prior to the Stock Closing and all suits, actions, proceedings, demands, judgments, costs and expenses incident thereto, including but not limited to any action or matter involving AD, the AD Stock and/or the One Acre Lots. If a claim is made against MEGO for which it is indemnified, MEGO will (i) notify Mardians; (ii) conduct its own defense; (iii) be reimbursed by the Mardians for all costs and fees (including attorneys' fees), monthly or upon settlement; and (iv) have the right to settle the claim with the consent of Mardians not to be unreasonably withheld or delayed. 7. Entry; Documents. ----------------- 7.1 Prior to the Stock Closing, MEGO, its contractors, agents or representatives shall be entitled to enter the One Acre Lots and conduct such testing, investigations, studies, and analysis as it deems appropriate. MEGO shall indemnify and hold the Mardians harmless for any damage to the One Acre Lots or for any injury suffered by a person lawfully on the One Acre Lots as a result of MEGO's activities. 7.2 Mardians shall deliver to MEGO within five (5) days after execution hereof copies of the Articles of Incorporation, Bylaws, Minute Book of AD and similar materials and all reports, studies, analysis, surveys, environmental audits and other written materials concerning the One Acre Lots and AD in the possession of Mardians, AD, or any affiliate thereof. If Mardians, AD or any affiliates thereof come into possession of any additional written materials thereafter, they shall promptly deliver such materials to MEGO. 8. Representations and Warranties of MEGO. ------------------------------------------ MEGO represents and warrants to the Mardians and AD that: 8.1 MEGO is duly organized and existing, in good standing under the laws of its state formation. MEGO has full corporate power and authority to carry on its business as now conducted. MEGO is duly qualified to do business in Nevada and in all states and jurisdictions in which the business or ownership of MEGO's properties or assets make it necessary to qualify. 8.2 The execution, delivery and performance of this Agreement have been duly authorized by MEGO's Board of Directors. This Agreement is valid and binding upon MEGO and is enforceable against MEGO in accordance with its terms, subject to bankruptcy, reorganization, insolvency, fraudulent conveyance, moratorium, receivership or other similar laws relating to or affecting creditor rights generally. 8.3 Neither the execution nor delivery of this Agreement by MEGO, nor the performance by MEGO of any of the covenants or obligations to be performed by MEGO hereunder, will result in any violation of any order, decree or judgment of any court or other governmental body or statute or law applicable to MEGO or of any terms of the Articles of Organization or Bylaws or constitute a default under any indenture, mortgage, deed of trust or other contract to which MEGO is a party. 8.4 Except as set forth herein, no consent, approval or authorization of, or notification to, or registration with any governmental authority, either federal, state or local is required in connection with the execution, delivery, and performance of this Agreement by MEGO. 9 8.5 Except as set forth below, MEGO has not entered into any obligations to pay any fee or commission to any broker, finder or intermediary for, or on account of the transactions contemplated by this Agreement. 8.6 All fillings by MEGO with Securities Exchange Commission are current and will remain current. 8.7 The representations and warranties of MEGO contained in this Agreement shall survive the Stock Closing for the period of time shown in 13.17 of this Agreement. 8.8 MEGO shall indemnify and hold Mardians harmless from and against any action, damages or injuries incurred by the Mardians and assigns from MEGO's inaccurate statements or omissions in a Public Report or registration of the MEGO Stock. 8.9 For so long as the Mardians own any of the MEGO Stock, MEGO shall remain in compliance with Rule 144 reporting and other requirements. 9. Operating Covenants. -------------------- 9.1 AD and Mardians shall not engage in any activity, including, without limitation, the marketing of the One Acre Lots, except registering such Lots, through PEC, with the appropriate authorities and obtaining a Public Report therefor. 10. Conditions Precedent to Obligations. -------------------------------------- 10.1 MEGO shall not be obligated to consummate the Stock Closing unless: 10.1.1 AD and Mardians are not in default hereunder. 10.1.2 AD and Mardians deliver to MEGO a certificate that all representations and warranties set forth in this Agreement are true and correct. 10.1.3 Each of the Mardians shall deliver to MEGO all AD Stock free and clear of any liens, encumbrances and obligations. 10.1.4 AD and Mardians shall have obtained Property Reports for all One Acre Lots in Units 5 and 7 of Lake Mead Ranchos, which said Property Reports shall be reasonably satisfactory to Mego. 10.1.5 There shall not have occurred any material adverse change in the assets, business, condition or prospects of AD. 10.1.6 Subject to MEGO's $200,000.00 cash payment at the Stock Closing, all One Acre Lots are to be free of all liens and encumbrances other than Permitted Encumbrances. The foregoing conditions are solely for the benefit of MEGO and MEGO shall be entitled to consummate this transaction despite the failure of any condition. If 10 any condition is unfulfilled at the Stock Closing, MEGO shall be entitled, in addition to any other remedy herein, to terminate this Agreement by written notice to the Mardians. Failure by MEGO to terminate shall not be deemed a waiver of any default hereunder. Mardians shall not be obligated to consummate the Stock Closing unless MEGO, on the Stock Closing date, delivers a certificate to the Mardians in conformance with 10.1.2 of this Agreement and delivers the MEGO Stock subject only to the restrictions shown in 2.3(a) and (b) of this Agreement, as applicable. 11. Company Board of Directors. ----------------------------- 11.1 On the Stock Closing, the Board of Directors and officers of AD shall consist of such persons as MEGO shall select and resignations of existing directors and officers will be delivered to MEGO as requested. 12. Risk of Loss. -------------- 12.1 The risk of loss or destruction of all or any part of any of the AD's properties or assets prior to the Stock Closing from any cause (including, without limitation, fire, theft, acts of God or public enemy) shall be upon the AD and the Mardians. Such risk shall be upon MEGO if such loss occurs after the Stock Closing. 13. Miscellaneous. ------------- 13.1 BINDING AGREEMENT. The parties covenant and agree that this Agree-ment, when executed and delivered by the parties, will constitute a legal, valid and binding agreement between the parties and will be enforceable in accordance with its terms. 13.2 ASSIGNMENT. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto, their legal representatives, successors and assigns. In no event shall the Mardians or AD assign their respective rights or obligations hereunder, either directly or indirectly. 13.3 ENTIRE AGREEMENT. This Agreement and its exhibits and schedules constitute the entire contract among the parties hereto with respect to the subject matter thereof, superseding all prior communications and discussions and no party hereto shall be bound by any communi-cation on the subject matter hereof unless such is in writing signed by any necessary party thereto and bears a date subsequent to the date hereof. The exhibits and schedules shall be construed with and deemed as an integral part of this Agreement to the same extent as if the same had been set forth verbatim herein. Information set forth in any exhibit, schedule or provision of this Agreement shall be deemed to be set forth in every other exhibit, schedule or provision of this Agreement and therefore shall be deemed to be disclosed for all purposes of this Agreement. 13.4 MODIFICATION. This Agreement may be waived, changed, amended, discharged or terminated only by an agreement in writing signed by the party against whom enforcement of any waiver, change, amendment, discharge or termination is sought. 13.5 NOTICES. All notices, requests, demands and other communications shall be in writing and may be given by overnight courier, personal delivery or facsimile and deemed to have been duly given three (3) days after postmark of 11 deposit in the United States mail, if mailed, certified or registered mail, postage prepaid: If to AD or the Mardians: 4132 S. Rainbow Blvd. PMB 324 Las Vegas, Nevada 89103 Attn: Susan Mardian If to Mego: 4310 Paradise Road Las Vegas, Nevada 89104 Attn: Jon A. Joseph With a copy to: Quarles & Brady Streich Lang, LLP Renaissance One Two North Central Avenue Phoenix, AZ 85004 Attn: Bruce B. May, Esq. or to such other address as any party shall designate to the other in writing. The parties shall promptly advise each other of changes in addresses for such notices. 13.6 CHOICE OF LAW. This Agreement shall be governed by, construed, interpreted and enforced according to the laws of the State of Nevada. 13.7 SEVERABILITY. If any portion of this Agreement shall be finally determined by any court or governmental agency of competent jurisdiction to violate applicable law or otherwise not to conform to requirements of law and, therefore, to be invalid, the parties will cooperate to remedy or avoid the invalidity, but, in any event, will not upset the general balance of relationships created or intended to be created between them as manifested by this Agreement and the instruments referred to herein. Except insofar as it would be an abuse of the foregoing principle, the remaining provisions hereof shall remain in full force and effect. 13.8 OTHER DOCUMENTS. The parties shall upon reasonable request of the other, execute such documents as may be necessary or appropriate to carry out the intent of this Agreement. 13.9 HEADINGS AND THE USE OF PRONOUNS. The paragraph headings hereof are intended solely for convenience of reference and shall not be construed to explain any of the provisions of this Agreement. All pronouns and any variations thereof and other words, as applicable, shall be deemed to refer to the masculine, feminine, neuter, singular or plural as the identity of the person or matter may require. 12 13.10 TIME IS OF THE ESSENCE. Time is of the essence of this Agreement. 13.11 NO WAIVER AND REMEDIES. No failure or delay on a parties part to exercise any right or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by a party of a right or remedy hereunder preclude any other or further exercise. No remedy or election hereunder shall be deemed exclusive but it shall, where ever possible, be cumulative with all other remedies in law or equity. 13.12 COUNTERPARTS. This Agreement may be executed in two or more counterparts, and by the different parties hereto on separate counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 13.13 FURTHER ASSURANCES. Each of the parties hereto shall use commercially practicable efforts to fulfill all of the conditions set forth in this Agreement over which it has control or influence (including obtaining any consents necessary for the performance of such party's obligations hereunder) and to consummate the transactions contemplated hereby, and shall execute and deliver such further instruments and provide such documents as are necessary to effect this Agreement. 13.14 RULES OF CONSTRUCTION. The normal rules of construction which require the terms of an agreement to be construed most strictly against the drafter of such agreement are hereby waived since each party has been represented by counsel in the drafting and negotiation of this Agreement. Any representation, warranty or agreement of the Mardians shall be joint and several. 13.15 THIRD PARTY BENEFICIARIES. Each party hereto intends this Agreement shall not benefit or create any right or cause of action in or on behalf of any person other than the parties hereto. 13.16 COMMISSIONS. At such time as and only if Stock Closing occurs, MEGO shall be responsible for a finders fee of $40,752 to Industrial Properties Group (Al Kingham) (the "Broker") and Mardians shall be responsible for a finders fee of 4% of the sales price to be delivered in a form to be agreed between Mardians and Broker. At such time as and only if the Mardians provide Ranchos Unit 6/Sunny Lake Ranchos Access, MEGO shall be responsible for a finders fee to Broker of $88,948.00 and Mardians shall be responsible for a finders fee to Broker of $88,948.00. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Notwithstanding anything herein to the contrary, any representation, warranty and indemnity in connection therewith and covenants by Mardian, AD or MEGO shall expire five (5) years from the date of the Stock Closing. 13 13.17 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date written above. ATLANTIC DEVELOPMENT MEGO FINANCIAL CORPORATION, a CORPORATION, a Nevada corporation New York corporation By: By: ---------------------------------- ------------------------------ Name: Susan R. Mardian Name: Gregg A. McMurtrie Its: President Title: Executive Vice President SUSAN R. MARDIAN - ------------------------------------ LORI A. MARDIAN - ------------------------------------- LEONARD K. MARDIAN For the purposes of being bound only pursuant to Section 6.1 of this Agreement. 14 EXHIBIT "A" ----------- PARCEL 1 (541 Lots) - ---------------------- Lots 3688 through 4228, inclusive, of Lake Mead Ranchos Unit 5, according to the plat thereof, recorded June 20, 1961, at Fee No. 104507, in the office of the County Recorder of Mohave County, Arizona. Except therefrom, all coal, oil, gas and mineral deposits as reserved in Instrument recorded in Book 86 of Deeds, Page 49. PARCEL 2 (402 Lots) - ---------------------- Lots 4229 through 4281, inclusive, and lots 4283 through 4631, inclusive, of Lake Mead Ranchos Unit 6, according to the plat thereof, recorded June 20, 1961, at Fee No. 104508, in the office of the County Recorder of Mohave County, Arizona. Except therefrom, all coal, oil, gas and mineral deposits as reserved in Instrument recorded in Book 86 of Deeds, Page 49. PARCEL 3 (567 Lots) - ---------------------- Lots 4633, 4635 through 4649, inclusive, 4654 through 4662, inclusive, 4664 through 4679, inclusive, 4681, 4682, 4684 through 4689, inclusive, 4692 through 4716, inclusive, 4718 through 4728, inclusive, 4730 through 4785, inclusive, 4787, 4789 through 4792, inclusive, 4794, 4796 through 4810, inclusive, 4812 through 4824, inclusive, 4826 through 4846, inclusive, 4849 through 4865, inclusive, 4867 through 4871, inclusive, 4874 through 4884, inclusive, and 4886 through 5223, inclusive, of Lake Mead Ranchos Unit 7, according to the plat thereof, recorded June 20, 1961, at Fee No. 104509, in the office of the County Recorder of Mohave County, Arizona. Except therefrom, all coal, oil, gas and mineral deposits as reserved in Instrument recorded in Book 86 of Deeds, Page 49. PARCEL 4 (511 Lots) - ---------------------- Lots 28 through 31, inclusive, 34 through 48, inclusive, 50 through 74, inclusive, 80 through 100, inclusive, 105 through 126, inclusive, 132 through 154, inclusive, 159 through 391, inclusive, 393 through 413, inclusive, 426, and 437 through 582, inclusive, of Sunny Lakes Ranchos Unit 1, according to the plat thereof, recorded December 19, 1961, at Fee No. 108884, in the office of the County Recorder of Mohave County, Arizona. 15 Except therefrom, all coal, oil, gas and mineral deposits as reserved in Instrument recorded in Book 86 of Deeds, Page 49. ALL AS MORE FULLY SET FORTH IN WARRANTY DEED FROM ARIZONA ACREAGE, LLC, A NEVADA LIMITED LIABILITY COMPANY TO ATLANTIC DEVELOPMENT CORP., A NEVADA CORPORATION, RECORDED MARCH 5, 2002 AS DOCUMENT NUMBER 2002014368 IN BOOK 4012, PAGE 174, IN THE OFFICE OF THE COUNTY RECORDER OF MOHAVE COUNTY, ARIZONA. 16 EXHIBIT "B" ----------- PERMITTED EXCEPTIONS 17 - ------ Exhibit B Order No. 291-00-169547 -------- Part One: 1. Taxes or assessments which are not shown as existing liens by the records of any taxing authority that levies taxes or assessments on real property or by the public records. Proceedings by a public agency which may result in taxes or assessments, or notices of such proceedings, whether or not shown by the records of such agency or by the public records. 2. Any facts, rights, interests or claims which are not shown by the public records but which could be ascertained by an inspection of the land or by making inquiry of persons in possession thereof. * 3. Easements, liens or encumbrances, or claims thereof, which are not shown by the public records. 4. Discrepancies, conflicts in boundary lines, shortage in area, encroachments or any other facts which a correct survey would disclose, and which are not shown by the public records. 5. (a) Unpatented mining claims; (b) reservations or exceptions in patents or in Acts authorizing the issuance thereof; (c) water rights, claims or title to water. 6. Any lien, or right to a lien, for services, labor or material, theretofore or hereinafter furnished, imposed by law and not shown by the public records. * On the Stock Closing Date, that certain Grazing Lease which affects the One Acre Lots shall be terminated so as not to affect the One Acre Lots. 18 Exhibit B Order No. 291-000-169547 -------- Part Two: (All recording dates refer to records in the office of the County Recorder in the County in which the land is situated.) EXCEPTIONS: 1. Taxes for the full year of 2002. (The first half is due October 1, 2002 and is delinquent November 1, 2002. The second half is due March 1, 2003 and is delinquent May 1, 2003.) 2. All matters as set forth in the Covenants, Conditions, and Restrictions in instrument recorded in Docket 138, Page 472, 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 42 USC 3604(c). (Parcel No. 2) 3. Easements, restrictions, reservations, conditions and set-back lines as set forth on the plat, recorded at Fee Nos 61-104507 and 61-104509, but deleting any covenant, condition or restriction indicating a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status or natural origin to the extent such covenants, conditions or restrictions violate 42 USC 3604 (c). 4. The right to enter upon said land and prospect for, mine and remove all coal, oil, gas and other mineral deposits, as reserved in instrument recorded in Book 86 of Deeds, Page 49. 19 EX-10.259 7 doc6.txt Exhibit 10.259 PURCHASE AGREEMENT ------------------ THIS PURCHASE AGREEMENT (this "Agreement") is entered into as of August 30 2002 by and between OB Sports, LLC, a Delaware limited liability company ("Seller"), and Mego Financial Corp. d/b/a Leisure Industries Corporation, a New York corporation ("Purchaser"). R E C I T A L S - - - - - - - - A. Seller owns all of the outstanding limited liability company membership interest (the "Membership Interests") of Cimarron Golf Club, LLC, a Delaware limited liability company (the "Company"). B. The Company (i) owns approximately 105 acres of real property as more fully described on Exhibit A (the "Owned Property") and (ii) leases or has easement access to an additional approximately 133 acres pursuant to those certain ground leases and easement agreement, each of which is more fully described on Exhibit B (the "Leased Property" and together with the Owned Property, the "Property"), on which an 18-hole championship golf course (the "Championship Golf Course") and an 18-hole executive golf course at Cimarron Golf Resort (the "Executive Golf Course" and together with the Championship Golf Course, the "Golf Courses") and the improvements thereon (including, but no limited to, a clubhouse complex, turf care / maintenance building, golf cart storage facility, practice greens, driving range, parking areas, rest rooms, snack bar, drinking fountains, water elements, cart paths and related landscaping) are situated. C. The Company is also engaged in the business of operating and managing the Golf Courses and related businesses (the "Business"). D. Purchaser desires to purchase all the outstanding Membership Interests owned by Seller in the Company and Seller desires to sell such Membership Interests to Purchaser, on the terms and subject to the conditions herein contained. A G R E E M E N T S - - - - - - - - - - Therefore, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: ARTICLE I Purchase and Sale of Membership Interests; Closing -------------------------------------------------- 1.1 Agreement to Purchase and Sell Membership Interests. On the terms and subject to the conditions contained in this Agreement, Purchaser hereby agrees to purchase from Seller, and Seller hereby agrees to sell to Purchaser, all of the outstanding Membership Interests, free and clear of all liens and encumbrances of every kind and nature whatsoever, whether arising by agreement, operation of law or otherwise (collectively, "Claims"). 1.2 Consideration. As consideration for the Membership Interests, Purchaser agrees to: (i) assume all of the Company's outstanding liabilities disclosed in the June 30, 2002 Pro Forma Balance Sheet included as part of the Disclosure Schedule, which includes the Mortgage Debt, Capital Lease obligations, Operating Leases and Land Leases set forth in the Debt / Commitment Schedule as of July 31, 2002 included as part of the Disclosure Schedule (provided, however, the Mortgage Debt and Capital Lease obligations shall not exceed $10,000,000) and all current liabilities incurred by the Company in the ordinary course of business since June 30, 2002; and (ii) issue Seller a promissory note in the principal amount of Nine Hundred Twenty Thousand Dollars ($920,000) (the "Note"), which amount shall bear interest at the rate of 5.0% per annum (which rate shall increase in the event of a default under the Note as provided therein) and shall be payable in thirty-six (36) monthly payments of principal and interest on the last day of each month commencing on January 31, 2003 and continuing through December 31, 2005. A copy of the Note is attached hereto as Exhibit C. 1.3 Closing. The transaction contemplated by this Agreement shall be consummated (the "Closing") at such time and place to be agreed to by the parties, provided that the conditions of Closing set forth in Sections 4.1 and 4.2 hereof are satisfied or waived (subject to Section 6.1(b)). The date on which the Closing shall occur in accordance with the preceding sentence is referred to in this Agreement as the "Closing Date". 1.4 Taxes and Refunds. Purchaser shall be responsible for all taxes and assessments, including supplemental taxes and the $5,000 property tax consultant fee, for the Company for the fiscal year commencing June 30, 2002, provided that Purchaser shall be entitled to any tax refunds due the Company for any prior fiscal year. ARTICLE II Representations and Warranties ------------------------------ 2.1 Representations and Warranties of Purchaser. Purchaser represents and warrants to Seller as follows: (a) Organization. Purchaser is a corporation duly organized, validly existing and in good standing, under the laws of the State of Delaware. Purchaser is qualified to transact business and is in good standing in each jurisdiction in which the nature of its business or location of its properties requires such qualification and in which the failure so to qualify could reasonably be expected to have a material adverse effect on the Company. (b) Authority. Purchaser has full corporate power and authority to enter into and perform this Agreement. The execution and delivery by Purchaser of this Agreement and the performance by Purchaser of its obligations hereunder have been duly authorized and approved by all requisite corporate action. This Agreement has been duly executed and delivered by a duly authorized officer of Purchaser. 2 (c) Consent. No consent, authorization, order or approval of, or filing or registration with, any governmental commission, board or other regulatory body of the United States or any state thereof is required for or in connection with the consummation by Purchaser of the transaction contemplated hereby. (d) Noncontravention. Neither the execution and delivery of this Agreement by Purchaser, nor the consummation by Purchaser of the transaction contemplated hereby, will conflict with or result in a breach of any of the terms, conditions or provisions of its Certificate of Incorporation or by-laws, or of any statute or administrative regulation, or of any order, writ, injunction, judgment or decree of any court or governmental authority or of any arbitration award. (e) Litigation. There is no action, suit, proceeding, investigation or administrative proceeding or arbitration by any governmental authority pending or threatened that could reasonably be expected to have a material adverse effect on the consummation of the transactions contemplated hereby. (f) Broker's Commission. Neither Purchaser, nor any of its Affiliates (as defined below) has dealt with any person or entity who is or may be entitled to a broker's commission, finder's fee, investment banker's fee or similar payment for arranging the transaction contemplated hereby or introducing the parties to each other. As used herein, an "Affiliate" is any person or entity which controls a party to this Agreement or the Company, which that party or the Company controls, or which is under common control with that party or the Company. 