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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 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)
<TABLE>
<S> <C>
NEW YORK 13-5629885
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (IRS EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
4310 PARADISE ROAD, LAS VEGAS, NV 89109
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 702-737-3700
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of November 9, 1998, 21,009,506 shares of the registrant's common stock
were outstanding. The aggregate market value of common stock held by
non-affiliates of the registrant as of November 9, 1998 was approximately
$12,025,681 based on a closing price of $1.13 for the common stock as reported
on the NASDAQ National Market on such date. For purposes of the foregoing
computation, all executive officers, directors and 5 percent beneficial owners
of the registrant are deemed to be affiliates. Such determination should not be
deemed to be an admission that such executive officers, directors or 5 percent
beneficial owners are, in fact, affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
None
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MEGO FINANCIAL CORP.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 12
Item 3. Legal Proceedings........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......... 14
PART II
Item 5. Market for the Registrant's Common Equity and Related
Security Holder Matters..................................... 15
Item 6. Selected Consolidated Financial Data........................ 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 37
Item 8. Financial Statements and Supplementary Data................. 37
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial
Disclosure.................................................. 37
PART III
Item 10. Directors and Executive Officers of the Company............. 38
Item 11. Executive Compensation...................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 45
Item 13. Certain Relationships and Related Transactions.............. 46
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on
Form 8-K.................................................... 49
Signatures.................................................. 60
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PART I
ITEM 1. BUSINESS
General
Mego Financial Corp. (Mego Financial) is a premier developer of timeshare
properties and a provider of consumer financing to purchase timeshare intervals
and land parcels through its wholly-owned subsidiary, Preferred Equities
Corporation (PEC) established in 1970. PEC is engaged primarily in originating,
selling, servicing and financing consumer receivables generated through
timeshare and land sales. 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 services.
Unless the context requires otherwise, the "Company" refers to Mego Financial
and its consolidated subsidiaries.
In 1992, Mego Financial organized a subsidiary, Mego Mortgage Corporation
(MMC), which has been a specialized consumer finance company that originates,
purchases, sells, securitizes and services consumer loans consisting primarily
of conventional uninsured home improvement and debt consolidation 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 Notes 3 and 19 of Notes to Consolidated Financial Statements, "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) -- Discontinued Operations of MMC" and "Item 13. Certain
Relationships and Related Transactions." Since the Spin-off, PEC has represented
substantially all of Mego Financial's operations.
The Company was incorporated under the laws of the state of New York in
1954 under the name Mego Corp. and, in 1992, changed its name to Mego Financial
Corp. In January 1988, the Company sold a controlling interest in the Company
consisting of approximately 43% of the then outstanding common stock after the
sale, to affiliates of the Assignors (as hereinafter defined). See "Item 13.
Certain Relationships and Related Transactions" and Note 2 of Notes to
Consolidated Financial Statements. In February 1988, the Company acquired PEC,
pursuant to an assignment by the Assignors (Comay Corp., GRI, RRE Corp., and H&H
Financial Inc.) of their contract right to purchase PEC. The Company's executive
offices are located at 4310 Paradise Road, Las Vegas, Nevada, and its telephone
number is (702) 737-3700.
Recent Events
On March 27, 1998, the Company announced that it had entered into a
definitive merger agreement (the Merger Agreement) under which it was to be
acquired by Sycamore Partners, LLC (Sycamore). Sycamore was to be financed by
Blackacre Capital Group, L.P., a real estate investment fund. Under the terms of
the Merger Agreement, the Company's shareholders were to receive a minimum of
$5.71 per share up to an estimated maximum of $5.75 per share. After further
communication and negotiation, on September 9, 1998, the Company announced that,
as a result of breaches by Sycamore, it had terminated the Merger Agreement.
Subsequently, on October 12, 1998, the Company received the $300,000 Liquidated
Damages Payment called for in the Merger Agreement.
On October 6, 1998, the Company announced that it has retained Friedman,
Billings, Ramsey & Co., Inc. to review strategic alternatives available to the
Company, including potential offers, mergers and financing transactions.
PREFERRED EQUITIES CORPORATION
General
PEC acquires, develops and converts rental and condominium apartment
buildings and hotels for sale as timeshare interests and engages in the retail
sale of land. PEC's strategy is to acquire properties in desirable destination
resort areas that offer a range of recreational activities and amenities. As
part of its strategic plan, PEC has shifted its emphasis from sales of land to
sales of timeshare interests due both to its diminishing
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inventory of land available for sale in Nevada and its increasing inventory of
timeshare interests from the opening of new timeshare resorts. PEC markets and
sells timeshare interests in its resorts in Las Vegas and Reno, Nevada;
Honolulu, Hawaii; Brigantine, New Jersey; Steamboat Springs, Colorado; Indian
Shores and Orlando, Florida; and sells land in Nevada and Colorado. PEC owns
additional properties in Steamboat Springs, Colorado and Las Vegas, Nevada which
are in the permitting process for construction for sale as timeshare interests
and is considering the purchase of additional properties for use in its
timeshare operations. Also, PEC owns property in Biloxi, Mississippi which it is
considering for the possible construction of a future timeshare resort. In
recent years, several major lodging, hospitality and entertainment companies,
including The Walt Disney Company, Hilton Hotels Corporation, Marriott Ownership
Resorts, Inc. and Hyatt Corporation, among others, have commenced developing and
marketing timeshare interests in various resort properties. The Company believes
that the entry into the timeshare industry of certain of these large and well-
known lodging, hospitality and entertainment companies has contributed to the
growth and acceptance of the industry. To enhance its competitive position, in
April 1995, PEC entered into a strategic alliance with Ramada Franchise Systems,
Inc. (Ramada) and its parent, Hospitality Franchise Systems, Inc., now Cendant
Corporation (Cendant), pursuant to which PEC was granted a ten-year (including a
renewal option) exclusive license to operate both its existing and future
timeshare properties under the name "Ramada Vacation Suites." The American
Resort Development Association (ARDA) estimates that approximately 1.8 million
families in the United States own timeshare interests in resorts worldwide and
that sales of timeshare interests in the United States aggregated approximately
$2.18 billion in 1997. Additionally, it is estimated by ARDA that sales volume
is increasing at a compounded annual rate of almost 9% due to the entry of
brand-name hospitality firms, such as Ramada, and well-financed publicly held
companies with lower costs of capital and strong growth among seasoned timeshare
companies.
Timeshare Properties and Sales
PEC acquires, develops and converts rental and condominium apartment
buildings and hotels for sale as timeshare interests. PEC's strategy is to
acquire properties in desirable destination resort areas that offer a range of
recreational activities and amenities. The timeshare interests offered by PEC in
its resorts other than in Hawaii generally consist of undivided fee interests in
the land and facilities comprising the property or an undivided fee interest in
a particular unit, pursuant to which the owner acquires the perpetual right to
weekly occupancy of a residence unit each year. In its resort in Hawaii, PEC
offers "right-to-use" interests, pursuant to which the owner has occupancy
rights for one week each year until December 31, 2009, the last full year of the
underlying land lease for the resort property. During fiscal 1998, 1997 and
1996, PEC sold 7,293, 7,860 and 6,982 timeshare interests, respectively, at
prices ranging from $4,250 to $30,890.
The Company believes that PEC's alliance with Ramada has enabled it to
capitalize on the Ramada reputation, name recognition and customer profile,
which closely matches PEC's customer profile. The arrangement required PEC to
pay an initial access fee of $1 million and monthly recurring fees equal to 1%
of PEC's Gross Sales (as defined in the agreement) through January 1996 and 1.5%
of PEC's Gross Sales each month commencing after January 1996. The initial term
of the arrangement is 5 years and PEC has the option to renew the arrangement
for an additional term of 5 years if it has met certain conditions, including
the addition of at least 20,000 timeshare interests during the initial term,
which condition was satisfied, and the payment of minimum annual fees. In
addition to the grant of the license, the arrangement provides for the
establishment of joint marketing programs. The Company believes it has benefited
from the use of the Ramada name, but is unable to quantify the amount of such
benefit.
In May 1997, PEC began offering a new sales program whereby a customer pays
a fixed fee on an installment basis to use a timeshare interest during an
initial one-year period with an option to purchase the timeshare interest. If
the customer exercises the option to purchase the interest, the fixed fee is
applied toward the down payment of the timeshare interest purchased.
PEC currently operates timeshare resorts in Las Vegas and Reno, Nevada;
Honolulu, Hawaii; Brigantine, New Jersey; Steamboat Springs, Colorado; Orlando
and Indian Shores, Florida; and owns additional properties in Las Vegas, Nevada
and Steamboat Springs, Colorado which are in the permitting process for
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construction. PEC is considering the purchase of additional properties for use
in its timeshare operations and has recently acquired property in Biloxi,
Mississippi for possible construction of a timeshare resort.
PEC's Ramada Vacation Suites at Las Vegas includes 34 buildings with a
total of 471 studio units and 1 and 2 bedroom units which have been converted
for sale as 24,021 timeshare interests, of which 4,471 remained available for
sale as of August 31, 1998. The resort is in close proximity to "the Strip" in
Las Vegas and features swimming pools and other amenities. Nevada timesharing
attracts the upper end of the tourism market and Las Vegas is the most dynamic
region of the state for timeshare industry growth according to ARDA statistics.
PEC is in the process of converting additional adjacent properties it owns to
timesharing units. PEC has completed the expansion of the common areas to
include an expanded lobby, convenience store and expanded sales facilities. At
August 31, 1998, a total of 3 buildings containing 18 apartment units were under
conversion to 918 timeshare interests.
The Ramada Vacation Suites at Reno consists of a 95-unit hotel that has
been converted for sale as 4,845 timeshare interests, of which 944 remained
available for sale as of August 31, 1998. The resort features an indoor swimming
pool, exercise facilities, sauna, jacuzzi and sun deck.
PEC's Ramada Vacation Suites at Honolulu is an 80-unit hotel consisting of
3 buildings that have been converted for sale as 4,160 timeshare interests, of
which 456 remained available for sale as of August 31, 1998. The resort is
within walking distance of a public beach and features a swimming pool and
jacuzzi. PEC holds the buildings, equipment and furnishings under a land lease
expiring in March 2010, under which PEC makes annual rental payments of
approximately $192,000.
The Ramada Vacation Suites on Brigantine Beach consists of a 91-unit hotel
and a 17-unit three story building that have been either converted or
constructed for sale as 5,508 timeshare interests, of which 701 remained
available for sale as of August 31, 1998. The resort is situated on beach front
property in close proximity to Atlantic City, New Jersey and features an
enclosed swimming pool, cocktail lounge, bar and restaurant.
The Ramada Vacation Suites at Steamboat Springs consists of 60 one- and
two-bedroom units, which have been converted for sale as 3,060 timeshare
interests, of which 1,043 remained available for sale as of August 31, 1998. PEC
acquired this condominium resort in 1994 and completed the conversion in 1995.
PEC has constructed a 5,500-square foot amenities building at this facility
which features a lobby, front desk, spa and sauna.
The Ramada Vacation Suites at Indian Shores consists of a 2-building
complex, which has been converted into a total of 32 one- and two-bedroom units
to be sold as 1,632 timeshare interests, of which 587 timeshare interests
remained available for sale at August 31, 1998. The resort is located on the
intercoastal waterway and is in close proximity to St. Petersburg, Florida.
The Ramada Vacation Suites at Orlando consists of a 7-building complex,
five of which have been converted into 72 units for sale as 3,672 timeshare
interests. At August 31, 1998, 2,463 timeshare interests in the five buildings
remained available for sale. At August 31, 1998, 2 buildings containing 30 units
were under conversion to 1,530 timeshare interests. Florida is one of the
country's most significant timeshare markets, representing 23.6% of the total
number of resorts in the United States, and, according to ARDA, has experienced
unprecedented growth.
The Ramada Vacation Suites -- Hilltop is a 2-tower building complex
complete with indoor swimming pool, restaurant, cocktail lounge and meeting room
facilities. Upon completion of conversion, the complex will consist of 56 one-
and two-bedroom units to be sold as 2,856 timeshare interests. In March 1998, 14
units became available for sale as 714 timeshare interests of which 608
timeshare interests remained available for sale at August 31, 1998. At August
31, 1998, 1 building containing 42 units was under conversion to 2,142 timeshare
interests. The resort is located in Steamboat Springs, Colorado, in close
proximity to the area's ski slopes and attractions.
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The following table sets forth certain information regarding the timeshare
interests at the Company's resort properties:
<TABLE>
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STEAMBOAT INDIAN
LAS VEGAS RENO WAIKIKI BRIGANTINE SPRINGS SHORES ORLANDO HILLTOP TOTAL
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Maximum number of timeshare
interests....................... 24,021 4,845 4,160 5,508 3,060 1,632 3,672 714 47,612
Net number of timeshare interests
sold through August 31, 1998.... 19,550 3,901 3,704 4,807(1) 2,017 1,045 1,209 106 36,339
Number of timeshare interests
available for sale at August 31,
1998............................ 4,471 944 456 701 1,043 587 2,463 608 11,273
Percent sold through August 31,
1998............................ 81% 81% 89% 87% 66% 64% 33% 15% 76%
Number of timeshare interests sold
during the year ended August 31,
1998............................ 3,004 230 542 87 690 1,098 1,519 123 7,293
Number of timeshare interests
reacquired during the year ended
August 31, 1998 through:
Contract cancellations.......... 376 124 87 42 57 51 44 -- 781
Exchanges (2)................... 2,103 277 395 54 473 362 338 17 4,019
Acquired for unpaid maintenance
fees.......................... 99 44 72 34 7 -- -- -- 256
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Total number of timeshare
interests reacquired during the
year............................ 2,578 445 554 130 547 413 382 17 5,056
------- ------- ------ ------- ------- ------- ------- ------- ------
Net number of timeshare interests
sold (reacquired) during the
year ended August 31, 1998...... 426 (215) (12) (43) 153 685 1,137 106 2,237
Additional timeshare interests
under development (3)........... 918 -- -- -- -- -- 1,530 2,142 4,590
Sales prices of timeshare
interests available at August
31, 1998 range
From............................ $ 8,550 $ 6,650 $4,250 $ 5,550 $ 7,450 $ 8,550 $ 8,550 $ 7,390 N/A
To.............................. $21,690 $10,690 $6,450 $13,350 $25,690 $16,060 $10,690 $30,890 N/A
</TABLE>
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(1) 4,823 timeshare interests were sold by the prior developer.
(2) These exchanges are primarily related to customers exchanging and/or
upgrading their current property to generally higher quality and higher
priced units.
(3) PEC owns additional units under conversion or to be converted to timeshare
interests, and are not included above. In Las Vegas, Nevada, the addition of
18 units will be converted into 918 timeshare interests. In Steamboat
Springs, Colorado at Hilltop, the addition of 42 units will be converted
into 2,142 timeshare interests. In Orlando, Florida, the addition of 30
units will be converted into 1,530 timeshare interests.
For the fiscal years ended August 31, 1998, 1997 and 1996, PEC's
consolidated revenue from sales of timeshare interests was $37.7 million, $32.3
million and $27.8 million, respectively, representing approximately 55.0% 47.9%
and 45.8% of total revenues, respectively.
RCI Exchange Network
The attractiveness of timeshare interest ownership in resorts is enhanced
significantly by the availability of exchange networks allowing owners to
exchange their occupancy right in the resort in which they own an interest for
an occupancy right in another participating network resort. Several companies,
including Resorts Condominiums International (RCI), which became a wholly-owned
subsidiary of Cendant in 1997, provide broad-based timeshare interest exchange
networks and PEC has qualified its resort properties for participation in the
RCI network.
RCI has a total of more than 3,200 participating resort facilities located
worldwide. Approximately 49.8% of the participating facilities are located in
the United States and Canada. PEC and the Owners' Association (as defined later)
of each of PEC's timeshare resorts have entered into an agreement with RCI
pursuant to which purchasers of timeshare interests in PEC's resorts may apply
for membership in the RCI exchange network. Under the terms of these agreements,
RCI agrees to make its exchange program available to PEC's customers who apply
for membership. RCI and the Owners' Association agree to promote RCI's program
and to honor qualified exchanges by members from other participating resorts.
The initial five-year terms of the
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agreements are automatically renewable for additional five-year terms, unless
either party gives the other party at least 180 days written notice prior to the
expiration of the then current term. Either party may terminate the agreement
upon a breach of the agreement by the other party. Membership in RCI entitles
PEC's customers, based on availability, trading potential (which is based on
their timeshare interval), and the payment of a variable exchange fee to RCI, to
exchange their occupancy right in the resort in which they own an interest, for
an occupancy right at the same or a different time in another participating
resort of similar trading potential. The cost of the subscription fee for RCI,
which is at the option and expense of the timeshare interest owner, is
approximately $63 for the first year and $74 for each annual renewal.
Owners' Associations and Property Management
PEC's resort properties require ongoing management services. Independent
not-for-profit corporations known as Owners' Associations have been established
to administer each of PEC's resorts other than the resort in Honolulu. PEC's
resort in Honolulu is administered by the White Sands Resort Club, a division of
PEC (together with the Owners' Associations, collectively the Associations).
Owners of timeshare interests in each of these resorts are responsible for the
payment of annual assessment fees to the respective Association, which are
intended to fund all of the operating expenses at the resort facilities and
accumulate reserves for replacement of furnishings, fixtures and equipment, and
building maintenance. Annual assessment fees for 1998 ranged from $249 to $445.
PEC has in the past financed budget deficits of the Associations, but is not
obligated to do so in the future, except in its Florida resorts. The Public
Offering Statements for the Indian Shores and Orlando resorts contain a
provision whereby PEC guarantees that the annual assessment fees will not exceed
a specified amount, in which case PEC agrees to pay any monetary deficiencies.
These guarantees are effective through the Associations' calendar year of
December 31, 1999 and may be extended by PEC annually thereafter. In fiscal
1998, PEC financed a budget deficit of $65,000 for the Owners' Association at
Indian Shores. During fiscal 1998 and 1997, the Associations had an aggregate
excess of $1.2 million and $1.6 million, respectively, of fees received compared
to expenses paid. The deficit and/or excess position of the Associations vary
primarily due to the timing of major improvement expenditures. Any budget
deficits financed by PEC are expected to be recovered in the future by increased
assessments to the Associations.
If the owner of a timeshare interest defaults in the payments of the annual
assessment fee, the Association may impose a lien on the related timeshare
interest. PEC has agreed to pay to the Associations the annual assessment fees
of timeshare interest owners who are delinquent with respect to such fees, but
have paid PEC in full for their timeshare interest. In exchange for the payment
by PEC of such fees, the Associations assign their liens for non-payment on the
respective timeshare interests to PEC. In the event the timeshare interest
holder does not satisfy the lien after having an opportunity to do so, PEC
typically acquires a quitclaim deed or forecloses on and acquires the timeshare
interest for the amount of the lien and any related foreclosure costs.
PEC has entered into management arrangements with the Associations pursuant
to which PEC receives annual management and administrative fees in exchange for
providing or arranging for various property management services such as
bookkeeping, staffing, budgeting, maintenance and housekeeping services. During
fiscal 1998, 1997 and 1996, PEC received $2.4 million, $2.2 million and $2.1
million, respectively, of such fees from the Associations. The management
arrangements are typically for initial terms ranging from three to five years
and automatically renew for successive additional one-year terms unless canceled
by the Association. No management arrangement has been canceled to date. The
Company believes that proper management is important for maintaining customer
satisfaction and protecting PEC's investment in its inventory of unsold
timeshare interests.
PEC's intent and goal is to manage these properties until all timeshare
interests are sold and the receivables generated from such sales have been paid.
However, due to cancellations, exchanges and upgrades, none of the resorts are
likely to realize a 100% sellout for an extended period of time. The Company
believes that continued management of these properties preserves the integrity
of the property and the portfolio performance on an ongoing basis beyond the end
of the sales period.
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Land Sales
PEC is engaged in the retail sale of land in Nevada and Colorado for
residential, commercial, industrial and recreational use. PEC acquires lots and
large tracts of unimproved land and then subdivides the tracts into lots and
parcels for retail sale. Residential lots range in size from one-quarter acre to
one and one-half acres, while commercial and industrial lots vary in size. PEC's
residential lots generally range in price from $16,000 to $47,000 while
commercial and industrial lots generally range in price from $19,000 to $79,000.
Improvements such as roads and utilities and, in some instances, amenities are
typically part of the development program in Nevada. During fiscal 1998, 1997
and 1996, PEC sold 2,091, 1,459 and 1,610 residential lots, and 12, 50 and 38
commercial and industrial lots, respectively. PEC has a continuing program to
plat various properties that it owns. Purchasers of lots and parcels frequently
exchange their property after the initial purchase for other property interests
offered by PEC. Additionally, PEC is required from time to time to cancel the
purchase of lots and parcels as a result of payment defaults or customer
cancellations following inspections of the property pursuant to contractual
provisions.
To date, a substantial portion of PEC's sales of retail lots and land
parcels have been in its Calvada subdivisions, containing approximately 30,000
lots in the Pahrump Valley, in Nye County, Nevada, located approximately 60
miles west of Las Vegas. The lots are designated as single family residential,
multiple family residential, mobile home, hotel/motel, industrial or commercial.
PEC owns a utility company that provides water and sewer service to portions of
the subdivisions and two golf courses that are available to property owners and
the public. The community of Pahrump has a population of approximately 28,000
and contains an urgent care medical facility, shopping, churches, fast food
restaurants, hotel/casino facilities and several schools.
The following table illustrates certain statistics regarding the Pahrump
valley subdivisions:
<TABLE>
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Number of acres acquired since 1969......................... 18,777
Number of lots platted...................................... 29,849
Net number of lots sold through August 31, 1998............. 29,596
Percent of lots sold through August 31, 1998................ 99%
Number of platted lots available for sale at August 31,
1998...................................................... 253
Number of acres available for platting...................... 198
Number of lots to be platted................................ 568
FOR THE YEAR ENDED AUGUST 31, 1998:
Number of lots sold......................................... 1,424
Number of lots canceled..................................... (488)
Number of lots exchanged.................................... (692)
------
Number of lots sold, net of cancellations and exchanges..... 244
======
</TABLE>
Central Nevada Utilities Company (CNUC), a wholly-owned subsidiary of PEC,
operates a sewer and water utility for portions of PEC's Nevada subdivisions and
certain other properties located within that subsidiary's certificated service
area (which is subject to the regulation of the Public Utilities Commission of
Nevada). As of August 31, 1998, CNUC had 1,759 customers. In recent years,
connections have grown at an average annual rate of 17% and 14% for residential
water and sewer, respectively.
PEC also sells larger unimproved tracts of land in Colorado. PEC owns
unimproved land in Huerfano County, Colorado, which is being sold for
recreational use in parcels of at least 35 acres, at prices ranging from $15,995
to $22,995 depending on location and size. These parcels are sold without any
planned improvements and without water rights, which rights have been reserved
by PEC, except for an owner's right to drill a domestic well. Substantially all
of the parcels have been sold, with approximately 81 parcels remaining in
inventory.
In February 1998, PEC acquired a substantial tract of land in Park County,
Colorado near the town of Hartsel. This property is being sold as 2,137 separate
parcels with an average price and size of $23,581 and five acres, respectively.
This includes 333 parcels which are awaiting approval of a water augmentation
plan by the
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State of Colorado water court, less 172 parcels which will eventually be sold as
pairs. As of August 31, 1998, 1,524 parcels remained unsold (excluding those
awaiting water court approval).
PEC previously acquired improved and unimproved land in Park County,
Colorado, known as South Park Ranch, which is being sold for recreational use as
1,872 separate parcels typically ranging in size from 5 to 9 acres or larger and
at a price of $16,995. As of August 31, 1998, 1,746 parcels had been sold with
126 parcels remaining in inventory. These parcels are sold without any planned
improvements, except for a recreational facility which includes a basketball
court, baseball field and picnic facilities.
The following table illustrates certain statistics regarding the parcels
and lots in Huerfano and Park Counties, Colorado:
<TABLE>
<S> <C>
Number of acres acquired since 1969......................... 60,782
Number of parcels and lots platted.......................... 4,831
Net number of parcels and lots sold through August 31,
1998...................................................... 3,100
Percent of parcels and lots sold through August 31, 1998.... 64%
Number of platted parcels and lots available for sale at
August 31, 1998........................................... 1,731
FOR THE YEAR ENDED AUGUST 31, 1998:
Number of parcels and lots sold............................. 679
Number of parcels and lots canceled......................... (199)
Number of parcels and lots exchanged........................ (182)
------
Number of parcels and lots sold, net of cancellations and
exchanges................................................. 298
======
</TABLE>
For the fiscal years ended August 31, 1998, 1997 and 1996, respectively,
PEC's net revenue from land sales was approximately $13.8 million, $16.6 million
and $18 million, representing approximately 20.1%, 24.7% and 29.6% of total
revenues.
Trust Arrangements
Title to certain of PEC's resort properties and land parcels in Huerfano
County, Colorado is held in trust by trustees to meet regulatory requirements
which were applicable at the time of the commencement of sales. In connection
with sales of timeshare interests pursuant to "right-to-use" or installment
sales contracts, title to certain of PEC's resort properties in the states of
Nevada and Hawaii are held in trust by trustees to meet requirements of certain
state regulatory authorities. Prior to 1988, PEC sold timeshare interests in
certain of its resorts in the state of Nevada pursuant to "right-to-use"
contracts and continues in other resorts to sell under installment sales
contracts under which the purchaser does not receive a deed until the purchase
price is paid in full. In addition, PEC offers "right-to-use" interests in its
resort in Hawaii, since it is on leased property. In connection with the
registration of the sale of such "right to use" timeshare interests, the
Department of Real Estate of the state of Nevada and the Department of Commerce
and Consumer Affairs of the state of Hawaii require that title to the related
resorts be placed in trust.
Customer Financing
PEC provides financing to virtually all the purchasers of its timeshare
interests, retail lots and land parcels who make a down payment equal to at
least 10% of the purchase price. The financing is generally evidenced by
non-recourse installment sale contracts as well as notes secured by deeds of
trust. Currently, the term of the financing generally ranges from two to twelve
years, with principal and interest payable in equal monthly payments. Interest
rates are fixed and generally range from 12.5% to 15.5% per year based on
prevailing market rates and the amount of the down payment made relative to the
sales price. PEC has a sales program whereby a 5% interest rate is charged on
those sales where the aggregate down payment is at least 50% of the purchase
price and the balance is payable in 36 or fewer monthly payments. PEC believes
its financing is attractive to purchasers who find it convenient to handle all
facets of the purchase through a single source. At August 31, 1998, PEC serviced
a customer receivables portfolio of 16,704 notes receivable relating to sales of
timeshare interests and land, which receivables had an aggregate outstanding
principal balance of $117.2 million, a weighted-average maturity of
approximately 6.7 years and a weighted-average interest rate of 11.9%.
7
<PAGE> 10
PEC has 6 financing arrangements with 5 institutional lenders for the
financing of customer receivables, which provide for borrowings of up to an
aggregate of $137.5 million. These lines of credit bear interest at variable
rates tied to the prime rate and 90 day London Interbank Offering Rate (LIBOR)
and are secured by timeshare and land receivables and inventory. At August 31,
1998, an aggregate of $77.4 million was outstanding under such lines of credit
and $60.1 million was available for borrowing. PEC periodically sells its
timeshare and land receivables to various third party purchasers and uses a
portion of the sales proceeds to reduce the outstanding balances of its lines of
credit, thereby increasing the borrowing availability under such lines by the
amount of prepayment. The sales have generally resulted in yields to the
purchaser less than the weighted-average yield on the receivables, with PEC
entitled to retain the difference, the estimated value of which is carried as
interest only receivables. The sales agreements generally provide for PEC to
continue servicing the sold receivables, and require that PEC repurchase or
replace accounts that have become more than 90 days contractually delinquent, or
as to which certain warranties and representations are determined to be
incorrect. In addition, the sales agreements generally require the maintenance
of cash reserve accounts for losses and contain minimum net worth requirements
and other covenants, the non-compliance with which would allow the purchaser to
replace PEC as the servicer. The sales agreements for timeshare receivables
contain certain covenants that generally require PEC to use its best efforts to
remain the manager of the related resorts and to cause the Associations to
maintain appropriate insurance and pay the real estate taxes. Performance by PEC
of such covenants generally is guaranteed by the Company. The principal balances
of receivables sold by PEC were $9.4 million, $30.1 million and $16 million
during fiscal 1998, 1997 and 1996, respectively.
At August 31, 1998, PEC was contingently liable to replace or repurchase
receivables sold with recourse in the aggregate amount of $66.8 million, if and
as such receivables become delinquent. Delinquencies greater than 60 days have
increased in fiscal 1998 from fiscal 1997 primarily due to a change in emphasis
in the Collection Department. The Preferred Client Services (PCS) group was
instituted to work with the portfolio and develop better relationships with
customers, thus reducing otherwise potential cancellations. There is a much
greater focus on working with the purchasers and their individual problems
rather than merely demanding repayment of debt. These procedures primarily
contributed to a decrease in cancellations to $15.3 million during fiscal 1998
from $20.3 million in fiscal 1997, a 24.8% decrease. PEC charges off or fully
reserves all receivables that are more than 90 days delinquent. The following
table sets forth information with respect to receivables owned and sold that
were 60 or more days delinquent, excluding accounts that have been fully
reserved or charged-off, as of the dates indicated (thousands of dollars):
<TABLE>
<CAPTION>
AUGUST 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
60-day delinquent.............. $ 11,836 $ 5,233 $ 6,685 $ 5,407 $ 5,330
Total receivables.............. $136,509 $137,688 $132,438 $123,752 $112,688
60-day delinquency
percentage................... 8.67% 3.80% 5.05% 4.37% 4.73%
</TABLE>
The 60-day delinquent amounts include any account that is contractually 60
days delinquent, including those accounts whereby customers are still making
payments but have not cured their delinquency status.
PEC provides an allowance for cancellations at the time it recognizes
revenues from sales of timeshare interests, which PEC believes, based on its
experience and its analysis of economic conditions, is adequate to absorb losses
on receivables that become uncollectible. Upon the sale of the receivables, the
allowance related to those receivables is reduced and the reserve for notes
receivable sold with recourse is appropriately increased.
Marketing
PEC markets timeshare interests and land through on-site and off-site sales
offices. PEC's sales staff receives commissions based on net sales volume. PEC
maintains fully-staffed on-site sales offices at its timeshare properties in Las
Vegas and Reno, Nevada; Steamboat Springs, Colorado; Indian Shores and Orlando,
Florida; and, Brigantine, New Jersey; as well as the Las Vegas headquarters, and
at its land projects in Nevada and Colorado. In Hawaii, brokers for PEC maintain
a smaller on-site sales office staffed with one to
8
<PAGE> 11
two sales associates. PEC also maintains off-site sales offices in West Covina,
California, Dallas, Texas and Denver, Colorado and plans to open an office in
Houston, Texas. PEC's marketing efforts are targeted primarily at tourists
meeting its customer profile. Currently, approximately 37.1% of sales are made
through the Las Vegas sales office. One of the principal sales techniques
utilized by PEC in Las Vegas is to offer pre-screened potential customers a gift
such as show tickets in exchange for attending PEC's sales presentations. In
addition, to show tickets, other inducements such as local tour packages,
dinners, and short-term room accommodations are also offered. The marketing
techniques utilized at PEC's sales offices at locations other than Las Vegas
include (i) exhibition booths located at shows, fairs and other attractions,
that generate inquiries from prospective customers, whom PEC then contacts by
telephone, (ii) referrals from existing customers, (iii) limited direct mail
programs, and (iv) brokers specializing in lead generation. Various premiums and
inducements are offered to prospective customers to obtain their attendance at
sales presentations, including the offer of short-term accommodations at certain
of PEC's timeshare resorts.
As part of its marketing strategy, PEC maintains an internal exchange
program. This program enables owners of PEC's timeshare interests to exchange
their occupancy right in the resort in which they own an interest for an
occupancy right at the same or a different time in another of PEC's timeshare
resorts. In addition, PEC has a sales program pursuant to which purchasers of
its timeshare interests, retail lots and land may exchange their equity
interests in one property for an interest in another of PEC's properties. For
example, a purchaser of a timeshare interest in one of PEC's timeshare resorts
may exchange his equity interest for an interest in a different unit within the
same resort, for an interest in one of PEC's other resorts or for a retail lot
or land parcel.
The agreement of sale for a timeshare interest or land may be rescinded
within various statutory rescission periods. For land sales made at a location
other than the property, the customer may generally cancel the contract within a
specified period, usually five months from the date of purchase, provided that
the contract is not in default, and provided the customer has completed a
developer-guided inspection and tour of the subject property first, and then
requests the cancellation. At August 31, 1998, $730,000 of recognized sales
remained subject to such cancellation. If a customer defaults after all
rescission and cancellation periods have expired, all payments are generally
retained by PEC, and the customer forfeits all rights to the property.
SEASONALITY
Sales of timeshare interests and land are somewhat seasonal. For the fiscal
years ended August 31, 1998, 1997 and 1996, quarterly sales as a percentage of
annual sales, for each of the fiscal quarters averaged:
<TABLE>
<CAPTION>
QUARTER ENDED % OF ANNUAL SALES
------------- -----------------
<S> <C>
November 30................................................. 23.7
February 28................................................. 24.0
May 31...................................................... 26.6
August 31................................................... 25.7
-----
100.0%
=====
</TABLE>
The majority of the Company's customers are tourists. The Company's major
marketing area, Las Vegas, Nevada, reaches peaks of tourist activity at periods
different from the Company's other major marketing areas, such as Reno, Nevada
and Denver, Park and Huerfano Counties, Colorado, which are more active in
summer than in winter. The Company's other major marketing areas, Honolulu,
Hawaii, and Orlando, Florida, are not subject to seasonality. The Company is not
dependent upon a limited number or segment of customers whose loss would have a
material adverse effect on the Company.
COMPETITION
The timeshare and real estate industries are highly competitive.
Competitors in the timeshare and real estate business include hotels, other
timeshare properties and real estate properties. Certain of the Company's
competitors are substantially larger and have more capital and other resources
than the Company.
9
<PAGE> 12
PEC's timeshare plans compete directly with many other timeshare plans,
some of which are in facilities located in Las Vegas, Reno, Lake Tahoe,
Honolulu, Atlantic City, Orlando, Tampa, and Steamboat Springs. In recent years,
several major lodging, hospitality and entertainment companies have begun to
develop and market timeshare properties. According to ARDA data, in 1997,
approximately 31.5% of timeshare resorts were located in the Mountain/Pacific
region of the United States, 23.6% in Florida, 12% in the Northeast region,
16.5% in the Southeast region and 16.4% in the Central region of the United
States. In addition, PEC competes with condominium projects and with traditional
hotel accommodations in these areas. Certain of these competing projects and
accommodations are larger and more luxurious than PEC's facilities. There are
currently available approximately 108,000 hotel and motel rooms in Las Vegas,
Nevada; 37,000 in Honolulu, Hawaii; 22,000 in Washoe County, Nevada, which
includes Reno and Lake Tahoe; 98,000 in the Orlando, Florida metropolitan area;
24,000 in the Indian Shores, Florida area; 23,000 in Atlantic City, New Jersey
and 3,000 in Steamboat Springs, Colorado.
GOVERNMENT REGULATION
The Company's timeshare and real estate operations are subject to extensive
regulation, potential suspension and licensing requirements by federal and state
authorities. The following is a summary of the regulations applicable to the
Company.
Environmental Regulation
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or chemical
releases at such property, and may be held liable to a governmental entity or to
third parties for property damage, personal injury and investigation and cleanup
costs incurred by such parties in connection with the contamination. Such laws
typically impose cleanup responsibility and liability without regard to whether
the owner knew of or caused the presence of the contaminants, and the liability
under such laws has been interpreted to be joint and several unless the harm is
divisible and there is a reasonable basis for allocation of responsibility. The
costs of investigation, remediation or removal of such substances may be
substantial, and the presence of such substances, or the failure to properly
remediate such property, may adversely affect the owner's ability to sell or
rent such property or to borrow using such property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances also may
be liable for the costs of removal or remediation of such substances at the
disposal or treatment facility, whether or not the facility is owned or operated
by such person. In addition, the owner or former owners of a site may be subject
to common law claims by third parties based on damages and costs resulting from
environmental contamination emanating from a site.
Timeshare Regulation
Nevada Revised Statutes Chapter 119A requires the Company to give each
customer a Public Offering Statement that discloses all aspects of the timeshare
program, including the terms and conditions of sale, the common facilities, the
costs to operate and maintain common facilities, the Company's history and all
services and facilities available to the purchasers. Section 514E of the Hawaii
Revised Statutes provides for similar information to be provided to all
prospective purchasers through the use of the Hawaii Disclosure Statement, just
as Chapter 721 of the Florida Statutes similarly provides through the use of a
Public Offering Statement. Section 11000, et seq., of the California Business
and Professions Code also provides for similar information to be provided to all
prospective purchasers through the use of an Out-of-state Timeshare Permit
issued by the California Department of Real Estate. Section 45 of the New Jersey
Statutes Annotated provides for similar information to be provided to all
prospective purchasers through the use of a Public Offering Statement. The Texas
Register at 22 Texas Administrative Code, Section 543 provides for similar
information to be provided to all prospective purchasers through the use of the
Texas Timeshare Disclosure Statement, and similarly, the Mississippi Real Estate
Commission requires that the situs state Public Offering Statement provides
prospective purchasers with the same information. Title 12, Article 61 of the
Colorado Revised Statutes provides for similar information to be provided to all
prospective purchasers in their contracts of sales or by
10
<PAGE> 13
separate written documents. Nevada and Colorado require a five-day rescission
period for all timeshare purchasers. The rescission period required by Hawaii
and New Jersey is seven days. The rescission period required by Florida is ten
days. The rescission period in California, Mississippi and Texas for
out-of-state sales is five days. The Nevada, California, New Jersey, Hawaii,
Colorado, Texas, Florida, Mississippi and Texas timeshare statutes have
stringent restrictions on sales and advertising practices and require the
Company to utilize licensed sales personnel.
Lending Regulation
PEC is subject to various federal lending regulations related to marketing,
financing and selling consumer receivables. These federal regulations include:
Fair Housing Act, Americans With Disabilities Act, Interstate Land Sales Full
Disclosure Act, Truth-In-Lending Act, Real Estate Settlement Procedures Act,
Equal Credit Opportunity Act, Federal Trade Commission Telemarketing Rule,
Federal Communications Commission Telephone Census Protection Act, Federal Trade
Commission Act (Unfair or Deceptive Act or Practices) and Fair Debt Collections
Practices Act.
The Company believes that it has made all required filings with state, city
and county authorities and is in material compliance with all federal, state and
local regulations governing timeshare interests. The Company believes that such
regulations have not had a material adverse effect on any phase of the Company's
operations, including the overall cost of acquiring property. Compliance with or
changes in official interpretations of regulations might, however, impose
additional compliance costs on the Company that cannot be predicted.
Real Estate Regulation
The real estate industry is subject to extensive regulation. The Company is
subject to compliance with various federal, state and local environmental,
zoning and other statutes and regulations regarding the acquisition,
subdivision, development and sale of real estate and various aspects of its
financing operations. The Interstate Land Sales Full Disclosure Act establishes
strict guidelines with respect to the subdivision and sale of land in interstate
commerce. The U.S. Department of Housing and Urban Development (HUD) has
enforcement powers with respect to this statute. In some instances (e.g., land
sales in Huerfano County, Colorado), the Company has been exempt from HUD
registration requirements because of the size or number of the subdivided
parcels and the limited nature or type of its offerings. The Company registers
its timeshare properties with various state agencies. The Company must disclose
financial information concerning the property, evidence of title, a description
of the intended manner of offering, proposed advertising materials, and must
bear the costs of such registration, which include legal and filing fees.
The Company believes that it is in compliance, in all material respects,
with all applicable federal, state and local regulations. The Company believes
that such regulations have not had a material adverse effect on any phase of its
operations. Compliance with future changes in regulations might, however, impose
additional compliance costs on the Company that cannot be predicted.
The city and county governments in areas where the Company operates have
enacted licensing and other ordinances that affect timeshare projects.
Advertising Regulation
In addition to requirements imposed by the various state timeshare acts,
PEC's marketing and advertising procedures are subject to the Federal Trade
Commission Act (Unfair and Deceptive Practices), Federal Trade Commission
Telemarketing Rules, Federal Communication Commission Telephone Consumer
Protection Act, Fair Housing Act, Equal Credit Opportunity Act and various state
consumer protection laws regulating telephone solicitations, the sale of travel,
and sweepstakes, both in states in which PEC timeshare resorts are located or
registered and in states in which it advertises.
11
<PAGE> 14
EMPLOYEES
As of August 31, 1998, PEC had 1,292 employees, of whom 1,191 were
full-time employees and 101 were part-time employees. Full-time employees were
comprised of the following: 655 sales and marketing officers and personnel, 174
general and administrative officers, managers and support staff, 349 hotel
personnel, and 13 utility company personnel. None of PEC's employees are
represented by a collective bargaining unit. The Company believes that its
relations with its employees are satisfactory.
ITEM 2. PROPERTIES
At August 31, 1998, the Company had 253 residential, commercial and
industrial lots, 1,731 recreational land parcels, 1,248 recreational vehicle
intervals, and 11,273 timeshare interests in its inventory. In addition, the
Company maintains the following properties:
The Company's principal executive offices are located at 4310 Paradise
Road, Las Vegas, Nevada 89109, where it occupies approximately 31,000 square
feet of office space in a building it owns. Title to the property is held by the
Company.
The Company owns a second office building located in Las Vegas, Nevada.
This building has approximately 67,500 square feet of office space, of which the
Company occupies approximately 49,800 square feet. The remaining approximately
17,700 square feet is leased to tenants on a short-term basis.
The Company leases an executive office at 1125 N. E. 125th Street in North
Miami, Florida, comprising approximately 3,200 square feet, at a rental of
$2,400 per month. The lease has been extended to December 1998.
The Company leases various other facilities on a short-term or
month-to-month basis for off-site sales offices in various cities throughout the
United States.
ITEM 3. LEGAL PROCEEDINGS
Following the Company's November 10, 1995 announcement disclosing certain
accounting adjustments, an action was filed on November 13, 1995, in the United
States District Court, District of Nevada (Court) by Christopher Dunleavy, as a
purported class action against the Company, certain of the Company's officers
and directors and the Company's independent auditors. The complaint alleged,
among other things, that the defendants violated Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder in connection with the
preparation and issuance of certain of the Company's financial reports issued in
1994 and 1995, including certain financial statements reported on by the
Company's independent auditors. The complaint also alleged that one of the
director defendants violated the federal securities laws by engaging in "insider
trading." The named plaintiff sought to represent a class consisting of
purchasers of Mego Financial's common stock between January 14, 1994 and
November 9, 1995, and sought damages in an unspecified amount, costs, attorney's
fees and such other relief as the court may deem just and proper.
On November 16, 1995, a second action was filed in the Court by Alan Peyser
as a purported class action against the Company and certain of its officers and
directors, which was served on the Company on December 20, 1995. The complaint
alleged, among other things, that the defendants violated the federal securities
laws by making statements and issuing certain financial reports in 1994 and 1995
that overstated the Company's earnings and business prospects. The named
plaintiff sought to represent a class consisting of purchasers of Mego
Financial's common stock between November 28, 1994 and November 9, 1995. The
complaint sought damages in an unspecified amount, cost, attorney's fees and
such other relief as the Court may deem just and proper.
On or about June 10, 1996, the Dunleavy and Peyser Actions were
consolidated under the caption "In re Mego Financial Corp. Securities
Litigation," Master File No. CV-9-95-01082-LD (RLJ), pursuant to a stipulation
by the parties.
On December 26, 1996, a third action was filed in the Court by Michael
Nadler as a purported class action. The Nadler complaint asserts claims
substantially similar to those in the Dunleavy and Peyser Actions.
12
<PAGE> 15
On April 23, 1998, counsel for the plaintiffs in the Dunleavy and Peyser
actions, and counsel for the defendants filed in the Court a Stipulation and
Agreement of Settlement (the Settlement Agreement) in accordance with a prior
Memorandum of Understanding dated May 12, 1997. The Settlement Agreement, which
was subject to a number of conditions, including approval by the Court, calls
for certification, for settlement purposes only, of a class consisting of all
purchasers of Mego Financial stock (excluding the defendants and their
respective directors, executive officers, partners and affiliates and their
respective immediate families, heirs, successors and assigns) during the period
from January 14, 1994 through November 9, 1995, inclusive, for creation of a
settlement fund of $1.725 million to be distributed to the class, for the
dismissal of all claims asserted in the actions with prejudice and for certain
releases to defendants. The portion of the settlement amount which has been
contributed by the Company, net of directors and officers insurance proceeds,
with contribution by another defendant, has not had a material adverse effect on
the Company. On October 19, 1998, the Court issued a Final Judgment and Order of
Dismissal with Prejudice, approving the Settlement Agreement, which will not
become final until the Effective Date, which is the date following either the
expiration of any appeal period without appeal, the date following the
affirmation of the Final Judgment on appeal, and on which such Final Judgment is
no longer subject to further judicial review. On November 13, 1998, Michael
Nadler, who had filed objections to the settlement, filed a Notice of Appeal
from the Final Judgment and Order of Dismissal with Prejudice and certain other
orders of the Court. In the event, for any reason, the Final Judgment is
vacated, the Company believes that it has substantial defenses to all of the
complaints that have been filed against it described above. However, the Company
presently cannot predict the outcome of this matter.
On February 23, 1998, an action was filed in the United States District
Court for the Northern District of Georgia, Civil Action No.1:98CV0593-CAM, by
Robert J. Feeney, plaintiff, as a purported class action against MMC and Jeffrey
S. Moore, the former President and Chief Executive Officer of MMC. The complaint
alleges, among other things, that the defendants violated the federal securities
laws in connection with the preparation and issuance of certain of MMC's
financial statements. The named plaintiff seeks to represent a class consisting
of purchasers of the common stock of MMC between April 11, 1997 and December 18,
1997, and seeks such other relief as the Court may deem just and proper. An
amended complaint was filed in such matter on or about June 29, 1998, which
amended complaint, among other things, adds Mego Financial as a defendant, adds
John Cole, Trent Hildebrand, Burt W. Price and Frank J. Murphy as Plaintiffs and
alleges an expansion of the purported class to certain purchasers of MMC's
common stock from April 11, 1997 through May 20, 1998. However, the Company was
not the parent company of MMC at the time when the majority of the matters which
are cited in the above-described action occurred. Motions to dismiss the
complaint have been filed by the defendants. The Company does not believe that
any judgment obtained will have a material adverse effect on the Company's or
PEC's business or financial condition.
On August 27, 1998, an action was filed in the United States District
Court, County of Clark, State of Nevada, No. A392585, by Robert and Jocelyne
Henry, husband and wife individually and on behalf of all others similarly
situated. The plaintiffs have filed a complaint for class action relief claiming
the Company is guilty of: breach of contract; unjust enrichment; customer fraud;
and bait and switch tactics as a result of a solicitation of betterment fees
pursuant to a letter sent to certain lot owners on January 26, 1995 (Letter).
The Letter was sent to approximately 1,400 lot owners stating that their lots
would be buildable by April 1, 1995 as a result of sewer and water lines being
run near their respective lots. The Letter offered to accept a betterment fee
payment in the amount of $2,380 per lot prior to an anticipated increase. The
Plaintiffs paid the fee and claimed they did not have a buildable lot as sewer
and water lines that were run did not reach their property. The Company does not
believe a determination in favor of the Plaintiffs will result in a material
judgment against the Company. Only approximately 350 customers accepted the
offer presented in the Letter and a number of those customers own lots that are
buildable. The Company is reviewing the various claims with counsel.
In the general course of business the Company, at various times, has been
named in other lawsuits. The Company believes that it has meritorious defenses
to these lawsuits and that resolution of these matters will not have a material
adverse affect on the business or financial condition of the Company.
13
<PAGE> 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended August 31, 1998. However, on
September 16, 1998, the Company held its annual meeting of shareholders at which
the 6 incumbent Directors were re-elected, and the approval of the Company's
Amended and Restated Stock Option Plan was approved by the Company's
Shareholders.
14
<PAGE> 17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS
MARKET INFORMATION
The Company's common stock is traded in the over-the-counter market and
since April 1, 1994, prices have been quoted on the Nasdaq National Market under
the symbol MEGO. Prior to April 1, 1994, the common stock was quoted on the
Nasdaq Small Cap Market under the symbol MEGO and, prior to May 1, 1994, was
traded on the Boston Stock Exchange under the symbol MGO. The following table
sets forth the high and low sales prices of the common stock as reported on the
Nasdaq National Market for the periods presented:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR 1997:
First Quarter............................................... 10 5 5/8
Second Quarter.............................................. 9 1/4 7 1/4
Third Quarter............................................... 8 1/8 5 1/2
Fourth Quarter.............................................. 9 1/4 6 3/8
FISCAL YEAR 1998:
First Quarter(1)............................................ 8 3/16 2 3/4
Second Quarter.............................................. 5 1/4 3 1/4
Third Quarter............................................... 5 5/8 3 13/16
Fourth Quarter.............................................. 3 13/16 1 15/16
FISCAL YEAR 1999:
First Quarter (through November 9, 1998).................... 2 1/4 11/16
</TABLE>
- ---------------
(1) On September 2, 1997, the Company distributed all of its 10 million shares
of MMC's common stock to the Company's shareholders in the Spin-off. The
Company believes the decline in the closing price of the common stock on
September 3, 1997 to $3 1/8 per share from the closing price on September 2,
1997 of $8 per share is directly attributable to the Spin-off.
