<PAGE> 1
================================================================================
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: FEBRUARY 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER: 1-8645
MEGO FINANCIAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 13-5629885
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4310 PARADISE ROAD, LAS VEGAS, NEVADA 89109
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(702) 737-3700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of April 10, 1998, there were 21,009,506 shares of Common Stock, $.01
par value per share, of the Registrant outstanding.
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<PAGE> 2
MEGO FINANCIAL CORP. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (unaudited)
Condensed Consolidated Statements of Financial Condition at
February 28, 1998 and August 31, 1997............................................................1
Condensed Consolidated Statements of Operations for the Three and Six Months Ended
February 28, 1998 and 1997.......................................................................2
Condensed Consolidated Statements of Stockholders' Equity for the Six Months Ended
February 28, 1998................................................................................3
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
February 28, 1998 and 1997.......................................................................4
Notes to Condensed Consolidated Financial Statements................................................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................................................12
PART II OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................24
Item 6. Exhibits and Reports on Form 8-K...................................................................24
SIGNATURE....................................................................................................25
</TABLE>
i
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(thousands of dollars, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
FEBRUARY 28, AUGUST 31,
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 2,974 $ 10,376
Restricted cash 2,263 2,049
Notes receivable, net of allowance for cancellations and discounts of $13,177
at February 28, 1998 and $11,341 at August 31, 1997 42,622 34,274
Interest only receivables, at fair value 3,109 3,296
Timeshare interests held for sale 36,639 35,088
Land and improvements inventory 2,185 2,206
Other investments 8,678 2,149
Property and equipment, net of accumulated depreciation of $13,373
at February 28, 1998 and $15,292 at August 31, 1997 24,262 24,220
Deferred selling costs 3,283 3,153
Prepaid debt expenses 1,321 1,286
Other receivables 1,757 --
Other assets 9,340 6,930
Net assets of discontinued operations -- 53,276
------------ ------------
TOTAL ASSETS $ 138,433 $ 178,303
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes and contracts payable $ 78,599 $ 65,569
Accounts payable and accrued liabilities 16,991 17,202
Reserve for notes receivable sold with recourse 6,408 8,703
Deposits 3,816 2,983
Negative goodwill 33 53
Accrued income taxes 6,235 6,235
------------ ------------
Total liabilities before subordinated debt 112,082 100,745
------------ ------------
Subordinated debt 4,221 4,321
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value (authorized--5,000,000 shares, none outstanding) -- --
Common stock, $.01 par value (authorized--50,000,000 shares; issued and
outstanding--21,009,506 shares at February 28, 1998 and August 31, 1997) 210 210
Additional paid-in capital 12,789 34,524
Retained earnings 9,131 38,503
------------ ------------
Total stockholders' equity 22,130 73,237
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 138,433 $ 178,303
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE> 4
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands of dollars, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES OF CONTINUING OPERATIONS
Timeshare interest sales, net $ 8,458 $ 7,573 $ 17,293 $ 15,129
Land sales, net 3,558 4,383 6,584 7,774
Gain on sale of notes receivable -- 441 -- 890
Interest income 1,693 1,762 3,317 3,399
Financial income 986 770 2,004 1,329
Incidental operations 660 717 1,421 1,443
Other 573 764 1,396 1,594
------------ ------------ ------------ ------------
Total revenues of continuing operations 15,928 16,410 32,015 31,558
------------ ------------ ------------ ------------
COSTS AND EXPENSES OF CONTINUING OPERATIONS
Direct cost of:
Timeshare interest sales 1,604 1,188 3,451 2,512
Land sales 414 424 813 734
Incidental operations 597 718 1,297 1,408
Commissions and selling 7,806 8,358 15,596 16,051
General and administrative 4,465 4,242 8,886 8,274
Interest expense 1,762 2,116 3,478 4,267
Depreciation 563 454 1,142 933
------------ ------------ ------------ ------------
Total costs and expenses of continuing operations 17,211 17,500 34,663 34,179
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (1,283) (1,090) (2,648) (2,621)
INCOME TAXES (BENEFIT) -- (2,458) -- (2,925)
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (1,283) 1,368 (2,648) 304
INCOME FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAXES OF $545 AND $2,078
FOR THE THREE AND SIX MONTHS ENDED
FEBRUARY 28, 1997, RESPECTIVELY, AND NET
OF $568 AND $631 OF MINORITY INTEREST
FOR THE THREE AND SIX MONTHS ENDED
FEBRUARY 28, 1997, RESPECTIVELY -- 2,413 -- 4,643
------------ ------------ ------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ (1,283) $ 3,781 $ (2,648) $ 4,947
============ ============ ============ ============
EARNINGS (LOSS) PER COMMON SHARE
Basic:
Income (loss) from continuing operations $ (0.06) $ 0.07 $ (0.13) $ 0.02
Income from discontinued operations -- 0.13 -- 0.25
------------ ------------ ------------ ------------
Net income (loss) applicable to common stock $ (0.06) $ 0.20 $ (0.13) $ 0.27
============ ============ ============ ============
Weighted-average number of common shares and
common share equivalents outstanding 21,009,506 18,579,788 21,009,506 18,506,049
============ ============ ============ ============
Diluted:
Income (loss) from continuing operations $ (0.06) $ 0.07 $ (0.13) $ 0.01
Income from discontinued operations -- 0.12 -- 0.24
------------ ------------ ------------ ------------
Net income (loss) applicable to common stock $ (0.06) $ 0.19 $ (0.13) $ 0.25
============ ============ ============ ============
Weighted-average number of common shares and
common share equivalents outstanding 21,009,506 19,662,582 21,009,506 19,619,912
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 5
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(thousands of dollars, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
COMMON STOCK
$.01 PAR VALUE ADDITIONAL
------------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at August 31, 1997 21,009,506 $ 210 $ 34,524 $ 38,503 $ 73,237
Distribution of Mego Mortgage Corporation
common stock in connection with the Spin-off
(see Note 6 of Notes to Condensed Consolidated
Financial Statements) -- -- (21,735) (21,441) (43,176)
Adjustment of receivable from Mego Mortgage
Corporation (See Note 5 of Notes to Condensed
Consolidated Financial Statements) -- -- -- (5,283) (5,283)
Net loss for the six months ended
February 28, 1998 -- -- -- (2,648) (2,648)
---------- ---------- ---------- ---------- ----------
Balance at February 28, 1998 21,009,506 $ 210 $ 12,789 $ 9,131 $ 22,130
========== ========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 6
Mego FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED FEBRUARY 28,
-----------------------------
1998 1997
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (2,648) $ 4,947
---------- ----------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Amortization of negative goodwill (20) (14)
Charges to allowance for cancellations (3,288) (7,137)
Provision for cancellations 2,309 4,957
Gain on sale of notes receivable -- (832)
Provision for uncollectible Owners' Association advances (403) (275)
Cost of sales 4,264 3,246
Depreciation 1,142 933
Gain on sale of stock of subsidiary -- 8,113
Additions to interest only receivables -- (602)
Amortization of interest only receivables 187 123
Repayments on notes receivable 18,503 18,186
Additions to notes receivable (25,872) (21,692)
Proceeds from sale of notes receivable -- 10,989
Purchase of land and timeshare interests (5,794) (7,891)
Additions to other receivables (3,485) --
Decreases in other receivables 6,545 --
Changes in operating assets and liabilities:
Decrease (increase) in restricted cash (214) 343
Increase in other assets (4,337) (327)
Increase in deferred selling costs (130) (305)
Decrease in accounts payable and accrued liabilities (211) (666)
Decrease in payable to assignors -- (2,579)
Increase (decrease) in deposits 833 (277)
Increase in accrued income taxes -- 6,484
---------- ----------
Total adjustments (9,971) 10,777
---------- ----------
Net cash provided by (used in) operating activities (12,619) 15,724
---------- ----------
NET CASH USED IN DISCONTINUED OPERATIONS -- (10,240)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,544) (4,045)
Proceeds from the sale of property and equipment 360 3
Additions to other investments (6,529) (626)
Payments on other investments -- 746
---------- ----------
Net cash used in investing activities (7,713) (3,922)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 24,956 22,385
Reduction of debt (11,926) (22,958)
Increase in common stock due to exercise of warrants -- 3
Increase in additional paid-in capital due to exercise of warrants -- 357
Payments on subordinated debt (424) --
Increase in subordinated debt 324 207
---------- ----------
Net cash provided by (used in) financing activities 12,930 (6)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,402) 1,556
CASH AND CASH EQUIVALENTS-- BEGINNING OF PERIOD 10,376 2,742
---------- ----------
CASH AND CASH EQUIVALENTS-- END OF PERIOD $ 2,974 $ 4,298
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest, net of amounts capitalized $ 3,496 $ 3,435
========== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
Issuance of 1,000,000 common stock warrants
in connection with commitment received $ -- $ 3,000
Reduction of additional paid-in capital
due to Spin-off of Mego Mortgage Corporation (21,735) --
Reduction of retained earnings due to Spin-off
of Mego Mortgage Corporation (21,441) --
Adjustment of receivable from Mego Mortgage
Corporation (5,283) --
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 7
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 1998 AND 1997
(unaudited)
1. FINANCIAL STATEMENTS
In the opinion of management, when read in conjunction with the
audited Consolidated Financial Statements for the years ended August 31, 1997
and 1996, contained in the Form 10-K of Mego Financial Corp. (Mego Financial)
filed with the Securities and Exchange Commission for the year ended August 31,
1997, the accompanying unaudited Condensed Consolidated Financial Statements
contain all of the information necessary to present fairly the financial
position of Mego Financial and Subsidiaries at February 28, 1998, the results of
its operations for the three and six months ended February 28, 1998 and 1997,
the change in stockholders' equity for the six months ended February 28, 1998
and the cash flows for the six months ended February 28, 1998 and 1997. All
intercompany accounts between Mego Financial and its subsidiaries have been
eliminated. Certain reclassifications have been made to conform prior periods
with the current period presentation. The accompanying Condensed Consolidated
Statements of Operations reflect the operating results of Mego Mortgage
Corporation (MMC) for prior periods as discontinued operations in accordance
with Accounting Principles Board (APB) Opinion No. 30. Prior period financial
results have been restated to reflect continuing operations. The footnote
information presented herein applies only to the continuing operations of Mego
Financial unless otherwise stated. See Note 6 for further discussion.
The preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. In the
opinion of management, all material adjustments necessary for the fair
presentation of these statements have been included herein which are normal and
recurring in nature. The results of operations for the three and six months
ended February 28, 1998 are not necessarily indicative of the results to be
expected for the full year.
2. NATURE OF OPERATIONS
Mego Financial is a specialty financial services company that,
through its subsidiary, Preferred Equities Corporation (PEC), is engaged
primarily in originating, selling, servicing and financing consumer receivables
generated through timeshare and land sales. Mego Financial and its subsidiaries
are also herein collectively referred to as "the Company" as the context
requires. Mego Financial was incorporated under the laws of the state of New
York in 1954 under the name Mego Corp. and, in 1992, changed its name to Mego
Financial Corp.
In 1992, Mego Financial organized a subsidiary, MMC, a specialized
consumer finance company that originates, purchases, sells, securitizes and
services consumer loans consisting primarily of debt consolidation loans and to
a lesser extent conventional uninsured home improvement loans. After an initial
public offering (the IPO) of MMC common stock in November 1996, Mego Financial
held 81.3% of the outstanding stock of MMC. On September 2, 1997, Mego Financial
distributed all of its remaining 10,000,000 shares of MMC's common stock to Mego
Financial's shareholders in a tax-free spin-off (the Spin-off). See Note 6.
3. PREFERRED EQUITIES CORPORATION
PEC markets and finances timeshare interests and land in select
resort areas. By providing financing to virtually all of its customers, PEC also
originates consumer receivables that it sells and generally services. In
February 1988, Mego Financial acquired PEC, pursuant to an assignment by the
Assignors (Comay Corp., Growth Realty Inc., RER Corp., and H&H Financial, Inc.)
of their contract right to purchase PEC.
To facilitate its sales of timeshare interests, the Company has
entered into several trust agreements. The trustees administer the collection of
the related notes receivable. The Company has assigned title to certain of its
resort properties in Nevada and its interest in certain related notes receivable
to the trustees.
5
<PAGE> 8
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 1998 AND 1997
(unaudited)
4. MERGER AGREEMENT WITH SYCAMORE PARTNERS
On March 27, 1998, the Company announced that it had entered into a
definitive merger agreement under which it is to be acquired by Sycamore
Partners, LLC ("Sycamore"). Sycamore is to be financed by Blackacre Capital
Group, L.P., a real estate investment fund. Under the terms of the merger, the
Company shareholders are to receive cash based upon a price of $6.00 per share,
less an adjustment related to a receivable from MMC on the Company's financial
statements. The adjustment is expected to be at least $0.25 per share but not
more than $0.29 per share so that the per share price to be received by
shareholders would be a minimum of $5.71 per share up to an estimated maximum of
$5.75 per share. See Note 5.
The aggregate value of this transaction would be approximately
$120,000,000 plus the Company's outstanding indebtedness. The completion of the
acquisition is subject to approval by the holders of two-thirds of the Company's
outstanding common stock, customary regulatory approvals and the satisfaction of
certain other conditions set forth in the merger agreement.
5. ADJUSTMENT OF RECEIVABLE FROM MEGO MORTGAGE CORPORATION
In April 1998, an agreement was made to adjust the income tax portion
of a receivable in the amount of $5,283,000 that MMC owed the Company under a
Tax Allocation and Indemnity Agreement dated November 19, 1996. MMC owed the
Company an estimated total of $6,152,000, $5,283,000 of which was a result of
filing a consolidated federal income tax return with the Company's affiliated
group prior to the Spin-off under such Tax Allocation and Indemnity Agreement
dated November 19, 1996. Following this transaction, MMC will owe the Company
$869,000.
6. DISCONTINUED OPERATIONS OF MEGO MORTGAGE CORPORATION
On September 2, 1997, Mego Financial distributed all of its 81.3%
interest in MMC comprised of 10,000,000 shares of MMC's common stock to Mego
Financial's shareholders in the Spin-off. MMC's financial results have been
accounted for as discontinued operations and, accordingly, the Company
reclassified its Condensed Consolidated Financial Statements for all periods
presented prior to that date. The net effect of the Spin-off resulted in the
Company recording an equity distribution in the amount of $43,176,000 in fiscal
1998, comprised of $21,735,000 of additional paid-in capital and $21,441,000 of
retained earnings.
7. RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to
Be Disposed Of," (SFAS 121) was issued by the Financial Accounting Standards
Board (FASB) in March 1995, and effective for fiscal years beginning after
December 15, 1995. SFAS 121 requires that long-lived assets be reviewed for
impairment and written down to fair value whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Under the
provisions of SFAS 121, impairment losses are recognized when expected future
cash flows are less than the assets' carrying value. The Company has not
recorded any expense related to impairment losses since adoption of SFAS 121.
The FASB issued SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" (SFAS 125) in June 1996.
SFAS 125 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. This statement also
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. It requires that
liabilities and derivatives incurred or obtained by transferors as part of a
transfer of financial assets be initially measured at fair value. SFAS 125 also
requires that servicing assets be measured by allocating the carrying amount
between the assets sold and retained interests based on their relative fair
values at the date of transfer. Additionally, this statement requires that the
servicing assets and liabilities be subsequently measured by (a) amortization in
proportion to and over the period of estimated net servicing income or loss and
(b)
6
<PAGE> 9
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 1998 AND 1997
(unaudited)
assessment for asset impairment or increased obligation based on their fair
values. SFAS 125 requires the Company's excess servicing rights be measured at
fair market value and reclassified as interest only receivables and accounted
for in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." As required by SFAS 125, the Company adopted the new
requirements effective January 1, 1997. Implementation of SFAS 125 did not have
any material impact on the financial statements of the Company, as the book
value of the Company's interest only receivables approximated fair value.
SFAS No. 128, "Earnings per Share," (SFAS 128) was issued by the FASB
in March 1997, effective for financial statements issued after December 15,
1997. SFAS 128 provides simplified standards for the computation and
presentation of earnings per share (EPS), making EPS comparable to international
standards. SFAS 128 requires dual presentation of "Basic" and "Diluted" EPS, by
entities with complex capital structures, replacing "Primary" and
"Fully-diluted" EPS under APB Opinion No. 15.
Basic EPS excludes dilution from common stock equivalents and is
computed by dividing income (loss) available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution from common stock equivalents, similar to
fully-diluted EPS, but uses only the average stock price during the period as
part of the computation.
An entity that reports discontinued operations is required to present
Basic and Diluted EPS for each of the income related line items. Data utilized
in calculating pro forma earnings per share under SFAS 128 are as follows
(thousands of dollars, except share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED FEBRUARY 28, SIX MONTHS ENDED FEBRUARY 28,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BASIC EPS
Income (loss) from continuing operations $ (1,283) $ 1,368 $ (2,648) $ 304
Income from discontinued operations -- 2,413 -- 4,643
------------ ------------ ------------ ------------
Net income (loss) $ (1,283) $ 3,781 $ (2,648) $ 4,947
============ ============ ============ ============
Weighted-average number of common shares outstanding
21,009,506 18,579,788 21,009,506 18,506,049
============ ============ ============ ============
DILUTED EPS
Income (loss) from continuing operations $ (1,283) $ 1,368 $ (2,648) $ 304
Income from discontinued operations -- 2,413 -- 4,643
------------ ------------ ------------ ------------
Net income (loss) $ (1,283) $ 3,781 $ (2,648) $ 4,947
============ ============ ============ ============
Weighted-average number of common shares and common
share equivalents outstanding 21,009,506 19,662,582 21,009,506 19,619,912
============ ============ ============ ============
</TABLE>
7
<PAGE> 10
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 1998 AND 1997
(unaudited)
The following tables reconcile income (loss)from continuing
operations, basic and diluted shares and EPS for the following periods
(thousands of dollars, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED FEBRUARY 28, 1998 THREE MONTHS ENDED FEBRUARY 28, 1997
-------------------------------------------- --------------------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------------ ---------- -------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) from continuing
operations $ (1,283) $ 1,368
BASIC EPS
Income (loss) from continuing
operations (1,283) 21,009,506 $ (0.06) 1,368 18,579,788 $ 0.07
------------ ------------ ======== ------------ ----------- ===========
Effect of dilutive securities:
Warrants -- -- -- 806,653
Stock options -- -- -- 276,141
------------ ------------ ------------ -----------
DILUTED EPS
Income (loss) from continuing
operations and assumed
conversions $ (1,283) 21,009,506 $ (0.06) $ 1,368 19,662,582 $ 0.07
============ ============ ======== ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED FEBRUARY 28, 1998 SIX MONTHS ENDED FEBRUARY 28, 1997
--------------------------------------------- -------------------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------------ ---------- --------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) from continuing
operations $ (2,648) $ 304
BASIC EPS
Income (loss) from continuing
operations (2,648) 21,009,506 $ (0.13) 304 18,506,049 $ 0.02
------------ ------------ ========= ------------ ---------- ===========
Effect of dilutive securities:
Warrants -- -- -- 841,497
Stock options -- -- -- 272,366
------------ ------------ ------------ ----------
DILUTED EPS
Income (loss) from continuing
operations and assumed
conversions $ (2,648) 21,009,506 $ (0.13) $ 304 19,619,912 $ 0.01
============ ============ ========= ============ ========== ===========
</TABLE>
8
<PAGE> 11
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 1998 AND 1997
(unaudited)
The following tables reconcile income from discontinued operations,
net of taxes and minority interest, basic and diluted shares, and EPS for the
following periods (thousands of dollars, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED FEBRUARY 28, 1998 THREE MONTHS ENDED FEBRUARY 28, 1997
---------------------------------------------- --------------------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
-------------- ----------- ------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income from discontinued
operations $ -- $ 2,981
Less: Minority interest in
discontinued operations -- 568
-------------- -----------
BASIC EPS
Income from discontinued
operations -- 21,009,506 $ -- 2,413 18,579,788 $ 0.13
------------- ============= ----------- ===========
Effect of dilutive securities:
Warrants -- -- -- 806,653
Stock options -- -- -- 276,141
------------- ----------- ----------- --------------
DILUTED EPS
Income from discontinued
operations and assumed
conversions $ -- 21,009,506 $ -- $ 2,413 19,662,582 $ 0.12
============== =========== ============= =========== ============== ===========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED FEBRUARY 28, 1998 SIX MONTHS ENDED FEBRUARY 28, 1997
------------------------------------------- ----------------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
----------- ----------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income from discontinued
operations $ -- $ 5,274
Less: Minority interest in
discontinued operations -- 631
----------- -----------
BASIC EPS
Income from discontinued
operations -- 21,009,506 $ -- 4,643 18,506,049 $ 0.25
----------- ----------- =========== ----------- ---------- =========
Effect of dilutive securities:
Warrants -- -- -- 841,497
Stock options -- -- -- 272,366
----------- ----------- ----------- ----------
DILUTED EPS
Income from discontinued
operations and assumed
conversions $ -- 21,009,506 $ -- $ 4,643 19,619,912 $ 0.24
=========== =========== =========== =========== ========== =========
</TABLE>
9
<PAGE> 12
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 1998 AND 1997
(unaudited)
The following tables reconcile the net income (loss) applicable to
common shareholders, basic and diluted shares and EPS for the following periods
(thousands of dollars, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED FEBRUARY 28, 1998 THREE MONTHS ENDED FEBRUARY 28, 1997
----------------------------------------------- -------------------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------------ ------------ ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $ (1,283) $ 3,781
BASIC EPS
Income (loss) applicable to
common stockholders (1,283) 21,009,506 $ (0.06) 3,781 18,579,788 $ 0.20
------------ ------------ =========== ------------ ---------- ===========
Effect of dilutive securities:
Warrants -- -- -- 806,653
Stock Options -- -- -- 276,141
------------ ------------ ------------ ----------
DILUTED EPS
Income (loss) applicable to
common stockholders and
assumed conversions $ (1,283) 21,009,506 $ (0.06) $ 3,781 19,662,582 $ 0.19
============ ============ =========== ============ ========== ===========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED FEBRUARY 28, 1998 SIX MONTHS ENDED FEBRUARY 28, 1997
-------------------------------------------- -------------------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $ (2,648) $ 4,947
BASIC EPS
Income (loss) applicable to
common stockholders (2,648) 21,009,506 $ (0.13) 4,947 18,506,049 $ 0.27
----------- ----------- =========== ----------- ----------- ===========
Effect of dilutive securities:
Warrants -- -- -- 841,497
Stock Options -- -- -- 272,366
----------- ----------- ----------- -----------
DILUTED EPS
Income (loss) applicable to
common stockholders and
assumed conversions $ (2,648) 21,009,406 $ (0.13) $ 4,947 19,619,912 $ 0.25
=========== =========== =========== =========== =========== ===========
</TABLE>
As a result of Mego Financial's loss from continuing operations for
the three and six months ended February 28, 1998, incentive stock options
outstanding to purchase 368,500 shares of Mego Financial's common stock were
considered antidilutive under SFAS 128 requirements and therefore were not
included in the weighted-average number of common shares.
10
<PAGE> 13
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 1998 AND 1997
(unaudited)
8. STOCKHOLDERS' EQUITY
Mego Financial's stock option plan (Stock Option Plan) was increased
by 500,000 shares upon shareholder approval which was obtained on September 9,
1997. On September 3, 1997, an additional 348,500 incentive stock options were
granted under the Stock Option Plan to employees at fair market value, which was
authorized by the Stock Option Committee, of which 15,000 are subject to future
shareholder approval of certain amendments to the Stock Option Plan in
accordance with applicable law. The total number of options outstanding is
393,500 which includes 45,000 options which were previously outstanding. There
were no options exercisable under this plan at February 28, 1998, however, upon
consummation of the merger described in Note 4, substantially all of these
options will be 100% vested and therefore exercisable.
The Spin-off resulted in a distribution by the Company of $21,735,000
of additional paid-in capital and $21,441,000 of retained earnings. These equity
amounts related to MMC which, as a result of the Spin-off, is no longer owned by
the Company. See Note 6.
11
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations section contains certain forward-looking
statements and information relating to Mego Financial Corp. (Mego Financial)
(Mego Financial and it subsidiaries are referred to herein collectively as 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 expectation and estimates
as to the Company's business operations, including the introduction of new
timeshare and land sales programs and future financial performance, including
growth in revenues and net income and cash flows. In addition, included herein
the words "anticipates," "believes," "estimates," "expects," "plans," "intends"
and similar expressions, as they relate to the Company or its management, are
intended to identify forward-looking statements. Such statements reflect the
current views of the Company's management with respect to future events and are
subject to certain risks, uncertainties and assumptions. Also, 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. No effect has
been given in the following Management's Discussion and Analysis of Financial
Condition and Results of Operations to the proposed merger transaction described
in Note 4 of Notes to Condensed Consolidated Financial Statements.
The following discussion and analysis should be read in conjunction
with the Condensed Consolidated Financial Statements, including the notes
thereto, contained elsewhere herein and in the Consolidated Financial
Statements, including the notes thereto, in the Company's Form 10-K for the
fiscal year ended August 31, 1997.
GENERAL
The business of the Company following the Spin-off (as later defined)
is primarily the marketing, financing and sale of timeshare interests, retail
lots and land parcels, and servicing the related notes receivable. The Company,
through its subsidiary Preferred Equities Corporation (PEC), provides financing
to purchasers of its timeshare interests and land. This financing is generally
evidenced by notes secured by deeds of trust and mortgages as well as
non-recourse installment sale contracts. These notes receivable are generally
payable over a period ranging from two to twelve years, bear interest at rates
ranging from 0% to 16% and generally require equal monthly payments of principal
and interest.
Discontinued Operations of Mego Mortgage Corporation (MMC)
The Company formed MMC in June 1992 as a wholly-owned subsidiary and
operated MMC as such until November 1996. MMC is a specialized consumer finance
company that originates, purchases, sells, securitizes and services consumer
loans consisting primarily of debt consolidation loans and, to a lesser extent,
conventional uninsured home improvement loans.
In November 1996, MMC consummated an initial public offering (the
IPO) and as a result, the Company's ownership of MMC was reduced to
approximately 81.3% of the outstanding common stock. On September 2, 1997, the
Company distributed all of its 10 million shares of MMC's common stock to the
Company's shareholders in a tax-free spin-off (the Spin-off). To fund MMC's past
operations and growth and in conjunction with filing consolidated tax returns,
MMC incurred debt and other obligations due to the Company and its subsidiary,
PEC. The amount of debt due to the Company was $1.8 million at February 28, 1998
after the adjustment of a receivable of $5.3 million described in Note 5 of
Notes to Condensed Consolidated Financial Statements and $10.1 million at August
31, 1997. It is not anticipated that the Company will provide funds to MMC or
guarantee MMC's indebtedness in the future, although it may do so.
MMC also has agreements with PEC for providing management services
and loan servicing. Effective January 1, 1998, the servicing fees paid to PEC by
MMC were reduced from 40 basis points to 35 basis points per year by written
agreement. In January 1998, the loan servicing agreement between PEC and MMC was
amended to permit the assignment by MMC of its servicing rights and obligations
with respect to certain loans sold to a
12
<PAGE> 15
financial institution. The institution may terminate the agreement for PEC to
service the loans upon 48 hours prior written notice to PEC, and, the
institution has verbally indicated that they intend to give such notice for the
Conventional loans in its portfolio. The servicing fees for the 6 months ended
February 28, 1998 and 1997 were $1.4 million and $657,000, respectively.
The accompanying Consolidated Statements of Operations reflect the
operating results of MMC as discontinued operations in accordance with
Accounting Principles Board (APB) Opinion No. 30. For additional information see
Note 6 of Notes to Condensed Consolidated Financial Statements.