2.2 Representations and Warranties of Seller. Seller represents and warrants to Purchaser that, except as set forth in the schedules delivered by Seller to Purchaser concurrently herewith and identified collectively as the "Disclosure Schedule": (a) Organization. The Company is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware and has full power and lawful authority to own, lease and operate its assets, properties and business and to carry on its business as now conducted. The Company is qualified to transact business and is in good standing in each jurisdiction in which the nature of its business or location of its properties requires such qualification and in which the failure so to qualify could reasonably be expected to have a material adverse effect on the Company. (b) Authority. Seller has full corporate power and authority to enter into and perform this Agreement. The execution and delivery by Seller of this Agreement and the performance by Seller of its obligations hereunder have been duly authorized and approved by all requisite corporate action. This Agreement has been duly executed and delivered by a duly authorized officer of Seller. (c) Consent. No consent, authorization, order or approval of, or filing or registration with, any governmental commission, board or other regulatory body of the United States or any state or political subdivision 3 thereof is required for or in connection with the consummation by Seller of the transactions contemplated hereby. (d) Noncontravention. Neither the execution and delivery of this Agreement by Seller, nor the consummation by Seller of the transaction contemplated hereby, will conflict with or result in a breach of any of the terms, conditions or provisions of Seller's or the Company's Articles of Organization or Limited Liability Company Agreement, or of any statute or administrative regulation, or of any order, writ, injunction, judgment or decree of any court or governmental authority or of any arbitration award to which the Company or Seller is a party or by which the Company or Seller is bound. (e) Litigation. There is no action, suit, proceeding, investigation or administrative proceeding or arbitration by any governmental authority pending or threatened against the Company or Seller that could reasonably be expected to have a material adverse effect on the consummation of the transactions contemplated hereby or affecting the Company's Property, operations, business, products, sales practices or financial condition. (f) Company Records. True and complete copies of the Articles of Organization and any amendments thereto, the Limited Liability Company Agreement, as amended and currently in force, all membership records, and all minute books and records of the Company, have been furnished for inspection to Purchaser. Said records accurately reflect all membership interest transactions and the current ownership of the Company. The minute books and records of the Company contain true and complete copies of all resolutions adopted by the members or the managers of the Company and any other action formally taken by them respectively as such. (g) Equity Ownership. Seller owns 100% of the Membership Interests of the Company free and clear of any Claims. There are no interests of the Company of any other class authorized, issued or outstanding. There are no outstanding subscriptions, options, warrants, rights (including preemptive rights), calls, convertible securities or other agreements or commitments of any character obligating the Company to issue any interests or securities of any kind or Seller to sell or transfer its Membership Interests in the Company. (h) Financials. Complete and accurate copies of the original construction budget and the unaudited balance sheets and profit and loss statements, together with any supplementary information thereto, of the Company for the fiscal years 2000 and 2001, the year-to-date ended March 31, 2002 and the months ended April 30, 2002, May 30, 2002 and June 30, 2002 (collectively, the "Financial Statements") have been delivered to Purchaser. The Financial Statements accurately and completely reflect the financial position of the Company as of the dates thereof and the results of operations of the Company for the periods covered by said statements, in accordance with generally accepted accounting principles ("GAAP") consistently applied. 4 (i) Title to Assets. With the exception of the lien of Textron Financial Corporation ("Textron") against all of the Company's assets (including, but not limited to, the Owned Property) reflected on the Disclosure Schedule, and the capital and operating leases between Textron and the Company and American Equipment Leasing and the Company listed on the Disclosure Schedule, the Company has good and marketable title to its assets, free and clear of any Claims. No unreleased mortgage, trust deed, chattel mortgage, security agreement, financing statement or other instrument encumbering any of the Company's assets has been recorded, filed, executed or delivered. (j) Insurance. A true and correct list and description (including coverages, deductibles and expiration dates) of all insurance policies which are owned by the Company or which name the Company as an insured (or loss payee) have been delivered to Purchaser. All such insurance policies are in full force and effect and the Company has not received notice of cancellation of any such insurance policies. (k) Taxes. The Company has filed on a timely basis (including authorized extensions) and in correct form all tax returns required to be filed by the Company and the Company has not received any notice from any taxing authority questioning the validity or accuracy of such tax returns. All applicable tax laws and agreements have been fully complied with, and all amounts required to be paid by the Company, to taxing authorities or others, on or before the date hereof have been paid. (l) Changes in Business. Since June 30, 2002, as disclosed in the Financial Statements delivered to Purchaser, the Company has not suffered or been threatened with any material adverse change in the usual and customary business, operations, assets, liabilities, financial condition or prospects of the Company. (m) Contracts. Copies of all material contracts, leases, and agreements to which the Company is a party and which relates to the conduct of the Company's business has been delivered to the Purchaser (the "Contracts"). All contracts or instruments to which the Company is a party are in full force and binding upon the parties thereto. No material default by the Company has occurred thereunder and, to the best of the Company's and Seller's knowledge, no material default by the other contracting parties has occurred or is occurring thereunder. The Company has made all payments it is required to make under the Contracts in a timely manner, including, but not limited to, all payments due under the leases, easements and other agreements pertaining to the Leased Property. (n) Licenses and Permits. A copy of all material licenses, permits, registrations and governmental approvals, agreements and consents applied for, pending by, issued or given to the Company, and every agreement with governmental authorities (Federal, state, local or foreign) entered into by the Company, which is in effect or has been applied for or is pending (excluding Environmental Permits) (as herein defined) (the "Permits") are contained in the Disclosure Schedule. Such Permits constitute all material licenses, permits, registrations, approvals and agreements and consents which are required in order for the Company to conduct its business as 5 presently conducted, including, but not limited to, all necessary special use permits, special exceptions or other special permits, to the extent needed. (o) Compliance with Laws. Both the Company and its assets and business are in compliance with all federal, state and local statutes, regulations, ordinances, rules, regulations and policies, all court orders and decrees and arbitration awards, and the common law, which pertain to environmental matters or contamination of any type whatsoever. (p) Property. All the real property the Company owns is set forth on Exhibit A attached hereto. The Company holds fee simple title to the Owned Property, subject only to real estate taxes not delinquent or payable and to covenants, conditions, restrictions and easements of record, none of which makes title to the Owned Property unmarketable and none of which are violated by the Company or will interfere with the Company's use thereof. All easements necessary or appropriate for the use or operation of the Property have been obtained. The improvements on the Property are in reasonably good operating condition and repair (ordinary wear and tear excepted). Other than normal capital expenditures in the ordinary course of business, no material expenditures are required to be made for the repair or maintenance of any improvements on the Property. To the best of Seller's knowledge, the buildings and other facilities located on the Property are free of any latent structural or engineering defects known to the Company. The Company or Seller has received no notice of any condemnation or eminent domain proceeding pending or threatened against the Property or any part thereof. Neither the Company nor Seller has any knowledge of any change or proposed change in the route, grade or width of, or otherwise affecting, any street or road adjacent to or serving the Property. To Seller's knowledge, no fact or condition exists which would result in the termination or material impairment of access to the Property from adjoining public or private streets or ways which could result in discontinuation of presently available or otherwise necessary sewer, water, electric, gas, telephone or other utilities or services. The easement agreement and ground leases described on Exhibit B (i) are in full force and effect with no amendments thereto, and (ii) will not be adversely affected by the transaction contemplated by this Agreement. (q) Land Use. The current use and occupancy of the Property for golfing and other related purposes (including, without limitation, sales of merchandise and food and beverages) are permitted as a matter of right as a principal use under all laws and regulations applicable thereto and will not be adversely affected by the transaction contemplated by this Agreement. The Zoning classification of the Property is sufficient for its current and projected use and such classification permits the use of the Property for a public and/or private golf course and related facilities. 6 (r) Personal Property. The furniture, fixtures, vehicles, machinery, shelving, racks, equipment, tools, dies, molds, jigs, fixtures and other tangible personal property owned or leased by the Company and used in its operations (collectively, the "Equipment") constitutes all tangible personal property necessary in order for the Company to conduct its business as it has been conducted in the past. All Equipment is in reasonably good operating condition and repair (ordinary wear and tear excepted). (s) Intellectual Property. All intellectual property used in the Company's business (such as trademarks, patents, copyrights, service marks, slogans, including the goodwill associated with each) is in good standing and neither the Company nor Seller has any knowledge of any claim and has no reason to believe that any third party is infringing on the rights of the Company or that the Company's use of any intellectual property infringes any right of any third party. (t) Environmental Matters. The Company and its assets and business (including, without limitation, the Property) are in material compliance with all federal, state, and local statutes, governmental regulations, ordinances, rules and policies, court orders, decrees, and arbitration awards, and the common law which governs environmental matters or contaminations (collectively, the "Environmental Laws"), including, without limitation, those related to manufacture, processing, use, distribution, treatment, storage, disposal, generation, transportation, or cleanup of pollutants, contaminants, pesticides, radioactive substances, solid wastes or hazardous or extremely hazardous, special, dangerous, or toxic wastes, substances, chemicals, or materials, including, without limitation, hazardous substances as defined in 101(14) of CERCLA, 24 U.S.C. 9601(14), within the meaning of any applicable Environmental Law (collectively, the "Hazardous Materials"). To the best of Seller's knowledge, the Company and its assets and business (including, without limitation, the Property) are in material compliance with all certifications, licenses, permits, registrations, governmental approvals, agreements, and consents required under or issued pursuant to any Environmental Law (collectively, the "Environmental Permits"). A copy of any notice, citation, inquiry or complaint which the Company has received in the past two years of any alleged violation of or liability or potential liability under any Environmental Law or Environmental Permit has been delivered to Purchaser, and all violations alleged in said notices have been corrected. The Company possesses and is in compliance with all Environmental Permits required for the operation of the Business. Copies of all Environmental Permits issued to the Company have been delivered to Purchaser. The Company has taken all appropriate measures to keep such Environmental Permits in effect where applicable and taken all remedial actions required, suggested or recommended by the Phase One Environmental Assessment (as defined in Section 5.11). All underground storage tanks and above-ground storage tanks which have been heretofore removed from all Property owned, operated, leased, managed, controlled or used by the Company have been removed in accordance with all applicable Environmental Laws. To the best of Seller's knowledge, there has been no storage, treatment, generation, or transportation of any Hazardous Materials nor any spill, discharge, leak, emission, escape, injections, dumping, disposal or other release or threatened release of any Hazardous Materials into the environment, whether or not notification or reporting to a governmental agency was required ("Release") by the Company in violation of, or which could give rise to any material obligation or the incurrence of, any material response costs or other damages under Environmental Laws or any other causes of action arising from such Release. 7 (u) Employee and Labor Matters. The Company has delivered a list of all employees, employed by the Company, including their name, social security number, date of hire, date of birth, and annual compensation, wage, or hourly rate of each employee of the Company. The Company does not have any contract with any of its employees which cannot be terminated without severance on 30 days notice or less. To Seller's knowledge, there is no reason to believe that all of the Company's employees will not be available for employment by Purchaser, after the Closing Date, on substantially the same terms. The Company does not have any employment, collective bargaining, or union agreements in connection with the conduct of the Business. The Company has not, with respect to its employees, engaged in any unfair labor practice, nor has it discriminated on the basis of race, religion, age or sex, or other protected category in its employment conditions or practices with respect to the employees and no suit or proceeding is pending against the Company for such actions and no action or claim is being made or threatened by any employee of the Company. (v) Broker's Commission. Neither Seller, nor any of their Affiliates, nor the Company, have dealt with any person, firm or corporation who is or may be entitled to a broker's commission, finder's fee, investment banker's fee or similar payment for arranging the transaction contemplated hereby or, introducing the parties to each other. ARTICLE III Conduct Prior to the Closing ---------------------------- 3.1 General. Between the date hereof and the Closing Date: (a) Seller shall and shall cause the Company to give to Purchaser's officers, employees, agents, attorneys, consultants, accountants and lenders reasonable access during normal business hours to all of the properties, books, contracts, documents, records and personnel of the Company and shall furnish to Purchaser and such persons as Purchaser shall designate to Seller such information as Purchaser or such persons may at any time and from time to time reasonably request. (b) Seller shall use their reasonable best efforts and make every reasonable good faith attempt (and Purchaser shall cooperate with Seller) to cause the Company to obtain all consents necessary to the consummation of the transaction contemplated hereby. (c) Seller shall cause the Company to carry on its business in the usual and ordinary course, consistent with past practices, and Seller and the Company shall use their reasonable best efforts to preserve the Company's business and the goodwill of its customers, suppliers and others having business relations with the Company and to retain the business organization of the Company intact, including keeping available the services of its present employees, representatives and agents, and to maintain all of its properties in good operating condition and repair, ordinary wear and tear excepted. Seller shall not permit or cause the Company to dispose of any of its assets outside the ordinary course of business. 8 (d) Without the prior written consent of Purchaser, and without limiting the generality of any other provision of this Agreement, Seller shall cause the Company not to take any action that would cause a material increase in the Company's expenditures or indebtedness as set forth in the Disclosure Schedule. 3.2 Claims and Litigation. Seller shall promptly notify Purchaser of any (i) lawsuits, claims, proceedings or investigations which after the date hereof it acquires knowledge of that are threatened in writing or commenced against Seller or the Company relating to the Business, or (ii) developments or updates in any pending lawsuits, claims, proceedings or investigations which are currently in existence against Seller or the Company relating to the Business. 3.3 Employment Matters. Seller shall not permit the Company to enter into any employment contract or agreement, not increase the hourly rates of pay of employees or increase the fixed compensation payable to any officer, director or employee of the Company, not pay any bonus or commission to any officer, director or employee of the Company and not establish or amend any "employee welfare benefit plan," "employee pension benefit plan" or "fringe benefit plan" or any other plan or arrangement of a similar nature. 3.4 Notification of Material Adverse Events. Seller shall promptly notify Purchaser in writing of any event following the date hereof of which Seller is or becomes aware that will or is likely to have a material adverse effect on the business, finan-cial condition, prospects of the Company or the Business. 3.5 Confidentiality. Each of the parties hereto shall preserve and maintain, and shall cause each of its affiliates to preserve and maintain, proprietary information and trade secrets of the other party, and shall not disclose to any third person or use any such proprietary information or trade secret for personal advantage, except that any party hereto shall be free to use or disclose any proprietary information and trade secrets that (i) were already in its possession at the time of disclosure to it; (ii) are a matter of public knowledge; (iii) hereafter become a matter of public knowledge other than through the receiving party; (iv) are lawfully obtained by the receiving party from a third party that is not, to the disclosing party's knowledge, after due inquiry, subject to any restrictions of confidentiality; or (v) are required to be disclosed by the receiving party by law or in response to any inquiries by any governmental authority. In the event that the Closing does not occur, upon the request of the disclosing party, each receiving party agrees to return or destroy all written documentation provided to it. 3.6 No Solicitation of Transactions. From the date hereof until the transactions contemplated hereby are consummated or this Agreement is terminated, Seller agrees that neither it nor any holder of any equity interest in the Company shall, directly or indirectly, solicit, initiate, knowingly encourage or enter into any agreement with respect to the sale or other transfer of ownership interests in the Company or the sale of any of the assets of the Company. Seller shall notify Purchaser of any contact or discussions it has with any other party regarding the sale of the Company. 9 3.7 Operation of the Business. Attached to the Disclosure Schedule is a summary as of July 31, 2002 of existing and projected published green fees, membership fees, tournament fees, driving range fees, club rentals, and other rates for the Golf Courses. From the date of execution of this Agreement until the date of Closing, Seller shall not permit the Company to reduce or cause to be reduced any published fees, rates or charges set forth in the Disclosure Schedule, or any other changes for which Seller or the Company has operational control other than in the ordinary course of business. 3.8 Casualty. In the event any of the improvements upon the Property are damaged or destroyed by fire or other casualty prior to the date of Closing and the cost to repair destroyed by fire or other casualty prior to the date of Closing and the cost to repair any such damage exceeds $100,000 and Seller has elected by written notice delivered to Purchaser not later than ten (10) days after the damage or destruction not to repair same at least ten (10) days prior to the Closing Date to substantially the same condition as prior to said casualty, Purchaser shall have the right to elect either to terminate this Agreement or to proceed to consummate the transaction contemplated by this Agreement. Such election shall be made by notice to Seller not later than ten (10) days following the date on which Seller has notified Purchaser of such damage or destruction and when Seller notifies Purchaser if the Property will be repaired. In the event Purchaser elects to terminate this Agreement, the parties shall have no further rights and liabilities with respect to each other. Failure of Purchaser to so terminate this Agreement shall conclusively constitute Purchaser's election to proceed with the transaction contemplated by this Agreement. Unless Purchaser has terminated this Agreement as herein provided, upon Closing, Seller shall assign to Purchaser all rights to insurance proceeds related to such damage or destruction, which have not theretofore been expended in cash for repairs to the Property by Seller or the Company. In the event of damage or destruction whereby the cost to repair the same is less than $100,000 and Seller has not repaired same at least ten (10) days prior to the Closing Date to substantially the same condition as prior to said casualty, the transaction contemplated by this Agreement shall be consummated in accordance with the terms hereof, without a reduction in the consideration except for a credit to Purchaser in the amount of the applicable deductible and, at Closing, Seller shall assign to Purchaser all rights to insurance proceeds related to such damage or destruction, which have not theretofore been expended in cash for repairs to the Property by Seller or the Company. 3.9 Condemnation. In the event, prior to the Closing Date, a "Material Portion of the Property" (i.e. greater than ten percent (10%) of the total square footage of the Property or any portion of the improvements) is taken by eminent domain or is under notice of an eminent domain proceeding or access to the Property is materially reduced or restricted, Purchaser shall have the right to elect either to terminate this Agreement or to proceed to consummate the purchase and sale hereunder, without a reduction in the Purchase Price provided Seller shall assign to Purchaser all rights to the award. Such election shall be made by written notice to Seller not later than ten (10) days following the date on which Seller has notified Purchaser of such eminent domain. In the event Purchaser elects to terminate this Agreement, the parties shall have no further rights and liabilities with respect to each other. Failure of Purchaser to so terminate this Agreement shall conclusively constitute its election to proceed with the purchase and sale hereunder. Unless Purchaser has terminated this Agreement as herein provided, upon Closing, Seller shall assign to Purchaser all rights to the award. 