As of November 9, 1998, there were 1,919 holders of record of the
21,009,506 outstanding shares of common stock. The closing sales price for the
common stock on November 9, 1998 was $1.13. See "Item 1. Business -- General,"
"Item 7. MD&A -- Discontinued Operations of MMC" and Note 3 of Notes to
Consolidated Financial Statements.
The Company did not pay any cash dividends on its common stock during the
fiscal years ended August 31, 1998 and 1997. The Company intends to retain
future earnings for the operation and expansion of its business and does not
currently anticipate paying cash dividends on its common stock. Any future
determination as to the payment of such cash dividends would depend on a number
of factors including future earnings, results of operations, capital
requirements, the Company's financial condition and any restrictions under
credit agreements existing from time to time, as well as such other factors as
the Board of Directors might deem relevant. No assurance can be given that the
Company will pay any dividends in the future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data set forth below have been derived from the
consolidated financial statements of the Company and its subsidiaries. The
consolidated financial statements as of August 31, 1998 and 1997 and for each of
the three years in the period ended August 31, 1998 have been audited by
Deloitte & Touche LLP, independent auditors, and are included elsewhere herein.
The consolidated financial statements as of August 31, 1996, 1995 and 1994 and
for the years ended August 31, 1995 and 1994 have been audited by Deloitte &
Touche LLP, independent auditors, and are not included herein.
15
<PAGE> 18
Certain reclassifications have been made to conform prior years with the
current year presentation. As a result of the Spin-off, all fiscal years
presented reflect the financial results of MMC as a discontinued operation as of
September 1, 1993. See "Item 1. Business -- General," "Item 7.
MD&A -- Discontinued Operations of MMC" and Note 3 of Notes to Consolidated
Financial Statements for additional information regarding the Spin-off. The
selected financial information set forth below should be read in conjunction
with the consolidated financial statements, the related notes thereto and "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein (thousands of dollars, except per share
amounts):
CONSOLIDATED SELECTED FINANCIAL DATA(1)(2)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994(3)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS' DATA:
REVENUES OF CONTINUING OPERATIONS:
Timeshare interest sales, net............. $ 37,713 $ 32,253 $ 27,778 $ 20,682 $ 19,521
Land sales, net........................... 13,812 16,626 17,968 20,812 13,534
Gain on sale of notes receivable.......... 656 2,013 1,116 1,586 875
Interest income........................... 7,161 7,168 6,594 7,238 8,089
Financial income.......................... 3,304 2,922 1,253 508 30
Other(4).................................. 5,944 6,514 5,943 6,687 5,969
----------- ----------- ----------- ----------- -----------
Total revenues of continuing
operations..................... 68,590 67,496 60,652 57,513 48,018
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES OF CONTINUING
OPERATIONS:
Cost of sales(5).......................... 11,789 10,477 8,099 7,749 6,992
Marketing and sales....................... 34,167 34,078 30,351 23,690 18,949
Depreciation.............................. 2,245 1,964 1,526 1,131 1,072
Interest expense.......................... 7,850 8,458 7,314 6,306 4,707
General and administrative................ 17,736 17,175 15,849 12,909 11,274
Payments to assignors..................... -- -- -- 7,252 8,526
----------- ----------- ----------- ----------- -----------
Total costs and expenses of
continuing operations.......... 73,787 72,152 63,139 59,037 51,520
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES..................... (5,197) (4,656) (2,487) (1,524) (3,502)
Income taxes (benefit).................... (1,968) (12,662) (1,068) 1,016 761
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS.............................. (3,229) 8,006 (1,419) (2,540) (4,263)
Income (loss) from discontinued
operations, net of income taxes and
minority interest(6).................... -- 11,334 6,270 3,434 (1,511)
Gain on prior discontinued operations, net
of income taxes of $450(7).............. -- -- -- 873 --
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS)......................... (3,229) 19,340 4,851 1,767 (5,774)
Cumulative preferred stock dividends(8)... -- -- 240 360 360
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) APPLICABLE TO COMMON
STOCK................................... $ (3,229) $ 19,340 $ 4,611 $ 1,407 $ (6,134)
=========== =========== =========== =========== ===========
PER SHARE DATA(9):
BASIC:
Income (loss) from continuing
operations.............................. $ (0.15) $ 0.43 $ (0.08) $ (0.14) $ (0.24)
Income (loss) from discontinued
operations.............................. -- 0.61 0.34 0.19 (0.08)
Gain on prior discontinued operations..... -- -- -- 0.05 --
Cumulative preferred stock dividends...... -- -- (0.01) (0.02) (0.02)
----------- ----------- ----------- ----------- -----------
Net income (loss) applicable to common
stock................................... $ (0.15) $ 1.04 $ 0.25 $ 0.08 $ (0.34)
=========== =========== =========== =========== ===========
Weighted-average number of common
shares.................................. 21,009,506 18,657,224 18,117,122 18,087,121 17,802,012
=========== =========== =========== =========== ===========
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994(3)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
DILUTED (10):
Income (loss) from continuing
operations.............................. $ (0.15) $ 0.41 $ (0.08) $ (0.14) $ (0.24)
Income from discontinued operations....... -- 0.58 0.33 0.19 (0.08)
Gain on prior discontinued operations..... -- -- -- 0.05 --
Cumulative preferred stock dividend....... -- -- (0.01) (0.02) (0.02)
----------- ----------- ----------- ----------- -----------
Net income applicable to common stock..... $ (0.15) $ 0.99 $ 0.24 $ 0.08 $ (0.34)
=========== =========== =========== =========== ===========
Weighted-average number of common shares
and common share equivalents
outstanding............................. 21,009,506 19,528,470 19,114,888 18,646,616 17,802,012
=========== =========== =========== =========== ===========
BALANCE SHEET DATA:
Total assets.............................. $ 142,076 $ 178,303 $ 145,505 $ 107,910 $ 87,319
Net assets of discontinued operations..... -- 53,276 30,514 19,234 4,139
Total liabilities excluding subordinated
debt.................................... 117,049 100,745 109,963 76,328 67,796
Subordinated debt(11)..................... 4,348 4,321 9,691 9,352 --
Redeemable preferred stock................ -- -- -- 3,000 3,000
Total stockholders' equity................ 20,679 73,237 25,851 19,230 16,523
</TABLE>
- ---------------
(1) 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 operations of MMC have been reclassified as discontinued operations and
prior years' Consolidated Financial Statements of the Company included
herein reflect the reclassification accordingly. See "Item 1.
Business -- General," "Item 7. MD&A -- Discontinued Operations of MMC" and
Note 3 of Notes to Consolidated Financial Statements.
(2) The statements of operations' data, per share data and balance sheet data
herein for the five fiscal years are not necessarily indicative of the
results to be expected in the future. Certain reclassifications have been
made to conform prior years with the current presentation.
(3) The Company has restated certain of its previously issued financial
statements including for the year ended August 31, 1994, upon which its
independent auditors had rendered unqualified opinions. The financial data
presented herein gives effect to those restatements.
(4) Other revenues include incidental operations, management fees from owners'
associations, and amortization of negative goodwill.
(5) Direct cost of sales includes costs of sales of timeshare interests, land
and incidental operations.
(6) Income from discontinued operations, net of taxes and minority interest,
includes the net income from MMC, after tax, reduced by the related
minority interests and certain general and administrative expense related
to the discontinued operations.
(7) A gain on discontinued operations of $873,000 after deducting $450,000 of
tax was recognized in fiscal 1995.
(8) See Note 15 of Notes to Consolidated Financial Statements.
(9) No cash dividends per common share were declared during the fiscal years
included herein.
(10) The incremental shares from assumed conversions are not included in
computing the diluted per share amounts for the years ended August 31, 1998
and 1994 because the Company incurred a net loss and the effect would be
anti-dilutive.
(11) In payment of the exercise price of $4,250,000 of warrants exercised for
1,000,000 shares of the Company's common stock by the Assignors, the
subordinated debt due to the Assignors was reduced by that amount in August
1997. See Note 14 of Notes to Consolidated Financial Statements and "Item
13. Certain Relationships and Related Transactions."
17
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations and the foregoing Business sections contain certain
forward-looking statements and information relating to the Company that are
based on the beliefs of management as well as assumptions made by and
information currently available to management. Such forward-looking statements
include, without limitation, the Company's 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. Such forward-looking statements also
include, without limitation, the Company's expectations and beliefs as to the
projected costs and anticipated timetable to address Year 2000 compliance
issues, the adequacy of its plans to address such issues and the impact on the
Company's operations in the event that certain or all of its plans or the plans
of its lenders and other third parties in respect of such compliance issues
prove to be inadequate. 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. In addition, the Company specifically
advises readers that the factors listed under the caption "Liquidity and Capital
Resources" could cause actual results to differ materially from those expressed
in any forward-looking statement. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated or expected.
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements, including the notes thereto, contained
elsewhere herein.
GENERAL
The business of the Company after the acquisition of PEC (see "Item 1.
Business" and "Item 13. Certain Relationships and Related Transactions"), and
following the Spin-off, is primarily the marketing, financing, and sale of
timeshare interests, retail lots and land parcels, and servicing the related
notes receivable.
Discontinued Operations of Mego Mortgage Corporation
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 conventional uninsured home improvement and debt
consolidation loans which are generally secured by liens on residential
property.
In November 1996, MMC consummated 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 the Spin-off. To
fund MMC's past operations and growth and in conjunction with a Tax Allocation
and Indemnity Agreement dated November 19, 1996 (Tax Agreement), MMC incurred
debt and other obligations due to the Company and its subsidiary, PEC. The
amount of debt due to the Company was $10.1 million at August 31, 1997, of which
$3.4 million was paid by MMC in October 1997 together with $500,000 advanced by
the Company to PEC on behalf of MMC in September 1997. In April 1998, an
agreement was made to adjust the balance due on the receivable by a reduction of
the income tax portion in the amount of $5.3 million previously deemed owed by
MMC to the Company under the Tax Agreement, since that amount was no longer
payable under that agreement. As of the date of the April 1998 agreement, MMC
owed the Company an estimated total of $6.2 million, of which $5.3 million was
the estimated amount due to the Company under the Tax Agreement prior to the
Spin-off. An agreement was subsequently made to settle the remaining $870,000
balance due the Company by MMC. In consideration of this settlement, MMC paid
the entire amount of $1.6 million, which was separately owed to PEC, in June
1998. Following this transaction, MMC
18
<PAGE> 21
had no outstanding indebtedness to the Company. MMC also had agreements with PEC
for providing management services and loan servicing. The accompanying
Consolidated Statements of Operations reflect the operating results of MMC as
discontinued operations in accordance with APB Opinion No. 30. For additional
information see Note 3 of Notes to Consolidated Financial Statements.
The Consolidated Statement of Operations for the fiscal year ended August
31, 1998, and the Consolidated Pro Forma Statements of Operations for the fiscal
years ended August 31, 1997 and 1996, reflect the continuing operations of the
Company. Consolidated Pro Forma Statements of Operations of continuing
operations are also presented below for each of the quarters of fiscal 1997. The
Consolidated Pro Forma Statements of Operations are unaudited and are based on
the historical statements of the periods presented and provide an understanding
of the results of the Company on a stand-alone basis excluding the operations of
MMC and the prior discontinued operations. The Consolidated Pro Forma Statements
of Operations give effect to the Spin-off as if it had occurred prior to
September 1, 1995 and are presented for comparative purposes only (thousands of
dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
------------------------------
PRO FORMA
-------------------
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
REVENUES:
Timeshare interest and land sales, net............... $51,525 $ 48,879 $45,746
Gain on sale of receivables.......................... 656 2,013 1,116
Interest income...................................... 7,161 7,168 6,594
Financial income and other........................... 9,248 9,436 7,196
------- -------- -------
Total revenues............................. 68,590 67,496 60,652
------- -------- -------
EXPENSES:
Direct costs of timeshare interest and land sales.... 9,145 7,493 5,842
Operating expenses................................... 56,792 56,201 49,983
Interest expense..................................... 7,850 8,458 7,314
------- -------- -------
Total expenses............................. 73,787 72,152 63,139
------- -------- -------
Loss before income taxes............................. (5,197) (4,656) (2,487)
Income taxes (benefit)............................... (1,968) (12,662) (1,068)
------- -------- -------
Income (loss) from continuing operations............. (3,229) 8,006 (1,419)
Cumulative preferred stock dividends................. -- -- 240
------- -------- -------
Net income (loss) applicable to common stock......... $(3,229) $ 8,006 $(1,659)
======= ======== =======
</TABLE>
19
<PAGE> 22
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-----------------------------------------------------
AUGUST 31, MAY 31, FEBRUARY 28, NOVEMBER 30,
PRO FORMA 1997 1997 1997 1996
--------- ---------- ------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Timeshare interest and land sales,
net................................. $12,774 $13,202 $11,956 $10,947
Gain on sale of receivables........... 620 503 441 449
Interest income....................... 1,828 1,941 1,762 1,637
Financial income and other............ 2,219 2,609 2,493 2,115
------- ------- ------- -------
Total revenues.............. 17,441 18,255 16,652 15,148
------- ------- ------- -------
EXPENSES:
Direct costs of timeshare interest and
land sales.......................... 2,501 1,746 1,612 1,634
Operating expenses.................... 14,967 14,326 14,014 12,894
Interest expense...................... 2,107 2,084 2,116 2,151
------- ------- ------- -------
Total expenses.............. 19,575 18,156 17,742 16,679
------- ------- ------- -------
Income (loss) before income taxes..... (2,134) 99 (1,090) (1,531)
Income taxes (benefit)................ (7,653) (2,084) (2,458) (467)
------- ------- ------- -------
Net income (loss)..................... $ 5,519 $ 2,183 $ 1,368 $(1,064)
======= ======= ======= =======
</TABLE>
The unaudited consolidated pro forma financial information is presented for
informational purposes only and should be read in conjunction with the Company's
historical Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" set
forth herein. The pro forma financial statements should not be considered
indicative of the operating results which the Company will achieve in the future
if it were operated on an independent, stand-alone basis because, among other
things, these statements are based on historical rather than prospective
information and upon certain assumptions which are subject to change.
The unaudited Consolidated Pro Forma Statements of Operations of the
Company reflect, in management's opinion, all adjustments necessary to fairly
state the pro forma results of operations for the periods presented and to make
the unaudited pro forma statements not misleading.
PEC
PEC recognizes revenue primarily from sales of timeshare interests and land
sales in resort areas, gain on sale of receivables and interest income. PEC
periodically sells its consumer receivables while generally retaining the
servicing rights. Revenue from sales of timeshare interests and land is
recognized after the requisite rescission period has expired and at such time as
the purchaser has paid at least 10% of the sales price for sales of timeshare
interests and 20% of the sales price for land sales. Land sales typically meet
these requirements within six to ten months of closing, and sales of timeshare
interests typically meet these requirements at the time of sale. The sales
price, less a provision for cancellation, is recorded as revenue and the
allocated cost related to such net revenue of the timeshare interest or land
parcel is recorded as expense in the 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
20
<PAGE> 23
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 value.
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 Consolidated Balance Sheets.
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% in each of
fiscal years 1998, 1997 and 1996. PEC has developed its assumptions based on
experience with its own portfolio, available market data and consultation with
its financial advisors.
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' 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, 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. A liability for reserve for
notes receivable sold with recourse is established at the time of each sale
based upon PEC's estimate of the fair value of the future recourse obligation
under each agreement of sale.
Fees for servicing notes receivable originated or acquired by PEC and sold
with servicing rights retained are generally based on a stipulated percentage of
the outstanding principal balance of such notes receivable and are recognized
when earned. Interest received on notes receivable sold, less amounts paid to
investors, is reported as financial income. Interest only receivables are
amortized systematically to reduce notes receivable servicing income to an
amount representing normal servicing income and the present value discount. Late
charges and other miscellaneous income are recognized when collected. Costs to
service notes receivable are recorded to expense as incurred. Interest income
represents the interest received on loans held in PEC's portfolio, the accretion
of the discount on the interest only receivables and interest on cash funds.
Total costs and expenses consist primarily of marketing and sales expenses,
general and administrative expenses, direct costs of sales of timeshare
interests and land, depreciation and amortization and interest
21
<PAGE> 24
expense. Marketing and sales costs directly attributable to unrecognized sales
are accounted for as deferred selling costs until such time as the sale is
recognized. The Company incurs a portion of operating expenses of the timeshare
Associations based on ownership of unsold timeshare interests at each of the
respective timeshare properties. These costs are referred to as "association
assessments" and are included in the Consolidated Statements of Operations under
the caption of general and administrative expenses. Management fees received
from the associations are included under the caption of other revenues. These
fees are not deemed to be the result of a separate revenue generating line of
business since the management activities to which they relate are part of the
support of the timeshare business and the fees are actually a reduction of the
expense the Company incurs to fulfill obligations regarding timeshares.
The following table sets forth certain data regarding notes receivable
additions and servicing through sales of timeshare interests and land:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Principal balance of notes receivable additions......... $ 57,789,000 $ 55,469,000
============ ============
Number of notes receivable additions, net of upgrades
and downgrades........................................ 5,076 5,540
============ ============
Notes receivable serviced at end of period.............. $117,150,000 $118,487,000
============ ============
</TABLE>
Land sales as of August 31, 1998 exclude $13.3 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 $1.9 million, estimated deferred selling costs of $3.7 million
and cost of sales of $2.0 million.
REAL ESTATE RISK
Real estate development involves significant risks, including risks that
suitable properties will not be available at reasonable prices, that
acquisition, development and construction financing may not be available on
favorable terms or at all, that infrastructure and construction costs may exceed
original estimates, that construction may not be completed on schedule, and that
upon completion of construction and improvements, properties may not be sold on
favorable terms or at all. In addition, PEC's timeshare activities, as well as
its ownership, improvement, subdivision and sale of land, are subject to
comprehensive federal, state and local laws regulating environmental and health
matters, protection of endangered species, water supplies, zoning, land
development, land use, building design and construction and other matters. Such
laws and difficulties in obtaining, or the failure to obtain, the requisite
licenses, permits, allocations, authorizations and other entitlements pursuant
to such laws can adversely impact the development and completion of PEC's
projects. The enactment of "slow-growth" or "no-growth" initiatives in any area
where PEC sells land or timeshare interests could also delay or preclude
entirely the development of such properties.
RESTATEMENT AND SEC INVESTIGATION
As previously reported in the Company's Form 10-K for the year ended August
31, 1997, Form 10-Q for the three months ended May 31, 1998, and in prior
reports, following the Company's restatement of certain of its previously issued
financial statements, including for the year ended August 31, 1994, upon which
its auditors had rendered unqualified opinions, the Securities and Exchange
Commission (SEC) commenced a formal investigation to determine, among other
things, whether the Company, and/or its officers and directors, violated
applicable federal securities laws in connection with the preparation and filing
of the Company's previously issued financial statements or certain of its common
stock.
In a letter from the SEC dated June 1, 1998, the Company was advised that
the staff inquiry had been terminated and that no enforcement action had been
recommended to the SEC. In addition, the letter referred to Securities Act
Release 5310 which provides that such letter should not be construed to mean
that any party has been exonerated or that no action may ultimately result from
the staff's investigation.
22
<PAGE> 25
CERTAIN PAYMENTS AND AMORTIZATION OF NEGATIVE GOODWILL
In connection with the assignment to the Company in 1988 by affiliates of
certain officers and directors of the Company (Assignors) of the right to
acquire PEC, the Company became obligated to make quarterly payments to the
Assignors equal to 63% of the cash balances of PEC, during the 7-year period
ended January 31, 1995, that could be used to pay a dividend without violating
PEC's loan agreements. Accrual of amounts owed under such assignment agreement
to the Assignors ended on January 31, 1995, when their right to the accrual
expired, at which time PEC owed the Assignors $13.3 million. On March 2, 1995,
$10 million of such amount was converted to subordinated debt. See Notes 14 and
19 of Notes to the Consolidated Financial Statements for further discussion. At
the time of the acquisition of PEC, the underlying book value of the net assets
acquired exceeded the purchase price paid by the Company by $42.3 million,
resulting in the creation of negative goodwill (Revaluation Adjustment). Of this
amount, $20 million was not amortized but was instead reduced as additional
payments were accrued to the Assignors. Amounts accrued to the Assignors in
excess of $20 million were expensed as such accruals were made. The amortization
of the remaining $22.3 million of the Revaluation Adjustment was directly
affected by the level of collections of the receivables of PEC included in the
acquired assets. As proceeds of these receivables were collected, through
installment payments or sale, a portion of the Revaluation Adjustment included
as a contra account in notes receivable was recorded to income as amortization
of negative goodwill, which amortization was completed at February 28, 1995. The
Company also amortized over a five-year period ended in 1998 negative goodwill
related to the excess of the underlying book value over the purchase price paid
in 1993 for the acquisition of the minority interest of Vacation Spa Resorts,
Inc. (VSR), formerly an 80%-owned subsidiary. The Consolidated Financial
Statements of the Company accordingly reflect amortization of a portion of the
Revaluation Adjustment (Revaluation Amortization), amortization of the negative
goodwill associated with the acquisition of the VSR minority interest and
accrual of payments to the Assignors.
RESULTS OF OPERATIONS
YEAR ENDED AUGUST 31, 1998 COMPARED TO YEAR ENDED AUGUST 31, 1997
PEC
Total revenues for PEC increased 1.6% or $1.1 million to $68.5 million
during fiscal 1998 from $67.4 million during fiscal 1997 primarily due to a net
increase of $2.6 million in timeshare and land sales to $51.5 million in fiscal
1998 from $48.9 million in fiscal 1997 (net timeshare sales increased by $5.4
million and net land sales decreased by $2.8 million), an increase in financial
income to $3.3 million in fiscal 1998 from $2.9 million in fiscal 1997,
partially offset by an aggregate decrease of $1.9 million in gain on sale of
notes receivable, incidental operations and other income.
Gross sales of timeshare interests increased to $41.4 million in fiscal
1998 from $39.9 million in fiscal 1997, an increase of 4.0%. Net sales of
timeshare interests increased to $37.7 million from $32.3 million, an increase
of 16.9%. The provision for cancellations represented 9.0% and 19.1% of gross
sales of timeshare interests for the years ended August 31, 1998 and 1997,
respectively. The decrease in the provision for cancellations was primarily due
to lower cancellation experience during the current fiscal year. The number of
cancellations during fiscal 1998 was 781 compared to 1,496 during fiscal 1997
which reduction was due, in part, to a change in the collection procedures as
previously discussed herein. The number of exchanges, generally for timeshares,
which are primarily made for upgrades, during fiscal 1998 was 4,019 compared to
3,749 during fiscal 1997.
Gross sales of land decreased to $14.9 million in fiscal 1998 from $19.2
million in fiscal 1997, a decrease of 22.6%. Net sales of land decreased to
$13.8 million in fiscal 1998 from $16.6 million in fiscal 1997, a decrease of
16.9%. The provision for cancellations decreased to 7.3% for the year ended
August 31, 1998 from 13.6% of gross sales of land for the year ended August 31,
1997, primarily due to a decrease in cancellation experience during fiscal 1998.
The 1998 decrease in gross land sales was the result of PEC's emphasis shift, as
part of its strategic plan, from sales of land, to sales of timeshare interests
due both to its diminishing inventory of land available for sale and its
increasing inventory of timeshare interests from the opening of new timeshare
23
<PAGE> 26
resorts. The shift from land sales to timeshare sales is due primarily to the
reduction of PEC's current land inventory in Nevada which has not been fully
replenished with additional land due generally to the unavailability of suitable
land at acceptable prices. However, the acquisition of the Hartsel property in
Colorado should enhance land sales for several years, including fiscal 1999.
Gain on sale of receivables decreased to $.7 million for fiscal 1998 from
$2 million for fiscal 1997, as more loans were kept in PEC's own portfolio. PEC
periodically sells receivables to reduce the outstanding balances under its
lines of credit.
Interest income was $7.0 million in fiscal 1998, relatively unchanged from
the $7.1 million in fiscal 1997.
Financial income increased to $3.3 million in fiscal 1998 from $2.9 million
in fiscal 1997, an increase of 13.1%. The increase is a result of the increased
number of loans serviced by PEC during fiscal 1998, generating increased
servicing fees. Included in the above is $2.0 million and $1.8 million for
fiscal years 1998 and 1997, respectively, for servicing of MMC's receivables.
This will not occur in the future since the loan servicing agreement with MMC
was terminated by agreement during 1998.
As a result of the foregoing, total PEC revenues increased to $68.5 million
during fiscal 1998 from $67.4 million during fiscal 1997.
Total costs and expenses increased to $71.7 million for fiscal 1998 from
$69.2 million for fiscal 1997, an increase of 3.7%. The increase resulted
primarily from an increase in general and administrative expenses to $16.3
million from $15.6 million, an increase of 4.7%, an increase in direct costs of
timeshare interest sales to $7.4 million from $5.9 million, an increase of
24.5%, and an increase in depreciation to $2.2 million from $2.0 million, an
increase of 14.3%. The increase in general and administrative expenses is
primarily due to general increases in payroll and commissions paid to the
collections and verifications department functions. The increase in direct costs
of timeshare sales is directly attributable to higher net timeshare sales in
1998 and to the higher costs to develop new timeshare inventory. Depreciation
expense increased to $2.2 million in fiscal 1998 from $2 million in fiscal 1997,
an increase of 14.3%. The increase is a result of the additions made to property
and equipment during fiscal 1998, and a full year of depreciation from fiscal
1997 additions, to support continued growth. Property and equipment, net of
accumulated depreciation, was $24.0 million at August 31, 1998 compared to $24.2
million at August 31, 1997.
As a percentage of gross sales of timeshare interests and land, marketing
and sales expenses relating thereto increased to 60.6% in fiscal 1998 from 57.7%
in fiscal 1997, and cost of sales increased to 16.2% in fiscal 1998 from 12.7%
in fiscal 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 was $7.2 million in fiscal 1998 and $7.1 million in fiscal
1997. The increase is a result of an increase in the average outstanding balance
of notes and contracts payable during fiscal 1998 compared to fiscal 1997.
A loss before income taxes of $3.2 million was recorded in fiscal 1998
compared to a loss before income taxes of $1.8 million in fiscal 1997. The
increase in loss is primarily due to the decrease in gain on sale of notes
receivable, the increase in general and administrative expenses, and an increase
in product cost, together with a decrease in land sales, the effect of which was
partially offset by an increase in timeshare sales.
No income tax provision or benefit was recorded for either fiscal 1998 or
1997. As part of an arrangement between PEC and the Company, regarding payment
of taxes (the Tax Sharing Arrangement), PEC 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 $3.2 million for
fiscal 1998 compared to a net loss of $1.8 million for fiscal 1997.
24
<PAGE> 27
COMPANY (consolidated)
Income from continuing operations decreased $11.2 million to a loss of $3.2
million in fiscal 1998 from income of $8 million in fiscal 1997, due principally
to the recording of a $2.0 million tax benefit in fiscal 1998 compared to the
much larger $12.7 million income tax benefit in fiscal 1997.
Income from discontinued operations, net of taxes and minority interest,
was $11.3 million in fiscal 1997 due to the inclusion of MMC. Income from
discontinued operations represents net income from MMC of $14.8 million reduced
by minority interest of $2.4 million and $1.1 million in general and
administrative expenses related to the discontinued operations. See "Item 1.
Business -- General," "Item 7. MD&A -- Discontinued Operations of MMC" and Note
3 of Notes to Consolidated Financial Statements.
Total costs and expenses during fiscal 1998 were $73.8 million, an increase
of 2.3% over $72.2 million in fiscal 1997. Direct costs of timeshare interest
sales increased $1.5 million, to $7.4 million in fiscal 1998 from $5.9 million
in fiscal 1997. The increase is primarily due to increased sales and the higher
costs to develop new timeshare inventory. Additionally, Mego Financial (parent
only) continues to incur interest on subordinated debt. The decrease in interest
expense is primarily attributable to the lower average balance of subordinated
debt in fiscal 1998 as the balance was significantly reduced immediately prior
to August 31, 1997. 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. Also, see prior discussion for PEC.
The income tax benefit for fiscal 1998 was $2.0 million compared to the
much larger income tax benefit of $12.7 million for fiscal 1997. The benefit for
both fiscal 1998 and 1997 was primarily due to the application of net operating
loss (NOL) carryforwards and changes in certain income tax liability reserves.
The 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 in fiscal 1997. See Notes 4 and 16 of Notes to
Consolidated Financial Statements.
Net loss applicable to common stock amounted to $3.2 million during fiscal
1998 compared to income of $19.3 million during fiscal 1997, primarily due to
the foregoing.
YEAR ENDED AUGUST 31, 1997 COMPARED TO YEAR ENDED AUGUST 31, 1996
PEC
Total revenues for PEC increased 11.1% or $6.7 million to $67.4 million
during fiscal 1997 from $60.7 million during fiscal 1996 primarily due to an
increase in timeshare sales to $32.3 million in fiscal 1997 from $27.8 million
in fiscal 1996 and an increase in gain on sale of notes receivable and interest
income from $7.7 million to $9.1 million.
Timeshare interests and land sales, net, increased to $48.9 million in
fiscal 1997 from $45.7 million in fiscal 1996, an increase of 6.8%. Gross sales
of timeshare interests increased to $39.9 million in fiscal 1997 from $33.2
million in fiscal 1996, an increase of 20.1%. Net sales of timeshare interests
increased to $32.3 million from $27.8 million, an increase of 16.1%. The
provision for cancellations represented 19.1% and 16.3% of gross sales of
timeshare interests for the years ended August 31, 1997 and 1996, respectively.
The increase in the provision for cancellations was primarily due to higher
cancellation experience during fiscal 1997. During the first quarter of fiscal
1997, the Ramada Vacation Suites at Indian Shores, Florida was completed and 360
timeshare interests in that resort were sold through August 31, 1997. The number
of cancellations during fiscal 1997 was 1,496 compared to 1,216 during fiscal
1996. The number of exchanges during fiscal 1997 was 3,749 compared to 3,305
during fiscal 1996.
Gross sales of land decreased to $19.2 million in fiscal 1997 from $22.3
million in fiscal 1996, a decrease of 13.9%. Net sales of land decreased to
$16.6 million in fiscal 1997 from $18 million in fiscal 1996, a decrease of
7.5%. The provision for cancellations decreased to 13.6% for the year ended
August 31, 1997 from 19.6% of gross sales of land for the year ended August 31,
1996, primarily due to a decrease in cancellation experience from the prior
years. The 1997 decrease in gross land sales was the result of PEC's emphasis
shift, as part of its
25
<PAGE> 28
strategic plan, from sales of land, to sales of timeshare interests due both to
its diminishing inventory of land available for sale and its increasing
inventory of timeshare interests from the opening of new timeshare resorts.
Gain on sale of receivables increased to $2 million for fiscal 1997 from
$1.1 million for fiscal 1996. This increase resulted from sales of timeshare
receivables and land receivables increasing to $30.1 million in fiscal 1997 from
$16 million in fiscal 1996.
Interest income increased to $7.1 million in fiscal 1997 from $6.6 million
for fiscal 1996, primarily due to the increased average outstanding portfolio of
timeshare notes receivable.
Financial income increased to $2.9 million in fiscal 1997 from $1.3 million
in fiscal 1996, an increase of 133.2%. The increase is a result of the increased
number of loans serviced by PEC, generating increased servicing fees.
As a result of the foregoing, total PEC revenues increased to $67.4 million
during fiscal 1997 from $60.7 million during fiscal 1996.
Total costs and expenses increased to $69.2 million for fiscal 1997 from
$59.3 million for fiscal 1996, an increase of 16.6%. The increase resulted
primarily from an increase in marketing and sales expense to $34.1 million from
$30.4 million, an increase of 12.3%; an increase in general and administrative
expenses to $15.6 million from $13.7 million, an increase of 13.4%, and an
increase in direct costs of timeshare interest sales to $5.9 million from $4
million, an increase of 48.1%. PEC's marketing and sales expenses increased
primarily as a result of increased sales and costs relating to the establishment
of new marketing programs during fiscal 1997 and strategies designed to increase
sales of timeshare interests, market research costs, additional staffing,
increased advertising costs and additional sales offices. The increase in
general and administrative expenses is primarily due to increases in payroll
related to hiring of additional administrative personnel and Association costs
related to a higher level of unsold timeshare inventory. In June 1997, sales
commenced at PEC's Orlando, Florida timeshare property and 1,122 new upscale,
luxury timeshare interests in Las Vegas became available for sale in September
1997. The increase in direct costs of timeshare sales is directly attributable
to the higher costs to develop new timeshare inventory.
As a percentage of gross sales of timeshare interests and land, marketing
and sales expenses relating thereto increased to 57.7% in fiscal 1997 from 54.7%
in fiscal 1996, and cost of sales increased to 12.7% in fiscal 1997 from 10.5%
in fiscal 1996.
Depreciation expense increased to $2.0 million in fiscal 1997 from $1.5
million in fiscal 1996, an increase of 28.7%. The increase is a result of the
additions made to property and equipment during fiscal 1997 to support continued
growth. Property and equipment, net of accumulated depreciation, increased to
$24.2 million at August 31, 1997 from $19.4 million at August 31, 1996, an
increase of 24.9%.
Interest expense increased to $7.1 million in fiscal 1997 from $5.6 million
in fiscal 1996, an increase of 25.7%. The increase is a result of an increase in
the average outstanding balance of notes and contracts payable during fiscal
1997 compared to fiscal 1996.
A loss before income taxes of $1.8 million was recorded in fiscal 1997
compared to income before income taxes of $1.3 million in fiscal 1996. The
decrease is largely due to the increase in marketing and sales expense and in
general and administrative expense, together with a decrease in land sales, the
effect of which was partially offset by an increase in timeshare sales.
No income tax provision or benefit was recorded for fiscal 1997 compared to
$455,000 in income tax provision for fiscal 1996. As part of an arrangement
between PEC and the Company, regarding payment of taxes (the Tax Sharing
Arrangement), PEC 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 $1.8 million
during fiscal 1997 compared to net income of $882,000 during fiscal 1996.
26
<PAGE> 29
COMPANY (consolidated)
Income from continuing operations increased $9.4 million to income of $8.0
million in fiscal 1997 from a loss of $1.4 million in fiscal 1996, due
principally to the recording in fiscal 1997 of a $12.7 million income tax
benefit. This increase was partially offset by a decrease of $2.6 million in PEC
net income, due to increased expenses related to expansion of selling
operations. See prior discussion for PEC.
Income from discontinued operations, net of taxes and minority interest,
increased 80.8% to $11.3 million during fiscal 1997 from $6.3 million during
fiscal 1996 due to the growth and profitability of MMC. Income from discontinued
operations represents net income from MMC of $14.8 million reduced by minority
interest of $2.4 million and $1.1 million in general and administrative expenses
related to the discontinued operations. See "Item 1. Business -- General," "Item
7. MD&A -- Discontinued Operations of MMC" and Note 3 of Notes to Consolidated
Financial Statements.
Total costs and expenses during fiscal 1997 were $72.2 million, an increase
of 14.3% over $63.1 million in fiscal 1996. Marketing and sales expenses and
general and administrative expenses increased 10.9% for fiscal 1997 compared to
fiscal 1996 due primarily to the expansion of timeshare marketing efforts by
PEC. 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 fiscal 1997 was $12.7 million compared to an
income tax benefit of $1.1 million for fiscal 1996. The increase in the benefit
was primarily due to the application of net operating loss (NOL) carryforwards
and changes in certain income tax liability reserves. The changes in certain
income tax liability reserves were a result of facts and circumstances
determined in an extensive review and analysis of the Company's federal income
tax liability completed in fiscal 1997. See Notes 4 and 16 of Notes to
Consolidated Financial Statements.
Net income applicable to common stock increased to $19.3 million during
fiscal 1997 from $4.6 million during fiscal 1996, primarily due to the
foregoing.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents for the Company was $1.8 million at August 31,
1998 compared to $10.4 million at August 31, 1997. The decrease was primarily
due to the funding of the Company's sales operations with a lesser amount of
receivable sales. The Company's principal cash requirements relate to PEC's
acquisition of timeshare properties and land and the payment of marketing and
sales 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 marketing and sales expenses in connection with sales of timeshare
interests and land. Marketing and sales expenses payable by PEC in connection
with sales of timeshare interests and land typically exceed the down payments
received at the time of sale, as a result of which PEC generates a cash
shortfall. This cash shortfall and PEC's other cash requirements are funded
primarily through sales of receivables, PEC's lines of credit in the aggregate
amount of $137.5 million and cash flows from operations. At August 31, 1998, no
commitments existed for material capital expenditures.
27
<PAGE> 30
At August 31, 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 August 31, 1998, an aggregate of $77.4 million was outstanding
under such lines of credit, and $60.1 million was available for borrowing. At
August 31, 1997, $62.1 million had been borrowed under these lines. Under the
terms of these lines of credit, PEC may borrow 70% to 90% of the balances of the
pledged timeshare and land receivables. Summarized lines of credit information
and accompanying notes relating to these six lines of credit outstanding at
August 31, 1998, consist of the following (thousands of dollars):
<TABLE>
<CAPTION>
BORROWING MAXIMUM
AMOUNT AT BORROWING REVOLVING
AUGUST 31, 1998 AMOUNT EXPIRATION DATE(F) MATURITY DATE INTEREST RATE
- --------------- --------- ------------------ ------------- -------------
<C> <C> <S> <C> <C>
$46,066 $75,000 (a) May 15, 2000 Various Prime + 2.0 - 2.25%
3,418 15,000 (b) December 15, 1998 Various Prime + 2.0%
10,561 15,000 (c) February 28, 1999 Various LIBOR + 4.0 - 4.25%
6,315 15,000 (c) May 1, 1999 Various LIBOR + 4.0 - 4.25%
4,360 10,000 (d) August 1, 2000 August 1, 2003 Prime + 2.0 - 2.25%
6,676 7,500 (e) December 15, 1998 Various Prime + 2.0 - 3.00%
</TABLE>
- ---------------
(a) Restrictions include PEC's requirement to maintain a minimum tangible net
worth of $20 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 August 31,
1998, $31.1 million was outstanding related to financings at prime +2%, of
which $23 million of loans secured by land receivables mature May 15, 2010
and $8.1 million of loans secured by timeshare receivables mature May 15,
2007. The outstanding borrowing amount includes $.6 million in acquisition
and development (A&D) financing maturing May 20, 1999, $5.1 million maturing
July 1, 2003 for the financing of corporate office buildings, both of which
loans are amortizing loans, and a real estate loan with an outstanding
balance of $1.2 million maturing March 20, 1999, all bearing interest at
prime +2.25%. The remaining A&D loans, receivables loans and a resort lobby
loan outstanding of $8.1 million are at prime +2% and mature between
November 30, 1998 and February 28, 2001.
(b) Restrictions include PEC's requirement to maintain a minimum tangible net
worth of $25 million during the life of the loan. These credit lines include
available financing for A&D and receivables. At August 31, 1998, $1.3
million was outstanding under the A&D loan maturing September 1, 1999, and
$2.1 million maturing June 1, 2002, was outstanding under the receivables
loan. Management has obtained a verbal commitment from the lender that this
revolving line of credit will be extended for a period of 18 months on
substantially the same terms.
(c) Restrictions include PEC's requirement to maintain a minimum tangible net
worth of $17 million during the life of the loan. These credit lines include
available financings for A&D and receivables. At August 31, 1998, $5.4
million was outstanding under the A&D loans which have maturity dates of
December 31, 2000 and June 30, 2001, and bear interest at 90 day LIBOR
+4.25%. The available receivable financings, of which $5.2 million was
outstanding at August 31, 1998, is at 90 day LIBOR +4% and has maturity
dates of June 5, 2005 and August 5, 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 of which $2.7 million was outstanding at August 31, 1998 in
respect to receivable debt, and a real estate loan of $4.0 million with a
maturity date of August 31, 1999. The maturity date for the receivables is
May 31, 2002. Management has obtained a verbal commitment from the lender
that this revolving line of credit will be extended for a period of 18
months on substantially the same terms.
28
<PAGE> 31
(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.
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>
FOR THE YEARS ENDED AUGUST 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Marketing and sales expenses attributable to
recognized and unrecognized sales................ $ 34,733 $ 34,388 $ 29,863
Less: Down payments................................ (12,934) (13,966) (13,231)
-------- -------- --------
Cash Shortfall..................................... $ 21,799 $ 20,422 $ 16,632
======== ======== ========
</TABLE>
During the fiscal years ended August 31, 1998 and 1997, PEC sold notes
receivable of $9.4 million and $30.1 million from which $8.0 million and $25.3
million of the sales proceeds were used to pay down debt during the fiscal years
ended August 31, 1998 and 1997, respectively. The receivables, which have
interest rates depending on the transaction ranging from 13.0% - 14.3% and
12.3% - 14.3% in fiscal 1998 and fiscal 1997, respectively, were sold to yield
returns of 9.75% in fiscal 1998 and 9% - 9.8% in fiscal 1997 to the purchasers,
with any excess interest received from the obligors being payable to PEC.
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 in either cash or receivables generally at the option
of the purchaser. At August 31, 1998, PEC was contingently liable to replace or
repurchase notes receivable sold with recourse totaling $66.8 million. The
repurchase provisions provide for substitution of receivables as recourse for
$66.1 million of sold notes receivable and cash payments for repurchase relating
to $651,000 of sold notes receivable. As of October 31, 1998, one purchaser had
exercised its option to require any future repurchases to be replaced by cash
payments. This recourse as of August 31, 1998 related to $19.2 million of
receivables. At August 31, 1998 and 1997, the undiscounted amounts of the
recourse obligations on such sold notes receivable were $7.8 million and $9.7
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.
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 its probable future credit losses to be
incurred over the lives of the notes receivable. Proceeds from the sale of notes
receivable sold with recourse were $9.4 million and $30.1 million for the years
ended August 31, 1998 and 1997, respectively. A liability for reserve for notes
receivable sold with recourse is established at the time of each sale based upon
PEC's analysis of the fair value of all probable losses resulting from PEC's
recourse obligation under each agreement of sale.
During fiscal years 1998 and 1997, PEC used cash of $20.1 million and
provided cash of $7.2 million in operating activities, respectively. This
decrease was primarily due to reduced notes receivable sales and an increase in
the purchase and development of land and timeshare units. During fiscal years
1998 and 1997, PEC provided cash of $3.2 million and used cash of $1.9 million
in investing activities, respectively, which increased as a result of a decline
in purchases for property and equipment and increased repayments from the parent
in fiscal 1998. During fiscal years 1998 and 1997, PEC provided cash of $15.7
million and used cash of $5.6 million from financing activities, respectively,
as a result of increased borrowings and decreased paydowns applied to such
borrowings.
COMPANY (consolidated)
At January 31, 1995, when accrual of payments to assignors ceased, $13.3
million was payable to the Assignors. On March 2, 1995, the Assignors agreed to
defer payment of $10 million (Subordinated Debt) of the amounts due to them
pursuant to an amendment to the Assignment and Assumption Agreement providing
29
<PAGE> 32
for the subordination of such amounts to payment of debt for money borrowed by
the Company or obligations of the Company's subsidiaries guaranteed by the
Company. Warrants (Warrants) to purchase 1 million shares of common stock, at an
exercise price of $4.25 per share (the closing market price per share on March
2, 1995), were granted to the Assignors in consideration of the payment deferral
and subordination. These Warrants were exercised in August 1997 in a non-cash
transaction, whereby the Subordinated Debt was reduced by $4.25 million.
Interest on the Subordinated Debt was to be paid semiannually at the rate of 10%
per year starting September 1, 1995, and the Subordinated Debt was to be repaid
in 7 equal semiannual payments commencing March 1, 1997. On June 14, 1995, the
Company paid an aggregate of $809,000 to the Assignors, including interest in
the amount of $59,000. In January 1997, the outstanding balance of payable to
Assignors of $2.6 million (including interest of $45,000) was paid in full.
Effective March 1, 1997, the Assignors received the first of what was originally
7 equal semiannual payments of $1,429,000 plus interest related to the repayment
of the Subordinated Debt. However, in connection with the reduction of the
Subordinated Debt in August 1997, payments aggregating $4.25 million were deemed
paid and the semiannual payments are scheduled to resume in March 1999, with a
partial payment made in September 1998. The Subordinated Debt is collateralized
by a pledge of PEC's outstanding stock. Interest of $1.2 million on Subordinated
Debt was paid during fiscal 1998. See "Item 13. Certain Relationships and
Related Transactions" and Note 14 of Notes to Consolidated Financial Statements.
During fiscal years 1998 and 1997, the Company used cash of $20.8 million
and provided cash of $32.5 million in operating activities, respectively. The
decrease was due primarily to decreased proceeds from sale of notes receivable.
During fiscal 1997, the Company used cash of $19.8 million in discontinued
operations. During fiscal years 1998 and 1997, the Company used cash of $4.2
million and $7 million in investing activities, respectively, which decreased as
a result of a decline in purchases of property and equipment. During fiscal
years 1998 and 1997, the Company provided cash of $16.4 million and $1.9 million
in financing activities, respectively, as a result of increased borrowings and
decreased paydowns applied to such borrowings.
Capital expenditures during fiscal years 1998 and 1997 were $15.6 million
and $8.9 million, respectively, for the acquisition of timeshare and land
inventory and $2.3 million and $6.8 million, respectively, for the purchase of
property and equipment. The Company made additional capital expenditures in 1998
for renovation of future timeshare inventory, refurbishment of present timeshare
inventory and the acquisition of replacement equipment. No commitments existed
at August 31, 1998 for material capital expenditures. The Company believes that
its capital requirements will be met from cash balances, internally generated
cash, existing lines of credit, sales of receivables, and the modification,
replacement or addition to its lines of credit and new financings.
The components of the Company's debt, including lines of credit consist of
the following (thousands of dollars):
<TABLE>
<CAPTION>
AUGUST 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Notes collateralized by receivables......................... $42,793 $31,489
Mortgages collateralized by real estate properties.......... 37,393 32,311
Installment contracts and other notes payable............... 1,800 1,769
------- -------
Total............................................. $81,986 $65,569
======= =======
</TABLE>
FINANCIAL CONDITION
AUGUST 31, 1998 COMPARED TO AUGUST 31, 1997
Cash and cash equivalents decreased 82.5% to $1.8 million at August 31,
1998 from $10.4 million at August 31, 1997, primarily as a result of funding of
the Company's sales operations with a lesser amount of receivable sales.
30
<PAGE> 33
Notes receivable, net, increased 39.4% to $47.8 million at August 31, 1998
from $34.3 million at August 31, 1997 primarily as a result of decreased
receivable sales of $9.4 million to one financial institution during fiscal 1998
compared to $30.1 million to two different financial institutions during fiscal
1997.
The Company provides allowance for cancellations in amounts which, in the
Company's judgment, will be adequate to absorb losses on notes receivable that
may become uncollectible. The Company's judgment in determining the adequacy of
this allowance is based on its continual review of its portfolio which utilizes
historical experience and current economic factors. These reviews take into
consideration changes in the nature and level of the portfolio, historical
rates, collateral values, and current and future economic conditions which may
affect the obligors' ability to pay, collateral values and overall portfolio
quality. Changes in the aggregate of the allowance for cancellations, excluding
discounts, and the reserve for notes receivable sold with recourse for the
fiscal years ended August 31, 1998 and 1997, consisted of the following
(thousands of dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
AUGUST 31,
-------------------
1998 1997
------- --------
<S> <C> <C>
Balance at beginning of year................................ $19,527 $ 19,924
Provision for cancellations............................... 4,827 10,219
Amounts charged to allowance for cancellations and reserve
for notes receivable sold with recourse................ (5,866) (10,616)
------- --------
Balance at end of year...................................... $18,488 $ 19,527
======= ========
</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>
FOR THE YEARS ENDED
AUGUST 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Allowance for cancellations, excluding discounts............ $11,868 $10,824
Reserve for notes receivable sold with recourse............. 6,620 8,703
------- -------
Total............................................. $18,488 $19,527
======= =======
</TABLE>
Timeshare and land sales, net, increased to $51.5 million at August 31,
1998 from $48.9 million at August 31, 1997. Timeshare and land sales, net, are
set forth in the following table (thousands of dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
AUGUST 31,
--------------------
1998 1997 $ CHANGE % CHANGE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Timeshare sales, net....................... $37,713 $32,253 $ 5,460 16.9%
Land sales, net............................ 13,812 16,626 (2,814) (16.9)%
------- ------- -------
Total timeshare and land sales,
net............................ $51,525 $48,879 $ 2,646 5.4%
======= ======= =======
</TABLE>
The implementation of SFAS No. 125 requires the reclassification of excess
servicing rights as interest only receivables which are carried at fair market
value. Interest only receivables increased 2.2% to $3.4 million at August 31,
1998 from $3.3 million at August 31, 1997. See Note 4 of Notes to Consolidated
Financial Statements.
Land and improvements inventory and timeshare interests held for sale
increased 17.3% to $43.8 million at August 31, 1998 from $37.3 million at August
31, 1997 primarily as a result of the acquisition of the Hartsel Ranch property
and the development of timeshare property.
Property and equipment, net, decreased 1.1% to $24.0 million at August 31,
1998 from $24.2 million at August 31, 1997.
31
<PAGE> 34
Net assets of discontinued operations were $53.3 million at August 31,
1997. The $53.3 million represented the net assets of MMC at August 31, 1997 of
$53.1 million and the Company's receivable of $10.1 million from MMC less the
minority interest of $9.9 million at August 31, 1997.
Notes and contracts payable increased 25.0% to $82.0 million at August 31,
1998 from $65.6 million at August 31, 1997 due to decreased paydowns of debt
with proceeds from receivable sales during fiscal 1997.
Accounts payable and accrued liabilities increased to $19.1 million at
August 31, 1998 from $17.2 million at August 31, 1997, primarily as a result of
increases in accrued payroll, interest and other unpaid operational costs.