PEC
PEC recognizes revenue primarily from sales of timeshare interests
and land sales in resort areas, gain on sale of receivables and interest income.
Periodically, PEC may sell its consumer receivables, generally retaining the
servicing rights. Revenue from sales of timeshare interests and land is
recognized after the requisite rescission period has expired and at such time as
the purchaser has paid at least 10% of the sales price for sales of timeshare
interests and 20% of the sales price for land sales. Land sales typically meet
these requirements within eight to ten months of closing, and sales of timeshare
interests typically meet these requirements at the time of sale. The sales
price, less a provision for cancellation, is recorded as revenue and the
allocated cost related to such net revenue of the timeshare interest or land
parcel is recorded as expense in the year that revenue is recognized. When
revenue related to land sales is recognized, the portion of the sales price
attributable to uncompleted required improvements, if any, is deferred.
Notes receivable with payment delinquencies of 90 days or more have
been considered in determining the allowance for cancellations. Cancellations
occur when the note receivable is determined to be uncollectible and the related
collateral, if any, has been recovered. Cancellation of a note receivable in the
quarter the revenue is recognized is deemed to not represent a sale and is
accounted for as a reversal of the revenue with an adjustment to cost of sales.
Cancellation of a note receivable subsequent to the quarter the revenue was
recognized is charged to the allowance for cancellations.
Gain on sale of notes receivable includes the present value of the
differential between contractual interest rates charged to borrowers on notes
receivable sold by PEC and the interest rates to be received by the purchasers
of such notes receivable, after considering the effects of estimated prepayments
and a normal servicing fee. PEC retains certain participations in cash flows
from the sold notes receivable and generally retains the associated servicing
rights. PEC generally sells its notes receivable at par.
The present values of expected net cash flows from the sale of notes
receivable are recorded at the time of sale as interest only receivables.
Interest only receivables are amortized as a charge to income, as payments are
received on the retained interest differential over the estimated life of the
underlying notes receivable. Interest only receivables are recorded at the lower
of unamortized cost or estimated fair value. The expected cash flows used to
determine the interest only receivables asset have been reduced for potential
losses under recourse provisions of the sales agreements. Reserve for notes
receivable sold with recourse represents PEC's estimate of the fair value of its
future credit losses to be incurred over the lives of the notes receivable in
connection with the recourse provisions of the sales agreements and is shown
separately as a liability in the Company's Condensed Consolidated Statements of
Financial Condition.
In discounting cash flows related to notes receivable sales, PEC
defers servicing income at an annual rate of 1% and discounts cash flows on its
sales at the rate it believes a purchaser would require as a rate of return.
Earned servicing income is included under the caption of financial income. The
cash flows were discounted to present value using a discount rate of 15% for the
six months ended February 28, 1998 and 1997. PEC has developed its assumptions
based on experience with its own portfolio, available market data and ongoing
consultation with its investment bankers.
In determining expected cash flows, management considers economic
conditions at the date of sale. In subsequent periods, these estimates may be
revised as necessary using the original discount rate, and any losses arising
from prepayment and loss experience will be recognized as realized.
Provision for 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'
13
<PAGE> 16
failure to fulfill their obligations under the terms of their notes receivable.
PEC records provision for cancellations at the time revenue is recognized, based
on historical experience and current economic factors. The related allowance for
cancellations represents PEC's estimate of the amount of the future credit
losses to be incurred over the lives of the notes receivable. The allowance for
cancellations is reduced by actual cancellations experienced, including
cancellations related to previously sold notes receivable which were reacquired
pursuant to the recourse obligations discussed herein. Such allowance is also
reduced to establish the separate liability for reserve for notes receivable
sold with recourse. PEC's judgment in determining the adequacy of this allowance
is based upon a periodic review of its portfolio of notes receivable. These
reviews take into consideration changes in the nature and level of the
portfolio, historical cancellation experience, current economic conditions which
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.
Recourse to PEC on sales of notes receivable is governed by the
agreements between the purchasers and PEC. The reserve for notes receivable sold
with recourse represents PEC's estimate of the fair value of future credit
losses to be incurred over the lives of the notes receivable. Fees for servicing
notes receivable originated or acquired by PEC and sold with servicing rights
retained are generally based on a stipulated percentage of the outstanding
principal balance of such notes receivable and are recognized when earned.
Total costs and expenses consist primarily of commissions and selling
expenses, general and administrative expenses, direct costs of sales of
timeshare interests and land, interest expense and depreciation. Commissions and
selling costs directly attributable to unrecognized sales are accounted for as
deferred selling costs until such time as the sale is recognized.
PEC has entered into financing arrangements with certain purchasers
of timeshare interests and land whereby no stated interest rate is charged if
the aggregate down payment is at least 50% of the purchase price and the balance
is payable in 24 or fewer monthly payments. Notes receivable of $7.1 million and
$7.0 million at February 28, 1998 and August 31, 1997, respectively, were made
under this arrangement.
Land sales as of February 28, 1998 exclude $11.8 million of sales not
yet recognized under generally accepted accounting principles (GAAP) since the
requisite payment amounts have not yet been received. If ultimately recognized,
revenues from these sales would be reduced by a related provision for
cancellations of $1.7 million, deferred selling costs of $3.3 million and cost
of sales of $1.1 million.
RESULTS OF OPERATIONS
Three Months Ended February 28, 1998 Compared to Three Months Ended February 28,
1997
PEC
Total revenues for PEC decreased 2.6%, or $427,000, to $15.9 million
during the three months ended February 28, 1998 from $16.3 million during the
three months ended February 28, 1997. The decrease was primarily due to a
decrease in land sales, net, to $3.6 million during the three months ended
February 28, 1998 from $4.4 million during the three months ended February 28,
1997, a decrease in gain on sale of receivables to $0 during the three months
ended February 28, 1998 from $441,000 during the three months ended February 28,
1997 and a decrease in other revenue, which were partially offset by an increase
in timeshare interest sales, net.
Timeshare interest and land sales, net, were $12.0 million during the
three months ended February 28, 1998 and 1997. Gross sales of timeshare
interests decreased to $9.3 million during the three months ended February 28,
1998 from $9.8 million during the three months ended February 28, 1997, a
decrease of 5.3%. Net sales of timeshare interests increased to $8.5 million
from $7.6 million, an increase of 11.7%. The provision for cancellations
represented 9.1% and 23.0% of gross sales of timeshare interests for the three
months ended February 28, 1998 and 1997, respectively. The decrease in the
provision for cancellations for timeshare interests and land was primarily due
to lower cancellation experience during the second quarter of fiscal 1998
compared to the second quarter of fiscal 1997 and to an analysis of the required
allowances, including the reserve for notes receivable sold with recourse, as of
February 28, 1998.
14
<PAGE> 17
Gross sales of land decreased to $3.9 million during the three months
ended February 28, 1998 from $5.1 million during the three months ended February
28, 1997, a decrease of 24.8%. Net sales of land decreased to $3.6 million
during the three months ended February 28, 1998 from $4.4 million during the
three months ended February 28, 1997, a decrease of 18.8%. The provision for
cancellations decreased to 7.6% of gross sales of land for the three months
ended February 28, 1998 from 14.4% for the three months ended February 28, 1997,
primarily due to lower cancellation experience during the second quarter of
fiscal 1998 compared to the second quarter of fiscal 1997 and to an analysis of
the required allowances, including the reserve for notes receivable sold with
recourse, as of February 28, 1998. The decrease in gross land sales was the
result of PEC's diminishing inventory of land available for sale and its
increasing inventory of timeshare interests from the opening of new timeshare
resorts. During the second quarter of fiscal 1998, PEC acquired land in Colorado
to add to its inventory. PEC expects to begin selling the lots in the third
quarter of fiscal 1998.
No gain on sale of receivables was recorded for the three months
ended February 28, 1998 compared to $441,000 for the three months ended February
28, 1997. There were no receivable sales during the three months ended February
28, 1998 while there were $5.4 million in receivable sales during the three
months ended February 28, 1997. PEC periodically sells receivables to reduce the
outstanding balances under its lines of credit.
Financial income increased to $986,000 during the three months ended
February 28, 1998 from $770,000 during the three months ended February 28, 1997,
an increase of 28.1%. The increase was a result of the increased number of loans
serviced by PEC for an unrelated party, generating increased servicing fees.
Other income decreased 25.2%, or $188,000, to $559,000 for the three
months ended February 28, 1998 from $747,000 for the three months ended February
28, 1997 primarily due to a loss on the closing of a timeshare sales office.
As a result of the foregoing, total PEC revenues decreased to $15.9
million during the three months ended February 28, 1998 from $16.4 million
during the three months ended February 28, 1997.
Total costs and expenses for PEC increased to $16.9 million for the
three months ended February 28, 1998 from $16.8 million for the three months
ended February 28, 1997. The increase resulted primarily from an increase in
direct costs of timeshare interest sales to $1.6 million from $1.2 million, an
increase of 35.0%; an increase of 24.0% in depreciation expense to $563,000 from
$454,000; and, an increase in general and administrative expense to $4.3 million
from $3.9 million, an increase of 10.9%, partially offset by a 16.9% decrease in
incidental operations to $597,000 from $718,000 and a 6.6% decrease in interest
expense to $1.6 million from $1.7 million. In September 1997, 1,122 new upscale,
luxury timeshare interests in PEC's Las Vegas, Nevada resort became available
for sale. The increase in direct costs of timeshare sales is generally
attributable to the sale of this higher cost timeshare inventory. The increase
in depreciation expense is due to the increase in property and equipment, net of
accumulated depreciation, to $24.3 million at February 28, 1998 from $22.5
million at February 28, 1997. The decrease in interest expense is due to a
decline in the interest rates on certain notes and contracts payable.
As a percentage of gross sales of timeshare interests and land,
commissions and selling expenses relating thereto increased to 59.3% during the
three months ended February 28, 1998 from 55.9% during the three months ended
February 28, 1997, and cost of sales increased to 15.3% during the three months
ended February 28, 1998 from 10.8% during the three months ended February 28,
1997. Sales prices of timeshare interests are typically lower than those of
land, while selling costs per sale, other than commissions, are approximately
the same in amount for timeshare interests and land; accordingly, PEC generally
realizes lower profit margins from sales of timeshare interests than from sales
of land.
Interest expense of PEC decreased to $1.6 million during the three
months ended February 28, 1998 from $1.7 million during the three months ended
February 28, 1997, a decrease of 6.6%. The decrease is a result of the
refinancing of certain notes and contracts payable to lower interest rates
during the three months ended February 28, 1998 compared to the three months
ended February 28, 1997.
A pre-tax loss of $991,000 was recorded by PEC during the three
months ended February 28, 1998 compared to pre-tax loss of $414,000 during the
three months ended February 28, 1997. The increase in the pre-tax loss is
primarily due to the decrease in land sales and the absence of gain on sale of
receivables during the three
15
<PAGE> 18
months ended February 28, 1998, together with an increase in general and
administrative expenses and direct cost of timeshare interest sales.
No income tax provision or benefit for PEC was recorded for the three
months ended February 28, 1998 and 1997. As part of an arrangement between PEC
and the Company, regarding payment of taxes, PEC generally does not recognize a
tax benefit for periods in which it records a loss.
As a result of the foregoing, PEC reported a net loss of $991,000
during the three months ended February 28, 1998 compared to a net loss of
$414,000 during the three months ended February 28, 1997.
COMPANY (consolidated)
Loss from continuing operations was $1.3 million during the three
months ended February 28, 1998 compared to income of $1.4 million during the
three months ended February 28, 1997, due primarily to an income tax benefit of
$2.5 million recognized during the three months ended February 28, 1997 while no
income tax benefit was recognized during the three months ended February 28,
1998. See prior discussion for PEC.
Total costs and expenses during the three months ended February 28,
1998 were $17.2 million, a decrease of 1.7% from $17.5 million during the three
months ended February 28, 1997. Combined commissions and selling expenses and
general and administrative expenses decreased 2.6% for the three months ended
February 28, 1998 compared to the three months ended February 28, 1997 due
primarily to PEC's efforts in lowering expenses and a decrease in commissions
and selling expense due to decreased land sales Additionally, Mego Financial
(parent only) continues to incur interest on subordinated debt. Total general
and administrative expenses for Mego Financial (parent only) were primarily
comprised of professional services, external financial reporting expenses and
regulatory and other public company corporate expenses.
The income tax benefit for the three months ended February 28, 1998
was $0 compared to an income tax benefit of $2.5 million for the three months
ended February 28, 1997. Based on the current tax position, it was determined
that no income tax benefit should be recorded for the three months ended
February 28, 1998. The changes in certain income tax liability reserves in
fiscal 1997 are a result of facts and circumstances determined in an extensive
review and analysis of the Company's federal income tax liability completed
during fiscal 1997.
Net loss applicable to common stock was $1.3 million during the three
months ended February 28, 1998 compared to net income applicable to common stock
of $3.8 million during the three months ended February 28, 1997, primarily due
to the foregoing and due to income from discontinued operations of $2.4 million
during the three months ended February 28, 1997 because of the Spin-off of MMC
while no income from discontinued operations was recorded during the three
months ended February 28, 1998.
Six Months Ended February 28, 1998 Compared to Six Months Ended February 28,
1997
PEC
Total revenues for PEC increased 1.4%, or $444,000, to $31.9 million
during the six months ended February 28, 1998 from $31.5 million during the six
months ended February 28, 1997. The increase was primarily due to an increase in
timeshare interest sales, net, to $17.3 million during the six months ended
February 28, 1998 from $15.1 million during the six months ended February 28,
1997 and an increase in financial income to $2.0 million during the six months
ended February 28, 1998 from $1.3 million during the six months ended February
28, 1997, partially offset by a decrease in land sales.
Timeshare interest and land sales, net, increased to $23.9 million
during the six months ended February 28, 1998 from $22.9 million during the six
months ended February 28, 1997, an increase of 4.3%. Gross sales of timeshare
interests were $19.3 million during the six months ended February 28, 1998 and
1997 . Net sales of timeshare interests increased to $17.3 million from $15.1
million, an increase of 14.3%. The provision for cancellations represented 10.3%
and 21.5% of gross sales of timeshare interests for the six months ended
February 28, 1998 and 1997, respectively. The decrease in the provision for
cancellations for timeshare interests and land was primarily due to lower
cancellation experience during the first half of fiscal 1998 compared to the
first half of
16
<PAGE> 19
fiscal 1997 and to an analysis of the required allowances, including the reserve
for notes receivable sold with recourse as of February 28, 1998.
Gross sales of land decreased to $7.2 million during the six months
ended February 28, 1998 from $8.9 million during the six months ended February
28, 1997, a decrease of 19.7%. Net sales of land decreased to $6.6 million
during the six months ended February 28, 1998 from $7.8 million during the six
months ended February 28, 1997, a decrease of 15.3%. The provision for
cancellations decreased to 8.2% of gross sales of land for the six months ended
February 28, 1998 from 13.0% for the six months ended February 28, 1997,
primarily due to lower cancellation experience during the first half of fiscal
1998 compared to the first half of fiscal 1997 and to an analysis of the
required allowances, including the reserve for notes receivable sold with
recourse as of February 28, 1998. The decrease in gross land sales was the
result of PEC's diminishing inventory of land available for sale and its
increasing inventory of timeshare interests from the opening of new timeshare
resorts. During the second quarter of fiscal 1998, PEC acquired land in Colorado
to add to its inventory. PEC expects to begin selling the lots in the third
quarter of fiscal 1998.
No gain on sale of receivables was recorded for the six months ended
February 28, 1998 compared to $890,000 for the six months ended February 28,
1997. There were no receivable sales during the six months ended February 28,
1998 while there were $10.1 million in receivable sales during the six months
ended February 28, 1997. PEC periodically sells receivables to reduce the
outstanding balances under its lines of credit.
Financial income increased to $2.0 million during the six months
ended February 28, 1998 from $1.3 million during the six months ended February
28, 1997, an increase of 50.8%. The increase was a result of the increased
number of loans serviced by PEC for an unrelated third party, generating
increased servicing fees.
Other income decreased 12.4% to $1.4 million for the six months ended
February 28, 1998 from $1.6 million for the six months ended February 28, 1997
primarily due to a loss on the closing of a timeshare sales office.
As a result of the foregoing, total PEC revenues increased to $31.9
million during the six months ended February 28, 1998 from $31.5 million during
the six months ended February 28, 1997.
Total costs and expenses for PEC increased to $33.5 million for the
six months ended February 28, 1998 from $32.8 million for the six months ended
February 28, 1997, an increase of 2.3%. The increase resulted primarily from an
increase in direct costs of timeshare interest sales to $3.5 million from $2.5
million, an increase of 37.4%; an increase in direct costs of land sales to
$813,000 from $734,000, an increase of 10.8%; and an increase in depreciation
expense to $1.1 million from $933,000, an increase of 22.4%, partially offset by
a decrease of $289,000 in interest expense and a decrease in direct costs of
incidental operations of $111,000. In September 1997, 1,122 new upscale, luxury
timeshare interests in PEC's Las Vegas, Nevada resort became available for sale.
The increase in direct costs of timeshare sales is generally attributable to the
sale of this higher cost timeshare inventory. The increase in direct costs of
land is attributable to increased sales of higher cost lots sold during the
current fiscal period compared to the same period last fiscal year. The increase
in depreciation expense is due to the increase in property and equipment, net of
accumulated depreciation, to $24.3 million at February 28, 1998 from $22.5
million at February 28, 1997. The decrease in interest expense is due to a
decline in the interest rates on certain notes and contracts payable.
As a percentage of gross sales of timeshare interests and land,
commissions and selling expenses relating thereto increased to 59.0% during the
six months ended February 28, 1998 from 56.9% during the six months ended
February 28, 1997, and cost of sales increased to 16.1% during the six months
ended February 28, 1998 from 11.5% during the six months ended February 28,
1997. Sales prices of timeshare interests are typically lower than those of
land, while selling costs per sale, other than commissions, are approximately
the same in amount for timeshare interests and land; accordingly, PEC generally
realizes lower profit margins from sales of timeshare interests than from sales
of land.
Interest expense of PEC decreased to $3.2 million during the six
months ended February 28, 1998 from $3.5 million during the six months ended
February 28, 1997, a decrease of 8.3%. The decrease is a result of the
refinancing of certain notes and contracts payable to lower interest rates
during the six months ended February 28, 1998 compared to the six months ended
February 28, 1997.
17
<PAGE> 20
A pre-tax loss of $1.6 million was recorded by PEC during the six
months ended February 28, 1998 compared to pre-tax loss of $1.3 million during
the six months ended February 28, 1997. The increase in the pre-tax loss is
largely due to the decrease in land sales and the absence of gain on sale of
receivables during the current period, together with an increase in general and
administrative expenses and direct costs of timeshare interest sales.
No income tax provision or benefit for PEC was recorded for the six
months ended February 28, 1998 and 1997. As part of an arrangement between PEC
and the Company, regarding payment of taxes, PEC generally does not recognize a
tax benefit for periods in which it records a loss.
As a result of the foregoing, PEC reported a net loss of $1.6 million
during the six months ended February 28, 1998 compared to a net loss of $1.3
million during the six months ended February 28, 1997.
COMPANY (consolidated)
Loss from continuing operations was $2.6 million during the six
months ended February 28, 1998 compared to income of $304,000 during the six
months ended February 28, 1997, due primarily to an income tax benefit of $2.9
million recognized during the six months ended February 28, 1997 while no income
tax benefit was recognized during the six months ended February 28, 1998.
Total costs and expenses during the six months ended February 28,
1998 were $34.7 million, an increase of 1.4% over $34.2 million during the six
months ended February 28, 1997. Combined commissions and selling expenses and
general and administrative expenses increased 0.6% for the six months ended
February 28, 1998 compared to the six months ended February 28, 1997 due
primarily to PEC's efforts to lower expenses and a decrease in commissions due
to decreased land sales. Additionally, Mego Financial (parent only) continues to
incur interest on subordinated debt. Total general and administrative expenses
for Mego Financial (parent only) were primarily comprised of professional
services, external financial reporting expenses and regulatory and other public
company corporate expenses.
The income tax benefit for the six months ended February 28, 1998 was
$0 compared to an income tax benefit of $2.9 million for the six months ended
February 28, 1997. Based on the current tax position, it was determined that no
income tax benefit should be recorded for the six months ended February 28,
1998. The changes in certain income tax liability reserves in fiscal 1997 are a
result of facts and circumstances determined in an extensive review and analysis
of the Company's federal income tax liability completed during fiscal 1997.
Net loss applicable to common stock was $2.6 million during the six
months ended February 28, 1998 compared to net income applicable to common stock
of $4.9 million during the six months ended February 28, 1997, primarily due to
the foregoing and due to income from discontinued operations of $4.6 million
during the six months ended February 28, 1997 because of the Spin-off of MMC
while no income from discontinued operations was recorded during the six months
ended February 28, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents for the Company were $3.0 million at
February 28, 1998 compared to $10.4 million at August 31, 1997. The decrease was
primarily due to PEC's acquisition and improvement of timeshare properties, no
sale of notes receivable occurring during the first two quarters of fiscal 1998,
the payment of commissions and selling expenses in connection with timeshare and
land sales and Mego Financial's payment of interest on subordinated debt. PEC
requires continued access to sources of debt financing and sales in the
secondary market for receivables.
PEC
PEC's cash requirements arise from the acquisition of timeshare
properties and land, payments of operating expenses, payments of taxes and
dividends to Mego Financial, payments of principal and interest on debt
obligations and payments of commissions and selling expenses in connection with
sales of timeshare interests and land. Commissions and selling expenses payable
by PEC in connection with sales of timeshare interests and land typically exceed
the down payments received at the time of sale, as a result of which PEC
generates a cash shortfall. This cash shortfall and PEC's other cash
requirements are funded primarily through sales of receivables, PEC's
18
<PAGE> 21
lines of credit in the aggregate amount of $137.5 million and cash flows from
operations. At February 28, 1998, no commitments existed for material capital
expenditures.
At February 28, 1998, PEC had arrangements with 5 institutional
lenders under 6 agreements for the financing of receivables in connection with
sales of timeshare interests and land and the acquisition of timeshare
properties and land, which provide for 6 lines of credit of up to an aggregate
of $137.5 million. Such lines of credit are secured by timeshare and land
receivables and mortgages. At February 28, 1998, an aggregate of $73.3 million
was outstanding under such lines of credit, and $64.2 million was available for
borrowing. Under the terms of these lines of credit, PEC may borrow 70% to 85%
of the balances of the pledged timeshare and land receivables. PEC is required
to comply with certain covenants under these agreements, which, among other
things, require PEC to meet certain minimum tangible net worth requirements. The
most stringent of such requirements provides that PEC maintain a minimum
tangible net worth of $25.0 million. At February 28, 1998, PEC's net worth was
$23.7 million. Necessary waivers of compliance with certain covenants related to
these and other agreements have been received. Summarized lines of credit
information and accompanying notes relating to these six lines of credit
outstanding at February 28, 1998, consist of the following (thousands of
dollars):
<TABLE>
<CAPTION>
BORROWING MAXIMUM
AMOUNT AT BORROWING REVOLVING
FEBRUARY 28, 1998 AMOUNT EXPIRATION DATE (f) MATURITY DATE INTEREST RATE
- -------------------- -------------- ------------------------- ----------------------- ---------------------------
<S> <C> <C> <C> <C>
$ 46,165 $ 75,000 (a) May 15, 2000 Various Prime + 2.0 - 2.25%
6,085 15,000 (b) May 30, 1998 Various Prime + 2.0%
8,070 15,000 (c) March 29, 1998 Various LIBOR + 4.0 - 4.25%
5,539 15,000 (c) February 6, 1998 August 6, 1999 LIBOR + 4.25%
4,430 10,000 (d) August 1, 2000 August 1, 2003 Prime + 2.25%
2,979 7,500 (e) April 30, 1998 May 31, 2002 Prime + 2.0%
</TABLE>
- ----------
(a) Restrictions include PEC's requirement to maintain a minimum tangible net
worth of $20.0 million with such amount increasing each fiscal quarter
after August 31, 1997 by an amount equal to 50% of PEC's consolidated net
income for each quarter up to a maximum requirement of $25 million. At
February 28, 1998, $30.3 million of loans secured by receivables were
outstanding related to financings at prime +2%, of which $20.1 million of
loans secured by land receivables mature May 15, 2010 and $10.1 million of
loans secured by timeshare receivables mature May 15, 2007. The outstanding
borrowing amount includes $1.5 million in acquisition and development (A&D)
financing maturing May 20, 1998 and $5.5 million maturing July 1, 2003 for
the financing of corporate office buildings; both of which are amortizing
loans and bear interest at prime +2.25%. The remaining A&D and receivables
loans, land acquisition loan and a resort lobby loan outstanding of $8.9
million are at prime +2% and mature between February 28, 1998 and February
20, 2001.
(b) Restrictions include PEC's requirement to maintain a minimum tangible net
worth of $25.0 million during the life of the loan. These credit lines
include available financing for A&D and receivables. At February 28, 1998,
$1.6 was outstanding under the A&D loan which matures in September 1999,
and $4.5 million maturing June 1, 2002 was outstanding under the
receivables loan.
(c) Restrictions include PEC's requirement to maintain a minimum tangible net
worth of $17.0 million during the life of the loan. These credit lines
include available financings for A&D and receivables. At February 28, 1998,
$6.6 million was outstanding under the A&D loans, bearing interest at the
90-day London Interbank Offering Rate (LIBOR) +4.25% and maturing between
March 1999 and August 1999. At February 28, 1998, $1.5 million was
outstanding under the receivables loan, bearing interest at the 90-day
LIBOR +4% and maturing in June 2005.
(d) Restrictions include PEC's requirement to maintain a minimum tangible net
worth of $25 million. This credit line is for the purpose of financing
receivables and costs of remodeling.
(e) Restrictions include PEC's requirement to maintain a minimum tangible net
worth of $15 million. This credit line is for the purpose of financing
receivables.
(f) Revolving expiration dates represent the expiration of the revolving
features of the lines of credit, at which time the credit lines become
loans with fixed maturities.
19
<PAGE> 22
A schedule of the cash shortfall arising from recognized and
unrecognized sales for the periods indicated is set forth below (thousands of
dollars):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
-------------------------- -------------------------
1998 1997 1998 1997
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Commissions and selling expenses attributable to
recognized and unrecognized sales $ 7,811 $ 8,371 $ 15,726 $ 16,412
Less: Down payments (3,147) (3,227) (6,263) (6,742)
-------- -------- -------- --------
Cash Shortfall $ 4,664 $ 5,144 $ 9,463 $ 9,670
======== ======== ======== ========
</TABLE>
During the six months ended February 28, 1998, PEC did not sell any
notes receivable. During the six months ended February 28, 1997, PEC sold notes
receivable of $10.1 million from which $8.3 million of the sales proceeds were
used to pay down debt during the six months ended February 28, 1997. The
receivables sold during the six months ended February 28, 1997 had a
weighted-average interest rate of 12.9% and were sold to yield a return of 9.0%
with any excess interest received from the obligors being payable to PEC.
At February 28, 1998, PEC was contingently liable to replace or
repurchase notes receivable sold with recourse totaling $76.1 million. PEC sells
notes receivable subject to recourse provisions as contained in each agreement.
PEC is obligated under these agreements to replace or repurchase accounts that
become over 90 days delinquent or are otherwise subject to replacement or
repurchase. The repurchase provisions provide for substitution of receivables as
recourse for $75.1 million of sold notes receivable and cash payments for
repurchase relating to $994,000 of sold notes receivable. At February 28, 1998
and 1997, the undiscounted amounts of the recourse obligations on such notes
receivable were $7.1 million and $11.9 million, respectively. PEC periodically
reviews the adequacy of this liability. These reviews take into consideration
changes in the nature and level of the portfolio, current and future economic
conditions which may affect the obligors' ability to pay, changes in collateral
values, estimated value of inventory that may be reacquired and overall
portfolio quality.