10 In the event, prior to the Closing Date, less than a Material Portion of the Property is taken by eminent domain or is under notice of an eminent domain proceeding, the transaction contemplated hereunder shall be consummated in accordance with the terms hereof, without a reduction in the consideration, and, at Closing, Seller shall assign to Purchaser all rights to the award. ARTICLE IV Seller's Conditions to Closing ------------------------------ The obligation of Seller to close the transaction contemplated hereby is subject to the fulfillment of all of the following conditions on or prior to the Closing Date, upon the non-fulfillment of any of which, this Agreement may, at Seller' option, be terminated pursuant to and with the effect set forth in Article VIII: 4.1 Accuracy of Representations and Warranties. Each and every representation and warranty made by Purchaser shall have been true and correct when made and shall be true and correct in all material respects as if originally made on and as of the Closing Date. 4.2 Performance of Obligations. All obligations of Purchaser to be performed hereunder through, and including on, the Closing Date (including, without limitation, all obligations which Purchaser would be required to perform at the Closing if the transaction contemplated hereby was consummated) shall have been performed. 4.3 Litigation. No suit, proceeding or investigation shall have been commenced or threatened by any governmental authority or private person on any grounds to restrain, enjoin or hinder, or to seek material damages on account of, the consummation of the transaction contemplated hereby. 4.4 Company Approval. Purchaser shall have taken all necessary action to authorize the execution, delivery and performance of this Agreement and the transactions contemplated hereby. 4.5 Textron Approval. Seller shall have received approval from Textron to sell the Membership Interests of the Company to Purchaser and Seller shall have entered into such agreements with Textron regarding its other obligations as approved by Seller. 11 ARTICLE V Purchaser's Conditions to Closing --------------------------------- The obligation of Purchaser to close the transaction contemplated hereby is subject to the fulfillment of all of the following conditions on or prior to the Closing Date, upon the nonfulfillment of any of which, this Agreement may, at Purchaser's option, be terminated pursuant to and with the effect set forth in Article VIII: 5.1 Accuracy of Representations and Warranties. Each and every representation and warranty made by Seller shall have been true and correct when made and shall be true and correct in all material respects as if originally made on and as of the Closing Date. 5.2 Performance of Obligations. All obligations of Seller to be performed hereunder through, and including on, the Closing Date (including, without limitation, all obligations which Seller would be required to perform at the Closing if transaction contemplated hereby was consummated) shall have been performed. 5.3 Consents and Permits. All necessary consents shall have been obtained or, to the extent the Permits held by the Company would terminate upon a change of control of the Company, Purchaser shall have either obtained licenses and permits on substantially the same terms as such Permits, or shall have obtained binding commitments from the applicable governmental authorities to issue such licenses and permits to the Company following the Closing. 5.4 Litigation. No suit, proceeding or investigation shall have been commenced or threatened by any governmental authority or private person on any grounds to restrain, enjoin or hinder, or to seek material damages on account of, the consummation of the transaction contemplated hereby. 5.5 Company Approval. Seller shall have taken all necessary action to authorize the execution, delivery and performance of this Agreement and the transactions contemplated hereby. 5.6 Due Diligence. Purchaser shall have completed an inspection of the assets, properties, liabilities and records of the Business satisfactory to it in all respects including, but not limited to, a physical inspection of the Property. 5.7 Material Adverse Changes. There shall have been no material adverse changes in the results of operations, conditions (financial or otherwise), properties, assets, business or prospects of the Business or the Company, including, but not limited to, the golf courses, driving range and putting greens. 5.8 Raintree Transaction. Purchaser shall have acquired all of the Raintree North America Resorts, Inc.'s ("Raintree") right, title and interest in and to that certain Project Development, Management and Sales Agreement dated May 3, 2000 (the "Raintree Project Development Agreement") by and between Raintree and Royale Mirage Partners, L.P. ("RMP"), which proposed transaction shall require the approval of Textron and such other consents and approvals as may be necessary or required. Further, the Raintree Project Development Agreement shall have been amended to the satisfaction of Purchaser. 12 5.9 Creditor Approval. The Company shall have obtained approval from certain creditors of the Company, including, but not limited to, Textron and American Equipment Leasing. 5.10 Textron Financing Terms. Purchaser and Textron shall have reached an agreement on the modification of certain terms and conditions in Textron's credit agreement with the Company and Textron's credit agreement with respect to Textron's interest in the Raintree Project Development Agreement Interest to the mutual satisfaction of Purchaser and Textron. Further Seller shall have executed all documentation Textron deems appropriate to restructure Textron's outstanding loans with Seller. 5.11 Real Property; Title Policy. Seller shall have delivered to Purchaser copies of all documentation relating to the Property, including, but not limited to: (i) a copy of an environmental report regarding the Property, including without, limitation, a Phase One Environmental Assessment dated November, 2000 prepared by Mainiero, Smith & Associates, Inc. (the "Phase One Environmental Assessment"); (ii) a copy of the latest tax bill for the Property; and (iii) a copy of the most current title policy for the Property together with a copy of all documents referenced therein, including the survey against which insurance was procured. Further, Purchaser shall have procured a title policy on the Property from First American Title Company on terms and conditions acceptable to Purchaser. 5.12 Resignations. Seller shall have resigned as manager of the Company and the current officers of the Company shall have resigned from such positions. 5.13 Elimination / Transfer of Unassumed Liabilities. Seller shall have eliminated and/or transferred all liabilities that Purchaser is not assuming after the Closing, including, but not limited to: (i) the intercompany payable owed by the Company to Seller; (ii) the intercompany revolving credit debt balance owed by the Company to Seller; (iii) the long-term junior subordinated debt balance owed by the Company to Seller, including all related accrued interest; (iv) all writeoff deferred financing costs and related accumulated amortization; and (v) any income tax attributes related to the elimination / transfer of any of the foregoing. Seller shall provide written evidence of the elimination or transfer of such liabilities on or before Closing. 5.14 Golf Course Development Agreement. Seller shall executed an Assignment and Assumption Agreement assigning all of Seller's right, title and interest in and to that certain Agreement dated March 18, 1999 by and among RMP, L.P., Rick Borsuk, Roland Mousseau, Seller and the Company (the "Golf Course Development Agreement"). Further, Purchaser and RMP shall have amended the Golf Course Development Agreement to the extent needed and on terms acceptable to Purchaser. 5.15 Seller's Additional Deliveries. In addition to this Agreement, Seller shall deliver or cause the Company to deliver to Purchaser the following: 13 (a) A certified copy of the Company's Articles of Organization; (b) Certificates of good standing of the Company issued by the Secretary of the State of Delaware and California; (c) A letter agreement between OB Sports Golf Management, LLC, the Company and Purchaser regarding the management of the Golf Courses after the Closing; and (d) An Affidavit of No Change with respect to the Property, certifying that no improvements have been made to the Property since the date of the most current survey delivered to Purchaser prior to the Closing. ARTICLE VI Termination/Remedy ------------------ 6.1 Termination of Agreement. This Agreement may be terminated only as provided below: (a) by Purchaser and Seller upon mutual written consent at any time prior to the Closing; (b) by Purchaser by giving written notice to Seller at any time prior to the Closing in the event (i) Seller has breached any representation, warranty, or covenant contained in this Agreement in any material respect (ii) any condition to Purchaser closing the transaction contemplated hereby has not been satisfied or (iii) of damage or condemnation of the Property in accordance with Sections 3.8 and 3.9; or (c) by Seller by giving written notice to Purchaser at any time prior to the Closing in the event (i) Purchaser has breached any representation, warranty, or covenant contained in this Agreement in any material respect or (ii) any condition to Seller closing the transaction contemplated hereby has not been satisfied. 6.2 Remedies. In the event of a breach of this Agreement, the non-breaching party shall not be limited to the remedy of termination of this Agreement, but shall be entitled to pursue all available legal and equitable rights and remedies, and shall be entitled to recover all of its reasonable costs and expenses incurred in pursuing them (including, without limitation, reasonable attorneys' fees). 14 ARTICLE VII Post-Closing Agreements ----------------------- 7.1 Post-Closing Agreements. From and after the Closing, the parties shall have the respective rights and obligations which are set forth in the remainder of this Article VII. 7.2 Disclosure of Confidential Information. As a further inducement for Purchaser to enter into this Agreement, Seller agree that for the longest period permitted by law after the Closing Date, Seller shall, and shall cause its Affiliates to, hold in strictest confidence, and not, without the prior written approval of Purchaser, use for their own benefit or the benefit of any party other than Purchaser or disclose to any person, firm or corporation other than Purchaser (other than as required by law or to that party's accountants, attorneys, professional advisers and key employees) any information of any kind relating to the Company's business, except such information as was publicly available prior to the Closing Date. 7.3 Hiring Away Employees. For a period of two (2) years from the Closing Date, Seller shall not take any actions which are calculated to persuade any salaried, technical or professional employees, representatives or agents of the Company to terminate their association with the Company. Seller agrees that in the event of a breach of this Section 7.3, Purchaser shall be entitled to injunctive relief in addition to such other legal and equitable remedies that may be available. 7.4 Survey and Title Matters. Seller acknowledges that Purchaser is making an accommodation to Seller by not requiring that an updated survey be completed prior to Closing. As a result Purchaser shall obtain an updated survey at Seller's sole cost and expense. Further, if such update survey discloses any new title exceptions or survey issues, Purchaser shall notify Seller and Seller shall cure such new objections within thirty (30) days. If Seller is unable to cure any new title exceptions or survey matters within the specified timeframe, Purchaser shall have the right to seek indemnification against Seller pursuant to Section 8.1(e) without being subject to the limitations set forth in Section 8.3. 7.5 Estoppel Certificates. Within 30 days after Closing, (i) Seller shall have obtained an estoppel certificate from Northern Wolverine 19/99, Inc., a Nevada corporation and lessor of that certain 83 acre property described in that certain Ground Lease dated March 31, 1999 by and between Wolverine and the Company (the "Ground Lease") in the form acceptable to Purchaser, and (ii) Purchaser shall have received written and/or verbal confirmation from the Coachella Valley Water District ("CVWD") that all payments required to be made by the Company prior to the Closing to CVWD under that certain Easement Agreement dated March 31, 1999 entered into by the Company with the CVWD (the "Easement Agreement") have been made, that neither party is in default under the Easement Agreement as of the Closing Date and that neither party has any claims against the other relating to the Easement Agreement. In the event that Seller fails to obtain the estoppels set forth, Purchaser shall have the right to seek indemnification against Seller for any matters that occur prior to the Closing that relate to the Ground Lease, the Easement Agreement, their respective validity, enforceability or claims or defaults thereunder as the same relates to the Leased Property, pursuant to Section 8.1(f) without being subject to the limitations set forth in Section 8.3. 15 7.6 Further Assurances. The parties shall execute such further documents, and perform such further acts, as may be necessary to transfer and convey the Membership Interests to Purchaser on the terms herein contained and to otherwise comply with the terms of this Agreement. ARTICLE VIII Indemnification --------------- 8.1 Seller's Indemnification Obligations. Seller shall indemnify, save and keep Purchaser, and its officers, directors, employees, agents, successors and assigns (each a "Purchaser Indemnitee" and collectively the "Purchaser Indemnitees") forever harmless against and from all damages, liabilities, demands, causes of actions, penalties, fees, costs and expenses sustained or incurred by any Purchaser Indemnitee, as a result of or arising out of or by virtue of: (a) any material inaccuracy in or breach of any representation and warranty made by Seller to Purchaser herein or in any closing document delivered to Purchaser in connection herewith; (b) the breach by Seller of, or failure of Seller to comply with, any of the covenants or obligations under this Agreement to be performed by Seller; (c) any material obligation relating to the Raintree Project Development Agreement for which Seller or the Company was responsible prior to the Closing Date; (d) any material default, breach, alleged default, or alleged breach by Seller or the Company under the Agreement entered into March 19, 1999 among Seller, the Company, Royale Mirage Partners, L.P., Rick Borsuk and Roland Mousseau (the "RMP Agreement") prior to the Closing Date; or (e) the updated survey to be conducted after the Closing on the Property; or (f) any matters relating to the Leased Property prior to the Closing, including, without limitation, enforcement of the Company's rights to the Leased Property. 8.2 Purchaser's Indemnification Obligations. Purchaser shall indemnify, save and keep Seller and its officers, directors, employees, agents, successors and assigns (each a "Seller Indemnitee" and collectively the "Seller Indemnitees") forever harmless against and from all damages, liabilities, demands, causes of actions, penalties, fees, costs and expenses sustained or incurred by any Seller Indemnitee, as a result of or arising out of or by virtue of: (a) any material inaccuracy in or breach of any representation and warranty made by Purchaser to Seller herein or in any closing document delivered to Seller in connection herewith; 16 (b) the breach by Purchaser of, or failure of Purchaser to comply with, any of the covenants or obligations under this Agreement to be performed by Purchaser; (c) any material obligation relating to the Raintree Project Development Agreement arising prior to the Closing Date for which Seller or the Company was not responsible or arising after the Closing Date; or (d) any and all matters of any nature whatsoever, related directly or indirectly, or arising out of or in connection with the development, ownership, operation, management, maintenance, repair and/or improvement of the Timeshare Project Property and the Timeshare Project Improvements (as those terms are defined in the RMP Agreement), except to the extent arising from Seller's or the Company's negligence or willful misconduct and subject to Section 8.1(d). 8.3 Limitations on Indemnification. (a) Purchaser's remedies following the Closing regarding indemnity claims described in Section 8.1 shall be limited to a right of offset against the Note up to the original principal amount of the Note plus interest accrued thereon during the Indemnification Period (the "Offset Right"). Purchaser shall hold this Offset Right from the Closing Date for a period of six (6) months thereafter (the "Indemnification Period"), at which point the Offset Right shall automatically terminate in the absence of any written claim(s) delivered by Purchaser to Seller during the Indemnification Period. (b) Seller's remedies following the Closing regarding indemnity claims described in Section 8.2 shall be limited to an increase in the principal amount of the Note by an amount equal to the original principal amount of the Note plus interest accrued thereon during the Indemnification Period (the "Increase Right"). Seller shall hold this Increase Right from the Closing Date for the Indemnification Period, at which point the Increase Right shall automatically terminate in the absence of any written claim(s) delivered by Seller to Purchaser during the Indemnification Period. (c) Neither party shall be entitled to bring a written indemnity claim against the other party until the aggregate sum of all claims exceed a minimum amount of $100,000. The maximum amount of any and all indemnity claims that one party will be entitled to bring against the other party, if any, shall be limited to a maximum amount of the principal amount of the Note, plus the amount of interest accruing on the Note at the rate of 5.0% per annum during the Indemnification Period. After applying any Offset Right against the Note or any Increase Right to the Note, as the case may be, the remaining principal balance (including any interest accrued through such date) shall be amortized and payable in thirty-six (36) monthly payments of principal and interest, as described in Section 1.2. The limitations contained in this Section 8.3 do not apply to an indemnification claim asserted by Purchaser under Sections 8.1(c), (d), (e) and (f) or by Seller under Sections 8.2(c) and (d). 17 ARTICLE IX Miscellaneous ------------- 9.1 Fees. Except as set forth herein, each party hereto shall bear all fees, costs and expenses incurred by such party in connection with, relating to or arising out of the negotiation, preparation, execution, delivery and performance of this Agreement and the consummation of the transaction contemplated hereby, including, without limitation, attorneys', accountants' and other professional fees and expenses. 9.2 Publicity. Except as otherwise required by law or applicable stock exchange rules, press releases concerning this transaction shall be made only with the prior written agreement of Seller and Purchaser. Except as otherwise required by law or applicable stock exchange rules, no such press releases or other publicity shall state the amount of the consideration. 9.3 Notices. All notices required or permitted to be given hereunder shall be in writing and may be delivered by hand, by facsimile, by nationally recognized private courier, or by United States mail. Notices delivered by mail shall be deemed given three (3) business days after being deposited in the United States mail, postage prepaid, registered or certified mail. Notices delivered by hand by facsimile, or by nationally recognized private carrier shall be deemed given on the first business day following receipt; provided, however, that a notice delivered by facsimile shall only be effective if such notice is also delivered by hand, or deposited in the United States mail, postage prepaid, registered or certified mail, on or before two (2) business days after its delivery by facsimile. All notices shall be addressed as follows: If to Seller: OB Sports, LLC c/o Rice Sangalis Toole & Wilson 5847 San Felipe, Suite 4350 Houston, Texas 77057 Attention: Kurt G. Keene Fax: (713) 783-9750 with a copy to: Holland & Knight LLP 2300 U.S. Bancorp Tower 111 S.W. Fifth Avenue Portland, Oregon 97204 Attention: George Gregores Fax: (503) 241-8014 If to Purchaser: Mego Financial Corp. d/b/a Leisure Industries Corporation 4310 Paradise Road Las Vegas, Nevada 89105 Attention: Floyd W. Kephart, CEO Fax: (702) 369-4398 18 with a copy to: Ungaretti & Harris 3500 Three First National Plaza Chicago, Illinois 60602 Attention: Gary I. Levenstein Fax: (312) 977-4405 and/or to such other respective addresses and/or addressees as may be designated by notice given in accordance with the provisions of this Section 9.3. 9.4 Transfer Taxes. Seller shall pay the cost of all sales, use, excise and transfer taxes, and all owners' title insurance premiums and surveyor's charges, which may be payable in connection with the transaction contemplated hereby. 9.5 Entire Agreement. This Agreement and the instruments to be delivered by the parties pursuant to the provisions hereof constitute the entire agreement between the parties and shall be binding upon and inure to the benefit of the parties hereto and their respective legal representatives, successors and permitted assigns. Each Exhibit and the Disclosure Schedule, shall be considered incorporated into this Agreement. Any amendments, or alternative or supplementary provisions to this Agreement must be made in writing and duly executed by an authorized representative or agent of each of the parties hereto. 9.6 Survival; Non-waiver. Subject to Section 8, all representations and warranties shall survive the Closing regardless of any investigation or lack of investigation by any of the parties hereto. The failure in any one or more instances of a party to insist upon performance of any of the terms, covenants or conditions of this Agreement, to exercise any right or privilege in this Agreement conferred, or the waiver by said party of any breach of any of the terms, covenants or conditions of this Agreement, shall not be construed as a subsequent waiver of any such terms, covenants, conditions, rights or privileges, but the same shall continue and remain in full force and effect as if no such forbearance or waiver had occurred. No waiver shall be effective unless it is in writing and signed by an authorized representative of the waiving party. A breach of any representation, warranty or covenant shall not be affected by the fact that a more general or more specific representation, warranty or covenant was not also breached. 9.7 Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed to be an original, and all such counterparts shall constitute but one instrument. 9.8 Severability. The invalidity of any provision of this Agreement or portion of a provision shall not affect the validity of any other provision of this Agreement or the remaining portion of the applicable provision. 9.9 Applicable Law. This Agreement shall be governed and controlled as to validity, enforcement, interpretation, construction, effect and in all other respects by the internal laws of the State of California applicable to contracts made in that State. 19 9.10 Binding Effect; Benefit. This Agreement shall inure to the benefit of and be binding upon the parties hereto, and their successors and permitted assigns. Nothing in this Agreement, express or implied, is intended to confer on any person other than the parties hereto, and their respective successors and permitted assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement. 9.11 Assignability. This Agreement shall not be assignable by either party without the prior written consent of the other party, except that at or prior to the Closing, Purchaser may assign its rights and delegate its duties under this Agreement to a subsidiary or affiliate of Purchaser and may assign its rights under this Agreement to its lenders for collateral security purposes, and after the Closing, Purchaser may assign its rights and delegate its duties under this Agreement to any third party. No such assignment shall relieve Purchaser of any of its liabilities under this Agreement. 9.12 Amendments. This Agreement shall not be modified or amended except pursuant to an instrument in writing executed and delivered on behalf of each of the parties hereto. 