Reserve for notes receivable sold with recourse decreased 24.0% to $6.6
million at August 31, 1998 from $8.7 million at August 31, 1997 due to the
decreased amount of receivable sales in fiscal 1998. Recourse to the Company on
sales of notes receivable is governed by the agreements between the purchasers
and the Company.
Accrued income taxes decreased 28.3% to $4.5 million at August 31, 1998
from $6.2 million at August 31, 1997 primarily due to application of NOL
carryforwards and changes in certain income tax liability reserves. The changes
in fiscal 1997 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 in fiscal 1997. See Note 16 of Notes to
Consolidated Financial Statements.
Stockholders' equity decreased to $20.7 million at August 31, 1998 from
$73.2 million at August 31, 1997 as a result of the distribution of MMC common
stock totaling $49.3 million in connection with the Spin-off, including the
adjustment of the receivable from MMC, and a net loss applicable to common stock
of $3.2 million during fiscal 1998.
AUGUST 31, 1997 COMPARED TO AUGUST 31, 1996
Cash and cash equivalents increased 278.4% to $10.4 million at August 31,
1997 from $2.7 million at August 31, 1996, primarily as a result of the receipt
of proceeds in connection with the exercise of common stock options and warrants
in August 1997.
Notes receivable, net, decreased 15.6% to $34.3 million at August 31, 1997
from $40.6 million at August 31, 1996 primarily as a result of increased
receivable sales of $30.1 million during fiscal 1997 compared to $16 million
during fiscal 1996. Receivable sales of $19.7 million and $10.4 million were
recorded to two different financial institutions during fiscal 1997.
The Company provides allowance for cancellations in amounts which, in the
Company's judgment, will be adequate to absorb losses on notes receivable that
may become uncollectible. The Company's judgment in determining the adequacy of
this allowance is based on its continual review of its portfolio which utilizes
historical experience and current economic factors. These reviews take into
consideration changes in the nature and level of the portfolio, historical
rates, collateral values, and current and future economic conditions which may
affect the obligors' ability to pay, collateral values and overall portfolio
quality. Changes in the aggregate of the allowance for cancellations, excluding
discounts, and the reserve for notes receivable sold with recourse for the
fiscal years ended August 31, 1997 and 1996, consisted of the following
(thousands of dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
AUGUST 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Balance at beginning of year................................ $19,924 $18,821
Provision for cancellations............................... 10,219 9,778
Amounts charged to allowance for cancellations and reserve
for notes receivable sold with recourse................ (10,616) (8,675)
------- -------
Balance at end of year...................................... $19,527 $19,924
======= =======
</TABLE>
32
<PAGE> 35
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>
FOR THE YEARS ENDED
AUGUST 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Allowance for cancellations, excluding discounts............ $10,824 $11,512
Reserve for notes receivable sold with recourse............. 8,703 8,412
------- -------
Total............................................. $19,527 $19,924
======= =======
</TABLE>
Timeshare and land sales, net, increased to $48.9 million at August 31,
1997 from $45.7 million at August 31, 1996 which increased net notes receivable.
Timeshare and land sales, net, are set forth in the following table (thousands
of dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
AUGUST 31,
--------------------
1997 1996 $ CHANGE % CHANGE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Timeshare sales, net....................... $32,253 $27,778 $ 4,475 16.1%
Land sales, net............................ 16,626 17,968 (1,342) (7.5)%
------- ------- -------
Total timeshare and land sales,
net............................ $48,879 $45,746 $ 3,133 6.8%
======= ======= =======
</TABLE>
The implementation of SFAS No. 125 requires the reclassification of excess
servicing rights as interest only receivables which are carried at fair market
value. Interest only receivables increased 53.5% to $3.3 million at August 31,
1997 from $2.1 million at August 31, 1996. See Note 4 of Notes to Consolidated
Financial Statements.
Timeshare interests held for sale and land and improvements inventory
increased 4% to $37.3 million at August 31, 1997 from $35.9 million at August
31, 1996 primarily as a result of the opening of the Indian Shores and Orlando
timeshare resorts during fiscal 1997.
Property and equipment, net, increased 24.9% to $24.2 million at August 31,
1997 from $19.4 million at August 31, 1996 due to increased capital expenditures
related to expansion of CNUC and the expansion of various other Company
facilities.
Net assets of discontinued operations increased 74.6% to $53.3 million at
August 31, 1997 from $30.5 million at August 31, 1996 primarily due to the
growth and earnings of MMC. The $53.3 million represents the net assets of MMC
at August 31, 1997 of $53.1 million and the Company's receivable of $10.1
million from MMC less the minority interest of $9.9 million at August 31, 1997.
Notes and contracts payable decreased 6.7% to $65.6 million at August 31,
1997 from $70.3 million at August 31, 1996 due to increased paydowns of debt
with proceeds from receivable sales during fiscal 1997.
Accounts payable and accrued liabilities increased to $17.2 million at
August 31, 1997 from $15.6 million at August 31, 1996, primarily as a result of
increases in accrued payroll, interest and other unpaid operational costs.
Reserve for notes receivable sold with recourse increased 3.5% to $8.7
million at August 31, 1997 from $8.4 million at August 31, 1996 due to increased
receivable sales. Recourse to the Company on sales of notes receivable is
governed by the agreements between the purchasers and the Company.
Accrued income taxes decreased 38.1% to $6.2 million at August 31, 1997
from $10.1 million at August 31, 1996 primarily due to application of NOL
carryforwards and changes in certain income tax liability reserves. The changes
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 in fiscal 1997. See Note 19 of Notes to Consolidated
Financial Statements.
Stockholders' equity increased 183.3% to $73.2 million at August 31, 1997
from $25.9 million at August 31, 1996 as a result of net income applicable to
common stock of $19.3 million during fiscal 1997, the
33
<PAGE> 36
gain on sale of MMC stock of $13.1 million in November 1996, warrants valued at
$3 million, issued in connection with a loan purchase commitment and the
proceeds from the exercise of common stock warrants and options of $11.9
million.
EFFECTS OF CHANGING PRICES AND INFLATION
The Company's operations are sensitive to increases in interest rates and
to inflation. Increased borrowing costs resulting from increases in interest
rates may not be immediately recoverable from prospective purchasers.
Inflationary increases are difficult to pass on to customers since increases in
sales prices often result in lower sales closing rates and higher cancellations.
The Company's notes receivable consist primarily of fixed-rate long term
installment contracts that do not increase or decrease as a result of changes in
interest rates charged to the Company. In addition, delinquency and cancellation
rates may be affected by changes in the national economy.
SEASONALITY
Sales of timeshare interests and land are somewhat seasonal. For the fiscal
years ended August 31, 1998, 1997 and 1996, quarterly sales as a percentage of
annual sales, for each of the fiscal quarters averaged:
<TABLE>
<CAPTION>
QUARTER ENDED % OF ANNUAL SALES
------------- -----------------
<S> <C>
November 30................................................. 23.7%
February 28................................................. 24.0
May 31...................................................... 26.6
August 31................................................... 25.7
-----
100.0%
=====
</TABLE>
The majority of the Company's customers are tourists. The Company's major
marketing area, Las Vegas, Nevada, reaches peaks of tourist activity at periods
different from the Company's other major marketing areas, such as Reno, Nevada,
and Denver, Park and Huerfano Counties, Colorado, which are more active in
summer than in winter. The Company's other major marketing areas, Honolulu,
Hawaii, and Orlando, Florida, are not subject to seasonality. The Company is not
dependent upon a limited number of customers whose loss would have a material
adverse effect on the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation,"
(SFAS 123), which establishes financial accounting and reporting standards for
stock-based employee compensation plans and for transactions in which an entity
issues its equity instruments to acquire goods or services from nonemployees.
Those transactions must be accounted for based on the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable. The Company elected to continue to apply
the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees," as permitted by SFAS 123, and, accordingly,
provides pro forma disclosure in Note 17 of Notes to Consolidated Financial
Statements.
Statement No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," (SFAS 125) was issued by the 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
34
<PAGE> 37
reclassified as interest only receivables and accounted for in accordance with
SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities"
(SFAS 115). 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. See Note 4 of Notes to Consolidated Financial Statements for
further discussion and SFAS 128 pro forma calculations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" (SFAS 130), and SFAS No. 131, "Disclosures and Segments of an Enterprise
and Related Information" (SFAS 131). SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. SFAS 131 establishes standards of
reporting by publicly-held business enterprises and disclosure of information
about operating segments in annual financial statements and, to a lesser extent,
in interim financial reports issued to shareholders. SFAS Nos. 130 and 131 are
effective for fiscal years beginning after December 15, 1997. As both SFAS Nos.
130 and 131 deal with financial statement disclosure, the Company does not
anticipate the adoption of these new standards will have a material impact on
its financial position, results of operations or cash flows. The Company has not
yet determined what its reporting segments will be under SFAS 131.
YEAR 2000 COMPLIANCE
The ability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
2-digit year is commonly referred to as the Year 2000 (Y2K) compliance issue. As
the year 2000 approaches, such systems may be unable to accurately process
certain data-based information. The Company expects that it will be compliant by
August 31, 1999, the end of the Company's fiscal year, and has been assured by
all of its significant third-party vendors, lenders and other parties such as
title companies, that they will be Y2K compliant by no later than December 31,
1999.
State of Readiness. The Company has identified the following applications
that required, or require, modification to be Y2K compliant.
<TABLE>
<CAPTION>
COMPLIANT AT IF "NO" ANTICIPATED
APPLICATION AUGUST 31, 1998 DATE OF COMPLIANCE
----------- --------------- -------------------
<S> <C> <C>
Reservation System............................. Yes
Property Management............................ Yes
Loan Receivables............................... No By December 31, 1998
Sales.......................................... No By March 31, 1999
General Ledger and Accounts Payable............ No (1)
Telephone -- Main Office....................... Yes
Telephone -- Resorts........................... No By August 31, 1999
</TABLE>
- ---------------
(1) The Company is in the process of engaging Mann & Associates, a regional
professional consultant and vendor for the Great Plains System (System).
Mann & Associates will be engaged to assist in the System setup, tailoring
and training. The System is planned to be fully operational, including
testing, by June 30, 1999. The Company has verbal, and upon signing the
agreement will have formal, representations and warranties from Great Plains
that the System, once installed, will be fully Y2K compliant.
35
<PAGE> 38
Additionally, the Company has obtained verbal assurances from the following
financial institutions and companies with which it does business that they will
be Y2K compliant by the date shown:
<TABLE>
<CAPTION>
INSTITUTION COMPLIANT AT AUGUST 31, 1998 IF "NO" COMPLIANT BY DATE
----------- ---------------------------- ---------------------------
<S> <C> <C>
Bank of America....................... No December 31, 1999
Textron............................... No December 31, 1999
Finova................................ No December 31, 1999
Heller Financial...................... No December 31, 1999
First Chicago NBD..................... No December 31, 1999
Litchfield Financial.................. No December 31, 1999
United Title Company.................. No December 31, 1999
RCI................................... No December 31, 1999
</TABLE>
Disclosure of Costs. The Company believes that its approximate total cost
to become Y2K compliant by not later than August 31, 1999 will be approximately
$350,000. Of this amount, as of August 31, 1998, the Company had expended
$60,000, including internal labor costs of approximately $50,000. The Company
believes it has adequate financial resources to pay for the balance of the Y2K
compliance costs.
Disclosure of Risk. The Company services consumer receivables arising out
of its sale of timeshare and land products to its customers on the Company's
internally-developed system. The most significant risk to the Company in not
being Y2K compliant by December 31, 1999 would be that the existing data base
could not adequately track payments due under its receivable portfolio. Many of
these receivables have been pledged to lenders to which the Company provides
servicing. In the event of the Company's failure to adequately track its
receivables, it could become in default under certain loan arrangements with its
lenders. The failure of a lender(s) to be Y2K compliant could affect such
lender's (s') loan documentation/records, which could adversely impact the
Company's ability to borrow under its lines of credit. The reservation system
operated by PEC could also be affected by a failure, which could make
assignments of its timeshare intervals for timeshare owners problematical. PEC's
wholly-owned utility subsidiary, CNUC, could also have problems with customer
billings if not compliant.
Certain operational aspects of PEC could be affected by not being Y2K
compliant, including elevator service at its resorts, telephone service and
other essential utility services. Any of the above discussed items, if not Y2K
compliant, could have a material adverse effect on the Company and PEC.
The Company expects to be fully compliant by August 31, 1999.
Contingency Plans. As the Company believes it will be fully compliant by
August 31, 1999, it does not have a contingency plan. However, in the event that
the Company is not fully compliant by the end of 1999, the failure to have a
contingency plan could have a material adverse effect on the Company.
36
<PAGE> 39
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about the Company's financial
instruments that are sensitive to changes in interest rates. Such information
includes fair values of the market risk sensitive instruments and contract terms
sufficient to determine future cash flows from those instruments, categorized by
expected maturity dates:
<TABLE>
<CAPTION>
AUGUST 31, EXPECTED MATURITY DATE
---------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
------ ------ ------- ------ ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest only receivables(a)
Fixed rate..................... $ -- $ 15 $ 22 $ 86 $ 264 $ 2,980 $ 3,367 $ 3,367
Average interest rate........ --% 12.27% 12.28% 13.03% 13.40% 13.00%
LIABILITIES:
Notes and contracts payable(b)
Fixed rate..................... $ 81 $ 195 $ 935 $ 454 $ 326 $ -- $ 1,991 $ 1,991
Average interest rates....... 10.21% 10.46% 9.00% 10.40% 9.20% --%
Variable rate.................. $7,886 $5,207 $14,166 $4,742 $11,142 $36,852 $79,995 $79,995
Average interest rates....... 11.06% 10.67% 10.16% 10.50% 10.60% 10.40%
Subordinated debt(c)
Fixed rate..................... $2,967 $1,381 $ -- $ -- $ -- $ -- $ 4,348 $ 4,348
Average interest rates....... 10.00% 10.00% --% --% --% --%
</TABLE>
- ---------------
(a) The fair value was estimated by discounting future cash flows of the
instruments using discount rates, default, loss and prepayment assumptions
based upon available market data, opinions from financial advisors and
portfolio experience.
(b) Notes payable generally are adjustable rate, indexed to the prime rate, or
to the 90 day London Interbank Offering Rate (LIBOR); therefore, carrying
value approximates fair value.
(c) Carrying value is approximately the same as fair value.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements of the Company and its
subsidiaries are included herewith:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets at August 31, 1998 and 1997..... F-3
Consolidated Statements of Operations -- Years Ended August
31, 1998, 1997 and 1996................................... F-4 - F-5
Consolidated Statements of Stockholders' Equity -- Years
Ended August 31, 1998, 1997 and 1996...................... F-6
Consolidated Statements of Cash Flows -- Years Ended August
31, 1998, 1997 and 1996................................... F-7 - F-8
Notes to Consolidated Financial Statements -- Years Ended
August 31, 1998, 1997 and 1996............................ F-9 - F-36
</TABLE>
All other schedules are omitted because of the absence of conditions under
which they are required or because the required information is included in the
financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
37
<PAGE> 40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information with respect to the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert Nederlander................ 65 Chairman of the Board, Chief Executive
Officer and Director
Jerome J. Cohen................... 70 President and Director
Don A. Mayerson................... 71 Executive Vice President, General Counsel
and Secretary
Herbert B. Hirsch................. 62 Senior Vice President, Chief Financial
Officer, Treasurer and Director
Eugene I. Schuster................ 61 Vice President and Director
Wilbur L. Ross, Jr................ 60 Director
John E. McConnaughy, Jr........... 69 Director
Frederick H. Conte................ 46 President and Chief Operating Officer of
PEC
Jon A. Joseph..................... 51 Vice President and Associate General
Counsel
Charles G. Baltuskonis............ 48 Vice President and Chief Accounting Officer
Richard L. Rodriguez.............. 41 Vice President
</TABLE>
Robert Nederlander has been the Chairman of the Board and Chief Executive
Officer of the Company since January 1988, when affiliates of the Assignors,
including Mr. Cohen, acquired approximately 43% of the outstanding common stock
of the Company (Share Acquisition). See "Item 13. Certain Relationships and
Related Transactions." Mr. Nederlander is the Chairman of the Executive
Committee and a member of the Audit Committee. Since July 1995, Mr. Nederlander
served on the Board of Directors of Cendant Corporation, formerly Hospitality
Franchise Systems, Inc. (HFS). In April 1995, prior to Mr. Nederlander becoming
a Board member of HFS, the Company entered into an agreement with Ramada, a
subsidiary of Cendant Corporation, pursuant to which the Company is licensed to
use the Ramada name in its timeshare operations. Mr. Nederlander has been
Chairman of the Board of Riddell Sports Inc. since April 1988 and was Riddell
Sports Inc.'s Chief Executive Officer from April 1988 through March 1993. From
February 1992 until June 1992, Mr. Nederlander was also Riddell Sports Inc.'s
interim President and Chief Operating Officer. Since November 1981, Mr.
Nederlander has been President and a director of the Nederlander Organization,
Inc., owner and operator of one the world's largest chains of legitimate
theaters. Mr. Nederlander served as the Managing General Partner of the New York
Yankees from August 1990 until December 1991, and has been a limited partner
since 1973. Since October 1985, Mr. Nederlander has been President of
Nederlander Television and Film Productions, Inc.; Vice Chairman of the Board
from February 1988 to early 1993 of Vacation Spa Resorts, Inc., an affiliate of
the Company; and Chairman of the Board of Allis-Chalmers Corp. from May 1989 to
1993, and from 1993 to 1996 as Vice Chairman. Mr. Nederlander remains a director
of Allis-Chalmers Corp. Mr. Nederlander was a director of MMC from September
1996 until June 1998. In October 1996, Mr. Nederlander became a director of News
Communications Inc., a publisher of community oriented free circulation
newspapers. Mr. Nederlander does not currently serve on a full time basis in his
capacities with the Company.
Jerome J. Cohen has been the President and a Director of the Company since
the Share Acquisition. Mr. Cohen serves as a member of the Executive Committee
and is Chairman of the Board and Chief Executive Officer of PEC. Mr. Cohen
served as Chairman of the Board of MMC from April 1995 to June 1998, as Chief
Executive Officer from June 1992 to September 1997 and as President from June
1992 to until March 1995. From April 1992 to June 1997, Mr. Cohen was a director
of Atlantic Gulf Communities Inc.,
38
<PAGE> 41
formerly known as General Development Corporation, a publicly held company
engaged in land development, land sales and utility operations in Florida and
Tennessee.
Don A. Mayerson has been the Secretary of the Company since the Share
Acquisition and the Executive Vice President and General Counsel of the Company
since April 1988. Mr. Mayerson served as a director of MMC from June 1992 until
June 1998 and served as Vice President, General Counsel and Secretary of MMC
from 1992 to September 1996. Mr. Mayerson has advised the Company that he plans
to retire on December 31, 1998.
Herbert B. Hirsch has been the Senior Vice President, Chief Financial
Officer, Treasurer and a Director of the Company since the Share Acquisition.
Mr. Hirsch serves as a member of the Executive Committee. Mr. Hirsch served as a
director of MMC from June 1992 to June 1998, and served as Vice President, Chief
Financial Officer and Treasurer of MMC from 1992 to September 1996.
Eugene I. Schuster has been a Vice President and a Director of the Company
since the Share Acquisition. Mr. Schuster is a member of the Stock Option
Committee. Mr. Schuster has also been Chief Executive Officer and Chairman of
the Board of Directors of Venture Funding, Ltd., a business development
corporation, since its inception in May 1983. Since February 1986, Mr. Schuster
has been the President and Chief Executive Officer and a director of Quest
BioTechnology, Inc., a publicly held biotechnology research and development
firm. Since September 1985, Mr. Schuster has been a director of Wavemat, Inc., a
publicly held company engaged in the manufacture and sale of microwave equipment
for advanced materials processing. Since January 1988, Mr. Schuster has been the
Chairman and from May 1988 through February 1995 was Chief Executive Officer, of
Cellex Biosciences, Inc., a publicly held manufacturer of automated cell culture
systems. Mr. Schuster is Chairman and Chief Executive Officer of Art
Renaissance, Inc., a privately held company which operates several chains of
retail art galleries. Mr. Schuster does not currently serve on a full time basis
in his capacities with the Company.
Wilbur L. Ross, Jr. has been a Director of the Company since 1984. Mr. Ross
serves as a member of the Audit, Stock Option and Executive Incentive
Compensation Committees. Mr. Ross has been a Senior Managing Director of
Rothschild Inc., an investment banking firm, since August 1976. Mr. Ross serves
as a director of Syms Corporation and is Chief Executive Officer and a director
of News Communications, Inc. and is a director of KTI, Inc.
John E. McConnaughy, Jr. has been a Director of the Company since 1984. Mr.
McConnaughy serves as Chairman of the Audit Committee and a member of the Stock
Option and Executive Incentive Compensation Committees. Mr. McConnaughy was
Chairman and Chief Executive Officer of Peabody International Corp. from 1969 to
1986. He was Chairman and Chief Executive Officer of GEO International Corp.
(GEO), a nondestructive testing, screen printing and oil field services company,
from 1981 to 1992. GEO was spun off in 1981 and became publicly held. Mr.
McConnaughy has been a director of Oxigene, Inc., Texstar Corporation, MAI
Corporation, Akzona Corp., First Bank Corp. (New Haven), Beringer Co., Inc. the
Pullman Co., Moore McCormack Resources and Peabody International Corp. He is
currently on the Board of Directors of Transact International, Inc., DeVlieg
Bullard, Inc., Levcor International, Inc., Riddell Sports, Inc., Wave Systems,
Inc and Adrien Arpel, Inc. Mr. McConnaughy is on the Board of Trustees and
Executive Committee of the Strang Cancer Prevention Center and is Chairman of
the Board of the Harlem School of the Arts.
Frederick H. Conte has been with PEC since 1978, and has been its President
and Chief Operating Officer since June 1998. Prior to this, Mr. Conte held
various positions at PEC, including that of Executive Vice President and Chief
Operating Officer, since February 1988.
Jon A. Joseph has been a Vice President and Associate General Counsel of
the Company since July 1995. Mr. Joseph was Executive Vice President of Valley
Bank of Nevada from 1984 to 1991. In 1992, Valley Bank of Nevada was acquired by
Bank of America. Mr. Joseph remained with the legal department of Bank of
America until June 1, 1995, when he joined the Company.
Charles G. Baltuskonis has been a Vice President and Chief Accounting
Officer of the Company since April 1997. He is a certified public accountant and
served as Senior Vice President and Controller of Chase
39
<PAGE> 42
Federal Bank from May 1995 to March 1997. Prior to that date, he was Chief
Financial Officer of F&C Bancshares and First Coastal Bank, a Senior Vice
President -- Finance of Bank of New England, and was a Senior Manager with the
public accounting firm of Ernst & Young.
Richard L. Rodriguez has been with PEC since 1984, and has been its
Treasurer since January 1994. He became a Vice President of Mego Financial in
November 1998 and a Vice President of PEC in August 1991. Prior to this Mr.
Rodriguez held various positions at PEC including General Manager of Customer
Services in 1985 and Manager of Financial Operations in April 1988.
PEC is currently undergoing a management transition. Jerome J. Cohen is
re-assuming the position of President of PEC which he held between 1988 and June
1998. Gregg A. McMurtrie, formerly a Vice President of PEC, has been promoted to
Executive Vice President and Chief Operating Officer. Frederick H. Conte,
currently President of PEC, will be leaving PEC after a transition period,
having accepted another senior position in the timeshare industry. Mr. Conte's
departure is on excellent terms with the Company, and he is contractually
obligated not to solicit employees of PEC.
Gregg A. McMurtrie was named Executive Vice President and Chief Operating
Officer of PEC in November 1998. Mr. McMurtrie joined the staff of PEC in August
1982. From August 1982 to July 1987, Mr. McMurtrie served in various capacities
in the credit, internal auditing, marketing, customer relations, sales and
executive departments. He was General Manager, Colorado Land Sales, from
September 1987 to February 1989. Since September 1989, Mr. McMurtrie has served
as Director of Sales Administration. He was promoted to Vice President of PEC in
August 1991. Since February 1992, he has also served as President, Secretary and
Treasurer of Preferred Equities Insurance Agency, Inc.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's Directors and executive officers, and persons who own more than
ten percent of the Company's outstanding common stock, to file with the SEC
initial reports of ownership and reports of changes in ownership of common
stock. Such persons are required by SEC regulation to furnish the Company with
copies of all such reports they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, all Section 16(a) filing requirements applicable to its
officers, Directors and greater than ten percent beneficial owners have been
satisfied, except that a Form 4 filed by Wilbur L. Ross, Jr. with respect to the
sale of an aggregate of 152,500 shares of Common Stock was not timely filed.
ADDITIONAL INFORMATION CONCERNING OFFICERS AND DIRECTORS
The Company's officers are elected annually by the Board of Directors and
serve at the discretion of the Board of Directors. The Company's directors hold
office until the next annual meeting of shareholders and until their successors
have been duly elected and qualified. The Company reimburses all directors for
their expenses in connection with their activities as directors of the Company.
Directors of the Company who are also employees of the Company do not receive
additional compensation for their services as directors. Members of the Board of
Directors of the Company who are not employees of the Company received an annual
fee of $40,000 in fiscal 1998 and will receive an annual fee of $30,000 for
fiscal 1999. Directors are also reimbursed for their expenses incurred in
attending meetings of the Board of Directors and its committees.
Effective as of September 23, 1998, the Company entered into
indemnification agreements with each of its directors and Don A. Mayerson, its
Executive Vice President, General Counsel and Secretary, which superseded
indemnification agreements entered into by the Company and such persons in April
1998. The new indemnification agreements provide certain protections now
afforded by the Company's Articles of Incorporation and By-laws so that they
cannot be changed without the consent of such directors and officer. In
addition, such agreements clarify the procedures for obtaining indemnification
from the Company and require the Company to maintain directors and officers
insurance.
40
<PAGE> 43
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and
long-term compensation earned by the Company's chief executive officer and each
of the four other most highly compensated executive officers whose annual salary
and bonus during the fiscal years presented exceeded $100,000 (Named Executive
Officers).
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
ANNUAL COMPENSATION ----------------------------
-------------------------------------------- NUMBER OF
FISCAL OTHER ANNUAL OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(A) COMPENSATION GRANTED(B) COMPENSATION(C)
--------------------------- ------ -------- -------- ------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Robert Nederlander................... 1996 $150,000 $ 2,885 $3,789 -- $2,293
Chairman of the Board and Chief 1997 150,000 2,885 4,378 -- 2,010
Executive Officer, MFC 1998 200,000 -- 6,373 12,500 1,039
Chairman of the Board, PEC
Jerome J. Cohen,..................... 1996 $300,000 $216,666 $6,279 -- $2,250
President, MFC 1997 300,002 368,800 7,259 -- 2,329
Chief Executive Officer, PEC 1998 300,002 -- 8,383 12,500 2,644
Don A. Mayerson...................... 1996 $200,000 $ 86,680 $5,305 -- $2,250
Executive Vice President, General 1997 200,000 147,520 6,132 -- 2,381
Counsel and Secretary, MFC 1998 200,000 -- 7,077 5,000 2,375
Senior Vice President, PEC
Herbert B. Hirsch.................... 1996 $200,000 $ 86,680 $1,512 -- $2,250
Senior Vice President, Chief 1997 200,000 147,520 1,743 -- 2,319
Financial Officer & Treasurer, MFC 1998 200,000 -- 2,005 5,000 2,341
Senior Vice President and Chief
Financial Officer , PEC
Frederick H. Conte................... 1998 $175,010 $ -- $ -- 30,000 $2,399
President and Chief Operating
Officer, PEC (effective June 1998)
</TABLE>
- ---------------
(a) In January 1997, pursuant to contractual arrangements, incentive
compensation attributable to the year ended August 31, 1996 was paid to
Messrs. Cohen, Mayerson and Hirsch and is included in the above table as
1996 compensation. Incentive compensation attributable to the year ended
August 31, 1997 paid to Messrs. Cohen, Mayerson and Hirsch is included in
the above table as 1997 compensation.
(b) The Company adopted the Stock Option Plan on November 17, 1993, and options
were granted to certain executive officers on December 22, 1993 and
subsequently to other employees, subject to shareholder approval of the
Stock Option Plan. The Stock Option Plan was approved by the shareholders on
February 9, 1994 and later amended and restated. See Stock Option Plan.
One-fifth of each grant to the Named Executive Officers became exercisable
on December 22, 1994 and an additional one-fifth became exercisable on
December 22, 1995 and December 22, 1996. In August 1997, in connection with
the approval by the Company's Board of Directors of the distribution to the
holders of record of the Company's common stock as of August 27, 1997 of all
10 million shares of MMC's common stock held by the Company in the Spin-off,
the Stock Option Committee accelerated the vesting of all such options,
excluding those options granted subsequent to February 26, 1997. See
"Aggregated Fiscal Year-End Option Table" and "Stock Option Plan." There
were 65,000 of options held by Named Executive Officers at August 31, 1998.
There were no options exercised by the executive officers during fiscal
1998. On September 23, 1998, the exercise price of these options was revised
from $3.125 per share to $1.00 per share. There were also an additional
37,500 of options granted on September 23, 1998 to the Named Executive
Officers at an exercise price of $1.00 per share.
(c) Represents the Company's discretionary matching contributions of 25% of the
employee's contribution to the Company's 401(k) Plan on behalf of the
employee.
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<PAGE> 44
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning grants of
stock options made during the fiscal year ended August 31, 1998 to the Named
Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION -------------------------
NAME GRANTED(#) FISCAL YEAR ($/SH)(1) DATE 5%($) 10%($)
---- ------------ ------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Robert Nederlander... 12,500 3.6% $3.438 09/02/02 $ 7,000 $ 20,000
Jerome J. Cohen...... 12,500 3.6% $3.125 09/02/07 $25,000 $ 62,000
Don A. Mayerson...... 5,000 1.4% $3.125 09/02/07 $10,000 $ 25,000
Herbert B. Hirsch.... 5,000 1.4% $3.125 09/02/07 $10,000 $ 25,000
Frederick H. Conte... 30,000 8.6% $3.125 09/02/07 $59,000 $149,000
</TABLE>
- ---------------
(1) On September 23, 1998, the exercise price of these options was revised to
$1.00 per share which represented fair value at the date of repricing.
AGGREGATED FISCAL YEAR-END OPTION VALUE TABLE
The following table sets forth certain information concerning unexercised
stock options held by the Named Executive Officers as of August 31, 1998. No
stock options were exercised by the Named Executive Officers during the fiscal
year ended August 31, 1998. See "Stock Option Plan" below in this section.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS HELD AT OPTIONS HELD AT
AUGUST 31, 1998 AUGUST 31, 1998(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert Nederlander......................... -- 12,500 $ -- $ --
Jerome J. Cohen............................ -- 12,500 $ -- $ --
Don A. Mayerson............................ -- 5,000 $ -- $ --
Herbert B. Hirsch.......................... -- 5,000 $ -- $ --
Frederick H. Conte......................... -- 30,000 $ -- $ --
</TABLE>
- ---------------
(1) The closing sales price of the Company's Common Stock as reported on the
Nasdaq National Market on August 31, 1998 was $1.938. The exercise price as
of August 31, 1998 was $3.125 per share, therefore, the value of the
unexercised options at August 31, 1998 was zero. On September 23, 1998, the
exercise price of these options was revised to $1.00 per share which
represented fair value at the date of repricing.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Jerome J. Cohen
which expires on January 31, 2002. The agreement provides for an annual base
salary of $300,000 plus 2.5% of Incentive Income as defined in the Company's
Incentive Plan (See "Executive Incentive Compensation Plan"). Mr. Cohen's
employment agreement does not provide for an early termination bonus or other
additional compensation based on performance.
The Company has entered into an employment agreement with Jon A. Joseph
which expires on August 31, 2000 and provides for an annual base salary of
$175,000 and a minimum annual bonus of $25,000.
PEC has entered into a compensation agreement with Frederick H. Conte which
provides for an annual base salary of $240,000. In addition, Mr. Conte is to
receive an incentive bonus each full fiscal year during Mr. Conte' s employment
at PEC commencing with fiscal 1999 and shall receive an incentive bonus in an
amount equal to .75% of Incentive Income as defined in the Company's Incentive
Plan. If Mr. Conte's employment is terminated by PEC, Mr. Conte shall receive
his base salary to the date of termination and a
42
<PAGE> 45
severance payment of $200,000 payable as installments over the following nine
months after termination. As discussed above, Mr. Conte has informed the Company
that he is terminating his employment with the Company after a short transition
period.
STOCK OPTION PLAN
Under the Company's Stock Option Plan, as originally adopted, 525,000
shares of common stock were reserved for issuance upon exercise of options. In
1997, the Company's Board of Directors approved an amendment to the Stock Option
Plan to increase by 500,000 shares the number of shares of common stock reserved
for issuance pursuant to the Company's Stock Option Plan, subject to approval by
the Company's shareholders. The amendment was approved by the shareholders at
the Annual Meeting held September 9, 1997, resulting in an aggregate of
1,025,000 shares of common stock reserved for issuance pursuant to the Stock
Option Plan of which 461,000 had been issued due to the exercise of options
through August 31, 1997. During fiscal 1998, the Company's Board of Directors
unanimously approved, subject to approval by the Company's shareholders, the
amendment and restatement of the Stock Option Plan. The amendments to the Stock
Option Plan (the Plan Amendments) approved by the Company's Board of Directors
consist of changes to permit the grant of options to non-employee directors of
the Company and changes to conform the Stock Option Plan to changes to the
federal securities laws. On September 16, 1998, the shareholders approved the
amendment and restatement of the Stock Option Plan. The Stock Option Plan is
designed to serve as an incentive for retaining qualified and competent
employees and directors.
The Stock Option Committee of the Company's Board of Directors, administers
and interprets the Stock Option Plan and is authorized, in its discretion, to
grant options thereunder to all eligible employees of the Company, including
officers of the Company. The Stock Option Plan provides for the granting of both
"incentive stock options" (as defined in Section 422A of the Internal Revenue
Code) and nonstatutory stock options. Options can be granted under the Stock
Option Plan on such terms and at such prices as determined by the Board, or a
committee thereof, except that the per share exercise price of options may not
be less than 80% of the fair market value of the common stock on the date of
grant, and, in the case of an incentive stock option, the per share exercise
price may not be less than 100% of such fair market value. In the case of
incentive stock options granted to a 10% shareholder, the per share exercise
price may not be less than 110% of the fair market value of the common stock on
the date of grant and shall expire five years from the date of grant. The
aggregate fair market value of the shares covered by incentive stock options
granted under the Stock Option Plan that become exercisable by a grantee for the
first time in any calendar year is subject to a $100,000 limit.
Options granted under the Stock Option Plan are exercisable after the
period or periods specified in the option agreement. Options granted under the
Stock Option Plan are not exercisable after the expiration of ten years from the
date of grant (except in the case of options granted to 10% shareholders) and
are not transferable other than by will or by the laws of descent and
distribution.
In August 1997, in connection with the Spin-off of MMC, the Stock Option
Committee accelerated the vesting of all options granted, excluding those
granted subsequent to February 26, 1997. As of August 31, 1997, an aggregate of
455,000 of such options were exercised.
In September 1997, subsequent to the Spin-off, 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 were subject to future shareholder approval of the Plan Amendments in
accordance with applicable law, which shareholders' approval was obtained on
September 16, 1998, when the Amended and Restated Stock Option Plan was approved
by shareholders. On September 23, 1998, an additional 111,000 incentive stock
options were granted under the Stock Option Plan. In addition, the exercise
price of all options issued September 2, 1997 was revised from $3.125 per share
to $1.00 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors has not designated a Compensation Committee, but has
delegated the responsibility and authority for setting and overseeing the
administration of policy which governs the
43
<PAGE> 46
compensation of all of the Company's employees (with the exception of Messrs.
Nederlander, Cohen, Mayerson, Hirsch and Schuster) to its President, Jerome J.
Cohen. The compensation paid to Messrs. Nederlander, Cohen, Mayerson, Hirsch and
Schuster is determined by the Board of Directors. The directors who are also
executive officers of the Company do not participate in deliberations of the
Board of Directors of the Company concerning their own compensation.
EXECUTIVE INCENTIVE COMPENSATION PLAN
On June 22, 1994, the Board of Directors of the Company approved and
adopted an Executive Incentive Compensation Plan (Incentive Plan) for executives
and other key employees of the Company and its subsidiaries who contribute to
the success of the Company. Under the terms of the Incentive Plan, awards of
incentive compensation are determined by the Incentive Compensation Committee of
the Board of Directors of the Company, which committee shall be composed of not
less than two members. The Incentive Plan provides that the Board of Directors
may amend, suspend or terminate the Incentive Plan at any time. Incentive
Compensation for any fiscal year is defined as an amount equal to 7.5% of
incentive income (Incentive Income) for such year. Incentive Income for any
fiscal year is defined as the amount reported as income before taxes in the
consolidated financial statements of the Company for such year. The maximum
amount of all awards of Incentive Compensation for any fiscal year shall not
exceed (a) 7.5% of Incentive Income for such year, reduced by (b) the amount of
Incentive Income which must be paid by the Company to employees pursuant to any
contractual obligation of the Company, increased by (c) any unawarded Incentive
Compensation carried forward from a prior fiscal year.
On June 22, 1994, the Board of Directors also approved an employment
agreement with Mr. Jerome J. Cohen, President of the Company, and agreements
with Messrs. Don A. Mayerson and Herbert B. Hirsch, executive officers of the
Company, pursuant to which Messrs. Cohen, Mayerson and Hirsch are entitled to
receive 2.5%, 1% and 1% respectively, of Incentive Income of the Company, as
defined in the Incentive Plan, for the five-year period commencing with fiscal
1995 (extended to a seven-year period for Mr. Cohen), which amounts would
directly reduce the amounts available for awards under the Incentive Plan.
On September 2, 1997, the Board of Directors increased the annual salaries
of Messrs. Nederlander and Schuster to $200,000 and $75,000, respectively. At
that meeting, the Board also authorized agreements with Messrs. Mayerson and
Hirsch pursuant to which the Company would pay them, as a separation payment,
$250,000 and $150,000, respectively, at such time as they no longer are employed
by the Company.
SPLIT-DOLLAR INSURANCE PLAN
On April 5, 1995, the Board of Directors of the Company established a
split-dollar life insurance plan (Split-Dollar Plan) pursuant to which the
Company pays the premiums for certain "second to die" life insurance policies on
the lives of Robert Nederlander, Jerome J. Cohen, Don A. Mayerson and Herbert B.
Hirsch, executive officers of the Company (Messrs. Nederlander, Cohen and Hirsch
are also directors of the Company), and their respective spouses, for a period
not to exceed five years, at an annual aggregate premium outlay of $400,000.
Each policy is in the name of a trust established for family beneficiaries
selected by each executive. On August 3, 1995, the Company approved a life
insurance policy for Mr. Schuster at an annual cost of $100,000 for a period of
five years. Pursuant to the plan, and with respect to each policy, after ten
years, or earlier upon the deaths of the respective insured parties, or certain
other events, the Company will receive the amount of premiums paid on the
policy.
44
<PAGE> 47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of November 9, 1998, information with
respect to the beneficial ownership of the Company's common stock by (i) each
person known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of common stock, (ii) each director of the Company, (iii)
each of the Named Executive Officers (as defined in "Item 11. Executive
Compensation"), and (iv) all directors and executive officers of the Company as
a group. Unless otherwise noted, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares of
common stock beneficially owned by them.
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME AND ADDRESS OF AMOUNT AND NATURE OF OUTSTANDING COMMON
BENEFICIAL OWNER OR IDENTITY OF GROUP BENEFICIAL OWNERSHIP(1) STOCK OWNED
------------------------------------- ----------------------- ------------------
<S> <C> <C>
Robert Nederlander(2)......................... 2,039,352 9.7%
Eugene I. Schuster and Growth Realty Inc.
(GRI)(3).................................... 1,835,634 8.7%
Jerome J. Cohen(4)............................ 1,104,464 5.3%
Herbert B. Hirsch(5).......................... 1,623,464 7.7%
Don A. Mayerson(6)............................ 829,555 3.9%
John E. McConnaughy, Jr.(7)................... 594,077 2.8%
Wilbur L. Ross, Jr.(8)........................ 1,000 *
Frederick H. Conte(9)......................... 29,214 0.1%
Friedman Billings Ramsey Group, Inc. and
affiliates(10).............................. 2,326,550 11.1%
All Officers and Directors as a Group (10
persons)(11)................................ 8,070,260 38.4%
</TABLE>
- ---------------
* Less than 1%.
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from November 9, 1998 upon the
exercise of options or warrants. Each beneficial owner's percentage
ownership is determined by assuming that options and warrants that are held
by such person (but not those held by any other person) and that are
exercisable within 60 days from the applicable date have been exercised.
(2) 810 Seventh Avenue, 21st Floor, New York, New York 10019. Includes 250,000
shares held by an affiliate of Mr. Nederlander and 2,500 shares issuable
under an option granted pursuant to the Company's Stock Option Plan. Does
not include 100,000 shares of common stock owned by the Robert E.
Nederlander Foundation, an entity organized and operated exclusively for
charitable purposes (the Foundation), of which Mr. Nederlander is
President. Mr. Nederlander disclaims beneficial ownership of the shares
owned by the Foundation.
(3) 321 Fisher Building, Detroit, Michigan 48202. Consists of (i) 1,599,634
shares held of record by GRI, a wholly-owned subsidiary of Venture Funding,
Ltd. of which Mr. Schuster is a principal shareholder, Director and Chief
Executive Officer, (ii) 235,000 shares held of record by Growth Realty
Holdings L.L.C., a limited liability corporation owned by Mr. Schuster, GRI
and Mr. Schuster's three children, and (iii) 1,000 shares issuable under an
option granted pursuant to the Company's Stock Option Plan.
(4) 1125 N. E. 125th Street, Suite 206, North Miami, Florida 33161. Includes
2,500 shares issuable under an option granted pursuant to the Company's
Stock Option Plan. Excludes 93,503 shares owned by Mr. Cohen's spouse and
500,000 shares owned by a trust for the benefit of his children over which
Mr. Cohen does not have any investment or voting power, as to which he
disclaims beneficial ownership. Also excludes 30,000 shares of common stock
owned by the Rita and Jerome J. Cohen Foundation, Inc., an entity organized
and operated exclusively for charitable purposes (the Cohen Foundation), of
which Mr. Cohen is President. Mr. Cohen disclaims beneficial ownership of
the shares owned by the Cohen Foundation.
45
<PAGE> 48
(5) 230 East Flamingo Road, Las Vegas, Nevada 89109. Includes 1,000 shares
issuable under an option granted pursuant to the Company's Stock Option
Plan.
(6) 1125 N. E. 125th Street, Suite 206, North Miami, Florida 33161. Includes
1,000 shares issuable under an option granted pursuant to the Company's
Stock Option Plan.
(7) 1011 High Ridge Road, Stamford, Connecticut 06905. Includes 1,000 shares
issuable under an option granted pursuant to the Company's Stock Option
Plan. Excludes 3,000 shares owned by a member of Mr. McConnaughy's family,
as to which Mr. McConnaughy does not have any investment or voting power,
and as to which he disclaims beneficial ownership.
(8) 1251 Avenue of the Americas, 51st Floor, New York, New York 10020. Consists
of 1,000 shares issuable under an option granted pursuant to the Company's
Stock Option Plan. Excludes 15,000 shares owned by a member of Mr. Ross'
family and 250,000 shares owned by Rothschild, Inc., of which Mr. Ross is a
Managing Director, over which Mr. Ross does not have any investment or
voting power, and as to which he disclaims beneficial ownership.
(9) 4310 Paradise Road, Las Vegas, NV 89109. Includes 6,000 shares issuable
under an option granted pursuant to the Company's Stock Option Plan.
(10) 1001 19th Street North, Arlington, VA. 22209. Based upon a Schedule 13G
dated July 13, 1998 filed jointly by Friedman Billings Ramsey Group, Inc.,
Friedman Billings Ramsey Group, Inc. Voting Trust, Eric F. Billings,
Emanuel J. Friedman and W. Russell Ramsey with the SEC. Consists of
2,266,550 shares owned by Friedman Billings Ramsey Group, Inc. and 60,000
shares owned personally by Emanuel J. Friedman. The Company has been
advised that Emanuel J. Friedman, Eric F. Billings and W. Russell Ramsey
are each control persons with respect to Friedman Billings Ramsey Group,
Inc. and are the sole voting trustees of the Friedman Billings Ramsey
Group, Inc. Voting Trust, which has sole discretion to vote approximately
89.1% of the voting power of Friedman Billings Ramsey Group, Inc.
(11) See Notes (2) - (9). Also includes 11,000 and 2,500 shares, respectively,
issuable under options granted to Mr. Joseph and Mr. Rodriguez pursuant to
the Company's Stock Option Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Purchase of Preferred Equities Corporation. Pursuant to a Stock Purchase
and Redemption Agreement dated October 6, 1987 and amended October 25, 1987,
Comay Corp., an affiliate of Messrs. Cohen and Mayerson (Comay), GRI, an
affiliate of Mr. Schuster, RRE Corp., an affiliate of Mr. Nederlander (together
with its assignee, RER Corp., another affiliate of Mr. Nederlander, RER), and
H&H Financial Inc., an affiliate of Mr. Hirsch (H&H), obtained the rights (PEC
Purchase Rights) to acquire PEC, a privately-held Nevada corporation engaged in
retail land sales, resort time-sharing and other real estate related activities.
(Comay, GRI, RER and H&H are collectively referred to as the Assignors).
Certain Arrangements Between the Company and Affiliates of Certain Officers
and Directors. Pursuant to the Assignment and Assumption Agreement, dated
February 1, 1988 as subsequently amended, the Assignors assigned (Assignment)
their PEC Purchase Rights to the Company. As part of the consideration for the
Assignment to the Company, the Assignors were entitled to receive from the
Company, on a quarterly basis until January 31, 1995, amounts equal in the
aggregate to 63% of the "Unrestricted Cash Balances" of PEC. The Assignment and
Assumption Agreement defines Unrestricted Cash Balances of PEC as the cash on
hand and on deposit of PEC and its subsidiary as of the end of a fiscal quarter
that could be used to make a dividend or other payment to the Company without
violating the most restrictive loan agreement to which PEC is a party or by
which PEC is bound.
On January 31, 1995, at which point the accrual of payments ceased, the
Company owed the Assignors an aggregate of $13.3 million pursuant to the
Assignment and Assumption Agreement. Pursuant to an amendment (the Amendment) to
the Assignment and Assumption Agreement, dated March 2, 1995, the Assignors
agreed to defer payment of the $10 million of Subordinated Debt and to
subordinate the payment of such amount to them to the Company's repayment of
certain borrowings and the repayment of certain obligations of subsidiaries of
the Company, the repayment of which obligations were guaranteed by the
46
<PAGE> 49
Company. In consideration of the payment deferral and subordination described
above, Warrants for 1 million shares of common stock at an exercise price of
$4.25 per share (the closing market price per share on March 2, 1995) were
granted to the Assignors. The Warrants were exercised in August 1997 in a
non-cash transaction whereby the Subordinated Debt was reduced by $4.25 million.
The Amendment calls for interest to be paid semiannually on the Subordinated
Debt at the rate of 10% per annum starting September 1, 1995, and seven equal
semiannual payments of $1.4 million plus interest, which commenced March 1,
1997. However, in connection with the reduction of the Subordinated Debt,
payments accumulating $4.25 million have been deemed paid and the semiannual
payments will resume in March 1999, with a partial payment in September 1998,
pursuant to the Third Amendment to the Assignment and Assumption Agreement. The
Subordinated Debt is collateralized by a pledge of PEC's outstanding stock. In
addition to the Subordinated Debt, at May 31, 1995, $3.3 million was payable to
the Assignors, which amount bore interest at the rate of 10% per year, payable
semiannually pursuant to the provisions of the Assignment and Assumption
Agreement (Unsubordinated Amount). During fiscal 1998, the Company paid an
aggregate of $640,000 to the Assignors on the subordinated debt, all of which
represented interest. The Unsubordinated Amount was paid in full in January
1997.
In April 1995, PEC entered into an arrangement with Ramada, a subsidiary of
Cendant Corporation, of which Mr. Nederlander became a director in July 1995.
See "Business -- Preferred Equities Corporation -- Timeshare Properties and
Sales."
Transactions with 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 conventional
uninsured home improvement and debt consolidation loans which are generally
secured by liens on residential property.
In November 1996, MMC consummated 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, Mego Financial distributed all of its 10 million
shares of MMC's common stock to Mego Financial's shareholders in the Spin-off.
To fund MMC's past operations and growth and in conjunction with filing
consolidated income tax returns, MMC incurred debt to the Company and its
subsidiary, PEC. The amount of intercompany debt was $10.1 million at August 31,
1997 of which $3.4 million was paid in October 1997 together with $500,000
advanced by the Company to MMC in September 1997. Subsequently, separate
agreements were made in April and June 1998 to adjust by reductions the
remaining $6.2 million indebtedness, since the major portion was no longer
payable under the Tax Sharing and Indemnity Agreement between the Company and
MMC, in consideration of which MMC paid $1.6 million, which was separately owed
to PEC. Following this transaction, MMC had no outstanding indebtedness to the
Company. See Note 4 to Notes to Consolidated Financial Statements.
Management Services Provided by PEC to MMC. MMC and PEC were parties to a
management services arrangement (the Management Arrangement) pursuant to which
certain executive, accounting, legal, management information, data processing,
human resources, advertising and promotional personnel of PEC provided services
to MMC on an as needed basis. For the years ended August 31, 1998, 1997 and
1996, approximately $616,000, $967,000, and $671,000, respectively, of the
salaries and expenses of certain employees of PEC were attributable to and paid
by MMC in connection with services rendered by such employees to MMC. In
addition, during the year ended August 31, 1996, MMC paid PEC for developing
certain computer programming costs of $56,000. This agreement was terminated by
agreement during fiscal 1998.