The components of the Company's debt, including lines of credit
consist of the following (thousands of dollars):
<TABLE>
<CAPTION>
FEBRUARY 28, AUGUST 31,
1998 1997
------------ ------------
<S> <C> <C>
Notes collateralized by receivables $ 39,552 $ 31,489
Mortgages collateralized by real estate properties 37,198 32,311
Installment contracts and other notes payable 1,849 1,769
------------ ------------
Total $ 78,599 $ 65,569
============ ============
</TABLE>
FINANCIAL CONDITION
February 28, 1998 Compared to August 31, 1997
Cash and cash equivalents decreased 71.3% to $3.0 million at February
28, 1998 from $10.4 million at August 31, 1997, primarily as a result of PEC's
acquisition and improvement of timeshare properties, no sale of notes receivable
during the first half of fiscal 1998, the payment of commissions and selling
expenses in connection with timeshare and land sales and Mego Financial's
payment of interest on subordinated debt.
Notes receivable, net, increased 24.4% to $42.6 million at February
28, 1998 from $34.3 million at August 31, 1997 primarily as a result of new
receivables added exceeding reductions while no receivable sales occurred during
the six months ended February 28, 1998.
20
<PAGE> 23
Changes in the aggregate of the allowance for cancellations,
excluding discounts, and the reserve for notes receivable sold with recourse for
the six months ended February 28, 1998 consists of the following (thousands of
dollars):
<TABLE>
<S> <C>
Balance at beginning of period $ 19,527
Provision for cancellations 2,579
Amounts charged to allowance for cancellations
and reserve for notes receivable sold with recourse (3,036)
--------
Balance at end of period $ 19,070
========
</TABLE>
The allowance for cancellations and the reserve for notes receivable
sold with recourse consisted of the following at these dates (thousands of
dollars):
<TABLE>
<CAPTION>
FEBRUARY 28, AUGUST 31,
1998 1997
------------ ------------
<S> <C> <C>
Allowance for cancellations, excluding discounts $ 12,662 $ 10,824
Reserve for notes receivable sold with recourse 6,408 8,703
------------ ------------
Total $ 19,070 $ 19,527
============ ============
</TABLE>
Statement of Financial Accounting Standard (SFAS) No. 125 (SFAS 125)
requires the reclassification of excess servicing rights as interest only
receivables which are carried at fair market value. Interest only receivables
decreased 5.7% to $3.1 million at February 28, 1998 from $3.3 million at August
31, 1997 due to normal amortization.
Timeshare interests held for sale and land and improvements inventory
increased 4.1% to $38.8 million at February 28, 1998 from $37.3 million at
August 31, 1997 primarily as a result of the completion of construction of
additional timeshare interests during the six months ended February 28, 1998.
Other investments increased $6.5 million to $8.7 million at February
28, 1998 from $2.1 million at August 31, 1997 due to the recent acquisition of
land in Colorado held for future sale.
Other receivables increased to $1.8 million at February 28, 1998 from
$0 at August 31, 1997, due to a receivable for management services and loan
servicing for MMC during the six months ended February 28, 1998 and the
remaining balance of the MMC receivable which was included in net assets of
discontinued operations at August 31, 1997.
Net assets of discontinued operations decreased to $0 at February 28,
1998 from $53.3 million at August 31, 1997 due to the completion of the Spin-off
on September 2, 1997. The $53.3 million at August 31, 1997 represented the net
assets of MMC of $53.1 million and the Company's receivable of $10.1 million
from MMC less the minority interest of $9.9 million. Of the $10.1 million, $9.7
million was due from MMC to the Company and $446,000 was due from MMC to PEC.
After the Spin-off, MMC was obligated to pay the debt due to the Company, $3.9
million of which was paid in October 1997 under the terms of an agreement and
$5.3 million which was eliminated through an adjustment in April 1998.
Notes and contracts payable increased 19.9% to $78.6 million at
February 28, 1998 from $65.6 million at August 31, 1997, due to increased
borrowings and no receivable sales occurred during the six months ended February
28, 1998; the proceeds of which are usually used to pay down debt.
Reserve for notes receivable sold with recourse decreased 26.4% to
$6.4 million at February 28, 1998 from $8.7 million at August 31, 1997 primarily
due to no receivable sales occurring during the six months ended February 28,
1998 and the reduced balance of the sold notes receivable. Recourse to PEC on
sales of notes receivable is governed by the agreements between the purchasers
and PEC.
Income taxes payable were $6.2 million at February 28, 1998 and
August 31, 1997. The change in certain income tax liability reserves are a
result of facts and circumstances determined in an extensive review and analysis
of the Company's federal income tax liability completed during fiscal 1997.
21
<PAGE> 24
Stockholders' equity decreased 69.8% to $22.1 million at February 28,
1998 from $73.2 million at August 31, 1997 primarily as a result of the
distribution by Mego Financial of all of its remaining shares of MMC common
stock to shareholders of Mego Financial pursuant to the Spin-off which resulted
in a distribution of $43.2 million in equity and the reduction by $5.3 million
of a receivable MMC owed the Company. See Note 5 of Notes to Condensed
Consolidated Financial Statements.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," (SFAS 125) was issued by the Financial Accounting Standards
Board (FASB) in June 1996. SFAS 125 provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities. This statement also provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. It requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be initially
measured at fair value. SFAS 125 also requires that servicing assets be measured
by allocating the carrying amount between the assets sold and retained interests
based on their relative fair values at the date of transfer. Additionally, this
statement requires that the servicing assets and liabilities be subsequently
measured by (a) amortization in proportion to and over the period of estimated
net servicing income or loss and (b) assessment for asset impairment or
increased obligation based on their fair values. SFAS 125 requires that the
Company's excess servicing rights be measured at fair market value and be
reclassified as interest only receivables and accounted for in accordance with
SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities."
As required by SFAS 125, the Company adopted the new requirements effective
January 1, 1997. Implementation of SFAS 125 did not have any material impact on
the financial statements of the Company, as the book value of the Company's
interest only receivables approximated fair value.
SFAS No. 128, "Earnings per Share," (SFAS 128) was issued by the FASB
in March 1997, effective for financial statements issued after December 15,
1997. SFAS 128 provides simplified standards for the computation and
presentation of earnings per share (EPS), making EPS comparable to international
standards. SFAS 128 requires dual presentation of "Basic" and "Diluted" EPS, by
entities with complex capital structures, replacing "Primary" and
"Fully-diluted" EPS under APB Opinion No. 15.
22
<PAGE> 25
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No significant developments in any litigation previously reported
occurred during the six months ended February 28, 1998.
ITEM 5. OTHER EVENTS
On March 27, 1998, the Company announced that it had entered into a
definitive merger agreement under which it is to be acquired by Sycamore
Partners, LLC ("Sycamore"). Sycamore is to be financed by Blackacre Capital
Group, L.P., a real estate investment fund. Under the terms of the merger, the
Company shareholders are to receive cash based upon a price of $6.00 per share,
less an adjustment related to a receivable from MMC on the Company's financial
statements. The adjustment is expected to be at least $0.25 per share but not
more than $0.29 per share so that the per share price to be received by
shareholders would be a minimum of $5.71 per share up to an estimated maximum of
$5.75 per share. See Note 5.
The aggregate value of this transaction would be approximately
$120,000,000 plus the Company's outstanding indebtedness. The completion of the
acquisition is subject to approval by the holders of two-thirds of the Company's
outstanding common stock, customary regulatory approvals and the satisfaction of
certain other conditions set forth in the merger agreement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
NUMBER -----------
------
<S> <C>
10.133 Agreement between the Company and Herbert B. Hirsch dated September 2, 1997 relating to a
severance payment.
10.134 Agreement between the Company and Don A. Mayerson dated September 2, 1997 relating to a
severance payment.
10.135 Amendment to Services and Consulting Agreement between Mego Mortgage Corporation and
Preferred Equities Corporation dated January 20, 1998.
10.136 Amendment to Loan Program Sub-Servicing Agreement between Mego Mortgage Corporation and
Preferred Equities Corporation dated January 20, 1998.
10.137 Agreement between Mego Mortgage Corporation and Preferred Equities Corporation, dated
February 9, 1998, regarding assignment of rights related to the Loan Program Sub-Servicing
Agreement to Greenwich Capital Markets, Inc.
10.138 Mortgage Loan Facility Agreement between FINOVA Capital Corporation and Preferred Equities
Corporation dated February 18, 1998
27.1 Financial Data Schedule (for SEC use only).
</TABLE>
No reports on Form 8-K were filed during the period except as reported in the
Company's Form 10-K for the year ended August 31, 1997.
23
<PAGE> 26
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/ Charles G. Baltuskonis
--------------------------------
Charles G. Baltuskonis
Vice President and Chief
Accounting Officer
Date: April 14, 1998
--------------
24
<PAGE> 1
EXHIBIT 10.133
AGREEMENT
It is hereby agreed by and between MEGO FINANCIAL CORP. (the "Company")
and HERBERT B. HIRSCH (the "Employee") as follows:
RECITALS
WHEREAS, the Employee has been a senior officer of the Corporation
since January, 1988, presently holding the offices of Senior Vice President,
Chief Financial Officer and Treasurer; and
WHEREAS, the Employee and the Company have agreed that it is
appropriate to enter into this contractual arrangement with respect to the
severance payment to be made by the Company to the Employee at such time as
the Employee is no longer employed by the Company; and
WHEREAS, the Board of Directors of the Company has approved the terms
of this agreement on September 2, 1997;
NOW THEREFORE, in consideration of the continuing services being
performed by the Employee and for other good and valuable consideration, it is
agreed as follows:
1. The above recitals are true and correct.
2. In the event the employment of the Employee in his present capacity with
the Company is terminated for any reason, including but not limited to the
Employee's death, disability, or retirement, the Company shall promptly pay to
the Employee (or his personal representative if the Employee is deceased) the
sum of ONE HUNDRED FIFTY THOUSAND DOLLARS ($150,000), in full satisfaction of
any severance obligations of the Company.
3. The foregoing severance payment shall be in addition to, and in no way
credited against, any sums due to or payable on behalf of the Employee by or
from the Company for any other reason, including but not limited to (i) accrued
salary and vacation pay, (ii) reimbursement of expenses due Employee, (iii)
amounts due Employee under the agreement dated August 1, 1994 between the
Company and the Employee relating to the payment of 1% of In-
1
<PAGE> 2
centive Income of the Company to the Employee through the end of fiscal 1999,
and (iv) second-to-die insurance premium amounts payable by the Company on
behalf of the Employee or a trust of the Employee under the Company's Split
Dollar Insurance Plan.
IN WITNESS WHEREOF, the parties have executed this agreement as of this 2nd day
of September, 1997.
MEGO FINANCIAL CORP.
By /s/ JEROME J. COHEN
-------------------------------
Jerome J. Cohen, President
HERBERT B. HIRSCH
/s/ HERBERT B. HIRSCH
- ----------------------------------
hhsev
2
<PAGE> 1
EXHIBIT 10.134
AGREEMENT
It is hereby agreed by and between MEGO FINANCIAL CORP. (the "Company")
and DON A. MAYERSON (the "Employee") as follows:
RECITALS
WHEREAS, the Employee has been a senior officer of the Corporation
since January, 1988, presently holding the offices of Executive Vice President,
General Counsel and Secretary; and
WHEREAS, the Employee and the Company have agreed that it is
appropriate to enter into this contractual arrangement with respect to the
severance payment to be made by the Company to the Employee at such time as
the Employee is no longer employed by the Company; and
WHEREAS, the Board of Directors of the Company has approved the terms
of this agreement on September 2, 1997;
NOW THEREFORE, in consideration of the continuing services being
performed by the Employee and for other good and valuable consideration, it is
agreed as follows:
1. The above recitals are true and correct.
2. In the event the employment of the Employee in his present capacity with
the Company is terminated for any reason, including but not limited to the
Employee's death, disability, or retirement, the Company shall promptly pay to
the Employee (or his personal representative if the Employee is deceased) the
sum of TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000), in full satisfaction of
any severance obligations of the Company.
3. The foregoing severance payment shall be in addition to, and in no way
credited against, any sums due to or payable on behalf of the Employee by or
from the Company for any other reason, including but not limited to (i) accrued
salary and vacation pay, (ii) reimbursement of expenses due Employee, (iii)
amounts due Employee under the agreement dated August 1, 1994 between the
Company and the Employee relating to the payment of 1% of In-
1
<PAGE> 2
centive Income of the Company to the Employee through the end of fiscal 1999,
and (iv) second-to-die insurance premium amounts payable by the Company on
behalf of the Employee or a trust of the Employee under the Company's Split
Dollar Insurance Plan.
IN WITNESS WHEREOF, the parties have executed this agreement as of this 2nd day
of September, 1997.
MEGO FINANCIAL CORP.
By /s/ JEROME J. COHEN
-------------------------------
Jerome J. Cohen, President
DON A. MAYERSON
/s/ DON A. MAYERSON
- ----------------------------------
damsev
2
<PAGE> 1
EXHIBIT 10.135
[PREFERRED EQUITIES CORPORATION LETTERHEAD]
January 20, 1998
Mego Mortgage Corporation
1000 Parkwood Circle, 5th Floor
Atlanta, GA 30339
Attention: James L. Belter, Executive Vice President
Re: Services and Consulting Agreement (the "Agreement") dated as of September
1, 1996 between Mego Mortgage Corporation ("MMC") and Preferred Equities
Corporation ("PEC")
Gentlemen:
This letter serves to confirm our agreement that commencing January 1, 1998 the
remuneration to be paid by MMC to PEC under the Agreement shall be at the annual
rate of $528,000.00 as more particularly itemized on Exhibit A attached hereto
and made a part hereof. Such sum will be payable at the rate of $44,000.00 per
month due and payable on the first business day of each month. Except as
modified hereby, all other terms and conditions of the Agreement shall remain in
full force and effect.
Please sign a copy of this letter in the space indicated below to indicate your
acceptance and approval of the foregoing
Very truly yours,
PREFERRED EQUITIES CORPORATION
By: /s/ FREDERICK H. CONTE
----------------------------------------------
Frederick H. Conte, Executive Vice President
Accepted and approved as of this 20th day of January, 1998.
MEGO MORTGAGE CORPORATION
By: /s/ JAMES L. BELTER
-------------------------------------------
Jame L. Belter, Executive Vice President
<PAGE> 2
EXHIBIT A
MMC MANAGEMENT SERVICES' AGREEMENT
<TABLE>
<CAPTION>
------------------------------
(Est.) (Rounded)
FY 1997 FY 1998 FY 1998
------------------------------
STRATEGIC PLANNING, MANAGEMENT AND TAX
<S> <C> <C> <C>
J. Cohen 163,800 --
Executive Office 155,400 4,314
SVP, Finance 100,800 81,589
------------------------------
420,000 85,903 86,000
------------------------------
ACCOUNTING AND FINANCE
Treasurer 4,175 4,584
Payroll 32,675 --
Accounting/Reporting 185,150 135,066
------------------------------
222,000 139,650 140,000
------------------------------
LEGAL 163,000 206,909 207,000
------------------------------
INFORMATION SYSTEMS 123,000 80,495 80,000
------------------------------
INSURANCE MANAGEMENT 16,000 12,830 13,000
------------------------------
HUMAN RESOURCES 19,000 -- --
------------------------------
OTHER
Purchasing 1,000 --
Advertising 3,000 --
------------------------------
4,000 -- --
------------------------------
------------------------------
TOTAL 967,000 525,787 528,000
------------------------------
</TABLE>
<PAGE> 3
MMC Allocation %'s
------------------
FY 97 % FY 98 %
------------------
(as of 1/1/98)
STRATEGIC PLANNING, ETC.
- ------------------------
Executive Office
D. Bottwin 20 10
SVP, Finance
H. Hirsch 30 25
ACCOUNTING AND FINANCE
- ----------------------
Treasurer
R. Rodriguez 2 2
CAO -- Accounting / Reporting
C. Baltuskonis 5 10
B. Coughlin 0 5
M. Sullivan 40 50
P. Bruhns 0 50
K. Morishige 20 50
D. Harrison 20 50
LEGAL
- -----
D. Mayerson 50 75
L. Morganroth 25 50
INFORMATION SYSTEMS
M. O'Brien 40 10
K. O'Brien 0 15
M. Kendall 0 100
INSURANCE MANAGEMENT
- --------------------
J. Goldstein 7.5 7.5
<PAGE> 1
EXHIBIT 10.136
[PREFERRED EQUITIES CORPORATION LETTERHEAD]
January 20, 1998
Mego Mortgage Corporation
1000 Parkwood Circle, 5th Floor
Atlanta, GA 30339
Attention: James L. Belter, Executive Vice President
Re: Loan Program Sub-Servicing Agreement dated as of September 1, 1996 between
Preferred Equities Corporation ("PEC") and Mego Mortgage Corporation
("MMC") as amended by Letter Agreement dated September 2, 1997 (and as
amended, the "Agreement")
Gentlemen:
This letter serves to confirm our agreement that the monthly servicing fee of
one-twelfth (1/12) of four tenths (4/10) of one percent (0.40%) of the
outstanding principal balance of all loans being serviced on the first day of
the prior month as set forth in Article 4 of the Agreement is hereby modified
and amended to be one-twelfth (1/1 2) of thirty-five one hundredths (35/100) of
one percent (0.35%) commencing for the month of January 1998. Except as modified
hereby, all other terms and conditions of the Agreement shall remain in full
force and effect.
Please sign a copy of this letter in the space indicated below to indicate your
acceptance and approval of the foregoing.
Very truly yours,
PREFERRED EQUITIES CORPORATION
By: /s/ FREDERICK H. CONTE
----------------------------------------------
Frederick H. Conte, Executive Vice President
Accepted and approved as of this 20th day of January, 1998.
MEGO MORTGAGE CORPORATION
By: /s/ JAMES L. BELTER
-------------------------------------------
Jame L. Belter, Executive Vice President
<PAGE> 1
EXHIBIT 10.137
[MEGO MORTGAGE LETTERHEAD]
February 9, 1998
Mr. Frederick H. Conte
Executive Vice President
Preferred Equities Corporation
4310 Paradise Road
Las Vegas, NV 89109
Re: Assignment by Mego Mortgage Corporation ("MMC") of its rights under the
Loan Program Sub Servicing Agreement dated as of September 1, 1996 as
amended between MMC and Preferred Equities Corporation ("PEC") (the
"Agreement")
Dear Mr. Conte:
As of February 10, 1998, MMC has entered into an Amendment of the Excess Yield
and Servicing Rights Purchase and Assumption Agreement dated January 22, 1998
(the "Amendment") (the "Purchase Agreement") with Greenwich Capital Markets,
Inc. (the "Purchaser"). Pursuant to Section 2(f) of the Amendment, MMC has
assigned, to the Purchaser, all of its rights and obligations under the
Agreement arising from and after February 3, 1998 with respect to the Additional
Conventional Loans, as defined in the Amendment: provided, however, each of MMC
and PEC hereby expressly acknowledge and agree that any fees and expenses owed
to PEC for services rendered (other than with respect to the Existing
Conventional Loans) prior to February 3, 1998 shall remain the sole obligation
of MMC.
As required by Section 2(h)(iv) of the Amendment, PEC hereby consents to such
assignment by MMC of MMC's rights under the Agreement solely with respect to the
Additional Conventional Loans, including without limitation terms and conditions
relating to MMC's ability to terminate PEC as subservicer in the Agreement with
respect to the Additional Conventional Loans. Each of the parties hereto agree
that upon such assignment, PEC shall service the Additional Conventional Loans
for the sole and exclusive benefit of the Purchaser.
Purchaser will have the option of removing any or all of the Additional
Conventional Loans from the serviced portfolio with 48 hours prior written
notice to PEC. The servicing fee for the deleted loans for any calendar month
will be pro-rated in accordance with the actual number of days the deleted loans
were serviced in a calendar month. For purposes of this computation, a calendar
month will consist of 30 days. With 48 hours prior written notice, PEC also
agrees to transfer to such entity designated by Purchaser any and all files,
documents, instruments and information in its possession with respect to such
Additional Conventional Loans upon Purchaser's removal of the relevant loans
from the Agreement.
<PAGE> 2
Please execute the attached copy of this letter thereby acknowledging the
consent by PEC to the assignment by MMC of MMC's rights under the Agreement with
respect to the Additional Conventional Loans on the terms outlined above.
Very truly yours,
/s/ JAMES L. BELTER
James L. Belter
Agreed and Accepted
Preferred Equities Corporation
By : /s/ Jerome J. Cohen
--------------------------------
Title: President
----------------------------
Date: 2/10/98
----------------------------
<PAGE> 1
EXHIBIT 10.138
[HARTSEL SPRINGS RANCH]
NOTE
U.S. $4,000,000.00 February ___, 1998
Phoenix, Arizona
FOR VALUE RECEIVED, the undersigned PREFERRED EQUITIES
CORPORATION, a Nevada corporation ("Maker"), promises to pay to FINOVA CAPITAL
CORPORATION, a Delaware corporation ("Lender"), or order, at such place as the
holder of this Note ("Holder") may from time to time designate in writing, in
lawful money of the United States of America, the principal sum of up to FOUR
MILLION AND NO/100 DOLLARS (U.S. $4,000,000.00), or so much thereof as has been
disbursed and not repaid, together with interest on the unpaid principal balance
from time to time outstanding from the date hereof until paid, as more fully
provided for below.
This Note is executed pursuant to the terms of that certain
Second Amended and Restated and Consolidated Loan and Security Agreement dated
effective as of May 15, 1997 between Maker and Lender (such Amended and Restated
and Consolidated Loan and Security Agreement, as may be further amended, the
"Loan Agreement"). All capitalized terms not otherwise defined herein shall have
the meanings ascribed to them in the Loan Agreement, the applicable provisions
of which are incorporated herein by reference.
Interest due under this Note shall (a) accrue daily on the
basis of the actual number of days in the computation period, (b) be calculated
on the basis of a year consisting of 360 days, and (c) be payable monthly in
arrears on the later of (i) ten (10) days after Lender mails an invoice or
statement therefor to Maker or (ii) the due date set forth in said invoice or
statement. Interest shall accrue initially at an annual interest rate ("Initial
Interest Rate") equal to Prime (as hereinafter defined) in effect on the date of
the initial advance of the loan evidenced by this Note ("Initial Prime") plus
two percent (2%) per annum, subject to adjustment on each Interest Rate Change
Date (as hereinafter defined), but in no event to exceed the maximum contract
rate permitted under the Applicable Usury Law (as hereinafter defined). The
interest rate shall change on each Interest Rate Change Date by adding to or
subtracting from the Initial Interest Rate, as the case may be, the change, if
any, between Initial Prime and Prime in effect on the applicable Interest Rate
Change Date. As used in this Note, the following capitalized terms shall have
the meaning set forth opposite them below:
"Prime" shall mean the rate of interest publicly
announced, from time to time, by Citibank, N.A., New York, New York
("Citibank"), as the corporate base rate of interest charged by
Citibank to its most creditworthy
<PAGE> 2
commercial borrowers notwithstanding the fact that some borrowers of
Citibank may borrow from Citibank at rates of less than such announced
Prime rate; and
"Interest Rate Change Date" means (a) the first
business day of Citibank during the calendar month following the date
of the initial advance of the loan evidenced by this Note and (b) the
first business day of Citibank during each successive month thereafter.
In the event the Project Release Fees applicable to the
Project with respect to which Advances under the Note are made do not reduce the
unpaid principal balance of this Note, as of the first anniversary of the date
hereof, to an unpaid principal balance of no more than Three Million Dollars
($3,000,000), Maker shall within ten (10) days thereafter pay to Lender a
principal payment in an amount equal to the amount by which the unpaid principal
balance of this Note exceeds Three Million Dollars ($3,000,000). In the event
the Project Release Fees described above do not reduce the unpaid principal
balance of this Note, as of the second anniversary of the date hereof, to an
unpaid principal balance of no more than One Million Five Hundred Thousand
Dollars ($1,500,000), Maker shall within ten (10) days thereafter pay to Lender
a principal payment in an amount equal to the amount by which the unpaid
principal balance of this Note exceeds One Million Five Hundred Thousand Dollars
($1,500,000). Notwithstanding anything herein to the contrary, if not sooner
paid, the entire remaining balance of this Note, together with all accrued and
unpaid interest and all other sums due and owing hereunder, shall be due and
payable in full on the third anniversary of the date hereof.
Payments of principal and/or interest shall, at the option of
Holder, earn interest after they are due at a rate ("Overdue Rate") equal to (a)
two percent (2%) per annum above the rate otherwise payable hereunder or (b) the
maximum contract rate permitted under the Applicable Usury Law, whichever of (a)
or (b) is lesser. Furthermore, in the event of the occurrence of an Event of
Default (as the term "Event of Default" is defined in the Loan Agreement) the
unpaid principal balance of this Note shall, at the option of Holder, accrue
interest at the Overdue Rate.
All payments made under this Note shall be applied first
against amounts due hereunder or under the Loan Agreement, other than principal
and interest; second, against interest then due under this Note; and third,
against the principal of this Note.
In the event any installment of principal and/or interest
required to be made in connection with the indebtedness evidenced hereby is not
paid when due and, except in the case of the final installment, for which no
grace period is allowed, such default continues for five (5) days after notice
thereof to Maker or an Event of Default occurs, Holder may, at its option,
without notice or demand, declare immediately due and payable
2
<PAGE> 3
the entire unpaid principal balance hereof, all accrued and unpaid interest
thereon, and all other charges owing in connection with the loan evidenced
hereby.
The contracted for rate of interest of the loan contemplated
hereby, without limitation, shall consist of the following: (i) the interest
rate, calculated and applied to the principal balance of this Note in accordance
with the provisions of this Note; (ii) Overdue Rate, calculated and applied to
the amounts due under this Note in accordance with the provisions hereof; (iii)
all Mortgage Loan Fees, Project Incentive Fees and other Fees as provided in the
Loan Agreement; and (iv) all Additional Sums (as hereinafter defined), if any.
Maker agrees to pay an effective contracted for rate of interest which is the
sum of the above referenced elements.
All fees, charges, goods, things in action or any other sums
or things of value (other than amounts described in the immediately previous
paragraph), paid or payable by Maker (collectively, the "Additional Sums"),
whether pursuant to this Note, the Loan Agreement, the other Documents or any
other documents or instruments in any way pertaining to this lending
transaction, or otherwise with respect to this lending transaction, that under
any applicable law may be deemed to be interest with respect to this lending
transaction, for the purpose of any applicable law that may limit the maximum
amount of interest to be charged with respect to this lending transaction, shall
be payable by Maker as, and shall be deemed to be, additional interest, and for
such purposes only, the agreed upon and "contracted for rate of interest" of
this lending transaction shall be deemed to be increased by the rate of interest
resulting from the Additional Sums.
Maker shall have no right to prepay this Note, other than
through the application of the above-referenced Project Release Fees.
In the event that Holder institutes legal proceedings to
enforce this Note and Holder is the prevailing party in such proceeding, Maker
agrees to pay Holder, in addition to any indebtedness due and unpaid, all costs
and expenses of such proceedings, including, without limitation, attorneys'
fees.
Holder shall not by any act or omission or commission be
deemed to waive any of its rights or remedies hereunder unless such waiver be in
writing and signed by an authorized officer of Holder and then only to the
extent specifically set forth therein; a waiver on one occasion shall not be
construed as continuing or as a bar to or waiver of such right or remedy on any
other occasion. All remedies conferred upon Holder by this Note or any other
instrument or agreement connected herewith or related hereto shall be cumulative
and none is exclusive and such remedies may be exercised concurrently or
consecutively at Holder's option.