9.13 Headings. The headings contained in this Agreement are for convenience of reference only and shall not affect the meaning or interpretation of this Agreement. [signature page attached] 20 IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. SELLER: OB Sports, LLC By: -------------------------------- Its: -------------------------------- PURCHASER: Mego Financial Corp., d/b/a Leisure Industries Corporation By: ---------------------------------- Its: --------------------------------- SIGNATURE PAGE TO LLC PURCHASE AGREEMENT 21 EX-10.260 8 doc7.txt Exhibit 10.260 $920,000.00 August 30, 2002 PROMISSORY NOTE For value received, MEGO FINANCIAL CORP. D/B/A LEISURE INDUSTRIES CORPORATION, a New York corporation ("Purchaser"), promises to pay to OB SPORTS, LLC, a Delaware limited liability company ("Seller"), at OB Sports, LLC, c/o Rice Sangalis Toole & Wilson, 5847 San Felipe, Suite 4350, Houston, Texas 77057, or such other address as Seller may specify, the principal sum of NINE HUNDRED TWENTY THOUSAND AND NO/100 DOLLARS ($920,000.00), together with accrued and unpaid interest thereon as set forth below. This Note is issued by Purchaser pursuant to the terms and conditions of that certain Purchase Agreement dated August 30, 2002 (the "Purchase Agreement") by and between Purchaser and Seller for the purchase of membership interests of Cimarron Golf Club, LLC, a Delaware limited liability company (the "Company"). Interest on the unpaid principal balance of this Note shall accrue at the rate of five percent (5%) per annum (computed on the basis of a 360-day year of twelve 30-day months) commencing on January 31, 2003, and shall be payable in thirty-six (36) monthly installments pursuant to the Purchase Agreement. The entire unpaid balance of principal and all accrued and unpaid interest shall be due and payable on December 31, 2005 (the "Maturity Date"). All payments of interest and principal shall be in lawful money of the United States of America. All payments shall be applied first to reasonable costs of collection and enforcement, if any, then to accrued and unpaid interest, and thereafter to principal. Purchaser reserves the right to prepay this Note in cash or wire transfer in whole or in part at any time without penalty or additional fees. In the event Purchaser fails to make any scheduled payment and such payment default continues for a period of thirty (30) days (a "Default"), the outstanding balance on the Note (principal balance plus any accrued but unpaid interest) shall then begin to accrue interest at a rate equal to seven percent (7%) per annum until the Default is cured. In the event three (3) Defaults occur during the term of this Note, the interest rate shall increase immediately to a rate equal to ten percent (10%) per annum until the Maturity Date or until the entire outstanding balance owed to Seller under this Note (including any accrued but unpaid interest) is paid in full. If either Purchaser or Seller asserts a claim for indemnification under Article VII of the Purchase Agreement (an "Indemnification Claim"), Purchaser will continue to make the payments due under this Note and interest will continue to accrue on the outstanding principal at the applicable rate. Once the final adjustment to the amount owed under this Note as a result of the Indemnification Claim is determined pursuant to the Purchase Agreement, the amount outstanding under this Note will be adjusted by the indemnification amount and the new total amount outstanding will be amortized and paid in equal monthly installments over the remainder of the original thirty-six (36) month payment period. The Maturity Date and the interest rate adjustment in the event of a Default will not be affected or altered by the provisions of this paragraph. No failure on the part of Seller to exercise any right or remedy hereunder, whether before or after the occurrence of a default, shall constitute a waiver thereof, and no waiver of any past default shall constitute a waiver of any future default or of any other default. No failure to accelerate the debt evidenced hereby by reason of default hereunder, or acceptance of a past due installment, or indulgence granted from time to time shall be construed to be a waiver of the right to insist upon prompt payment thereafter or shall be deemed to be a novation of this Note or as a reinstatement of the debt evidenced hereby or as a waiver of such right of acceleration or any other right, or be construed so as to preclude the exercise of any right which Seller may have, whether by the laws of the State of California, by agreement or otherwise, and none of the foregoing shall operate to release, change or affect the liability of Purchaser. This Note may not be modified or amended orally, but only by an agreement in writing signed by the party against whom such agreement is sought to be enforced. PURCHASER CONSENTS TO THE EXCLUSIVE JURISDICTION OF THE STATE OR FEDERAL COURTS OF THE STATE OF CALIFORNIA FOR ANY LEGAL ACTION, SUIT OR PROCEEDING ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, AND AGREES THAT ANY SUCH ACTION, SUIT, OR PROCEEDING MAY BE BROUGHT ONLY IN SUCH COURTS. PURCHASER FURTHER WAIVES ANY OBJECTION TO THE LAYING OF VENUE FOR ANY SUIT, ACTION OR PROCEEDING IN SUCH COURTS. PURCHASER AGREES TO ACCEPT AND ACKNOWLEDGE SERVICE OF ANY AND ALL PROCESS THAT MAY BE SERVED IN ANY SUIT, ACTION OR PROCEEDING. PURCHASER AGREES THAT ANY SERVICE OF PROCESS UPON IT MAILED BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED TO THE PURCHASER AT THE ADDRESS SET FORTH IN THE PURCHASE AGREEMENT, SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON SUCH PARTY IN ANY SUCH SUIT, ACTION OR PROCEEDING. PURCHASER AGREES TO WAIVE ANY RIGHT IT MIGHT HAVE TO A TRIAL BY JURY IN ANY SUCH SUIT, ACTION OR PROCEEDING. This Note shall inure to the benefit of Seller and its successors and permitted assigns and shall be binding upon Purchaser and its successors and assigns. Purchaser acknowledges and agrees that this Note and the rights and obligations of all parties hereunder shall be governed by and construed under the laws of the State of California MEGO FINANCIAL CORP. D/B/A LEISURE INDUSTRIES CORPORATION By: ----------------------------- Its: ----------------------------- 2 EX-10.261 9 doc8.txt Exhibit 10.261 PURCHASE AGREEMENT ------------------ THIS PURCHASE AGREEMENT (this "AGREEMENT") is made as of September 9, 2002, among Raintree Resorts International, Inc., a Nevada corporation ("RAINTREE INTERNATIONAL"), Raintree North America Resorts, Inc., a Texas corporation ("RAINTREE NORTH AMERICA") (each individually, a "SELLER" and collectively "SELLERS"), and Mego Financial Corp. d/b/a Leisure Industries Corporation, a New York corporation ("PURCHASER"). R E C I T A L S - - - - - - - - A. Raintree International, directly and through subsidiaries, is engaged in the business of developing and operating resort time-share projects. B. Raintree North America, a second-tier subsidiary of Raintree International, is engaged in developing, managing and promoting Cimarron Resort Condominiums, a condominium complex a/k/a Club Regina Cimarron, located in Cathedral City, California ("CIMARRON"), pursuant to that certain Project Development, Management, and Sales Agreement dated May 3, 2000 between Raintree North America and Royale Mirage Partners, L.P. ("RMP") (such agreement, the "DEVELOPMENT AGREEMENT"), a copy of which is attached hereto as Exhibit A. C. In connection with the operation of Cimarron, Raintree North America is a party to that certain Declaration of Covenants, Conditions and Restrictions and First Amended and Restated Agreement of Trust (the "TRUST") dated November 26, 2001 by and among Raintree North America, BNY Western Trust Company, as successor-in-interest to U.S. Trust Company, National Association ("TRUSTEE") and Cimarron Beneficial Interest Owners Association (as amended by the First Amendment dated as of March 26, 2002, the "TRUST AGREEMENT"), a copy of which is attached hereto as Exhibit B, pursuant to which condominium units located within Cimarron have been transferred to Trustee for the purpose of Raintree North America's use and management, and sale thereof to other persons who purchase second beneficial interests in the Trust in connection with the purchase by such persons of memberships from Raintree North America. D. Purchaser desires to purchase from Raintree North America, all of its right, title and interest in and to the Development Agreement and Trust Agreement, and Sellers desire to sell the foregoing to Purchaser, on the terms and subject to the conditions herein contained. A G R E E M E N T S - - - - - - - - - - Therefore, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree to the foregoing and as follows: 1 ARTICLE I PURCHASE AND SALE OF PROPERTY; CLOSING AND MANNER OF PAYMENT ------------------------------------------------------------ 1.1 AGREEMENT to Purchase and Sell Property. On the terms and subject to the conditions contained in this Agreement, Purchaser shall purchase from Raintree North America, and Raintree North America shall sell to Purchaser, all of its right, title and interest in and to the following: (a) the Development Agreement; and (b) the Trust Agreement. The Development Agreement and the Trust Agreement shall be collectively referred to as the "PURCHASED PROPERTY." 1.2 PURCHASE PRICE. The aggregate purchase price (the "PURCHASE PRICE") for the Purchased Property shall be ONE MILLION NINE HUNDRED AND SIXTY THOUSAND DOLLARS and 0/100 Dollars ($1,960,000.00). 1.3 MANNER OF PAYMENT OF PURCHASE PRICE. The Purchase Price shall be paid in the following matter: (a) Purchaser's assumption and payment of $531,778.37 of Raintree North America's liabilities, as described on Schedule I attached hereto; and (b) The balance of the Purchase Price ($1,428,221.63) by wire transfer of immediately available funds to such bank account or accounts as Sellers shall designate by written notice delivered to Purchaser not later than one (1) business day prior to the Closing (as defined below). (Purchaser shall have no responsibility for the disbursement thereof from said account or accounts to Sellers). 1.4 TIME AND PLACE OF CLOSING. The Closing shall occur at 10:00 a.m., at the offices of Ungaretti & Harris, 3500 Three First National Plaza Chicago, Illinois 60602 on September 9, 2002, or on such other date, or at such time or place, as shall be mutually agreed upon by Sellers and Purchaser. ARTICLE II REPRESENTATIONS AND WARRANTIES 2.1 GENERAL STATEMENT. Purchaser makes the representations and warranties to Sellers set forth in Section 2.2, and Sellers make the representations and warranties to Purchaser set forth in Section 2.3. All such representations and warranties and all representations and warranties which are set forth elsewhere in this Agreement and in any financial statement, other exhibit or document delivered by a party hereto to another party pursuant to this Agreement or in connection herewith shall survive the Closing (and none shall merge into any instrument of conveyance), regardless of any investigation 2 or lack of investigation by any of the parties to this Agreement. No specific representation or warranty shall limit the generality or applicability of a more general representation or warranty. Representations and warranties of the parties are initially made as of the date hereof. All representations and warranties of Sellers are made subject to the exceptions noted in the schedule delivered by Sellers to Purchaser concurrently herewith and identified as the "Disclosure Schedule." 2.2 REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents and warrants to Sellers as follows: (a) Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of New York and has the requisite corporate power and authority to carry on its business as now being conducted. Purchaser is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification necessary, except where the failure to be so qualified would not, individually or in the aggregate, have a material adverse effect on the business, assets, properties, liabilities, results of operations or financial condition of Purchaser and its Subsidiaries taken as a whole (a "PURCHASER MATERIAL ADVERSE EFFECT"). (b) Purchaser has the requisite corporate power and authority to enter into this Agreement and to carry out its obligations hereunder. The execution and delivery of this Agreement and the consummation by Purchaser of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Purchaser. This Agreement has been duly executed and delivered by Purchaser and, assuming this Agreement has been duly executed and delivered by the other parties hereto, constitutes a valid and binding obligation of Purchaser, enforceable against Purchaser in accordance with its terms, except for (i) the effect thereon of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting the rights of creditors generally and (ii) limitations imposed by Federal or state law or equitable principles upon the specific enforceability of any of the remedies, covenants or other provisions thereof and upon the availability of injunctive relief or other equitable remedies. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated by this Agreement and compliance with the provisions hereof will not, (A) conflict with or violate any of the provisions of the Certificate of Incorporation or By-Laws of Purchaser; (B) conflict with, result in a breach of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or loss of a material benefit under, or require the consent of any person under, any loan agreement, note, indenture or other agreement, permit, concession, franchise, lease, contract, license or similar instrument, obligation or undertaking to which Purchaser or any of its Subsidiaries is a party or by which Purchaser or any of its Subsidiaries or any of their assets is bound or affected; or (C) contravene any law, rule or regulation of any state or of the United States or any political subdivision thereof or therein, or any order, writ, judgment, injunction, decree, determination or award currently in effect, subject, in the case of clauses (B) and (C), to those conflicts, breaches, defaults and similar matters, which, 3 individually or in the aggregate, have not had and would not reasonably be expected to have a Purchaser Material Adverse Effect, or materially and adversely affect Purchaser's ability to consummate the transactions contemplated hereby. No consent, approval or authorization of, or declaration or filing with, or notice to, any Governmental Entity which has not been received or made, is required by or with respect to Purchaser or any of its Subsidiaries in connection with the execution and delivery of this Agreement by Purchaser or the consummation by Purchaser of the transactions contemplated hereby. (c) All negotiations relative to this Agreement and the transactions contemplated hereby have been carried out by Purchaser directly with Sellers, and Purchaser has incurred no obligation to pay any person or entity a finder's fee, brokerage commission or similar payment in connection with the transactions contemplated by this Agreement. 2.3 REPRESENTATIONS AND WARRANTIES OF SELLERS RELATING TO THE PURCHASED PROPERTY AND CIMARRON. Sellers represent and warrant to Purchaser as follows: 2.3.1 ORGANIZATION AND AUTHORITY. ----------------------------- (a) ORGANIZATION. Raintree International, Raintree U.S. Holdings, LLC, a Texas limited liability company and parent of Raintree North America ("RAINTREE U.S.") and Raintree North America are duly organized, validly existing and in good standing under the laws of their respective jurisdictions of formation and have the requisite power and authority to carry on their respective businesses as they are now being conducted and to own their respective properties. Raintree International, Raintree U.S. and Raintree North America are duly qualified to do business and are in good standing in each jurisdiction where they are at any time selling fractional time-share interests or where the nature of their respective business or the ownership or leasing of their respective properties makes such qualification necessary, except where the failure to be so qualified would not, individually or in the aggregate, have a Cimarron Material Adverse Effect. As used in this Agreement, the term "CIMARRON MATERIAL ADVERSE EFFECT" means a material adverse effect on the business, assets, properties, liabilities, results of operations or financial condition of Raintree International or Raintree North America, individually or in the aggregate with respect to Cimarron or the Purchased Property. (b) NON-CONTRAVENTION. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated by this Agreement and compliance with the provisions hereof will not, (i) conflict with or violate any of the provisions of the organizational and governing documents of Raintree International, Raintree U.S. or Raintree North America; (ii) conflict with, result in a breach of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or loss of a material benefit under, or require the consent of any person under, any loan agreement, note, indenture or other agreement, permit, concession, franchise, lease, contract, license or similar instrument, obligation or undertaking to which Raintree International, Raintree U.S. or Raintree North America are a party or by which Raintree International, 4 Raintree U.S. or Raintree North America or any of their respective assets are bound or affected; or (iii) contravene any law, rule or regulation of any state or of the United States or any order, writ, judgment, injunction, decree, determination or award currently in effect, subject, in the case of clauses (i) and (ii), to those conflicts, breaches, defaults, contraventions and similar matters, which, individually or in the aggregate, have not had and would not reasonably be expected to have a Cimarron Material Adverse Effect, or materially and adversely affect Sellers' ability to consummate the transactions contemplated hereby. No consent, approval or authorization of, or declaration or filing with, or notice to, any Governmental Entity which has not been received or made, is required by or with respect to Raintree International, Raintree U.S. or Raintree North America in connection with the execution and delivery of this Agreement, the consummation of the transactions contemplated hereby and to allow for the ongoing offering and sale of interests in Cimarron. 2.3.2 BOOKS AND RECORDS; ASSETS AND LIABILITIES. ----------------------------------------------- (a) BOOKS AND RECORDS. Raintree North America's books, accounts and records with respect to Cimarron and the Purchased Property are, and have been, maintained in its respective usual, regular and ordinary manner and except as set forth on the Disclosure Schedule, in accordance with generally accepted accounting practices, and all transactions to which it is or has been a party relating to Cimarron and the Purchased Property, are properly reflected therein. (b) TITLE TO ASSETS. Raintree North America's interest in the Development Agreement and the Trust Agreement is free and clear of any liens, claims, encumbrances and security interests, except for Permitted Liens. No unreleased mortgage, trust deed, chattel mortgage, security agreement, financing statement or other instrument encumbering any of Raintree North America's assets has been recorded, filed, executed or delivered relating to Cimarron or the Purchased Property. (c) LIABILITIES. Raintree North America does not have any liabilities provided for, reserved against or incurred that relates to or has arisen out of a breach of contract, breach of warranty, tort or infringement by or against Raintree North America or any claim or lawsuit involving Raintree North America relating to Cimarron or the Purchased Property. (d) MATERIAL CHANGES. Since March 31, 2002, Raintree North America has not, with respect or relating to Cimarron or the Purchased Property: (i) sold, assigned, leased, exchanged, transferred or otherwise disposed of any of its assets or property, except for sales of time-share interests and cash applied in the payment of its liabilities, in the usual and ordinary course of business in accordance with its past practices; 5 (ii) suffered any casualty, damage, destruction or loss, or interruption in use, of any asset or property (whether or not covered by insurance), on account of fire, flood, riot, strike or other hazard or Act of God; (iii) written off any material asset as unusable or obsolete or for any other reason; (iv) made or suffered (except for effects from the notice by Raintree International of the Chapter 11 bankruptcy filing by Raintree U.S.) any material change in the conduct or nature of any aspect of its business, whether or not made in the ordinary course of business or whether or not such change had a Cimarron Material Adverse Effect; (v) waived any right arising out of the conduct of, or with respect to, its business; (vi) incurred any obligations or made any material capital expenditures, or discharged or prepaid any liabilities, outside the usual and ordinary course of business in accordance with past practices; (vii) made any change in accounting methods or principles; (viii) borrowed any money or issued any bonds, debentures, notes or other corporate securities, including without limitation, those evidencing borrowed money; (ix) paid, declared or set aside any dividend or other distribution on its securities of any class or purchased, exchanged or redeemed any of its securities of any class; (x) entered into any transaction with, or made any payment to, or incurred any liability to, any Related Party; (xi) made any payments or distributions to its employees, officers or directors except such amounts as constitute currently effective compensation for services rendered, or reimbursement for reasonable ordinary and necessary out-of-pocket business expenses; (xii) increased the compensation payable to any employee other than normal recurring increases consistent with past practice; (xiii) paid or incurred any management or consulting fees, or engaged any consultants; (xiv) lost the services (whether voluntarily or involuntarily) of any key employee; or 6 (xv) without limitation by the enumeration of any of the foregoing, entered into any transaction other than in the usual and ordinary course of business in accordance with past practices. (e) MATERIAL ADVERSE EFFECTS. Raintree North America has not suffered or been threatened with, and neither Raintree International, nor Raintree North America has knowledge of any facts which may cause or result in, any Cimarron Material Adverse Effect. 2.3.3 LEGAL MATTERS. --------------- (a) LEGAL PROCEEDINGS. There are no actions, suits or claims or legal, administrative or arbitration proceedings or investigations pending or, to the knowledge of Sellers, threatened against Raintree U.S. or Raintree North America or any of its or their respective properties, assets or businesses relating to Cimarron or the Purchased Property or, to the knowledge of Sellers, relating to the transactions contemplated by this Agreement. Neither Raintree U.S. nor Raintree North America is a party to, or bound by, any decree, order or arbitration award (or agreement entered into in any administrative, judicial or arbitration proceeding with any governmental authority) with respect to or affecting the properties, assets, personnel or business activities of Cimarron. (b) LEGAL COMPLIANCE. Raintree North America has obtained and maintains all Permits which are required in order for it to conduct its business as presently conducted. Raintree North America is not in violation of, or delinquent in respect to, any decree, order or arbitration award or law, statute, or regulation of or agreement with, or any Permit from, any Federal, state or local governmental authority to which the property, assets, personnel or business activities to which Cimarron or the Purchased Property is subject, including, without limitation, laws, statutes and regulations relating to equal employment opportunities, fair employment practices, occupational health and safety, wages and hours, and discrimination. (c) ENVIRONMENTAL MATTERS. Raintree North America and each of its respective assets and businesses are in compliance with all Environmental Laws except where the failure to be in compliance would not have a Cimarron Material Adverse Effect. Neither Raintree North America, nor its businesses are currently subject to any pending or, to Sellers' knowledge, threatened judicial or administrative investigation, proceeding, order, judgment decree or settlement alleging or relating to a violation of or liability under any Environmental Law relating to Cimarron or the Purchased Property. Neither Raintree International, Raintree U.S., nor Raintree North America has received written notice from any government authority or third party claimant to the effect that it is or may be liable under Environmental Laws as a result of the release, storage, disposal or arrangement for disposal of any materials in violation of Environmental Laws relating to Cimarron or the Purchased Property. (d) PAYMENT OF TAXES. Raintree International and Raintree North America have filed all tax returns and has paid all impositions, if any, 7 required to be filed by each of them or paid by each of them, including real estate taxes and assessments relating to Cimarron. 