Servicing Agreement between PEC and MMC. Prior to September 1, 1996, MMC
had an arrangement with PEC pursuant to which it paid annual servicing fees at
an annual rate of 50 basis points on the principal balance of loans serviced.
For the years ended August 31, 1998, 1997 and 1996, MMC paid servicing fees to
PEC of approximately $2,008,000, $1,766,000 and $709,000, respectively. MMC
entered into a servicing agreement with PEC (the Servicing Agreement), providing
for the payment of servicing fees at an annual rate of 50 basis points on the
principal balance of loans serviced per year. The Servicing Agreement was
modified
47
<PAGE> 50
effective September 1, 1997, to provide for the payment of servicing fees at an
annual rate of 40 basis points on the principal balance of loans serviced per
year, reducing to 35 basis points per year. For the years ended August 31, 1998,
1997 and 1996, MMC incurred interest expense in the amount of $29,000, $16,000
and $29,000, respectively, related to fees payable to PEC for these services.
The interest rates were based on PEC's average cost of funds and equaled 10.46%
in 1998, 10.48% in 1997 and 10.68% in 1996. By agreement prior to August 31,
1998, PEC no longer services loans for MMC.
48
<PAGE> 51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)Certain documents filed as part of Form 10-K. See Item 8 above for a list of
financial statements included as part of this Annual Report on Form 10-K.
(b)Reports on Form 8-K. The Company did not file any current report on Form 8-K
during the quarter ended August 31, 1998.
(c) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.1(1) Disclosure Statement dated October 3, 1983, together with
Schedules A through G and Debtors' Plan, filed as Exhibit
(2) to Mego International (a predecessor of the Company)
Form 10-K for the year ended February 28, 1983, and
incorporated herein by reference.
2.2(8) Articles of Merger of Vacation Spa Resorts, Inc. with and
into Preferred Equities Corporation dated March 10, 1993,
Agreement and Plan of Merger dated as of July 24, 1992,
among Preferred Equities Corporation and Vacation Spa
Resorts, Inc., Amendment to Agreement and Plan of Merger
dated July 14, 1992, and Amendment to Agreement and Plan of
Merger dated December 7, 1992.
3.1(a)(1) Certificate of Incorporation of the Company, as amended,
filed as Exhibit 3.1 to the Company's Form 10-K for the
fiscal year ended August 31, 1987 and incorporated herein by
reference.
3.1(b)(5) Certificate of Amendment of the Certificate of Incorporation
of the Company, dated June 19, 1992.
3.1(c)(8) Certificate of Amendment of the Certificate of Incorporation
of the Company, dated August 26, 1993.
3.2(1) By-laws of the Company, as amended.
3.3(10) Mego Mortgage Corporation Amended and Restated Certificate
of Incorporation of Mego Mortgage Corporation.
3.4(10) Mego Mortgage Corporation By-laws of Mego Mortgage
Corporation, as amended.
4.1(10) Mego Mortgage Corporation Specimen Common Stock Certificate.
10.4(a)(1) Stock Purchase Agreement dated October 25, 1987 by and among
the Company, and Robert Nederlander, Jerome J. Cohen, Don A.
Mayerson, Herbert Hirsch and Growth Realty Inc. (GRI)
(collectively, the Purchasers) filed as Exhibit A to a
Schedule 13D dated October 25, 1987, filed by Jerome J.
Cohen, et al., and incorporated herein by reference.
10.4(b)(1) Letter dated January 7, 1988 from the Purchasers of the
Company, updating representations made by the Company, in
the Stock Purchase Agreement (Exhibit 10.5(a)) filed as
Exhibit 10.2 to a Current Report on Form 8-K of the Company,
dated January 7, 1988, and incorporated herein by reference.
10.5(a)(1) Assignment Agreement dated October 25, 1987 by and among
Comay Corp. (Comay), GRI, RER Corp. (RER) (as successor in
interest to RRE Corp.) and H&H Financial, Inc. (H&H)
(collectively the Assignors) and the Company, with respect
to shares of Common Stock of Preferred Equities Corporation
(PEC), filed as Exhibit B to a Schedule 13D dated October
25, 1987 filed by Jerome J. Cohen, et al., and incorporated
herein by reference.
</TABLE>
49
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.5(b)(1) Assignment and Assumption Agreement dated February 1, 1988
by and among the Assignors and the Company filed as Exhibit
10.2 to a Current Report of Form 8-K of the Company, dated
February 1, 1988 and incorporated herein by reference.
10.5(c)(1) Amendment to Exhibit 10.6(b) dated as of July 29, 1988 filed
as Exhibit 10.3 to a Current Report on Form 8-K of the
Company, dated August 1, 1988 and incorporated herein by
reference.
10.6(a)(1) Stock Purchase and Redemption Agreement dated as of October
6, 1987 by and among PEC, Comay, GRI, RRE Corp., H&H, Linda
Sterling and the 1971 Rosen Family Stock Trust filed as
Exhibit C to a Schedule 13D dated October 25, 1987 filed by
Jerome J. Cohen, et al., and incorporated herein by
reference.
10.6(b)(1) Amendment dated as of October 25, 1987 of Exhibit 10.7(a)
filed as Exhibit 10.3(b) to a Current Report on Form 8-K of
the Company dated February 1, 1988, and incorporated herein
by reference.
10.7(1) Loan and Security Agreement dated February 1, 1988 by and
between the Company and Greyhound Real Estate Finance
Company filed as Exhibit 10.7 to a Current Report on Form
8-K of the Company dated February 1, 1988 and incorporated
herein by reference.
10.8(1) Pledge and Security Agreement dated February 1, 1988 by and
among the Company and Comay, GRI, REF, H&H and PEC regarding
the pledge of PEC stock pursuant to the Assignment Agreement
and the Assignment and Assumption Agreement (Exhibits
10.6(a) and (b)) filed as Exhibit 10.8 to the Form 8
Amendment dated April 18, 1988 to a Current Report on Form
8-K of the Company dated February 1, 1988 and incorporated
herein by reference.
10.9(1) Purchase Agreement dated June 30, 1988 by and among
Preferred Equities Corporation (PEC), Southern Colorado
Properties, Inc., Colorado Land and Grazing Company and The
Oxford Finance Companies, Inc. filed as Exhibit 10.1 to a
Quarterly Report of the Company on Form 10-Q for the quarter
ended May 31, 1988 and incorporated herein by reference.
10.10(2) Amendment to Exhibit 10.5(b), dated July 29, 1988.
10.11(3) Amended and Restated Loan and Security Agreement between
Greyhound Real Estate Finance Company and Vacation Spa
Resorts, Inc., dated May 10, 1989 and Amended and Restated
Promissory Note and Guarantee and Subordination Agreement.
10.12(3) Amendment No. 2 to Loan and Security Agreement between
Greyhound Real Estate Finance Company and Vacation Spa
Resorts, Inc., dated April 16, 1990 and Amendment No. 2 to
Promissory Note and Guarantee and Subordination Agreement.
10.13(3) Purchase Agreement dated 24th day of September, 1990 by and
among Brigantine Inn, Ltd., Brigantine Preferred Properties,
Inc. and Preferred Equities Corporation.
10.14(3) Purchase Agreement dated 24th day of September, 1990 by and
among Brigantine Villas, L.P., Brigantine Preferred
Properties, Inc., and Preferred Equities Corporation.
10.15(4) Amendment No. 3 to Loan and Security Agreement between
Greyhound Real Estate Finance Company and Preferred Equities
Corporation, dated May 31, 1991 and Amendment No. 2 to
Promissory Note.
10.16(4) Amendment No. 3 to Loan and Security Agreement between
Greyhound Real Estate Finance Company and Vacation Spa
Resorts, Inc., dated May 31, 1991 and Amendment No. 2 to
Promissory Note.
10.17(4) Loan and Security Agreement between Dorfinco Corporation and
Preferred Equities Corporation, dated July 31, 1991 and
related Promissory Note dated August 9, 1991.
</TABLE>
50
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.18(4) Forbearance and Assumption Agreement, Guarantee and Second
Amendment to Loan and Security Agreement between Chemical
Bank of New Jersey, Brigantine Villas, L.P. and Brigantine
Preferred Properties, Inc., dated June 12, 1991, Amended and
Restated Promissory Note dated June 18, 1991, and Second
Amendment to Mortgage dated June 18, 1991.
10.19(5) Stock Purchase Agreement dated August 13, 1992 between the
Company and PEC.
10.20(5) Amendment No. 4 to Amended and Restated Loan and Security
Agreement between Greyhound Real Estate Finance Company and
Preferred Equities Corporation, dated January 13, 1992, and
Amendment No. 3 to Amended and Restated Promissory Note.
10.21(5) Agreement to Wholesale Financing and related Promissory Note
between ITT Commercial Finance Corp. and Calvada Homes,
Inc., dated January 17, 1992.
10.22(5) Purchase and Sale Agreement between Golden West Homes and
Calvada Homes, Inc., dated February 26, 1992.
10.23(5) Standard Form of Agreement between Owner and Contractor
between Calvada Homes, Inc. and Emfad Enterprises, Inc.,
dated March 23, 1992.
10.24(5) Loan Modification and Extension Agreement between Valley
Bank of Nevada and Preferred Equities Corporation dated
January 30, 1992.
10.25(5) Amendment No. 2 to Amended and Restated Loan Agreement
between Valley Bank of Nevada and Vacation Spa Resorts,
Inc., dated February 20, 1992, and related Promissory Note
dated February 20, 1992.
10.26(6) Purchase and Servicing Agreement dated as of October 15,
1992 among Vacation Spa Resorts, Inc. and Preferred Equities
Corporation as Sellers, Preferred Equities Corporation as
Servicer, and NBD Bank, N.A. as Purchaser.
10.27(6) Guaranty Agreement as of October 15, 1992 made by Vacation
Spa Resorts, Inc., Preferred Equities Corporation, and the
Company in favor of NBD Bank, N.A.
10.28(6) Letter from Greyhound Financial Corporation dated December
4, 1992 extending the borrowing term of the Amended and
Restated Loan and Security Agreement dated May 10, 1992,
between Greyhound Real Estate Finance Company and Preferred
Equities Corporation and Loan and Security Agreement dated
March 30, 1989, between Greyhound Real Estate Finance
Company and Vacation Spa Resorts, Inc., to December 31,
1992.
10.29(7) Asset Sale Agreement dated December 22, 1992, by and between
Brigantine Preferred Properties, Inc. as Seller, and The
Oxford Finance Companies as Buyer.
10.30(7) Amendment No. 5 to Amended and Restated Loan and Security
Agreement between Greyhound Real Estate Finance Company and
Preferred Equities Corporation, dated February 23, 1993,
Amendment No. 4 to Loan and Security Agreement between
Greyhound Real Estate Finance Company and Vacation Spa
Resorts, Inc., dated February 23, 1993.
10.31(7) First Amendment to Stock Purchase Agreement dated March 10,
1993, by and between the Company and Preferred Equities
Corporation.
10.32.(7) Amendment No. 6 to Amended and Restated Loan and Security
Agreement between Greyhound Real Estate Finance Company and
Preferred Equities Corporation, dated June 28, 1993, and
three (3) related Promissory Notes, relating to the Grand
Flamingo Winnick, Grand Flamingo Fountains, and Preferred
Equities Corporation corporate offices.
</TABLE>
51
<PAGE> 54
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.33(7) Second Amendment to Loan and Security Agreement dated June
30, 1993, between Dorfinco Corp. and Preferred Equities
Corporation, and First Amendment to Promissory Note.
10.34(7) Agreement for Sale of Notes Receivable arising from
Timeshares sales dated August 3, 1993, by and between
Brigantine Properties, Inc. as Seller, and The Oxford
Finance Companies as Buyer.
10.35(7) Purchase and Sale Agreement dated August 30, 1993, between
Preferred Equities Corporation as Developer, and Marine
Midland Bank, N.A., and Wellington Financial Corp.
10.36(7) Purchase Agreement dated August 31, 1993, between Mego
Financial Corp. as Seller, and Legg Mason Special Investment
Trust as Buyer, for the purchase of 300,000 shares of the
Company's Preferred Stock.
10.37(8) Amended and Restated Loan Agreement between Bank of America
Nevada and Preferred Equities Corporation, dated September
10, 1993.
10.38(8) Agreement for Line of Credit and Commercial Promissory Note
between Mego Mortgage Corporation and First National Bank of
Boston, dated January 4, 1994.
10.39(8) Amendment No. 7 to Amended and Restated Loan and Security
Agreement between Greyhound Real Estate Finance Company and
Preferred Equities Corporation, dated January 24, 1994.
10.40(8) Agreement between Mego Mortgage Corporation and Hamilton
Consulting, Inc., dated January 31, 1994.
10.41(8) Loan Purchase and Sale Agreement dated March 22, 1994,
between Mego Mortgage Corporation as Buyer, and Southwest
Beneficial Finance, Inc. as Seller.
10.42(8) Amendment No. 8 to Amended and Restated Loan and Security
Agreement between Greyhound Real Estate Finance Company and
Preferred Equities Corporation, dated April 15, 1994.
10.43(8) Purchase and Servicing Agreement dated as of June 1, 1994,
between Preferred Equities Corporation as Seller and
Servicer, and NBD Bank, N.A. as Purchaser.
10.44(8) Purchase and Servicing Agreement dated as of July 6, 1994,
between Preferred Equities Corporation as Seller, and First
National Bank of Boston as Purchaser.
10.45(8) Amendment No. 9 to Amended and Restated Loan and Security
Agreement between Greyhound Real Estate Finance Company and
Preferred Equities Corporation, dated August 31, 1994, and
Amendment No. 4 to Amended and Restated Promissory Note
dated August 31, 1994, Amendment No. 6 to Loan and Security
Agreement between Greyhound Real Estate Finance Company and
Preferred Equities Corporation dated August 31, 1994, and
Amendment No. 4 to Promissory Note dated August 31, 1994,
between Preferred Equities Corporation as
successor-in-interest to Vacation Spa Resorts, Inc., and
Greyhound Financial Corporation.
10.46(8) Master Loan Purchase and Servicing Agreement dated as of
August 26, 1994, between Mego Mortgage Corporation as
Seller, and First National Bank of Boston, as Purchaser.
10.47(9) Third Amendment to Loan and Security Agreement and
Assumption Agreement dated August 23, 1994, by and between
Preferred Equities Corporation, Colorado Land and Grazing
Corp. and Dorfinco Corporation.
10.48(9) General Loan and Security Agreement dated October 5, 1994,
between Steamboat Suites, Inc. and Textron Financial
Corporation.
10.49(9) Purchase and Servicing Agreement, Second Closing, dated
November 29, 1994, between Preferred Equities Corporation
and NBD Bank, N.A.
</TABLE>
52
<PAGE> 55
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.50(9) Form of Agreement with respect to the Company's
"Split-Dollar" Life Insurance Plan, including Form of
Assignment of Limited Interest in Life Insurance as
Collateral Security.
10.51(9) Construction Loan Agreement dated January 20, 1995, by and
between Preferred Equities Corporation and NBD Bank.
10.52(9) Amendment No. 10 to Amended and Restated Loan and Security
Agreement dated January 26, 1995, by and between Greyhound
Financial Corporation and Preferred Equities Corporation.
10.53(9) Loan Agreement re: Calvada Golf Course dated January 31,
1995, by and among The First National Bank of Boston and
Preferred Equities Corporation.
10.54(9) Second Amendment to Assignment and Assumption Agreement
dated March 2, 1995, by and between RER Corp., Comay Corp.,
Growth Realty, Inc. and H&H Financial, Inc. and Mego
Financial Corp.
10.55(9) First Amendment to General Loan and Security Agreement dated
February 27, 1995, between Steamboat Suites, Inc. and
Textron Financial Corporation.
10.56(9) Master Loan Purchase and Servicing Agreement dated April 1,
1995, by and between Greenwich Capital Financial Products,
Inc. and Mego Mortgage Corporation.
10.57(9) Licensing Agreement dated April 18, 1995, by and among
Hospitality Franchise Systems, Inc., Ramada Franchise
Systems, Inc. and Preferred Equities Corporation.
10.58(9) Purchase and Servicing Agreement, Third Closing, dated May
24, 1995, between NBD Bank, N.A. and Preferred Equities
Corporation.
10.59(9) Participation and Servicing Agreement dated May 25, 1995, by
and between Atlantic Bank, N.A. and Mego Mortgage
Corporation.
10.60(9) Purchase and Servicing Agreement, dated as of August 31,
1995, between Preferred Equities Corporation, Colorado Land
and Grazing Corp. and First National Bank of Boston.
10.61(9) Warehousing Credit and Security Agreement, dated as of
August 11, 1995, between Mego Mortgage Corporation and First
National Bank of Boston.
10.62(10) Mego Mortgage Corporation Stock Option Plan.
10.63(10) Form of Tax Allocation and Indemnity Agreement entered into
between Mego Mortgage Corporation and the Company.
10.64(10) Loan Program Sub-Servicing Agreement between Mego Mortgage
Corporation and Preferred Equities Corporation dated as of
September 1, 1996.
10.65(10) Servicing Agreement by and among Mego Mortgage FHA Title I
Loan Trust 1996-1, First Trust of New York, National
Association, as Trustee, Norwest Bank Minnesota, N.A. as
Master Servicer and the Registrant, as Servicer dated as of
March 21, 1996.
10.66(10) Loan Purchase Agreement between Financial Asset Securities
Corp., as Purchaser, and the Mego Mortgage Corporation, as
Seller, dated as of March 21, 1996.
10.67(11) Indemnification Agreement among MBIA Insurance Corporation,
as Insurer, Mego Mortgage Corporation, as Seller and
Greenwich Capital Markets, Inc. as Underwriter, dated as of
March 29, 1996.
10.68(10) Pooling and Servicing Agreement, dated as of March 21, 1996,
among Mego Mortgage Corporation, Financial Asset Securities
Corp., as Depositor, First Trust of New York, National
Association, as Trustee and Contract of Insurance Holder and
Norwest Bank Minnesota, N.A., as Master Servicer.
</TABLE>
53
<PAGE> 56
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.69(11) Insurance Agreement among MBIA Insurance Corporation, as
Insurer, Norwest Bank Minnesota, N.A., as Master Servicer,
Mego Mortgage Corporation, as Seller, Servicer and Claims
Administrator, Financial Asset Securities Corp., as
Depositor, Greenwich Capital Financial Products, Inc., and
First Trust of New York, National Association, as Trustee
and Contract of Insurance Holder, dated as of March 21,
1996.
10.70(11) Credit Agreement dated as of June 28, 1996 between Mego
Mortgage Corporation and First National Bank of Boston as
Agent.
10.71(10) Loan Purchase Agreement dated as of August 1, 1996 between
Financial Asset Securities Corp., as Purchaser, and Mego
Mortgage Corporation, as Seller.
10.72(10) Pooling and Servicing Agreement dated as of August 1, 1996
between Financial Asset Securities Corp., as Purchaser, and
Mego Mortgage Corporation, as Seller.
10.73(11) Amendment No. 1 to Warehousing Credit and Security Agreement
dated as of August 9, 1996 between Mego Mortgage Corporation
and First National Bank of Boston.
10.74(10) Office Lease by and between MassMutual and Mego Mortgage
Corporation dated April 1996.
10.75(11) Amendment to Master Loan Purchase and Servicing Agreement
between Greenwich Capital Financial Products, Inc., and Mego
Mortgage Corporation dated February 1, 1996.
10.76(11) Amendment No. 2 to Master Loan Purchase and Servicing
Agreement between Greenwich Capital Financial Products,
Inc., and Mego Mortgage Corporation dated July 1, 1996.
10.77(10) Services and Consulting Agreement between Mego Mortgage
Corporation and Preferred Equities Corporation dated as of
September 1, 1996.
10.78(11) Employment Agreement between Mego Mortgage Corporation and
Jeffrey S. Moore dated January 1, 1994.
10.79(11) Form of Indenture entered into between Mego Mortgage
Corporation and the Indenture Trustee.
10.80(10) Master Repurchase Agreement dated as of September 4, 1996
between Mego Mortgage Corporation and Greenwich Capital
Markets, Inc.
10.81(10) Letter agreement dated October 1, 1996 between Mego Mortgage
Corporation and Greenwich Capital Markets, Inc.
10.82(10) Amended and Restated Master Loan Purchase and Servicing
Agreement dated as of October 1, 1996 among Mego Mortgage
Corporation, Mego Financial Corp. and Greenwich Capital
Markets, Inc.
10.83(10) Form of Agreement entered into between Mego Mortgage
Corporation and Mego Financial Corp.
10.84(10) Commitment letter between Mego Mortgage Corporation and
Greenwich Capital Markets, Inc. dated September 17, 1996.
10.85(12) Amendment No. 11 to Amended and Restated Loan and Security
Agreement dated September 22, 1995, by and between Finova
Capital Corporation and Preferred Equities Corporation and
related Promissory Note relating to Aloha Bay Phase II.
10.86(12) Amendment No. 12 to Amended and Restated Loan and Security
Agreement dated September 29, 1995, by and between Finova
Capital Corporation and Preferred Equities Corporation and
Amended and Restated Promissory Note relating to Corporate
Office Building.
</TABLE>
54
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.87(12) Fourth Amendment to Loan and Security Agreement and
Assumption Agreement dated September 30, 1995, by and
between Preferred Equities Corporation, Colorado Land and
Grazing Corp., Mego Financial Corp. and Dorfinco
Corporation.
10.88(12) Request for Receivables Purchase dated November 16, 1995, by
and between Preferred Equities Corporation as Seller and NBD
Bank as Purchaser.
10.89(12) Second Amendment to General Loan and Security Agreement
dated November 30, 1995, by and between Steamboat Suites,
Inc. and Textron Financial Corporation and Restated and
Amended Receivables Promissory Note.
10.90(12) Amendment No. 13 to Amended and Restated Loan and Security
Agreement dated December 13, 1995, by and between Finova
Capital Corporation and Preferred Equities Corporation and
three (3) related Promissory Notes, relating to the Grand
Flamingo Towers Lobby, Ida and Winnick Building Additions.
10.91(12) Purchase and Sale Agreement dated December 29, 1995, by and
between Overlook Lodge Limited Liability Company as Seller
and Preferred Equities Corporation as Purchaser.
10.92(12) Second Amendment to Purchase and Sale Agreement dated
February 8, 1996, as previously amended by an Amendment to
Purchase and Sale Agreement dated May 10, 1994, between
Preferred Equities Corporation, Marine Midland Bank, and
Wellington Financial Corp.
10.93(12) Acquisition and Construction Loan Agreement dated March 29,
1996, by and between Heller Financial, Inc. and Preferred
Equities Corporation and three (3) related Promissory Notes;
Acquisition Promissory Note, Revolving Renovation Promissory
Note, and Receivables Promissory Note.
10.94(12) Construction Loan Agreement dated April 30, 1996, by and
between Preferred Equities Corporation and NBD Bank and
related Promissory Note.
10.95(12) Amendment No. 14 to Amended and Restated Loan and Security
Agreement dated June 5, 1996, by and between Finova Capital
Corporation and Preferred Equities Corporation and Second
Amended and Restated Promissory Note, relating to
Headquarters and FCFC Property.
10.96(12) Amendment No. 15 to Amended and Restated Loan and Security
Agreement dated August 16, 1996, by and between Finova
Capital Corporation and Preferred Equities Corporation;
Amendment No. 7 to Loan and Security Agreement; Amendment
No. 5 to Amended and Restated Promissory Note; Amendment No.
5 to Promissory Note; Amendment No. 1 to Promissory Note
[Towers Lobby].
10.97(12) Request for Receivables Purchase dated July 30, 1996, by and
between Preferred Equities Corporation as Seller and NBD
Bank as Purchaser.
10.98(12) Preferred Stock redemption agreement by and between Mego
Financial Corp. and Legg Mason Special Investment Trust,
Inc.
10.99(12) Amendment to Common Stock Purchase Warrant issued by Mego
Financial Corp. to Legg Mason Special Investment Trust, Inc.
10.100(14) Third Amendment to General Loan and Security Agreement dated
November 29, 1996 between Steamboat Suites, Inc. as Debtor
and Textron Financial Corporation as Lender and the related
Restated and Amended Receivables Promissory Note dated
November 30, 1996 effective October 6, 1994.
</TABLE>
55
<PAGE> 58
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.101(14) Fifth Amendment to Loan and Security Agreement dated
November 29, 1996 by and among Preferred Equities
Corporation and Colorado Land and Grazing Corp. as Borrower;
Mego Financial Corp. as Guarantor; and Dorfinco Corporation
as Lender and the related Fourth Amendment to Promissory
Note dated November 29, 1996.
10.102(14) Acquisition and Renovation Loan Agreement dated August 6,
1996 between Heller Financial, Inc. as Lender and Preferred
Equities Corporation as Borrower; and Interval Receivables
Loan and Security Agreement dated August 6, 1996 by and
among Heller Financial, Inc. as Lender and Preferred
Equities Corporation as Borrower and Mego Financial Corp. as
Guarantor, and the three related Promissory Notes.
10.103(15) Subdivision Improvement Agreement dated March 7, 1995
between Preferred Equities Corporation and the Board of
County Commissioners of the County of Nye, State of Nevada.
10.104(15) Subdivision Improvement Agreement dated February 20, 1996
between Preferred Equities Corporation and the Board of
County Commissioners of the County of Nye, State of Nevada.
10.105(15) Subdivision Improvement Agreement dated February 20, 1996
between Preferred Equities Corporation and the Board of
County Commissioners of the County of Nye, State of Nevada.
10.106(15) Subdivision Improvement Agreement dated December 17, 1996
between Preferred Equities Corporation and the Board of
County Commissioners of the County of Nye, State of Nevada.
10.107(15) Subdivision Improvement Agreement dated December 17, 1996
between Preferred Equities Corporation and the Board of
County Commissioners of the County of Nye, State of Nevada.
10.108(15) Subdivision Improvement Agreement dated December 17, 1996
between Preferred Equities Corporation and the Board of
County Commissioners of the County of Nye, State of Nevada.
10.109(15) Subdivision Improvement Agreement dated December 17, 1996
between Preferred Equities Corporation and the Board of
County Commissioners of the County of Nye, State of Nevada.
10.110(15) Subdivision Improvement Agreement dated December 17, 1996
between Preferred Equities Corporation and the Board of
County Commissioners of the County of Nye, State of Nevada.
10.111(15) Commitment letter between Preferred Equities Corporation and
FINOVA Capital Corporation dated March 3, 1997.
10.112(15) Employment Agreement between Mego Financial Corp. and Irving
J. Steinberg dated August 1, 1996.
10.113(16) Employment Agreement between Jerome J. Cohen and Mego
Financial Corp. dated September 1, 1996.
10.114(16) Purchase and Servicing Agreement between Preferred Equities
Corporation as Seller and BankBoston, N.A. as Purchaser
dated May 30, 1997.
10.115(16) Second Amended and Restated and Consolidated Loan and
Security Agreement between Preferred Equities Corporation as
Borrower and FINOVA Capital Corporation as lender, dated May
15, 1997.
10.116(16) Form of Owners Association Agreement between Resort
Condominiums International, Inc. and Homeowners Associations
with schedule listing the associations.
</TABLE>
56
<PAGE> 59
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.117(16) Loan Purchase Agreement dated as of November 1, 1996 between
Financial Asset Securities Corp. and Mego Mortgage
Corporation.
10.118(16) Pooling and Servicing Agreement dated as of November 1, 1996
among Financial Asset Securities Corp., Mego Mortgage
Corporation, Norwest Bank Minnesota, N.A. and First Trust of
New York, National Association.
10.119(16) Home Loan Purchase Agreement dated as of March 1, 1997
between Financial Asset Securities Corp. and Mego Mortgage
Corporation.
10.120(16) Sale and Servicing Agreement dated as of March 1, 1997 among
Mego Mortgage Home Loan Owner Trust 1997-1, Financial Asset
Securities Corp., Mego Mortgage Corporation, Norwest Bank
Minnesota, N.A. and First Trust of New York, National
Association.
10.121(16) Trust Agreement dated as of March 1, 1997 among Financial
Asset Securities Corp., Mego Mortgage Corporation,
Wilmington Trust Company and First Trust of New York,
National Association.
10.122(16) Home Loan Purchase Agreement dated as of May 1, 1997 between
Financial Asset Securities Corp. and Mego Mortgage
Corporation.
10.123(16) Sale and Servicing Agreement dated as of May 1, 1997 among
Mego Mortgage Home Loan Owner Trust 1997-2, Financial Asset
Securities Corp., Mego Mortgage Corporation, Norwest Bank
Minnesota N.A. and First Trust of New York, National
Association.
10.124(16) Trust Agreement dated as of May 1, 1997 among Financial
Asset Securities Corp., Mego Mortgage Corporation,
Wilmington Trust Company and First Trust of New York,
National Association.
10.125(16) Home Loan Purchase Agreement dated as of June 14, 1997
between Financial Asset Securities Corp. and Mego Mortgage
Corporation.
10.126(16) Sale and Servicing Agreement dated as of June 14, 1997 among
Mego Mortgage Home Loan Owner Trust 1997-3, Financial Asset
Securities Corp., Mego Mortgage Corporation, Norwest Bank
Minnesota N.A. and First Trust of New York, National
Association.
10.127(13) Agreement between Mego Financial Corp. and Mego Mortgage
Corporation dated August 29, 1997.
10.128(17) Sub-Servicing Agreement dated September 1, 1996, as amended
September 2, 1997, between Mego Financial Corp., Mego
Mortgage Corporation and Preferred Equities Corporation.
10.129(17) Third Amendment to Assignment and Assumption Agreement by
and between RER Corp., Comay Corp., Growth Realty, Inc. and
H&H Financial, Inc. and Mego Financial Corp. dated August
20, 1997.
10.130(17) Loan and Security Agreement between Litchfield Financial
Corporation and Preferred Equities Corporation dated July
30, 1997.
10.131(17) Employment Agreement between Stuart Harelik and Mego
Financial Corp. dated October 9, 1996.
10.132(17) Employment Agreement between Jon A. Joseph and Mego
Financial Corp. dated August 31, 1997.
10.133(17) Agreement between the Company and Herbert B. Hirsch dated
September 2, 1997 relating to a severance payment.
</TABLE>
57
<PAGE> 60
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.134(17) Agreement between the Company and Don A. Mayerson dated
September 2, 1997 relating to a severance payment.
10.135(17) Amendment to Services and Consulting Agreement between Mego
Mortgage Corporation and Preferred Equities Corporation
dated January 20, 1998.
10.136(17) Amendment to Loan Program Sub-Servicing Agreement between
Mego Mortgage Corporation and Preferred Equities Corporation
dated January 20, 1998.
10.137(17) Agreement between Mego Mortgage Corporation and Preferred
Equities Corporation, dated February 9, 1998, regarding
assignment of rights related to the Loan Program Sub-
Servicing Agreement to Greenwich Capital Markets, Inc.
10.138(17) Mortgage Loan Facility Agreement between FINOVA Capital
Corporation and Preferred Equities Corporation dated
February 18, 1998.
10.139(18) Termination of Services and Consulting Agreement between
Mego Mortgage Corporation and Preferred Equities
Corporation, dated April 22, 1998.
10.140(18) Settlement letter from Mego Financial Corp. to Mego Mortgage
Corporation dated June 26, 1998.
10.141(18) Settlement letter from Preferred Equities Corporation to
Mego Mortgage Corporation dated June 26, 1998.
10.142 Amended and Restated Real Estate Purchase and Sales
Agreement by and among Preferred Equities as borrower and
Mercantile Equities Corporation and Hartsel Springs Ranch of
Colorado, Inc., as Noteholder dated as of November 25, 1997.
10.143 Letter Amendment to General Loan and Security Agreement
dated December 1, 1997, between Steamboat Suites, Inc. and
Textron Financial Corporation.
10.144 Mortgage Loan Facility Agreement between FINOVA Capital
Corporation and Preferred Equities Corporation dated March
20, 1998.
10.145 Loan and Security Agreement dated August 12, 1998 between
Preferred Equities Corporation as Borrower and Dorfinco
Corporation as Lender and the related Promissory Note.
10.146 Post-72 Lots Purchase Money Promissory Note by and among
Preferred Equities and Mercantile Equities Corporation and
Hartsel Springs Ranch of Colorado, Inc. dated as of February
20, 1998.
10.147 Purchase Money Promissory Note by and among Preferred
Equities as borrower and Mercantile Equities Corporation and
Hartsel Springs Ranch of Colorado, Inc., as Noteholder dated
as of February 20, 1998.
10.148 Compensation Agreement between Frederick H. Conte and
Preferred Equities Corporation dated September 1, 1998.
10.149 Form of Indemnification Agreement, each dated as of
September 23, 1998 between the Company and each of Robert
Nederlander, Jerome J. Cohen, Eugene I. Schuster, Herbert B.
Hirsch, John E. McConnaughy, Jr., Wilbur L. Ross, Jr. and
Don A. Mayerson.
21.1(19) List of subsidiaries.
27.1 Financial Data Schedule (for SEC use only).
</TABLE>
- ---------------
(1) Filed as part of the Company's Form 10-K for fiscal year ended August 31,
1988 and incorporated herein by reference.
(2) Filed as part of the Company's Form 10-K for fiscal year ended August 31,
1989 and incorporated herein by reference.
58
<PAGE> 61
(3) Filed as part of the Company's Form 10-K for fiscal year ended August 31,
1990 and incorporated herein by reference.
(4) Filed as part of the Company's Form 10-K for fiscal year ended August 31,
1991 and incorporated herein by reference.
(5) Filed as part of the Company's Registration Statement on Form S-4
originally filed August 31, 1992 and incorporated herein by reference.
(6) Filed as part of the Company's Form 10-K for fiscal year ended August 31,
1992 and incorporated herein by reference.
(7) Filed as part of the Company's Form 10-K for fiscal year ended August 31,
1993 and incorporated herein by reference.
(8) Filed as part of the Company's Form 10-K for fiscal year ended August 31,
1994 and incorporated herein by reference.
(9) Filed as part of the Company's Form 10-K for fiscal year ended August 31,
1995 and incorporated herein by reference.
(10) Filed as part of the Registration Statement on Form S-1 filed by Mego
Mortgage Corporation, as amended (File No. 333-12443), and incorporated
herein by reference.
(11) Filed as part of the Registration Statement on Form S-1 filed by Mego
Mortgage Corporation, as amended (File No. 333-13421), and incorporated
herein by reference.
(12) Filed as part of the Company's Form 10-K for fiscal year ended August 31,
1996 and incorporated herein by reference.
(13) Filed as part of Mego Mortgage Corporation's Form 10-K for fiscal year
ended August 31, 1996 and incorporated herein by reference.
(14) Filed as part of the Company's Form 10-Q for the quarter ended November 30,
1996 and incorporated herein by reference.
(15) Filed as part of the Company's Form 10-Q for the quarter ended February 28,
1997 and incorporated herein by reference.
(16) Filed as part of the Company's Form 10-Q for the quarter ended May 31, 1997
and incorporated herein by reference.
(17) Filed as part of the Company's Form 10-Q for the quarter ended February 28,
1998 and incorporated herein by reference.
(18) Filed as part of the Company's Form 10-Q for the quarter ended May 31, 1998
and incorporated herein by reference.
(19) Filed as part of the Company's Form 10-K for the fiscal year ended August
31, 1997 and incorporated herein by reference.
(d) Financial Statement schedules required by Regulation S-X. No financial
statement schedules are included because of the absence of the conditions
under which they are required or because the information is included in the
financial statements or the notes thereto.
59
<PAGE> 62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
MEGO FINANCIAL CORP.
Date: November 23, 1998 By: /s/ JEROME J. COHEN
--------------------------------------
Jerome J. Cohen, President and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the date(s) indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ROBERT NEDERLANDER Chairman of the November 23, 1998
- -------------------------------------------------------- Board, Chief
Robert Nederlander Executive Officer and
Director
/s/ JEROME J. COHEN President and November 23, 1998
- -------------------------------------------------------- Director
Jerome J. Cohen
/s/ HERBERT B. HIRSCH Senior Vice November 23, 1998
- -------------------------------------------------------- President, Chief
Herbert B. Hirsch Financial Officer,
Treasurer and
Director
/s/ EUGENE I. SCHUSTER Vice President and November 23, 1998
- -------------------------------------------------------- Director
Eugene I. Schuster
/s/ CHARLES G. BALTUSKONIS Vice President and November 23, 1998
- -------------------------------------------------------- Chief Accounting
Charles G. Baltuskonis Officer
/s/ WILBUR L. ROSS, JR. Director November 23, 1998
- --------------------------------------------------------
Wilbur L. Ross, Jr.
/s/ JOHN E. MCCONNAUGHY, JR. Director November 23, 1998
- --------------------------------------------------------
John E. McConnaughy, Jr.
</TABLE>
60
<PAGE> 63
MEGO FINANCIAL CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
----------
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Financial Statements:
Consolidated Balance Sheets at August 31, 1998 and 1997... F-3
Consolidated Statements of Operations -- Years Ended
August 31, 1998, 1997 and 1996......................... F-4
Consolidated Statements of Stockholders' Equity -- Years
Ended August 31, 1998, 1997 and 1996................... F-5
Consolidated Statements of Cash Flows -- Years Ended
August 31, 1998, 1997 and 1996......................... F-6 - F-7
Notes to Consolidated Financial Statements.................. F-8 - F-35
</TABLE>
F-1
<PAGE> 64
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Mego Financial Corp. and Subsidiaries
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheets of Mego
Financial Corp. and its subsidiaries (the Company) as of August 31, 1998 and
1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended August
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Mego Financial Corp. and its
subsidiaries at August 31, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended August 31, 1998
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Diego, California
November 9, 1998
F-2
<PAGE> 65
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Cash and cash equivalents................................... $ 1,813 $ 10,376
Restricted cash............................................. 1,694 2,049
Notes receivable, net of allowance for cancellations and
discounts of $12,403 and $11,341 at August 31, 1998 and
1997, respectively........................................ 47,789 34,274
Interest only receivables, at fair value.................... 3,367 3,296
Timeshare interests held for sale........................... 35,798 35,088
Land and improvements inventory............................. 7,965 2,206
Other investments........................................... 4,395 2,149
Property and equipment, net of accumulated depreciation of
$14,119 and $15,292 at August 31, 1998 and 1997,
respectively.............................................. 23,950 24,220
Deferred selling costs...................................... 3,719 3,153
Prepaid debt expenses....................................... 1,431 1,286
Other assets................................................ 10,155 6,930
Net assets of discontinued operations....................... -- 53,276
-------- --------
TOTAL ASSETS...................................... $142,076 $178,303
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes and contracts payable............................... $ 81,986 $ 65,569
Accounts payable and accrued liabilities.................. 19,098 17,202
Reserve for notes receivable sold with recourse........... 6,620 8,703
Deposits.................................................. 4,877 2,983
Negative goodwill......................................... -- 53
Accrued income taxes...................................... 4,468 6,235
-------- --------
Total liabilities before subordinated debt........ 117,049 100,745
-------- --------
Subordinated debt........................................... 4,348 4,321
Redeemable preferred stock, Series A, 12% cumulative
preferred stock, $.01 par value, $10 redemption value, 0
shares issued and outstanding at August 31, 1998 and
1997...................................................... -- --
Stockholders' equity:
Preferred stock, $.01 par value (authorized--5,000,000
shares)................................................ -- --
Common stock, $.01 par value (authorized--50,000,000
shares); issued and outstanding--21,009,506 at August
31, 1998 and 1997...................................... 210 210
Additional paid-in capital................................ 12,789 34,524
Retained earnings......................................... 7,680 38,503
-------- --------
Total stockholders' equity........................ 20,679 73,237
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $142,076 $178,303
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 66
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES OF CONTINUING OPERATIONS
Timeshare interest sales, net............................. $ 37,713 $ 32,253 $ 27,778
Land sales, net........................................... 13,812 16,626 17,968
Gain on sale of notes receivable.......................... 656 2,013 1,116
Interest income........................................... 7,161 7,168 6,594
Financial income.......................................... 3,304 2,922 1,253
Incidental operations..................................... 2,831 3,050 2,995
Other..................................................... 3,113 3,464 2,948
----------- ----------- -----------
Total revenues of continuing operations........... 68,590 67,496 60,652
----------- ----------- -----------
COSTS AND EXPENSES OF CONTINUING OPERATIONS
Direct cost of:
Timeshare interest sales............................... 7,375 5,922 3,998
Land sales............................................. 1,770 1,571 1,844
Incidental operations.................................. 2,644 2,984 2,257
Marketing and sales....................................... 34,167 34,078 30,351
Depreciation.............................................. 2,245 1,964 1,526
Interest expense.......................................... 7,850 8,458 7,314
General and administrative................................ 17,736 17,175 15,849
----------- ----------- -----------
Total costs and expenses of continuing
operations...................................... 73,787 72,152 63,139
----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES......... (5,197) (4,656) (2,487)
INCOME TAXES (BENEFIT)...................................... (1,968) (12,662) (1,068)
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS.................... (3,229) 8,006 (1,419)
INCOME FROM DISCONTINUED OPERATIONS NET OF INCOME TAXES OF
$9,062 AND $4,235 FOR 1997 AND 1996, RESPECTIVELY, AND
MINORITY INTEREST OF $2,358 FOR 1997...................... -- 11,334 6,270
----------- ----------- -----------
NET INCOME (LOSS)........................................... (3,229) 19,340 4,851
CUMULATIVE PREFERRED STOCK DIVIDENDS........................ -- -- 240
----------- ----------- -----------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK................ $ (3,229) $ 19,340 $ 4,611
=========== =========== ===========
EARNINGS (LOSS) PER COMMON SHARE
Basic:
Income (loss) from continuing operations............... $ (0.15) $ 0.43 $ (0.08)
Income from discontinued operations.................... -- 0.61 0.34
Cumulative preferred stock dividends................... -- -- (0.01)
----------- ----------- -----------
Net income (loss) applicable to common stock........... $ (0.15) $ 1.04 $ 0.25
=========== =========== ===========
Weighted-average number of common shares and common share
equivalents outstanding................................... 21,009,506 18,657,224 18,117,122
=========== =========== ===========
Diluted:
Income (loss) from continuing operations............... $ (0.15) $ 0.41 $ (0.08)
Income from discontinued operations.................... -- 0.58 0.33
Cumulative preferred stock dividends................... -- -- (0.01)
----------- ----------- -----------
Net income (loss) applicable to common stock........... $ (0.15) $ 0.99 $ 0.24
=========== =========== ===========
Weighted-average number of common shares and common share
equivalents outstanding................................... 21,009,506 19,528,470 19,114,888
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 67
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
$.01 PAR VALUE ADDITIONAL
------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at September 1, 1995............. 18,087,556 $180 $ 4,498 $ 14,552 $ 19,230
Issuance of common stock in connection
with the exercise of stock options..... 2,218 1 9 -- 10
Issuance of common stock in connection
with redemption of preferred stock..... 343,347 3 1,997 -- 2,000
Dividends on preferred stock............. -- -- -- (240) (240)
Net income............................... -- -- -- 4,851 4,851
---------- ---- -------- -------- --------
Balance at August 31, 1996............... 18,433,121 184 6,504 19,163 25,851
Gain on sale of stock of subsidiary...... -- -- 13,085 -- 13,085
Issuance of warrants in connection with
commitment received.................... -- -- 3,000 -- 3,000
Issuance of common stock in connection
with the exercise of common stock
warrants............................... 2,300,000 23 11,712 -- 11,735
Issuance of common stock in connection
with exercise of stock options......... 276,385 3 223 -- 226
Net income............................... -- -- -- 19,340 19,340
---------- ---- -------- -------- --------
Balance at August 31, 1997............... 21,009,506 210 34,524 38,503 73,237
Distribution of MMC common stock in
connection with spin-off and
adjustments of receivable from MMC..... -- -- (21,735) (27,594) (49,329)
Net loss................................. -- -- -- (3,229) (3,229)
---------- ---- -------- -------- --------
Balance at August 31, 1998............... 21,009,506 $210 $ 12,789 $ 7,680 $ 20,679
========== ==== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 68
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................................... $ (3,229) $ 19,340 $ 4,851
-------- -------- --------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Amortization of negative goodwill...................... (53) (29) (49)
Charges to allowance for cancellations................. (5,984) (10,470) (6,918)
Provision for cancellations............................ 4,827 10,219 9,778
Gain on sale of notes receivable....................... (656) (2,013) (1,116)
Provision for uncollectible owners' association
advances............................................. (403) 275 12
Cost of sales.......................................... 9,145 7,493 5,842
Depreciation........................................... 2,245 1,964 1,526
Gain on sale of stock subsidiary....................... -- 13,085 --
Additions to interest only receivables................. (523) (1,543) (781)
Amortization of interest only receivables.............. 452 394 716
Repayments on notes receivable, net.................... 36,669 34,243 26,596
Additions to notes receivable.......................... (57,789) (55,469) (51,535)
Proceeds from sale of notes receivable................. 9,418 30,117 16,003
Purchase of land and timeshare interests............... (15,614) (8,911) (20,883)
Additions to other receivables......................... (4,193) -- --
Decreases to other receivables......................... 8,140 -- --
Changes in operating assets and liabilities:
Decrease in restricted cash.......................... 355 134 1,752
Increase in other assets............................. (5,050) (1,328) (957)
Decrease (increase) in deferred selling costs........ (566) (252) 431
Increase in accounts payable and accrued
liabilities....................................... 1,896 1,606 3,837
Increase (decrease) in deposits...................... 1,894 12 (648)
Decrease in payable to assignors..................... -- (2,579) --
Increase (decrease) in accrued income taxes.......... (1,767) (3,836) 2,232
-------- -------- --------
Total adjustments................................. (17,557) 13,112 (14,162)
-------- -------- --------
Net cash provided by (used in) operating
activities...................................... (20,786) 32,452 (9,311)
-------- -------- --------
NET CASH USED IN DISCONTINUED OPERATIONS.................... -- (19,762) (11,280)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment........................ (2,334) (6,811) (8,690)
Proceeds from sale of property and equipment.............. 359 24 19
Additions to other investments............................ (2,246) (769) (1,381)
Decreases in other investments............................ -- 592 940
-------- -------- --------
Net cash used in investing activities............. (4,221) (6,964) (9,112)
-------- -------- --------
</TABLE>
F-6
<PAGE> 69
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings.................................. 51,311 38,568 54,551
Reduction of debt......................................... (34,894) (43,251) (27,801)
Preferred stock dividends................................. -- -- (240)
Redemption of preferred stock............................. -- -- (1,000)
Increase in additional paid-in capital due to exercise of
warrants............................................... -- 7,472 --
Increase in additional paid-in capital due to exercise of
stock options.......................................... -- 223 9
Increase in common stock due to exercise of stock
options................................................ -- 3 1
Increase in common stock due to exercise of warrants...... -- 13 --
Payments on subordinated debt............................. (640) (2,429) (1,000)
Increase in subordinated debt............................. 667 1,309 1,339
-------- -------- --------
Net cash provided by financing activities......... 16,444 1,908 25,859
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (8,563) 7,634 (3,844)
CASH AND CASH EQUIVALENTS -- BEGINNING OF YEAR.............. 10,376 2,742 6,586
-------- -------- --------
CASH AND CASH EQUIVALENTS -- END OF YEAR.................... $ 1,813 $ 10,376 $ 2,742
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest, net of amounts capitalized................... $ 7,595 $ 8,193 $ 9,136
======== ======== ========
Income taxes........................................... $ -- $ -- $ 25
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
In connection with the securitization of loans and
creation of mortgage related securities, the Company
retained interest only securities and residual interest
securities (included in net assets of discontinued
operations)............................................ $ -- $ -- $ 20,096
======== ======== ========
Redemption of preferred stock through issuance of common
stock.................................................. $ -- $ -- $ 2,000
======== ======== ========
In connection with the acquisition of certain timeshare
interest held for sale................................. $ -- $ -- $ 245
======== ======== ========
Issuance of warrants for 1,000,000 shares of common stock
in connection with commitment received................. $ -- $ 3,000 $ --
======== ======== ========
Reduction of subordinated debt to assignors in connection
with the exercise of 1,000,000 common stock warrants... $ -- $ 4,250 $ --
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 70
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
1. NATURE OF OPERATIONS
Mego Financial Corp. (Mego Financial) is a premier developer of timeshare
properties and a provider of consumer financing to purchase timeshare intervals
and land parcels through its wholly-owned subsidiary, Preferred Equities
Corporation (PEC), established in 1970. PEC is engaged primarily in originating,
selling, servicing and financing consumer receivables generated through
timeshare and land sales. Mego Financial and its subsidiaries are herein
individually or collectively referred to as the Company as the context requires.
PEC markets and finances timeshare interests and land in select resort areas. By
providing financing to virtually all of its customers, PEC also originates
consumer receivables that it sells and generally services. Mego Financial was
incorporated under the laws of the state of New York in 1954 under the name Mego
Corp. and, in 1992, changed its name to Mego Financial Corp. In February 1988,
Mego Financial acquired PEC, pursuant to an assignment by the Assignors, as
defined below, of their contract right to purchase PEC. See Note 2 for further
discussion.
To facilitate its sales of timeshare interests, the Company has entered
into several trust agreements. The trustees administer the collection of the
related notes receivable. The Company has assigned title to certain of its
resort properties in Nevada and its interest in certain related notes receivable
to the trustees.
In 1992, Mego Financial organized a subsidiary, Mego Mortgage Corporation
(MMC), which has been a specialized consumer finance company that originates,
purchases, sells, securitizes and services consumer loans consisting primarily
of conventional uninsured home improvement and debt consolidation 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 Notes 3 and 19. Since the Spin-off, PEC has represented substantially all of
Mego Financial's operations.