3
<PAGE> 4
Every person or entity at any time liable for the payment of
the indebtedness evidenced hereby waives: presentment for payment, protest and
demand; notice of protest, demand, dishonor and nonpayment of this Note; and
trial by jury in any litigation arising out of, relating to or connected with
this Note or any instrument given as security herefor. Every such person or
entity further consents that Holder may renew or extend the time of payment of
any part or the whole of the indebtedness at any time and from time to time at
the request of any other person or entity liable therefor. Any such renewals or
extensions may be made without notice to any person or entity liable for the
payment of the indebtedness evidenced hereby.
This Note is given and accepted as evidence of indebtedness
only and not in payment or satisfaction of any indebtedness or obligation.
Time is of the essence with respect to all of Maker's
obligations and agreements under this Note.
This Note and all of the provisions, conditions, promises and
covenants hereof shall be binding in accordance with the terms hereof upon
Maker, its successors and assigns, provided nothing herein shall be deemed
consent to any assignment restricted or prohibited by the terms of the Loan
Agreement. If more than one (1) person or other entity has executed this Note as
Maker, the obligations of such persons and entities shall be joint and several.
This Note has been executed and delivered in Phoenix, Arizona,
and the obligations of Maker hereunder shall be performed in Phoenix, Arizona.
THIS NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ARIZONA AND, TO
THE EXTENT THEY PREEMPT THE LAWS OF SUCH STATE, THE LAWS OF THE UNITED STATES.
Maker (a) hereby irrevocably submits itself to the process, jurisdiction and
venue of the courts of the State of Arizona, Maricopa County, and to the
process, jurisdiction and venue of the United States District Court for Arizona,
for the purposes of suit, action or other proceedings arising out of or relating
to this Note or the subject matter hereof brought by Holder and (b) without
limiting the generality of the foregoing, hereby waives and agrees not to assert
by way of motion, defense or otherwise in any such suit, action or proceeding
any claim that Maker is not personally subject to the jurisdiction of the
above-named courts, that such suit, action or proceeding is brought in an
inconvenient forum or that the venue of such suit, action or proceeding is
improper.
It is the intent of the parties to comply with the usury law
("Applicable Usury Law") applicable pursuant to the terms of the preceding
paragraph or such other usury law which is applicable if the law chosen by the
parties is not. Accordingly, it is agreed that notwithstanding any provisions to
the contrary in this Note, or in any of the documents securing payment hereof or
otherwise relating hereto, in no event shall this
4
<PAGE> 5
Note or such documents require the payment or permit the collection of interest
in excess of the maximum contract rate permitted by the Applicable Usury Law. In
the event (a) any such excess of interest otherwise would be contracted for,
charged or received from Maker or otherwise in connection with the loan
evidenced hereby, or (b) the maturity of the indebtedness evidenced by this Note
is accelerated in whole or in part, or (c) all or part of the principal or
interest of this Note shall be prepaid, so that under any of such circumstance
the amount of interest contracted for, shared or received in connection with the
loan evidenced hereby, would exceed the maximum contract rate permitted by the
Applicable Usury Law, then in any such event (1) the provisions of this
paragraph shall govern and control, (2) neither Maker nor any other person or
entity now or hereafter liable for the payment hereof will be obligated to pay
the amount of such interest to the extent that it is in excess of the maximum
contract rate permitted by the Applicable Usury Law, (3) any such excess which
may have been collected shall be either applied as a credit against the then
unpaid principal amount hereof or refunded to Maker, at Holder's option, and (4)
the effective rate of interest will be automatically reduced to the maximum
amount of interest permitted by the Applicable Usury Law. It is further agreed,
without limiting the generality of the foregoing, that to the extent permitted
by the Applicable Usury Law: (x) all calculations of interest which are made for
the purpose of determining whether such rate would exceed the maximum contract
rate permitted by the Applicable Usury Law shall be made by amortizing,
prorating, allocating and spreading during the period of the full stated term of
the loan evidenced hereby, all interest at any time contracted for, charged or
received from Maker or otherwise in connection with such loan; and (y) in the
event that the effective rate of interest on the loan should at any time exceed
the maximum contract rate allowed under the Applicable Usury Law, such excess
interest that would otherwise have been collected had there been no ceiling
imposed by the Applicable Usury Law shall be paid to Holder from time to time,
if and when the effective interest rate on the loan otherwise falls below the
maximum amount permitted by the Applicable Usury Law, to the extent that
interest paid to the date of calculation does not exceed the maximum contract
rate permitted by the Applicable Usury Law, until the entire amount of interest
which would have otherwise been collected had there been no ceiling imposed by
the Applicable Usury Law has been paid in full. Maker further agrees that should
the maximum contract rate permitted by the Applicable Usury Law be increased at
any time hereafter because of a change in the law, then to the extent not
prohibited by the Applicable Usury Law, such increases shall apply to all
indebtedness evidenced hereby regardless of when incurred; but, again to the
extent not prohibited by the Applicable Usury Law, should the maximum contract
rate permitted by the Applicable Usury Law be decreased because of a change in
the law, such decreases shall not apply to the indebtedness evidenced hereby
regardless of when incurred.
Lender by acceptance hereof and Maker by execution hereof
hereby agrees that the Project Incentive Fee with respect to the Additional
Project for which advances under this Note are made equals Thirty-One Thousand
Ninety Dollars ($31,090) (i.e., 1,552 Lots X $20.00 per Lot = $27,700).
5
<PAGE> 6
In the event of any conflict or inconsistency between the
provisions of this Note and the provisions of the Loan Agreement, the provisions
of the Loan Agreement shall control.
This Note is secured by a Deed of Trust, Assignment of Rents and Proceeds and
Security Agreement (the "Hartsel Deed of Trust") of even date herewith executed
by Maker, as Trustor, for the benefit of Lender, as Beneficiary, and encumbering
real and personal property situated in Park County, Colorado, and more
particularly described therein.
"MAKER"
PREFERRED EQUITIES CORPORATION,
a Nevada corporation
By: ______________________________
Name: ________________________
Its: _________________________
Federal Taxpayer Identification
Number: 88-0106662
Address:
4310 Paradise Road
Las Vegas, Nevada 89109
Attention: President
6
<PAGE> 7
This instrument was prepared by
and after recording return to:
Randall S. Dalton, Esq.
Gammage & Burnham
Two North Central Avenue
18th Floor
Phoenix, Arizona 85004
DEED OF TRUST, ASSIGNMENT OF
RENTS AND PROCEEDS AND SECURITY AGREEMENT
[HARTSEL SPRINGS RANCH]
THIS DEED OF TRUST, ASSIGNMENT OF RENTS AND PROCEEDS AND
SECURITY AGREEMENT ("Deed of Trust") is made as of the 18th day of February,
1998, by and among PREFERRED EQUITIES CORPORATION, a Nevada corporation
("Trustor"), whose mailing address is 4310 Paradise Road, Las Vegas, Nevada
89109-6597, and the Public Trustee for Park County, Colorado ("Trustee"), for
the benefit of FINOVA CAPITAL CORPORATION, a Delaware corporation
("Beneficiary"), having an office and mailing address at 7272 East Indian School
Road, Suite 410, Scottsdale, Arizona 85251 (Attn: Vice President - Law).
W I T N E S S E T H:
Beneficiary has loaned to Trustor the principal sum of up to
Four Million and No/100 Dollars (U.S. $4,000,000.00) ("Loan"), under the
circumstances set forth in the Loan Agreement, as defined below, which Loan is
evidenced by a Promissory Note of even date herewith (as from time to time
modified, extended, renewed, replaced or restated, the "Note").
ARTICLE I
GRANTING CLAUSES
NOW, THEREFORE, in consideration for the making of the Loan,
for the purpose of securing (a) the timely repayment of the Loan, as evidenced
by the Note, with interest thereon, (b) the timely repayment of that certain
Second Amended and Restated Promissory Note dated May 15, 1997 (the "Receivables
Note") in the principal amount of Seventy-Five Million United States Dollars
(U.S. $75,000,000.00), (c) the timely repayment of that certain Second Amended
and Restated Promissory Note [Headquarters and FCFC Property] dated as of June
5, 1996 (the "Office Note") in the original principal amount of Six Million
Seven Hundred Seventy-Three Thousand Seven Hundred Seventy-Eight and 74/100
United States Dollars (U.S. $6,773,778.74), as amended, (d) the timely repayment
<PAGE> 8
of that certain Promissory Note (the "Towers Note") dated as of December 13,
1995, as amended pursuant to that Amendment No. 1 to Promissory Note [Towers
Lobby] dated as of August 16, 1996, in the original principal amount of One
Million Two Hundred Eighty-Six Thousand One Hundred Twenty-Six and No/100 United
States Dollars (U.S. $1,286,126.00), as amended, (e) the timely repayment of
that certain Promissory Note (the "Ida Building Addition Note") dated as of
December 13, 1995 in the original principal amount of One Million Five Hundred
Thousand United States Dollars (U.S. $1,500,000), as amended, (f) the timely
repayment of that certain Promissory Note (the "Aloha Bay Note") dated as of
September 22, 1995 in the original principal amount of Three Million Six Hundred
Thousand United States Dollars (U.S. $3,600,000), as amended, (g) the timely
repayment of that certain Promissory Note (the "Ida Building One Note") dated as
of January 26, 1995 in the original principal amount of Two Million Nine Hundred
Ninety-Nine Thousand Seven Hundred and No/100 United States Dollars (U.S.
$2,999,700.00), as amended, (h) the timely repayment of that certain Promissory
Note (the "Ida Building Two Note") dated as of April 27, 1995 in the original
principal amount of One Million Seven Hundred Fifty-Five Thousand and No/100
United States Dollars (U.S. $1,755,000.00), as amended, (i) the timely repayment
of that certain Promissory Note (the "Winnick Building Addition Note") dated as
of December 13, 1995 in the original principal amount of Two Million One Hundred
Thousand United States Dollars (U.S. $2,100,000.00), as amended, (j) the timely
repayment of that certain Promissory Note (the "Second Winnick Building Addition
Note") dated as of May 15, 1997 in the original principal amount of One Million
Eight Hundred Eighteen Thousand and No/100 Dollars (U.S. $1,818,000.00), as
amended, (k) the timely repayment of the Note, (l) the timely repayment of any
and all indebtedness evidenced by any Project Note as may be executed by Trustor
for the benefit of Beneficiary after the date hereof and as contemplated by the
Loan Agreement hereinafter described, (m) the timely payment of the Hartsel
Springs Ranch Incentive Fee ("Incentive Fee") in the amount of Thirty-One
Thousand Forty and No/100 United States Dollars (U.S. $31,040.00), the
obligation for payment of which is set forth in the Loan Agreement hereafter
described, (n) the full, timely and faithful performance of and compliance with
("Performance") all the covenants and conditions made by Trustor herein, in the
Note, in the Receivables Note, in the Office Note, in the Towers Note, in the
Ida Building Addition Note, in the Aloha Bay Note, in the Ida Building One Note,
in the Ida Building Two Note, in the Winnick Building Addition Note, in the
Second Winnick Building Addition Note, in any Project Note, in the Second
Amended and Restated and Consolidated Loan and Security Agreement between
Trustor and Beneficiary dated effective as of May 15, 1997, as may be
subsequently amended (as so amended and restated, the "Loan Agreement"), in the
Documents (as defined in the Loan Agreement), and in each and every other
document executed in connection therewith, other than the Environmental
Certificate with Representations, Covenants and Warranties of even date herewith
executed in connection with the Premises (the "Environmental Certificate")
- 2 -
<PAGE> 9
and in any and all modifications, extensions, renewals, replacements or
restatements of any of the foregoing (this Deed of Trust, the Note, the
Receivables Note, the Office Note, the Towers Note, the Ida Building Addition
Note, the Aloha Bay Note, the Ida Building One Note, the Ida Building Two Note,
the Winnick Building Addition Note, the Second Winnick Building Addition Note,
any Project Note, the Loan Agreement, the Documents and the other documents
(exclusive of the Environmental Certificate), as from time to time modified,
extended, renewed, replaced or restated, are collectively referred to as the
"Loan Documents"), and also (n) the payment of any and all other indebtedness,
direct or contingent (other than arising out of the Environmental Certificate),
that may now or hereafter become owing to Beneficiary from Trustor or any
successor-in-ownership of the Trust Property (all of the foregoing secured
obligations collectively "Obligations" or individually "Obligation"), Trustor
hereby irrevocably grants, conveys, bargains, sells, assigns, warrants and
confirms unto Trustee, its successors and assigns, in trust, with power of sale
and right of entry and possession, all of Trustor's right, title and interest in
and to the real estate located in Park County, Colorado, and more fully
described in Exhibit A attached hereto and by this reference incorporated herein
("Premises") (the Premises and other rights, titles and interests hereby
granted, conveyed, bargained, sold and assigned to Trustee and/or Beneficiary as
provided below are collectively referred to as the "Trust Property").
TOGETHER WITH all of Trustor's right, title and interest in
and to all buildings and other improvements now or hereafter erected on the
Trust Property, all building materials at any time intended to be incorporated
into the improvements now or hereafter erected on the Trust Property and all
fixtures, equipment, machinery, appliances, furniture, furnishings and other
articles of personal property of Trustor of every kind and nature whatsoever now
or hereafter located on the Trust Property, and used, intended for use or usable
in connection with the operation of the Trust Property, including, without
limitation, all heating, lighting, laundry, incinerating and power equipment,
engines, pipes, pumps, tanks, motors, conduits, switchboards, plumbing,
cleaning, fire prevention, fire extinguishing, refrigerating, ventilating and
communications apparatus, air cooling and air conditioning apparatus, elevators,
escalators, shades, awnings, screens, storm doors and windows, wall beds,
stoves, ranges, refrigerators, freezers, food and beverage preparation and
serving equipment, cabinets, partitions, ducts, compressors, canopies,
furnishings, garbage and rubbish disposals, counters, bathtubs, sinks, basins,
carpets, floor and wall coverings, drapes, swimming pool equipment, inventory,
merchandise and proceeds therefrom and all substitutions and replacements
therefor; it being understood and agreed that all such property is part and
parcel of the Trust Property and appropriated to the use thereof, and whether
affixed or annexed to the Trust Property or not, shall for the purpose of this
Deed of Trust be deemed conclusively to be a portion of the security for the
Performance of the Obligations;
TOGETHER WITH all of the right, title and interest of Trustor,
now or hereafter acquired in and to all and singular the tenements,
hereditaments, rights of way, easements, riparian rights, water and water rights
and water rights applications appurtenant or pertaining to the Premises or
necessary for the operation of the Premises for its intended
- 3 -
<PAGE> 10
purpose, as well as all rights in ditches for the irrigation of the Trust
Property and shares of stock evidencing such rights, and such other rights,
liberties and privileges now or hereafter belonging or appertaining thereto;
TOGETHER WITH, subject to the assignment thereof to
Beneficiary pursuant to Article III hereof or otherwise, all income, rents,
royalties, revenues, issues, profits, fees and other proceeds of the Trust
Property, including, without limitation, all of the right, title and interest of
Trustor, now or hereafter acquired, as lessor or seller, as the case may be, in
and to all leases, subleases, assignments, co-occupancy or co-tenancy
agreements, sales contracts, installment sales agreements and purchase money
notes pertaining to the Trust Property, or any part thereof, and all security
documents related to any of the foregoing;
TOGETHER WITH all right, title and interest of Trustor, now or
hereafter acquired, in and to any and all strips and gores of land adjacent to
and used in connection with the Premises and all right, title and interest of
Trustor, now owned or hereafter acquired, in, to and under the ways, streets,
sidewalks and alleys now or hereafter adjoining the Premises;
TOGETHER WITH, subject to any assignment thereof to
Beneficiary, all of Trustor's rights and as "declarant", "developer", "owner"
and/or otherwise under the governing documents or restrictive covenants
affecting the Trust Property, if any, including, without limitation, owners'
association charters or articles or certificate of incorporation, bylaws and
rules and regulations related thereto, if any, whether now or hereafter existing
(collectively, the "Project Documents");
TOGETHER WITH, insofar as permitted by applicable law and
subject to any assignment thereof to Beneficiary, any licenses, contracts,
management contracts or agreements pursuant to which any third party is
rendering services to Trustor, franchise agreements, insurance policies
pertaining to the ownership, operation or maintenance of the Trust Property (but
only to the extent they so pertain), to the extent assignable, permits,
authorizations or certificates, now or hereafter required or used in connection
with the ownership, operation or maintenance of the Trust Property;
TOGETHER WITH, subject to any assignment thereof to
Beneficiary, all rights of Trustor under that certain License Agreement between
Trustor and Hartsel Springs Ranch of Colorado, Inc. to the name "Hartsel Springs
Ranch" and all intangibles, choses in action, names, logos, trademarks, trade
names and copyrights now or hereafter used in connection with the Trust Property
(except with respect to the name "Ramada Vacation Suites");
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<PAGE> 11
TOGETHER WITH all replacements, substitutions or renewals of
or additions to, all products of, and all books, records and files of Trustor
pertaining in whole or in part to any of the foregoing;
AND TOGETHER WITH, subject to the assignment thereof to
Beneficiary pursuant to Article II hereof, to the extent hereinafter provided,
all proceeds and payments of the conversion, voluntary or involuntary, of any of
the foregoing, into cash or otherwise, including, without limitation, all
accounts, all condemnation awards in respect to any taking by eminent domain or
otherwise payable to the extent hereinafter provided in Article II, and all
proceeds of any insurance required to be maintained by Trustor pursuant to this
Deed of Trust, whether payable to Trustor or otherwise.
TO HAVE AND TO HOLD the Trust Property with all and singular
the rights, easements and appurtenances thereunto appertaining unto Trustee, its
successors and assigns forever, in trust for the benefit and security of the
Beneficiary, for the purposes and uses herein set forth.
PROVIDED ALWAYS that upon Performance of all of the
Obligations, this Deed of Trust shall be subject to termination and reconveyance
and shall be released in the manner provided by law, but at the expense of
Trustor; otherwise to be and remain in full force and effect.
ARTICLE II
REPRESENTATIONS, WARRANTIES AND COVENANTS
TO BETTER SECURE THE OBLIGATIONS, TRUSTOR, JOINTLY AND
SEVERALLY IF MORE THAN ONE, REPRESENTS, WARRANTS, COVENANTS AND AGREES WITH
TRUSTEE AND BENEFICIARY AS FOLLOWS:
2.1 TRUSTOR; GOOD STANDING; AUTHORITY TO CONVEY;
PERFORMANCE OF THE OBLIGATIONS.
(a) Trustor is a corporation duly organized and
validly existing and in good standing under the laws of the State of
Nevada and is qualified to do business and in good standing in each
jurisdiction where the location or nature of the properties used or its
business, as the same is being or is proposed to be conducted, makes
such qualification necessary (except where failure to do so would not
(i) adversely affect Beneficiary's ability to realize upon this Deed of
Trust or the other security for the Performance of the Obligations or
(ii) materially adversely affect the business or financial condition of
Trustor or the ability of Trustor to complete Performance of the
Obligations), with powers and authority adequate for executing,
delivering and Performing under the Loan Documents, for undertaking and
Performing the Obligations, and for carrying on its business and owning
its property. Trustor will,
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until Trustor has completed Performance of all of the Obligations,
maintain such powers, authority and qualifications.
(b) Trustor has good right and power to convey the
Trust Property and to execute and deliver this Deed of Trust. All
action necessary and required by Trustor's governance documents and by
all applicable laws for the obtaining of the Loan and for the execution
and delivery of this Deed of Trust and all other Loan Documents
executed and delivered in connection with the Loan has been duly and
effectively taken; and this Deed of Trust is and will be, and all other
Loan Documents are and will be legal, valid, binding and enforceable
against Trustor in accordance with their respective terms (subject,
however, to bankruptcy, insolvency, reorganization, arrangement,
moratorium, or other similar laws relating to or affecting the rights
of creditors generally and general principles of equity), and do not
violate the usury laws of the State where the Premises are located. The
execution, delivery and Performance of the Obligations of this Deed of
Trust and the other Loan Documents do not and will not violate,
constitute a default under, or (other than the lien in favor of
Beneficiary) result in the creation or imposition of any lien, charge
or encumbrance upon any of the properties or assets of Trustor pursuant
to the terms of, any provision of: any law, regulation, judgment,
decree, order, franchise or permit applicable to Trustor; Trustor's
governance documents; or any contract or other agreement or instrument
to which Trustor is a party or by which Trustor or Trustor's assets are
bound. Except for such consents as have been disclosed in writing to
Beneficiary and have been obtained and are in full force and effect, no
consent of any government or agency thereof, or of any other person,
firm or entity not a party hereto is or will be required as a condition
to the valid execution, delivery, performance or enforceability of the
Loan Documents.
(c) Trustor will Perform when due all the
Obligations.
2.2 TITLE.
(a) Trustor is lawfully seized of a good and
marketable title in fee simple in the Premises and of a good and
marketable title in fee simple as to the buildings and other
improvements erected thereon and has good and legal title to the rest
of the Trust Property. The Trust Property is free from liens, claims,
restrictions or encumbrances, except for such liens, claims,
restrictions or encumbrances as are listed in Exhibit B attached hereto
and by this reference incorporated herein ("Permitted Encumbrances").
(b) Trustor does hereby warrant and shall forever
defend the Trust Property against the claims of all persons whatsoever.
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2.3 INSURANCE.
(a) Throughout the term of the Deed of Trust, Trustor
will provide, maintain and deliver or cause to be provided, maintained
and delivered, at no cost or expense to Beneficiary, such insurance as
is from time to time required in writing by the Beneficiary, written by
such insurers, in such amounts and forms and with such limits,
deductibles and retentions as are satisfactory to Beneficiary.
(b) RESERVED.
(c) A complete certified copy of each policy signed
by an authorized insurance company representative, shall be delivered
to the Beneficiary from time to time, as requested by Beneficiary.
(d) If any policy required by Beneficiary is not
received by Beneficiary as required by Beneficiary, Beneficiary
reserves the right to procure such insurance and pay the premium
therefor; and such sum shall, without notice or demand, become
immediately due and payable with interest from the date of its advance
until received by Beneficiary from Trustor at the Overdue Rate (as the
term "Overdue Rate" is defined in the Note) and secured hereby. In any
event, failure to deliver any required insurance policy within the
requirements prescribed in this Deed of Trust will constitute an Event
of Default and require immediate cure by the Trustor.
(e) Trustor will furnish to Beneficiary, from time to
time upon request, within fifteen (15) days following any such request,
a certificate signed by the Trustor and the appropriate insurance
carrier representative containing a detailed list of the insurance
policies then outstanding and in force on the Trust Property.
(f) Trustor will promptly notify Beneficiary of any
damage to or destruction of the Trust Property costing more than Twenty
Five Thousand Dollars ($25,0000) to repair or restore, whether or not
the same is covered by insurance, and if so covered, will promptly make
proof of loss relating thereto. Beneficiary may make proof of loss to
the Trust Property if not made promptly by Trustor. Trustor hereby
authorizes Beneficiary, at Beneficiary's option, to be named as the
loss-payee on any insurance policy and to adjust or compromise in the
name of Trustor any loss covered by any insurance policy on the Trust
Property; provided, however, that Beneficiary's right to adjust or
compromise any loss shall be available to Beneficiary only if the
Project Documents give Trustor the right to adjust or compromise such
loss. As between Trustor and Beneficiary, Trustor hereby authorizes
Beneficiary, at Beneficiary's option, to collect and receipt the
proceeds from any such policy and use such proceeds as set forth in
subparagraph (g) below. To the extent, but only to the
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extent, that the Project Documents provide that insurance proceeds
would be payable to Trustor, such proceeds shall be paid directly to
Beneficiary instead of to Trustor or Trustor and Beneficiary jointly.
(g) To the extent, but only to the extent, that the
Project Documents provide that insurance proceeds would be payable to
Trustor, the proceeds of all insurance shall, at the option of
Beneficiary, be applied by Beneficiary in reduction of the indebtedness
secured hereby in such order as Beneficiary shall determine whether the
same be then matured or unmatured (unless otherwise elected by
Beneficiary, no such application shall be deemed to be an advance
payment of any subsequently accruing fixed sum), used to fulfill any of
the Obligations, or paid over, subject to such terms and conditions as
Beneficiary may in its sole but reasonable discretion then impose,
wholly or in part to Trustor by Beneficiary for the repair and
restoration of the Trust Property or for any other purpose or object
satisfactory to Beneficiary. If insurance proceeds are paid over to
Trustor for the purpose of repair and restoration of the Trust
Property, Beneficiary, without limitation of its right to impose other
terms and conditions, may require receipt and approval by itself and
its architect of plans and specifications for the work to be done;
disbursement of proceeds not more frequently than monthly for work done
against invoices, lien waivers, title insurance policy endorsements and
architect's certifications; title policy endorsements, retention of
holdbacks until completion of construction and expiration of mechanic's
lien periods; and receipt of assurance adequate to Beneficiary in its
sole judgment that the proceeds remaining after disbursement will be
sufficient to complete such repair and replacement. Trustor hereby
assigns to Beneficiary for the uses and purposes aforesaid all
insurance required by this Deed of Trust and the proceeds thereof.
Beneficiary shall not be responsible for the insolvency of any insurer
or any insurance underwriter. Furthermore, other than to the extent
resulting from the gross negligence or willful misconduct of
Beneficiary, Beneficiary shall not be responsible for such insurance or
for the collection of any insurance moneys. Application of insurance
proceeds by Beneficiary, regardless of the manner or order, shall not
waive Performance of the Obligations, cure or waive any default by
Trustor in the Performance of the Obligations, or invalidate or affect
any act done hereunder because of any such default. Beneficiary shall
not be obligated to see to the proper application of insurance proceeds
paid over to Trustor.
2.4 CONDEMNATION OF TITLE OR USE; EMINENT DOMAIN; SPECIAL
PROVISIONS.
(a) All awards heretofore or hereafter made by any
public or quasi-public authority to the present and all subsequent
owners of the Trust Property by virtue of an exercise of the right of
eminent domain by such authority, including, without limitation, any
award for a taking (whether direct or indirect) of title, possession or
right of access to a public way, or for any change of grade or streets
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affecting the Trust Property (collectively, "Condemnation Awards"), are
hereby assigned to Beneficiary. Beneficiary, at its option, is hereby
authorized, directed and empowered to collect and receive the proceeds
of any such awards from the authorities making the same and to give
proper receipts and acquittances therefor. Such proceeds shall be
received, held, applied and used as set forth in paragraph 2.3(g)
hereof with respect to insurance proceeds. If prior to the receipt by
Beneficiary of such award or payment the Trust Property shall have been
sold on foreclosure of this Deed of Trust, Beneficiary shall have the
right to receive such award or payment to the extent of any deficiency
found to be due upon such sale, with interest thereon, at the rate
provided in the Note, notwithstanding any rule of law or provision, if
any, herein or in any of the other Loan Documents forbidding deficiency
judgments or personal liability, and whether or not a deficiency
judgment on this Deed of Trust shall have been sought or denied. Upon
request by Beneficiary, Trustor will make, execute and deliver any and
all assignments and other instruments sufficient for the purpose of
effectuating the assignment of all such awards to Beneficiary.
Beneficiary shall have the right to intervene and participate in any
proceeding for and in connection with any taking referred to in this
paragraph; provided, however, that if such intervention shall not be
permissible or permitted by the court, Trustor will, at its expense,
consult with Beneficiary, its attorneys and experts and make all
reasonable efforts to cooperate with them in any defense of such
proceedings. Trustor will not, without Beneficiary's prior written
consent, enter into any agreement for the taking of the Trust Property
or any part thereof with any person or persons authorized to acquire
the same by condemnation or eminent domain.