2.3.4 TANGIBLE PROPERTY. ------------------- (a) OWNED REAL ESTATE. Raintree International, Raintree U.S. and Raintree North America do not own any real property relating to Cimarron or the Development Agreement. (b) LEASED REAL ESTATE. Neither Raintree International, nor Raintree North America, nor either of their Affiliates, leases any real estate relating to Cimarron or the Development Agreement other than the local sales office previously used and identified in the Disclosure Schedule as being so leased by Raintree North America. (c) PERMITTED ENCUMBRANCES. The legal description of the real property upon which Cimarron is being developed (the "CIMARRON REAL PROPERTY") - is attached hereto as Exhibit C. Sellers have made available complete and correct copies of all title insurance policies, surveys, environmental reports, engineering reports, appraisals, permits, certificates of occupancy, and other documents and materials of any and every type in its possession, custody, or control. Except as provided in the Disclosure Schedule (the "PERMITTED ENCUMBRANCES"), no liens, encumbrances, restrictions or other exceptions to title affect Cimarron. (d) REAL ESTATE TAXES AND ASSESSMENTS. To the knowledge of the Sellers, there are no challenges or appeals pending regarding the amount of the taxes on, or the assessed valuation of, the Cimarron Real Property, and no special arrangements or agreements exist with any governmental authority with respect thereto (the representations and warranties contained in this subparagraph (d) shall not be deemed to be breached by any prospective general increase in real estate tax rates). (e) CONDEMNATION PROCEEDINGS. To the knowledge of the Sellers, there are no condemnation proceedings pending or threatened with respect to any portion of the Cimarron Real Property. (f) DEFECTS. To the knowledge of the Sellers, the buildings and other facilities located on the Cimarron Real Property are free of any latent structural or engineering defects , or any patent structural or engineering defects other than defects disclosed in writing by RMP, copies of which have been provided to Purchaser, in connection with the Development Agreement or that would not materially affect the project development and operation of Cimarron and the Purchased Property. 2.3.5 CONTRACT RIGHTS AND INTELLECTUAL PROPERTY. ---------------------------------------------- (a) CONTRACTS. All agreements, leases, subleases or instruments to which Raintree North America is a party or by which it is bound relating to or in connection with Cimarron or the Purchased Property, are in full force and binding upon the parties thereto. Neither Raintree North America nor any of the other parties thereto are in default under any such agreement, 8 lease, sublease or other instrument and, to the best of Sellers' knowledge, no default by the other contracting parties has occurred thereunder. No event, occurrence or condition exists which, with the lapse of time, the giving of notice, or both, or the happening of any further event or condition, would become a default by Raintree North America or the other contracting party thereunder. Raintree North America has not released or waived any of its rights under any such agreement, lease, sublease or other instrument. None of the Sellers is subject to any legal obligation to renegotiate, nor do Sellers have knowledge of a claim for a legal right to renegotiate, any contract, loan, agreement, lease, sublease or instrument relating to Cimarron or the Purchased Property to which anyof the Sellers or Raintree U.S. is now or has been a party. (b) INTELLECTUAL PROPERTY. Raintree North America has the right to use the Intellectual Property used by it in the conduct of business relating to or in connection with Cimarron or the Purchased Property ("CIMARRON INTELLECTUAL PROPERTY") and no proceedings have been instituted or, to the Sellers' knowledge, threatened which challenge Raintree North America's right to use Cimarron Intellectual Property. Neither of the Sellers (i) has any knowledge of any claim that any third party asserts ownership rights in any of the Cimarron Intellectual Property; (ii) has any knowledge of any claim or any reason to believe that Raintree North America's use of any Cimarron Intellectual Property infringes any right of any third party; and (iii) has any knowledge or any reason to believe that any third party is infringing any of Raintree North America's rights in any of the Cimarron Intellectual Property. 2.3.6 TIME-SHARE MATTERS. -------------------- (a) STATUS OF TIME-SHARE PROJECT. Pursuant to the Trust Agreement, the real property has been duly subjected to a condominium declaration and a beneficial interest owners association has been formed for the owners of second beneficial interests in the Trust under the laws of the State of California, and such owners' association is validly existing and in good standing under the applicable laws of California. Pursuant and subject to the Trust Agreement, 10 Units have been transferred to the Trust and have been dedicated to the time-share regime. Each time-share interest is validly created, fully transferable and separate real estate interest under the laws of the State of California. (b) COMPLIANCE WITH LEGAL REQUIREMENTS. Sellers and, to the knowledge of Sellers, RMP have complied with all applicable legal requirements in all material respects including, with respect to Cimarron, all legal requirements of the state of California and all other government jurisdictions (including Mexico) in which time-share interests have been or will be sold or offered for sale by Sellers, including, without limitation, the Federal Trade Commission Act, the Truth-in-Lending Act and Regulation Z, the Equal Opportunity Credit Act and Regulation B, the Fair Housing Act, the Americans With Disabilities Act and related accessibility guidelines, the Interstate Land Sales Full Disclosure Act, the Real Estate Settlement Procedures Act and Regulation X, and the Civil Rights Act of 1964 and 1968, state condominium and timeshare laws, federal and state securities laws, all home and telephone solicitation, sweepstakes, and lottery laws, all real estate licensing, disclosure, and escrow laws, and all other foreign, 9 federal, state, and local laws applicable to the development of condominium or timeshare resorts and/or the marketing or sale of vacation ownership interests, except for failures to comply that have not and will not have a Cimarron Material Adverse Effect. (c) SALES ACTIVITIES. Prior to the date of this Agreement, Raintree North America has sold time-share interests and offered time-share interests for sale only in the jurisdictions identified in the Disclosure Schedule. No registrations are required for Cimarron in the jurisdiction in which sales are currently made. Furthermore, with respect to the offer of sale or sale of any time-share interest relating to Cimarron, there is no outstanding violation or order against Sellers, the Time-Share Association (as defined below), any affiliate of Sellers or, to the knowledge of Sellers, RMP, by any foreign, federal, state and local governmental agency (including, without limitation, the Registration Agency or other governmental agency) nor is there any action or investigation, by any such agency, pending or threatened against Sellers, any Affiliate of Sellers, or the Time-Share Association or to the knowledge of Sellers, RMP or its Affiliates. Raintree North America has entered into valid and binding agreements of sale, pursuant to which Raintree has sold a total of 1,518 net weekly Ownership Intervals (as defined in the Development Agreement). The list attached to the Certificate dated as of August 23, 2002 by Resort Communications, Inc. as Records Agent under the Records Management Agreement describing all of such sales (together with subsequent sales) of Ownership Intervals is accurate and complete in all material respects. (d) ZONING COMPLIANCE. Neither the timeshare use nor other transient use and occupancy of Cimarron violates or constitutes or will violate or constitute a non-conforming use or, except for variances already obtained, which variances will not be affected by the transactions contemplated by this Agreement, require a variance under any private covenant or restriction or any zoning, use or similar law, ordinance or regulation affecting the use or occupancy of Cimarron. (e) OBLIGATIONS TO PURCHASERS. Sellers have performed all of their respective obligations to time-share interest purchasers and there are no executory obligations to time-share interest purchasers to be performed by Sellers, except for non-delinquent and executory obligations disclosed to time-share interest purchasers in their purchase contracts. (f) TIME-SHARE ASSOCIATION. The Cimarron Interval Owners Association has been replaced by the Cimarron Beneficial Interest Owners Association, and the Cimarron Beneficial Interest Owners Association is a California non-profit mutual benefit corporation which is duly organized, validly existing and in good standing under applicable laws, rules and regulations of the State of California. All time-share interest purchasers are members of the Cimarron Beneficial Interest Owners Association ("TIMESHARE ASSOCIATION"). The Timeshare Association, by or through RCI Management, Inc., as the manager ("MANAGER"), is fully and satisfactorily performing the obligations of maintaining, repairing or replacing the common areas, common elements, common property and recreational facilities of Cimarron. The Management Services Agreement dated February 17, 2000, between the Cimarron Resort Condominium Owers Association and Manager, the Management 10 Services Agreement dated February 17, 2000, between the Cimarron Interval Owners Association and Manager, as amended by the First Amendment to Management Services Agreement dated August 3, 2001, between the Cimarron Interval Owners Association, Manager, RMP, Raintree North America, and the Timeshare Association (collectively the "MANAGEMENT AGREEMENT"), is in full force and effect and none of the parties thereto are presently in default thereunder. Raintree North America, the Timeshare Association and, to the knowledge of Sellers, RMP are current in all monetary payments to be made to Manager under the Management Agreement. (g) ASSESSMENTS AND RESERVES. When a time-share interest purchaser closes on the purchase of a time-share interest, such time-share interest purchaser automatically becomes a member of the Time-Share Association, and will thereafter remain a member of the Time-Share Association and be entitled to vote on the affairs thereof, subject only to, in the case of sales by Raintree North America, payment in full to Raintree North America and retaining ownership of a time-share interest. The Time-Share Association has the authority to levy annual assessments to cover the costs of maintaining and operating Cimarron and such obligations are enforceable by a lien against the time-share interest if the time-share interest purchaser is delinquent in paying his assessment. The Time-Share Association is solvent, and levied assessments are reasonably expected to be adequate to cover the current costs of maintaining and operating Cimarron and to establish and maintain a reasonable and adequate reserve for capital improvements to the extent and as required under Cimarron's governing documents. To Sellers' knowledge, there will be no events (other than inflation) which could give rise to a material increase in such costs, except for additions of subsequent phases to Cimarron that will not materially increase assessment levels. All assessments are deposited in a separate account of the Time-Share Association and are only withdrawn therefrom to pay the costs and expenses necessary to maintain Cimarron including a reserve fund for repair and replacement. (h) TITLE TO AND MAINTENANCE OF COMMON AREAS AND AMENITIES. The Trustee, for the benefit of the Time-Share Association and the time-share interest owners, will at all times own the furnishings of the units within Cimarron and all the common areas of Cimarron and other amenities which have been promised or represented as being available to time-share interest purchasers, free and clear of liens and security interests except for the Permitted Encumbrances. No part of Cimarron is or will be subject to partition by the owners of time-share interests except as contemplated at the end of the term of the Trust. All access roads, utilities and off-site improvements necessary to the use of Cimarron have been dedicated to and/or accepted by the responsible governmental authority or utility company or are owned by an association of owners of property in a larger planned development or developments of which Cimarron is a part. (i) UNSOLD INTERESTS. To Sellers' knowledge, RMP has good and marketable title to the real property and all units set forth in the Disclosure Schedule. The listing of sold and unsold time-share interests set forth in the Disclosure Schedule is true, accurate and complete in all respects. 11 (j) RAINTREE EXCHANGE. That certain Raintree Vacation Club Affiliation Agreement, The Cimarron Resort Condominiums (the "RAINTREE EXCHANGE AGREEMENT") dated as of October 3, 2001, and executed by and between Raintree Vacation Exchange, LLC ("RVE"), Raintree North America, the Time-Share Association and Manager is in full force and effect, and subsequent to Closing (i) Manager shall continue to manage Cimarron, and (ii) Raintree North America and the Time-Share Association have fully complied with and are current in the payment of any and all moneys due under the Raintree Exchange Agreement. (k) 1:1 RATIO. Sellers represent and warrant that there are sufficient units available in Cimarron for use by time-share interest purchasers in good standing under their purchase agreements with respect to Cimarron. (l) EXCHANGE COMPANY. Purchasers from Raintree North America of time-share interests of Cimarron are presently affiliated and in good standing with Resort Condominiums International pursuant to agreements relating to Cimarron. (m) PROJECT DEVELOPMENT, MANAGEMENT AND SALES AGREEMENT. The Development Agreement is in full force and effect and neither party has in the past or is presently in default (either a payout default or a performance default) pursuant to any of the terms thereof. Except as noted in the Disclosure Schedule, all monetary payments due from Raintree North America to RMP and due from RMP to Raintree North America have been made in a timely manner. Any and all amendments to the Development Agreement are included in the Disclosure Schedule. Raintree North America may assign its interest in the Development Agreement to Purchaser, and RMP has consented to such assignment by Raintree North America. Cimarron is presently in "Stage 1" (as defined in the Development Agreement) out of the five "Stages" of development. Raintree North America has exercised its option to purchase "Stage 1". (n) OB SPORTS AGREEMENT. To the knowledge of Sellers, the OB Sports Agreement dated as of March 18, 1999, by and among RMP, OB Sports, LLC ("OB SPORTS") and Cimarron Golf Club, LLC ("CIMARRON GOLF") ("OB SPORTS AGREEMENT") is in full force and effect and none of the parties is presently in default pursuant to any of the terms thereof. Except as set forth in the Disclosure Schedule, all monetary payments required to be made by Raintree North America to OB Sports in connection with the sale of any time-share interest have been made in a timely manner. To the knowledge of Sellers, the OB Sports Agreement and all amendments thereto are included in the Disclosure Schedule. To the knowledge of Sellers, the second priority deed of trust encumbering Cimarron in the original principal amount of $18,000,000 in favor of Cimarron Golf is current and neither RMP nor Cimarron Golf has been in the past or is presently in default thereof. (o) TEXTRON LOAN AGREEMENT. The Textron Loan and Security Agreement by and between RMP and Textron Financial Corporation ("TEXTRON") dated as of October 20, 1999, provides for project loans up to $28,000,000 ("TEXTRON 12 LOAN AGREEMENT"). The Textron Loan Agreement is presently in full force and effect and, except as set forth in the Disclosure Schedule, Raintree North America and, to the knowledge of the Sellers, RMP is not presently in default thereunder. The Textron Loan Agreement and all amendments thereto are included in the Disclosure Schedule. Textron is continuing to fund all construction and receivables draws in connection with the Textron Loan Agreement in a timely manner. (p) CIMARRON TRUST. That Trust is in full force and effect and none of the parties has in the past or is presently in default pursuant to any of the terms thereof. Time-share interests from Cimarron have been conveyed to the Trustee pursuant to the Trust Agreement free and clear of liens for sale to the public in Mexico by Raintree North America or an Affiliate. (q) INDEBTEDNESS. Except as set forth on the Disclosure Schedule, Sellers are not in default under any loan agreement or other obligation for borrowed money. ARTICLE III CONDITIONS TO CLOSING --------------------- 3.1 CONDITIONS TO SELLERS' OBLIGATIONS. The obligation of Sellers to close the transactions contemplated hereby is subject to the fulfillment or waiver of all of the following conditions on or prior to the Closing Date, upon the non-fulfillment of any of which, this Agreement may, at Sellers' option, be terminated pursuant to and with the effect set forth in Article VII: (a) Each and every representation and warranty made by Purchaser shall have been true and correct when made and shall be true and correct in all material respects as if originally made on and as of the Closing Date. (b) All obligations of Purchaser to be performed hereunder through, and including on, the Closing Date (including, without limitation, all obligations which Purchaser would be required to perform at the Closing if the transactions contemplated hereby were consummated) shall have been performed. (c) No suit, proceeding or investigation shall have been commenced or threatened by any Governmental Entity or private person on any grounds to restrain, enjoin or hinder, or to seek material damages on account of, the consummation of the transactions contemplated hereby. 3.2 CONDITIONS TO PURCHASER'S OBLIGATIONS. The obligation of Purchaser to close the transactions contemplated hereby is subject to the fulfillment or waiver of all of the following conditions on or prior to the Closing Date, upon the non-fulfillment of any of which, this Agreement may, at Purchaser's option, be terminated pursuant to and with the effect set forth in Article VII: 13 (a) Each and every representation and warranty made by Sellers shall have been true and correct when made and shall be true and correct in all material respects as if originally made on and as of the Closing Date. (b) All obligations of Sellers to be performed hereunder through, and including on, the Closing Date (including, without limitation, all obligations which Sellers would be required to perform at the Closing if the transactions contemplated hereby were consummated) shall have been performed. (c) All of the consents, waivers and estoppels required to consummate the transaction contemplated hereunder shall have been obtained (without cost to Purchaser or Sellers in excess of the normal and customary cost associated therewith) or, to the extent that the Permits held by Raintree North America with respect to Cimarron or the Development Agreement, would terminate upon the assignment of the Development Agreement, Purchaser shall have either obtained Permits on substantially the same terms as such Permits, or shall have obtained binding commitments from the applicable Government Entities to issue such Permits following the Closing. (d) Purchaser and OB Sports, LLC shall have entered into a purchase and sale agreement pursuant to which Purchaser shall acquire all of the outstanding equity interests of Cimarron Golf Club, LLC on terms and conditions satisfactory to Purchaser. (e) Purchaser and Textron shall have entered into an agreement pursuant to which Textron shall consent to the transactions contemplated herein and agree to provide financing to Purchaser as Purchaser deems necessary in connection with the transactions contemplated hereby. (f) Seller has delivered a consent and estoppel letter (the "CONSENT AND ESTOPPEL LETTER"), duly executed by Royale Mirage Partners, L.P. confirming that (i) Raintree North America is in not in breach or default under the Development Agreement and that no event has occurred which, with notice or the passage of time, or both, would constitute a breach or default, or permit termination or modification of, the Development Agreement and (ii) Royale Mirage Partners, L.P. consents to the assignment of the Development Agreement to Purchaser. (g) Purchaser and Raintree International shall have entered into an time-share interval purchase agreement substantially in the form of Exhibit D (the "INTERVAL PURCHASE AGREEMENT"), pursuant to which Purchaser will agree to sell certain Cimarron time-share intervals to Raintree International for re-sale. (h) No suit, proceeding or investigation shall have been commenced or threatened by any governmental authority or private person on any grounds to restrain, enjoin or hinder, or to seek material damages on account of, the consummation of the transactions contemplated hereby. 14 (i) All amounts due and owing to Textron as "release fees" relating to sales of Cimarron time-share intervals shall be paid in full, except as waived or otherwise not required by Textron as of the Closing Date. (j) Textron shall have released Purchaser from any obligations relating to the "special advance" pursuant to a Fifth Loan Modification Agreement to certain subsidiaries of Raintree International (the "SPECIAL ADVANCE") on June 28, 2002. (k) Purchaser shall have received confirmation from the City of Cathedral City, California that the development of Cimarron is in full compliance with the development plan approved by the City of Cathedral City and that there are no outstanding defaults or fees due thereunder. (l) Purchaser shall have received an acknowledgment in form and substance acceptable to it from BNY Western of the transfer of the First Beneficial Interest under the Trust Agreement to Purchaser. ARTICLE IV CLOSING ------- 4.1 FORM OF DOCUMENTS. At the Closing, the parties shall deliver the documents, and shall perform the acts, which are set forth in this Article IV. All documents which Sellers shall deliver shall be in form and substance reasonably satisfactory to Purchaser and its counsel. All documents which Purchaser shall deliver shall be in form and substance reasonably satisfactory to Raintree International and its counsel. 4.2 SELLERS' DELIVERIES. Sellers shall execute or deliver to Purchaser all of the following: (a) an assignment and assumption agreement substantially in the form attached hereto as Exhibit E (the "ASSIGNMENT AGREEMENT"), duly executed by Raintree North America, pursuant to which it assigns to Purchaser all of its right, title and interest in and to the Purchased Property; (b) a certificate, executed by the Secretary of Raintree International, dated the Closing Date, certifying to the attached Certificate of Incorporation, Bylaws, resolutions adopted by Raintree International's board of directors, good standing certificates of Raintree International issued by the Secretaries of State of Nevada and Texas, and such other matters as Purchaser may reasonably require; 15 (c) a certificate, executed by the Secretary of Raintree North America, dated the Closing Date, certifying to the attached Articles of Incorporation, Bylaws, resolutions adopted by Raintree North America's board of directors, good standing certificates of Raintree North America issued by the Secretaries of State of Texas and California, and such other matters as Purchaser may reasonably require; (d) a certificate dated the Closing Date and signed by the Presidents of each Seller, certifying that the conditions specified in Section 4.2 have been satisfied. (e) the favorable written opinions of Andrews & Kurth, Mayor, Day & Caldwell L.L.P., special counsel to Sellers, and of local counsel reasonably acceptable to Purchaser admitted to practice in the State of Nevada and such other jurisdictions as may be required, addressing the matters set forth in Exhibit F hereto; (f) all necessary consents and Permits required to be obtained pursuant to the provisions of Section 3.2(c); (g) physical possession of all records, tangible assets, licenses, policies, contracts, plans, leases or other instruments owned by or pertaining to Cimarron and the Purchased Property, which are in the possession of any Seller; (h) the Consent and Estoppel Letter; (i) the Interval Purchase Agreement, duly executed by Raintree International; (j) pay-off letters or other evidence from RMP, Cimarron Golf Club, LLC and the City of Cathedral City necessary to confirm the amounts to be paid to them pursuant to Section 1.3 hereof; (k) a letter from Textron acknowledging the release of Purchaser from any obligations relating to the Special Advance; and (l) without limitation by the specific enumeration of the foregoing, all other documents reasonably required from Sellers to consummate the transactions contemplated hereby. 