2. ACQUISITION OF PREFERRED EQUITIES CORPORATION
The acquisition of PEC on February 1, 1988, was effected pursuant to an
Assignment Agreement, dated October 25, 1987, between Mego Financial and several
corporations (Assignors) and a related Assignment and Assumption Agreement
(Assignment and Assumption Agreement), dated February 1, 1988, and amended on
July 29, 1988, between Mego Financial and the Assignors (collectively, such
agreements constitute the Assignment). The acquisition of PEC was accomplished
by PEC's issuing 2 shares of its common stock to Mego Financial for a purchase
price of approximately $50,000. Immediately prior to that time, the previously
outstanding shares held by others were surrendered and redeemed by PEC at a cost
to PEC of approximately $10,463,000 plus fees and expenses, leaving Mego
Financial with all of the outstanding shares of PEC.
The right to purchase shares from PEC was obtained by Mego Financial
pursuant to the Assignment, which assigned to Mego Financial the right to
purchase shares from PEC pursuant to the Stock Purchase and Redemption
Agreement, dated October 6, 1987, between PEC and the Assignors, as amended on
October 25, 1987. Consideration for the Assignment consisted of promissory notes
(Purchase Notes) from Mego Financial to the Assignors in the aggregate amount of
$2,000,000 and additional payments to the Assignors as described below. The
Purchase Notes were paid in full prior to August 31, 1988. After the payment of
the Purchase Notes, the Assignors were entitled to receive from Mego Financial
on a quarterly basis, as determined as of the end of each quarter, additional
payments equal in the aggregate to 63% of PEC's consolidated unrestricted cash
balances, for a period ended on January 31, 1995. The additional payments were
collateralized by a pledge of PEC stock to the Assignors.
F-8
<PAGE> 71
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
On March 2, 1995, Mego Financial entered into the Second Amendment to
Assignment and Assumption Agreement (Amendment) whereby the Assignors agreed to
defer payment of $10,000,000 of the amount payable to Assignors and to
subordinate such amount constituting (Subordinated Debt), in right of payment to
debt for money borrowed by Mego Financial or obligations of subsidiaries
guaranteed by Mego Financial. Warrants (Warrants) for 1,000,000 shares of Mego
Financial common stock, at an exercise price of $4.25 per share (the closing
market price per share on March 2, 1995) were granted to the Assignors in
consideration of the payment deferral and subordination. The Warrants were
exercised in August 1997, in a non-cash transaction, whereby the Subordinated
Debt was reduced by $4,250,000. The Amendment calls for interest to be paid
semiannually at the rate of 10% per annum starting September 1, 1995, and 7
equal semi-annual payments of $1,429,000 plus interest, which commenced March 1,
1997. However, in connection with the reduction of the Subordinated Debt,
payments aggregating $4,250,000 have been deemed paid and the semiannual
payments will resume in March 1999 with a partial payment in September 1998,
pursuant to the Third Amendment to the Assignment and Assumption Agreement. The
Subordinated Debt is collateralized by a pledge of PEC's outstanding stock. See
Notes 14 and 19 for further discussion.
3. DISCONTINUED OPERATIONS
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
Consolidated Financial Statements for all periods presented prior to that date.
In April 1998, an agreement was made to adjust the balance due on a $10,100,000
receivable at August 31, 1997 by a reduction of the income tax portion in the
amount of $5,283,000 previously deemed owed by MMC to the Company under a Tax
Allocation and Indemnity Agreement dated November 19, 1996 (Tax Agreement) since
that amount was no longer payable under that agreement. As of the date of the
April 1998 agreement, MMC owed the Company an estimated total of $6,153,000, of
which $5,283,000 was the estimated amount due to the Company under the Tax
Agreement prior to the Spin-off. An agreement was subsequently made to settle
the remaining $870,000 balance due the Company by MMC. In consideration of this
settlement, MMC paid the entire amount of $1,574,000, which was separately owed
to PEC, in June 1998. Following this transaction, MMC had no outstanding
indebtedness to the Company. The net effect of the Spin-off resulted in the
Company recording a distribution in the amount of $49,329,000 for financial
statement purposes in fiscal 1998.
F-9
<PAGE> 72
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
The summarized components of the net assets of discontinued operations at
August 31, 1997 were as follows (thousands of dollars):
<TABLE>
<S> <C>
Cash and cash equivalents, including restricted cash........ $ 12,994
Loans held for sale, net.................................... 9,523
Mortgage related securities................................. 106,299
Mortgage servicing rights................................... 9,507
Other receivables........................................... 7,945
Property and equipment, net................................. 2,153
Other....................................................... 5,779
--------
Total assets...................................... 154,200
--------
Notes and contracts payable................................. 35,572
Accounts payable and accrued liabilities.................... 7,759
Other liabilities and obligations........................... 57,762
--------
Total liabilities................................. 101,093
--------
Due to Mego Financial....................................... 10,100
Undistributed minority interest in discontinued
operations................................................ (9,931)
--------
Net assets of discontinued operations....................... $ 53,276
========
</TABLE>
Operating results of the discontinued operations were as follows (thousands
of dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
AUGUST 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
REVENUES
Gain on sale of loans and mortgage related securities....... $48,641 $19,236
Interest income, net........................................ 3,133 988
Financial income and other.................................. 3,036 3,348
------- -------
Total revenues.................................... 54,810 23,572
------- -------
EXPENSES
Operating expenses.......................................... 25,511 12,845
Net provision for credit losses............................. 6,300 55
Interest expense............................................ 245 167
------- -------
Total expenses.................................... 32,056 13,067
------- -------
Income before income taxes.................................. 22,754 10,505
Income taxes................................................ 9,062 4,235
Minority interest in discontinued operations................ 2,358 --
------- -------
Net income from discontinued operations..................... $11,334 $ 6,270
======= =======
</TABLE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation -- The accompanying
consolidated financial statements include the accounts of Mego Financial and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. See Note 1 for further discussion. The accompanying
Consolidated Statements of Operations reflect the operating results of MMC as
discontinued operations for fiscal 1997 and 1996 in accordance with Accounting
Principles Board (APB) Opinion No. 30. Prior period operating results have been
restated to reflect continuous operations. The footnote information presented
F-10
<PAGE> 73
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
herein applies only to the continuing operations of Mego Financial unless
otherwise stated. See Note 3 for further discussion.
Parent Company Only Basis -- At August 31, 1998 and 1997, Mego Financial,
on a "parent company only" basis, reflected total assets of $29,495,000 and
$98,157,000, respectively, which were comprised principally of its equity
investment in subsidiaries of $27,294,000 and $79,723,000, respectively, and
liabilities of $4,468,000 and $10,669,000, respectively, excluding subordinated
debt. The decrease reflected above is primarily due to the distribution of MMC
common stock totaling $49.3 million in connection with the Spin-off including
the adjustment of a receivable from MMC. At August 31, 1998, liabilities were
comprised principally of accrued income taxes of $4,468,000, excluding
subordinated debt. At August 31, 1997, liabilities were comprised principally of
accrued income taxes of $6,235,000 and payable to PEC of $3,072,000, excluding
subordinated debt. At August 31, 1998 and 1997, subordinated debt of $4,348,000
and $4,321,000, respectively, was outstanding. See Notes 2 and 19 for further
discussion.
Cash Equivalents -- Cash equivalents consist primarily of certificates of
deposit, repurchase agreements and commercial paper with original maturities of
90 days or less.
Restricted Cash -- Restricted cash represents cash on deposit which relates
to utility subsidiary customer deposits and betterment fees; cash on deposit in
accordance with notes receivable sale agreements; and untransmitted funds
received from collection of notes receivable which have not as yet been
disbursed to the purchasers of such notes receivable in accordance with the
related sale agreements.
Notes Receivable -- The basis is the outstanding principal balance of the
notes reduced by the allowance for cancellations and discounts. Substantially
all of the notes receivable generated by PEC are carried at the lower of cost or
market on an aggregate basis by type of receivable.
Allowance for Cancellations -- Provision for cancellations relating to
notes receivable is recorded as expense in amounts sufficient to maintain the
allowance at a level considered adequate to provide for anticipated losses
resulting from customers' failure to fulfill their obligations under the terms
of their notes receivable. The Company records provision for cancellations at
the time revenue is recognized, based upon periodic analysis of the portfolio,
collateral values, historical credit loss experience, borrowers' ability to
repay and current economic factors. The allowance for cancellations represents
the Company's estimate of the future credit losses to be incurred over the lives
of the notes receivable. The 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 the reserve for notes receivable sold with recourse. Recourse to
the Company on sales of notes receivable is governed by the agreements between
the purchasers and the Company. The Company's judgment in determining the
adequacy of this allowance is based upon a periodic review of its portfolio of
notes receivable. These reviews take into consideration changes in the nature
and level of the portfolio, current economic conditions which may affect the
purchasers' ability to pay, the estimated value of inventory that may be
reacquired and overall portfolio quality. Changes in the allowance as a result
of such reviews are reflected in the provision for cancellations.
Interest Only Receivables -- Interest only receivables were formerly excess
servicing rights which were renamed in accordance with Statement of Financial
Accounting Standards (SFAS) No. 125 (as hereinafter defined) and are carried at
fair market value.
Timeshare Interests Held for Sale -- Costs incurred in connection with
preparing timeshare interests for sale are capitalized and include all costs of
acquisition, renovation and furnishings. Timeshare interests held for sale are
valued at the lower of cost or net realizable value.
F-11
<PAGE> 74
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
Land and Improvements Inventory -- Land and improvements inventory include
carrying costs capitalized during the development period and costs of
improvements incurred to date and are stated at cost, not in excess of market
value.
Property and Equipment -- Property and equipment is stated at cost and is
depreciated over its estimated useful life (generally 3 - 40 years) using the
straight-line method. Costs of maintenance and repairs that do not improve or
extend the life of the respective assets are recorded as expense.
Utility Accounting Policies -- The Company, through a wholly-owned
subsidiary, provides water and sewer services to customers in the Pahrump valley
of Nevada. This subsidiary is subject to regulation by the Public Utilities
Commission of Nevada and the Company's accounting policies conform to generally
accepted accounting principles as applied in the case of regulated public
utilities in accordance with the accounting requirements of the regulatory
authority having jurisdiction. Contributions in aid of construction (CIAC)
received by the Company from its customers are included as a separate liability
and amortized over the period of 9 - 25 years, which represents the estimated
remaining useful life of the corresponding improvements. Amortization of CIAC
reduces depreciation expense. CIAC is included in accounts payable and accrued
liabilities in the amounts of $8,264,000 and $6,409,000 at August 31, 1998 and
1997, respectively. The Company excludes from the CIAC liability a sum equal to
the income taxes related to the receipt of CIAC funds.
Reserve for Notes Receivable Sold with Recourse -- Recourse to the Company
on sales of notes receivable is governed by the agreements between the
purchasers and the Company. The reserve for notes receivable sold with recourse
represents the Company's estimate of the fair value of future credit losses to
be incurred over the lives of the notes receivable. Proceeds from the sale of
notes receivable sold with recourse were $9,418,000, $30,117,000 and $16,003,000
for the years ended August 31, 1998, 1997 and 1996, respectively. A liability
for reserve for notes receivable sold with recourse is established at the time
of each sale based upon the Company's estimate of the future fair value of the
recourse obligation under each agreement of sale.
Income Taxes -- The Company utilizes the provisions of SFAS No. 109,
"Accounting for Income Taxes" (SFAS 109). SFAS 109 requires the Company to
adhere to an asset/liability approach for financial accounting and reporting for
income taxes. Income tax expense is provided for the tax effects of transactions
reported in the financial statements and consists of taxes currently due plus
deferred taxes related primarily to differences between the bases of the balance
sheet for financial and income tax reporting. The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when they are recovered or settled.
Deferred taxes also are recognized for operating losses that are available to
offset future taxable income and tax credits that are available to offset future
income taxes. See Note 16.
Revenue and Profit Recognition -- Timeshare Interests and Land
Sales -- Sales of timeshare interests and land are recognized and included in
revenues after certain "down payment" and other "continuing investment" criteria
are met. Land sale revenues are recognized using the deposit method in
accordance with the provisions of SFAS No. 66, "Accounting for Sales of Real
Estate." The agreement for sale generally provides for a down payment and a note
secured by a deed of trust or mortgage payable to the Company in monthly
installments, including interest, over a period of up to ten years. Revenue is
recognized after the requisite rescission period has expired and at such time as
the purchaser has paid at least 10% of the sales price for sales of timeshare
interests and 20% of the sales price for land sales. Land sales usually meet
these requirements within eight to ten months from closing, and sales of
timeshare interests usually meet these requirements at the time of sale. The
sales price, less a provision for cancellation, is recorded as revenue and the
allocated cost related to such net revenue of the timeshare interest or land is
recorded as expense in the
F-12
<PAGE> 75
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
year that revenue is recognized. When revenue related to land sales is
recognized, the portion of the sales price attributable to uncompleted required
improvements, if any, is deferred.
All payments received prior to the recognition of the sale as revenue are
accounted for as deposits. Selling costs directly attributable to unrecognized
sales are accounted for as deferred selling costs until the sale is recognized.
For land sales made at a location other than at the property, the purchaser
may cancel the contract within a specified inspection period, usually five
months from the date of purchase, provided that the purchaser is not in default
under the terms of the contract. At August 31, 1998, $730,000 of recognized
sales remain subject to such cancellation. If a purchaser defaults under the
terms of the contract, after all rescission and inspection periods have expired,
all payments are generally retained by the Company.
If the underlying note receivable is at a "below market" interest rate, a
discount is applied to the note receivable balance and amortized over its term
so that the effective yield is 10%.
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 sale in the quarter
the revenue is recognized is deemed to not represent a sale and is accounted for
as a reversal of the revenue with an adjustment to cost of sales. Cancellation
of a note receivable subsequent to the quarter the revenue was recognized is
charged to the allowance for cancellations.
Revenue Recognition -- Gain on Sale of Notes Receivable -- Gain on sale of
notes receivable includes the present value of the differential between
contractual interest rates charged to borrowers on notes receivable sold by the
Company and the interest rates to be received by the purchasers of such notes
receivable, after considering the effects of estimated prepayments and a normal
servicing fee. The Company retains certain participations in cash flows from the
sold notes receivable and generally retains the associated servicing rights. The
Company generally sells its notes receivable at par value.
The present 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. Reserve for notes receivable sold
with recourse represents the Company's estimate of losses to be incurred in
connection with the recourse provisions of the sales agreements and is shown
separately as a liability in the Company's Consolidated Balance Sheets.
In discounting cash flows related to notes receivable sales, the Company
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 which averaged
15% in each of fiscal years 1998, 1997 and 1996. The Company has developed its
assumptions based on experience with its own portfolio, available market data
and consultation with its financial advisors.
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.
Interest Income -- Interest income is recorded as earned. Interest income
represents the interest earned on notes receivable and short term investments.
F-13
<PAGE> 76
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
Financial Income -- Fees for servicing notes receivable originated or
acquired by the Company and sold with servicing rights retained are generally
based on a stipulated percentage of the outstanding principal balance of such
notes receivable and are recognized when earned. Interest received on notes
receivable sold, less amounts paid to investors, is reported as financial
income. Capitalized interest only receivables are amortized systematically to
reduce income to an amount representing normal servicing income and the present
value discount. Late charges and other miscellaneous income are recognized when
collected. Costs to service notes receivable are recorded as expense when
incurred.
Timeshare Owners' Associations -- The Company incurs a portion of operating
expenses of the timeshare owners' associations based on ownership of the unsold
timeshare interests at each of the respective timeshare properties. These costs
are referred to as Association Assessments and are included in the Consolidated
Statements of Operations in general and administrative expense. Management fees
and costs received from the associations are included in other revenues. See
Note 19.
Income (Loss) Per Common Share -- Basic income (loss) per common share is
based on the net income (loss) applicable to common stock for each period
divided by the weighted-average number of common shares outstanding during the
period. Diluted income per common share is computed by dividing net income
applicable to common stock by the weighted-average number of common shares plus
common share equivalents. Income (loss) from continuing operations per share,
income (loss) from discontinued operations per share and gain on prior
discontinued operations per share, are also disclosed due to the Spin-off of
MMC. See Note 3. In loss periods, anti-dilutive common share equivalents are
excluded.
Recently Issued Accounting Standards -- The Financial Accounting Standards
Board (the FASB) issued Statement No. 123, "Accounting for Stock-Based
Compensation," (SFAS 123), which established financial accounting and reporting
standards for stock-based employee compensation plans and for transactions in
which an entity issues its equity instruments to acquire goods or services from
nonemployees. Those transactions must be accounted for based on the fair value
of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable. SFAS 123 is effective for fiscal
years beginning after December 15, 1995. The Company elected to continue to
apply the provisions of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," as permitted by SFAS 123, and accordingly provides pro forma
disclosure in Note 17.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" (SFAS 125) was issued by the 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 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" (SFAS 115). 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
F-14
<PAGE> 77
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
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 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>
FOR THE YEARS ENDED AUGUST 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
BASIC:
Income (loss) from continuing operations...... $ (3,229) $ 8,006 $ (1,419)
Income from discontinued operations........... -- 11,334 6,270
Preferred stock dividends..................... -- -- (240)
----------- ----------- -----------
Net income (loss)............................. $ (3,229) $ 19,340 $ 4,611
=========== =========== ===========
Weighted-average number of common shares
outstanding................................ 21,009,506 18,657,224 18,117,122
=========== =========== ===========
DILUTED:
Income (loss) from continuing operations...... $ (3,229) $ 8,006 $ (1,419)
Income from discontinued operations........... -- 11,334 6,270
Preferred stock dividends..................... -- -- (240)
----------- ----------- -----------
Net income (loss)............................. $ (3,229) $ 19,340 $ 4,611
=========== =========== ===========
Weighted-average number of common shares and
common share equivalents outstanding....... 21,009,506 19,528,470 19,114,888
=========== =========== ===========
</TABLE>
The following table reconciles income (loss) from continuing operations,
basic and diluted shares and EPS for the following periods (thousands of
dollars, except per share amounts):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
--------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ---------------------------- -----------------------------
PER- PER- PER-
INCOME SHARE INCOME SHARE INCOME SHARE
(LOSS) SHARES AMOUNT (LOSS) SHARES AMOUNT (LOSS) SHARES AMOUNT
------- ---------- ------ ------ ---------- ------ ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from continuing
operations....................... $(3,229) $8,006 $(1,419)
BASIC EPS
Income (loss) from continuing
operations....................... (3,229) 21,009,506 $(0.15) 8,006 18,657,224 $0.43 (1,419) 18,117,122 $(0.08)
------- ---------- ====== ------ ---------- ===== ------- ---------- ======
Effect of dilutive securities:
Warrants......................... -- -- -- 620,133 -- 735,870
Stock options.................... -- -- -- 251,113 -- 261,896
------- ---------- ------ ---------- ------- ----------
DILUTED EPS
Income (loss) from continuing
operations and assumed
conversions...................... $(3,229) 21,009,506 $(0.15) $8,006 19,528,470 $0.41 $(1,419) 19,114,888 $(0.08)
======= ========== ====== ====== ========== ===== ======= ========== ======
</TABLE>
F-15
<PAGE> 78
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
The following table reconciles income from discontinued operations, net of
tax and minority interest, basic and diluted shares, and EPS for the following
periods (thousands of dollars, except per share amounts):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
------------------------------------------------------------
1997 1996
----------------------------- ----------------------------
PER- PER-
SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- ---------- ------ ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Income from discontinued
operations(1)........................ $13,692 $6,270
Less: Minority interest in discontinued
operations........................... 2,358 --
------- ------
BASIC EPS
Income from discontinued operations.... 11,334 18,657,224 $0.61 6,270 18,117,122 $0.34
------- ---------- ===== ------ ---------- =====
Effect of dilutive securities:
Warrants............................. -- 620,133 -- 735,870
Stock options........................ -- 251,113 -- 261,896
------- ---------- ------ ----------
DILUTED EPS
Income from discontinued operations and
assumed conversions.................. $11,334 19,528,470 $0.58 $6,270 19,114,888 $0.33
======= ========== ===== ====== ========== =====
</TABLE>
- ---------------
(1) Net of income taxes of $9,062 and $4,235 for 1997 and 1996, respectively.
The following table reconciles 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>
FOR THE YEARS ENDED AUGUST 31,
--------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ----------------------------- ----------------------------
PER- PER- PER-
INCOME SHARE INCOME SHARE INCOME SHARE
(LOSS) SHARES AMOUNT (LOSS) SHARES AMOUNT (LOSS) SHARES AMOUNT
------- ---------- ------ ------- ---------- ------ ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)................ $(3,229) $19,340 $4,851
Less: Preferred stock
dividends...................... -- -- 240
------- ------- ------
BASIC EPS
Income (loss) applicable to
common stockholders............ (3,229) 21,009,506 $(0.15) 19,340 18,657,224 $1.04 4,611 18,117,122 $0.25
------- ---------- ====== ------- ---------- ===== ------ ---------- =====
Effect of dilutive securities:
Warrants....................... -- -- -- 620,133 -- 735,870
Stock options.................. -- -- -- 251,113 -- 261,896
------- ---------- ------- ---------- ----- ----------
DILUTED EPS
Income (loss) applicable to
common stockholders and assumed
conversions.................... $(3,229) 21,009,506 $(0.15) $19,340 19,528,470 $0.99 $4,611 19,114,888 $0.24
======= ========== ====== ======= ========== ===== ====== ========== =====
</TABLE>
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" (SFAS 130), and SFAS No. 131, "Disclosures and Segments of an Enterprise
and Related Information" (SFAS 131). SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. SFAS 131 establishes standards of
reporting by publicly-held business enterprises and disclosure of information
about operating segments in annual financial statements and, to a lesser extent,
in interim financial reports issued to shareholders. SFAS Nos. 130 and 131 are
effective for fiscal years beginning after December 15, 1997. As both SFAS Nos.
130 and 131 deal with financial statement disclosure, the Company does not
anticipate the adoption of these new standards will have a
F-16
<PAGE> 79
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
material impact on its financial position, results of operations or cash flows.
The Company has not yet determined what its reporting segments will be under
SFAS 131.
Reclassification -- Certain reclassifications have been made to conform
prior years with the current year presentation.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles (GAAP) requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
5. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments" (SFAS
107), requires disclosure of estimated fair value information for financial
instruments, whether or not recognized in the Balance Sheets. Fair values are
based upon estimates using present value or other valuation techniques in cases
where quoted market prices are not available. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instrument. SFAS 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
Estimated fair values, carrying values and various methods and assumptions
used in valuing the Company's financial instruments at August 31, 1998 and 1997
are set forth below (thousands of dollars):
<TABLE>
<CAPTION>
AUGUST 31, 1998 AUGUST 31, 1997
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents(a)............... $1,813 $ 1,813 $10,376 $10,376
Notes receivable, net(b)................... 47,789 48,152 34,274 34,753
Interest only receivables(c)............... 3,367 3,367 3,296 3,296
FINANCIAL LIABILITIES:
Notes and contracts payable(d)............. 81,986 81,986 65,569 65,569
Subordinated debt(a)....................... 4,348 4,348 4,321 4,321
</TABLE>
- ---------------
(a) Carrying value is approximately the same as fair value.
(b) The fair value was estimated by using outstanding commitments from investors
adjusted for non-qualified receivables and the collateral securing such
receivables.
(c) The fair value was estimated by discounting future cash flows of the
instruments using discount rates, default, loss and prepayment assumptions
based upon available market data, opinions from financial advisors and
portfolio experience.
(d) Notes payable generally are adjustable rate, indexed to the prime rate, or
to the 90 day London Interbank Offering Rate (LIBOR); therefore, carrying
value approximates fair value.
The fair value estimates were based upon pertinent market data and relevant
information on the financial instruments at that time. Because no market exists
for a certain portion of the financial instruments, fair value estimates may be
based upon judgments regarding future expected loss experience, current economic
F-17
<PAGE> 80
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
conditions, risk characteristics of various financial instruments and other
factors. Changes in assumptions could significantly affect the estimates and do
not reflect any premium or discount that could result from the bulk sale of the
entire portion of the financial instruments. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision.
Fair value estimates are based upon existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For instance, the Company has certain fee-generating
business lines (e.g., its loan servicing operations) that were not considered in
these estimates since these activities are not financial instruments. In
addition, the tax implications related to the realization of the unrealized
gains and losses can have an effect on fair value estimates and have not been
considered in any of the estimates.
6. CONCENTRATIONS OF RISK
Availability of Funding Sources -- The Company funds substantially all of
the notes receivable, timeshare inventory and land inventory with borrowings
through its financing facilities and internally generated funds. These
borrowings are in turn repaid with the proceeds received by the Company from
such notes receivable through loan sales and payments. Any failure to renew or
obtain adequate financing under its financing facilities, or other borrowings,
or any substantial reduction in the size of or pricing in the markets for the
Company's notes receivable, could have a material adverse effect on the
Company's operations.
Geographic Concentrations -- The Company services notes receivable in all
50 states, the District of Columbia and Canada. At August 31, 1998, 28% of the
dollar value of notes receivable serviced had been originated in California. No
other state accounted for more than 10% of the servicing portfolio of the
Company's receivables. The risk inherent in such concentrations is dependent
upon regional and general economic stability which affects property values and
the financial stability of the borrowers. The Company's timeshare and land
inventories are concentrated in Nevada, New Jersey, Colorado, and Florida. The
risk inherent in such concentrations is in the continued popularity of these
resort destinations, which affects the marketability of the Company's products.
Credit Risk -- The Company is exposed to on-balance sheet credit risk
related to its notes receivable. The Company is exposed to off-balance sheet
credit risk related to notes receivable sold under recourse provisions. The
outstanding balance of notes receivable sold with recourse provisions totaled
$71,890,000 and $77,061,000 at August 31, 1998 and 1997, respectively.
Interest Rate Risk -- The Company's profitability is in part determined by
the difference, or "spread," between the effective rate of interest received on
the notes receivable originated by the Company and the interest rates payable
under its financing facilities to fund the Company's notes receivable and
inventory held for sale and the yield required by investors on notes receivable
sales. The spread can be adversely affected after a note is originated or
purchased and while it is held by increases in the interest rate demanded by
investors. In addition, because the notes receivable originated by the Company
have fixed rates, the Company bears the risk of narrowing spreads because of
interest rate increases during the period from the date the notes receivable are
originated until the closing of the sale. Additionally, the fair value of
interest only receivables owned by the Company may be adversely affected by
changes in the interest rate environment which could affect the discount rate
and prepayment assumptions used to value the assets.
F-18
<PAGE> 81
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
7. NOTES RECEIVABLE
Notes receivable consist of the following (thousands of dollars):
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Related to timeshare sales.................................. $ 32,353 $ 21,947
Related to land sales....................................... 27,839 23,668
-------- --------
Total............................................. 60,192 45,615
-------- --------
Less: Allowance for cancellations........................... (11,868) (10,824)
Discounts................................................. (535) (517)
-------- --------
(12,403) (11,341)
-------- --------
Total............................................. $ 47,789 $ 34,274
======== ========
</TABLE>
The Company provides financing to the purchasers of its timeshare interests
and land. This financing is generally evidenced by notes secured by deeds of
trust or mortgages as well as non-recourse installment sales contracts. These
notes receivable are generally payable over a period of up to 12 years, bear
interest at rates ranging from 12.5% to 15.5% and require equal monthly
installments of principal and interest.
The Company has entered into financing arrangements with certain purchasers
of timeshare interests and land whereby a 5% interest rate is charged if the
aggregate down payment is at least 50% of the purchase price and the balance is
payable in 36 or fewer monthly payments. Notes receivable of $7,258,000 and
$7,023,000 at August 31, 1998 and 1997, respectively, made under this
arrangement are included in the table above. A discount is established to
provide for an effective interest rate (currently 10%) on notes receivable
bearing no stated interest rate at the time of sale, and is applied to the
principal balance and amortized over the terms of the notes receivable. The
effective interest rate is based upon the economic interest rate environment and
similar industry data.
The Company is obligated under certain agreements for the sale of notes
receivable and certain loan agreements to maintain various minimum net worth
requirements. The most restrictive of these agreements requires PEC to maintain
a minimum net worth of $25,000,000. PEC's net worth at August 31, 1998 was
$27,294,000.
At August 31, 1998 and 1997, receivables aggregating $49,645,740 and
$41,063,000, respectively, were pledged to lenders to collateralize certain of
the Company's indebtedness. Receivables which qualify for the lenders' criteria
may be pledged as collateral whether or not such receivables have been
recognized for accounting purposes. See Note 13 for further discussion.
F-19
<PAGE> 82
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
Allowance for Cancellations -- The Company provides an allowance for
cancellations, in an amount which in the Company's judgment will be adequate to
absorb losses on notes receivable that may become uncollectible. The Company's
judgment in determining the adequacy of this allowance is based on its continual
review of its portfolio which utilizes historical experience and current
economic factors. These reviews take into consideration changes in the nature
and level of the portfolio, historical rates, collateral values, current and
future economic conditions which may affect the obligors' ability to pay and
overall portfolio quality. Changes in both the allowance for cancellations and
the reserve for notes receivable sold with recourse consist of the following
(thousands of dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
------------------------------
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Balance at beginning of year......................... $19,527 $ 19,924 $18,821
Provision for cancellations.......................... 4,827 10,219 9,778
Amounts charged to allowance for cancellations and
reserve for notes receivable sold with recourse.... (5,866) (10,616) (8,675)
------- -------- -------
Balance at end of year............................... $18,488 $ 19,527 $19,924
======= ======== =======
Allowance for cancellations.......................... $11,868 $ 10,824 $11,512
Reserve for notes receivable sold with recourse...... 6,620 8,703 8,412
------- -------- -------
Total...................................... $18,488 $ 19,527 $19,924
======= ======== =======
</TABLE>
Number of Notes Receivable Accounts Serviced -- The number of notes
receivable accounts serviced at August 31, 1998 and 1997, was 16,704 and 18,038,
respectively. At August 31, 1998 and 1997, the amount of notes receivable with
payment delinquencies of 90 days or more was $9,654,000 and $4,026,000,
respectively, on serviced accounts other than accounts serviced for MMC.
Notes Receivable Serviced and Originated -- At August 31, 1998 and 1997,
notes receivable serviced were $117,150,000 and $118,487,000, respectively,
other than accounts serviced for MMC. Notes receivable originated were
$57,789,000 and $55,469,000 for the years ended August 31, 1998 and 1997,
respectively.
8. INTEREST ONLY RECEIVABLES
With the implementation of SFAS 125 on January 1, 1997, the Company's
future and existing excess servicing rights were renamed interest only
receivables. Activity in interest only receivables is as follows (thousands of
dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year............................. $3,296 $2,147 $2,082
Plus: Additions.......................................... 523 1,543 781
Less: Amortization....................................... (452) (394) (716)
------ ------ ------
Balance at end of year................................... $3,367 $3,296 $2,147
====== ====== ======
</TABLE>
As of August 31, 1998 and 1997, interest only receivables consisted of
excess cash flows on sold loans totaling $71,890,000 and $77,061,000,
respectively, yielding weighted-average interest rates of 12.5% and 12.3%,
respectively, net of normal servicing fees and had weighted-average pass-through
yields to the investor of 9.2%, for both years. These loans were sold under
recourse provisions as described in Note 4.
F-20
<PAGE> 83
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
The principal balance of notes receivable as shown below, represents a
series of sales, providing a range of yields to purchasers at fixed rates for
the periods indicated as follows (thousands of dollars):
<TABLE>
<CAPTION>
1998 1997
----------------------------- ----------------------------------
PRINCIPAL BALANCE OF PRINCIPAL BALANCE OF
NOTES RECEIVABLE SOLD YIELD NOTES RECEIVABLE SOLD YIELD
--------------------- ----- --------------------- ----------
<S> <C> <C> <C>
9,418..$...... 9.75% $19,741 9% - 9.13%
10,376(a) 9% - 9.75%
</TABLE>
- ---------------
(a) These series of sales were to the same purchaser, while the other series of
sales were to different purchasers.
9. INVENTORIES
Timeshare interests held for sale consist of the following (thousands of
dollars):
<TABLE>
<CAPTION>
AUGUST 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Timeshare interests (including capitalized interest of $710
and $473 in 1998 and 1997, respectively).................. $22,845 $17,624
Timeshare interests under construction (including
capitalized interest of $888 and $1,043 in 1998 and 1997,
respectively)............................................. 12,953 17,464
------- -------
Total............................................. $35,798 $35,088
======= =======
</TABLE>
At August 31, 1998 and 1997, 11,273 and 9,124 timeshare interests,
respectively, were available for sale. Timeshare units amounting to 90 and 176
at August 31, 1998 and 1997, respectively, were under construction and awaiting
completion of remodeling, renovation, furnishing, conversion and registration,
representing 4,590 and 8,976 timeshare interests, respectively.
10. OTHER INVESTMENTS
Other investments in the following locations, at lower of cost or market,
consist of the following (thousands of dollars):
<TABLE>
<CAPTION>
AUGUST 31,
----------------
1998 1997
------ ------
<S> <C> <C>
Water rights:
Huerfano County, Colorado................................. $ 533 $ 532
Nye County, Nevada........................................ 413 413
Land:
Nye County, Nevada........................................ 721 602
Clark County, Nevada...................................... 84 51
Timeshare project:
Biloxi, Mississippi....................................... 2,257 --
Other....................................................... 387 551
------ ------
Total............................................. $4,395 $2,149
====== ======
</TABLE>
F-21
<PAGE> 84
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
11. PROPERTY AND EQUIPMENT
Property and equipment and related accumulated depreciation, consist of the
following (thousands of dollars):
<TABLE>
<CAPTION>
AUGUST 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Water and sewer systems..................................... $17,450 $16,209
Furniture and equipment..................................... 5,330 7,065
Buildings................................................... 9,745 10,643
Vehicles.................................................... 2,812 2,531
Recreational facilities and equipment....................... 1,050 1,323
Land........................................................ 1,342 1,342
Leasehold improvements...................................... 340 399
------- -------
38,069 39,512
Less: Accumulated depreciation.............................. (14,119) (15,292)
------- -------
Total............................................. $23,950 $24,220
======= =======
</TABLE>
12. OTHER ASSETS
Other assets consist of the following (thousands of dollars):
<TABLE>
<CAPTION>
AUGUST 31,
-----------------
1998 1997
------- ------
<S> <C> <C>
Other receivables........................................... $ 6,744 $3,574
Miscellaneous assets........................................ 627 843
Deposits and impounds....................................... 379 511
Licenses.................................................... 667 967
Other receivables collateralized by trust deeds and second
mortgages................................................. 53 86
Prepaid expenses and other.................................. 1,685 949
------- ------
Total............................................. $10,155 $6,930
======= ======
</TABLE>
F-22
<PAGE> 85
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
13. NOTES AND CONTRACTS PAYABLE
The Company's debt including lines of credit consists of the following
(thousands of dollars):
<TABLE>
<CAPTION>
AUGUST 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Notes collateralized by receivables (a).................. $42,793 $31,489
Mortgages collateralized by real estate
properties(b)(1)....................................... 37,393 32,311
Installment contracts and other notes payable............ 1,800 1,769
------- -------
Total.......................................... $81,986 $65,569
======= =======
</TABLE>
- ---------------
(1) Includes $2,790,000 of separate mortgage borrowings not under the lines of
credit.
The details of the notes payable are summarized as follows (thousands of
dollars):
<TABLE>
<CAPTION>
AUGUST 31,
------------------
1998 1997
------- -------
<S> <C> <C>
(a) NOTES COLLATERALIZED BY RECEIVABLES
Borrowings bearing interest at prime plus: 2% in 1998
and 1997 including "lines of credit" (see below)............ $42,793 $31,489
======= =======
(b) MORTGAGES COLLATERALIZED BY REAL ESTATE PROPERTIES
Mortgages collateralized by the respective underlying
assets with various repayment terms and fixed interest rates
of 8% in 1997 and variable rates of prime plus: 2% to 3% and
90 day LIBOR plus 4.25% in 1998 and 1997.................... $37,393 $32,311
======= =======
</TABLE>
The prime rate of interest was 8.50% and the 90 day LIBOR was 5.63% at
August 31, 1998.
Maturities -- Scheduled maturities of the Company's notes and contracts
payable are as follows (thousands of dollars):
<TABLE>
<CAPTION>
YEARS ENDING AUGUST 31,
-----------------------
<S> <C>
1999....................................................... $ 7,967
2000....................................................... 5,402
2001....................................................... 15,101
2002....................................................... 5,196
2003....................................................... 11,468
Thereafter................................................. 36,852
-------
$81,986
=======
</TABLE>
F-23
<PAGE> 86
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
Lines of Credit -- PEC is the borrower under 6 agreements for lines of
credit with 5 lenders not to exceed $137,500,000 which are collateralized by
security interests in timeshare and land receivables and are guaranteed by the
Company. At August 31, 1998 and 1997, an aggregate of $77,396,000 and
$62,089,000 had been borrowed under these lines, respectively. Under the terms
of such lines of credit, PEC may borrow 70% to 90% of the balances of the
pledged timeshare and land receivables. Summarized line of credit information
relating to these six lines of credit outstanding at August 31, 1998, consist of
the following (thousands of dollars):
<TABLE>
<CAPTION>
BORROWING MAXIMUM
AMOUNT AT BORROWING REVOLVING
AUGUST 31, 1998 AMOUNT EXPIRATION DATE(F) MATURITY DATE INTEREST RATE
- --------------- --------- ------------------ ------------- -------------
<C> <C> <S> <C> <C>
46,0$66..... $75,000 (a) May 15, 2000 Various Prime + 2.0 -2.25%
3,418...... 15,000 (b) December 15, 1998 Various Prime + 2.0%
10,561..... 15,000 (c) February 28, 1999 Various LIBOR + 4.0 - 4.25%
6,315...... 15,000 (c) May 1, 1999 Various LIBOR + 4.0 - 4.25%
4,360...... 10,000 (d) August 1, 2000 August 1, 2003 Prime + 2.0 -2.25%
6,676...... 7,500 (e) December 15, 1998 Various Prime + 2.0 -3.00%
</TABLE>
- ---------------
(a) Restrictions include PEC's requirement to maintain a minimum tangible net
worth of $20,000,000 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 $25,000,000. At August 31,
1998, $31,076,000 was outstanding related to financings at prime +2%, of
which $23,020,000 of loans secured by land receivables mature May 15, 2010
and $8,057,000 of loans secured by timeshare receivables mature May 15,
2007. The outstanding borrowing amount includes $570,000 in acquisition and
development (A&D) financing maturing May 20, 1999 and $5,083,000 maturing
July 1, 2003 for the financing of corporate office buildings; both of which
loans are amortizing loans, and a real estate loan with an outstanding
balance of $1,174,000 maturing March 20, 1999, all bearing interest at prime
+2.25%. The remaining A&D loans, receivables loans and a resort lobby loan
outstanding of $8,163,000 are at prime +2% and mature between November 30,
1998 and February 28, 2001.
(b) Restrictions include PEC's requirement to maintain a minimum tangible net
worth of $25,000,000 during the life of the loan. These credit lines include
available financings for A&D and receivables. At August 31, 1998, $1,351,000
was outstanding under the A&D loan maturing September 1, 1999 and
$2,067,000, maturing June 1, 2002, was outstanding under the receivables
loan. Management has obtained a verbal commitment from the lender that this
revolving line of credit will be extended for a period of 18 months on
substantially the same terms.
(c) Restrictions include PEC's requirement to maintain a minimum tangible net
worth of $17,000,000 during the life of the loan. These credit lines include
available financings for A&D and receivables. At August 31, 1998, $5,413,000
was outstanding under the A&D loans which have maturity dates of December
31, 2000 and June 30, 2001 and bear interest at 90 day LIBOR +4.25%. The
available receivable financings of which $5,148,000 was outstanding at
August 31, 1998, is at 90 day LIBOR +4% and has maturity dates of June 5,
2005 and August 5, 2005.
(d) Restrictions include PEC's requirement to maintain a minimum tangible net
worth of $25,000,000. 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 $15,000,000. This credit line is for the purpose of financing
receivables of which $2,676,000 was outstanding at August 31, 1998 in
respect to receivable debt and a real estate loan of $4,000,000 with a
maturity date of August 31, 1999. The maturity date for the receivables is
May 31, 2002. Management has obtained a verbal
F-24
<PAGE> 87
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
commitment from the lender that this revolving line of credit will be
extended for a period of 18 months on substantially the same terms.
(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.
14. SUBORDINATED DEBT
On March 2, 1995, Mego Financial entered into the Amendment whereby the
Assignors agreed to defer payment of $10,000,000 of the amount payable to
Assignors and to subordinate such amount, constituting Subordinated Debt, in
right of payment to debt for money borrowed by Mego Financial or obligations of
subsidiaries guaranteed by Mego Financial. Warrants for 1,000,000 shares of Mego
Financial common stock, at an exercise price of $4.25 per share (the closing
market price per share on March 2, 1995) were granted to the Assignors in
consideration of the payment deferral and subordination. The Warrants were
exercised in August 1997 in a non-cash transaction whereby the Subordinated Debt
was reduced by $4,250,000. The Amendment calls for interest to be paid
semi-annually at the rate of 10% per annum starting September 1, 1995, and 7
equal semi-annual payments of $1,429,000 plus interest, which commenced March 1,
1997. However, in connection with the reduction of the Subordinated Debt,
payments aggregating $4,250,000 were deemed paid and the semiannual payments
will resume in March 1999 with a partial payment in September 1998, pursuant to
the Third Amendment to the Assignment and Assumption Agreement. The Subordinated
Debt is collateralized by a pledge of PEC's outstanding stock. See Note 2 for
further discussion. The following table represents Subordinated Debt activity
(thousands of dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
AUGUST 31,
-------------------
1998 1997
------- --------
<S> <C> <C>
Balance at beginning of year................................ $4,321 $ 9,691
Accreted interest........................................... 667 1,309
Less: Interest payments..................................... (640) (1,000)
Principal paydowns.................................... -- (1,429)
Reduction due to exercise of warrants................. -- (4,250)
------ -------
Balance at end of year...................................... $4,348 $ 4,321
====== =======
</TABLE>
15. REDEEMABLE PREFERRED STOCK
Mego Financial had designated 300,000 shares of its 5,000,000 authorized
preferred shares as Series A, 12% Cumulative Preferred Stock, par value, $.01
per share. The remaining 4,700,000 authorized preferred shares have not been
designated. As of August 31, 1993, Mego Financial sold 300,000 shares of its
Series A, 12% Cumulative Preferred Stock (Preferred Stock), at a price of $10
per share. The Preferred Stock was stated at its par value of $.01 per share,
and redemption value of $10 per share. Mego Financial was obligated to redeem
100,000 shares of Preferred Stock on August 31, 1995, at $10 per share. In
August 1995, Mego Financial gave notice of redemption of 100,000 shares. On
September 1, 1995, after receipt of the certificates, Mego Financial redeemed
100,000 shares of its Preferred Stock. On August 31, 1996, the holder of Mego
Financial's 200,000 shares of outstanding 12% cumulative Preferred Stock with a
redemption price of $2,000,000 redeemed their shares for 343,347 shares of Mego
Financial's common stock. The number of common shares exchanged was based upon
the 10 day average closing stock price of $5.825 for Mego Financial's common
stock immediately prior to August 31, 1996. In conjunction with the exchange,
the expiration date of the warrants outstanding to purchase 300,000 shares of
Mego Financial's common stock at a price of $1.20, issued in conjunction with
the Preferred Stock, and due to expire on August 31, 1996, was
F-25
<PAGE> 88
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
extended to August 31, 1997. In February 1997, the warrants were exercised and
300,000 shares of Mego Financial common stock were issued.
16. INCOME TAXES
Mego Financial files a consolidated federal income tax return with its
subsidiaries for its tax year which ends the last day of February. The
operations of MMC will no longer be included subsequent to the Spin-off which
occurred on September 2, 1997.
The benefit for fiscal 1998 and from continuing operations recorded for
fiscal 1997 is primarily a result of the use of net operating loss (NOL)
carryforwards which were previously fully reserved and currently are used to
offset income on a consolidated basis. In addition, due to changes in facts and
circumstances determined in fiscal 1997, certain income tax liability reserves
recorded in prior periods were reversed.
Deferred income taxes shown in Balance Sheets as Accrued Income Taxes,
reflect the net tax effects of (a) temporary differences between the carrying
amount of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes, (b) temporary differences between the
timing of revenue recognition for book purposes and for income tax purposes, and
(c) operating loss and tax credit carryforwards. The tax effects of significant
items comprising the Company's net deferred income tax, shown on Balance Sheets
as Accrued Income Taxes, as of August 31, 1998 and 1997 are as follows
(thousands of dollars):
<TABLE>
<CAPTION>
AUGUST 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Deferred tax liabilities:
------- -------
Timing of revenue recognition............................. $20,651 $13,279
------- -------
20,651 13,279
------- -------
Deferred tax assets:
Difference between book and tax carrying value of
assets................................................. 14,007 4,821
Other..................................................... 2,176 2,223
------- -------
16,183 7,044
------- -------
Net deferred income tax........................... $ 4,468 $ 6,235
======= =======
</TABLE>
The provision for income taxes as reported is different from the tax
provision computed by applying the statutory federal rate of 34%. The
differences are as follows (thousands of dollars):
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Loss from continuing operations before income
taxes.............................................. $ 5,197 $ 4,656 $ 2,487
======= ======== =======
Tax at the statutory federal rate.................... $(1,767) $ (1,583) $ (846)
Increase (decrease) in income taxes resulting from:
Contributions in aid of construction............... -- -- 81
Preferred stock dividends.......................... -- -- (82)
Application of NOL carryforwards and changes in
certain income tax liability reserves........... (201) (11,079) --
Other.............................................. -- -- (221)
------- -------- -------
Total...................................... $(1,968) $(12,662) $(1,068)
======= ======== =======
</TABLE>
The income tax provision applied to discontinued operations exceeds the
statutory federal rate primarily due to state income taxes.
F-26
<PAGE> 89
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
17. STOCKHOLDERS' EQUITY
Mego Financial has a stock option plan (Stock Option Plan), adopted
November 1993, amended September 9, 1997, and amended and restated as of
September 16, 1998 by approval of shareholders, for officers, key employees and
directors which provides for non-qualified and qualified incentive options. The
Stock Option Committee of the Board of Directors determines the option price
(not to be less than fair market value for qualified incentive options) at the
date of grant. The options generally expire ten years from the date of grant and
are exercisable over the period stated in each option at the cumulative rate of
20% per year commencing December 22, 1994, for three years and the remaining 40%
after December 22, 1997. In August 1997, in connection with the Spin-off of MMC,
the Stock Option Committee vested all options previously granted, excluding
those granted subsequent to February 26, 1997. On September 23, 1998, an
additional 111,000 incentive and non-incentive stock options were granted under
the Stock Option Plan. In addition, the exercise prices of 304,500 of options
issued on September 2, 1997 were revised from $3.125 per share to $1.00 per
share.
The following table sets forth shares reserved and options exercised,
granted and forfeited for the following periods:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
RESERVE SHARES OPTIONS SHARE
-------------- --------- ---------------
<S> <C> <C> <C>
At August 31, 1995......................... 523,000 465,000 $ 2.50/2.75
Exercised.................................. (4,000) (4,000) $ 2.50
Forfeited.................................. -- (6,000) $ 2.50
Granted.................................... -- 25,000 $ 5.875
-------- --------
At August 31, 1996......................... 519,000 480,000 $ 2.50/8.75
Exercised.................................. (455,000) (455,000) $ 2.50/8.75
Forfeited.................................. -- (50,000) $ 6.75/8.00
Granted.................................... 500,000 70,000 $ 5.625/6.75
-------- --------
At August 31, 1997......................... 564,000 45,000 $ 5.625
Exercised.................................. -- -- --
Forfeited.................................. -- (49,000) $3.125/5.625
Granted.................................... -- 348,500(1) $3.125/3.438
-------- -------- ------------
At August 31, 1998......................... 564,000 344,500 $3.125/5.625
======== ======== ============
</TABLE>
- ---------------
(1) Exercise price reduced to $1.00 per share at September 23, 1998 which
represented fair value at the date of repricing.
SFAS 123 establishes financial accounting and reporting standards for
stock-based employee compensation plans and for transactions in which an entity
issues its equity instruments to acquire goods or services from non employees.
Those transactions must be accounted for based on the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable. The Company elected to continue to apply
the provisions of APB Opinion No. 25 as permitted by SFAS 123 and, accordingly,
provides pro forma disclosure below.
Stock options granted under Mego Financial's Stock Option Plan are
qualified and unqualified stock options that: (1) are generally granted at
prices which are equal to the fair value of the stock on the date of grant; (2)
generally subject to a grantee's continued employment with the Company, vest at
various periods over a four-year period; and (3) expire ten years subsequent to
the award.
F-27
<PAGE> 90
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
A summary of the status of Mego Financial's stock options granted under the
Stock Option Plan as of August 31, 1998, 1997 and 1996 and the changes during
the year is presented below:
<TABLE>
<CAPTION>
AUGUST 31, 1998 AUGUST 31, 1997 AUGUST 31, 1996
-------------------- -------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year....................... 45,000 $5.625 480,000 $3.746 465,000 $3.605
Granted...................... 348,500 3.136(1) 70,000 6.027 25,000 5.875
Exercised.................... -- -- 455,000 3.512 4,000 2.500
Forfeited.................... 49,000 3.380 50,000 7.375 6,000 2.500
------- ------- -------
Outstanding at end of year... 344,500 3.427 45,000 5.625 480,000 3.746
======= ======= =======
Options exercisable at end of
year....................... -- -- -- -- 165,000 3.133
======= ======= =======
</TABLE>
- ---------------
(1) Exercise price reduced to $1.00 per share at September 23, 1998 which
represented fair value at the date of repricing.