(b) Anything to the contrary herein notwithstanding,
for so long as any part of the Trust Property is subject to the Project
Documents, any and all insurance proceeds arising from damage or
destruction to the Trust Property and any and all Condemnation Awards
received by Beneficiary shall be delivered and paid out by Beneficiary
to the Insurance Trustee, if any, under the Project Documents, to be
distributed and used in accordance with the provisions of the Project
Documents.
2.5 RESTRICTIONS ON TRANSFER, MERGER AND CONSOLIDATION;
NO ADDITIONAL LIENS.
(a) To the extent not prohibited by applicable law
and except as may be expressly permitted herein or in the Loan
Agreement, Trustor will not, without the prior written consent of
Beneficiary: (i) sell, convey, lease, sublease, assign, mortgage,
pledge, encumber or otherwise transfer the Trust Property or any part
thereof other than the sale of Units or Lots (as defined in the Loan
Agreement) in the ordinary course of business or (ii) assign or
hypothecate any rent, issues, profits or proceeds from the Trust
Property (other than Purchaser Notes and Purchaser Mortgages, as each
of those terms is defined in the Loan Agreement). Any such act shall be
expressly subject to this Deed of Trust and the prior lien created
hereby, and
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written consent of Beneficiary to any one such act shall not be
construed to be a waiver of this provision with respect to any
subsequent act.
(b) Without limiting the generality of the foregoing,
neither Trustor nor any other person have or shall have, without the
prior written consent of Beneficiary, any right, power or authority to
create, incur, permit, or suffer to be placed or imposed upon the Trust
Property any lien, security interest or other charge or encumbrance
whatsoever, except this Deed of Trust, the Permitted Encumbrances and
such other liens and security interests, if any, as may be expressly
permitted herein. If any such prohibited lien shall arise, Trustor will
promptly discharge such lien; provided, however, that Trustor shall
have the right to contest in good faith, with due diligence and
appropriate proceedings, at no cost or expense to Beneficiary, the
validity, applicability, or amount of any such lien, provided further,
however, that Trustor, prior to commencing such contest, shall have
furnished to Beneficiary a bond or other security in such form,
substance and amount as is reasonably satisfactory to Beneficiary.
2.6 TAXES, ASSESSMENTS.
(a) TRUSTOR WILL PAY OR CAUSE TO BE PAID WHEN DUE,
AND INDEMNIFY AND HOLD HARMLESS Trustee, Beneficiary, their successors,
assigns and shareholders and the directors, officers, employees, agents
and servants of the foregoing from all taxes (including, without
limitation, revenue and documentary stamp taxes, intangible taxes, ad
valorem real estate and personal property taxes), assessments, water,
sewer and other utility rates, rents and charges, license and
registration fees and excises, together with any penalties, fines or
interest thereon, in each case whether general or special, ordinary or
extraordinary, foreseen or unforeseen, of every character in respect of
the Trust Property or any of the Loan Documents, which at any time
prior to Performance of the Obligations may be imposed on or become a
lien upon (i) Trustee or Beneficiary, (ii) the Trust Property or any
part thereof or any rent or other income or proceeds therefrom, (iii)
the occupancy, operation, use, possession or disposition thereof
(including, without limitation, any disposition in exercise of the
rights of Beneficiary arising from an Event of Default (as hereinafter
defined)), or (iv) any activity conducted on or in connection with the
Trust Property or part thereof (all such taxes, assessments, rents,
rates, charges, fees, excises and any such penalties, fines or interest
thereon, collectively "Impositions" ). The Obligation to pay
Impositions shall not apply to any Imposition measured by the net
income payable by Beneficiary in consequence of the receipt of payments
of principal and/or interest called for in the Note or commitment fees,
if any, paid in connection with the Loan. The Obligation to pay
Impositions shall include the Obligation to pay any increase to
Beneficiary in federal income taxes owing to such jurisdictions as a
result of inclusion in income of Beneficiary of any amount required by
this paragraph to be paid to or for Beneficiary.
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(b) If claim is made against Beneficiary for any
Imposition, Beneficiary will use reasonable efforts to promptly notify
Trustor thereof (but failure to do so shall not prejudice Beneficiary's
rights hereunder).
(c) If the burden of any Imposition cannot lawfully
be shifted from Beneficiary to Trustor, then all sums hereby secured,
without any deduction, shall, at the option of the Beneficiary, become
due and payable upon demand, notwithstanding anything contained herein
or any law heretofore or hereafter enacted.
(d) Trustor has filed or caused to be filed all tax
returns which are required to be filed by it and (except to the extent
being contested in good faith and for the payment of which adequate
security has been provided) has paid or caused to be paid all taxes
shown to be due or payable on such returns and all Impositions which
are due and payable.
(e) Trustor will furnish to Beneficiary receipts or
other evidence satisfactory to Beneficiary showing payment of all ad
valorem real estate and personal property taxes and assessments within
30 days of the final due date of such taxes and assessments. If such
receipts or other evidence of payment is not provided, Beneficiary may
take such action as Beneficiary deems necessary, at Trustor's expense,
to obtain such evidence of payment.
(f) Trustor shall have the right to contest in good
faith, with due diligence and appropriate proceedings, at no cost or
expense to Beneficiary, the validity, applicability or amount of such
Impositions; provided, however, that Trustor, prior to commencing such
contest, shall have furnished to Beneficiary a bond or other security
in such form, substance and amount as is reasonably satisfactory to
Beneficiary.
2.7 IMPOUNDS.
(a) Upon the occurrence of an Event of Default and at
all times thereafter, Trustor will upon written request of Beneficiary
make monthly deposits with Beneficiary of the following: (i) an
installment of the taxes and special assessments levied or to be levied
against the Trust Property and (ii) an installment of the premium or
premiums that will become due and payable to renew the insurance on the
Trust Property. Such installments are to be equal to the estimated
taxes and assessments and premium or premiums for such insurance next
due (as reasonably estimated by Beneficiary giving due consideration to
the previous year's tax and premiums), less all installments already
paid therefor, and divided by the number of months that are to elapse
before one (1) month prior to the date when such taxes and assessments
or premium or premiums shall become delinquent. If the Trust Property
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is a part of a larger tract for purposes of real estate taxation,
Trustor shall have or cause to have the property taxes assessed
separately; or, if a separate assessment is not possible, Trustor, upon
request of Beneficiary, will make the monthly deposits for an
installment of taxes and special assessments calculated for the larger
tract. If amounts paid to Beneficiary under the provisions of this
paragraph are insufficient to discharge the Obligation for such taxes
and assessments or insurance premiums as the same become due, Trustor
will pay to Beneficiary upon demand such additional sums as may be
required to fully pay and discharge this Obligation.
(b) Nothing in this paragraph shall release Trustor
of its Obligation to pay taxes, assessments and insurance premiums as
the same become due and payable to the extent that provision is not
made for such payment pursuant to the terms of this paragraph. To the
extent not prohibited by law, deposits made under this paragraph shall
not be deemed to be held in trust and may be commingled with
Beneficiary's general funds; and Beneficiary shall have no liability to
Trustor for any interest on such deposits.
(c) If, by reason of any Event of Default,
Beneficiary declares all indebtedness secured hereby to be due and
payable, Beneficiary, to the extent not prohibited by applicable law,
may, at its option and without notice, then apply any funds in the
impounds account against such indebtedness in such order as Beneficiary
may in its discretion determine. Application of such funds to the
indebtedness secured hereby shall not cure or waive any default by
Trustor in the Performance of the Obligations or invalidate any act
done hereunder because of any such default. The enforceability of the
Obligations herein relating to taxes, assessments and insurance
premiums shall not be affected except insofar as those Obligations have
been met by compliance with this paragraph.
(d) Beneficiary may from time to time, at its option,
waive, and after any such waiver reinstate, any or all provisions
hereof requiring such deposits, by notice to Trustor. While any such
waiver is in effect, Trustor will pay Impositions and insurance
premiums as herein elsewhere provided.
2.8 COMPLIANCE WITH INSURANCE TERMS, LAWS, ETC. Trustor has
complied, and will comply or cause compliance with and will not suffer or permit
any violation of: (a) all terms of any insurance policy covering or applicable
to the Trust Property or any part thereof, all requirements of the issuer of any
such policy, and all orders, rules, regulations and other requirements of the
National Fire Protection Association (or any other body exercising similar
functions) applicable to or affecting the Trust Property or any use or condition
of the Trust Property; and (b) all laws, ordinances, regulations, covenants,
conditions and restrictions affecting Trustor or the Trust Property; provided,
however, that Trustor shall have the right to contest in good faith, with due
diligence and appropriate proceedings, at no cost or expense to Beneficiary, the
validity or applicability of such law,
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ordinance, regulation, covenant, condition or restriction, provided
further, however, that Trustor, prior to commencing such contest, shall
have furnished to Beneficiary a bond or other security in such form,
substance and amount as is reasonably satisfactory to Beneficiary.
2.9 ALTERATIONS, MAINTENANCE, INSPECTION, REPAIR.
(a) Trustor (i) will not, without the prior written
consent of Beneficiary, make any material alteration to the Trust
Property or remove, demolish, or alter the design or structural
character of any building now or hereafter erected upon the Trust
Property, unless otherwise permitted herein or required by law; (ii)
will not, without the prior written consent of Beneficiary, remove or
permit the removal from the Premises of any fixtures, equipment,
machinery, appliances, fixtures, furniture, furnishings or other items
of personal property which constitute part of the Trust Property,
except in the ordinary course of business or unless otherwise permitted
herein; (iii) will promptly repair or cause to be repaired any portions
of the Trust Property that may be damaged or destroyed (regardless of
the sufficiency of insurance and condemnation proceeds) and will not
commit or suffer waste upon the Trust Property, but will at all times
make or cause to be made such repairs, maintenance and renewals and
replacements, or otherwise, as may be necessary to maintain the Trust
Property and condition thereof in good order and repair; (iv) will keep
or cause the Trust Property to be kept free of rubbish and other
unsightly conditions; (v) will keep or cause all buildings and other
improvements on the Trust Property to be kept free of dry rot, fungus,
termites and all other harmful or destructive pests; (vi) will keep or
cause all ornamental plants, trees and shrubs on the Trust Property to
be kept neatly pruned and in good condition; and (vii) will complete,
subject to clauses (i) and (iii) above, promptly, in a good and
workmanlike manner and in substantial conformity with plans and
specifications approved in writing by Beneficiary any improvements now
or hereafter commenced.
(b) Nothing contained in this Deed of Trust and/or
any of the other Loan Documents shall constitute any consent or request
by Trustee or Beneficiary, express or implied, for the performance of
any labor or service or the furnishing of any materials or other
property in respect of the Trust Property, or be construed to give
Trustor any right, power or authority to contract for or permit the
performance of any labor or services or the furnishing of any materials
or other property in such fashion as would permit the making of any
claim against Trustee or Beneficiary in respect thereof or any claim
that any lien based on the performance of such labor or services or the
furnishing of any such materials or other property is prior to this
Deed of Trust. During the performance of any such labor or services or
the furnishing of any such materials or other property with respect to
the Trust Property or the Premises, Trustor will post in conspicuous
locations notices reasonably sufficient to
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advise the suppliers of such services or materials of the
non-responsibility of Beneficiary with respect to the same.
2.10 USE; ZONING.
(a) Trustor will use the Trust Property for the
purposes of selling residential lots.
(b) The use of the Trust Property for residential
purposes above does not and will not violate any private covenant or
restriction affecting the Trust Property. The Trust Property is zoned
for residential use and the Trust Property is not a part of a larger
tract of land owned or leased by Trustor or any of its affiliates, or
otherwise considered as part of one zoning lot, or, if it is, any
authorization or variance required for the subdivision of such larger
tract which a sale of the Trust Property would entail has been obtained
from all the appropriate governmental authorities, so that the Trust
Property constitutes one zoning lot (including street access and
parking and utility facilities, if relevant) capable of being conveyed
as such. The necessary rights-of-way for all roads necessary for the
full utilization of the Trust Property for its intended purposes have
been acquired, and/or have been dedicated to public use and accepted by
the appropriate governmental authority.
(c) Trustor will not, without Beneficiary's prior
written consent, seek, join in or consent to any change in any private
covenant, zoning law or other public or private restriction, which
change would limit the use of the Trust Property or any part thereof or
reduce its fair market value.
2.11 ESTABLISHMENT AND MAINTENANCE OF THE DEED OF TRUST;
FURTHER ASSURANCES.
(a) Trustor will establish and maintain this Deed of
Trust, subject only to the Permitted Encumbrances and such other liens
and security interests, if any, as may be expressly permitted herein,
as a Deed of Trust and lien and security interest on the Trust Property
and any other property intended to be encumbered and on all renewals
and replacements of all such property. Trustor will perform all acts
and execute all instruments necessary or required by Beneficiary in
order to permit the immediate registration and/or recordation of this
Deed of Trust at the appropriate office for the foregoing purposes in
the county where the Premises are located. Trustor will furnish to
Beneficiary from time to time such proof as Beneficiary may reasonably
request with respect to Trustor's compliance with the foregoing.
(b) Trustor will pay all expenses incurred by Trustee
and/or Beneficiary in connection with the preparation, completion,
registration and/or recordation of this Deed of Trust or any other
Document.
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(c) If this Deed of Trust or any provision hereof
shall be deemed invalidated in whole or in part by any present or
future law or any decision of any court having jurisdiction, Trustor
will execute and deliver such other and further instruments and do such
things as in the sole opinion of Beneficiary will carry out the true
intent and spirit of this Deed of Trust. From time to time, Trustor
will execute and deliver such further documents and assurances as in
the sole opinion of Beneficiary may be required to more effectively
subject the Trust Property and any other property intended to be
transferred or encumbered to or for the benefit of Trustee or
Beneficiary as security for the Performance of the Obligations.
(d) Trustor, at its sole cost and expense, will
appear in and prosecute or defend any action or proceeding that may
affect the priority of this Deed of Trust or the security of
Beneficiary hereunder, and will pay all costs and expenses (including
the cost of searching title and attorneys' fees) incurred in such
action or proceeding. Beneficiary may, at its option, appear in and
defend any action or proceeding purporting to affect the priority of
this Deed of Trust or the security hereof or the rights or powers of
Trustee and/or Beneficiary. All amounts paid, suffered or incurred by
Beneficiary in exercising the authority herein granted, including,
without limitation, court costs, attorneys' fees and other expenses,
with interest at the Note Rate (or at the Overdue Rate in the event
such advance is necessary as a result of the occurrence of an Event of
Default or an event which with notice, passage of time or both, would
constitute an Event of Default (an "Incipient Default") ) from the date
of advance until paid, shall, without notice or demand, immediately be
due and payable by Trustor to Beneficiary and be secured by this Deed
of Trust. The Note Rate means the rate of interest at which the unpaid
principal balance of the Note accrues in the absence of an Event of
Default.
2.12 RIGHT OF BENEFICIARY TO ACT. If there be commenced any
action or proceedings affecting the Trust Property or the title thereto, or if
Trustee or Beneficiary be made a party to any action or proceeding because of
its status hereunder, or if Trustor defaults in the Performance of any of its
Obligations, then Beneficiary, or Trustee upon written instruction from
Beneficiary (the legality thereof to be determined solely by Beneficiary),
without obligation to do so, may procure such abstracts or other evidence of
title as it deems necessary; may appear in any such action as Beneficiary deems
advisable; perform such Obligations and for such purposes may enter upon the
Trust Property; and shall become subrogated to the lien and rights of all
persons to whom payments have been made in performing the Obligations. For any
of such purposes, including court costs, attorneys' fees and expenses,
Beneficiary may advance such sums of money as it deems necessary. Such sums
advanced, with interest from the date of advance at the Note Rate (or the
Overdue Rate in the event such advance is necessary as a result of the
occurrence of an Event of Default or Incipient Default) until paid, shall,
without notice or demand, immediately be due from Trustor to Beneficiary and be
secured by this Deed of Trust. Beneficiary shall be the sole
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judge of the legality, validity and priority of any claim, lien, encumbrance,
tax, assessment and premium it discharges pursuant hereto and of the amount
necessary to be paid in satisfaction thereof. Any action taken by Beneficiary or
Trustee pursuant to this paragraph shall not waive Performance of any
Obligation, cure or waive any default by Trustor in the Performance of the
Obligations, or invalidate or affect any act done hereunder because of such a
default. The foregoing notwithstanding, Beneficiary agrees to use reasonable
efforts to give Trustor five (5) days prior written notice as to the taking of
any action pursuant to this Section 2.12 unless (i) the delay incurred in taking
such action, pending the giving of such notice, would further jeopardize the
Trust Property or the lien of this Deed of Trust or (ii) Beneficiary takes such
action as a result of the occurrence of an Event of Default.
2.13 RISK OF LOSS; INDEMNITY. As between Trustor and
Beneficiary, Trustor assumes the entire risk of loss of the Trust Property from
any cause whatsoever and further assumes all risks and liability for the Trust
Property, and the use and operation thereof, and for injuries or deaths of
persons and damage to property, however arising from or incident to such use or
operation, whether such injury or death to persons be of agents or employees of
Trustor or of third parties and such damage to property be of Trustor or of
others. TRUSTOR WILL SAVE AND HOLD HARMLESS and defend Trustee and Beneficiary,
their successors, assignees and shareholders (including corporate shareholders)
and the directors, officers, employees, agents and servants of the foregoing,
from any and all losses, costs, expenses (including court costs and attorneys'
fees), damages, demands, claims, suits, proceedings (whether civil or criminal),
orders and judgments, penalties, fines and other sanctions (collectively,
"Damages") arising or incurred because of or incident to (a) the Trust Property
or the actual or alleged management, control, condition, destruction,
disposition, use or operation thereof; (b) any brokerage fees arising from or in
connection with the making of the Loan, (c) any incorrectness in the assurance
which the Trustor hereby gives: (i) that there are no present violations on the
Premises of any enforceable covenants, conditions, or restrictions; (ii) that,
except to the extent shown as Permitted Encumbrances, there are no encroachments
of buildings, structures, or improvements located on the Premises onto adjoining
lands, nor any encroachments onto said land of buildings, structures, or
improvements located on adjoining lands; (d)(i) any future violations on the
Premises of any covenants, conditions, or restrictions occurring prior to
acquisition of title to said estate or interest by the Beneficiary, provided
such violations result in loss or impairment of the lien of this Deed of Trust,
or result in loss or impairment of the title to said estate or interest if the
Beneficiary shall acquire such title in satisfaction of the indebtedness secured
by this Deed of Trust; (ii) unmarketability of the title to said estate or
interest by reason of any violations on the Premises, occurring prior to
acquisition of title to the Premises by the Beneficiary, of any covenants,
conditions or restrictions; (e) any interest or claims not shown by the public
records which could be ascertained by an inspection of the Premises; (f)
easements or claims of easements not shown by public records; and; (g)
discrepancies, conflicts and boundary lines, shortage in area, encroachments and
any facts which a correct survey and inspection of the Premises would disclose,
and which are not shown by the public records, unless in any of the foregoing
cases, the Damages arise from the gross negligence or willful misconduct of
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the person or entity seeking indemnification. On written request by a person or
other entity covered by the above agreement of indemnity, Trustor will
undertake, at its own cost and expense, on behalf of such indemnitee, using
counsel satisfactory to the indemnitee, the defense of any legal action or
proceeding to which such indemnitee shall be a party, provided that such action
or proceeding shall result from, or grow or arise out of any of the events set
forth in this paragraph.
2.14 NON-DEFAULT STATUS. Except as disclosed in the exhibit
delivered pursuant to paragraph 8.3(a) of the Loan Agreement, Trustor is not in
default of any payment on account of indebtedness for borrowed money or in
violation of or default under any material term of any agreement, instrument,
undertaking, or order, decree or judgment of any court, arbitration or
governmental authority to which it is a party or by which it or its assets are
bound. Trustor is fully familiar with all of the covenants, terms and conditions
of the Loan Documents and is not in default thereunder. No act or event has
occurred which after notice and/or lapse of time would constitute such a default
or an Event of Default.
2.15 APPROVALS AND REPORTS. Trustor has obtained or has caused
to be obtained all necessary consents, licenses, permits, franchises, approvals
and exemption certificates and has made or caused to be made all registrations
or declarations with each government or any agencies or departments thereof that
are required in connection with the Trust Property and the use thereof as
contemplated herein; and the same are in full force and effect. All such filings
and reports delivered to any governmental authority have been truthfully
completed and duly filed; and true and complete copies of such applications,
consents, licenses, permits, franchises, exemption certificates, approvals,
filings and reports have been delivered to Beneficiary. Trustor undertakes to
continue in full force and effect all of the foregoing and will obtain any new
or additional governmental approvals as become necessary for the Performance of
the Obligations.
2.16 LITIGATION. There is no action, litigation or other
proceeding pending or threatened before any arbitration tribunal, court,
governmental agency or administrative body against Trustor which, if adversely
determined, would adversely affect Beneficiary's ability to realize upon this
Deed of Trust or the other security for the Performance of the Obligations or
would materially adversely affect the business or financial condition of
Trustor, or impair the ability of Trustor to complete Performance of the
Obligations; or which questions the validity of any of the Loan Documents.
2.17 FULL DISCLOSURE. Neither this Deed of Trust nor any other
Document, certificate, financial statement or written material furnished to
Beneficiary by or on behalf of Trustor in connection with the transactions
contemplated hereby contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained herein
and therein not misleading. To the extent any of such documents is a contract,
such document constitutes the legal, valid and binding obligation of the parties
thereto in accordance with its terms (subject, however, to bankruptcy,
insolvency,
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reorganization, arrangement, moratorium, or other similar laws relating to or
affecting the rights of creditors generally and general principles of equity),
no party thereto is in material default thereunder, and Trustor knows of no
reason why any party thereto has a right to terminate the contract prematurely
for failure of a stated condition or otherwise. There is no fact known to
Trustor which materially adversely affects or in the future may (so far as
Trustor can now foresee) materially adversely affect the business or financial
condition of Trustor which has not been set forth specifically in detail in the
Loan Documents or the certificates, financial statements or other written
materials furnished to Beneficiary in connection with the transactions
contemplated hereby.
2.18 RESERVED.
2.19 ENVIRONMENTAL REPRESENTATIONS.
(a) Except as may be otherwise expressly stated in
the Disclosure Schedule (as defined in the Environmental Certificate),
Trustor hereby represents, covenants and warrants to Beneficiary and
its successors and assigns, as follows:
(i) The location and construction,
occupancy, operation and use of all improvements now and
hereafter attached to or placed, erected, constructed or
developed as a portion of the Trust Property (the
"Improvements") do not and will not violate any applicable
laws, statute, ordinance, rule, regulation, policy, order or
determination of any federal, state, local or other
governmental authority ("Governmental Authority") or any board
of fire underwriters (or other body exercising similar
functions), or any restrictive covenant or deed restriction
affecting any portion of the Trust Property, including without
limitation, any applicable zoning ordinances and building
codes, flood disaster laws and health and environmental laws,
rules and regulations (hereinafter collectively called the
"Applicable Laws").
(ii) Without in any way limiting the
generality of (i) above, neither the Trust Property nor
Trustor are the subject of any pending or, to the best of
Trustor's knowledge, threatened investigation or inquiry by
any Governmental Authority, or are subject to any remedial
obligations under any Applicable Laws pertaining to health or
the environment ("Applicable Environmental Laws"), including,
without limitation, the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended
("CERCLA"), the Resource Conservation and Recovery Act of
1987, as amended ("RCRA"), and the Toxic Substances Control
Act, The Clean Air Act, and The Clean Water Act, and
applicable state laws, and this representation and warranty
would continue to be true and correct following disclosure to
any applicable Governmental Authority of all relevant facts,
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<PAGE> 25
conditions and circumstances pertaining to the Trust Property
and/or Trustor and which are known to Trustor.
(iii) Trustor is not required to obtain any
permits, licenses or authorizations to construct, occupy,
operate or use any portion of the Trust Property by reason of
any Applicable Environmental Laws, or if any such permits,
licenses or authorizations are required by any Applicable
Environmental Laws, such permits, licenses or authorizations
have, as of the date hereof, been obtained.
(iv) Trustor has taken all steps necessary
to determine and has determined that, to the best of its
knowledge, no hazardous substances, solid wastes, or other
substances known or suspected to pose a threat to health or
the environment ("Hazards") have been disposed of or otherwise
released on or to the Trust Property or exist on or within any
portion of the Trust Property in violation of any Applicable
Environmental Law. No prior use, either by Trustor or, to the
best of Trustor's knowledge, after diligent inquiry, the prior
owners of the Trust Property, has occurred which violates any
Applicable Environmental Laws. The use which Trustor makes and
intends to make of the Trust Property will not result in the
disposal or release of any hazardous substance, solid waste or
Hazards on, in or to the Trust Property in violation of any
Applicable Environmental Law. The terms "hazardous substance"
and "release" shall each have the meanings specified in
CERCLA, including, without limitation, petroleum products and
petroleum wastes of any kind, and the terms "solid waste" and
"disposal" (or "disposed") shall each have the meanings
specified in RCRA; provided, however, that in the event either
that CERCLA or RCRA is amended so as to broaden the meaning of
any term defined thereby, such broader meaning shall apply
subsequent to the effective date of such amendment; and
provided further that, to the extent that the laws of the
State of Colorado establish a meaning for "hazardous
substance", "release", "solid waste", or "disposal" which is
broader than that specified in either CERCLA or RCRA, such
broader definition shall apply.
(v) To the best of Trustor's knowledge and
belief, there are no on-site or off-site locations where
hazardous substances, including such substances as asbestos
and Polychlorinated Biphenyls, solid wastes, or Hazards from
the Trust Property have been stored, treated, recycled or
disposed of.
(vi) To the best of Trustor's knowledge and
belief, there has been no litigation brought or threatened nor
any settlement reached by or with any parties alleging the
presence, disposal, release, or threatened release, of any
hazardous substance, solid wastes or Hazards from the use or
operation of the Trust Property.
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<PAGE> 26
(vii) To the best of Trustor's knowledge and
belief after diligent investigation and inquiry, the Trust
Property is not on any federal or state "Superfund" list, and
not on EPA's Comprehensive Response, Compensation & Liability
System (CERCLIS) list or on any state environmental agency
list of sites under consideration for CERCLIS, nor subject to
any environmentally related liens.
(viii) Neither Trustor nor, to the best of
Trustor's knowledge and belief, any tenant of any portion of
the Trust Property, has received any notice from any
Governmental Authority with respect to any violation of any
Applicable Laws.
(ix) Trustor shall not cause any violation
of any Applicable Environmental Laws, nor permit any tenant of
any portion of the Trust Property to cause such a violation,
nor permit any environmental liens to be placed on any portion
of the Trust Property.
All of the foregoing representations and warranties, as
supplemented from time to time, shall be continuing and shall be true and
correct for the period from the date hereof through and as of the date of the
full release and reconveyance of this Deed of Trust, with the same force and
effect as if made each day throughout such period.