4.3 PURCHASER'S DELIVERIES. Purchaser shall execute and/or deliver to Sellers all of the following: (a) the Purchase Price to be paid to Raintree North America at Closing as provided in Section 1.2; (b) a certificate, executed by the Secretary of Purchaser, dated the Closing Date, certifying to the attached Certificate of Incorporation, Bylaws, resolutions adopted by Purchaser's board of directors, good standing certificates of Purchaser issued by the Secretaries of State of New York and Nevada, and such other matters as Sellers may reasonably require; (c) a certificate dated the Closing Date and signed by the President of Purchaser, certifying that the conditions specified in Section 4.3 have been satisfied. (d) the Assignment Agreement, duly executed by Purchaser; 16 (e) the Interval Purchase Agreement, duly executed by Purchaser; (f) the favorable written opinions of counsel to Purchaser addressing the matters set forth in Exhibit G hereto; and (g) without limitation by the specific enumeration of the foregoing, all other documents reasonably required from Purchaser to consummate the transactions contemplated hereby. ARTICLE V POST-CLOSING AGREEMENTS ----------------------- 5.1 POST-CLOSING AGREEMENTS. From and after the Closing, the parties shall have the respective rights and obligations which are set forth in the remainder of this Article V. 5.2 BACK-UP INFORMATION. Sellers shall, at Purchaser's request, furnish complete detailed back-up information with respect to the Purchased Property to the extent such material is in Sellers' possession or is reasonably available to Sellers. 5.3 THIRD PARTY CLAIMS. The parties shall cooperate with each other with respect to the defense of any claims or litigation made or commenced by third parties subsequent to the Closing Date which are not subject to the indemnification provisions contained in Article VI, provided that the party requesting cooperation shall reimburse the other party for the other party's reasonable out-of-pocket costs and expenses of furnishing such cooperation. 5.4 FURTHER ASSURANCES. The parties shall execute such further documents, and perform such further acts, as may be necessary to transfer and convey the Purchased Property to Purchaser on the terms herein contained and to otherwise comply with the terms of this Agreement. ARTICLE VI INDEMNIFICATION --------------- 6.1 AGREEMENT OF RAINTREE INTERNATIONAL TO INDEMNIFY. Subject to the conditions and provisions of this Article VI, Raintree International hereby agrees to indemnify, defend and hold harmless Purchaser, and its officers, directors, employees, agents, representatives and Affiliates (the "PURCHASER INDEMNIFIED PERSONS") from and against and in any respect of any liabilities, demands, claims, actions or causes of action, regulatory, legislative or judicial proceedings or investigations, assessments, levies, losses, fines, penalties, damages, costs and expenses, including, without limitation reasonable attorneys', accountants', investigators', and experts' fees and expenses, sustained or incurred in connection with the defense or investigation of any such claim (collectively, "DAMAGES"), against, resulting to, imposed upon or incurred by the Purchaser Indemnified Persons (whether such claims are by, against or relate to Purchaser or any other party, including a Governmental Entity), directly or indirectly, by reason of or resulting from (a) any misrepresentation or breach of any representation or warranty, or noncompliance 17 with any covenants or other agreements, given or made by Sellers in this Agreement or in any document furnished by or on behalf of Sellers pursuant to this Agreement or (b) the claim of any broker or finder engaged or alleged to have been engaged by Sellers. 6.2 AGREEMENT OF PURCHASER TO INDEMNIFY. Subject to the conditions and provisions of this Article VI, Purchaser hereby agrees to indemnify, defend and hold harmless Sellers and their respective officers, directors, employees, agents, representatives and Affiliates (the "SELLER INDEMNIFIED PERSONS") from and against and in any respect of all Damages against, resulting to, imposed upon or incurred by any Seller Indemnified Persons (whether such claims are by, against or relate to Sellers or any other party, including a Governmental Entity), directly or indirectly, by reason of or resulting from (a) any misrepresentation or breach of any representation or warranty, or noncompliance with any covenants or other agreements, given or made by Purchaser in this Agreement or in any document furnished by or on behalf of Purchaser pursuant to this Agreement or (b) the claim of any broker or finder engaged or alleged to have been engaged by Purchaser. 6.3 INDEMNIFICATION PROCEDURES. A party entitled to indemnification hereunder shall herein be referred to as an "indemnified party." A party obligated to indemnify an indemnified party shall herein be referred to as an "indemnifying party." (a) THIRD PARTY CLAIMS. Within 10 business days after an indemnified party receives notice of any third party claim or the commencement of any action by any third party which such indemnified party reasonably believes may give rise to a claim for indemnification from an indemnifying party hereunder, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party under this Article VI, notify such indemnifying party in writing in reasonable detail of such claim or action and include with such notice copies of all notices and documents (including court papers) served on or received by the indemnified party from such third party. Failure to give such written notice within the time period described above shall not release the indemnifying party except to the extent such party is prejudiced by such failure. Upon receipt of such notice, the indemnifying party shall be entitled to participate in such claim or action, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party, and to settle or compromise such claim or action, provided that if such settlement or compromise shall provide for any relief other than a monetary payment by the indemnifying party, such settlement or compromise shall be effected only with the consent of the indemnified party, which consent shall not be unreasonably withheld or delayed. After notice to the indemnified party of the indemnifying party's election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Article VI for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation, provided that the indemnified party shall have the right to employ counsel to represent it if (i) the employment of such counsel has been specifically authorized in writing by the indemnifying party, (ii) such claim or action involves remedies other than monetary damages and such remedies, in the indemnified party's reasonable judgment, could have a material adverse effect on such indemnified party or (iii) the named parties to any such third party claim 18 (including impleaded parties) include both the indemnified party and the indemnifying party and such indemnified party shall have been advised in writing by its counsel that there may be conflicting interests between the indemnifying party and the indemnified party in the legal defense of such third party claim, and in any such event the fees and expenses of such separate counsel shall be paid by the indemnifying party, provided that the indemnifying party shall not be obligated to pay the fees or expenses of more than one separate counsel for all indemnified parties arising out the same claim or action. If the indemnifying party does not elect to assume the defense of such claim or action within 30 days of the indemnified party's delivery of notice of such a claim or action, the indemnifying party shall be deemed to have waived its right to assume the defense of such third party claim and the indemnified party shall be entitled to assume the defense thereof. If the indemnifying party fails to acknowledge in writing its indemnification obligation to the indemnified party for such claim or action within a reasonable period following the request therefor by the indemnified party, the indemnified party shall be entitled to assume the defense of such claim or action in any manner it deems appropriate including, without limitation, settling any such third party claim or consenting to the entry of any judgment with respect thereto, provided that it acts reasonably and in good faith. Unless it has been conclusively determined through a final judicial determination (or settlement tantamount thereto) that the indemnifying party is not liable to the indemnified party under this Section 6.3, the indemnified party shall act reasonably and in accordance with its good faith business judgment with respect to such defense, and shall not settle or compromise any such claim or action without the consent of the indemnifying party, which consent shall not be unreasonably withheld or delayed. The parties hereto agree to render to each other such assistance as may reasonably be requested in order to insure the proper and adequate defense of any such claim or action, including making employees available on a mutually convenient basis to provide additional information and explanation of any relevant materials or to testify at any proceedings relating to such claim or action. (b) OTHER CLAIMS. Within 10 business days after an indemnified party sustains any damages not involving a third party claim or action which such indemnified party reasonably believes may give rise to a claim for indemnification from an indemnifying party hereunder, such indemnified party shall deliver notice of such claim to the indemnifying party, specifying with reasonable detail the basis on which indemnification is being asserted and the amount of such damages. If the indemnifying party does not notify the indemnified party within 30 calendar days following its receipt of such notice that the indemnifying party disputes its liability to the indemnified party under this Article VI, such claim specified by the indemnified party in such notice shall be conclusively deemed a liability of the indemnifying party under this Article VI and the indemnifying party shall pay the amount of such claim to the indemnified party on demand or, in the case of any notice in which the amount of the claim (or any portion thereof) is estimated, on such later date when the amount of such claim (or such portion thereof) becomes finally determined. If the indemnifying party has timely disputed its liability with respect to such claim, as provided above, the indemnifying party and the indemnified party shall proceed in good faith to negotiate a resolution of such dispute and, if not resolved through negotiations, such dispute shall be resolved by litigation in an 19 appropriate court of competent jurisdiction. (c) PROMPT PAYMENT. The indemnifying party shall promptly pay or reimburse, as appropriate, the indemnified party for any Damages to which it is entitled to be indemnified hereunder. No party shall permit any exercise of any right of set-off against any other party. 6.4 CHARACTERIZATION OF INDEMNITY PAYMENTS. Purchaser and Sellers agree to treat any payment made by Sellers hereunder to Purchaser as an adjustment to the Purchase Price. However, in the event the Internal Revenue Service determines that any such payment constitutes taxable gain or income to the payee, such payment shall be increased so that the payee receives, on an after-Tax basis, the amount which would have been received had the payment not resulted in taxable gain or income. ARTICLE VII TERMINATION ----------- 7.1 TERMINATION. This Agreement may be terminated at any time prior to the Closing Date: (a) by the mutual written agreement of Purchaser and Raintree International; or (b) by either of such parties if the Closing Date shall not have occurred by September 9, 2002; provided, however, that the right to terminate this Agreement under this Section 7.1(b) shall not be available to any party whose failure to fulfill any material obligation under this Agreement has been the cause of or resulted in the failure of the Closing to occur on or prior to the aforesaid date. 7.2 REMEDIES. Notwithstanding any termination right granted in Section 7.1, in the event of the non-fulfillment of any condition to a party's closing obligations, such party may elect to do one of the following: (a) proceed to close despite the non-fulfillment of any closing condition, it being understood that consummation of the Closing shall not be deemed a waiver of a breach of any representation, warranty or covenant or of any party's rights and remedies with respect thereto; (b) decline to close, terminate this Agreement as provided in Section 7.1, and thereafter seek damages to the extent permitted in Section 7.3; or (c) seek specific performance of the obligations of the other party. Each party hereby agrees that in the event of any breach by such party of this Agreement, the remedies available to the other party at law would be inadequate and that such party's obligations under this Agreement may be specifically enforced. 20 7.3 RIGHT TO DAMAGES. Except as provided in the following sentence, if this Agreement is terminated pursuant to Section 7.1, neither party hereto shall have any claim against the other. In the event this Agreement is terminated as a result of the non-terminating party's material breach of any of the representations and warranties of the non-terminating party contained in Article II being in a material respect incorrect when made, termination shall not be deemed or construed as limiting or denying any legal or equitable right or remedy of the terminating party, and the terminating party shall also be entitled to recover, without limitation, its costs and expenses which are incurred in pursuing its rights and remedies (including reasonable attorneys' fees). ARTICLE VIII MISCELLANEOUS ------------- 8.1 EXPENSES. Regardless of whether the transactions contemplated hereby have been consummated at the Closing, each party shall pay its own expenses incidental to the preparation of this Agreement, the carrying out of the provisions of this Agreement and the consummation of the transactions contemplated hereby. 8.2 PRESS RELEASES. Raintree International, Raintree North America and Purchaser shall not issue any press release or otherwise make public any information with respect to this Agreement or the transactions contemplated hereby prior to the Closing. Raintree International and Purchaser shall issue a joint press release announcing the execution of this Agreement and the occurrence of the Closing. 8.3 Contents of Agreement; Parties in Interest; Etc. This Agreement and the agreements referred to or contemplated herein set forth the entire understanding of the parties hereto with respect to the transactions contemplated hereby, and, except as set forth in this Agreement, such other agreements and the exhibits and the Disclosure Schedule hereto (which such exhibits and the Disclosure Schedule are and shall be considered incorporated into this Agreement), there are no representations or warranties, express or implied, made by any party to this Agreement with respect to the subject matter of this Agreement. Any and all previous agreements and understandings between or among the parties regarding the subject matter hereof, whether written or oral, are superseded by this Agreement and the agreements referred to or contemplated herein. 8.4 ASSIGNMENT AND BINDING EFFECT. This Agreement may not be assigned by any party hereto without the prior written consent of the other parties, and any such attempted assignment without such consent shall be void. All the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and permitted assigns of the parties hereto. 8.5 NOTICES. All notices required or permitted to be given hereunder will be in writing and may be delivered by hand, by facsimile, by nationally recognized private courier, or by United States mail. Notices delivered by mail 21 will be deemed given five (5) business days after being deposited in the United States mail, postage prepaid, registered or certified mail, return receipt requested. Notices delivered by hand, by facsimile, or by nationally recognized private carrier will be deemed given on the day of receipt. All notices will be addressed as follows: If to Sellers: Raintree Resorts International, Inc. 10000 Memorial Drive, Suite 480 Houston, Texas 77024 Attention: Mr. Douglas Y. Bech Fax: (713) 613-2828 with a copy to: Andrews & Kurth L.L.P. 600 Travis, Suite 4200 Houston, Texas 77002 Attention: Mr. Robert V. Jewell Fax: (713) 238-7135 If to Purchaser: Mego Financial Corp. 4310 Paradise Road Las Vegas, Nevada 89109 Attention: Mr. Floyd Kephart Fax: (702) 369-4398 with a copy to: Ungaretti & Harris 3500 Three First National Plaza Chicago, Illinois 60602 Attention: Mr. Gary I. Levenstein Fax: (312) 977-4405 and/or to such other respective addresses and/or persons as may be designated by notice given in accordance with the provisions of this Section 8.5. 8.6 AMENDMENT. This Agreement may be amended, modified or supplemented at any time prior to the Closing Date by mutual written agreement of the respective Boards of Directors of Purchaser and Raintree International. Any amendment, modification or revision of this Agreement and any waiver of compliance or consent with respect hereto shall be effective only if in a written instrument executed by the parties hereto. 22 8.7 GOVERNING LAW. This Agreement shall be governed by and interpreted and enforced in accordance with the laws of the State of Nevada, as applied to contracts made and fully performed in such state. 8.8 BENEFIT TO OTHERS. The representations, warranties, covenants and agreements contained in this Agreement are for the sole benefit of the parties hereto, and their respective successors and assigns, and they shall not be construed as conferring, and are not intended to confer, any rights on any other person, except for the Seller Indemnified Persons and Purchaser Indemnified Persons. 8.9 SEVERABILITY. If any term or other provision of this Agreement is determined to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other terms and provisions of the Agreement shall remain in full force and effect. Upon such determination, the parties hereto shall negotiate in good faith to modify this Agreement so as to give effect to the original intent of the parties to the fullest extent permitted by applicable law. 8.10 SECTION HEADINGS. All section headings are for convenience only and shall in no way modify or restrict any of the terms or provisions hereof. 8.11 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original. This Agreement and any counterpart so executed shall be deemed to be one and the same instrument. 8.12 DEFINITIONS. The following capitalized terms used herein and/or the exhibits and schedules hereto shall have the meanings set forth below. "AFFILIATE" means with respect to any person, any person which controls such person, which that person controls, or which is under common control with such person. For purposes of the preceding sentence, the term "control" means the power, direct or indirect, to direct or cause the direction of the management and policies of a person or entity through voting securities, contract or otherwise. "CLAIMS" means options, proxies, voting trusts, voting agreements, judgments, pledges, charges, escrows, rights of first refusal or first offer, mortgages, indentures, claims, transfer restrictions, liens, equities, security interests and other encumbrances of every kind and nature whatsoever, whether arising by agreement, operation of law or otherwise. "CLOSING" means the consummation of the transactions contemplated by this Agreement. "CLOSING DATE" means the date on which the Closing occurs in accordance with Section 1.4. "ENVIRONMENTAL LAWS" means all federal, state and local statutes, regulations, ordinances, rules, regulations and policies, all court orders and decrees and arbitration awards, and the common law, which pertain to environmental matters or contamination of any type whatsoever. Environmental Laws include, without limitation, those relating to: manufacture, processing, use, distribution, treatment, storage, disposal, generation or transportation of 23 hazardous materials; air, soil, surface or ground water or noise pollution; releases; protection of wildlife, endangered species, wetlands or natural resources; containers; health and safety of employees and other persons; and notification requirements relating to the foregoing. "GOVERNMENTAL ENTITY" governmental agency or regulatory body, court, agency, commission, division, department, public body or other authority. "INTELLECTUAL PROPERTY" means all of the following: (i) trademarks, service marks, slogans, trade names, trade dress and the like (ii) all proprietary formulations, manufacturing methods, know-how and trade secrets; (iii) all patents on and pending applications to patent any technology or design; (iv) all copyrights; and (v) all licenses of rights in computer software, trademarks, patents, copyrights, unpatented formulations, and other know-how. "PERMITS" means all licenses, permits, registrations, approvals and agreements and consents which are required in order for the applicable company to conduct its business as presently conducted and in the context of any environmental matters also means licenses, permits, registrations, approvals, agreements and consents which are required under or are issued pursuant to Environmental Laws. "RELATED PARTY" means any present or former officer, director, stockholder or Affiliate of such company, any present or former known spouse, ancestor or descendant of any of the aforementioned persons or any trust or other similar entity for the benefit of any of the foregoing persons. "SUBSIDIARY" means any corporation, partnership, limited liability company, joint venture or other legal entity and of which the person referred to (either alone or through or together with any other Subsidiary), owns, directly or indirectly, 50% or more of the capital stock or other equity interests the holders of which are generally entitled to vote with respect to matters to be voted on in such corporation, partnership, joint venture or other legal entity. REMAINDER OF PAGE INTENTIONALLY LEFT BLANK 24 IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. SELLERS: -------- RAINTREE RESORTS INTERNATIONAL, INC. By: ----------------------------------- Name: Brian Tucker Title: Chief Operating Officer RAINTREE NORTH AMERICA RESORTS, INC. By: ----------------------------------- Name: Brian Tucker Title: Vice President PURCHASER: ---------- MEGO FINANCIAL CORP. d/b/a LEISURE INDUSTRIES CORPORATION By: ----------------------------------- Name: Gregg McMurtrie Title: Executive Vice President 25 SCHEDULES AND EXHIBITS Schedule I Disclosure Schedule Exhibit A - Development Agreement Exhibit B - Trust Agreement, including all amendments Exhibit C - Legal Description of Real Property Exhibit D - Interval Purchase Agreement Exhibit E - Assignment Agreement Exhibit F - Sellers' Counsel Opinion(s) Exhibit G - Purchaser's Counsel Opinion 26 Schedule I ASSUMED LIABILITIES AND PAYMENTS - ----------------------------------- Royale Mirage Partners, L.P. - $228,161.72 OB Sports - $119,039.65 City of Cathedral City - $14,913.85 Robert Gibson (finder's fee) - $10,000.00 RCI Management, Inc. - $157,008.15 Brobeck (attys for BNY Western) - $2,655.00 27 EX-10.262 10 doc9.txt Exhibit 10.262 FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT THIS FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (the "AMENDMENT") is made effective as of September 9, 2002, by and between TEXTRON FINANCIAL CORPORATION, a Delaware corporation ("LENDER"), ROYALE MIRAGE PARTNERS, L.P., a California limited partnership ("BORROWER"), RAINTREE NORTH AMERICA RESORTS, INC., a Texas corporation ("RAINTREE"), RAINTREE RESORTS INTERNATIONAL, INC., a Nevada corporation ("RAINTREE INTERNATIONAL") and MEGO FINANCIAL CORP. d/b/a Leisure Industries Corporation, a New York corporation ("LEISURE"). BACKGROUND A. Pursuant to the terms of a certain Loan and Security Agreement between Lender and Borrower dated October 20, 1999 (as amended as described below and as the same may be further amended, modified or supplemented from time to time, the "LOAN AGREEMENT"), Borrower requested and Lender agreed, inter alia, to extend to Borrower (a) a Development Loan in the original principal amount of up to $18,200,000 and (b) a Receivables Loan in the original principal