The fair value of each option granted during fiscal 1998, 1997 and 1996 is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions: (1) dividend yield of zero; (2)
expected volatility of 65.0% for 1998 and 59.3% for 1997 and 1996; (3) risk-free
interest rate of 6% for 1998, 1997 and 1996 and; (4) expected life of 7 years.
The weighted-average fair value of options granted during 1998, 1997 and 1996
were $2.13, $3.93 and $3.83, respectively. As of August 31, 1998, there were
344,500 options outstanding which have exercise prices ranging from $3.125 to
$5.625 per common share and a weighted-average remaining contractual life of
8.78 years.
Had compensation cost for Mego Financial's fiscal 1998, 1997 and 1996
grants for stock options been determined consistent with SFAS 123, the Company's
pro forma net income and pro forma net income per common share for fiscal 1998,
1997 and 1996 would approximate the pro forma amounts below (thousand of
dollars, except per share amounts):
<TABLE>
<CAPTION>
AUGUST 31, 1998 AUGUST 31, 1997 AUGUST 31, 1996
------------------------ ------------------------ ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)
applicable to common
stock............... $(3,229) $(3,333) $19,340 $19,042 $4,611 $4,431
Net income (loss) per
common share:
Basic................. (0.15) (0.16) 1.04 1.02 0.25 0.24
Diluted............... (0.15) (0.16) 0.99 0.98 0.24 0.23
</TABLE>
In addition to the 1,000,000 warrants exercised as described in Note 14, an
additional 1,300,000 warrants were exercised in August 1997 for $7,485,000. As
of August 31, 1998, there were no warrants outstanding.
F-28
<PAGE> 91
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
18. TIMESHARE INTEREST SALES AND LAND SALES
Timeshare interest sales, net -- A summary of the components of timeshare
interest sales is as follows (thousands of dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Timeshare interest sales.............................. $41,449 $39,850 $33,178
Less: Provision for cancellations..................... (3,736) (7,597) (5,400)
------- ------- -------
Total....................................... $37,713 $32,253 $27,778
======= ======= =======
</TABLE>
Land sales, net -- A summary of the components of land sales is as follows
(thousands of dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Land sales............................................ $14,903 $19,248 $22,346
Less: Provision for cancellations..................... (1,091) (2,622) (4,378)
------- ------- -------
Total....................................... $13,812 $16,626 $17,968
======= ======= =======
</TABLE>
The following table reflects the maturities of receivables from land sales
for each of the five years after August 31, 1998 (thousands of dollars):
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
---- ------ ---- ------ ------
<S> <C> <C> <C> <C> <C>
Land receivables maturities...................... $490 $1,131 $543 $1,209 $1,453
</TABLE>
The range of interest rates are from 0.0% to 15.0% and the weighted-average
interest rate at August 31, 1998 was 11.8%.
The delinquency information related to land loans at August 31, 1998 is as
follows (thousands of dollars):
<TABLE>
<CAPTION>
PRINCIPAL BALANCE % OF LOANS SERVICED
----------------- -------------------
<S> <C> <C>
30 - 59 days................................ $2,097 1.8%
60 - 90 days................................ $1,362 1.2%
Over 90 days................................ $3,476 3.0%
</TABLE>
The estimated total costs and expenditures for improvements on these loans
for the next five years are deemed immaterial for disclosure purposes at August
31, 1998. No material obligations for future improvements on land existed at
August 31, 1997.
19. RELATED PARTY TRANSACTIONS
Timeshare Owners' Associations -- Owners' Associations have been
incorporated for the Grand Flamingo, Reno Spa, Brigantine, Steamboat Springs,
Aloha Bay and Orlando timesharing resorts. The respective Owners' Associations
are independent not-for-profit corporations. PEC acts as the managing agent for
these Owners' Associations and the White Sands Waikiki Resort Club, which is a
division of PEC, (Associations) and has received management fees for its
services of $2,388,000, $2,198,000 and $2,081,000 in 1998, 1997 and 1996,
respectively. Such fees were recorded under the caption of other revenue. The
expenses of PEC for management of each timeshare resort are incurred to preserve
the integrity of the property and the portfolio performance on an on-going basis
beyond the end of the sales period. PEC does not manage resorts of other
developers and would not collect management fees or incur expenses were it not
part of the total timeshare sale package and support of the portfolio. The
owners of timeshare interests in each Association are responsible for payment to
the Associations of assessments, which are intended to fund all of the operating
F-29
<PAGE> 92
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
expenses at each of the resort facilities. The Company's share of the
Association Assessments, net of room income, was $1,677,000, $1,589,000 and
$983,000 for 1998, 1997 and 1996, respectively, and have been recorded under the
caption general and administrative expense. The Company has in the past financed
budget deficits of the Associations as is reflected in the receivable from such
Associations, but is not obligated to do so in the future, except in its Florida
resorts. The Public Offering Statements for the Indian Shores and Orlando
resorts contain a provision whereby PEC guarantees that the annual assessment
fees will not exceed a specified amount, in which case PEC agrees to pay any
monetary deficiencies. These guarantees are effective through the Associations'
calendar year of December 31, 1999 and may be extended by PEC annually
thereafter. In fiscal 1998, PEC financed a budget deficit of $65,000 for the
Owners' Association at Indian Shores..
Since January 1988, the Company has agreed to pay to the Associations the
assessments of timeshare interest owners who are delinquent with respect to
their assessments, but have paid the Company in full for their timeshare
interests. In exchange for these payments, the Associations assign their liens
for non-payment of assessments on the respective timeshare interests to the
Company. In the event the timeshare interest holder does not satisfy the lien
after having an opportunity to do so, the Company acquires the timeshare
interest for the amount of the lien and any foreclosure costs.
At August 31, 1998 and 1997, $477,000 and $500,000, respectively, was due
from Owners' Associations and is included under the caption accounts payable and
accrued liabilities.
Payments to Assignors -- Certain transactions have been entered into with
the Assignors, who are affiliates of certain officers and directors of the
Company, and these transactions are more fully described in Notes 2 and 14.
During the years ended August 31, 1998, 1997 and 1996, approximately $0,
$2,796,000 and $1,196,000, including interest of $0, 218,000 and $196,000,
respectively, were paid to the Assignors.
Subordinated Debt -- On March 2, 1995, the Company entered into the
Amendment whereby the Assignors agreed to defer payment of $10,000,000 of the
amount payable to Assignors and to subordinate such amount, constituting
Subordinated Debt, in right of payment to debt for money borrowed by Mego
Financial or obligations of subsidiaries guaranteed by Mego Financial. During
the years ended August 31, 1998, 1997 and 1996, approximately $640,000,
$2,429,000 and $1,000,000, including interest of $640,000, $1,000,000 and
$1,000,000, respectively, were paid on the Subordinated Debt. In connection with
the exercise of warrants for 1,000,000 shares of common stock in August 1997, a
non-cash payment of $4,250,000 was recorded, whereby the Subordinated Debt was
reduced by such amount. See Note 14 for further discussion.
Transactions with MMC -- In November 1996, MMC consummated 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, Mego Financial distributed all
of its 10,000,000 shares of MMC's common stock to Mego Financial's shareholders
in the Spin-off. To fund MMC's past operations and growth and in conjunction
with the Tax Agreement, MMC incurred debt to the Company and its subsidiary PEC.
The amount of intercompany debt was $10,100,000 at August 31, 1997, of which
approximately $3,400,000 was paid by MMC in October 1997 together with $500,000
advanced by the Company to PEC on behalf of MMC in September 1997. In April
1998, an agreement was made to adjust the balance due on the receivable by
reductions of the income tax portion in the amount of $5,283,000 previously
deemed owed by MMC to the Company under the Tax Agreement since that amount was
no longer payable under that agreement. As of the date of the April 1998
agreement, MMC owed the Company an estimated total of $6,153,000, of which
$5,283,000 was the estimated amount due to the Company under the Tax Agreement
prior to the Spin-off. An agreement was subsequently made to settle the
remaining $870,000 balance due the Company by MMC. In consideration of this
settlement, MMC paid the entire amount of $1,574,000, which was separately owed
to PEC, in June 1998. Following this transaction, MMC had no outstanding
indebtedness to the Company.
F-30
<PAGE> 93
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
Management Services Provided by PEC. MMC and PEC were parties to a
management services arrangement pursuant to which certain executive, accounting,
legal, management information, data processing, human resources, advertising and
promotional personnel of PEC provided services to MMC on an as needed basis. For
the years ended August 31, 1998, 1997 and 1996, approximately $616,000, $967,000
and $671,000, respectively, of the salaries and expenses of certain employees of
PEC were attributable to and paid by MMC in connection with services rendered by
such employees to MMC. In addition, during the year ended August 31, 1996, MMC
paid PEC for developing certain computer programming costs of $56,000. This
agreement was terminated by agreement prior to August 31, 1998.
Servicing Agreement between PEC and MMC. Prior to September 1, 1996, MMC
had an arrangement with PEC pursuant to which it paid annual servicing fees at
an annual rate of 50 basis points on the principal balance of loans serviced.
For the years ended August 31, 1998, 1997 and 1996, MMC paid servicing fees to
PEC of approximately $2,008,000, $1,766,000 and $709,000, respectively. MMC
entered into a servicing agreement with PEC (the Servicing Agreement), which
provided for the payment of servicing fees at an annual rate of 50 basis points
on the principal balance of loans serviced per year. The Servicing Agreement was
modified effective September 1, 1997, to provide for the payment of servicing
fees at an annual rate of 40 basis points on the principal balance of loans
serviced per year, reducing to 35 basis points per year on January 1, 1998. For
the years ended August 31, 1998, 1997 and 1996, MMC incurred interest expense in
the amount of $29,000, $16,000 and $29,000, respectively, related to fees
payable to PEC for these services. The interest rates were based on PEC's
average cost of funds and equaled 10.46% in 1998, 10.48% in 1997 and 10.68% in
1996. By agreement prior to August 31, 1998, PEC no longer services loans for
MMC.
20. COMMITMENTS AND CONTINGENCIES
Future Improvements -- Central Nevada Utilities Company (CNUC), a
subsidiary, has issued performance bonds of $2,943,000 outstanding at August 31,
1998, to ensure the completion of water, sewer and other improvements in
portions of the Calvada development areas. The cost of the improvements will be
offset by the future receipt of betterment fees and connection fees.
Leases -- The Company leases certain real estate for sales offices. The
Company also leases its Hawaii real estate for timeshare usage. Rental expense
for fiscal 1998, 1997 and 1996 was $2,035,000, $2,339,000 and $2,567,000,
respectively. Future minimum rental payments under operating leases are set
forth below (thousands of dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDING AUGUST 31,
-------------------------------
<S> <C>
1999...................................................... $1,796
2000...................................................... 1,334
2001...................................................... 981
2002...................................................... 447
2003...................................................... 196
Thereafter................................................ 1,276
------
Total........................................... $6,030
======
</TABLE>
Litigation -- Following the Company's November 10, 1995 announcement
disclosing certain accounting adjustments, an action was filed on November 13,
1995, in the United States District Court, District of Nevada (Court) by
Christopher Dunleavy, as a purported class action against the Company, certain
of the Company's officers and directors and the Company's independent auditors.
The complaint alleged, among other things, that the defendants violated Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder in
connection with the preparation and issuance of certain of the Company's
financial reports issued in 1994 and 1995, including certain financial
statements reported on by the Company's
F-31
<PAGE> 94
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
independent auditors. The complaint also alleged that one of the director
defendants violated the federal securities laws by engaging in "insider
trading." The named plaintiff sought to represent a class consisting of
purchasers of Mego Financial's common stock between January 14, 1994 and
November 9, 1995, and sought damages in an unspecified amount, costs, attorney's
fees and such other relief as the court may deem just and proper.
On November 16, 1995, a second action was filed in the Court by Alan Peyser
as a purported class action against the Company and certain of its officers and
directors, which was served on the Company on December 20, 1995. The complaint
alleged, among other things, that the defendants violated the federal securities
laws by making statements and issuing certain financial reports in 1994 and 1995
that overstated the Company's earnings and business prospects. The named
plaintiff sought to represent a class consisting of purchasers of Mego
Financial's common stock between November 28, 1994 and November 9, 1995. The
complaint sought damages in an unspecified amount, costs, attorney's fees and
such other relief as the Court may deem just and proper.
On or about June 10, 1996, the Dunleavy and Peyser Actions were
consolidated under the caption "In re Mego Financial Corp. Securities
Litigation," Master File No. CV-9-95-01082-LD (RLJ), pursuant to a stipulation
by the parties.
On December 26, 1996 a third action was filed in the court by Michael
Nadler as a purported class action. The Nadler complaint asserts claims
substantially similar to those in the Dunleavy and Peyser Actions. On April 23,
1998, counsel for the plaintiffs in the Dunleavy and Peyser actions, and counsel
for the defendants filed in the Court a Stipulation and Agreement of Settlement
(the Settlement Agreement) in accordance with a prior Memorandum of
Understanding dated May 12, 1997. The Settlement Agreement, which was subject to
a number of conditions, including approval by the Court, calls for
certification, for settlement purposes only, of a class consisting of all
purchasers of Mego Financial stock (excluding the defendants and their
respective directors, executive officers, partners and affiliates and their
respective immediate families, heirs, successors and assigns) during the period
from January 14, 1994 through November 9, 1995, inclusive, for creation of a
settlement fund of $1.725 million to be distributed to the class, for the
dismissal of all claims asserted in the actions with prejudice and for certain
releases to defendants. The portion of the settlement amount which has been
contributed by the Company, net of anticipated directors and officers insurance
proceeds, with contribution by another defendant, has not had a material adverse
effect on the Company. On October 19, 1998, the Court issued a Final Judgment
and Order of Dismissal with Prejudice, approving the Settlement Agreement, which
will not become final until the Effective Date, which is the date following
either the expiration of any appeal period without appeal, the date following
the affirmation of the Final Judgment on appeal and on which such Final Judgment
is no longer subject to further judicial review. On November 13, 1998, Michael
Nadler, who had filed objections to the settlement, filed a Notice of Appeal
from the Final Judgment and Order of Dismissal with Prejudice and certain other
orders of the Court. In the event, for any reason, the Final Judgment is
vacated, the Company believes that it has substantial defenses to all of the
complaints that have been filed against it described above. However, the Company
presently cannot predict the outcome of this matter
On February 23, 1998, an action was filed in the United States District
Court for the Northern District of Georgia, Civil Action No.1:98CV0593-CAM, by
Robert J. Feeney, plaintiff, as a purported class action against MMC and Jeffrey
S. Moore, the former President and Chief Executive Officer of MMC. The complaint
alleges, among other things, that the defendants violated the federal securities
laws in connection with the preparation and issuance of certain of MMC's
financial statements. The named plaintiff seeks to represent a class consisting
of purchasers of the common stock of MMC between April 11, 1997 and December 18,
1997, and seeks such other relief as the Court may deem just and proper. An
amended complaint was filed in such matter on or about June 29, 1998, which
amended complaint, among other things,
F-32
<PAGE> 95
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
adds Mego Financial as a defendant, adds John Cole, Trent Hildebrand, Burt W.
Price and Frank J. Murphy as Plaintiffs and alleges an expansion of the
purported class to certain purchasers of MMC's common stock from April 11, 1997
through May 20, 1998. However, the Company was not the parent company of MMC at
the time when the majority of the matters which are cited in the above-described
action occurred. Motions to dismiss the Complaints have been filed by the
defendants. The Company does not believe that any judgment obtained will have a
material adverse effect on the Company's or PEC's business or financial
condition.
On August 27, 1998, an action was filed in the United States District
Court, County of Clark, State of Nevada, No. A392585, by Robert and Jocelyne
Henry, husband and wife individually and on behalf of all others similarly
situated. The plaintiffs have filed a complaint for class action relief claiming
the Company is guilty of: breach of contract; unjust enrichment; customer fraud;
and bait and switch tactics as a result of a solicitation of betterment fees
pursuant to a letter sent to certain lot owners on January 26, 1995 (Letter).
The Letter was sent to approximately 1,400 lot owners stating that their lots
would be buildable by April 1, 1995 as a result of sewer and water lines being
run near their respective lots. The Letter offered to accept a betterment fee
payment in the amount of $2,380 per lot prior to an anticipated increase. The
Plaintiffs paid the fee and claimed they did not have a buildable lot as sewer
and water lines that were run did not reach their property. The Company does not
believe a determination in favor of the Plaintiffs will result in a material
judgment against the Company. Only approximately 350 customers accepted the
offer presented in the Letter and a number of those customers own lots that are
buildable. The Company is reviewing the various claims with counsel.
In the general course of business the Company, at various times, has been
named in other lawsuits. The Company believes that it has meritorious defenses
to these lawsuits and that resolution of these matters will not have a material
adverse affect on the business or financial condition of the Company.
Contingencies -- At August 31, 1998, irrevocable letters of credit in the
amount of $310,000 were issued and outstanding to secure certain obligations of
the Company. These letters are collateralized by notes receivable in the amount
of $1,036,000.
License Agreement -- In April 1995, PEC entered into a strategic alliance
pursuant to which PEC was granted a ten-year (including a renewal option)
exclusive license to operate both its existing and future timeshare properties
under the name "Ramada Vacation Suites." PEC has renamed its timeshare resorts.
The arrangement provides for the payment by PEC of an initial access fee of
$1,000,000, which has been paid, and monthly recurring fees equal to 1% of PEC's
Gross Sales (as defined) each month through January 1996 and 1.5% of PEC's Gross
Sales each month commencing in February 1996. The initial term of the
arrangement is five years and PEC has the option to renew the arrangement for an
additional term of five years.
F-33
<PAGE> 96
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables reflect consolidated quarterly financial data for the
Company for the fiscal years ended August 31, 1998 and 1997 (thousands of
dollars, except per share amounts):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------------------------------------
AUGUST 31, MAY 31, FEBRUARY 28, NOVEMBER 30,
1998 1998 1998 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Net timeshare interest and land sales.... $ 14,539 $ 13,109 $ 12,016 $ 11,861
Gain on sale of receivables.............. 656 -- -- --
Interest income.......................... 1,913 1,931 1,693 1,624
Financial income and other............... 1,956 2,471 2,219 2,602
----------- ----------- ----------- -----------
Total revenues................. 19,064 17,511 15,928 16,087
----------- ----------- ----------- -----------
EXPENSES:
Direct costs of timeshare interest and
land sales............................. 2,705 2,176 2,018 2,246
Operating expenses....................... 14,852 15,019 13,431 13,490
Interest expense......................... 2,215 2,157 1,762 1,716
----------- ----------- ----------- -----------
Total expenses................. 19,772 19,352 17,211 17,452
----------- ----------- ----------- -----------
Income (loss) from continuing operations
before income taxes.................... (708) (1,841) (1,283) (1,365)
Income taxes (benefit)................... (240) (1,728) -- --
----------- ----------- ----------- -----------
Income (loss) from continuing
operations............................. (468) (113) (1,283) (1,365)
Income from discontinued operations, net
of taxes and minority interest......... -- -- -- --
----------- ----------- ----------- -----------
Net income applicable to common stock.... $ (468) $ (113) $ (1,283) $ (1,365)
=========== =========== =========== ===========
EARNINGS (LOSS) PER COMMON SHARE:
Basic:
Income (loss) from continuing
operations.......................... $ (0.02) $ (0.01) $ (0.06) $ (0.06)
Income from discontinued operations.... -- -- -- --
----------- ----------- ----------- -----------
Net income applicable to common
stock............................... $ (0.02) $ (0.01) $ (0.06) $ (0.06)
=========== =========== =========== ===========
Weighted-average number of common
shares.............................. 21,009,506 21,009,506 21,009,506 21,009,506
=========== =========== =========== ===========
Diluted:
Income (loss) from continuing
operations.......................... $ (0.02) $ (0.01) $ (0.06) $ (0.06)
Income from discontinued operations.... -- -- -- --
----------- ----------- ----------- -----------
Net income applicable to common
stock............................... $ (0.02) $ (0.01) $ (0.06) $ (0.06)
=========== =========== =========== ===========
Weighted-average number of common
shares and common share equivalents
outstanding......................... 21,009,506 21,009,506 21,009,506 21,009,506
=========== =========== =========== ===========
</TABLE>
F-34
<PAGE> 97
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------------------------------------
AUGUST 31, MAY 31, FEBRUARY 28, NOVEMBER 30,
1997 1997 1997 1996
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Net timeshare interest and land sales.... $ 12,774 $ 13,202 $ 11,956 $ 10,947
Gain on sale of receivables.............. 620 503 441 449
Interest income.......................... 1,828 1,941 1,762 1,637
Financial income and other............... 2,219 2,609 2,493 2,115
----------- ----------- ----------- -----------
Total revenues................. 17,441 18,255 16,652 15,148
----------- ----------- ----------- -----------
EXPENSES:
Direct costs of timeshare interest and
land sales............................. 2,501 1,746 1,612 1,634
Operating expenses....................... 14,967 14,326 14,014 12,894
Interest expense......................... 2,107 2,084 2,116 2,151
----------- ----------- ----------- -----------
Total expenses................. 19,575 18,156 17,742 16,679
----------- ----------- ----------- -----------
Income (loss) from continuing operations
before income taxes.................... (2,134) 99 (1,090) (1,531)
Income taxes (benefit)................... (7,653) (2,084) (2,458) (467)
----------- ----------- ----------- -----------
Income (loss) from continuing
operations............................. 5,519 2,183 1,368 (1,064)
Income from discontinued operations, net
of taxes and minority interest......... 3,747 2,944 2,413 2,230
----------- ----------- ----------- -----------
Net income applicable to common stock.... $ 9,266 $ 5,127 $ 3,781 $ 1,166
=========== =========== =========== ===========
EARNINGS (LOSS) PER COMMON SHARE:
Basic:
Income (loss) from continuing
operations.......................... $ 0.29 $ 0.11 $ 0.07 $ (0.06)
Income from discontinued operations.... 0.20 0.16 0.13 0.12
----------- ----------- ----------- -----------
Net income applicable to common
stock............................... $ 0.49 $ 0.27 $ 0.20 $ 0.06
=========== =========== =========== ===========
Weighted-average number of common
shares.............................. 18,878,748 18,733,121 18,579,788 18,433,121
=========== =========== =========== ===========
Diluted:
Income (loss) from continuing
operations.......................... $ 0.28 $ 0.11 $ 0.07 $ (0.06)
Income from discontinued operations.... 0.19 0.16 0.12 0.12
----------- ----------- ----------- -----------
Net income applicable to common
stock............................... $ 0.47 $ 0.27 $ 0.19 $ 0.06
=========== =========== =========== ===========
Weighted-average number of common
shares and common share equivalents
outstanding......................... 19,619,687 19,299,365 19,662,582 18,433,121
=========== =========== =========== ===========
</TABLE>
F-35
<PAGE> 1
EXHIBIT 10.142
AMENDED AND RESTATED
REAL ESTATE PURCHASE AND SALE AGREEMENT
THIS AMENDED AND RESTATED REAL ESTATE PURCHASE AND SALE AGREEMENT
("Restated Agreement") is made and entered into as of this 25th day of November,
1997, by and between MERCANTILE EQUITIES CORPORATION, a Nevada corporation
("Mercantile"), with its principal address being Hartsel Springs Ranch, 2870
Juniper Drive, Golden, CO 80401 and HARTSEL SPRINGS RANCH OF COLORADO, INC., a
Colorado corporation ("HSRC"), having the same principal address as Mercantile
(Mercantile and HSRC are hereinafter collectively referred to as "Seller"), and
PREFERRED EQUITIES CORPORATION, a Nevada corporation, with its principal address
being 4310 Paradise Road, Las Vegas, Nevada ("Purchaser"). In consideration of
the mutual covenants and promises herein set forth, the parties agree as
follows:
RECITAL OF FACT
Seller and Purchaser entered into a REAL ESTATE PURCHASE AND SALE AGREEMENT
("Agreement") as of October 17, 1997, whereby the Purchaser would acquire
certain Lots in Hartsel Springs Ranch from Seller. Seller and Purchaser have
mutually determined that the Lot count shown in the Agreement is, through the
fault of neither party, different than the Lot count that Seller now desires to
convey to Purchaser and Purchaser desires to acquire from Seller. Accordingly,
Seller and Purchaser are entering into this Restated Agreement in order to
clarify the Lot count, the consideration to be paid for the Lots and to make
certain other amendments to the Agreement as noted below. The parties intend to
attach all Exhibits as referenced in this Restated Agreement, to the Restated
Agreement on or before the end of the Inspection Period, November 24, 1997, and
to determine a final Lot count on or before said date and the consideration to
be paid for the Lots. So long as the Purchaser has not terminated the Agreement
on or before 5:00 P.M. P.S.T. on November 24, 1997, Purchaser and Seller shall
execute this Restated Agreement on November 25, 1997, and record a memorandum of
this Restated Agreement against the Lots on said date.
Now, therefore, in consideration of the foregoing and other good and
valuable consideration, the parties hereto hereby agree as follows:
1. DEFINITIONS. All capitalized terms used within this Restated Agreement
and any Escrow Instructions, unless otherwise defined, shall have the respective
meanings ascribed in the Appendix of Defined Terms attached hereto and made a
part hereof.
2. PURCHASE AND SALE. Seller agrees to sell to Purchaser and Purchaser
agrees to purchase from Seller, certain of the platted lots in Hartsel Springs
Ranch including 1,360 Lots in South Ranch as shown on Exhibit "A-1"("South
Ranch Lots"), 54 partial Lots in South Ranch as
1
<PAGE> 2
shown on Exhibit "A-2" ("South Ranch Partial Lots"), 165 Lots in South Ranch as
shown on Exhibit "A-3" ("South Ranch Add-On Lots"), 314 Lots in South Ranch
platted after June 1st of 1972 as shown on Exhibit "A-4" (the "Post-72
Lots"),439 Lots in North Ranch as shown on Exhibit "A-5" ("North Ranch Lots")
and 8 partial Lots in North Ranch shown on Exhibit "A-6" ("North Ranch Partial
Lots). (The South Ranch Lots, South Ranch Partial Lots, South Ranch Add-On Lots,
North Ranch Lots, North Ranch Partial Lots and Post-72 Lots are hereinafter
collectively referred to as "the Lots"). Excluded from the purchase by Purchaser
are the following described parcels of real property in Hartsel Springs Ranch
and Seller's proposed use of said parcels: the lodge and timeshare development
more particularly described on Exhibit "B-1" attached hereto and made a part
hereof; bison preserve area more particularly described on Exhibit "B-2"
attached hereto and made a part hereof; equestrian center area and reservoir
more particularly described on Exhibit "B-3" attached hereto and made a part
hereof; bison preserve and RV resort lots more particularly described on Exhibit
"B-4" attached hereto and made a part hereof; reservoir "A & B," RV resort and
commercial area more particularly described on Exhibit "B-5" attached hereto and
made a part hereof; Hartsel Spring and lots more particularly described on
Exhibit "B-6" attached hereto and made a part hereof; and highway signs and
monument locations more particularly described on Exhibit "B-7" attached hereto
and made a part hereof. The real property shown on Exhibits "B-1" through "B-7"
inclusive and all other real property owned by Seller in Hartsel Springs Ranch
is hereinafter referred to as the "Seller's Retained Property." At Closing,
Seller is to convey to Purchaser all of its right, title and interest in and to
all of the Lots shown on Exhibits "A-1" through "A-6" inclusive, together with
all of the following property rights:
(a) All improvements located on the Lots, including
buildings, roads, structures and other facilities, if
any, (the "Improvements");
(b) All licenses, leases, permits, franchise agreements,
authorizations and approvals, if any, pertaining to
ownership and/or operation of the Lots which are
separable and transferable from Seller's Retained
Property, including but not limited to the Contracts,
Licenses, Leases, Plans and Studies that are
acceptable to Purchaser; and
(c) All easements, privileges, rights-of-way, riparian
and other water rights (subject to Seller's right to
fully develop and use the springs and water in
Seller's Retained Property as shown on Exhibit "B-6;"
however, said use will not impair availability of
water to the Lots for domestic purposes) and
appurtenances pertaining to or accruing to the
benefit of the Lots that are owned by Seller.
The Lots, Improvements and all of the other property and rights described in
this Section 2. are hereinafter collectively called the "Property."
3. PURCHASE PRICE. The Purchase Price to be paid by the Purchaser to the
Seller at Closing for the Property is to be determined on or before November 24,
1997, as follows:
(a) $2,700 for each South Ranch Lot;
2
<PAGE> 3
(b) Subject to receipt of the Water Opinion prior to
Closing, $2,700 for each two of the South Ranch
Partial Lots which Purchaser can combine to form a
saleable Lot;
(c) Subject to receipt of the Water Opinion prior to
Closing, $2,700 for each two of the South Ranch
Add-On Lots;
(d) $2,700 for each Post-72 Lot assuming the Plan of
Augmentation is approved on or before two (2) years
and six (6) months after Closing, or at
Purchaser's election, $2,041 for each Post-72 Lot if
the Plan of Augmentation is not approved on or before
two (2) years and six (6) months after Closing;
(e) $3,250 for each North Ranch Lot; and
(f) Subject to receipt of the Water Opinion prior to
Closing, $3,250 for each two of the North Ranch
Partial Lots which Purchaser can combine to form
a saleable Lot.
The Seller shall have the right to sell the Lots prior to the end of
the Inspection Period; however, at Closing, Seller is to deliver not less
than 439 North Ranch Lots. A final determination of the total number of South
Ranch Lots, South Ranch Partial Lots, South Ranch Add-On Lots, Post-72 Lots
and North Ranch Partial Lots shall be made on or before the end of the
Inspection Period and inserted in the appropriate blank space on page 1 of
this Restated Agreement on or before execution of this Restated
Agreement on November 25, 1997.
At Closing, in consideration of $1.00, Seller is to deliver to Purchaser
the Option, a form of which is attached hereto and made a part hereof as Exhibit
"E," for the Option Lots.
4. TERMS OF PAYMENT. The Purchase Price is to be paid in currency of the
United States of America and shall be paid at Closing to Seller as follows:
(a) $250,000.00 in Earnest Money has been deposited by the
Purchaser with the Escrow Agent and will go "hard" upon
execution of this Restated Agreement;
(b) Purchaser will deliver cash, inclusive of the Earnest
Money, to Seller at Closing for the South Ranch Lots,
South Ranch Partial Lots and South Ranch Add-On Lots
(the South Ranch Lots, South Ranch Partial Lots and
South Ranch Add-On Lots will be delivered free and
clear at Closing, subject only to the Title
Exceptions); and
(c) The balance of the Purchase Price will be paid by
Purchaser delivering to Seller the Purchase Money Note,
a form of which is attached hereto and made a part
hereof as Exhibit "F-1," for the North Ranch Lots and
North Ranch Partial Lots secured by the Purchase Money
Mortgage, a form of which is attached hereto and made a
part hereof as Exhibit "F-2," recorded against the
North Ranch Lots and North Ranch Partial Lots and by
Purchaser's delivery to Seller of the Post-72 Lots
Purchase Money Note, a form of which is attached hereto
and made a part hereof as Exhibit "G-1," secured by the
Post-72 Lots Purchase Money Mortgage,a form of which is
3
<PAGE> 4
attached hereto and made a part hereof as Exhibit
"G-2," recorded against the Post-72 Lots.
5. CLOSING DATE. The Closing will be conducted through the Escrow
established by the Escrow Agent, in accordance with customary escrow closings
for Park County, Colorado. The Earnest Money Deposit shall be opened by the
Escrow Agent depositing the Earnest Money in an interest-bearing account with a
federally insured Colorado commercial bank. Purchaser and Seller shall mutually
agree upon the Closing Date which shall occur on or before the Outside Closing
Date. The Outside Closing Date shall occur on or before sixty (60) days
following execution of this Restated Agreement, unless extended as a result of
Purchaser not yet obtaining the Governmental Approvals and as otherwise provided
herein.
In the event Purchaser does not terminate the Agreement on or before the
end of the Inspection Period and Closing does not occur on or before the Outside
Closing Date through no fault of Buyer or Seller, the Earnest Money Deposit
shall be returned to Buyer and neither Buyer or Seller shall have any further
rights or obligations under this Restated Agreement; however, the Outside
Closing Date will be extended ten (10) business days after Purchaser's receipt
of the Governmental Approvals in the event all other conditions, except for
Purchaser obtaining the Governmental Approvals, have been met on or before the
Outside Closing Date. In the event Purchaser does not terminate the Agreement
during the Inspection Period and all other conditions, except for the Purchaser
obtaining the Governmental Approvals,have been met on or before the Outside
Closing Date and Purchaser is unable to obtain the Governmental Approvals on or
before July 1, 1998, this Restated Agreement shall terminate and the Escrow
Agent shall deliver the Earnest Money Deposit to Seller in consideration of the
Property being unavailable for sale during this period of time.
6. TITLE. Seller, at Seller's expense, has delivered to Purchaser the Title
Commitment for the Title Policy. The Title Commitment shall be endorsed and
updated at Seller's expense within ten (10) days before Closing. The Title
Policy will be delivered to Purchaser at Seller's expense at Closing. The Title
Commitment and any endorsement or update thereof shall show Seller to be vested
with good, marketable and insurable fee simple title to the Lots, free and clear
of all Defects, except only the following Title Exceptions:
(a) Ad valorem real estate taxes for the year of Closing,
provided same are not then due and payable, and
subsequent years;
(b) All applicable zoning ordinances and regulations, none
of which shall prohibit or otherwise interfere with all
uses presently being made of the Property and/or
Purchaser's Intended Use of the Property;
(c) Those Title Exceptions acceptable to Purchaser as
described on Exhibit "C" attached hereto;
4
<PAGE> 5
(d) The Coverage CC&R, which is attached hereto and made a
part hereof as Exhibit "H," recorded as a senior-most
lien against the Lots and Seller's Retained Property;
(e) The Restriction on Sale of Seller's Retained Property,
which is attached hereto and made a part hereof as
Exhibit "I," recorded as a lien, junior only to the
Coverage CC&R, against Seller's Retained Property;
(f) The Purchase Money Mortgage, recorded against the North
Ranch Lots and North Ranch Partial Lots, and Post-72
Lots Purchase Money Mortgage, recorded against the
Post-72 Lots;
(g) The Option, recorded against the Option Lots, junior
only to the Coverage CC&R and Restriction On The Sale
Of Seller's Retained Property; and
(h) Restrictions or matters appearing on the plat or
otherwise common to the subdivision of which the
Property might be a part, none of which shall prohibit
or otherwise interfere with all uses presently being
made of the Property and/or Purchaser's Intended Use of
the Property.
Title shall be deemed good, marketable and insurable only if the Title
Commitment allows for issuance of an Owner's ALTA Form B Marketability Policy
effective as of Closing Date at minimum promulgated risk rate premiums, without
any guarantees and without any exceptions, standard or otherwise, other than the
Title Exceptions. Purchaser shall have until the expiration of the Title Review
Period within which to examine the Title Commitment as well as any Survey. If
Purchaser finds any Title Exception to be a Defect, Purchaser shall, no later
than the expiration of the Title Review Period, notify Seller in writing
specifying any such Defects (which Defects shall also include any UCC-1
Financing Statements filed against any personal property of Seller and/or the
Contracts with the Colorado Secretary of State); provided, that if Purchaser
fails to give Seller written notice of Defects before the expiration of the
Title Review Period, then any such Defect shown on the Title Commitment and/or
Survey, if any, shall, be described on Exhibit "C" as acceptable Title
Exceptions and be deemed to be waived as a Defect(s) to Closing. Purchaser may
raise as additional Defects any matters first shown by any subsequent
endorsement to the Title Commitment and/or recertifications of the Survey, if
any, by providing Seller written notice of Defects within five (5) days of
Purchaser's knowledge of any such Defect or such Defect shall be deemed to be
waived as a Defect(s) to Closing. If Purchaser has given Seller timely written
notice of Defects and the Defects cause title to the Property to be other than
as represented in this Restated Agreement, Seller shall use its best efforts to
cause such Defects to be cured by the Closing Date including but not limited to
the removal by payment, bonding, or otherwise of any lien against the Property
capable of removal by the payment of money or bonding. At Purchaser's option,
the Closing Date may be extended for a reasonable period for purposes of
eliminating any Defects. In the event that Seller does not eliminate the Defects
as of the Closing Date, Purchaser shall have the option of either: (i) so long
as it will not cost more than $250,000.00 to eliminate the Defects, Closing and
accepting the title "as is," and deducting from the Purchase Price the amount of
any lien or encumbrance which can be satisfied by a liquidated amount, or (ii)
cancelling this Restated
5
<PAGE> 6
Agreement, in which event the Escrow Agent shall return the Earnest Money
Deposit to Purchaser, whereupon both parties shall be released from all further
obligations under this Restated Agreement, except only (i) for those obligations
which are intended to survive Closing and/or any earlier termination of this
Restated Agreement, and (ii) Seller shall remain liable to Purchaser in the
event any such Defects were caused by Seller's willful act or willful failure to
act. Seller shall execute appropriate documents as required for "gap coverage"
by the title insurer.
7. DELIVERIES. Seller has delivered to Purchaser true, correct and complete
copies of items (a) through (f) inclusive:
(a) All contracts, franchise agreements, pre-paid reservation
deposits or other reservation agreements, marketing
agreements, Leases, tenancies, arrangements, Licenses,
concessions, easements, service arrangements, employment
contracts or agreements, brokerage agreements, and any and
all other contracts or agreements, either recorded or
unrecorded, written or oral, affecting the Property or any
portion thereof, or the use thereof (the "Contracts"). A
true, correct and complete list of the Contracts is to be
attached hereto as Exhibit "D," and all new Contracts
hereafter entered into by Seller as, and solely to the
extent, permitted hereby, shall be added to Exhibit "D";
(b) All permits, licenses, authorizations or approvals (other
than those which are no longer in effect) issued by any
governmental body or agency having jurisdiction over Hartsel
Springs Ranch, related to the ownership, sale of lots and/or
operation of Hartsel Springs Ranch, including but not
limited to federal, state and local lot sale registrations
(the "Licenses");
(c) Copies of the bill or bills issued for the years 1995, 1996
and 1997 when available, for real estate and personal
property taxes and any subsequently issued notices
pertaining to real estate or personal property taxes or
assessments applicable to the Property;
(d) An existing Survey, if any, and all plat plans, engineering
and architectural plans and as-built plans, specifications
and drawings relating to the Property (the "Plans") and all
engineering and environmental studies or audits relating to
the Property ("Studies"), which are within the control or
possession of Seller;
(e) Seller's Litigation Schedule; and
(f) The Cease and Desist Order.
Notwithstanding the foregoing, Seller has not provided (i) copies of
materials previously provided to Purchaser as shown on Exhibit "D-1" and (ii)
copies of any mortgage loan documents or agreements between Seller and its
lenders, as all existing liens that secure any such
6
<PAGE> 7
mortgage loan documents or agreements are to be released or reconveyed as a lien
against the Lots, at or prior to Closing.
Seller has delivered to Purchaser drafts of the Purchase Money Note,
Purchase Money Mortgage, Post-72 Lots Purchase Money Note and Post-72 Lots
Purchase Money Mortgage.
Purchaser has delivered to Seller drafts of the Coverage CC&Rs and
Restriction On The Sale Of Seller's Retained Property.
On or before November 19, 1997, Seller is to deliver to Purchaser a draft
of the Option for the Option Lots.
8. INSPECTION PERIOD. Purchaser shall have the right to inspect the
Property pursuant to 8.(a) and 8.(b), in order to determine whether the
Property is satisfactory.
(a) Purchaser shall have until 5:00 P.M. P.S.T. on November 24,
1997(the period between the date of the Agreement and 5:00 P.M.
P.S.T. on November 24, 1997, shall be referred to in this
Restated Agreement from time to time as the "Inspection Period,"
which Inspection Period will be extended on a day-to-day basis
for each day beyond the periods referred to in Section 7. above
that Seller fails to deliver to Purchaser any material items
required to be delivered to Purchaser pursuant thereto) to
examine the Purchase Money Note, Purchase Money Mortgage, Post-72
Purchase Money Note, Post-72 Purchase Money Mortgage, Option,
Title Commitment, the Contracts, the Leases, the Licenses, the
Plans, the Studies, The Cease and Desist Order, Seller's
Litigation Schedule and the Survey, if any, to decide whether
they are satisfactory to Purchaser and to make such physical,
zoning, land use, environmental, water rights and other
examinations, inspections and investigations of the Property or
the use or operation thereof which Purchaser, in Purchaser's sole
discretion, may determine to make. In the event Purchaser is not
satisfied with the Property, determined in Purchaser's sole and
absolute discretion for any or no reason, Purchaser may cancel
this transaction by giving written notice to the Escrow Agent on
or before the end of the Inspection Period, in which event the
Earnest Money Deposit shall be immediately returned to Purchaser.
(b) Purchaser shall have until the expiration of the Inspection
Period to make a physical inspection of the Property by
architects, engineers, environmental specialists, and/or any
other agent of Purchaser's choice, for the purpose of determining
the condition and suitability of the Property. In the event that,
based upon such inspection or otherwise, Purchaser is not
satisfied with the condition of the Property, determined in
Purchaser's sole discretion for any or no reason, Purchaser may
cancel this transaction by giving written notice to the Escrow
Agent on or before the end of the Inspection Period, in which
7
<PAGE> 8
event the Earnest Money Deposit shall be immediately returned to
Purchaser.
In the event the Agreement is not terminated on or before the end
of the Inspection Period pursuant to 8(a) or 8(b), the Earnest Money Deposit
shall continue to be held by the Escrow Agent and be credited at Closing
toward the Purchase Price or in the event Governmental Approvals are not
obtained on or before July 1, 1998, the Earnest Money Deposit will be delivered
to Seller, or as otherwise called for pursuant to this Restated Agreement.
9. CONDITIONS PRECEDENT. The obligation of Purchaser to proceed to
Closing shall be subject to any conditions precedent to Closing in the
Escrow Instructions and the following conditions precedent to Closing
being fully met and completed on or before the Closing Date:
(a) The Property is now zoned R-1 under the Park County, Colorado
land use statutes, rules and regulations and the Property will
remain so zoned and classified at Closing so as to permit sale of
the Property and each and every use now being made on the
Property and the Intended Use. There shall be no special or
limiting conditions or agreements under any zoning resolution
that prohibit or frustrate the use of the Property as it is
presently being used or for the Purchaser's Intended Use and the
Property shall comply with all applicable zoning, environmental
and land use requirements, laws and regulations.
(b) As of the Closing, there shall be no Contracts, arrangements or
any other agreements of any nature whatsoever, whether oral or
written, other than the Contracts that are acceptable to
Purchaser, affecting the Property, that cannot be cancelled by
Purchaser upon not more than thirty (30) days notice and without
payment of premium or charge therefor.
(c) As of the Closing, all of Seller's employees employed at the
Property shall be re-assigned or terminated, and no such
employees shall have any claim whatsoever against Purchaser
and/or the Property for back wages, withholding taxes or any
other matter.
(d) In the event Purchaser determines to locate Purchaser's Sales
Office upon Seller's Retained Property, or to lease Seller's
existing sales office, Purchaser and Seller agreeing, prior to
the end of the Inspection Period, upon a location for Purchaser's
Sales Office and the terms and conditions for the development and
use of the Purchaser's Sales Office or agreeing on or before the
end of the Inspection Period, to the terms and conditions for
leasing Seller's existing sales office. In the event the property
site on which the Purchaser's Sales Office is to be located is
conveyed to Purchaser in fee simple, the representations of
Seller in 10.(a) through (1) inclusive shall be made in
association with any such purchase and shall survive the Closing.
8
<PAGE> 9
(e) Purchaser shall be allowed to use the name "Hartsel Springs
Ranch" and derivatives thereof and other tradenames, trademarks
and copyrights subject to the mutually agreeable License, a form
of which is attached hereto and made a part hereof as Exhibit
"J," to be granted from Seller to Purchaser at Closing.
(f) Bluegreen Corporation's ("BXG") marketing agreement and right of
first refusal thereunder having expired with any litigation by
and between Seller and BXG in no manner affecting Purchaser's
acquisition or sale of the Lots.
(g) Recordation of the Restriction On The Sale Of Seller's Retained
Property on Seller's Retained Property, junior only to the
Coverage CC&R.
(h) Recordation of the Coverage CC&R as a senior-most lien on the
Lots and Seller's Retained Property.
(i) Receipt of all Governmental Approvals.
(j) Approval, in the reasonable opinion of Purchaser, of Seller's
Litigation Schedule, updated as of the Closing Date, in the event
there are material changes to Seller's Litigation Schedule
delivered during the Inspection Period.
(k) Receipt of the Water Opinion.
(l) Recordation of the Option against the Option Lots, junior only to
the Coverage CC&R and Restriction On The Sale Of Seller's
Retained Property.
(m) All of Seller's representations shall be true and correct on the
Closing Date and Seller shall not be in breach of any warranty or
covenant as of the Closing Date.
In the event any of the foregoing conditions precedent are not fulfilled as
of the Outside Closing Date (or earlier date if specified otherwise), then
Purchaser shall have the option of either: (i) waiving the condition and closing
"as is," without reduction in the Purchase Price (except as provided for in this
Restated Agreement) or claim against Seller therefor, or (ii) cancelling this
Restated Agreement by written notice to Seller given by not later than the
Outside Closing Date, in which event the Escrow Agent shall return the Earnest
Money Deposit to Purchaser, whereupon both parties shall be released from all
further obligations under this Restated Agreement, except those obligations
which are specifically stated to survive termination or Closing of this
transaction. In addition to the elections available to Purchaser pursuant to (i)
and (ii) immediately above, Seller shall be liable to Purchaser for damages in
the event any condition precedent is not met or fulfilled by the Outside Closing
Date as a result of Seller's willful act or willful failure to act.
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<PAGE> 10
9-A. CONDITIONS SUBSEQUENT - Purchaser is acquiring the Post-72 Lots in
consideration of delivery to the Seller of the Post-72 Lots Purchase
Money Note in the amount of $847,800.00 (or $2,700.00 for each Post-72
Lot) to be secured by the Post-72 Lots Purchase Money Mortgage to be
recorded against the Post-72 Lots. In the event the Plan of
Augmentation is approved by final nonappealable order of the Water
Court on or before two (2) years and six (6) months from the Closing
Date, the principal of the Post-72 Lots Purchase Money Note shall be
reduced by the total of Purchaser's costs and expenses (including but
not limited to engineering fees, legal fees and court costs (but
excluding all internal costs and expenses of Purchaser for its staff
personnel or otherwise) expended in obtaining approval of the Plan of
Augmentation. Until such time as the Plan of Augmentation is approved,
the Post-72 Lots Purchase Money Note and Post-72 Lots Purchase Money
Mortgage shall be recourse only to the Post-72 Lots. In the event the
Plan of Augmentation is approved or in the event the Plan of
Augmentation is not approved but Purchaser elects to purchase the
Post-72 Lots at the price of $2,041 for each Post-72 Lot, the Post-72
Lots Purchase Money Note and Post-72 Lots Purchase Money Mortgage
shall be recourse to the Purchaser and the Post-72 Lots.
In the event the Plan of Augmentation is not approved by final
nonappealable order of the Water Court, or final nonappealable order
of any court to which the decision of the Water Court may be appealed,
on or before two (2) years and six (6) months from the Closing Date,
Purchaser may (i) elect to purchase the Post-72 Lots and the principal
of the Post-72 Purchase Money Note shall be reduced to $640,874.00 (or
$2,041 for each Post-72 Lot) and Seller will not be obligated to
provide water and storage facilities or (ii) re-convey the Post-72
Lots to Seller, subject only to the Title Exceptions, in consideration
for the cancellation of the Post-72 Lots Purchase Money Note and
re-conveyance of the Post-72 Lots Purchase Money Mortgage. In the
event Purchaser elects to re-convey the Post-72 Lots to Seller, the
Post-72 Lots will not be subject to the Restriction On The Sale Of
Seller's Retained Property.
10. SELLER'S REPRESENTATIONS. As a specific inducement for Purchaser to
enter into this Restated Agreement, Seller represents, warrants and covenants to
Purchaser and agrees with Purchaser as follows:
(a) Seller has not entered into any pre-paid or other reservation
agreements, Leases, tenancies, occupancy agreements, contracts,
arrangements, Licenses, concessions, easements, marketing
agreements or other agreements, including, without limitation,
marketing agreements with any third party regarding the sale of
Hartsel Springs Ranch property, service arrangements and
employment agreements, either recorded or unrecorded, written or
oral, affecting the Property, or any portion thereof or the use
thereof, other than the Contracts. Each of the Contracts: (i) is
in good standing and not in default or would be in default
subject to the giving of notice or passage of time or both; (ii)
fully assignable to Purchaser without any change in the terms and
provisions thereof; and (iii) except as expressly provided to the
contrary on Exhibit "D," may be cancelled by Purchaser upon not
more than thirty (30) days notice without payment of premium or
penalty therefor. No
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<PAGE> 11
tenant occupying space under a Lease or any other agreement
(i) has prepaid any rent or any other sums; (ii) is holding over
contrary to the wishes of Seller; (iii) is entitled to the
construction of any tenant improvements or common area
improvements; (iv) has any right to set off against any amount of
rent due or to become due; and (v) has no understanding with
Seller regarding occupancy or any other usage of the Property
except as expressly shown on Exhibit "D." Seller shall not modify
any of the Contracts nor shall Seller cancel or permit the
cancellation of any of the Contracts, and Seller shall not enter
into any new Contract or other agreement affecting the Property.