(b) Trustor shall conduct and complete all
investigations, studies, sampling, and testing and all remedial,
removal, and other actions necessary to clean up and remove hazardous
substances, solid wastes or Hazards on, in, from or affecting any
portion of the Trust Property (i) in accordance with all Applicable
Environmental Laws, (ii) to the reasonable satisfaction of Beneficiary
and (iii) in accordance with the orders and directives of all
Governmental Authorities. Trustor shall (i) give notice to Beneficiary
immediately upon (A) Trustor's receipt of any notice from any
Governmental Authority of a violation of any Applicable Laws or
acquiring knowledge of the receipt of any such notice by any tenant of
any portion of the Trust Property and (B) acquiring knowledge of the
presence of any hazardous substances, solid wastes or Hazards (other
than those described in the Disclosure Schedule) on the Trust Property
in a condition that is resulting or could reasonably be expected to
result in any adverse environmental impact in violation of Applicable
Environmental Laws, with a full description thereof; (ii) promptly
comply with all Applicable Environmental Laws requiring the notice,
removal, treatment, or disposal of such hazardous substances, solid
wastes or Hazards and provide Beneficiary with satisfactory evidence of
such compliance; and (iii) provide Beneficiary, within thirty (30) days
after demand by Beneficiary, with a bond, letter of credit, or similar
financial assurance evidencing to Beneficiary's satisfaction that
sufficient funds are available to pay the cost of removing, treating,
and disposing of such hazardous
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substances, solid wastes or Hazards and discharging any assessments
that may be established on the Trust Property as a result thereof.
(c) If Beneficiary shall ever have reason to believe
that there are hazardous substances, solid wastes or Hazards (other
than those described in the Disclosure Schedule) affecting any of the
Trust Property, Beneficiary (by its officers, employees and agents) at
any time and from time to time, either prior to or after the occurrence
of an Event of Default under this Deed of Trust, may contract for the
services of persons (the "Site Reviewers") to perform environmental
site assessments ("Site Assessments") on the Trust Property for the
purpose of determining whether there exists on the Trust Property any
environmental condition that could result in any liability, cost, or
expense to the owner, occupier, or operator of such Trust Property
arising under any Applicable Environmental Laws. The Site Assessments
may be performed at any time or times, upon reasonable notice, and
under reasonable conditions established by Trustor that do not impede
the performance of the Site Assessments. The Site Reviewers are hereby
authorized to enter upon the Trust Property for such purposes. The Site
Reviewers are further authorized to perform both above and below the
ground testing for environmental damage or the presence of hazardous
substances, solid wastes and Hazards on the Trust Property and such
other tests on the Trust Property as may be necessary to conduct the
Site Assessments in the reasonable opinion of the Site Reviewers.
Trustor will supply to the Site Reviewers such historical and
operational information regarding the Trust Property as may be
reasonably requested by the Site Reviewers to facilitate the Site
Assessment and will make available for meetings with the Site Reviewers
appropriate personnel having knowledge of such matters, if any. On
request, Beneficiary shall make the results of such Site Assessments
fully available to Trustor, which (prior to an Event of Default under
this Deed of Trust) may, at its election, participate under reasonable
procedures in the direction of such Site Assessments and the
description of tasks of the Site Reviewers. The cost of performing such
Site Assessments shall be paid by Trustor upon demand of Beneficiary.
(d) Without limiting the generality of any other
provision of this Deed of Trust, Trustor hereby DEFENDS, INDEMNIFIES
AND HOLDS HARMLESS Beneficiary, its employees, agents, shareholders,
officers, directors, and assigns, or any person who acquires title at a
foreclosure sale, private trustee's sale, or deed in lieu of such
proceedings (collectively, the "Indemnified Parties"), from and against
any claims, demands, obligations, penalties, fines, suits, liabilities,
settlements, damages, losses, costs or expenses (including, without
limitation, attorney and consultant fees and expenses, investigation
and laboratory fees and expenses, cleanup costs, and court costs and
other litigation expenses) of whatever kind or nature, known or
unknown, contingent or otherwise, arising out of or in any way related
to (i) the presence, disposal, release, threatened release, removal or
production of any hazardous substances, solid wastes or Hazards which
are on, in,
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<PAGE> 28
from or affecting any portion of the Trust Property; (ii) any personal
injury (including wrongful death) or Trust Property damage (real or
personal) arising out of or related to such hazardous substances, solid
wastes or Hazards; (iii) any lawsuit brought or threatened, settlement
reached, or order by Governmental Authority relating to such hazardous
substances, solid wastes or Hazards; and/or (iv) any violation of any
Applicable Laws or demands of Governmental Authorities, or violation of
any policies or requirements of Beneficiary relating to Applicable Laws
or demands of Governmental Authorities, which are based upon or in any
way related to such hazardous substances, solid wastes or Hazards,
regardless of whether or not any of the conditions described under any
of the foregoing subsections (i) through (iv), inclusive, was or is
caused by or within the control of Trustor. Trustor agrees, upon notice
and request by an Indemnified Party, to contest and defend any demand,
claim, suit, proceeding or action with respect to which Trustor has
hereinabove indemnified and held the Indemnified Parties harmless and
to bear all costs and expenses of such contest and defense. Trustor
further agrees to reimburse any Indemnified Party upon demand for any
costs or expenses incurred by any Indemnified Party in connection with
any matters with respect to which Trustor has hereinabove indemnified
and held the Indemnified Parties harmless. Beneficiary agrees to use
reasonable efforts to give Trustor prior written notice as to the
incurring of such costs or expenses for which Beneficiary would seek
reimbursement unless the delay in incurring such costs and expenses,
pending the giving of such notice, would further jeopardize the Trust
Property or the lien of this Deed of Trust. The provisions of this
paragraph shall be in addition to any other obligations and liabilities
Trustor may have to Beneficiary at common law, in equity or under
documentation executed in connection with the Loan, and shall survive
the closing, funding and payment in full of the Loan, as well as any
foreclosure of the Loan or granting of any deed in lieu of foreclosure
and the recordation of any release of the lien of this Deed of Trust.
(e) Beneficiary shall have the right, but not the
obligation, without in any way limiting Beneficiary's other rights and
remedies under this Deed of Trust, to enter onto the Trust Property or
to take such other actions as it deems necessary or advisable to clean
up, remove, resolve, or minimize the impact of, or otherwise deal with
(collectively, "Remediate" or as a noun, "Remediation"), any hazardous
substances, solid wastes or Hazards on or affecting the Trust Property
following receipt of any notice from any person or entity asserting the
existence of any hazardous substances, solid wastes or Hazards
pertaining to the Trust Property or any part thereof that, if true,
could result in an order, notice, suit, imposition of a lien on the
Trust Property, or other action or that, in Beneficiary's sole opinion,
could jeopardize Beneficiary's security under this Deed of Trust. All
reasonable costs and expenses paid or incurred by Beneficiary in the
exercise of any such rights shall be secured by this Deed of Trust and
shall be payable by Trustor upon demand. The foregoing notwithstanding,
prior to Beneficiary incurring any costs or expenses described in this
subparagraph 2.19(e), Beneficiary shall give Trustor not less than
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fifteen (15) days prior written notice (unless public health or safety
reasons dictate a shorter notice period, in which case the notice shall
state the shortened period which it provides) of its intent to incur
any such expenses, and shall not incur any such expenses if Trustor
responds within the notice period that it will perform any legal
obligations it has incurred under any Applicable Environmental Law to
Remediate hazardous substances, solid wastes and Hazards on or
affecting the Trust Property and thereafter promptly commence to do so
and diligently prosecute such Remediation to a conclusion as required
hereunder and by Applicable Environmental Laws.
(f) Trustor acknowledges that Beneficiary has and
will rely upon the representations, covenants, warranties and
agreements set forth in closing and funding the Loan and the making of
the foregoing representations, warranties and covenants is an essential
condition but for which Beneficiary would not close or fund the Loan.
The representations, covenants, warranties and agreements herein
contained shall be binding upon Trustor, its successors, assigns and
legal representatives and shall inure to the benefit of Beneficiary,
its successors, assigns and legal representatives.
2.20 COMPLIANCE WITH AMERICANS WITH DISABILITIES
ACT OF 1990.
(a) Trustor hereby represents, covenants and warrants
to Beneficiary, its successors and assigns, as follows:
(i) Trustor has made and will make all
modifications and/or provided and will provide all
accommodations which may be required to be made or provided by
Trustor pursuant to 42 U.S.C. ss. 12101, et seq., and all
applicable rules and regulations promulgated thereunder (the
"ADA") in order to accommodate the needs and requirements of
disabled persons, including, without limitation, disabled
employees of Trustor and shall otherwise comply or cause
compliance with all provisions of the ADA.
(ii) Trustor has received no notice or
complaint regarding any noncompliance with the ADA of the
Trust Property or of Trustor's employment practices and, to
the best of Trustor's knowledge, there has been no threatened
litigation alleging any such noncompliance by Trustor or the
Trust Property.
(b) Trustor shall promptly provide Beneficiary with
copies of all notices or claims which may be received by Trustor and
involving claims made by any individual, entity or governmental agency
as to any alleged noncompliance of the Trust Property or Trustor's
employment practices with the requirements of the ADA.
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<PAGE> 30
(c) Trustor shall observe and comply and shall ensure
that all and other occupants of the Trust Property observe and comply
in all material respects with all obligations and requirements of the
ADA as it applies to the Trust Property, which shall include, without
limitation, installing or constructing all improvements or alterations
which may be necessary to cause the Trust Property to be accessible to
all persons as and to the extent required by the ADA.
(d) Without limiting the generality of any other
provision of this Deed of Trust, Trustor shall indemnify, defend and
hold harmless Beneficiary, its successors and assigns, and the
directors, officers, employees, agents and servants of the foregoing,
from any and all losses, costs, expenses (including court costs and
attorneys' fees), damages, demands, claims, suits, proceedings, orders
and judgments, penalties, fines and other sanctions arising from any
claim that the Trust Property or occupant thereof is not in compliance
with the requirements of the ADA or that Trustor has otherwise
discriminated against any disabled person in violation of the ADA.
ARTICLE III
ASSIGNMENT OF RENTS AND SALES PROCEEDS;
SECURITY AGREEMENT
3.1 ASSIGNMENT OF RENTS.
(a) Trustor hereby absolutely assigns and transfers
to Beneficiary (i) all the right, title and interest of Trustor in and
to all existing and future lease agreements, occupancy agreements and
use agreements relating to the Trust Property or any part thereof
(whether written or oral and whether for a definite term or month to
month) (collectively "Leases"), (ii) all right and power of Trustor to
amend, cancel or terminate any Leases and (iii) all Trustor's income,
rents, royalties, revenues, issues, profits, fees, and other proceeds
(including, without limitation, room sales) from the Trust Property
(collectively "Rents"). Rents, for purposes of this Deed of Trust,
shall not include Purchaser Notes arising from the sale of Lots to the
extent that such Lots have been released from the lien of this Deed of
Trust. This assignment shall extend to and cover any and all extensions
and renewals of Leases and to all security for the obligations of the
lessees or occupants thereunder and any and all guaranties or
indemnities of or similar arrangements with respect to any such
obligations. This assignment is given to facilitate Performance of the
Obligations. In pursuance of this assignment, and not in lieu hereof,
Trustor will, to the extent this assignment does not extend to future
Leases and otherwise when requested by Beneficiary, execute and deliver
to Beneficiary separate assignments of the Leases, the terms of such
assignments being incorporated herein by reference.
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<PAGE> 31
(b) Trustor hereby authorizes and directs the lessees
and tenants of the Trust Property that upon written notice from
Beneficiary, all payments required under the Leases, or in any way
respecting same, including payments past due, shall be made directly to
the Beneficiary as they become due. Trustor hereby relieves such
lessees and tenants from any liability to Trustor by reason of such
payments being made to Beneficiary. Nevertheless, until Beneficiary
notifies in writing Trustor or such lessees and tenants that such
payments are to be made to Beneficiary, Trustor shall be entitled to
collect all Rents. Beneficiary is hereby authorized to give such
notification upon the occurrence of an Event of Default and at any time
thereafter while such Event of Default is continuing.
(c) All Rents collected by Trustor shall be applied
in the following manner:
FIRST, to the payment of all taxes and lien
assessments levied and due and payable against the Trust Property,
where provision for paying such is not otherwise made to the
satisfaction of Beneficiary;
SECOND, to the payment of ground rents (if any) due
and payable with respect to the Trust Property;
THIRD, to the payment of the Obligations due and
owing to Beneficiary;
FOURTH, to the payment of current operating costs and
expenses (including repairs, maintenance and necessary acquisitions of
property and expenditures for capital improvements) arising in
connection with the Trust Property; and
FIFTH, to Trustor or its designee.
All Rents collected by Beneficiary may be applied to
the items above listed in any manner that Beneficiary deems advisable
and without regard to the aforestated priorities. Receipt by
Beneficiary of the Rents shall not constitute a waiver of any right
that Beneficiary may enjoy under this Deed of Trust or under applicable
law; nor shall the receipt and application thereof cure any default
hereunder, or invalidate or affect any act done in connection with such
default, including without limitation, any foreclosure proceeding or
any foreclosure sale authorized by this Deed of Trust and applicable
law. Beneficiary does not assume any obligation of the lessor under any
of the Leases, and no liability shall attach to Beneficiary for failure
or inability to collect any Rents. Trustor will (i) timely fulfill or
perform each and every term, covenant and provision of each Lease to be
fulfilled or performed by the lessor thereunder; (ii) give prompt
notice to Beneficiary of each
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<PAGE> 32
notice under the Leases received by Trustor, together with a complete
copy of such notice; and (iii) enforce, short of termination thereof,
the Performance of each and every term, covenant and provision of each
Lease. Trustor, without first obtaining the prior written consent of
Beneficiary, will not: accept Rent payments for more than one month in
advance; cancel, modify, renew, accept the surrender of, or consent to
the subordination of, any Lease; or in any way release or impair
Beneficiary's right to proceed against (A) any security for the payment
and performance of the obligations of the lessees under the Leases or
of any guarantors or sureties of any such obligations, or (B) any
person primarily or secondarily liable for the payment and performance
of such obligations.
(d) This assignment is not a delegation of Trustor's
duties under the Leases and does not operate to make Beneficiary a
mortgagee in possession or place upon Beneficiary responsibility for
the control, care, management or repair of the Trust Property or for
the performance of any of the terms and conditions of any of the
assigned Leases nor does this assignment operate to make Beneficiary
responsible or liable for (i) any waste committed on the Trust Property
by the tenants or any other person, (ii) any dangerous or defective
condition of the Trust Property or (iii) any negligence in the
management, upkeep, repair or control of the Trust Property resulting
in loss, injury or death to any tenant, invitee, licensee, employee or
stranger. Without limiting the generality of any other provision of
this Deed of Trust, TRUSTOR SHALL AND DOES HEREBY AGREE TO INDEMNIFY
AND TO HOLD BENEFICIARY HARMLESS from and against any and all
liability, loss or damage which may or might be incurred by reason of
this assignment unless caused by Beneficiary's gross negligence or
willful misconduct. Should Beneficiary incur any liability by reason of
this assignment or in defense of any claim or demand for loss or damage
as provided above, the amount thereof and all related costs and
expenses, including, without limitation, attorneys' fees, together with
interest thereon at the Overdue Rate from the date paid by Beneficiary
until repaid by Trustor, shall be secured hereby and Trustor shall
reimburse Beneficiary therefor immediately upon demand.
(e) Trustor represents and warrants that: (i) Trustor
is the owner of the landlord's interest in the Leases, if any, with
full power and authority to assign the same together with the Rents;
(ii) there are no outstanding assignments or pledges of the Leases or
Rents; (iii) Trustor has not anticipated the payment of any Rents for
more than one (1) month in advance; and (iv) there are no defaults now
existing under any of the Leases and there exists no state of facts
which, with the giving of notice or lapse of time or both, would
constitute a default under any of the Leases.
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3.2 SECURITY AGREEMENT.
(a) To the extent any of the Trust Property is
property covered by the Uniform Commercial Code ("UCC Property"), this
Deed of Trust constitutes a security agreement and Trustor hereby
grants to Beneficiary, as secured party, a security interest in the
Trust Property and the proceeds thereof in favor of Beneficiary for the
purpose of securing Performance of the Obligations. This security
interest shall be self-operative with respect to the UCC Property, but
Trustor will execute and deliver on demand such security agreements,
financing statements and other instruments as Beneficiary may request
in order to impose and/or perfect the lien and security interest hereof
more specifically upon any of the UCC Property. Should the lien and/or
security interest of this Deed of Trust on any UCC Property be subject
to a prior security agreement covering such UCC Property, then upon the
occurrence of an Event of Default, all the right, title and interest of
Trustor in and to any and all deposits made in connection with the
transaction whereby such prior security agreement was made are hereby
assigned to Beneficiary, together with the benefit of any payments now
or hereafter made in connection with such transactions.
(b) The UCC Property is used primarily for business
(other than farm) purposes.
(c) Trustor shall replace or cause to be replaced
with property of equal or greater value all portions or items of UCC
Property which are consumed or worn out in ordinary usage. Trustor may
sell or dispose of only that part of the UCC Property that it is
obliged to replace and has replaced; and, unless Beneficiary then
agrees otherwise in writing, all proceeds from any such sale or
disposition in excess of the amount expended for such replacements
shall promptly be paid over by Trustor to be applied against the
indebtedness secured hereby, whether or not such indebtedness is then
due and payable. The foregoing notwithstanding, Trustor may sell or
dispose and not replace UCC Property which in the aggregate, after
taking into account all other items of UCC Property that have been sold
or disposed and not replaced, is not of a material value and is not
material to or necessary for the continued operation of the Premises
for the purposes for which it is intended; provided, however, that
unless Beneficiary then agrees otherwise in writing, all proceeds from
such sale or disposition shall be promptly paid over by Trustor to be
applied against the indebtedness secured hereby, whether or not such
indebtedness is then due and payable.
(d) Trustor warrants that its chief executive office
and principal place of business is as set forth at the beginning of
this Deed of Trust. Trustor further warrants that the UCC Property is
located at the Premises. Trustor will immediately notify Beneficiary in
writing of any change in its principal place of business/chief
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executive office/residence, as the case may be, and of any change in
location of the UCC Property not removed or replaced as permitted or
required by the terms of this Deed of Trust.
(e) All covenants of Trustor contained in this Deed
of Trust, whether or not expressly referred to herein, shall apply to
the UCC Property to the extent applicable to the UCC Property. The
covenants and warranties of Trustor and the rights and remedies of
Beneficiary contained in this paragraph are in addition to, and not in
limitation of, those contained in the other provisions of the Deed of
Trust.
(f) This Deed of Trust shall be deemed a financing
statement filed as a fixture filing; provided the filing of any other
financing statement relating to the UCC Property shall not be construed
to diminish any of Beneficiary's rights or priorities hereunder.
3.3 SERVICING AGENT. Beneficiary may, at its option, require
that so long as Beneficiary is entitled to collect such payments, all payments
on the Leases be collected by a servicing agent according to the terms of a
servicing agreement in form and substance satisfactory to Beneficiary. Trustor
will promptly pay all costs in connection therewith.
3.4 POWER OF ATTORNEY. Upon and during the continuance of an
Event of Default, Beneficiary shall have the right, but not the obligation: (a)
to demand and receive payment and performance and to enforce any and all of
Trustor's rights with respect to the Leases and the personal property covered
hereby; (b) to exercise any right and to perform any obligation of Trustor under
or in connection with the Project Documents, the Leases and any other instrument
covered hereby, at Trustor's expense; (c) with respect to rights to payment and
performance assigned hereunder, while an Event of Default exists, to make
extension agreements, release persons liable thereon or securities for payment
or other performance, and settle and compromise disputes in connection with
those rights; (d) while an Event of Default exists, to modify, cancel, or accept
the surrender of the terms of any Lease; (e) to take any action Beneficiary may
deem necessary or desirable to perfect the assignments and the security interest
made and granted to Beneficiary hereunder; and (f) to perform all these acts in
the name of Trustor or in the name of Beneficiary with the same force and effect
as if performed by Beneficiary in the absence of this provision. For all of the
foregoing purposes, Trustor irrevocably appoints Beneficiary, until Performance
of the Obligations, as its attorney-in-fact. All such actions may be taken
without notice to Trustor and without being called to account therefor by
Trustor.
3.5 RELATIONSHIP. Nothing in this instrument shall be
construed to obligate Beneficiary to discharge or perform the duties of Trustor
under the Project Documents, the Leases or any other instrument or of a landlord
to a tenant or to impose any liability as a result of the exercise of the right
to collect rents or proceeds under a Lease; nor shall Beneficiary be responsible
or liable in any manner with respect to the Trust Property or the
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use, occupancy or enjoyment of all or any part thereof. Nothing herein shall be
construed as establishing a partnership or joint venture between Trustor and
Beneficiary.
ARTICLE IV
DEFAULTS AND REMEDIES
4.1 EVENTS OF DEFAULT AND REMEDIES. The following events and
occurrences shall constitute an event of default ("Event of Default") under this
Deed of Trust:
(a) other than a default or violation referred to
elsewhere in this Paragraph 4.1, an "Event of Default" as defined in
the Loan Agreement occurs, or an act or event occurs under the Loan
Agreement, whether or not denominated as an "Event of Default", which
expressly entitles Beneficiary to accelerate Performance of any of the
Obligations and/or exercise its remedies;
(b) there is a default in the Performance of any of
the terms of paragraphs 2.3 or 2.5(a) hereof or Trustor knowingly
violates or suffers or permits the violation of any of the warranties
or conditions of the policies of insurance required under paragraph
2.3;
(c) any party holding a mortgagee's or beneficiary's
interest under a mortgage or deed of trust or any other lien or
security interest on any part of the Trust Property commences
foreclosure or sale thereof; or
(d) Trustor vacates or abandons the Trust Property.
4.2 REMEDIES. At any time after an Event of Default has
occurred, to the extent not prohibited by the applicable law:
(a) Beneficiary may without further demand, protest
or notice of any kind to Trustor, declare all indebtedness secured
hereby to be due and payable immediately, and upon such declaration the
same shall be immediately due and payable, together with applicable
premiums, and collectible by an action at law; and/or
(b) Beneficiary may commence proceedings for the
complete or partial foreclosure of this Deed of Trust by commencing an
action to foreclose this Deed of Trust as a mortgage and/or deed of
trust and/or cause Trustee to exercise the power of sale herein
granted; and/or
(c) Trustee and/or Beneficiary may without regard to
the adequacy of any security for the Performance of the Obligations,
personally, or by any of its and/or their agents or employees, or by a
receiver appointed by a court of competent
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jurisdiction, enter into and upon all or any part of the Trust Property
and may exclude Trustor, its agents and servants therefrom; and having
and holding the same, may in its and/or their own name(s) or the name
of Trustor, as it/they deems best, control, lease, manage and operate
the Trust Property, conduct the business thereof, and exercise all
rights and powers of Trustor with respect thereto, including, without
limitation, the Leases, either personally or by its agents, employees
or receivers; and upon every such entry, Trustee and/or Beneficiary at
the expense of Trustor, from time to time, either by purchase, repair
or construction, may maintain, restore and insure the Trust Property;
and likewise, from time to time, at the expense of Trustor, Trustee
and/or Beneficiary may make all necessary or proper repairs, renewals
and replacements and such useful alterations, additions, betterments
and improvements thereto and thereon as to it may seem advisable; and
Trustee and/or Beneficiary shall be entitled to collect and receive all
Rents and to apply them in the manner Beneficiary is entitled to apply
them pursuant to paragraph 3.1 hereof; and/or
(d) Beneficiary shall be entitled, as a matter of
right, to the appointment of a receiver of the Trust Property and the
court may appoint a receiver, either before or after judgment, without
notice and without regard to the solvency or insolvency of Trustor or
any Guarantor (as defined in the Loan Agreement) at the time of the
application for such receiver and without regard to the then value of
the Trust Property or any other security held for Performance of the
Obligations; and such receiver shall have full power and authority to
collect the Rents and all other powers necessary or incidental for the
protection, possession, control, management and operation of the Trust
Property, at the expense of the Trust Property and of Trustor, to
maintain, restore and insure the Trust Property, and to pay all taxes,
assessments and other charges arising in connection therewith; and/or
(e) Trustee and/or Beneficiary may take such steps to
protect and enforce its rights whether by action, suit or proceeding in
equity or at law for the specific performance of any covenant,
condition or agreement in this Deed of Trust or any of the other Loan
Documents, or in aid of the execution of any power herein expressly or
impliedly granted, or for any foreclosure hereunder or for the
enforcement of any other appropriate legal or equitable remedy, or
otherwise as Beneficiary shall elect; and/or
(f) Trustee and/or Beneficiary may take possession of
the personal property covered hereby and may enter and remain upon the
Trust Property to protect the personal property; and upon written
notice from Trustee and/or Beneficiary, Trustor will assemble the
personal property and make it available to Beneficiary at the Trust
Property or at any other place designated in the notice, which shall be
reasonably convenient to both parties; and/or
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(g) all of the Trust Property (both realty and
personalty) is encumbered as one unit, and all the Trust Property, at
Beneficiary's option, may be foreclosed or sold in the same proceeding
or in separate proceedings; and all of the Trust Property (both realty
and personalty) may, at Beneficiary's option, be sold as such in one
unit as a going business; and/or
(h) Beneficiary may exercise the "declarant's,"
"developer's" and "owner's" rights under the Project Documents (it
being agreed and understood that such right is reserved to the Trustor
other than upon the occurrence of and during the continuance of an
Event of Default); and/or
(i) Trustee and/or Beneficiary may assert such other
rights and remedies as they may have hereunder or under any of the
other Loan Documents, at law, in equity or by statute, including those
of a secured party and of a mortgagee and/or trust deed beneficiary.
4.3 POWER OF SALE. Beneficiary may foreclose the lien of this
Deed of Trust, insofar as it encumbers the Trust Property, either by judicial
action or by non-judicial foreclosure through the Trustee. Foreclosure through
Trustee will be initiated by Beneficiary's filing of its notice of election and
demand for sale with Trustee. Upon the filing of such notice of election and
demand for sale, Trustee shall promptly comply with all notice and other
requirements of the laws of Colorado then in force with respect to such sales,
and shall give four (4) weeks' public notice of the time and place of such sale
by advertisement weekly in some newspaper of general circulation then published
in the county or city and county in which the Trust Property is located. Any
sale conducted by Trustee pursuant to this section shall be held at the front
door of the county courthouse for such county or city and county, or on the
Trust Property, or at such other place as similar sales are then customarily
held in such county or city and county, provided that the actual place of sale
shall be specified in the notice of sale. The proceeds of any sale under this
section shall be applied first to the fees and expenses of the officer
conducting the sale, and then to the reduction or discharge of the Obligations;
any surplus remaining shall be paid over to Trustor or to such other person or
persons as may be lawfully entitled to such surplus. At the conclusion of any
foreclosure sale, the officer conducting the sale shall execute and deliver to
the purchaser at the sale a certificate of purchase which shall describe the
property sold to such purchaser and shall state that upon expiration of the
applicable periods for redemption, the holder of such certificate will be
entitled to a deed to the property described in the certificate. After the
expiration of all applicable periods of redemption, unless the property sold has
been redeemed by Trustor, the officer who conducted such sale shall execute and
deliver an appropriate deed to the holder of the certificate of purchase or the
last certificate of redemption, as the case may be, and such deed shall operate
to divest Trustor and all persons claiming under Trustor of all right, title,
and interest, whether legal or equitable, in the property described in the deed.
Nothing in this section dealing with foreclosure procedures or specifying
particular actions to be taken by Beneficiary or by Trustee or any similar
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officer shall be deemed to contradict or add to the requirements and procedures
now or hereafter specified by Colorado law, and any such inconsistency shall be
resolved in favor of Colorado law applicable at the time of foreclosure. Trustee
may postpone sale of all or any portion of the Trust Property by public
announcement at such time and place of sale, and from time to time thereafter
may postpone such sale by public announcement at the time fixed by the preceding
postponement. The recitals in any deed executed pursuant to this power of sale
of any matters or facts shall be conclusive proof of the truthfulness thereof.