amount of up to $20,000,000, subject to the terms and conditions set forth therein. B. Pursuant to that certain First Amendment to Loan and Security Agreement between Lender and Borrower dated March 31, 2000 (the "FIRST AMENDMENT"), Borrower requested and Lender agreed, inter alia, to extend certain advance periods and amend certain borrowing sublimits under the Loans, subject to the terms and conditions set forth therein. C. Pursuant to that certain Second Amendment to Loan and Security Agreement between Lender and Borrower (and consented to by Raintree) dated December 11, 2000 (the "SECOND AMENDMENT"), Borrower requested and Lender agreed, inter alia, to (i) consent to and approve the execution, delivery and performance by Borrower of that certain Project Development, Management and Sales Agreement between Borrower and Raintree dated effective May 3, 2000 (as amended and as it may be amended, modified or supplemented from time to time, the "PROJECT DEVELOPMENT AGREEMENT"), (ii) Raintree assuming, as of May 3, 2000, the authority and responsibility for and the performance of all matters in connection with the Project Development and Operation (as such term is defined in the Project Development Agreement) and full control of and full financial and other responsibility for the Project (as such terms are defined in the Project Development Agreement), including without limitation, the performance of and compliance with all terms and covenants of the Textron Loan and other Project Loans (as such terms are defined in the Project Development Agreement), and (iii) Raintree performing on behalf of Borrower all of Borrower's obligations under the Loan Documents, including without limitation, such obligations of Borrower related to the development, construction, marketing, operation, management and administration of the Project and the sale of Vacation Ownership Interests, subject to the terms and conditions set forth in the Loan Agreement. D. Pursuant to that certain Third Amendment to Loan and Security Agreement between Lender, Borrower and Raintree dated September 28, 2001 (the "THIRD AMENDMENT"), Borrower and Raintree requested and Lender agreed, inter alia, to (i) add Raintree as a co-borrower under the Receivables Loan, and (ii) amend and supplement certain terms and conditions of the Loan Agreement to permit the sale of Vacation Ownership Interests by Raintree to Purchasers in Mexico as a part of the Club Regina Membership Program of Raintree, including without limitation, the formation of the Cimarron Trust, as evidenced by that certain Declaration of Covenants, Conditions and Restrictions and First Amended and Restated Agreement of Trust (Cimarron Trust) dated effective September 28, 2001 among Raintree North America Resorts, Inc., as First Beneficiary or Developer, BNY Western Trust Company, as successor in interest to U.S. Trust Company, National Association, as Trustee, and Cimarron Beneficial Interest Owners Association, as Association (the "TRUST AGREEMENT") into which Units will be conveyed by Borrower or Raintree, and from which Raintree will sell Vacation Ownership Interests to Purchasers, subject to the terms and conditions set forth in the Loan Agreement. E. As evidenced by the Third Amendment and the Project Documents (as defined below), Raintree commenced the sales of Vacation Ownership Interests to Purchasers in Mexico as a part of Raintree's Club Regina Membership Program as further described in the Affiliation Agreement, the Joint Operating Agreement, the Mercantile Commission Agreement, the Services Contract and certain of the other Project Documents. F. Pursuant to that certain Purchase Agreement among Raintree International, Raintree and Leisure dated of even date herewith (the "LEISURE PURCHASE AGREEMENT"), Raintree agreed to sell to Leisure and Leisure agreed to purchase from Raintree all of Raintree's right, title and interest in and to the Project Development Agreement and the Trust Agreement, subject to the terms and conditions set forth therein. G. Pursuant to that certain Interval Purchase Agreement among Raintree International, Raintree and Leisure dated of even date herewith (the "INTERVAL PURCHASE AGREEMENT"), Leisure agreed to sell to Raintree and Raintree agreed to purchase from Leisure certain Vacation Ownership Interests to sell to Purchasers in Mexico as a part of the Club Regina Membership Program of Raintree, subject to the terms and conditions set forth therein and under the Loan Agreement. H. Pursuant to that certain Purchase Agreement between O.B. Sports, LLC, as seller, and Leisure, as purchaser, dated of even date herewith and all other documents executed in connection therewith, Leisure has agreed to purchase from O.B. Sports, LLC all of the outstanding membership interests owned by O.B. Sports, LLC in Cimarron Golf Club, LLC subject to the terms and conditions set forth therein. In addition, Leisure has agreed to assume certain obligations of O.B. Sports, LLC to Lender (Golf Division) in connection with the purchase by Leisure of the membership interests owned by O.B. -2- Sports, LLC in Cimarron Golf Club, LLC . I. Borrower, Raintree and Leisure have requested and Lender has agreed to amend the terms of the Loan Agreement in accordance with the terms and conditions of this Amendment. J. All capitalized terms not defined in this Amendment shall have the meanings set forth in the Loan Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained in this Amendment and for other good and valuable consideration, the receipt and adequacy of which are acknowledged, the parties to this Amendment, intending to be legally bound hereby, agree as follows: 1. CONSENT. Notwithstanding anything to the contrary contained in the Loan Agreement, the other Loan Documents or the Project Development Agreement, Lender and Borrower hereby consent to and approve the sale by Raintree to Leisure of all of Raintree's right, title and interest in and to the Project Development Agreement and the Trust Agreement in accordance with the terms and conditions of the Leisure Purchase Agreement. Such sale shall not constitute a Default or an Event of Default under the Loan Agreement, the other Loan Documents or the Project Development Agreement. Notwithstanding the foregoing, Raintree agrees that such consent and approval, as set forth in this PARAGRAPH 1, shall not be deemed to be a release of Raintree of its obligations to Borrower or Lender under the Project Development Agreement for the period from May 3, 2000 through the date hereof. As a condition precedent to Lender's consent as set forth in this PARAGRAPH 1, Leisure agrees to execute and deliver to Lender a collateral assignment of all of Leisure's right, title and interest in and to the Project Development Agreement and the Trust Agreement, which collateral assignment shall be in form and content acceptable to Lender. By its execution of this Amendment, Borrower hereby consents to and approves the execution by Leisure of the collateral assignments in favor of Lender of Leisure's right, title and interest in and to the Project Development Agreement and the Trust Agreement, as evidenced by the collateral assignment agreements. Lender, Raintree and Borrower agree that Borrower's obligations under the Loan Documents related to the Receivables Loan will be performed by Raintree; provided however, in no event will the performance by Raintree of such obligations be construed to be a waiver of or release by Lender of Borrower's obligations to Lender under the Loan Documents. Lender, Leisure and Borrower agree that Borrower's obligations under the Loan Documents related to the Development Loan will be performed by Leisure as expressly provided for and in accordance with the terms and conditions of the Project Development Agreement; provided however, in no event will the performance by Leisure of such obligations be construed to be a waiver of or release by Lender of Borrower's obligations to Lender under the Loan Documents. Borrower and Raintree will execute and deliver to Lender a Amended and Restated Receivables Loan Note, in form and content acceptable to Lender, evidencing Borrower's and Raintree's - -3- obligations to Lender under the Receivables Loan. 2. CHANGE OF CONTROL. Leisure agrees that by purchasing Raintree's right, title and interest in and to the Project Development Agreement, Leisure has assumed all of the Developer's (as such term is defined in the Project Development Agreement) obligations and covenants under the Project Development Agreement, including assuming the authority and responsibility for and the performance of all matters in connection with the Project Development and Operation (as such term is defined in the Project Development Agreement) and full control of and full financial and other responsibility for the Project (as such terms are defined in the Project Development Agreement), including without limitation, the performance of and compliance with all terms and covenants of the Textron Loan and other Project Loans (as such terms are defined in the Project Development Agreement) other than with respect to the Receivables Loan. 3. OBLIGATIONS OF LEISURE. Leisure covenants and agrees to perform on behalf of Borrower all of Borrower's obligations under the Loan Documents related to the Development Loan in accordance with the terms and conditions of the Project Development Agreement. For purposes of clarification, (i) Leisure shall not assume Borrower's or Raintree's obligations to Lender under the Loan Documents related to the Receivables Loan, and (ii) Leisure will perform on behalf of Raintree and Borrower all of Raintree's and Borrower's obligations under the Loan Documents related to the Development Loan, including without limitation, such obligations of Raintree and Borrower related to the development, construction, operation, management and administration of the Project. 4. CONTINUING OBLIGATIONS OF RAINTREE . Pursuant to the terms of the Loan Agreement and the other Loan Documents, Raintree covenants and agrees to continue to perform on behalf of Borrower all of Borrower's obligations hereunder and under the Loan Documents related to the Receivables Loan and certain obligations on behalf of Borrower as further described in the Interval Purchase Agreement, including without limitation, such obligations of Borrower and Raintree related to the marketing of the Project as further described in the Interval Purchase Agreement and the sale of Vacation Ownership Interests in accordance with the terms of the Loan Agreement and the other Loan Documents. Raintree covenants and agrees to maintain and perform all of Raintree's obligations under all of the project documents related to the Project (collectively, the "PROJECT DOCUMENTS"), including without limitation, the Amended and Restated Condominium Declaration, the Records Management Agreement, the Lockbox Agreement, the Servicing Agreement, the Management Agreement, the Affiliation Agreement, the Joint Operating Agreement, the Mercantile Commission Agreement and the Services Contract. Raintree further covenants and agrees that such Project Documents will not be modified or amended with the prior written consent of Lender. 5. CONSENT TO INTERVAL PURCHASE AGREEMENT. Notwithstanding anything to the contrary contained in the Loan Agreement or the other Loan Documents, Lender hereby consents to and -4- approves the sale by Leisure of certain Vacation Ownership Interests to Raintree in accordance with the terms of the Interval Purchase Agreement in order to permit Raintree to continue to sell to Purchasers in Mexico such Vacation Ownership Interests as a part of the Club Regina Membership Program of Raintree. Leisure and Raintree acknowledge and agree that certain release payment terms set forth in the Interval Purchase Agreement may be increased from time to time at Lender's reasonable discretion. 6. PRINCIPAL PAYMENTS. SECTION 5.1(B)(III) of the Loan Agreement shall be and is hereby amended to read, in its entirety, as follows: "(iii) Notwithstanding anything herein or elsewhere to the contrary, the aggregate principal reduction payments on the Development Loan received by Lender as Release Payments pursuant to SUBSECTIONS 5.1(B)(I) AND 5.1(B)(II) above must equal the following amounts as of the following dates: DATE AGGREGATE PRINCIPAL REDUCTIONS September 1, 2002 $6,000,000.00 June 1, 2003 $12,000,000.00 November 1, 2003 $18,200,000.00 To the extent such payments have not been made as a result of the Release Payments, Borrower, Raintree or Leisure shall make such payments from other funds on the date set forth above." 7. INDEMNIFICATION OF LENDER. Raintree and Borrower, jointly and severally, agree to be bound by the indemnification provisions set forth in SECTION 17.22 of the Loan Agreement; provided however, Raintree's obligations thereunder shall not extend to (a) any period prior to May 3, 2000, the effective date of the Project Development Agreement, or (b) any period after March 1, 2003 with respect to its obligations related to the Development Loan. Leisure agrees to indemnify and hold harmless the Indemnified Lender Parties and to be bound by the indemnification provisions set forth in SECTION 17.22 of the Loan Agreement for any period after the date hereof in connection with the performance by Leisure of Borrower's obligations under the Loan Documents related to the Development Loan. In addition, (i) Raintree agrees that the indemnification obligations set forth in SECTION 17.22 of the Loan Agreement shall also extend to any and all liabilities, claims, demands, losses, damages, cost and expenses related to Raintree's failure to perform its obligations under this Amendment, (ii) Borrower agrees that the indemnification obligations set forth in SECTION 17.22 of the Loan Agreement shall also extend to any and all liabilities, claims, demands, losses, damages, cost and expenses related to Borrower's failure to perform -5- its obligations under this Amendment, and (iii) Leisure agrees that the indemnification obligations set forth in SECTION 17.22 of the Loan Agreement shall also extend to any and all liabilities, claims, demands, losses, damages, cost and expenses related to Leisure's failure to perform its obligations under this Amendment. 8. NOTICES AND INFORMATION. Raintree and Leisure agree to provide to Lender and Borrower such notices and information as required under SECTIONS 18.14 AND 18.15 of the Loan Agreement that otherwise would be delivered to Lender by the Borrower. Lender agrees to provide to Raintree, Leisure and Borrower such notices and information as required under the Loan Agreement that otherwise would be delivered to Borrower by the Lender. Borrower consents to the delivery to Raintree and Leisure of such notices and information provided that Borrower also concurrently receives such notices and information. For purposes hereof, all notices to Lender shall be provided to the parties and in the manner set forth in the Loan Agreement and notices to Raintree, Leisure and Borrower shall be provided to the parties set forth below in the manner set forth in the Loan Agreement: If to Raintree: c/o Raintree Resorts International, Inc. 10000 Memorial Drive, Suite 480 Houston, Texas 77024 Attention: Douglas Y. Bech If to Leisure: c/o Mego Financial Corp. 4310 Paradise Road Las Vegas, Nevada 89109 Attention: Floyd Kephart If to Borrower: c/o James Mah London Mah & Associates Ltd. 103-1847 W. Broadway Vancouver BC V6J 1Y6 Notwithstanding anything to the contrary contained herein and in SECTIONS 18.14 AND 18.15 of the Loan Agreement, Borrower, Raintree and Leisure agree that Lender is not obligated to deliver to Borrower, Raintree or Leisure any notice or information received by Lender from such parties unless otherwise expressly provided for in this PARAGRAPH 8 or under the Loan Agreement or other Loan Documents. - -6- 9. ADDITIONAL COLLATERAL. Borrower, Leisure and Raintree acknowledge and agree that the defined term "Collateral" shall have such meaning as provided in the Loan Agreement and the other Loan Documents and shall be amended to further include the following: (i) A first priority assignment against and lien against the proceeds from the Vacation Owner Agreement executed by Purchasers in favor of Raintree encumbering the Vacation Ownership Interests financed by the Notes Receivable, including a first priority assignment of Raintree's rights (exercisable following the occurrence of, and solely during the continuance of, an Event of Default hereunder) to cancel such Vacation Owner Agreement and to re-sell (or cause the resale of) the Vacation Ownership Interests relating to such Vacation Owner Agreement; (ii) All of Leisure's rights, title and interest (but not obligations) as a beneficiary under the Trust Agreement with respect to all matters related to or affecting all present and future Vacation Owner Agreements and Vacation Ownership Interests assigned to Lender from time to time; and (ii) All of Leisure's rights, title and interest in to and under the Project Development Agreement. In addition, coincident with the execution of the Amendment, Raintree International shall execute and deliver to Lender a guaranty agreement, in form and content acceptable to Lender, evidencing Raintree International's obligation to act as surety for and guarantee the obligations of Raintree to Lender under the Receivables Loan, the Receivables Loan Note, the Loan Agreement and all other Loan Documents. 10. GRANT OF SECURITY INTEREST. To secure the payment and performance of the Obligations, Borrower, Leisure and Raintree unconditionally and irrevocably assign, pledge and grant to Lender and ratify and confirm the prior assignment, pledge and grant to Lender of a continuing first priority security interest in and to the Collateral, as expanded as described in PARAGRAPH 9 above. 11. ADDITIONAL REPORTING AND INVENTORY CONTROL. Raintree will deliver to Lender and Borrower on a monthly basis, or as otherwise more frequently requested by Lender, a written sales report setting forth, among other things, (i) the sales made or required to be made by Raintree during such period, (ii) any payments made to Lender, Leisure and/or Borrower or other third parties in connection with such sales, (iii) that sales made to Purchasers and Vacation Ownership Interests held by Raintree are maintained at a 1.0 to 1.0 ratio, (iv) a reconciliation of membership percentage to interval ownership, (v) a detailed itemization of Vacation Ownership Interests sold during such period, and (vi) such other additional information or reporting as may be requested by Lender. Such report shall be in form and content acceptable to Lender and certified to be true and correct by the chief financial officer of Raintree - -7- and include any necessary footnote clarifications. In addition, Leisure will deliver to Lender and Borrower on a monthly basis, or as otherwise more frequently requested by Lender, (a) a written sales report setting forth, among other things, an itemized description of the Vacation Ownership Intervals sold by Leisure to Raintree under the Interval Purchase Agreement, including without limitation, the purchase price and any other release fees or other sums paid in connection therewith, and (b) a written report, in form and content acceptable to Lender, detailing the status of Leisure's obtaining the necessary permits, approvals, registrations, and authorizations as further described in PARAGRAPH 14 below and detailing the progress of the development of Phase I and Phase II of the Project. 12. ASSESSMENTS. At the request of Lender, Borrower, Raintree and Leisure acknowledge and agree that any and all payments from the sale of any Vacation Ownership Interests received by Raintree, Leisure or their agents (net of the Payout Amounts paid to Borrower under the Project Development Agreement and release fees and other payments paid to Lender under the Loan Agreement) and any assessments, maintenance fees or other operating expenses for the maintenance, repair and operation of the Resort collected by Borrower, Raintree, Leisure or their agents and any other sums or the proceeds thereof that constitute Collateral for the Obligations will be forwarded to a lockbox maintained by Lender or for its account. At the request of Lender, Borrower, Raintree and Leisure will promptly execute such agreements or documents as requested by Lender to evidence such agreement and will cause or direct any Purchaser, Member, the VOI Association or any of Borrower's, Raintree's or Leisure's agents to comply with such request. 13. THE TRUST. Leisure represents and warrants to Lender and covenants and agrees with Lender as follows: (A) Leisure will not amend or permit the amendment of the Trust Agreement without the prior written consent of the Lender, such consent not to be unreasonably withheld. Leisure will not enter into any new trust agreements in any way related to the Units or any Vacation Ownership Interest now or hereafter created without the prior written consent of the Lender, such consent not to be unreasonably withheld. Leisure will cause all Units and Vacation Ownership Interests to be conveyed to the Trustee, subject to the terms of the Trust Agreement. (B) In the event that the Trustee resigns or is replaced for any reason as Trustee under the Trust Agreement, Leisure agrees that it will provide the Lender with at least ten (10) days' prior written notice before any replacement trustee is appointed by Leisure pursuant to the terms of the Trust Agreement. Leisure agrees that any such replacement trustee must be reasonably acceptable to the Lender. (C) Leisure agrees to take any and all actions necessary to prevent any lien (other than liens in favor of the Lender or the Permitted Exceptions) from attaching to the legal or equitable ownership interest in any Unit or Vacation Ownership Interest subject to the Trust Agreement, -8- provided however, Leisure shall not be obligated to take such action with respect to liens attaching to Second Beneficial Interest previously sold to a Purchaser. (D) Leisure shall obtain and maintain or cause the Trustee to obtain and maintain a fidelity bond or similar insurance in form, content and amount reasonably acceptable to Lender insuring the Trustee from any and all liability in any way related to or arising out of the Trust Agreement or any matters related thereto or to any property held by the Trustee pursuant to the Trust Agreement. (E) As to each Vacation Ownership Interest covered by each Vacation Owner Agreement, the Trustee pursuant to the terms of the Trust Agreement will have good title to and lawful right and full authority to convey the Vacation Ownership Interest to the Purchaser thereof. This will require the applicable Payout Amounts to be remitted to Borrower and release fees and other payments remitted to Lender as a condition precedent to the transfer of title to the Trustee. Such Vacation Ownership Interests are not subject to any lien or encumbrance except the lien in favor of the Lender and Permitted Exceptions. 14. REGISTRATION BY LEISURE. Coincident with the execution of this Amendment, Leisure will undertake and diligently pursue the approval by the State of California of Phase I and Phase II of the Project as a timeshare project and deliver to Lender on or before March 1, 2003, evidence that a timeshare public report has been issued and approved by the Division for Phase I and Phase II of the Project and that Leisure and Phase I and Phase II of the Project have all necessary permits, approvals, registrations, and authorizations required under the Timeshare Act and all other applicable Legal Requirements. 15. ADDITIONAL RECEIVABLES LOAN FACILITY. Lender and Leisure agree to negotiate in good faith the terms and conditions of an additional receivables loan facility to be extended by Lender to Leisure in connection with the sale of Vacation Ownership Interests at Phase I and Phase II of the Project in order to consummate such financing contemporaneously with the issuance of the timeshare public report and approval by the Division of Leisure and Phase I and Phase II of the Project and the receipt by Leisure of all necessary permits, approvals, registrations, and authorizations required under the Timeshare Act and other applicable Legal Requirements. On or before March 1, 2003, Leisure will execute and deliver to Lender such documents, agreements, statements, resolutions, certificates, consents, opinions of counsel and other information as Lender may require as negotiated by Lender and Leisure in good faith to evidence such credit facility; provided however, in any event the terms and conditions of such credit facility as evidenced by such documentation must comply with the formal underwriting of Lender and be submitted to and approved by Lender's Credit Committee. 