(b) Seller has no notice or knowledge of: (i) any pending improvement
liens to be made by any governmental authority with respect to
the Property; (ii) any violations of building codes and/or zoning
ordinances or other governmental regulations with respect to the
Property; (iii) any pending or threatened lawsuits , other than
shown on the Seller's Litigation Schedule; or (iv) any pending or
threatened condemnation proceedings, other than shown on Seller's
Litigation Schedule.
(c) To the best of Seller's knowledge, no fact or condition exists
which would result in the termination or impairment of access to
the Property or the ability to obtain septic system approvals,
water (other than for the Post-72 Lots), electric, gas, telephone
or other utilities or services to the Property.
(d) To the best of Seller's knowledge, no additional Park County
Zoning Approval will be required or necessary to carry out the
Intended Use.
(e) During the period between the date of this Restated Agreement and
Closing, Seller shall continue to operate and manage the Property
in a prudent, businesslike and responsible manner consistent with
its operation and management prior to the date of this Restated
Agreement and keep same clear of accumulations of trash and
debris. Seller shall have the right to the end of the Inspection
Period to sell the Lots. From the date of execution of this
Restated Agreement until the Closing Date, Seller may not sell or
otherwise convey, lien or encumber any of the Lots. Seller shall
continue to maintain all of the present services to the Property
and make all repairs and replacements to the Property in the
ordinary course of business. In addition, Seller shall make all
payments due prior to Closing in connection with the Property,
and payments on any other obligations affecting the Property.
(f) Seller is vested with good, marketable and insurable fee simple
title to the Lots subject only to the Title Exceptions.
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<PAGE> 12
(g) Prior to Closing, Seller shall comply with all laws, rules,
regulations, and ordinances of all governmental authorities
having jurisdiction over the Property. Seller shall be
responsible for and shall promptly pay all amounts owed for
labor, materials supplied, services rendered and/or any other
bills or amounts related to Seller and Seller's ownership and/or
operation of the Property prior to Closing.
(h) Subject only to Seller's right to sell the Lots to the end of the
Inspection Period and Bluegreen's right of first refusal, which
shall expire on or before the end of the Inspection Period, prior
to Closing, no portion of the Property or any interest therein,
beneficial or otherwise, shall be alienated, encumbered, conveyed
or otherwise transferred. In addition, Seller shall not negotiate
any potential sale of the Property with any third party during
the term hereof. Further, prior to Closing, no interest in the
Seller, beneficial or otherwise, shall be alienated, encumbered,
conveyed or otherwise transferred if such event could, within the
opinion of Purchaser, negatively affect Seller's ability to
fulfill the transaction contemplated by this Restated Agreement.
(i) Mercantile is a corporation duly formed and validly existing
under the laws of the State of Nevada. HSRC is a corporation duly
formed and validly existing under the laws of the State of
Colorado. The execution, delivery and performance of this
Restated Agreement by Seller have been duly authorized and no
consent of any other person or entity to such execution, delivery
and performance is required to render this document a valid and
binding instrument enforceable against Seller in accordance with
its terms. Neither the execution of this Restated Agreement or
the consummation of the transactions contemplated hereby will:
(i) result in a breach of, or default under, any agreement to
which Seller is a party or by which the Property is bound; or
(ii) violate any restrictions to which Seller is subject.
(j) To the best of Seller's knowledge, there has not been and there
is not now: (i) any Hazardous Substance present on the Property;
(ii) any present or past generation, recycling, reuse, sale,
storage, handling, transport and/or disposal of any Hazardous
Substance on the Property; or (iii) any failure to comply with
any applicable local, state or federal environmental laws,
regulations, ordinances or administrative or judicial orders
relating to the generation, recycling, reuse, sale, storage,
handling, transport and/or disposal of any Hazardous Substance.
Seller has not received any notice from any governmental
authority regarding the presence of any Hazardous Substance, any
present or past generation, recycling, reuse, sale, storage,
handling, transport and/or disposal of any Hazardous Substance or
any failure to comply with any applicable local, state or federal
environmental
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<PAGE> 13
laws, regulations, ordinances or administrative or judicial
orders relating to the generation, recycling, reuse, sale,
storage, handling, transport and/or disposal of any Hazardous
Substance. As used herein, the term "Hazardous Substance" means
any substance or material defined or designated as a hazardous or
toxic waste material or substance, or other similar term by any
federal, state or local environmental statute, regulation or
ordinance presently or hereinafter in effect, as such statute,
regulation or ordinance may be amended from time to time.
(k) Except as is disclosed on Exhibit "D," there are no Leases,
occupancy agreements, marketing agreements, sales agreements, or
any other type or form of agreement, either written or oral,
which affect the Property and Seller has exclusive possession of
the Property.
(l) Seller has no unfulfilled obligation of any nature whatsoever
owed to any of Seller's employees including but not limited to
the payment of employees wages and associated payroll taxes that
could result in a claim against the Purchaser or the Property.
(m) Each South Ranch Lot, South Ranch Partial Lot, South Ranch Add-On
Lot, North Ranch Partial Lot and North Ranch Lot that makes up a
part of the Property (i) has, a reserved right for a water well
(ii) is served by fully installed Park County roads of record or
easements for road extensions (not less than ninety percent (90%)
of the lots that make up the Property are served by fully
installed Park County roads of record) (iii) will be delivered
unencumbered except for the Title Exceptions and (iv) has access
(subject to the expenditures as necessary to make utilities
available to the Lots) to other Park County services including
but not limited to electric, telephone, police services, fire
services and schools. The foregoing representation also applies
to the Post-72 Lots with the exception of 10.(m) (i).
(n) While the Restriction on Sale of Seller's Retained Property is in
effect, Seller will not sell any of the Seller's Retained
Property except as allowed by this Restated Agreement and the
Restriction On The Sale Of Seller's Retained Property.
(o) Seller agrees to record the Restriction On The Sale Of Seller's
Retained Property against all of Seller's Retained Property
junior only to the Coverage CC&R. In the event of a breach of the
Restriction On The Sale Of Seller's Retained Property by Seller
or any Affiliate of or successor in interest to Seller, Seller
will consent to the filing of the Injunction. The Injunction will
prevent Seller from selling any lot,
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<PAGE> 14
now existing or to be platted in Hartsel Springs Ranch owned by
Seller, or any Affiliate of or successor in interest to Seller,
for a period of ten (10) years from the date of filing. The
Seller and Purchaser hereby agree that the determination of
damages in the event of Seller's breach of the Restriction On The
Sale Of Seller's Retained Property would be difficult to
ascertain and hereby agree that the filing of the Injunction is
an appropriate remedy for Seller's breach of the Restriction On
The Sale Of Seller's Retained Property.
(p) Seller shall make available at its cost, sufficient water rights
and storage facilities as may be required or necessary, as
determined pursuant to 12.(v) of this Restated Agreement, to
obtain approval of the Plan of Augmentation.
(q) Seller shall assist Purchaser with the preparation and submission
of all Governmental Approvals including executing all
applications and other documents as may be necessary in the
reasonable opinion of Purchaser. Any out-of-pocket costs incurred
by Seller in assisting Purchaser shall be borne by Purchaser.
The following representations, warranties and covenants of Seller shall be
deemed renewed at and shall survive the Closing: 10.(a); (b); (c); (g); (i);
(j); (k); (l); (m); (n); (o); (p) and (q) provided, however, if Seller becomes
aware of any event or changed circumstance that causes or makes a
representation, warranty or covenant of Seller given herein with respect to the
Property untrue as of Closing, Seller shall, immediately upon learning of same,
notify Purchaser of such event or changed circumstance in writing, and unless
Seller is willing and able to remediate the event or changed circumstance or
condition prior to Closing, Purchaser shall have the right by written notice to
Seller and Escrow Agent to either (i) terminate this Restated Agreement, in
which event the Earnest Money Deposit shall be returned to Purchaser and neither
party shall have any further obligation hereunder, or (ii) proceed to Closing,
in which event the affected representation, warranty or covenant shall be deemed
modified as of the Closing Date to conform to the event or changed circumstance
or condition.
Notwithstanding the election available to Purchaser pursuant to (i) and
(ii) above, in the event any representation, warranty and/or covenant of Seller
made in this Restated Agreement becomes untrue as of or prior to Closing, Seller
shall be liable to Purchaser for damages in the event Seller (i) knowingly or
negligently made an inaccurate or untruthful representation or warranty or
covenanted to perform an act which Seller did not intend to perform or knew it
was incapable of performing or (ii) by commission or omission caused or allowed
a representation or warranty true when made to become untrue.
11. REPRESENTATIONS OF PURCHASER. As a specific inducement for Seller to
enter into this Restated Agreement, Purchaser represents, warrants and covenants
to Seller and agrees with Seller as follows: (a) that the execution, delivery
and performance of this Restated Agreement by Purchaser is the legal, valid and
binding agreement of the Purchaser; (b) Purchaser is
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<PAGE> 15
an experienced developer of real property and has been and is currently engaged
in the sale of residential real estate lots in Park County, Colorado as part of
its ordinary business activities; (c) through the delivery of the Purchase Money
Note, Post-72 Lots Purchase Money Note and/or through arms length lending
transactions, has the financial ability and wherewithal, subject to Purchaser's
right to cancel during the Inspection Period, to proceed to Closing and to pay
the balance of the Purchase Price by the delivery of cash or cash equivalent
using currency of the United States of America and delivery of the Purchase
Money Note and Post-72 Lots Purchase Money Note; (d) Purchaser shall diligently
proceed to obtain the Governmental Approvals on or before the Outside Closing
Date, as some may be extended pursuant to the terms and conditions of this
Restated Agreement; and (e) subject to Seller making available to Purchaser
sufficient water and storage facilities at Seller's cost as required pursuant to
this Restated Agreement, Purchaser shall diligently proceed to obtain approval
of the Plan of Augmentation.
12. COVENANTS OF SELLER. In addition to the other covenants and agreements
of Seller contained in this Restated Agreement, Seller hereby covenants and
agrees with Purchaser to: (i) record against Seller's Retained Property, junior
only to the Coverage CC&R and be bound by the terms and conditions of, the
Restriction On The Sale Of Seller's Retained Property (ii) to record the
Coverage CC&R as a senior-most lien against the Lots and Seller's Retained
Property (iii) to assist Purchaser in obtaining the Governmental Approvals
including but not limited to executing any and all applications or other
registration materials whatsoever as reasonably requested by the Purchaser (iv)
to allow for the filing of the Injunction in the event Seller violates the
Restriction On The Sale Of Seller's Retained Property(v) at Seller's cost, to
make water and storage facilities available, as required in the opinion of
counsel hired by Purchaser to obtain approval of the Plan of Augmentation
(Seller shall have the right to approve said counsel in Seller's reasonable
opinion) and (vi) Seller shall record the Option junior only to the Coverage
CC&R and Restriction On The Sale Of Seller's Retained Property, against the
Option Lots. All recordations are to be completed at or prior to Closing.
Seller's covenants shall survive Closing.
12-A. COVENANTS OF PURCHASER. In addition to the other covenants and
agreements of Purchaser contained in this Restated Agreement, Purchaser hereby
covenants and agrees with Seller to: (i) diligently pursue all Governmental
Approvals (ii) to assist Seller, at Seller's expense in a Section 1031 tax
deferred exchange and (iii) subject to Seller providing, at Seller's cost, water
and storage facilities as determined pursuant to 12.(v), Purchaser shall pay the
costs and expenses of having the Plan of Augmentation approved. Purchaser's
covenants shall survive Closing.
13. DEFAULT PROVISIONS. In the event of the failure or refusal of the
Purchaser to proceed with Closing on or before the Outside Closing Date as same
may be extended pursuant to the terms hereof, without fault on Seller's part and
without failure of title or any conditions precedent to Purchaser's obligations
hereunder, Seller shall receive the Earnest Money Deposit as agreed upon
liquidated damages for said breach as Seller's sole and exclusive remedy for
default of
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<PAGE> 16
Purchaser, whereupon the parties shall be relieved of all further obligations
hereunder, except those obligations which are specifically stated herein to
survive the termination or Closing of this transaction.
In the event of a default by Seller under this Restated Agreement,
Purchaser at its option shall have the right to: (i) receive the return of the
Earnest Money Deposit whereupon the parties shall be released from all further
obligations under this Restated Agreement, except those obligations which are
specifically stated herein to survive the termination or Closing of this
transaction, unless the default was caused by the willful act, willful omission,
misrepresentation or breach of covenant by Seller in which event Seller shall
continue to be liable for damages caused thereby, anything to the contrary
notwithstanding, or, alternatively, (ii) seek specific performance of the
Seller's obligations hereunder and/or any other equitable remedies, without
thereby waiving damages. Notwithstanding the foregoing, in the event of a
default by either party of any obligation which specifically survives Closing,
then the non-defaulting party shall be entitled to seek any legal redress
permitted by law or equity.
The provisions hereof shall survive Closing.
14. PRORATIONS. Real estate and personal property taxes, rents (whether or
not actually collected), interest, costs and revenues and all other proratable
items shall be prorated as of the Closing Date. Seller shall be responsible for
the payment of all utility bills and shall receive credit for any prepaid
utility deposits as of the Closing Date. Seller shall pay all sales and/or use
tax due on revenues received and purchases made prior to the Closing Date and
shall comply with all statutory provisions necessary for Purchaser to avoid
transferee liability for same. In the event the taxes for the year of Closing
are unknown, the tax proration will be based upon the taxes for the prior year,
and at the request of either party, the taxes for the year of Closing shall be
reprorated and adjusted when the tax bill for such year is received and the
actual amount of taxes is known. The provisions of this paragraph shall survive
the Closing.
15. IMPROVEMENT LIENS. Certified, confirmed or ratified liens for
governmental improvements as of the Closing Date, if any, shall be paid in full
by Seller, and pending liens for governmental improvements as of the Closing
Date shall be assumed by the Purchaser, provided that where the governmental
improvement has been substantially completed as of the Closing Date, such
pending lien shall be considered certified.
16. CLOSING COSTS. The parties shall bear the following Closing costs:
(a) The Purchaser shall be responsible for payment of the following:
(i) the cost of examining the Title Commitment and Survey, if
any, (ii) any and all costs and expenses of architectural,
engineering and other inspection and feasibility studies and
reports incidental to Purchaser's inspections, and (iii) clerk's
recordation fees for recording the warranty deed.
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<PAGE> 17
(b) The Seller shall be responsible for payment of the following: (i)
any costs associated with issuance of the Title Commitment and
delivery of a Survey if available, (ii) the premium for the Title
Policy, (iii) any transfer taxes in connection with the delivery
of the deed and documentary stamp tax and surtax, (iv) recording
costs on documents necessary to clear title and (v) the cost of
recording the Option, Coverage CC&R and Restriction On The Sale
Of Seller's Retained Property.
(c) Each party shall pay its own legal fees except as provided in
Section 25(d) below.
(d) The parties shall equally share the cost of Escrow.
17. CLOSING. The Closing shall be held at the offices of the Escrow Agent.
At Closing, Seller shall execute and/or deliver to Purchaser through Escrow
the following Closing documents:
(a) a good and sufficient warranty deed to convey the Property to
Purchaser subject only to the Title Exceptions;
(b) an appropriate mechanic's lien affidavit, sufficient in form and
content for any title insurance company to delete the standard
exceptions for mechanic's liens, and, to the extent of work
performed in the ninety (90) days prior to Closing, appropriate
releases and indemnities to allow Purchaser to obtain title
insurance coverage over any unfiled liens;
(c) an affidavit of exclusive possession;
(d) a certified copy of the Restriction On The Sale Of Seller's
Retained Property recorded junior only to the Cover CC&R against
all of Seller's Retained Property;
(e) a certified copy of the Coverage CC&R recorded as a senior-most
lien against the Property and Seller's Retained Property;
(f) assignments of or license agreements for any of the trademarks,
tradenames, copyrights, contract rights, guarantees and
warranties, intangible rights and other property and rights
included in this transaction that Purchaser elects to take by
assignment or license;
(g) appropriate evidence of Seller's formation, existence and
authority to sell and convey the Property;
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<PAGE> 18
(h) an appropriate "gap" affidavit and/or indemnity as required by
the title insurer;
(i) the Title Policy;
(j) a certificate reaffirming all representations, warranties and
covenants of Seller;
(k) the License;
(l) Evidence, satisfactory to Purchaser, that Seller has sufficient
water resources and storage facilities, either existing or to be
made available by Seller, at its cost, to allow for approval of
the Plan of Augmentation;
(m) a certified copy of the Option recorded against the Option Lots
junior only to the Coverage CC&R and Restriction On The Sale Of
Seller's Retained Property; and
(n) such other items as may be required by Escrow Agent to consummate
the Closing.
At Closing, Purchaser shall deliver through Escrow to the Seller:
(a) The Earnest Money Deposit;
(b) The Purchase Money Note and Purchase Money Mortgage;
(c) The Post-72 Lots Purchase Money Note and Post-72 Lots Purchase
Money Mortgage;
(d) The balance of the Purchase Price in currency of the United
States of America in cash or cash equivalent; and
(e) Such other documents as may be required by Escrow Agent to
consummate the Closing.
At Closing, Seller and Purchaser shall each execute counterpart Closing
statements and such other documents as are reasonably necessary to consummate
this transaction.
18. BROKERS; CONSULTANTS. Purchaser and Seller each represent that they
know of no Broker who may have any claim for a commission in connection with
this transaction.
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19. ASSIGNABILITY. Purchaser shall be entitled to assign its rights
hereunder to any Affiliate of Purchaser, provided that upon any such assignment,
Purchaser shall not be released from its obligations hereunder.
20. INSPECTIONS. Purchaser, and Purchaser's agents and contractors, shall
have the right during the term of this Restated Agreement to enter upon the
Property at reasonable times for purposes of inspection and making tests and
studies thereon. Throughout the term of this Restated Agreement, Seller, its
agents and employees shall at all times cooperate with Purchaser, its agents and
contractors in connection with their performance of the inspections provided
herein. Purchaser agrees to indemnify, defend and hold harmless Seller from and
against all liabilities, damages, claims, costs, fees and expenses whatsoever
(including reasonable attorneys fees and court costs at trial and all appellate
levels) arising out of or resulting from any damage to the Property caused by
Purchaser, or Purchaser's agents, contractors or employees, in connection with
such inspection or investigation.
21. ESCROW AGENT. The Escrow Agent shall not be liable for any actions
taken in good faith, but only for its gross or willful negligence. Purchaser and
Seller hereby agree to indemnify and hold the Escrow Agent harmless from and
against any loss, liability, claim or damage whatsoever (including reasonable
attorney's fees and court costs at trial and all appellate levels) the Escrow
Agent may incur or be exposed to in its capacity as escrow agent hereunder
except for that caused by Escrow Agent's gross negligence and/or willful
misconduct. If there be any dispute as to disposition of any proceeds held by
the Escrow Agent pursuant to the terms of this Restated Agreement, the Escrow
Agent is hereby authorized to interplead said amount or the entire proceeds with
any Colorado court of competent jurisdiction and thereby be released from all
obligations hereunder. So long as the Earnest Money Deposit is deposited with a
federally insured Colorado commercial bank, the Escrow Agent shall not be liable
for any failure of the depository.
22. NOTICES. Any notices required or permitted to be given under this
Restated Agreement shall be in writing and shall be deemed to have been given if
delivered by hand, sent by recognized overnight courier (such as Federal
Express), sent by facsimile transmission or mailed by certified or registered
mail, return receipt requested, in a postage prepaid envelope, and addressed as
follows:
<TABLE>
<S> <C>
If to the Purchaser at: Preferred Equities Corporation
4310 Paradise Road
Las Vegas, Nevada 89109
Attn: Frederick H. Conte,
Executive Vice President
Fax No. (702) 369-4398
</TABLE>
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<PAGE> 20
<TABLE>
<S> <C>
With a copy to: Preferred Equities Corporation
4310 Paradise Road
Las Vegas, Nevada 89109
Attn: Jon A. Joseph, Esq.
Fax No. (702) 369-4398
If to the Seller at: Richard Grumet, President
Hartsel Springs Ranch
P.O. Box 5
Hartsel, Colorado 80449
Fax No. (719) 836-0321
With a copy to: Gregory M. Lattimer
6960 S. Newland Ct.
Littleton, Colorado 80123
Fax No. (303) 215-1204
If to the Escrow Agent at: Security Title Guaranty Co.
60615 U.S. Highway 285
P.O. Box 331
Bailey, Colorado 80421
Attn: Ginger Dyer
Fax No. (303) 838-5537
</TABLE>
Notices personally delivered or sent by overnight courier shall be deemed
given on the date of delivery, notices transmitted by facsimile shall be deemed
given on the date sent provided that the transmitting machine confirms
transmission in writing (or otherwise, upon actual receipt by the other party)
and notices mailed in accordance with the foregoing shall be deemed given three
(3) days after deposit in the U.S. mails. Signatures on documents transmitted
via facsimile shall be binding as if an original signature. A copy of all
notices shall be provided to the Escrow Agent; however, failure to provide such
copy(ies) shall not modify the effect of any such notice on the primary
recipient.
23. RISK OF LOSS. Seller shall continue to bear the risk of loss to and
including the Closing Date. The Property shall be conveyed to Purchaser in the
same condition as on the date of this Restated Agreement, force majeure
excepted, free of all Leases, tenancies or occupancies other than those
described on Exhibit "D" that are acceptable to Purchaser, and Seller shall not
remove anything from the Property between now and Closing. In the event that the
Property or any material portion thereof is taken by eminent domain prior to
Closing, Purchaser shall have the option of either: (i) cancelling this Restated
Agreement and receiving a refund of the Earnest Money Deposit whereupon both
parties shall be relieved of all further obligations under this Restated
Agreement, except those obligations which are specifically stated herein to
survive the termination or Closing of this transaction, or (ii) Purchaser may
proceed with Closing in which case Purchaser shall be entitled to all
condemnation awards and settlements. In the event the Property is
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<PAGE> 21
damaged or destroyed as a result of force majuere or otherwise prior to Closing,
Seller shall have the option to repair and restore the Property to the same
condition as before the damage and the Closing Date shall be deferred for up to
sixty (60) days to permit such repair and restoration. If Seller elects not to
repair and restore or if Seller is unable to repair and restore within such
sixty (60) day period, then Purchaser shall have the option of either: (i)
cancelling this Restated Agreement and receiving a refund of the Earnest Money
Deposit, whereupon both parties shall be released from all further obligations
under this Restated Agreement, except those obligations which are specifically
stated herein to survive the termination or Closing of this transaction, or (ii)
allowing Seller additional time to repair and restore or (iii) proceeding with
Closing, in which case Purchaser shall be entitled to all insurance proceeds, if
any and to a credit equal to the insurance deductibles, if any.
24. SELLER'S INDEMNITY. Seller shall indemnify and hold Purchaser harmless
from any and all liability, including costs and attorneys' fees (at trial and
all appellate levels) for:
(a) Any contracts for services to the Property existing now or at any
time prior to Closing;
(b) Any personal property taxes remaining unpaid for calendar years
prior to the year of Closing;
(c) Any claims made against Purchaser by Seller's employee(s)
employed at the Property;
(d) Any claims made against Purchaser or the Property by persons or
governmental agencies who claim monies due for wages or other
payments for employee(s) benefits and any and all payroll taxes,
including but not limited to, federal, state, local and other tax
withholdings and federal and state unemployment taxes;
(e) Any claims made against Purchaser, or any attempt whatsoever to
prevent the issuance of, or otherwise interfere with, the filing
of the Injunction in the event the Restriction On The Sale Of
Seller's Retained Property is breached;
(f) Any claims made against Purchaser or the Lots as a result of the
termination of Seller's marketing agreement with Bluegreen
Corporation; and
(g) Any misrepresentations made by Seller and/or breach of warranty
or covenant by Seller as to matters which survive Closing.
24A. PURCHASER'S INDEMNITY - Purchaser shall indemnify and hold Seller
harmless from any and all liability, including costs and attorneys' fees (at
trial and all appellate levels) for (i) any action taken by Seller against
Purchaser in the event monumentation, signage and other identification to be
installed on the Property by Purchaser does not reasonably conform with
21
<PAGE> 22
design, scale and/or quality of the Master Plan Monumentation program at Hartsel
Springs Ranch (ii) any damage or impairment to the name "Hartsel Springs Ranch"
as a result of Purchaser's use of said name or joinder of Seller in litigation
or governmental proceeding as a result of Purchaser's use of said name and (iii)
for damages to the Seller in the event Purchaser influenced or otherwise caused
Bluegreen Corporation to breach its marketing agreement with Seller; Purchaser
categorically denies having taken any action which in any manner may have
resulted in Bluegreen Corporation's breach of said marketing agreement.
The provisions of this Section shall survive the Closing.
25. MISCELLANEOUS.
(a) This Restated Agreement shall be construed and governed in
accordance with the laws of the State of Colorado. All of the
parties to this Restated Agreement have been represented by
competent counsel and have participated fully in the negotiation
and preparation hereof; and, accordingly, this Restated Agreement
shall not be more strictly construed against any one of the
parties hereto.
(b) All signs and monumentation erected by Purchaser on South Ranch
shall be subject to the reasonable review and approval of Seller.
(c) In the event any term or provision of this Restated Agreement be
determined by appropriate judicial authority to be illegal or
otherwise invalid, such provision shall be given its nearest
legal meaning or be construed as deleted as such authority
determines, and the remainder of this Restated Agreement shall be
construed to be in full force and effect.
(d) In the event of any litigation between the parties under this
Restated Agreement, the prevailing party shall be entitled to
reasonable attorney's fees and court costs at all trial and
appellate levels. The provisions of this subparagraph shall
survive the Closing coextensively with other surviving provisions
of this Restated Agreement.
(e) If any date upon which, or by which, action required under this
Restated Agreement is a Saturday, Sunday or legal holiday
recognized by the Federal government and/or the State of
Colorado, then the date for such action shall be extended to the
first day that is after such date and is not a Saturday, Sunday
or legal holiday recognized by the Federal government and/or the
State of Colorado.
(f) In construing this Restated Agreement, the singular shall be held
to include the plural, the plural shall include the singular, the
use of any gender shall include every other and all genders, and
captions and paragraph headings shall be disregarded.
22
<PAGE> 23
(g) Neither Purchaser nor Seller is aware of any fact, event or
condition which could or would prevent or adversely affect their
respective abilities to meet and comply with their respective
representations, covenants and conditions pursuant to and under
this Restated Agreement. This Restated Agreement is entered into
subject to a covenant of good faith and fair dealing on behalf of
both Purchaser and Seller. Remedies available to either party
under this Restated Agreement shall be available to either party
under this Restated Agreement if circumstances so warrant and
allow.
(h) All of the Exhibits and any Escrow Instructions attached to this
Restated Agreement are incorporated in, and made a part of, this
Restated Agreement.
(i) Time is of the essence for each and every provision of this
Restated Agreement.
26. ACCEPTANCE DATE. This Restated Agreement shall be of no force and
effect and shall be deemed to be null and void unless executed by the Purchaser
and the Seller on or before October 10, 1997, the Acceptance Date.
27. ENTIRE AGREEMENT. This Restated Agreement, the Escrow Instructions, if
any, and the Exhibits attached hereto constitute the entire agreement between
the parties and there are no other agreements, representations or warranties
other than as set forth herein. This Restated Agreement may not be changed,
altered or modified except by an instrument in writing signed by the party
against whom enforcement of such change would be sought. This Restated Agreement
shall be binding upon the parties hereto and their respective successors and
assigns and shall supersede and completely replace the Agreement.
23
<PAGE> 24
EXECUTED as of the date first above written in several counterparts, each
of which shall be deemed an original, but all constituting only one agreement.
<TABLE>
<S> <C>
Witnessed by: SELLER:
MERCANTILE EQUITIES CORPORATION
/s/ GREGORY M. LATTIMER By: /s/ RICHARD S. GRUMET
- ------------------------ -----------------------
/s/ V. M. DYER Name: Richard S. Grumet
- ------------------------ Title: President
Witnessed by: SELLER:
HARTSEL SPRINGS RANCH OF COLORADO
/s/ GREGORY M. LATTIMER By: /s/ RICHARD S. GRUMET
- ------------------------ ----------------------
/s/ V. M. DYER Name: Richard S. Grumet
- ------------------------ Title: President
PURCHASER:
PREFERRED EQUITIES CORPORATION,
a Nevada corporation
Witnessed by:
/s/ JON A. JOSEPH By: /s/ FREDERICK H. CONTE
- ------------------------- ------------------------
/s/ C. SCOTT MAYNARD Name: Frederick H. Conte
- ------------------------- Title: Executive Vice President
</TABLE>
24
<PAGE> 25
APPENDIX OF DEFINED TERMS
ACCEPTANCE DATE - defined in Section 26.
AFFILIATE - shall mean a person, partnership, corporation or any other
organization of any nature or type whatsoever, that controls, is controlled by
or under control with Purchaser or Seller. As used herein, "control" means the
ability, standing alone, to direct the affairs of another person or entity
without their respective consent.
AGREEMENT - defined in the Recital of Fact.
BROKER(S) - means the broker(s), if any, defined in Section 18.
CEASE AND DESIST ORDER - means the Cease and Desist Order issued against Bankers
Life and Casualty Company et al on March 12, 1979.
CLOSING - means conveyance of the Property from Seller to Purchaser via warranty
deed and termination of Escrow.
CLOSING DATE - The date on which the Lots are conveyed to the Purchaser.
CONTRACTS - defined in Section 7. A schedule of Contracts is attached as Exhibit
"D." Contracts include but are not limited to Leases, Licenses, Plans, Studies
and the Survey, if any.
COVERAGE CC&R - mean the covenants, conditions and restrictions to be recorded
as a senior-most lien against the Lots and Seller's Retained Property. The
Coverage CC&R will help maintain the open space character of Hartsel Springs
Ranch by providing that all improvements to real property located in Hartsel
Springs Ranch be limited to forty percent (40%) coverage of any lot now platted
or platted at any time in the future, including but not limited to paving and
landscaping.
DEFECTS - means Title Exceptions as shown on the Title Commitment that are
unacceptable to Purchaser.
EARNEST MONEY - means a portion of the Purchase Price and any interest earned
thereon delivered to the Escrow Agent for deposit in a federally insured
Colorado financial institution.
EARNEST MONEY DEPOSIT - means the Earnest Money deposited by the Escrow Agent in
a federally insured Colorado financial institution.
ESCROW - means the escrow established with the Escrow Agent to facilitate the
conveyance of the Property from Seller to Purchaser pursuant to the terms of
this Restated Agreement.
ESCROW AGENT - means Security Title Guaranty Co., Attn: Ginger Dyer.
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<PAGE> 26
ESCROW INSTRUCTIONS - means any writing by and between Purchaser, Seller and
Escrow Agent entered into to help facilitate the Closing. All Escrow
Instructions shall be attached to and become a part of this Restated Agreement.
In the event of any conflict between the terms of this Restated Agreement and
Escrow Instructions, the terms and conditions of the Escrow Instructions shall
control.
GOVERNMENTAL APPROVALS - means approval by Department of Housing and Urban
Development ("HUD") and State of Colorado governmental authorities of
registration of the South Ranch Lots, South Ranch Partial Lots, South Ranch
Add-On Lots, North Ranch Partial Lots and North Ranch Lots for sale by
Purchaser.
HARTSEL SPRINGS RANCH - means the Property, Seller's Retained Property and all
other property owned by Seller or its affiliates or assignees in the property
commonly known as Hartsel Springs Ranch.
HAZARDOUS SUBSTANCE - defined in Section 10(j).
INJUNCTION - defined in Section 10.(o).
INSPECTION PERIOD - defined in Section 8.
INTENDED USE - means Purchaser's sale of the Lots by conveyance of fee simple
real property lot sales to customers of Purchaser.
LEASES - means all writings and/or oral agreements that in any manner whatsoever
create an occupancy interest in the Property.
LICENSE - means the license for Purchaser to use the name "Hartsel Springs
Ranch," a form of which is attached hereto as Exhibit "J."
LICENSES - defined in Section 7.(c). Includes all HUD and other governmental
filings.
LOTS - defined in Section 2.
NORTH RANCH LOTS - means the Lots shown on Exhibit "A-5."
NORTH RANCH PARTIAL LOTS - means the Lots shown on Exhibit "A-6."
OPTION - means Purchaser's option to acquire the Lots shown on Exhibits "B-3,"
"B-5" and "B-6" to this Restated Agreement in the event Seller does not require
some or all of said lots for reservoir purposes at a price of $2,700 for any
said lot in South Ranch and $3,250 for any said lot in North Ranch.
OPTION LOTS - means the Lots shown on Exhibits "B-3," "B-5" and "B-6."
OUTSIDE CLOSING DATE - defined in Section 5.
26
<PAGE> 27
PLAN OF AUGMENTATION - means a plan of water augmentation for the Post-72 Lots
to be filed with the Colorado Water Court which, upon nonappealable approval by
the Water Court, or nonappealable order of any court to which the decision of
the Water Court may be appealed, which is to occur on or before two (2) years
and six (6) months from the Closing Date, will allow for a well permit for
domestic use to be issued for each Post-72 Lot. Seller is to provide, at its
cost, sufficient water resources and storage facilities (as determined pursuant
to Section 12(v) of this Restated Agreement) so that the Plan of Augmentation
will be approved. Purchaser will pay all costs and expenses in association with
the approval of the Plan of Augmentation including but not limited to legal and
court costs but excluding all internal expenses of Purchaser for its staff
personnel or otherwise, with said amounts to be credited against the principal
balance of the Post-72 Purchase Money Note.
PLANS - defined in Section 7.(d).
POST - 72 LOTS - means the Lots shown on Exhibit "A-4."
POST - 72 LOTS PURCHASE MONEY MORTGAGE - means the mortgage or deed of trust to
be recorded against the Post-72 Lots to secure payment of the Post-72 Lots
Purchase Money Note. Post-72 Lots will be released from the lien of the Post-72
Lots Purchase Money Mortgage upon the payment (including normal amortization) of
release prices of $3,250.00 for each Post-72 Lot, if Purchaser pays $2,700.00
for each Post-72 Lot or upon the payment (including normal amortization) of
release prices of $2,591.00 for each Post-72 Lot, if Purchaser pays $2,041.00
for each Post-72 Lot.
POST - 72 LOTS PURCHASE MONEY NOTE - means a promissory note delivered to Seller
from Purchaser at Closing in the face amount of $847,800.00 (2,700 times the
number of Post-72 Lots). Prior to the Plan of Augmentation being approved, the
Post-72 Lots Purchase Money Note will be recourse as to the principal balance
thereof but not interest owed thereon only to the Post-72 Lots and provide for
the payment of interest only payable quarterly calculated at the Prime Rate plus
2% on $640,874.00 ($2,041 times the number of Post-72 Lots). The face amount of
the Post-72 Lots Purchase Money Note and the amount of principal interest will
be imputed on shall be adjusted pursuant to the ultimate paragraph of Section
9-A. of this Restated Agreement and as described below.
If the Plan of Augmentation is approved on or before the two (2) years and six
(6) months from the Closing Date, the Post-72 Lots Purchase Money Note shall
become recourse as to principal as well as interest to the Purchaser and be
adjusted by subtracting from the principal face amount of the Post-72 Lots
Purchase Money Note Purchaser's out-of-pocket costs spent in having the Plan of
Augmentation approved, with interest on the resultant principal amount to be
charged at 2% over the Prime Rate payable quarterly with quarterly amortization
payments, with all principal not otherwise paid due and payable five (5) years
from the date of the first payment after said adjustment. Release prices of
$3,000.00 for the release of each Post-72 Lot will be credited against the next
regularly scheduled quarterly principal payment(s).
27
<PAGE> 28
If the Plan of Augmentation is not approved on or before two (2) years and six
(6) months from the Closing Date, Purchaser shall have within thirty (30) days
of disapproval or failure to approve within said two (2) year and six (6) month
period, the election of (i) reducing the principal balance of the Post-72 Lots
Purchase Money Note to $640,874.00 ($2,041.00 times the number of the Post-72
Lots), payable on a recourse basis, with interest charged at 2% over the Prime
Rate and quarterly amortization payments, with all principal not otherwise paid
due and payable five (5) years from the date of said election. Release payments
of $3,000.00 for each Post-72 Lot shall be credited against the next regularly
scheduled quarterly principal payment(s) or (ii) re-conveying, subject only to
the Title Exceptions, the Post-72 Lots to Seller in consideration of
cancellation of the Post-72 Lots Purchase Money Note. In the event the Post-72
Lots are re-conveyed, the Post-72 Lots shall not be subject to the Restriction
On The Sale Of Seller's Retained Property.
PRIME RATE - The rate of interest paid by the most credit worthy borrowers to
large commercial banks as published in The Wall Street Journal. The interest
rate on the Purchase Money Note and Post-72 Lots Purchase Money Note shall be at
2% over the Prime Rate adjusted as of the first business day of each month.
PROPERTY - defined in Section 2.
PURCHASE MONEY NOTE - means the recourse promissory note to be delivered by
Purchaser to Seller at Closing in an amount determined by multiplying 439
North Ranch Lots times $3,250 and adding thereto the consideration to be paid
for the North Ranch Partial Lots with interest on said amount to be paid at 2%
over the Prime Rate payable quarterly with quarterly amortization payments,
having a term of five (5) years from the Closing Date. Release prices
shall be credited against the next regularly scheduled principal payment(s).
PURCHASE MONEY MORTGAGE - means the mortgage or deed of trust recorded against
the North Ranch Lots to secure Purchaser's performance of the Purchase Money
Note. Lots in North Ranch subject to the Purchase Money Mortgage shall be
released from the lien of the Purchase Money Mortgage at the direction of
Purchaser for the payment of $5,000 a Lot, until such time as the Purchase Money
Note is repaid in full. Releases will also be given for each $5,000.00 increment
of regularly scheduled principal reduction. Purchase Money Note principal shall
be paid quarterly (with release prices credited to the next regularly scheduled
principal payment(s)), with all principal not otherwise paid being due and
payable five (5) years from the Closing Date.
28
<PAGE> 29
PURCHASE PRICE - defined in Section 3.
PURCHASER - defined in the preamble to this Restated Agreement.
PURCHASER'S SALES OFFICE - means at Purchaser's election, Purchaser's sales
office located at a site mutually agreeable to Purchaser and Seller or by lease
of Seller's existing sales office or as otherwise determined by Purchaser.
RESTATED AGREEMENT - defined in the preamble of this Restated Agreement.
RESTRICTION ON THE SALE OF SELLER'S RETAINED PROPERTY - means the restrictive
covenant to be recorded on or before the Closing Date, junior only to the
Coverage CC&R, against Seller's Retained Property. The covenant shall run with
the land and restrict Seller, its Affiliates and its successors and assigns for
a period of the earlier of ten (10) years from the Closing Date or for one (1)
year from whenever all of the Lots have been sold, from selling residential lots
in Hartsel Springs Ranch, now platted or platted in the future, unless said lots
are (i) improved with a single family dwelling to be sold at a price not less
than $99,000.00, (ii) sold pursuant to a Park County approved, platted and
recorded subdivision restricting said lots solely for RV use and having a
maximum size of 5,000 square feet, (iii) used, to a maximum of ten (10) lots,
for trade out services (iv) used for "Buffalo Package" sales so long as no said
lot shall be sold for less than $40,001.00 (v) used for the "homestead package,"
so long as no said lot is sold for less than $75,000.00 and (vi) used to develop
Seller's Retained Property with a guest lodge/timeshare development, reservoirs
and bison preserve.
RIGHT OF FIRST REFUSAL - means Seller's covenant, pursuant to 12(vi) of this
Restated Agreement whereby Seller grants to Purchaser a right of first refusal
to match any bona fide offer for any or all of Seller's Retained Property upon
the same terms and conditions offered to Seller for any or all of said Seller's
Retained Property. Seller shall deliver to Purchaser copies of all offers to
acquire any or all of Seller's Retained Property to Purchaser and Purchaser
shall have thirty (30) days after receipt of a copy of any said offer(s) to
advise Seller in writing that it has determined to match said offer(s). A form
of which is attached hereto and made a part hereof as Exhibit "K".
SELLER - defined in the preamble to this Restated Agreement, including Seller's
Affiliates, successors and assigns.
SELLER'S LITIGATION SCHEDULE - A schedule of litigation showing all existing and
pending or threatened litigation involving Seller, the Property, Seller's
Retained Property and Hartsel Springs Ranch.
SELLER'S RETAINED PROPERTY - means the real property shown on Exhibit "B-1"
through "B-7" inclusive and all other real property located in Hartsel Springs
Ranch, other than the Lots, owned by Seller, its Affiliates, successors and
assigns.
SOUTH RANCH LOTS - means the Lots shown on Exhibit "A-1."
29
<PAGE> 30
SOUTH RANCH ADD-ON LOTS - means the Lots shown on Exhibit "A-3."
SOUTH RANCH PARTIAL LOTS - means the Lots shown on Exhibit A-2."
STUDIES - defined in Section 7.(d).
SURVEY - means any existing survey of the Property and any survey of the
Property to be ordered by and paid for by the Purchaser.
TITLE COMMITMENT - means the commitment for the Title Policy.
TITLE EXCEPTION - means exceptions to Purchaser's fee simple ownership as shown
on the Title Commitment and/or the Survey. Title Exceptions not objected to by
Purchaser will appear on Exhibit "C" and on the Title Policy.
TITLE POLICY - means the ALTA Form B Marketability owner's title insurance
policy issued by a company acceptable to Purchaser in the amount of the Purchase
Price insuring Purchaser's fee simple ownership to the Lots subject only to the
Title Exceptions, to be delivered from Seller to Purchaser at Closing.
TITLE REVIEW PERIOD - means October 24, 1997.
WATER OPINION - means a legal opinion in form and substance acceptable to
Purchaser from a Colorado attorney acceptable to Purchaser, delivered from
Seller to Purchaser at or prior to Closing opining to the fact that the South
Ranch Add-On Lots, South Ranch Partial Lots and North Ranch Partial Lots have a
reserved right to drill a well.
ZONING APPROVAL - means that existing zoning of the Property as represented by
Seller in Section 9.(a) of this Restated Agreement, which allows for Purchaser's
Intended Use of the property.
30
<PAGE> 31
EXHIBITS
<TABLE>
<S> <C> <C>
Exhibit "A-1" - South Ranch Lots
Exhibit "A-2" - South Ranch Partial Lots
Exhibit "A-3" - South Ranch Add-On Lots
Exhibit "A-4" - Post-72 Lots
Exhibit "A-5" - North Ranch Lots
Exhibit "A-6" - North Ranch Partial Lots
Exhibit "B-1" - Lodge and Timeshare Development
Exhibit "B-2" - Bison Preserve Area
Exhibit "B-3" - Equestrian Center Area and Reservoir
Exhibit "B-4" - Bison Preserve Area and RV Lots
Exhibit "B-5" - Reservoir "A and B," RV Resort and Commercial Area
Exhibit "B-6" - Hartsel Spring and Lots
Exhibit "B-7" - Highway Signs and Monument Locations
Exhibit "C" - Title Exceptions
Exhibit "D" - Contracts
Exhibit "D-1" - Contracts Previously Provided by Seller
Exhibit "E" - Option
Exhibit "F-1" - Purchase Money Note
Exhibit "F-2" - Purchase Money Mortgage
Exhibit "G-1" - Post-72 Lots Purchase Money Note
Exhibit "G-2" - Post-72 Lots Purchase Money Mortgage
Exhibit "H" - Coverage CC&R
Exhibit "I" - Restriction On The Sale Of Seller's Retained Property
Exhibit "J" - License
Exhibit "K" - Right of First Refusal
</TABLE>
1
<PAGE> 1
EXHIBIT 10.143
[TEXTRON LETTERHEAD]
December 10, 1997
Steamboat Suites, Inc.
4310 Paradise Road
Las Vegas, Nevada 89109
Re: Amendment to General Loan and Security Agreement
Gentlemen:
Reference is made to that certain Inventory Loan in the original
principal amount of Five Million Dollars ($5,000,000.00) (the "Inventory Loan")
from Textron Financial Corporation (the "Lender") to Steamboat Suites, Inc. (the
"Borrower"), pursuant to that certain General Loan and Security Agreement dated
October 5, 1994, as amended on February 27, 1995, November 30,1995 and November
29, 1996 (the "Loan Agreement"). Reference is further made to letter amendment
dated September 23,1996 wherein a one time Inventory Advance was extended to
Borrower.
Each capitalized term used herein, but not otherwise defined herein,
shall have the meaning ascribed to such term in the Loan Agreement. Each of the
documents executed and delivered in connection with the Loan is collectively
referred to herein as the "Loan Documents".
The Borrower has requested the Lender, and Lender has agreed, to amend
the Inventory Loan under the Loan Agreement as hereinafter provided in this
letter agreement. Accordingly, for good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, it is hereby agreed as
follows:
1. Section 2.1(b) of the Loan Agreement, which presently provides
Borrower may not re-borrow previously paid Inventory Advances and
Section 1.1, Inventory Termination Date in which no Inventory Advance
was to be made after certain events including May 1, 1996 are hereby
amended to provide that a second "one-time"
<PAGE> 2
Inventory Advance in the principal amount of $1,000,000.00 may be made
by Lender to Borrower in accordance with the other terms and
conditions of the Loan Agreement, such Advance to occur not later than
December 31, 1997. Upon the issuance of such Advance, the principal
balance outstanding under the Inventory Loan shall be $1,850,513.82.
The Inventory Promissory Note, the Inventory Deed of Trust and other
documents shall continue to secure the Inventory Loan. In addition,
the undersigned hereby confirm and represent that the Collateral
pledged for the Loan has a Fair Market Value sufficient to continue to
secure and repay the Loan.
2. The "Inventory Maturity Date" as defined in the Loan Agreement shall
be amended to be September 1, 1999. All other terms of the Loan
Agreement, Inventory Deed of Trust and Inventory Promissory Note shall
remain in full force and effect.
3. Each of the other Loan Documents is hereby amended so that (i) all
references in such Loan Document to the "Agreement" shall mean the Loan
Agreement, as amended to date and (ii) all references in such Loan
document, to that Loan Document or to any of the other Loan Documents
shall mean the Loan Document or such other Loan Documents as amended to
date.
4. Borrower shall pay to Lender the reasonable fees, expenses and
disbursements of Lender preparing or reviewing this letter agreement or
otherwise representing Lender in connection with any matters relating
to the Loan Agreement or this letter agreement.
5. Borrower and the undersigned Guarantors hereby ratify and affirm in
all respects each and every representation, warranty, covenant,
condition, term and agreement set forth in the Loan Agreement, except
as the Loan Agreement has been expressly amended by this letter
agreement. Borrower hereby confirms that the Loan Agreement and each of
the other Loan Documents are in full force and effect as of the date
hereof. Each of the Guarantors hereby confirm that each respective
Guaranty Agreement and Subordination Agreement is in full force and
effect as of the date hereof.
6. The effective date of this letter agreement is December 10, 1997.
7. This letter agreement may be executed in any number of counterparts,
each of which when so executed and delivered shall be deemed to be an
original without the production of any other counterpart and all of
which taken together shall constitute but one and the same instrument.
This letter agreement shall also be effective upon exchange and receipt
of facsimile signatures on such counterparts.
Kindly acknowledge your agreement with and acceptance of the terms and
conditions of this letter agreement by signing in the appropriate space below.
2
<PAGE> 3
Very truly yours,
TEXTRON FINANCIAL CORPORATION
By: __________________________________
Its: __________________________________
EACH OF THE UNDERSIGNED HEREBY
AGREES WITH AND ACCEPTS THE
TERMS AND CONDITIONS OF THE
LETTER AGREEMENT DATED AS OF
DECEMBER 10, 1997
Witness: STEAMBOAT SUITES, INC.
_________________________________ By: __________________________________
Its: _________________________________
GUARANTORS:
PREFERRED EQUITIES CORPORATION
_________________________________ By: __________________________________
Its: _________________________________
MEGO FINANCIAL CORP.
_________________________________ By: __________________________________
Its: _________________________________
3
<PAGE> 1
EXHIBIT 10.144
PROMISSORY NOTE
[Biloxi Property]
U.S. $1,173,750.00 March 20, 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 ONE
MILLION ONE HUNDRED AND SEVENTY-THREE THOUSAND SEVEN HUNDRED AND FIFTY AND
NO/100 DOLLARS (U.S. $1,173,750.00), 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, as amended and
supplemented by that certain Letter Agreement of even date herewith by and
between Maker and Lender (the "Letter Agreement") (such Amended and Restated and
Consolidated Loan and Security Agreement, as amended and supplemented by the
Letter Agreement and as otherwise amended to date, and as may be further
amended, is herein 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, and (b) be
calculated on the basis of a year consisting of 360 days. Interest shall accrue
initially at an annual interest rate ("Initial Interest Rate") equal to Prime
(as hereinafter defined) in effect on the date of the initial advance of the
loan evidenced by this Note ("Initial Prime") plus two and one-quarter percent
(2.250%) 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
<PAGE> 2
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.
Interest shall be payable monthly in arrears commencing on
April 1, 1998 and on the first day of each month thereafter. Notwithstanding
anything herein to the contrary, if not sooner paid, the entire principal
balance of this Note, together with accrued and unpaid interest thereon and all
other sums due and owing hereunder, shall be due and payable in full on the
first anniversary of the date hereof (the "Maturity Date"); provided, that so
long as: (i) there does not exist on the original Maturity Date an Event of
Default, or an event, act or failure to act which with notice, passage of time
or both would constitute an Event of Default, (ii) Lender has received from
Maker, not less than thirty (30) days prior to the original Maturity Date,
written notice of Maker's desire to extend the original Maturity Date, and (iii)
Maker has paid to Lender in immediately available funds, on or prior to the
original Maturity Date, a renewal fee in the amount of two and one-half percent
(2.50%) of the outstanding and unpaid principal balance of this Note as of the
original Maturity Date, then the Maturity Date in all events shall be the second
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 the entire unpaid
principal balance hereof, all accrued and unpaid interest thereon, and all other
charges owing in connection with the loan evidenced hereby.