At any time before Trustee's sale pursuant to this paragraph, Beneficiary may
rescind any notice of breach or default and of election to cause the Trust
Property to be sold by executing and delivering to Trustee a written notice of
such rescission, which notice, when recorded, shall also constitute a
cancellation of any prior declaration of default and demand for sale. The
exercise by Beneficiary of such right of rescission shall not constitute a
waiver of any breach or default then existing or subsequently occurring; impair
the right of Beneficiary to execute and deliver to Trustee, as above provided,
other declarations of default and demands for sale, and notices of breach or
default, and of election to cause the Trust Property to be sold to satisfy the
Obligations; or otherwise affect any provision, covenant or condition of the
Note and/or of this Deed of Trust and/or of any of the other Loan Documents or
any of the rights, obligations or remedies of the parties thereunder or
hereunder. Beneficiary may, by following the procedures and satisfying the
requirements prescribed by applicable law, foreclose only a portion of the Trust
Property and, in such event, said foreclosure shall not affect the lien of this
Deed of Trust on the remaining portion of the Trust Property not foreclosed.
4.4 RIGHTS, POWERS AND REMEDIES CUMULATIVE; WAIVER.
(a) Each and every power and remedy in this Deed of
Trust specifically given to Beneficiary shall be cumulative and shall
be in addition to every other power and remedy specifically given in
the Loan Documents or now or hereafter existing at law, in equity, or
by statute. Each and every such power and remedy may be exercised from
time to time and as often and in such order as may be deemed expedient
by Beneficiary; and the exercise or the beginning of the exercise of
any power or remedy shall not be construed to be a waiver of the right
to exercise at the same time or thereafter any other power or remedy.
No delay or omission by Beneficiary in the exercise of any right or
power or in the pursuit of any remedy accruing upon the occurrence of
any Event of Default shall impair any such right, power or remedy or be
construed to be a waiver thereof or of any such Event of Default or to
be any acquiescence therein; nor shall the acceptance by Beneficiary of
any security or any payment on or performance of any of the other
Obligations, though made after default, be deemed a waiver of any right
to take advantage of any future Event of Default or of any past Event
of Default not completely cured thereby.
(b) Whenever by the terms of this Deed of Trust or
any other Document Beneficiary is given any option, such option may be
exercised when the
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right accrues or at any time thereafter; provided, however, that in the
event such option is exercisable upon the occurrence of an Event of
Default, such option may be exercised only during the continuance of
such Event of Default.
(c) Any failure by Beneficiary to insist upon the
strict performance by Trustor of any of the terms and provisions hereof
shall not be deemed to be a waiver of any of the terms and provisions
hereof, and Beneficiary, notwithstanding any such failure, shall have
the right thereafter to insist upon the strict performance by Trustor
of any and all of the terms and provisions of this Deed of Trust to be
performed by Trustor. Neither Trustor nor any other person now or
hereafter obligated for the Performance of the whole or any part of the
Obligations shall be relieved of such Obligation (i) by reason of the
failure of Trustee or Beneficiary to comply with any request of Trustor
or of any other person so obligated to take action to foreclose this
Deed of Trust or otherwise enforce any of the provisions of this Deed
of Trust or any other Document or any other Obligation, or (ii) by
reason of the release, regardless of consideration, of the whole or any
part of the security held for the Performance of the Obligations of any
person primarily or secondarily liable for the Performance of the
Obligations, or (iii) by reason of the failure to join any person in a
foreclosure proceeding, or (iv) by reason of any transfer of the Trust
Property or any part thereof by Trustor or any subsequent owner of the
Trust Property, or (v) by reason of any agreements or stipulations
between any subsequent owner or owners of the Trust Property, or any
part thereof, and Beneficiary with reference to the Trust Property,
this Deed of Trust or any of the other Loan Documents, including,
without limitation, any agreements or stipulations extending the time
of payment or modifying the terms of the Obligations or this Deed of
Trust without first having obtained the consent of Trustor or such
other person; and in the last event, Trustor and all such other persons
shall continue to be liable hereunder and under the other Loan
Documents according to such agreements or stipulations unless expressly
released and discharged in writing by Beneficiary. Any such action may
be taken without the consent of any junior lienholder and without
impairing or affecting the lien of this Deed of Trust or the priority
of such lien over any subordinate lien; and Beneficiary may resort for
the Performance of the Obligations to its several securities therefor
in such order and manner as Beneficiary may elect.
4.5 POWER OF ATTORNEY. Beneficiary is hereby irrevocably
appointed the true and lawful attorney-in-fact of Trustor, in its name and
stead, to make all necessary conveyances, assignments, transfers and deliveries
of the Trust Property sold pursuant to this Article IV; and for that purpose,
Beneficiary may execute all necessary instruments of conveyance, assignment and
transfer, and may substitute one or more persons with like power, Trustor hereby
ratifying and confirming all that its attorney or such substitute or substitutes
shall lawfully do by virtue hereof. Nevertheless, if so requested by
Beneficiary, Trustor will ratify and confirm any such sale or sales by executing
and delivering to Trustee or to such purchaser or purchasers all such
instruments as may be advisable, in the judgment
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of Beneficiary, for that purpose and are designated in such request. Any such
sale or sales made under or by virtue of this Article IV whether made under the
power of sale granted in this Deed of Trust or under or by virtue of judicial
proceedings or of a judgment or decree of foreclosure and sale, shall operate to
divest all the estate, right, title, interest, claim and demand whatsoever,
whether at law or in equity, of Trustor in and to the Trust Property and rights
so sold, and shall be a perpetual bar both at law and in equity against Trustor
and against any and all persons claiming or who may claim the same, or any part
thereof from, through or under Trustor.
4.6 BENEFICIARY'S RIGHT TO BID AND PURCHASE. Upon any sale
made under or by virtue of this Article IV, including, without limitation, made
under the power of sale herein granted or under or by virtue of judicial
proceedings or of a judgment or decree of foreclosure and sale, any person,
including, without limitation, Beneficiary, its agents or employees may bid for
and acquire the Trust Property or any part thereof. If Beneficiary's bid is
successful, Beneficiary, in lieu of paying cash for the Trust Property covered
thereby, may make settlement for the purchase price by crediting upon the
indebtedness secured hereby, in such order as Beneficiary may determine, the net
sales price after deducting therefrom the expenses of the sale and the costs of
the action and any other sums which Beneficiary is authorized to deduct under
this Deed of Trust.
4.7 APPLICATION OF PROCEEDS OF SALE. To the extent not
prohibited by the applicable law, the purchase money and other proceeds of any
sale made under or by virtue of this Article IV, together with any other sums
which then may be held by Beneficiary under this Deed of Trust as part of the
Trust Property or the proceeds thereof, whether under the provisions of this
Deed of Trust or otherwise, shall be applied as follows:
FIRST, to the payment of the costs and expenses of
such sale, including reasonable compensation to Trustee and
Beneficiary, their agents and attorneys, and the expenses of any
judicial proceedings wherein the same may be made, and of all advances
made hereunder or under any other Loan Documents securing the
Performance of the Obligations (together with interest on all such
advances at the Overdue Rate from the date of advance until received by
Beneficiary or Trustee), as the case may be, and to the payment of all
taxes, assessments or liens prior to the lien of this Deed of Trust,
except any taxes, assessments, liens or other charges, subject to which
the Trust Property shall have been sold;
SECOND, to the payment of the whole amount then
due, owing and unpaid upon the Note, including premium, if any;
THIRD, to the payment of any other Obligations; and
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FOURTH, to the payment of the surplus, if any, to
Trustor, its successors or assigns, or to whosoever may be lawfully
entitled to receive the same upon its written request, or as any court
of competent jurisdiction may direct.
4.8 RIGHT TO RECOVER JUDGMENT. To the extent permitted by the
applicable law, Beneficiary shall be entitled to recover judgment on the Note
either before or after or during the pendency of any proceedings for the
enforcement of the provisions of this Deed of Trust; and the right of
Beneficiary to recover such judgment shall not be affected by any entry or sale
hereunder, or by the exercise of any other right, power or remedy for the
enforcement of the provisions of this Deed of Trust, or the foreclosure of the
lien hereof. In the event of a sale of the Trust Property and of the application
of the proceeds of sale, as herein provided, to the payment of the Obligations,
Beneficiary shall be entitled to enforce payment of and to receive all amounts
then remaining due and unpaid upon the Note, and to enforce payment of all other
charges, payments and costs due under this Deed of Trust and the other Loan
Documents; and shall be entitled to recover judgment for any portion of the
Obligations remaining unpaid, with interest at the Overdue Rate from the date of
entry of such judgment to the date that payment is actually received by
Beneficiary from Trustor.
4.9 CERTAIN ASSURANCES. Trustor will not at any time insist
upon, or plead, or in any manner whatever claim or take any benefit or advantage
of any stay or extension or moratorium law, any homestead law or any exemption
from execution or sale of the Trust Property or any part thereof, now or at any
time hereafter in force, which may affect the covenants and terms of performance
of this Deed of Trust or Trustor will not claim, take or insist upon any benefit
or advantage of any law now or hereafter in force providing for the valuation or
appraisal of the Trust Property, or any part thereof, prior to any sale or sales
thereof which may be made pursuant to any provision herein, or pursuant to the
decree, judgment or order of any court of competent jurisdiction; or, after any
such sale or sales, claim or exercise any right under any statute heretofore or
hereafter enacted to redeem the property so sold or any part thereof. Trustor
hereby expressly waives to the extent not prohibited by law all benefit or
advantage of any such law or laws, and covenants not to hinder, delay or impede
the execution of any power herein granted or delegated to Trustee and/or
Beneficiary, but to suffer and permit the execution of every power as though no
such law or laws had been made or enacted. Trustor, for itself and all who may
claim under it, waives, to the extent that they lawfully may, all right to have
the Trust Property marshalled upon any foreclosure hereof.
4.10 EXPENSES. Trustor will pay all costs, charges and
expenses, including attorneys' fees and court costs, which Trustee and/or
Beneficiary may incur in collecting any sum secured hereby or in exercising any
of the remedies hereunder; and all such costs and expenses shall be secured by
this Deed of Trust and, without notice or demand, be payable by Trustor to
Beneficiary, as the case may be, with interest at the Overdue Rate from the date
of advance until received by Beneficiary from Trustor.
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4.11 TRUSTOR TENANT AT WILL AFTER SALE. Trustor agrees that
after any sale hereunder, Trustor and/or all parties occupying the Trust
Property, or any part thereof, shall, at the option of the purchaser(s) at such
sale, be mere tenants at the will and sufferance of the purchaser(s) at such
sale or sales, and that such purchaser(s) shall be entitled to immediate
possession thereof, and that if Trustor or any such tenant or tenants fail to
vacate the Trust Property, or any part thereof immediately at such purchaser's
request, such purchaser(s) may, and shall have the right to, file or institute
an action in forcible entry and detainer or institute or maintain any other
action or suit or exercise any other rights or remedies given landlords under
any statute or law. Notwithstanding the above, however, at the option of any
purchaser at such sale, any tenant leases covering the Trust Property or any
part thereof in effect at the time of such sale shall remain in full force and
effect and such purchaser(s) shall automatically become the "landlord"
thereunder with all rights and obligations accruing to the landlord thereunder.
ARTICLE V
MISCELLANEOUS
5.1 BENEFICIARY'S ACCOUNT. All moneys payable hereunder or
under the other Loan Documents shall be paid to Beneficiary in Phoenix, Arizona,
at its address first above mentioned, unless otherwise designated by Beneficiary
by notice.
5.2 MODIFICATION. This Deed of Trust, the Loan Agreement and
the Loan Documents exclusively and completely state the rights of Beneficiary
and Trustor with respect to the Trust Property. No modification, variation,
termination, discharge or abandonment hereof and no waiver of any of the
provisions or conditions hereof shall be valid unless in writing and signed by
duly authorized representatives of Beneficiary and Trustor or the successors,
transferees or assigns of either, subject, however, to the limitations herein on
Trustor with respect to assignment, merger and consolidation. This Deed of Trust
supersedes any and all prior representations, warranties and/or inducements,
written or oral, heretofore made by Beneficiary (other than in the other Loan
Documents) concerning this transaction, which are null and void and of no force
or effect whatsoever.
5.3 POWERS COUPLED WITH AN INTEREST. The powers and agency
hereby granted by Trustor are coupled with an interest and are irrevocable until
Performance of the Obligations and are granted as cumulative to Beneficiary's
other remedies for the enforcement of Performance of the Obligations.
5.4 COUNTERPARTS. This Deed of Trust may be executed
simultaneously in any number of identical copies, any number of which having
been executed by all parties hereto shall constitute an original for all
purposes.
5.5 NOTICE. Any notice required or permitted to be given
hereunder shall be given in the manner set forth in the Loan Agreement.
Notwithstanding anything herein to
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the contrary, if any notice given to Trustor by Trustee or Beneficiary is given
in the manner permitted or required by a statute of the State where the Premises
are located, such notice shall be deemed to have been effectively given
regardless of whether notice has been given in the manner required by the Loan
Agreement.
5.6 BINDING EFFECT. This Deed of Trust shall inure to the
benefit of and be binding upon Beneficiary and Trustor, and, subject to the
provisions of paragraph 2.5, their heirs, legatees, devisees, personal
representatives, administrators, executors, successors and assigns. The term
"Trustor" shall mean both the original Trustor and any subsequent owner or
owners of any of the Trust Property. The term "Beneficiary" shall mean the owner
and holder, including pledgees, of the Note, whether or not named as Beneficiary
herein. Whenever in this Deed of Trust reference is made to "Trustee", it shall
be construed to mean the trustee or trustees for the time being, whether
original or successors or successor in the trust; and that all title, estate,
rights, powers, trusts and duties hereunder given or appertaining to or
devolving upon the trustee if more than one, shall be in each Trustee so that
any action hereunder or purporting to be hereunder of any one of the original or
any successor trustee shall for all purposes be considered to be as effective as
the action of every trustee.
5.7 SEVERABILITY. If any one or more of the provisions
contained in this Deed of Trust shall be held invalid, illegal or unenforceable
in any respect, the validity, legality and enforceability of the remaining
provisions contained herein shall not in any way be affected or impaired
thereby; provided that where the provisions of any invalidating law may be
waived, they are hereby waived by Trustor to the fullest extent possible.
5.8 INTERPRETATION. All headings are inserted for convenience
only and shall not affect any construction or interpretation of this Deed of
Trust. The provisions of this Deed of Trust shall apply to the parties according
to the context hereof and without regard to the number or gender of words and
expressions used herein. Unless otherwise indicated, all references herein to
clauses and other subdivisions refer to the corresponding paragraphs, clauses
and other subdivisions of this Deed of Trust; the words "herein", "hereof",
"hereto", "hereunder" and words of similar import refer to this Deed of Trust as
a whole and not to any particular paragraph, clause or other subdivision hereof;
and reference to a numbered or lettered subdivision of an Article or paragraph
shall include relevant matter within the Article or paragraph which is
applicable to but not within such numbered or lettered subdivision.
5.9 CHOICE OF LAW. THIS DEED OF TRUST HAS BEEN DELIVERED IN
PHOENIX, ARIZONA. THE PROVISIONS OF THIS DEED OF TRUST AND ALL RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF ARIZONA AND, TO THE EXTENT
THEY PREEMPT SUCH LAWS, THE LAWS OF THE UNITED STATES. HOWEVER,
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THE INTERNAL LAWS OF THE STATE WHERE THE PREMISES ARE LOCATED SHALL APPLY TO THE
APPOINTMENT OF TRUSTEES, TO THE CREATION OF LIENS AND TO ANY FORECLOSURE,
FORECLOSURE SALE, APPOINTMENT OF A RECEIVER OR OTHER REMEDY WITH RESPECT TO THAT
PORTION OF THE TRUST PROPERTY CONSISTING OF REAL PROPERTY.
5.10 JURISDICTION AND VENUE. TRUSTOR AND TRUSTEE HEREBY AGREE
THAT ALL ACTIONS OR PROCEEDINGS INITIATED BY TRUSTOR AND ARISING DIRECTLY OR
INDIRECTLY OUT OF THE LOAN DOCUMENTS SHALL BE LITIGATED IN THE SUPERIOR COURT OF
ARIZONA, MARICOPA COUNTY DIVISION, OR THE UNITED STATES DISTRICT COURT FOR THE
DISTRICT OF ARIZONA OR, IF BENEFICIARY INITIATES SUCH ACTION, IN ADDITION TO THE
FOREGOING COURTS ANY COURT IN WHICH BENEFICIARY SHALL INITIATE SUCH ACTION, TO
THE EXTENT SUCH COURT HAS JURISDICTION. TRUSTOR AND TRUSTEE HEREBY EXPRESSLY
SUBMIT AND CONSENT IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING
COMMENCED BY TRUSTOR OR BENEFICIARY IN ANY OF SUCH COURTS. TRUSTOR AND TRUSTEE
WAIVE ANY CLAIM THAT PHOENIX, ARIZONA OR THE DISTRICT OF ARIZONA IS AN
INCONVENIENT FORUM OR AN IMPROPER FORUM BASED ON LACK OF VENUE. THE EXCLUSIVE
CHOICE OF FORUM FOR TRUSTOR SET FORTH IN THIS SECTION SHALL NOT BE DEEMED TO
PRECLUDE THE ENFORCEMENT BY BENEFICIARY OF ANY JUDGMENT OBTAINED IN ANY OTHER
FORUM OR THE TAKING, BY BENEFICIARY, OF ANY ACTION TO ENFORCE THE SAME IN ANY
OTHER APPROPRIATE JURISDICTION, AND TRUSTOR HEREBY WAIVES THE RIGHT TO
COLLATERALLY ATTACK ANY SUCH JUDGMENT OR ACTION.
5.11 WAIVER OF RIGHT TO JURY TRIAL. BENEFICIARY AND TRUSTOR
ACKNOWLEDGE AND AGREE THAT ANY CONTROVERSY WHICH MAY ARISE UNDER ANY OF THE LOAN
DOCUMENTS OR WITH RESPECT TO THE TRANSACTION CONTEMPLATED THEREBY WOULD BE BASED
UPON DIFFICULT AND COMPLEX ISSUES AND, THEREFORE, THE PARTIES AGREE THAT ANY
LAWSUIT ARISING OUT OF ANY SUCH CONTROVERSY SHALL BE TRIED IN A COURT OF
COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY.
INITIALS ______
5.12 [INTENTIONALLY NOT USED]
5.13 [INTENTIONALLY NOT USED]
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<PAGE> 45
5.14 [INTENTIONALLY NOT USED]
5.15 RECONVEYANCE BY TRUSTEE. Upon (a) Performance of all of
the Obligations owed to Beneficiary under the Note and this Deed of Trust, (b)
payment in full of the Incentive Fee, (c) surrender to Trustee of this Deed of
Trust and the Note for cancellation and retention, and (d) payment of the
Trustee's fees, Trustee shall reconvey, without warranty, the Trust Property
then held hereunder. The recitals in such reconveyance of any matters or facts
shall be conclusive proof of the truthfulness thereof. The grantee in such
reconveyance may be described as "the person or persons legally entitled
thereto."
5.16 SUBROGATION OF BENEFICIARY. Beneficiary shall be
subrogated for further security to the lien, although released of record, of any
and all encumbrances paid out of the proceeds of the loan secured by this Deed
of Trust.
5.17 LIMITATION IN INTEREST. It is the intent of Trustor and
Beneficiary to comply with the usury law ("Applicable Usury Law") which is
applicable pursuant to the terms of paragraph 5.9 hereof or which is applicable
if the law chosen by the parties is not. Accordingly, it is agreed that
notwithstanding any provisions to the contrary in this Deed of Trust or in any
of the other Loan Documents, in no event shall this Deed of Trust or the other
Loan Documents require the payment or permit the collection of interest in
excess of the maximum contract rate permitted by the Applicable Usury Law. If
(a) any such excess of interest otherwise would be contracted for, charged or
received from Trustor or otherwise in connection with the Obligations, (b) the
maturity of the Obligations is accelerated in whole or in part, or (c) all or
part of the principal or interest of the Obligations shall be prepaid, so that
under any of such circumstances the amount of interest contracted for, charged
or received in connection with the Obligations would exceed the maximum contract
rate permitted by the Applicable Usury Law, then in any such event (1) the
provisions of this paragraph shall govern and control, (2) neither Trustor nor
any other person or entity now or hereafter liable for the payment hereof will
be obligated to pay the amount of such interest to the extent that it is in
excess of the maximum contract rate permitted by the Applicable Usury Law, (3)
any such excess which may have been collected shall be either applied as a
credit against the then unpaid principal amount of the Obligations to Trustor or
refunded to Trustor, at Beneficiary's option, and (4) the effective rate of
interest will be automatically reduced to the maximum contract rate permitted by
the Applicable Usury Law. It is further agreed, without limiting the generality
of the foregoing, that to the extent permitted by the Applicable Usury Law: (x)
all calculations of the rate of interest which are made for the purpose of
determining whether such rate would exceed the maximum contract rate permitted
by the Applicable Usury Law shall be made by amortizing, prorating, allocating
and spreading during the period of the full stated term of the Obligations, all
interest at any time contracted for, charged or received from Trustor or
otherwise in connection with the Obligations; and (y) in the event that the
effective rate of interest on the Obligations should at any time exceed the
maximum contract rate permitted by the Applicable Usury Law, such
- 39 -
<PAGE> 46
excess interest that would otherwise have been collected had there been no
ceiling imposed by the Applicable Usury Law shall be paid to Beneficiary from
time to time, if and when the effective interest rate on the Obligations
otherwise falls below the maximum contract rate permitted by the Applicable
Usury Law, to the extent that interest paid to the date of calculation does not
exceed the maximum contract rate permitted by the Applicable Usury Law, until
the entire amount of interest which would have otherwise been collected to such
date of calculation had there been no ceiling imposed by the Applicable Usury
Law has been paid in full. Trustor further agrees that should the maximum
contract rate permitted by the Applicable Usury Law be increased at any time
hereafter because of a change in the law, then to the extent not prohibited by
the Applicable Usury Law, such increases shall apply to all Obligations
regardless of when incurred; but, again to the extent not prohibited by
Applicable Usury Law, should the maximum contract rate permitted by the
Applicable Usury Law be decreased because of a change in the law, such decreases
shall not apply to the Obligations regardless if arising from an advance of the
Loan after the effective date of such decrease.
5.18 TRUSTOR'S CERTIFICATION. Trustor, upon written request of
Beneficiary made in the manner provided herein for the giving of notices, will
certify in writing to Beneficiary or to any proposed assignee of the Obligations
within seven (7) days after receiving such request, the amount then owing on the
Note, the amount of any other Obligations then owing to Trustor's knowledge, and
whether any off-sets or defenses exist against the Obligations or against this
Deed of Trust or any other Loan Documents. In the event Trustor fails to return
such certification to Beneficiary within the period stated, then the amount
owing on the Note and the amount of any other Obligations then owing to
Beneficiary, as stated in Beneficiary's request, shall be deemed accurate and
correct, and Trustor shall thereby have waived and released any rights of offset
or other defenses which might exist against the Obligations or against this Deed
of Trust or any other Loan Documents.
5.19 TIME OF ESSENCE. Time is of the essence in the
Performance of the Obligations by trustor.
5.20 ADDRESS. Trustor requests that a copy of any Notice of
Default and a copy of any Notice of Sale hereunder be mailed to Trustor at its
mailing address set forth in the introductory paragraph to this Deed of Trust.
5.21 BENEFICIARY'S DISCRETION. Unless otherwise specified
herein, whenever Beneficiary must exercise its discretion under the Loan
Documents or give or withhold its consent under the Loan Documents, such
discretion or consent may be exercised, given or withheld in Beneficiary's sole
and absolute discretion except as otherwise set forth in the Loan Documents to
the contrary.
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<PAGE> 47
ARTICLE VI
SPECIAL PROVISIONS
6.1 INTERVAL RELEASES. Beneficiary hereby agrees that it will
promptly release from the lien of this Deed of Trust and from the effect of any
UCC financing statement an individual Lot (as defined in the Loan Agreement) in
the Premises which is sold by Trustor, upon the satisfaction of the following
terms and conditions:
(i) The payment to Beneficiary of a Project Release
Fee in the amount of Three Thousand Six Hundred Dollars ($3,600.00 )
with respect to such Lot, which shall be applied as an ordinary payment
of principal under the Note;
(ii) No Event of Default shall have occurred and be
continuing and no event shall then exist, which with notice, passage of
time or both, would constitute an Event of Default;
(iii) The Purchaser (as defined in the Loan
Agreement) of the Lot must not be affiliated with the Trustor or with
any of the Control Group (as defined in the Loan Agreement);
(iv) The Lot to be released must have been sold by
Trustor in the ordinary course of Trustor's business in a bona fide,
arms-length transaction;
(v) Beneficiary shall have received a written request
for such release in which Trustor certifies as to compliance with items
(i) through (v) above and further certifies that all of the
requirements for such release have been satisfied; and
(vi) Trustor has paid all of Beneficiary's
out-of-pocket expenses incurred in connection with such release and has
submitted to Beneficiary all necessary documents with respect to the
same.
For purposes hereof, a person or entity shall be deemed affiliated with Trustor
or with the Control Group, if it is a shareholder, officer, director, agent,
employee, salesman, broker or creditor of Trustor or the Control Group, or a
relative of Trustor, of the Control Group or of any of the foregoing, or any
other person or entity related to or affiliated with Trustor or the Control
Group, including, without limitation, the Guarantor (as defined in the Loan
Agreement) and any independent contractor. No partial release of a Lot pursuant
hereto shall impair or affect Beneficiary's remaining security interest as it
pertains to those portions of the Premises remaining subject hereto. Upon the
release of a Lot from the lien of this Deed of Trust, such Lot shall no longer
be deemed part of the Trust Property. Upon the release of a Lot from this Deed
of Trust, such release will also constitute a release from the lien of this Deed
of Trust, of any Purchaser Notes or Purchaser Mortgages (as defined in the Loan
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<PAGE> 48
Agreement) subsequently arising from the sale of such Lot; provided, however,
that notwithstanding the foregoing, such Purchaser Notes and Purchaser Mortgages
shall be subject to Beneficiary's security interest to the extent that such
Purchaser Notes or Purchaser Mortgages constitute Receivables Collateral (as
defined in the Loan Agreement).
6.2 VARIABLE RATE. The Note contains the following language
with respect to fluctuations in the rate of interest payable thereunder:
Interest shall accrue initially at an annual interest
rate ("Initial Interest Rate") equal to Prime (as hereinafter defined)
in effect on the date of the initial advance of the loan evidenced by
this Note ("Initial Prime") plus two percent (2%) per annum, subject to
adjustment on each Interest Rate Change Date (as hereinafter defined),
but in no event to exceed the maximum contract rate permitted under the
Applicable Usury Law (as hereinafter defined). The interest rate shall
change on each Interest Rate Change Date by adding to or subtracting
from the Initial Interest Rate, as the case may be, the change, if any,
between Initial Prime and Prime in effect on the applicable Interest
Rate Change Date. As used in this Note, the following capitalized terms
have the meaning set forth opposite them below:
"Prime" shall mean the rate of interest publicly
announced, from time to time, by Citibank, N.A., New York, New York
("Citibank"), as the corporate base rate of interest charged by
Citibank to its most creditworthy commercial borrowers notwithstanding
the fact that some borrowers of Citibank may borrow from Citibank at
rates of less than such announced Prime rate; and
"Interest Rate Change Date" means (a) the first
business day of Citibank during the calendar month following the date
of the initial advance of the loan evidenced by this Note, and (b) the
first business day of Citibank during each successive month thereafter.
[Signatures appear on following page]
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<PAGE> 49
IN WITNESS WHEREOF, this Deed of Trust is duly executed as of
the day and year first above written.
PREFERRED EQUITIES CORPORATION, a
Nevada corporation
"Trustor"
By: ____________________________________
Name: ______________________________
Title:______________________________
_____ Check here to confirm that
Paragraph 5.11 has been initialed.