16. ADDITIONAL EVENTS OF DEFAULT. The following subsections shall be added as additional "Events of Default" under SECTION 22 of the Loan Agreement: -9- (A) The failure of Borrower, Raintree or Leisure to perform or observe any obligations, covenants, agreements or warranties contained in this Amendment, the Loan Agreement, any of the other Loan Documents or the Trust Agreement and any applicable notice and cure periods have expired. (B) A default or an Event of Default occurs under the Project Development Agreement and any applicable notice and cure periods have expired. (C) A default or an Event of Default occurs under the Leisure Purchase Agreement and any applicable notice and cure periods have expired, provided that such default or Event of Default would reasonably be expected to have a material adverse effect on Leisure's ability to perform its obligations under the Project Development Agreement. (D) A default or an Event of Default occurs under the Interval Purchase Agreement and any applicable notice and cure periods have expired, provided that such default or Event of Default would reasonably be expected to have a material adverse effect on Leisure's ability to perform its obligations under the Project Development Agreement. (E) A default or an Event of Default occurs under that certain Purchase Agreement between O.B. Sports, LLC, as seller, and Leisure, as purchaser, dated of even date herewith and all other documents executed in connection therewith evidencing the purchase by Leisure from O.B. Sports, LLC of all of the outstanding membership interests owned by O.B. Sports, LLC in Cimarron Golf Club, LLC, provided that such default or Event of Default would reasonably be expected to have a material adverse effect on Leisure's ability to perform its obligations under the Project Development Agreement or constitute an Event of Default under the Leisure Golf Loan (as defined below). (F) An Event of Default occurs under the loan agreement, assumption agreement or other agreements executed in connection therewith between Leisure and Lender (Golf Division) related to the assumption by Leisure of the outstanding obligations of O.B. Sports, LLC to Lender (Golf Division) (the "LEISURE GOLF LOAN"). 17. ADDITIONAL REMEDIES. In addition to the remedies set forth in SECTION 23 of the Loan Agreement and in other sections of the Loan Documents, should an Event of Default occur, Lender may, take any one or more actions described in this Amendment or any of the other documents executed in connection herewith or given as security therefor, and any other rights and remedies available to Lender at law or in equity. 18. LIMITATION OF REMEDIES. Lender agrees that if Borrower or Raintree (i) fails to perform its obligations under the Receivables Loan resulting directly from Borrower's or Raintree's failure to make when due, any payment or mandatory prepayment of principal or interest on the Receivables Loan, or (ii) impairs or jeopardizes any of the Receivables Loan Collateral as determined by Lender in its sole -10- and absolute discretion, or (iii) fails to continue to perform its obligations related to sales actives related to the sale of Vacation Ownership Interests (including without limitation, any representations, warranties or covenants related thereto) or (iv) fails to comply with any representation, warranty or covenant of Borrower or Raintree under the Loan Agreement or the other Loan Documents, Lender will not seek to enforce its rights or remedies under the Loan Documents against Leisure, the Resort or the Property. Notwithstanding the foregoing, Borrower, Raintree and Leisure agree that such limitation shall not prohibit Lender from exercising any other rights or remedies available to Lender under the Loan Documents, at law or in equity. 19. REPURCHASE OR RESALE OF VACATION OWNERSHIP INTERESTS. In the event that Lender exercises any of its rights and remedies under the Loan Documents and forecloses upon any Vacation Ownership Interests, Lender and Leisure agree to negotiate in good faith the terms and conditions upon which Leisure would purchase, market or sell such Vacation Ownership Interests from or on behalf of Lender, including without limitation, the purchase price or the marketing and sale terms, and any documents or agreements evidencing such terms and conditions of such purchase or marketing and sales. Lender and Leisure agree that Leisure has the option, but is not obligated, to purchase, market or sell such Vacation Ownership Interests from Lender unless a formal agreement among the parties is consummated. 20. ADDITIONAL CONDITIONS. The obligation of Lender to enter into this Amendment is subject to the satisfaction of Lender in its sole and absolute discretion of the conditions precedent set forth on EXHIBIT A attached hereto. Borrower, Raintree and Leisure agree that Borrower's, Raintree's or Leisure's failure to comply in Lender's sole and absolute discretion with the post-closing obligations set forth on EXHIBIT B attached hereto, Lender may, at its option, cease to make further Advances to Borrower or Raintree under the Receivables Loan. 21. ADDITIONAL DOCUMENTS; FURTHER ASSURANCES. Borrower, Raintree and Leisure covenant and agree to execute and deliver to Lender, or to cause to be executed and delivered to Lender contemporaneously herewith, at the sole cost and expense of Borrower, Raintree and Leisure, any and all other documents, agreements, statements, resolutions, certificates, consents, opinions of counsel and information as Lender may require in connection with the matters or actions described herein. Borrower, Raintree and Leisure further covenant and agree to execute and deliver to Lender or to cause to be executed and delivered at the sole cost and expense of Borrower, Raintree and Leisure, from time to time, any and all other documents, agreements, statements, certificates and information as Lender shall request to evidence or effect the terms hereof or any of the other Loan Documents, or to enforce or to protect Lender's interest in the Collateral. All such documents, agreements, statements, certificates and information shall be in form and content acceptable to Lender in its sole discretion. 22. PROTECTION OF COLLATERAL. Borrower, Raintree and Leisure hereby authorize and appoint Lender to take such actions as Lender may deem advisable to protect the Collateral and its interests thereon and its rights thereunder, to execute on the Borrower's, Raintree's or Leisure's behalf and -11- file at Borrower's, Raintree's and Leisure's expense financing statements, and amendments thereto, in those public offices deemed necessary or appropriate by Lender to establish, maintain and protect a continuously perfected security interest in the Collateral, and to execute on the Borrower's, Raintree's and Leisure's behalf such other documents and notices as Lender may deem advisable to protect the Collateral and its interests therein and its rights thereunder. 23. CHALLENGES TO ENFORCEMENT. Borrower and Raintree acknowledge and agree that they do not have any defense, setoff, counterclaim or challenge against the payment of any sums owing under the Loan Documents or the enforcement of any of the terms and conditions of the Loan Documents. Leisure acknowledges and agrees that it does not have any defense, setoff, counterclaim or challenge against the payment of any sums owing under the Loan Documents related to the Development Loan or the enforcement of any of the terms and conditions of the Loan Documents related to the Development Loan unless otherwise expressly provided herein. 24. CONFIRMATION OF COLLATERAL. Nothing contained in this Amendment shall be deemed to be a compromise, satisfaction, accord and satisfaction, novation or release of any of the Loan Documents or any obligations under the Loan Documents, or a waiver by Lender of any of its rights under the Loan Documents, at law or in equity. Notwithstanding anything to the contrary contained in the Project Development Agreement or the Leisure Purchase Agreement, all liens, security interest, rights and remedies granted to the Lender herein and under the Loan Documents are hereby ratified, confirmed and continued. 25. REPRESENTATIONS AND WARRANTIES OF BORROWER. Borrower represents and warrants, which representations and warranties shall survive until all obligations owed by Borrower to Lender under the Loan Documents are paid and satisfied in full, as follows: (A) All representations and warranties of Borrower set forth in the Loan Documents are true and complete as of the date hereof. (B) To its actual knowledge, no condition or event exists or has occurred which would constitute a Default or an Event of Default under the Loan Documents. (C) The representations, warranties and other agreements of Borrower as set forth in that certain Consent and Estoppel Letter (as described in the Leisure Purchase Agreement)are true and correct and Lender is relying on such letter in entering into this Amendment. (D) The execution of this Amendment by Borrower and all documents or agreements to be executed or delivered pursuant to the terms of this Amendment: (I) have been duly authorized by all requisite action of Borrower; - -12- (II) will not conflict with or result in the breach of or constitute a default (upon the passage of time, delivery of notice or both) under Borrower's formation and governing documents or under any applicable statute, law, rules, regulation or ordinance, or any indenture, mortgage, loan or other document or agreement to which Borrower is a party or by which Borrower may be bound or affected; and (III) will not result in the creation or imposition of any additional lien, charge or encumbrance of any nature whatsoever upon any of the property or assets of Borrower, except liens in favor of the Lender. 26. REPRESENTATIONS AND WARRANTIES OF RAINTREE. Raintree represents and warrants, which representations and warranties shall survive until all obligations owed by Raintree to Lender under the Loan Documents are paid and satisfied in full, as follows: (A) All representations and warranties of Raintree set forth in the Loan Documents are true and complete as of the date hereof, except as set forth in the Disclosure Schedule appended to the Leisure Purchase Agreement. (B) No condition or event exists or has occurred which would constitute a Default or an Event of Default under the Loan Documents, except as set forth in the Disclosure Schedule appended to the Leisure Purchase Agreement. (C) The execution of this Amendment by Raintree and all documents or agreements to be executed or delivered pursuant to the terms of this Amendment: (I) have been duly authorized by all requisite action of Raintree; (II) will not conflict with or result in the breach of or constitute a default (upon the passage of time, delivery of notice or both) under Raintree's formation and governing documents or under any applicable statute, law, rules, regulation or ordinance, or any indenture, mortgage, loan or other document or agreement to which Raintree is a party or by which Raintree may be bound or affected; and (III) will not result in the creation or imposition of any additional lien, charge or encumbrance of any nature whatsoever upon any of the property or assets of Raintree, except liens in favor of the Lender. (D) The federal taxpayer's identification number of Raintree is 76-0658292 - -13- (E) That certain Indemnification Letter Agreement from Raintree International and Raintree in favor of Lender dated November 20, 2001 is in full force and effect and is hereby ratified and confirmed. (F) Raintree has paid to Lender all outstanding release fees due and owing to Lender in connection with the release by Lender of certain Units deeded into the Trust for the period through and including the date hereof. (G) Raintree has paid to Borrower all Payout Amounts due and owing to Borrower under the Project Development Agreement for the sale of Vacation Ownership Interests for the period through and including the date hereof. (H) Raintree has entered into valid and binding agreements of sale, pursuant to which Raintree has sold as of July 31, 2002 a total of 1,518 Vacation Ownership Interests. All of such sales of Vacation Ownership Interests have been in compliance with all applicable statutes, laws, rules, regulations and other legal requirements. Attached hereto as EXHIBIT B is a list describing all of such sales, which list is accurate and complete and includes all footnote clarifications. 27. REPRESENTATIONS AND WARRANTIES OF RAINTREE INTERNATIONAL. Raintree International represents and warrants, which representations and warranties shall survive until all obligations owed by Raintree International to Lender under the Receivables Loan is paid and satisfied in full, as follows: (A) The execution of this Amendment by Raintree International and all documents or agreements to be executed or delivered pursuant to the terms of this Amendment: (I) have been duly authorized by all requisite action of Raintree International; (II) will not conflict with or result in the breach of or constitute a default (upon the passage of time, delivery of notice or both) under Raintree International's formation and governing documents or under any applicable statute, law, rules, regulation or ordinance, or any indenture, mortgage, loan or other document or agreement to which Raintree International is a party or by which Raintree International may be bound or affected; and (III) will not result in the creation or imposition of any additional lien, charge or encumbrance of any nature whatsoever upon any of the property or assets of Raintree International, except liens in favor of the Lender. -14- (B) That certain Indemnification Letter Agreement from Raintree International and Raintree in favor of Lender dated November 20, 2001 is in full force and effect and is hereby ratified and confirmed. 28. REPRESENTATIONS AND WARRANTIES OF LEISURE. Leisure represents and warrants, which representations and warranties shall survive until all obligations owed by Leisure to Lender under the Loan Documents are paid and satisfied in full, as follows: (A) The execution of this Amendment by Leisure and all documents or agreements to be executed or delivered pursuant to the terms of this Amendment: (I) have been duly authorized by all requisite action of Leisure; (II) will not conflict with or result in the breach of or constitute a default (upon the passage of time, delivery of notice or both) under Leisure's formation and governing documents or under any applicable statute, law, rules, regulation or ordinance, or any indenture, mortgage, loan or other document or agreement to which Leisure is a party or by which Leisure may be bound or affected; and (III) will not result in the creation or imposition of any additional lien, charge or encumbrance of any nature whatsoever upon any of the property or assets of Leisure, except liens in favor of the Lender. (B) The federal taxpayer's identification number of Leisure is 13-5629885. 29. CERTAIN FEES, COSTS, EXPENSES AND EXPENDITURES. Borrower, Raintree and Leisure will be responsible for all of Lender's expenses in connection with the review, preparation, negotiation, documentation and closing of this Amendment and the consummation of the terms and transactions contemplated under this Amendment, including without limitation, fees, disbursements, expenses and costs of counsel retained by Lender, all fees related to filings, recording of documents and searches, whether or not the transactions contemplated under this Amendment are consummated; provided however, all of such expenses shall be paid from proceeds of the Loan. 30. RELEASE. Borrower, Raintree and Leisure acknowledge and agree that they have no claims, suits or causes of action against Lender and hereby remise, release and forever discharge Lender, its officers, directors, shareholders, representatives and their successors and assigns, from any claims, suits or causes of action whatsoever, in law or in equity, which Borrower, Raintree or Leisure may have against them at any time up to and including the date of this Amendment. - -15- 31. NO WAIVER. Nothing contained in this Amendment shall be deemed to be a waiver, release or amendment of or to any rights, remedies or privileges afforded to Lender under the Loan Documents or under the Uniform Commercial Code. Nothing contained in this Amendment shall constitute a waiver by Lender of Borrower's, Raintree's or Leisure's compliance with the terms of the Loan Documents, nor shall anything contained in this Amendment constitute an agreement by Lender to enter into any further amendments with Borrower, Raintree or Leisure. 32. INCONSISTENCIES. To the extent of any inconsistency between the terms and conditions of this Amendment and the terms and conditions of the other Loan Documents, the terms and conditions of this Amendment shall prevail. All terms and conditions of the Loan Documents not inconsistent with this Amendment shall remain in full force and effect and are hereby ratified and confirmed by Borrower, Raintree and Leisure. 33. CONSTRUCTION. All references to the Loan Agreement therein or in any other Loan Documents shall be deemed to be a reference to the Loan Agreement as amended hereby. 34. BINDING EFFECT. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 35. GOVERNING LAW. This Amendment shall be governed as to the validity, interpretation, construction, enforcement and in all other respects by the law of the State of Rhode Island, without regard to its rules and principles regarding conflicts of laws or any rule or cannon of construction which interprets agreements against the draftsman. Notwithstanding anything to the contrary provided herein or in any of the other Loan Documents, Borrower, Raintree and Leisure expressly waive any and all claims to jurisdiction in Mexico or any other states in the United States other than the State of Rhode Island. 36. COUNTERPARTS. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original without the production of any other counterpart. 37. SEVERABILITY. The provisions of this Amendment and all other Loan Documents are deemed to be severable, and the invalidity and unenforceability of any provision shall not affect or impair the remaining provisions which shall continue in full force and effect. 38. HEADINGS. The headings of the sections of this Amendment are inserted for convenience only and shall not be deemed to constitute a part of this Amendment. 39. LITIGATION. To the fullest extent not prohibited by applicable law which cannot be waived, each of the Borrower, Raintree, Leisure and Lender hereby knowingly waives any and all right to -16- a trial by jury in any action or proceeding to enforce or defend or clarify any right, power, remedy or defense arising out of or related to this Amendment, the other Loan Documents, or the transactions contemplated herein or therein, whether sounding in tort or contract or otherwise, or with respect to any course of conduct, course of dealing, statements (whether verbal or written) or actions of any party; and each agrees that any such action or proceeding shall be tried before a judge and not before a jury. Each of the Borrower, Raintree, Leisure and Lender further waives any right to seek to consolidate any such litigation in which a jury trial has been waived with any other litigation in which a jury trial cannot or has not been waived. Further, the Borrower, Raintree and Leisure hereby certify that no representative or agent of Lender, nor Lender's counsel, has represented, expressly or otherwise, that Lender would not in the event of such litigation, seek to enforce this waiver of right to jury trial provision. The Borrower, Raintree and Leisure acknowledge that the provisions of this section are a material inducement to Lender's agreement to enter into this Amendment. 40. NO AMENDMENT TO PROJECT DEVELOPMENT AGREEMENT. Nothing in this Amendment is intended or shall be construed to amend or modify the terms and conditions of the Project Development Agreement. 41. WAIVER OF DEFAULTS; RESERVATION OF RIGHTS. Lender agrees for the benefit of Leisure and Borrower to waive Raintree's defaults under the Loan Agreement and other Loan Documents resulting from (i) the Chapter 11 bankruptcy filing by Raintree U.S. Holdings, L.L.C., the parent of Raintree, and (ii) those defaults occurring under or as a result of the default under that certain Indenture among Raintree International (f/n/a Club Regina Resorts, Inc.), CR Resorts Capital, S. de R.L. de C.V. and IBJ Schroeder Bank and Trust Company dated December 5, 1997; provided however, such waiver shall not be construed to limit in any manner Lender's rights and remedies against Raintree under the Loan Agreement, the other Loan Documents or any other agreements between Raintree and Lender. - -17- IN WITNESS WHEREOF, the parties hereto have executed this Amendment effective as of the day and year first above written. ROYALE MIRAGE PARTNERS, L.P., a California limited partnership By: RMP-GP, Inc., a California corporation, its sole general partner By: ________________________________________ E.A. Borsuk, President By: ________________________________________ James Mah, Senior Vice President RAINTREE NORTH AMERICA RESORTS, INC., a Texas corporation ________________________ By:__________________________________________ Witness: ______________ Brian R. Tucker, Vice President RAINTREE RESORTS INTERNATIONAL, INC., a Nevada corporation ________________________ By:__________________________________________ Witness: ______________ Brian R. Tucker, Chief Operating Officer MEGO FINANCIAL CORP. d/b/a Leisure Industries Corporation, a New York corporation ________________________ By:__________________________________________ Witness: ______________ Name/Title:___________________________________ -18- TEXTRON FINANCIAL CORPORATION, a Delaware corporation By:___________________________________ Name/Title:_____________________________ -19- EXHIBIT A CONDITIONS PRECEDENT (A) AMENDMENT DOCUMENTS. Borrower, Raintree and Leisure and all other required persons and entities will have executed and delivered to Lender this Amendment and such other documents as Lender may require. (B) REPRESENTATIONS AND WARRANTIES. All representations and warranties of Borrower, Raintree and Leisure as set forth in the Loan Documents, the Trust Agreement and the Leisure Purchase Agreement, as applicable, will be true at and as of the date hereof. (C) NO DEFAULT. No condition or event shall exist or have occurred which would constitute a Default or an Event of Default hereunder. (D) LEISURE PURCHASE DOCUMENTS. Raintree or Leisure shall deliver or cause to be delivered to Lender a fully executed copy of the Leisure Purchase Agreement, the Interval Purchase Agreement and all other documents executed in connection therewith, including without limitation, any and all documents, agreements, statements, resolutions, certificates, consents, opinions of counsel and other information to be delivered by Raintree and Leisure as provided therein. (E) O.B. DOCUMENTS. Leisure shall deliver or cause to be delivered to Lender a fully executed copy of that certain Purchase Agreement between O.B. Sports, LLC, as seller, and Leisure, as purchaser, dated of even date herewith and all other documents executed in connection therewith evidencing the purchase by Leisure from O.B. Sports, LLC of all of the outstanding membership interests owned by O.B. Sports, LLC in Cimarron Golf Club, LLC. In addition, Leisure shall deliver or cause to be delivered to Lender a fully executed copy of that certain Assumption Agreement and all other agreements in connection therewith evidencing the assumption by Leisure or its affiliate of certain obligations of O.B. Sports, LLC to Lender under that certain credit facility extended to O.B. Sports, LLC by Lender, as evidenced by that certain Loan Agreement between O.B. Sports, LLC and Lender dated of even date herewith and all other documents executed in connection therewith. (F) PROJECT DEVELOPMENT AGREEMENT. Raintree shall deliver to Lender evidence that Raintree has cured or has caused Borrower to waive any and all existing defaults (whether payment or performance) under the Project Development Agreement. (F) OTHER. Raintree and Leisure shall deliver or cause to be delivered to Lender all other documents, agreements, statements, resolutions, certificates, consents, opinions of counsel and information as Lender may require in its sole and absolute discretion. -20- EXHIBIT B POST-CLOSING CONDITIONS (A) THIRD AMENDMENT DOCUMENTATION. On or before September 30, 2002, Raintree shall deliver or cause to be delivered to Lender all of the documents, agreements, statements, resolutions, certificates, consents, opinions of counsel and other information as required under the Third Amendment, including without limitation, such documents, agreements, statements, resolutions, certificates, consents, opinions of counsel and other information as further described in EXHIBITS B AND C appended thereto. (F) OTHER. Promptly upon the request by Lender, Raintree and Leisure shall deliver or cause to be delivered to Lender all other documents, agreements, statements, resolutions, certificates, consents, opinions of counsel and information as Lender may require in its sole and absolute discretion. -21- -----END PRIVACY-ENHANCED MESSAGE-----