- 43 -
<PAGE> 50
STATE OF __________)
) ss.
County of _________)
The foregoing instrument was acknowledged before me this ____
day of February, 1998, by ___________________ as the ____________________ of
Preferred Equities Corporation, a Nevada corporation on behalf of the
corporation.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the ____ day of
___________, 1998.
_____________________________________
Notary Public in and for ____________
County, _____________________________
NOTARY SEAL:
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<PAGE> 51
EXHIBIT A
LEGAL DESCRIPTION
- 45 -
<PAGE> 52
EXHIBIT B
PERMITTED EXCEPTIONS
[TO INCLUDE THE CC&R'S WHICH ARE BEING RECORDED]
- 46 -
<PAGE> 53
CONSENT OF GUARANTOR
(HARTSEL SPRINGS RANCH)
The undersigned, MEGO FINANCIAL CORP., a New York corporation
(formerly named Mego Corp.) ("Guarantor"), hereby acknowledges that Guarantor
executed and delivered to GREYHOUND REAL ESTATE FINANCE COMPANY, an Arizona
corporation ("GREFCO"), an Amended and Restated Guarantee and Subordination
Agreement dated as of May 10, 1989 (the "Guarantee"), guaranteeing performance
of the obligations of PREFERRED EQUITIES CORPORATION, a Nevada corporation
("Borrower"), to Lender (as hereinafter defined) under the Loan Agreement, the
Note and other Documents (as the terms "Loan Agreement," "Note" and "Documents"
are defined in the Guarantee).
GREFCO has assigned the Note and all of GREFCO's rights and
obligations under the Loan Agreement and the other Documents to FINOVA CAPITAL
CORPORATION, a Delaware corporation (formerly known as Greyhound Financial
Corporation) ("Lender"), pursuant to a plan of liquidation between GREFCO and
Lender.
With Guarantor's ratification, consent and approval, Borrower
and Lender amended and restated the Loan Agreement pursuant to that certain
Second Amended and Restated Loan and Consolidated Loan and Security Agreement
dated May 15, 1997 (the "Amended and Restated Loan Agreement").
Guarantor hereby acknowledges that, pursuant to the terms of
the Amended and Restated Loan Agreement, Lender proposes to advance to Borrower
an additional principal sum of up to Four Million and No/100 Dollars
($4,000,000.00) (the "Hartsel Loan"). Guarantor further acknowledges that the
Hartsel Loan is evidenced by that certain Note in the principal amount of
$4,000,000.00, dated February __, 1998, executed by Borrower and payable to the
order of Lender (as from time to time modified, extended, renewed, replaced or
restated, the "Hartsel Project Note"), and secured, in part, by that certain
Deed of Trust, Assignment of Rents and Proceeds and Security Agreement of even
date with the Hartsel Project Note executed by Borrower, as trustor, for the
benefit of Lender, as beneficiary, and encumbering the real and personal
property described therein (as from time to modified and amended, the "Hartsel
Deed of Trust") and that certain side letters and other documents are being
executed in connection with the Hartsel Loan (as from time to time modified,
extended, renewed, replaced or restated the "Hartsel Ancillary Documents").
<PAGE> 54
Guarantor consents to the Hartsel Project Note, the Hartsel
Deed of Trust and the Hartsel Ancillary Documents and agrees that (i) the
Guarantee shall remain in full force and effect, (ii) that the obligations of
the Guarantor under the Guarantee are joint and several with those of each other
Obligor (as that term is defined in the Guarantee), (iii) Guarantor's liability
under the Guarantee shall continue undiminished by the Hartsel Project Note, the
Hartsel Deed of Trust, and the Hartsel Ancillary Documents and (iv) all terms,
conditions and provisions set forth in the Hartsel Project Note, the Hartsel
Deed of Trust and the Hartsel Ancillary Documents and all other Documents
executed therewith, are hereby ratified, approved and confirmed.
Guarantor reaffirms as if made on the date hereof all of
Guarantor's representations and warranties contained in the Guarantee except as
otherwise set forth in the Amended and Restated Loan Agreement or on EXHIBIT 1
attached hereto. Guarantor acknowledges that as of the date hereof, it has (a)
no defense, counterclaim, offset, cross-complaint, claim or demand or any nature
whatsoever which can be asserted as a basis to seek affirmative relief or
damages from Lender or GREFCO or as a basis to reduce or eliminate all or any
part of its liability under the Guarantee, and (b) no other claim against Lender
or GREFCO with respect to any portion of the transaction described in the
Documents.
IN WITNESS WHEREOF, Guarantor has hereunto executed this
instrument as of the _____ day of ___________, 1998.
MEGO FINANCIAL CORP., a New York
corporation
By _____________________________
Its ____________________________
- 2 -
<PAGE> 55
STATE OF _____________ )
) ss.
COUNTY OF ___________ )
BEFORE ME, the undersigned authority, a Notary Public in and
for the County and State aforesaid, on this day personally appeared
_____________________
____________________________________________________________________, known to
me to be the __________________________ of MEGO FINANCIAL CORP., a New York
corporation, who acknowledged to me that the same was the free act and deed of
such corporation and that s/he being authorized by proper authority to do so,
executed the same on behalf of such corporation for the purposes and
consideration therein expressed, and in the capacity therein stated.
GIVEN UNDER MY HAND AND SEAL OF OFFICE this _____ day of
_____________, 1998.
________________________________________
Notary Public
My Commission Expires:
- ---------------------
- 3 -
<PAGE> 56
EXHIBIT 1 TO
CONSENT OF GUARANTOR
EXCEPTIONS TO REPRESENTATIONS AND WARRANTIES REAFFIRMED
BY GUARANTOR PURSUANT TO THIS CONSENT
[IF NONE, INSERT "NONE"]
<PAGE> 57
ENVIRONMENTAL CERTIFICATE WITH REPRESENTATIONS,
COVENANTS AND WARRANTIES
[HARTSEL SPRINGS RANCH]
The undersigned, PREFERRED EQUITIES CORPORATION, a Nevada
corporation ("Borrower"), hereby executes this Certificate for the purpose of
inducing FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender"), to make
a loan to Borrower in the stated principal sum of up to $4,000,00.00 (the
"Loan"), which Loan is to be secured by, among other things, a Deed of Trust,
Assignment of Rents and Proceeds and Security Agreement [Hartsel Springs Ranch]
(the "Mortgage"), dated as of even date herewith, to the Public Trustee of Park
County, Colorado, as Trustee, encumbering certain real and personal property as
therein described, including the land more particularly described in Exhibit A
attached hereto and made a part hereof and all improvements thereon
(collectively, the "Property").
1. REPRESENTATIONS, COVENANTS AND WARRANTIES. Except as may be
otherwise expressly stated in the Disclosure Schedule attached hereto as Exhibit
B and made a part hereof, Borrower hereby represents, covenants and warrants to
Lender and its successors and assigns, as follows:
(a) The location and construction, occupancy,
operation and use of all improvements now and hereafter attached to or
placed, erected, constructed or developed as a portion of the Property
(the "Improvements") do not and will not violate any applicable laws,
statute, ordinance, rule, regulation, policy, order or determination of
any federal, state, local or other governmental authority
("Governmental Authority") or any board of fire underwriters (or other
body exercising similar functions), or any restrictive covenant or deed
restriction affecting any portion of the Property, including without
limitation, any applicable zoning ordinances and building codes, flood
disaster laws and health and environmental laws, rules and regulations
(hereinafter collectively called the "Applicable Laws").
(b) Without in any way limiting the generality of (a)
above, neither the Property nor Borrower are the subject of any pending
or, to the best of Borrower's knowledge, threatened investigation or
inquiry by any Governmental Authority, or are subject to any remedial
obligations under any Applicable Laws pertaining to health or the
environment ("Applicable Environmental Laws"), including, without
limitation, the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended ("CERCLA"), the Resource Conservation
and Recovery Act of 1987,
<PAGE> 58
as amended ("RCRA"), and the Toxic Substances Control Act, The Clean
Air Act, and The Clean Water Act, and applicable state laws, and this
representation and warranty would continue to be true and correct
following disclosure to any applicable Governmental Authority of all
relevant facts, conditions and circumstances pertaining to the Property
and/or Borrower.
(c) Borrower is not required to obtain any permits,
licenses or authorizations to construct, occupy, operate or use any
portion of the Property by reason of any Applicable Environmental Laws,
or if any such permits, licenses or authorizations are required by any
Applicable Environmental Laws, such permits, licenses or authorizations
have, as of the date hereof, been obtained.
(d) Borrower has taken all steps reasonably necessary
to determine and has determined that, to the best of its knowledge, no
hazardous substances, solid wastes, or other substances known or
suspected to pose a threat to health or the environment ("Hazards")
have been disposed of or otherwise released on or to the Property or
exist on or within any portion of the Property. No prior use, either by
Borrower or, to the best of Borrower's knowledge, after due inquiry,
the prior owners of the Property, has occurred which violates any
Applicable Environmental Laws. The use which Borrower makes and intends
to make of the Property will not result in the disposal or release of
any hazardous substance, solid waste or Hazards on, in or to the
Property in violation of any Applicable Environmental Laws. The terms
"hazardous substance" and "release" shall each have the meanings
specified in CERCLA, including, without limitation, petroleum products
and petroleum wastes of any kind, and the terms "solid waste" and
"disposal" (or "disposed") shall each have the meanings specified in
RCRA; provided, however, that in the event either that CERCLA or RCRA
is amended so as to broaden the meaning of any term defined thereby,
such broader meaning shall apply subsequent to the effective date of
such amendment; and provided further that, to the extent that the laws
of the State of Colorado establish a meaning for "hazardous substance",
"release", "solid waste", or "disposal" which is broader than that
specified in either CERCLA or RCRA, such broader definition shall
apply.
(e) To the best of Borrower's knowledge and belief,
there are no on-site or off-site locations where hazardous substances
generated from the Property, including such substances as asbestos and
Polychlorinated Biphenyls, solid wastes, or Hazards, have been stored,
treated, recycled, or disposed of.
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<PAGE> 59
(f) To the best of Borrower's knowledge and belief,
there has been no litigation brought or threatened nor any settlement
reached by or with any parties alleging the presence, disposal,
release, or threatened release, of any hazardous substance, solid
wastes or Hazards from the use or operation of the Property.
(g) To the best of Borrower's knowledge and belief
after diligent investigation and inquiry, the Property is not on any
federal or state "Superfund" list, and not on EPA's Comprehensive
Response, Compensation & Liability System (CERCLIS) list or on any
state environmental agency list of sites under consideration for
CERCLIS, nor subject to any environmentally related liens.
(h) Neither Borrower nor, to the best of Borrower's
knowledge and belief, any tenant of any portion of the Property, has
received any notice from any Governmental Authority with respect to any
violation of any Applicable Laws.
(i) Borrower shall not cause any violation of any
Applicable Environmental Laws, nor permit any tenant of any portion of
the Property to cause such a violation, nor permit any environmental
liens to be placed on any portion of the Property.
All of the foregoing representations and warranties, as
supplemented from time to time, shall be continuing and shall be true and
correct for the period from the date hereof through and as of the date of the
final payment of all indebtedness owed by Borrower to Lender and the final
performance of all obligations under all instruments evidencing, governing,
securing or relating to such indebtedness, with the same force and effect as if
made each day throughout such period, and all of such representations and
warranties shall survive such payment and performance.
2. COVENANT TO CLEAN UP AND NOTIFY. Borrower shall conduct and
complete all investigations, studies, sampling, and testing and all remedial,
removal, and other actions necessary to clean up and remove hazardous
substances, solid wastes or Hazards on, in, from or affecting any portion of the
Property (a) in accordance with all Applicable Environmental Laws, (b) to the
reasonable satisfaction of Lender, and (c) in accordance with the orders and
directives of all Governmental Authorities. Borrower shall (a) give notice to
Lender immediately upon (i) Borrower's receipt of any notice from any
Governmental Authority of a violation of any Applicable Laws or acquiring
knowledge of the receipt of any such notice by any tenant of any portion of the
Property and (ii) acquiring knowledge of the presence of any hazardous
substances, solid wastes or Hazards (other than those described in Exhibit B
attached hereto) on the Property in a condition that is resulting or could
- 3 -
<PAGE> 60
reasonably be expected to result in any adverse environmental impact in
violation of Applicable Environmental Laws, with a full description thereof; (b)
promptly comply with all Applicable Environmental Laws requiring the notice,
removal, treatment, or disposal of such hazardous substances, solid wastes or
Hazards and provide Lender with satisfactory evidence of such compliance; and
(c) provide Lender, within thirty (30) days after demand by Lender, with a bond,
letter of credit, or similar financial assurance evidencing to Lender's
satisfaction that sufficient funds are available to pay the cost of removing,
treating, and disposing of such hazardous substances, solid wastes or Hazards
and discharging any assessments that may be established on the Property as a
result thereof.
3. SITE ASSESSMENT. If Lender shall ever have reason to
believe that there are hazardous substances, solid wastes or Hazards (other than
those described in Exhibit B attached hereto) affecting any of the Property,
Lender (by its officers, employees and agents) at any time and from time to
time, either prior to or after the occurrence of an Event of Default under the
Loan Agreement pursuant to which the Loan is made, may contract for the services
of persons (the "Site Reviewers") to perform environmental site assessments
("Site Assessments") on the Property for the purpose of determining whether
there exists on the Property any environmental condition that could result in
any liability, cost, or expense to the owner, occupier, or operator of such
Property arising under any Applicable Environmental Laws. The Site Assessments
may be performed at any time or times, upon reasonable notice, and under
reasonable conditions established by Borrower that do not impede the performance
of the Site Assessments. Subject to the provisions of the Declaration (as
defined in the Loan Agreement), the Site Reviewers are hereby authorized to
enter upon the Property for such purposes. Subject to the provisions of the
Declaration, the Site Reviewers are further authorized to perform both above and
below the ground testing for environmental damage or the presence of hazardous
substances, solid wastes and Hazards on the Property and such other tests on the
Property as may be necessary to conduct the Site Assessments in the reasonable
opinion of the Site Reviewers. Borrower will supply to the Site Reviewers such
historical and operational information regarding the Property as may be
reasonably requested by the Site Reviewers to facilitate the Site Assessment and
will make available for meetings with the Site Reviewers appropriate personnel
having knowledge of such matters, if any. On request, Lender shall make the
results of such Site Assessments fully available to Borrower, which (prior to an
Event of Default) may, at its election, participate under reasonable procedures
in the direction of such Site Assessments and the description of tasks of the
Site Reviewers. The cost of performing such Site Assessments shall be paid by
Borrower upon demand of Lender.
4. INDEMNITY AND HOLD HARMLESS. Borrower hereby defends,
indemnifies and holds harmless Lender, its employees, agents, shareholders,
officers and directors (collectively, the "Indemnified Parties"), from and
against any claims,
- 4 -
<PAGE> 61
demands, obligations, penalties, fines, suits, liabilities, settlements,
damages, losses, costs or expenses (including, without limitation, attorney and
consultant fees and expenses, investigation and laboratory fees and expenses,
cleanup costs, and court costs and other litigation expenses) of whatever kind
or nature, known or unknown, contingent or otherwise, arising out of or in any
way related to (i) the presence, disposal, release, threatened release, removal
or production of any hazardous substances, solid wastes or Hazards which are on,
in, from or affecting any portion of the Property; (ii) any personal injury
(including wrongful death) or property damage (real or personal) arising out of
or related to such hazardous substances, solid wastes or Hazards; (iii) any
lawsuit brought or threatened, settlement reached, or order by Governmental
Authority relating to such hazardous substances, solid wastes or Hazards; and/or
(iv) any violation of any Applicable Laws, or demands of Governmental
Authorities, or violation of any policies or requirements of Lender relating to
Applicable Laws or demands of Governmental Authorities, which are based upon or
in any way related to such hazardous substances, solid wastes or Hazards,
regardless of whether or not any of the conditions described under any of the
foregoing subsections (i) through (iv), inclusive, was or is caused by or within
the control of Borrower. Borrower agrees, upon notice and request by an
Indemnified Party, to contest and defend any demand, claim, suit, proceeding or
action with respect to which Borrower has hereinabove indemnified and held the
Indemnified Parties harmless and to bear all costs and expenses of such contest
and defense. Borrower further agrees to reimburse any Indemnified Party upon
demand for any costs or expenses incurred by any Indemnified Party in connection
with any matters with respect to which Borrower has hereinabove indemnified and
held the Indemnified Parties harmless. Lender agrees to use reasonable efforts
to give Borrower prior written notice as to the incurring of such costs or
expenses for which Lender would seek reimbursement unless the delay in incurring
such costs and expenses, pending the giving of such notice, would further
jeopardize Lender's collateral or security interest. The provisions of this
paragraph shall be in addition to any other obligations and liabilities Borrower
may have to Lender at common law, in equity or under documentation executed in
connection with the Loan, and shall survive the closing, funding and payment in
full of the Loan, as well as any foreclosure of the Loan or granting of any deed
in lieu of foreclosure and the recordation of any release of the lien of any
security interest securing repayment of the Loan.
5. LENDER'S RIGHT TO REMOVE HAZARDOUS MATERIALS. Lender shall
have the right, but not the obligation, without in any way limiting Lender's
other rights and remedies, to enter onto the Property or to take such other
actions as it deems necessary or advisable to clean up, remove, resolve, or
minimize the impact of, or otherwise deal with (collectively "Remediate" or as a
noun, "Remediation"), any hazardous substances, solid wastes or Hazards on or
affecting the Property following receipt of any notice from any person or entity
asserting the existence of any
- 5 -
<PAGE> 62
hazardous substances, solid wastes or Hazards pertaining to the Property or any
part thereof that, if true, could result in an order, notice, suit, imposition
of a lien on the Property, or other action or that, in Lender's sole opinion,
could jeopardize Lender's security. All reasonable costs and expenses paid or
incurred by Lender in the exercise of any such rights shall be payable by
Borrower upon demand. The foregoing notwithstanding, prior to Lender incurring
any costs or expenses described in this Paragraph 5, Lender shall give Borrower
not less than fifteen (15) days prior written notice (unless public health or
safety reasons dictate a shorter notice period, in which case the notice shall
state the shortened period which it provides) of its intent to incur any such
expenses, and shall not incur any such expenses if Borrower responds within the
notice period that it will perform any legal obligations it has incurred under
any Applicable Environmental Law to Remediate hazardous substances, solid wastes
and Hazards on or affecting the Property and thereafter promptly commence to do
so and diligently prosecute such Remediation to a conclusion as required
hereunder and by Applicable Environmental Laws.
6. RELIANCE AND BINDING NATURE. Borrower acknowledges that
Lender has and will rely upon the representations, covenants, warranties and
agreements set forth in closing and funding the Loan and that the execution and
delivery of this Certificate is an essential condition but for which Lender
would not close or fund the Loan. The representations, covenants, warranties and
agreements herein contained shall be binding upon Borrower, its successors,
assigns and legal representatives and shall inure to the benefit of Lender, its
successors, assigns and legal representatives.
Dated and Effective as of this ____ day of __________, 1998.
PREFERRED EQUITIES CORPORATION,
a Nevada corporation
By: _______________________________
Name: _________________________
Title: ________________________
"Borrower"
- 6 -
<PAGE> 63
EXHIBIT A
LEGAL DESCRIPTION
<PAGE> 64
EXHIBIT B
DISCLOSURE SCHEDULE
<PAGE> 65
HARTSEL SPRINGS SIDE LETTER
February 18, 1998
Preferred Equities Corporation
4310 Paradise Road
Las Vegas, Nevada 89109-6597
Re: FINOVA Mortgage Loan Facility
Gentlemen:
Reference is made to that certain Second Amended and Restated
and Consolidated Loan and Security Agreement dated May 15, 1997 between FINOVA
Capital Corporation, a Delaware corporation ("Lender") and Preferred Equities
Corporation, a Nevada corporation ("Borrower") (the "Loan Agreement"). Unless
otherwise defined herein, all capitalized terms used herein shall have the same
meaning as set forth in the Loan Agreement.
This Side Letter is being executed in connection with an
Advance by Lender of no more than Four Million Dollars ($4,000,000) of the
Mortgage Loan Facility in order to finance the purchase by Borrower of One
Thousand Five Hundred Fifty-Two (1,552) platted lots located in Park County,
Colorado and commonly known as Hartsel Springs Ranch (the "Hartsel Springs
Lots").
This Side Letter Agreement will confirm certain agreements
between the Borrower and the Lender concerning the Hartsel Springs Lots and the
advance of the Mortgage Loan Facility made in connection therewith and shall
constitute an amendment to the Loan Agreement and Documents.
1. The Hartsel Springs Lots shall be deemed an Additional
Project.
2. The definition of Documents as set forth in the Loan
Agreement, shall be amended to include each now existing and hereafter created
Project Note, each now existing and hereafter created Mortgage securing the
payment of each such Project Note and this Side Letter.
3. Subject to the satisfaction of all conditions precedent to
the making of an Advance of the Receivables Loan as set forth in the Loan
Agreement,
<PAGE> 66
Preferred Equities Corporation
February 18, 1998
Page 2
Lender agrees to make Advances of the Receivables Loan, from time to time,
against Instruments or Contracts arising from the sale of the Hartsel Springs
Lots.
4. At such time as Borrower establishes a sales office for
the sale of the Hartsel Springs Lots and in the event such sales office is not
located on the property which is the subject matter of the Mortgage otherwise
encumbering the Hartsel Springs Lots, Borrower shall, within ten (10) days
following the establishment of such sales office, grant to Lender a lien on and
security interest in such sales office as security for the payment and
performance of the Obligations.
5. Paragraph (d) of Exhibit I-C (Conditions of Eligible
Receivables) to the Loan Agreement shall be amended as follows:
(i) The word "or" appearing immediately prior to "(iv)"
shall be deleted;
(ii) The "." at the end of such paragraph shall be deleted
in favor of "; and"; and
(iii) A clause (v) shall be added reading as follows:
(v) In the case of Receivables Collateral
encumbering Lots, consecutive monthly installments of
principal and interest having a remaining term exceeding one
hundred and twenty (120) months but not exceeding one hundred
and forty four (144) months; provided that no more than One
Million Dollars ($1,000,000) of the Receivables Loan shall be
used to finance Eligible Receivables described in this clause
(v).
6. Borrower warrants and represents to Lender that the
Amended and Restated Real Estate Purchase and Sale Agreement (the "Purchase
Agreement") dated as of November 25, 1997 between Mercantile Equities
Corporation, Hartsel Springs Ranch of Colorado, Inc. and Borrower, a copy of
which was forwarded to Lender's counsel, is a true and correct copy thereof, is
the sole agreement with respect to the purchase by Borrower of the Hartsel
Springs Lots and has not been amended, modified or superseded. The Hartsel
Springs Lots constitutes One Thousand Five Hundred Fifty-Two Lots (1,552) all of
which will be purchased by Borrower pursuant to the Purchase Agreement. The Lots
identified in the Purchase Agreement as the Fifty Four (54) "South Ranch Partial
Lots" are subject to plat restrictions requiring that the partial lots in the
subdivision known as "Hartsel Ranch" be sold together with the corresponding
partial lot in the subdivision known as "Estates of Colorado". As a
<PAGE> 67
Preferred Equities Corporation
February 18, 1998
Page 3
result of such plat restrictions, the South Ranch Partial Lots shall be deemed
to constitute Twenty Seven (27) Hartsel Springs Lots.
7. As a condition precedent to Lender's obligation to make an
Advance of the Mortgage Loan Facility for purposes of acquiring the Hartsel
Springs Lots, Borrower shall deliver to Lender the following (all as defined in
the Purchase Agreement) all of which shall be subject to the approval of Lender:
(a) The Water Opinion (which shall run in favor of Lender and
Borrower);
(b) Preliminary copies of all Governmental Approvals;
(c) All Licenses; (d) The Cease and Desist Order;
(e) Seller's Litigation Schedule;
(f) Consent from the Seller as to the collateral assignment to
Lender of the License;
(g) Satisfactory letter of explanation from the Borrower
concerning the item set forth on Seller's Litigation
Schedule as "Whistleblower"
(h) Satisfactory letter of explanation from the Purchaser
under the Purchase Agreement concerning the item set forth
in Seller's Litigation Schedule as "Bluegreen
Corporation"; and
8. Borrower agrees to comply in all respects with the Cease
and Desist Order and give Lender evidence upon Lender's request as to such
compliance. Borrower agrees to indemnify Lender and its successors and assigns
from all loss or liability to Lender and such successors and assigns arising
from the failure of Borrower to fully comply with the Cease and Desist Order.
9. On or before April, 6, 1998, and under all circumstances
prior to any obligation on the part of the Lender to make an Advance of the
Receivables Loan against Instruments or Contracts arising from the sale of the
Hartsel Springs Lots, Borrower shall deliver to Lender final unconditional
copies of all Governmental Approvals.
10. Lender shall withhold the sum of Thirty Two Thousand
Dollars ($32,000) from the Advance of the Mortgage Loan Facility which is the
subject matter of this Side Letter (the "Holdback") until such time as Lender
has received and
<PAGE> 68
Preferred Equities Corporation
February 18, 1998
Page 4
approved a Water Opinion in form and substance acceptable to Lender and from a
Colorado attorney acceptable to Lender which indicates to the satisfaction of
Lender that the owner of each Hartsel Springs Lot within Unit 99 of Hartsel
Ranch can be issued a permit to drill and operate a well for household use in
one (1) single family residence. Borrower represents and warrants to Lender that
the Purchaser under the Purchase Agreement has agreed to the aforementioned
Holdback. Lender will advance the Holdback upon receipt of the aforementioned
Water Opinion on the condition that there does not then exist an Event of
Default or any act or event which with notice, passage of time or both, would
constitute an Event of Default and on the further condition that Lender is
satisfied that the priority of its Deed of Trust recorded against the Hartsel
Springs Lots is not adversely affected as a result of such Advance.
In the event the foregoing represents an accurate statement of
the agreements that have been reached please sign and return this letter to the
undersigned.
FINOVA Capital Corporation
By: _______________________
Name:__________________
Its:___________________
Accepted this 18th day of February, 1998.
Preferred Equities Corporation,
a Nevada corporation
By: ____________________________
Name:_______________________
Its:________________________
RSD/slg
<PAGE> 69
REQUEST FOR ADVANCE AND DISBURSEMENT INSTRUCTIONS
The undersigned, as ___________________________________ of
PREFERRED EQUITIES CORPORATION, a Nevada corporation, hereby instructs FINOVA
CAPITAL CORPORATION ("FINOVA") to advance Three Million Nine Hundred Sixty-Eight
Thousand and 00/100 Dollars ($3,968,000.00)1 in immediate available funds, which
funds shall be distributed as follows:
1. Security Title Guaranty Company $3,948,160.00
Bank: Colorado National Bank
ABA Routing No.: 102000021
For Credit to: United Title Companies, Inc.
Account Number: 120412789832
Reference: Security Title Guaranty Co.
Order Number: X017658A98
Reference: Escrow No. XO 57278A97
2. FINOVA Capital Corporation $ 19,840.00
(Loan Fee - $19,840.00)
Total Funds Disbursed: $3,968,000.00
The undersigned acknowledges and agrees that, even though all
or a portion of the disbursements described above are to be directed to entities
other than
- --------------------------------
1 Maximum Funding by FINOVA $4,000,000.00
Less: Holdback ( 32,000.00)
-------------
Total Advance $3,968,000.00
<PAGE> 70
the undersigned, receipt of such disbursements by such payees shall constitute
receipt of the proceeds by the undersigned.
Dated: February ____, 1998.
PREFERRED EQUITIES CORPORATION, a
Nevada corporation
By: _____________________________
Name:
Title:
- 2 -
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