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<PAGE> 3
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) the Overdue Rate, calculated and applied
to the amounts due under this Note in accordance with the provisions hereof;
(iii) the Biloxi Advance Loan Fee (defined in the Letter Agreement), 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.
Prepayment from time to time of the principal amount of this
Note is permitted without penalty; provided, that in the event a prepayment of
this Note occurs as a result of an acceleration by Lender of this Note pursuant
to Lender's right to declare an acceleration thereof under the terms of the Loan
Agreement, then Maker shall pay to Lender a prepayment premium equal to five
percent (5.0%) of the principal being prepaid.
In the event that Holder institutes legal proceedings to
enforce this Note and Holder is the prevailing party in such proceeding, Maker
agrees to pay Holder, in addition to any indebtedness due and unpaid, all costs
and expenses of such proceedings, including, without limitation, attorneys'
fees.
Holder shall not by any act or omission or commission be
deemed to waive any of its rights or remedies hereunder unless such waiver be in
writing and signed by an authorized officer of Holder and then only to the
extent specifically set forth therein; a waiver on one occasion shall not be
construed as continuing or as a bar to or waiver of such right or remedy on any
other occasion. All remedies conferred upon Holder by this Note or any other
instrument or agreement connected herewith or related hereto shall be cumulative
and none is exclusive and such remedies may be exercised concurrently or
consecutively at Holder's option.
Every person or entity at any time liable for the payment of
the indebtedness evidenced hereby waives: presentment for payment, protest and
demand; notice of protest,
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<PAGE> 4
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 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
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<PAGE> 5
connection with the loan evidenced hereby, or (b) the maturity of the
indebtedness evidenced by this Note is accelerated in whole or in part, or (c)
all or part of the principal or interest of this Note shall be prepaid, so that
under any of such circumstance the amount of interest contracted for, shared or
received in connection with the loan evidenced hereby, would exceed the maximum
contract rate permitted by the Applicable Usury Law, then in any such event (1)
the provisions of this paragraph shall govern and control, (2) neither Maker nor
any other person or entity now or hereafter liable for the payment hereof will
be obligated to pay the amount of such interest to the extent that it is in
excess of the maximum contract rate permitted by the Applicable Usury Law, (3)
any such excess which may have been collected shall be either applied as a
credit against the then unpaid principal amount hereof or refunded to Maker, at
Holder's option, and (4) the effective rate of interest will be automatically
reduced to the maximum amount of interest permitted by the Applicable Usury Law.
It is further agreed, without limiting the generality of the foregoing, that to
the extent permitted by the Applicable Usury Law: (x) all calculations of
interest which are made for the purpose of determining whether such rate would
exceed the maximum contract rate permitted by the Applicable Usury Law shall be
made by amortizing, prorating, allocating and spreading during the period of the
full stated term of the loan evidenced hereby, all interest at any time
contracted for, charged or received from Maker or otherwise in connection with
such loan; and (y) in the event that the effective rate of interest on the loan
should at any time exceed the maximum contract rate allowed under the Applicable
Usury Law, such excess interest that would otherwise have been collected had
there been no ceiling imposed by the Applicable Usury Law shall be paid to
Holder from time to time, if and when the effective interest rate on the loan
otherwise falls below the maximum amount permitted by the Applicable Usury Law,
to the extent that interest paid to the date of calculation does not exceed the
maximum contract rate permitted by the Applicable Usury Law, until the entire
amount of interest which would have otherwise been collected had there been no
ceiling imposed by the Applicable Usury Law has been paid in full. Maker further
agrees that should the maximum contract rate permitted by the Applicable Usury
Law be increased at any time hereafter because of a change in the law, then to
the extent not prohibited by the Applicable Usury Law, such increases shall
apply to all indebtedness evidenced hereby regardless of when incurred; but,
again to the extent not prohibited by the Applicable Usury Law, should the
maximum contract rate permitted by the Applicable Usury Law be decreased because
of a change in the law, such decreases shall not apply to the indebtedness
evidenced hereby regardless of when incurred.
In the event of any conflict or inconsistency between the
provisions of this Note and the provisions of the Loan Agreement, the provisions
of the Loan Agreement shall control.
This Note is secured by a Deed of Trust, Assignment of Rents
and Proceeds and Security Agreement of even date herewith executed by Maker,
as Trustor, for the benefit of Lender, as Beneficiary, and encumbering real and
personal property situated in Harrison
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<PAGE> 6
County, Mississippi, as more particularly described therein, by the Loan
Agreement and by certain other Mortgages now existing or hereafter arising.
"MAKER"
PREFERRED EQUITIES CORPORATION,
a Nevada corporation
By:
---------------------------------------
Name: Charles G. Baltuskonis
Its: Vice President and
Chief Accounting Officer
Federal Taxpayer
Identification Number: 88-0106662
Address:
4310 Paradise Road
Las Vegas, Nevada 89109
Attention: President
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<PAGE> 7
This instrument was prepared by Indexing Instructions:
and after recording return to:
Randall S. Dalton, Esq.
Gammage & Burnham
Two North Central Avenue, 18th Floor
Phoenix, Arizona 85004
Phone: 602/256-0566
DEED OF TRUST, ASSIGNMENT OF
RENTS AND PROCEEDS AND SECURITY AGREEMENT
[BILOXI PROPERTY]
THIS DEED OF TRUST, ASSIGNMENT OF RENTS AND PROCEEDS AND
SECURITY AGREEMENT (this "Deed of Trust") is made as of the 20th day of March,
1998, by and among PREFERRED EQUITIES CORPORATION, a Nevada corporation
("Trustor"), whose mailing address is 4310 Paradise Road, Las Vegas, Nevada
89109-6597, and Jim B. Tohill, 633 N. State Street, Jackson, Mississippi 39202
("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
One Million One Hundred Seventy-Three Thousand Seven Hundred and Fifty and
No/100 United States Dollars (U.S. $1,173,750.00) (the "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, amended, 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
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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 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 amended and supplemented by that certain Letter Agreement [Biloxi
Property] by and between Trustor and Beneficiary of even date herewith (as so
amended and supplemented, as further amended and supplemented to date and as may
be subsequently amended, restated, supplemented or extended, 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
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with Representations, Covenants and Warranties of even date herewith executed in
connection with the Premises (the "Environmental Certificate") 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 (o)
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", some of which Obligations consist of a line of credit
to be used primarily for business or commercial purposes entitled to the lien
protection afforded by Sections 89-1-49 and 89-5-21 of the Mississippi Code of
1972, as amended), 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 the Second
Judicial District of Harrison County, Mississippi, 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"). For purposes of the laws of
the State of Mississippi governing limitations on actions, the latest date that
any of the Notes is finally due and payable is May 31, 2010.
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
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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 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, accounts, accounts receivable 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 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 certificates 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 intangibles, choses in action, names, logos, trademarks, trade
names and copyrights now or
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hereafter used in connection with the Trust Property (except with respect to the
name "Ramada Vacation Suites");
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, 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, 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
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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 shall, 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 shall 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").
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(b) Trustor does hereby warrant and shall forever
defend the Trust Property against the claims of all persons whatsoever.
2.3 Insurance.
(a) Throughout the term of the Deed of Trust, Trustor
shall 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 shall 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 shall promptly notify Beneficiary of any
damage to or destruction of the Trust Property costing more than Twenty
Five Thousand Dollars ($25,000) to repair or restore, whether or not
the same is covered by insurance, and if so covered, shall 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
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Beneficiary's option, to collect and receipt the proceeds from any
such policy and use such proceeds as set forth in Section 2.3(g) below.
To the extent, but only to the 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,
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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 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 Section 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 shall 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
Section 2.4(a); provided, however, that if such intervention shall not
be permissible or permitted by the court, Trustor shall, 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 shall 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 shall 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 (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
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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 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
shall 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 SHALL 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
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owing to such jurisdictions as a result of inclusion in income of
Beneficiary of any amount required by this Section 2.6(a) to be paid
to or for Beneficiary.
(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 shall 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 shall 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
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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 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 Section 2.7(a) are insufficient to discharge
the Obligation for such taxes and assessments or insurance premiums as
the same become due, Trustor shall pay to Beneficiary upon demand such
additional sums as may be required to fully pay and discharge this
Obligation.
(b) Nothing in this Section 2.7 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 Section 2.7. To the
extent not prohibited by law, deposits made under this Section 2.7
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 Section 2.7.
(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 shall 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
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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, 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
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Premises, Trustor shall post in conspicuous locations notices
reasonably sufficient to 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 shall use the Trust Property (if
developed from its present state of unused land) for the purpose of
selling Units.
(b) The use of the Trust Property for the sale of
Units 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 shall 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 shall 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 shall 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 shall furnish to
Beneficiary from time to time such proof as Beneficiary may reasonably
request with respect to Trustor's compliance with the foregoing.
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(b) Trustor shall 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.
(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
shall 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 shall 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
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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 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 Section 2.12 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 SHALL 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
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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 the person or entity seeking
indemnification. On written request by a person or other entity covered by the
above agreement of indemnity, Trustor shall 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 Section
2.13.
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
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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, 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) Representations, Covenants and Warranties. Except
as disclosed in the Disclosure Schedule, attached to the Environmental
Certificate as Exhibit "B" and incorporated therein by reference
(herein the "Disclosure Schedule"), Trustor, to the best of its
knowledge after due inquiry and investigation, hereby represents,
covenants and warrants to Beneficiary as follows:
(i) Trustor certifies that it investigated
the present and past uses of the Trust Property, and employed
a qualified environmental consultant, acceptable to Trustor,
to make due inquiry of all Operations and the potential
existence and/or Release of Contaminants at the Trust
Property. To the best of Trustor's knowledge, Trustor
certifies that such investigation complied with Beneficiary's
guidelines for conducting such investigation.
(ii) The Trust Property is not listed on any
federal, state, or local list identifying properties with a
known or suspected Release. Trustor is unaware of any
condition that, if known to a Governmental Authority, would
require (i) the Trust Property be listed or (ii) Remedial
Action.
(iii) Operations have never been, and will
not be, for the purpose of the manufacture, Remedial Action,
generation, Release, or refining of any Contaminant (whether
legal or illegal, accidental or intentional).
(iv) Trustor obtained, and is and shall
continue to be in compliance with, all EHS Permits necessary
for the Operations at the Trust Property.
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(v) No Environmental Lien has, is, or will
be attached to the Trust Property or any portion thereof.
(vi) Trustor is not, has not, and does not
anticipate being, subject to any action by a Governmental
Authority regarding: (i) the violation of any Environmental
Requirement; (ii) any Remedial Action; (iii) any liability
arising out of or related to the presence or Release of any
Contaminant resulting from or pertaining to the Operations at
the Trust Property.
(vii) Trustor certifies that to the best of
its knowledge and after appropriate inquiry, except as set
forth in the Disclosure Schedule, there has been no
unauthorized release of any contaminant at, on, from, or
beneath the property.
The foregoing representations, covenants and warranties are
continuing and shall be true and correct from the date hereof through the final
payment of all indebtedness owed by Trustor to Beneficiary and the final
Performance of all Obligations owed to Beneficiary, with the same force and
effect as if made each day throughout such period. All representations,
covenants and warranties survive payment and Performance.
Beneficiary warrants that it shall act, in its capacity as a
lender, in compliance with all federal, state, and local laws regarding
environmental lender liability, including, without limitation, 42 U.S.C.
Section 9607 under the Comprehensive Environmental Response, Compensation and
Liability Act.
(b) Covenant to Clean Up and Notify.
(i) Trustor, at its own cost, shall perform
all Remedial Action: (i) in accordance with all Environmental
Requirements; (ii) to the reasonable satisfaction of
Beneficiary; and (iii) in accordance with any Governmental
Authority orders, directives, and/or terms, whether negotiated
or imposed.
(ii) Trustor shall give notice to
Beneficiary immediately, via certified mail, of any deviation
from any of the above representations, covenants and
warranties. Such notification is triggered by, but not limited
to Trustor's: (i) receipt of notice from any Governmental
Authority of any known, alleged or suspected violation of any
Environmental Requirement; (ii) receipt, or anticipated
receipt, of any notice from a Governmental Authority of the
Release of a Contaminant, violation of an EHS Permit, and/or
damages for personal or property injury or natural resources,
stemming from a violation or Release; and (iii) knowledge of
the presence of any Contaminant (other than those described in
the Disclosure Schedule) on the Trust Property in a
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condition that may adversely impact the Environment.
Notification shall include an explanation of the deviation
from the representation and warranty and a description of
the communication to or knowledge on the part of the
Trustor. Trustor, at Beneficiary's request, shall provide
all documents pertaining to any environmental matters
(including but not limited to otherwise privileged or
confidential materials).
(iii) In the event of such deviation,
Trustor must: (i) promptly comply with all Environmental
Requirements, including but not limited to those requiring
Remedial Action and/or notification of a Release, and provide
Beneficiary with satisfactory evidence of such compliance; and
(ii) provide Beneficiary, within thirty (30) days, financial
assurance evidencing, to Beneficiary's reasonable
satisfaction, that sufficient funds are available to pay the
cost of Remedial Action, compliance with any Environmental
Requirement, and discharging any Environmental Liens.
(c) Site Assessment.
(i) If Beneficiary believes that
Contaminants (other than those described in the Disclosure
Schedule) affect the Trust Property, Beneficiary, at any time,
may contract for the services of persons ("Site Assessors") to
perform environmental site assessments ("Site Assessments") to
determine whether any environmental condition exists that
could result in the diminution of the value of the Trust
Property, and/or any liability, cost, or expense to the owner,
occupier, or operator of the Trust Property. Site Assessments
may be performed at any time, upon reasonable notice and with
minimal interference with Trustor's affairs to the extent
practicable, as determined by Beneficiary. Site Assessments
must be performed pursuant to Beneficiary's guidelines.
Trustor shall not impede or interfere with the Site
Assessment, and shall cooperate fully with the Site Assessors.
The Site Assessors, which term includes their employees,
agents, subcontractors, and assigns are hereby authorized to
enter upon the Trust Property for such purposes and are
further authorized to perform tests on the Trust Property
necessary to conduct the Site Assessment. Trustor shall supply
Site Assessors historical and operational information
regarding the Trust Property to facilitate the Site
Assessment. Trustor shall make appropriate personnel, having
knowledge of relevant matters, available for meetings with the
Site Assessors. On request, Beneficiary shall make the results
of such Site Assessments available to Trustor. The cost of
performing the Site Assessments, including, without
limitation, sampling and monitoring, the preparation of any
reports or studies, and the cost of laboratory analysis, shall
be paid by Trustor upon demand.
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(ii) Prior to a breach, default or Event of
Default under or as defined in any Loan Document, Beneficiary
may notify Trustor of its intent to conduct a Site Assessment
and allow Trustor to initiate and pay for the Site Assessment
directly. Unless otherwise agreed, a Site Assessment performed
pursuant to this Section 2.19(c) must be: (i) initiated within
seven (7) business days of the date upon which Trustor is
contacted by Beneficiary; and (ii) completed with a finalized
report delivered to Beneficiary within thirty (30) calendar
days of the date upon which Trustor is contacted. The Site
Assessors hired by Trustor must be acceptable to Beneficiary.
Beneficiary must be consulted by Trustor and approve the scope
of any proposed Site Assessment. Site Assessors must provide a
draft and final report discussing their findings. Beneficiary
shall be given the opportunity to review and comment on all
draft reports. Beneficiary shall be provided copies of all
draft and final reports. Any and all representations and
findings by Site Assessors shall expressly run to the benefit
of Beneficiary.
(d) Indemnify and Hold Harmless.
(i) Trustor shall indemnify, defend and hold
harmless Beneficiary, its employees, shareholders, officers,
directors, and agents from and against any and all
Environmental Costs.
(ii) Trustor agrees, upon request by
Beneficiary, to contest and to defend against all
Environmental Costs. Beneficiary may, without being obligated
to, hire counsel, consultants, and others necessary to defend
against any Environmental Costs.
(iii) Trustor agrees to reimburse
Beneficiary upon demand for any expenses incurred in
connection with any Environmental Costs. The provisions of
this Section 2.19 are 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
the granting of any deed in lieu of foreclosure and the
recordation of any release of the lien of this Deed of Trust
or of the Loan Agreement.
(e) Beneficiary's Right to Remove Contaminants.
(i) Beneficiary shall have the right, but
not the obligation, without limiting Beneficiary's other
rights and remedies under this Deed of Trust or the
Environmental Certificate, to enter onto the Trust Property or
to take such other actions as it deems necessary or advisable
to effectuate a Remedial Action, or to in any other way
resolve or minimize the impact of, or
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otherwise deal with, any Contaminant on or affecting the Trust
Property in such a manner that may jeopardize Beneficiary's
security interest. Costs and expenses paid or incurred by
Beneficiary in the exercise of any such rights shall be
secured by this Deed of Trust and the Loan Agreement and shall
be payable by Trustor upon demand.
(ii) Without limiting Beneficiary's other
rights and remedies, Beneficiary will notify Trustor of its
intent to undertake a Remedial Action or any other action as
discussed above. Prior to Beneficiary's initiation of any such
action, unless otherwise agreed to by Trustor and Beneficiary,
Trustor shall have thirty (30) days from the date of receiving
Beneficiary's notice to complete the required action and
provide Beneficiary with satisfactory completion
documentation.
(f) Reliance and Binding Nature. Trustor acknowledges
that Beneficiary has and will rely upon the representations,
warranties, and indemnification set forth herein and that the execution
and delivery of this Deed of Trust is an essential condition but for
which Beneficiary would not close or fund the Loan. The
representations, warranties and indemnifications herein 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.
(g) Relation to Other Documents. All terms and
conditions contained in the Loan Documents, including, without
limitation, this Deed of Trust, shall be interpreted to give such terms
full force and effect. In the event terms or conditions contained in
this Section 2.19 directly conflict with or are contrary to terms and
conditions contained in the other Loan Documents, and the matter at
issue concerns or is related to the Site Assessment or indemnity and
hold harmless provisions of this Section 2.19, this Section 2.19 shall
govern and supersede any conflicting requirement.
For the purposes of this Section 2.19, the following terms
shall have the following meanings:
"Contaminant" means any pollutant, hazardous, radioactive, or
toxic substance, hazardous waste, medical, radioactive, or special waste,
petroleum or petroleum-derived substance or waste, asbestos-containing material,
polychlorinated biphenyls (PCBs), or any hazardous or toxic constituent thereof
and includes, but is not limited to, any substance defined in or regulated under
any Environmental Requirement.
"EHS Permits" means all environmental, health and safety
permits, licenses, consents, and authorizations required by any Environmental
Requirement.
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"Environment" shall have the same meaning as defined under
Environmental Laws. If Environmental Laws conflict, the most expansive
definition is used.
"Environmental Conditions" means the presence or release into
the Environment of Contaminants arising out of Operations.
"Environmental Costs" means any and all claims, demands,
liabilities, damages, losses, expenses, fines, penalties, judgments, awards,
settlements and costs (including, without limitation, legal, accounting,
consulting, engineering, construction and other costs) arising out of
Environmental Conditions. Environmental Costs include, without limitation, all
past, current and future expenses, arising out of: (a) any pending, threatened
or completed action by a Governmental Authority or any person or entity for
property damage, bodily injury or personal injury; (b) any inquiry,
investigation, audit, study, assessment, notice of violation, administrative
complaint, summons, citation directive or judicial complaint; (c) any
development of remedial or response plans; and (d) any conduct or activity in
any way associated therewith.
"Environmental Laws" means any applicable federal, state or
local laws, statutes, codes, ordinances, rules or regulations, court order or
decree, administrative order or governmental agency guidelines.
"Environmental Lien" means a lien in favor of any Governmental
Authority for any: (a) liability under any Environmental Requirement; or (b)
damages arising from, or costs incurred by such Governmental Authority in
response to a Release of a Contaminant into the Environment.
"Environmental Requirement" means all Environmental Laws or
EHS Permits relating to the Environment, health or safety, including, without
limitation: (a) the use, handling, treatment storage, or Release of any
Contaminant; and (b) workplace or worker safety and health, as authorized by any
Governmental Authority.
"Governmental Authority" means any federal, state or local
agency, department, court or other administrative, legislative or regulatory
federal, state or local governmental body, or any private individual or entity
in place of such entities.
"Operations" means the entire scope of activity performed or
undertaken at the Trust Property, past and present, with respect to any and all
Contaminants.
"Release" means the actual, partial, or threatened release,
spill, emission, escape, leaking, pumping, injection, deposit, discharge,
dispersal, dumping, disposal, leaching, placing, production or migrating into
the Environment of any Contaminant.
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"Remedial Action" means actions required to: (a) clean up,
remove, treat or otherwise address Contaminants in the Environment; (b) prevent
or minimize the Release of Contaminants into the Environment; or (c) determine
if a remedial response or corrective action is needed, design an appropriate
response, compile necessary data and reports, conduct pre- and post-remedial
investigation, monitoring, operation, maintenance and care. Remedial Action
shall be undertaken such that the Trust Property is utilized to its maximum
economic benefit.
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. Section 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.
(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
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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 (this "Assignment"): (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, accounts,
accounts receivable, profits, fees, and other proceeds (including,
without limitation, room sales) from the Trust Property (collectively
"Rents"). 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 shall, 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.
(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.
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(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 shall (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 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.
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(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 accepted 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.
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 shall 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
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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 shall immediately notify Beneficiary
in writing of any change in its principal place of business/chief
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 Section 3.2 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.
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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
shall 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 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 Section 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;
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(b) there is a default in the Performance of any of
the terms of Section 2.3 or Section 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 Section 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 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 Section
3.1 hereof; and/or
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(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 shall 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
(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.
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4.3 Power of Sale. Should Beneficiary elect to foreclose by
exercise of the power of sale herein granted, Beneficiary will deposit with
Trustee such items as Trustee may require. After such notice(s) of default and
sale and other notices have been given as then required by law, and after lapse
of such time as may then be required by law after such events, Trustee, without
demand on Trustor, shall sell the Trust Property at the time and place of sale
fixed by it in such notice of sale, either as a whole or in separate parcels,
and in such order as it may determine, at public auction to the highest bidder
for cash in lawful money of the United States payable at the time of sale, or to
the extent not prohibited by law upon such other terms and conditions as are
acceptable to Trustee and Beneficiary. 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. If Trustee is
directed by Beneficiary to foreclose pursuant to a nonjudicial foreclosure sale,
Trustee shall sell the Trust Property, or any part thereof, after having first
given notice of the time, place and terms of sale as required by Section 89-1-55
of the Mississippi Code of 1972, as amended. If the Trust Property is situated
in two or more counties or in two judicial districts of the same county or
different counties, Trustee shall have full power to select in which county or
judicial district the sale of all of any part of the Trust Property shall be
made. Trustee shall have authority to fix the day, hour, terms and place of sale
and may conduct any sale personally or through an agent whose appointment need
not be recorded. Trustor waives any provision of law which restricts or limits
the right of Trustee to offer more than 160 acres at one time, regardless of the
manner in which the Trust Property may be described. In the event any portion of
the Trust Property is subject to the provisions of the Uniform Commercial Code,
Trustee shall have the same authority, rights and obligation with respect to
such property as to all other Trust Property, or Beneficiary may proceed
directly with respect to the Trust Property subject to the provisions of the
Uniform Commercial Code. In the event Beneficiary directs Trustee to sell that
portion of the Trust Property which is subject to the Uniform Commercial Code,
Trustee may elect to sell such property separately subject to the provisions of
the Uniform Commercial Code, or Trustee may sell all Trust Property pursuant to
the provisions relating to sales of real property. Trustee may sell real and
personal property separately or coordinate sales in any manner deemed advisable
by Beneficiary. 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.
From time to time before Trustee's sale pursuant to this Section 4.3,
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, 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
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and/or of any of the other Documents or any of the rights, obligations or
remedies of the parties thereunder or hereunder.
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 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
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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 shall 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 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.
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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
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 shall 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
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affect the covenants and terms of performance of this Deed of Trust or Trustor
shall 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 shall 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.
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.
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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 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 Section 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,
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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 sections, 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 section, paragraph, clause or
other subdivision hereof; and reference to a numbered or lettered subdivision of
an Article, section or paragraph shall include relevant matter within the
Article, section 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, 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
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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 Acceptance by Trustee. Trustee accepts this trust when
this Deed of Trust, duly executed and acknowledged, is made a public record.
5.13 Protection of Trustee. At any time, or from time to time,
without liability therefor and without notice, upon written request of
Beneficiary and without affecting the personal liability of any person for
payment of the indebtedness secured hereby or the effect of this Deed of Trust
upon the remainder of the Trust Property, Trustee and Beneficiary may: reconvey
any part of the Trust Property; consent in writing to the making of any map or
plat thereof; join in granting any easement thereon; or join in any extension
agreement or any agreement subordinating the lien or charge hereof. Trustee
shall be protected in acting upon any notice, request, consent, demand,
statement, note or other paper or document believed by it to be genuine and to
have been signed by the party purporting to sign such document. Trustee shall
not be liable for any error of judgment, nor for any act done or step taken or
omitted, nor for any mistake of law or fact, nor for anything which it may do or
refrain from doing in good faith. Trustee shall have no accountability under
this Deed of Trust except for its own individual willful default or gross
negligence. Any necessity of Trustee herein named, or any successor in trust,
making oath or giving bond, is expressly waived.
5.14 Substitution of Trustee. Beneficiary shall be entitled to
remove, substitute, or add a Trustee or Trustees, at its sole option, with or
without cause or notice, by instrument duly executed, acknowledged and recorded
among the land records in the jurisdictions where this Deed of Trust is
recorded, subject to the laws of the applicable jurisdiction. Thereupon such
additional or successor Trustee or Trustees, without further act,
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deed or conveyance, shall become vested with all estates, property, title
rights, powers, privileges, discretions, trusts, duties and obligations of his
or their co-trustee, or predecessors in the trust hereunder with like effect as
if originally named as Trustee or Trustees hereunder. Exercise of the power to
substitute Trustees, no matter how often, shall not be an exhaustion thereof.
5.15 Reconveyance by Trustee. Upon (a) written request of
Beneficiary stating that all sums secured hereby have been paid, (b) surrender
to Trustee of this Deed of Trust and the Note for cancellation and retention and
(c) payment of its 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 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.
5.18 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 Section 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
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permitted by the Applicable Usury Law, then in any such event (1) the provisions
of this Section 5.18 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 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.
5.19 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.
41
<PAGE> 48
ARTICLE VI
SPECIAL PROVISIONS
6.1 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 2.250% 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.
[SIGNATURE PAGE FOLLOWS]
42
<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"
Witness: By: _________________________________
_______________________________ Name: ______________________________
Print Name: _____________________ Title: ______________________________
_____ Check here to confirm that
Section 5.11 has been initialed.
STATE OF )
) ss.
County of )
Personally came and appeared before me, the undersigned
authority in and for the above mentioned county and state, the within named
___________________, who acknowledged that he/she is _______________ of
Preferred Equities Corporation and that he/she signed, executed and delivered
the above and foregoing Deed of Trust on the day and year therein given, after
being duly authorized to execute the same by Preferred Equities Corporation and
as and for the act and deed of Preferred Equities Corporation.
GIVEN Under My Hand And Official Seal Of Office, this the ____
day of March, 1998.
-----------------------------------
NOTARY PUBLIC
My Commission Expires:
- ---------------------
43
<PAGE> 50
EXHIBIT A
Legal Description
(to be attached)
44
<PAGE> 51
EXHIBIT B
Permitted Exceptions
Item 1. A ten foot water and sewer easement along the North side of
Highway 90 as granted to City of Biloxi by instrument dated
April 7, 1972, recorded February 1, 1973 in Book 35, Page 129;
and in instrument dated April 11, 1972, recorded February 22,
1973 in Book 35, Page 139; and in instrument dated June 16,
1972, recorded February 2, 1973 in Book 35, Page 141.
Item 2. A ten foot water and sewer easement running East and West
through the Northerly portion of subject property as granted
to the City of Biloxi by instrument dated June 8, 1972,
recorded February 2, 1973 in Book 35, Page 171; and in
instrument dated June 16, 1972, recorded February 2, 1973 in
Book 35, Page 173.
Item 3. Encroachment of open wood carport onto adjacent property
along the East boundary line of subject property as shown by
survey prepared by Kenny L. Alston, R.L.S., dated May 26,
1994, revised and corrected January 14, 1997.
Item 4. Encroachment of chain link fence of approximately 2.38 feet
along the East boundary line of subject property as shown by
survey prepared by Kenny L. Alston, R.L.S., dated May 26,
1994, revised and corrected January 14, 1997.
Item 5. Protective covenants contained in instrument filed for record
record in the office of the Chancery Clerk and recorded in
said office in Book 284 at Page 408.
45
<PAGE> 52
ENVIRONMENTAL CERTIFICATE WITH REPRESENTATIONS,
COVENANTS AND WARRANTIES
[Biloxi Property]
The undersigned, PREFERRED EQUITIES CORPORATION, a Nevada
corporation ("Borrower"), hereby executes this Environmental Certificate with
Representations, Covenants and Warranties (this "Environmental Certificate") as
of the 20th day of March, 1998, 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 $1,173,750 (the "Loan"), which Loan is to be
secured by, among other things, a Deed of Trust, Assignment of Rents and
Proceeds and Security Agreement [Biloxi Property] (the "Mortgage"), dated as of
even date herewith, executed by Borrower, as Trustor, for the benefit of Lender,
as beneficiary, and 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. Definitions. For those terms not specifically defined
herein, meanings shall be those defined in the Loan Agreement. Capitalized terms
defined herein shall have the meanings given to them; in addition, the following
terms shall have the following meanings:
"Contaminant" means any pollutant, hazardous, radioactive, or
toxic substance, hazardous waste, medical, radioactive, or special waste,
petroleum or petroleum-derived substance or waste, asbestos-containing material,
polychlorinated biphenyls (PCBs), or any hazardous or toxic constituent thereof
and includes, but is not limited to, any substance defined in or regulated under
any Environmental Requirement (defined herein).
"EHS Permits" means all environmental, health and safety
permits, licenses, consents, and authorizations required by any Environmental
Requirement (defined herein).
"Environment" shall have the same meaning as defined under
Environmental Laws (defined herein). If Environmental Laws conflict, the most
expansive definition is used.
"Environmental Conditions" means the presence or release into
the Environment of Contaminants arising out of Operations (defined herein).
"Environmental Costs" means any and all claims, demands,
liabilities, damages, losses, expenses, fines, penalties, judgments, awards,
settlements and costs (including, without limitation, legal, accounting,
consulting, engineering, construction and other costs) arising out of
Environmental Conditions. Environmental Costs include, without
1
<PAGE> 53
limitation, all past, current and future expenses, arising out of: (a) any
pending, threatened or completed action by a Governmental Authority or any
person or entity for property damage, bodily injury or personal injury; (b) any
inquiry, investigation, audit, study, assessment, notice of violation,
administrative complaint, summons, citation directive or judicial complaint; (c)
any development of remedial or response plans; and (d) any conduct or activity
in any way associated therewith.
"Environmental Laws" means any applicable federal, state or
local laws, statutes, codes, ordinances, rules or regulations, court order or
decree, administrative order or governmental agency guidelines.
"Environmental Lien" means a lien in favor of any Governmental
Authority for any: (a) liability under any Environmental Requirement; or (b)
damages arising from, or costs incurred by such Governmental Authority in
response to a Release (defined herein) of a Contaminant into the Environment.
"Environmental Requirement" means all Environmental Laws or
EHS Permits relating to the Environment, health or safety, including, without
limitation: (a) the use, handling, treatment storage, or Release (defined
herein) of any Contaminant; and (b) workplace or worker safety and health, as
authorized by any Governmental Authority (defined herein).
"Governmental Authority" means any federal, state or local
agency, department, court or other administrative, legislative or regulatory
federal, state or local governmental body, or any private individual or entity
in place of such entities.
"Operations" means the entire scope of activity performed or
undertaken at the Property, past and present, with respect to any and all
Contaminants.
"Release" means the actual, partial, or threatened release,
spill, emission, escape, leaking, pumping, injection, deposit, discharge,
dispersal, dumping, disposal, leaching, placing, production or migrating into
the Environment of any Contaminant.
"Remedial Action" means actions required to: (a) clean up,
remove, treat or otherwise address Contaminants in the Environment; (b) prevent
or minimize the Release of Contaminants into the Environment; or (c) determine
if a remedial response or corrective action is needed, design an appropriate
response, compile necessary data and reports, conduct pre- and post-remedial
investigation, monitoring, operation, maintenance and care. Remedial Action
shall be undertaken such that the Property is utilized to its maximum economic
benefit.
2. Representations, Covenants and Warranties. Except as
disclosed in the Disclosure Schedule, attached hereto as Exhibit B and
incorporated herein by reference,
2
<PAGE> 54
Customer, to the best of its knowledge after due inquiry and investigation,
hereby represents, covenants and warrants to FINOVA as follows:
(a) Customer certifies that it investigated the
present and past uses of the Property, and employed a qualified
environmental consultant, acceptable to Customer, to make due inquiry
of all Operations and the potential existence and/or Release of
Contaminants at the Property. Customer certifies that such
investigation complied with FINOVA's guidelines for conducting such
investigation.
(b) The Property is not listed on any federal, state,
or local list identifying properties with a known or suspected Release.
Customer is unaware of any condition that, if known to a Governmental
Authority, would require (i) the Property be listed or (ii) Remedial
Action.
(c) Operations have never been, and will not be, for
the purpose of the manufacture, Remedial Action, generation, Release,
or refining of any Contaminant (whether legal or illegal, accidental or
intentional).
(d) Customer obtained, and is and shall continue to
be in compliance with, all EHS Permits necessary for the Operations at
the Property.
(e) No Environmental Lien has, is, or will be
attached to the Property or any portion thereof.
(f) Customer is not, has not, and does not anticipate
being, subject to any action by a Governmental Authority regarding: (i)
the violation of any Environmental Requirement; (ii) any Remedial
Action; (iii) any liability arising out of or related to the presence
or Release of any Contaminant resulting from or pertaining to the
Operations at the Property.
(g) Customer certifies that to the best of its
knowledge and after appropriate inquiry, except as set forth in Exhibit
B, there has been no unauthorized release of any contaminant at, on,
from, or beneath the property.
The foregoing representations, covenants and warranties are
continuing and shall be true and correct from the date hereof through the final
payment of all indebtedness owed by Customer to FINOVA and the final performance
of all obligations owed to FINOVA, with the same force and effect as if made
each day throughout such period. All representations, covenants and warranties
survive payment and performance.
FINOVA warrants that it shall act, in its capacity as a
lender, in compliance with all federal, state, and local laws regarding
environmental lender liability, including,
3
<PAGE> 55
without limitation, 42 U.S.C. Section 9607 under the Comprehensive
Environmental Response, Compensation and Liability Act.
3. Covenant to Clean Up and Notify.
(a) Customer, at its own cost, shall perform all
Remedial Action: (i) in accordance with all Environmental Requirements;
(ii) to the reasonable satisfaction of FINOVA; and (iii) in accordance
with any Governmental Authority orders, directives, and/or terms,
whether negotiated or imposed.
(b) Customer shall give notice to FINOVA immediately,
via certified mail, of any deviation from any of the above
representations, covenants and warranties. Such notification is
triggered by, but not limited to Customer's: (i) receipt of notice from
any Governmental Authority of any known, alleged or suspected violation
of any Environmental Requirement; (ii) receipt, or anticipated receipt,
of any notice from a Governmental Authority of the Release of a
Contaminant, violation of an EHS Permit, and/or damages for personal or
property injury or natural resources, stemming from a violation or
Release; and (iii) knowledge of the presence of any Contaminant (other
than those described in Exhibit B) on the Property in a condition that
may adversely impact the Environment. Notification shall include an
explanation of the deviation from the representation and warranty and a
description of the communication to or knowledge on the part of the
Customer. Customer, at FINOVA's request, shall provide all documents
pertaining to any environmental matters (including but not limited to
otherwise privileged or confidential materials).
(c) In the event of such deviation, Customer must:
(i) promptly comply with all Environmental Requirements, including but
not limited to those requiring Remedial Action and/or notification of a
Release, and provide FINOVA with satisfactory evidence of such
compliance; and (ii) provide FINOVA, within thirty (30) days, financial
assurance evidencing, to FINOVA's reasonable satisfaction, that
sufficient funds are available to pay the cost of Remedial Action,
compliance with any Environmental Requirement, and discharging any
Environmental Liens.
4. Site Assessment.
(a) If FINOVA believes that Contaminants (other than
those described in Exhibit B) affect the Property, FINOVA, at any time,
may contract for the services of persons ("Site Assessors") to perform
environmental site assessments ("Site Assessments") to determine
whether any environmental condition exists that could result in the
diminution of the value of the Property, and/or any liability, cost, or
expense to the owner, occupier, or operator of the Property. Site
Assessments may be performed at any time, upon reasonable notice and
with minimal interference with Customer's affairs to the extent
practicable, as determined by FINOVA. Site
4
<PAGE> 56
Assessments must be performed pursuant to FINOVA's guidelines. Customer
shall not impede or interfere with the Site Assessment, and shall
cooperate fully with the Site Assessors. The Site Assessors, which term
includes their employees, agents,subcontractors, and assigns are hereby
authorized to enter upon the Property for such purposes and are further
authorized to perform tests on the Property necessary to conduct the
Site Assessment. Customer shall supply Site Assessors historical and
operational information regarding the Property to facilitate the Site
Assessment. Customer shall make appropriate personnel, having knowledge
of relevant matters, available for meetings with the Site Assessors. On
request, FINOVA shall make the results of such Site Assessments
available to Customer. The cost of performing the Site
Assessments, including, without limitation, sampling and monitoring,
the preparation of any reports or studies,and the cost of laboratory
analysis, shall be paid by Customer upon demand.
(b) Prior to a breach, default or Event of Default
under or as defined in any Loan Document, FINOVA may notify Customer of
its intent to conduct a Site Assessment and allow Customer to initiate
and pay for the Site Assessment directly. Unless otherwise agreed, a
Site Assessment performed pursuant to this paragraph must be: (i)
initiated within seven (7) business days of the date upon which Customer
is contacted by FINOVA; and (ii) completed with a finalized report
delivered to FINOVA within thirty (30) calendar days of the date upon
which Customer is contacted. The Site Assessors hired by Customer must
be acceptable to FINOVA. FINOVA must be consulted by Customer and
approve the scope of any proposed Site Assessment. Site Assessors must
provide a draft and final report discussing their findings. FINOVA shall
be given the opportunity to review and comment on all draft reports.
FINOVA shall be provided copies of all draft and final reports. Any and
all representations and findings by Site Assessors shall expressly run
to the benefit of FINOVA.
5. Indemnify and Hold Harmless.
(a) Customer shall indemnify, defend and hold
harmless FINOVA, its employees, shareholders, officers, directors, and
agents from and against any and all Environmental Costs.
(b) Customer agrees, upon request by FINOVA, to
contest and to defend against all Environmental Costs. FINOVA may,
without being obligated to, hire counsel, consultants, and others
necessary to defend against any Environmental Costs.
(c) Customer agrees to reimburse FINOVA upon demand
for any expenses incurred in connection with any Environmental Costs.
The provisions of this Section 5 are in addition to any other
obligations and liabilities Customer may
5
<PAGE> 57
have to FINOVA 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 the Mortgage.
6. FINOVA's Right to Remove Contaminants.
(a) FINOVA shall have the right, but not the
obligation, without limiting FINOVA's other rights and remedies under
the Mortgage or Loan Agreement and this Environmental Certificate, to
enter onto the Property or to take such other actions as it deems
necessary or advisable to effectuate a Remedial Action, or to in any
other way resolve or minimize the impact of, or otherwise deal with,
any Contaminant on or affecting the Property in such a manner that may
jeopardize FINOVA's security interest. Costs and expenses paid or
incurred by FINOVA in the exercise of any such rights shall be secured
by the Mortgage and Loan Agreement and shall be payable by Customer
upon demand.
(b) Without limiting FINOVA's other rights and
remedies, FINOVA will notify Customer of its intent to undertake a
Remedial Action or any other action as discussed above. Prior to
FINOVA's initiation of any such action, unless otherwise agreed to by
Customer and FINOVA, Customer shall have thirty (30) days from the date
of receiving FINOVA's notice to complete the required action and
provide FINOVA with satisfactory completion documentation.
7. Reliance and Binding Nature. Customer acknowledges that
FINOVA has and will rely upon the representations, warranties, and
indemnification set forth herein and that the execution and delivery of this
Environmental Certificate is an essential condition but for which FINOVA would
not close or fund the Loan. The representations, warranties and indemnifications
herein shall be binding upon Customer, its successors, assigns and legal
representatives and shall inure to the Benefit of FINOVA, its successors,
assigns and legal representatives.
8. Relation to Other Documents. All terms and conditions
contained in the Loan Documents, including, without limitation, this
Environmental Certificate, shall be interpreted to give such terms full force
and effect. In the event terms or conditions contained in this Environmental
Certificate directly conflict with or are contrary to terms and conditions
contained in the other Loan Documents, and the matter at issue concerns or is
related to the Site Assessment or indemnity and hold harmless provisions of this
Environmental Certificate, this Environmental Certificate shall govern and
supersede any conflicting requirement.
6
<PAGE> 58
IN WITNESS WHEREOF, this Environmental Certificate has been
executed and delivered by an officer of Customer duly authorized thereunto as of
the date first above written.
PREFERRED EQUITIES CORPORATION,
a Nevada corporation
By:
Name: Charles G. Baltuskonis
Its: Vice President and
Chief Accounting Officer
(Form A)
Rev. - 2/27/98
7
<PAGE> 59
EXHIBIT A
Description of Property
ALL that certain plot, piece or parcel of land, situate, lying and being in the
County of Harrison and State of Mississippi, more particularly described as
follows:
(to be attached)
8
<PAGE> 60
EXHIBIT B
Disclosure Schedule
(None)
9
<PAGE> 61
CONSENT OF GUARANTOR
(Biloxi Property)
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"), (i) an Amended and Restated Guarantee and Subordination
Agreement dated as of May 10, 1989 (the "PEC Guaranty"), 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 PEC Guarantee); and (ii) a Guarantee and
Subordination Agreement dated as of March 30, 1989 (the "VSR Guarantee", and,
collectively with the PEC Guarantee, the "Guarantee"), guaranteeing performance
of the obligations of Vacation Spa Resorts, Inc., a Tennessee corporation,
predecessor-in-interest to Borrower, to Lender under the Loan Agreement, the
Note and other Documents (as the terms "Loan Agreement," "Note" and "Documents"
are defined in the VSR Guarantee).
GREFCO has assigned the respective Notes and all of GREFCO's
rights and obligations under the respective Loan Agreements and the other
respective 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 respective 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 One Million One Hundred Fifty Thousand
United States Dollars (U.S. $1,150,000) (the "Biloxi Loan"). Guarantor further
acknowledges that the Biloxi Loan is evidenced by and subject to, among other
things, that certain Letter Agreement, dated March 20, 1998, by and between
Borrower and Lender (the "Biloxi Letter Agreement"), as well as that certain
promissory note in the original principal amount of $1,150,000 (as amended,
extended or renewed from time to time, the "Biloxi Note") and secured, in part,
by that certain Deed of Trust, Assignment of Rents and Proceeds and Security
Agreement of even date with the Biloxi Letter Agreement 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
"Biloxi Deed of Trust")
<PAGE> 62
and that certain other documents are being executed in connection with the
Biloxi Loan (as from time to time modified, extended, renewed, replaced or
restated the "Biloxi Ancillary Documents"; and, together with the Biloxi Letter
Agreement, the Biloxi Note, and the Biloxi Deed of Trust, the "Biloxi
Documents").
Guarantor consents to the Biloxi Documents and agrees that
(i)the Guarantee shall remain in full force and effect and shall extend to
Borrower's Obligations arising under the Biloxi Documents, (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
Biloxi Documents and (iv) all terms, conditions and provisions set forth in the
Biloxi 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 20th day of March, 1998.
MEGO FINANCIAL CORP.,a New York
corporation
By:
Name: Jon A. Joseph
Its: Vice President
2
<PAGE> 63
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 Jon A.
Joseph, known to me to be a Vice President 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
March, 1998.
----------------------------------------------
Notary Public
My Commission Expires:
- ---------------------
3
<PAGE> 64
EXHIBIT 1 TO
CONSENT OF GUARANTOR
Exceptions To Representations And Warranties Reaffirmed
By Guarantor Pursuant To This Consent
[If none, insert "none"]
4
<PAGE> 65
OFFICER'S CERTIFICATE
OF PREFERRED EQUITIES CORPORATION
The undersigned, Jon A. Joseph, the Corporate Secretary of
Preferred Equities Corporation, a Nevada corporation (the "Company"), does
hereby certify that:
1. I am the duly elected and presently acting Corporate
Secretary of the Company and as such have access to the corporate records of the
Company and am familiar with the matters therein contained and herein certified.
2. Attached hereto as Exhibit 1 is a certificate of good
standing from the Nevada Secretary of State and, since the date of such
certificate, there has been no change in the status of the Company.
3. Attached hereto as Exhibit 2 is a [certificate of foreign
qualification] from the Mississippi Secretary of State and, since the date of
such certificate, there has been no change in the status of the Company.
4. The Articles of Incorporation of the Company are in full
force and effect and have not been modified, rescinded or amended since August
16, 1996.
5. The Bylaws of the Company are in full force and effect and
have not been modified, rescinded or amended since August 16, 1996.
6. Attached hereto as Exhibit 2 is a true and correct copy of
resolutions, and the preamble thereto, adopted at a meeting of the Board of
Directors of the Company held on March 13, 1998, and such resolutions and
preamble were duly adopted by said Board of Directors and are in full force and
effect on and as of the date hereof, not having been in any way amended, altered
or repealed.
7. The forms of Letter Agreement, Note and Deed of Trust
described in such resolutions are identical to the corresponding documents
executed and delivered by the Company to FINOVA Capital Corporation.
8. There are no dissolution proceedings pending on the date
hereof with respect to the Company.
9. The following persons are now, and at all times subsequent
to January 1, 1997 have been duly qualified and acting officers of the Company,
duly elected to the offices set forth opposite their respective names, and the
signature appearing opposite the name of each such officer is his authentic
signature:
[Signatures are on following page]
1
<PAGE> 66
Name Office Signature
- ----------------------- --------------------------- --------------------------
Charles G. Baltuskonis Vice President and
Chief Accounting Officer __________________________
IN WITNESS WHEREOF, the undersigned has executed this
Certificate as of March 20, 1998.
By:
Name: Jon A. Joseph
Title: Corporate Secretary
2
<PAGE> 67
OFFICER'S CERTIFICATE
OF MEGO FINANCIAL CORP.
The undersigned, Don A. Mayerson, the Corporate Secretary of
Mego Financial Corp., a New York corporation (the "Company"), does hereby
certify that:
1. I am the duly elected and presently acting Corporate
Secretary of the Company and as such have access to the corporate records of the
Company and am familiar with the matters therein contained and herein certified.
2. Attached hereto as Exhibit 1 is a certificate of good
standing from the New York Secretary of State and, since the date of such
certificate, there has been no change in the status of the Company.
3. The Articles of Incorporation of the Company are in full
force and effect and have not been modified, rescinded or amended since August
16, 1996.
4. The Bylaws of the Company are in full force and effect and
have not been modified, rescinded or amended since August 16, 1996.
5. Attached hereto as Exhibit 2 is a true and correct copy of
resolutions, and the preamble thereto, adopted at a meeting of the Board of
Directors of the Company held on March 13, 1998, and such resolutions and
preamble were duly adopted by said Board of Directors and are in full force and
effect on and as of the date hereof, not having been in any way amended, altered
or repealed.
6. There are no dissolution proceedings pending on the date
hereof with respect to the Company.
7. The following persons are now, and at all times subsequent
to January 1, 1997 have been duly qualified and acting officers of the Company,
duly elected to the offices set forth opposite their respective names, and the
signature appearing opposite the name of each such officer is his authentic
signature:
[Signatures appear on following page]
<PAGE> 68
Name Office Signature
- ------------------- ------------------------ ---------------------------------
Jon A. Joseph Vice President ________________________________
IN WITNESS WHEREOF, the undersigned has executed this
Certificate as of March 20, 1998.
By:__________________________
Name: Don A. Mayerson
Title: Corporate Secretary
2
<PAGE> 69
REQUEST FOR ADVANCE AND DISBURSEMENT INSTRUCTIONS
The undersigned, as Vice President and Chief Accounting
Officer of PREFERRED EQUITIES CORPORATION, a Nevada corporation, hereby
instructs FINOVA CAPITAL CORPORATION ("FINOVA") to advance ONE MILLION ONE
HUNDRED SEVENTY-THREE THOUSAND SEVEN HUNDRED FIFTY AND NO/100 DOLLARS
($1,173,750.00) in immediate available funds, which funds shall be distributed
as follows:
1. Bank: Whitney National Bank of Mississippi $ 1,150,000.00
ABA Routing No.: 065501353
For Credit to: The Trust Account
of Virgil G. Gillespie
Account Number: 8071500
2. FINOVA Capital Corporation $ 23,750.00
(Loan Fee - $23,750.00)
Total Funds Disbursed: $ 1,173,750.00
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 the undersigned, receipt of such disbursements by such payees shall
constitute receipt of the proceeds by the undersigned.
Dated: March 20, 1998.
PREFERRED EQUITIES CORPORATION,
a Nevada corporation
By: _____________________________________
Name: Charles G. Baltuskonis
Title: Vice President and
Chief Accounting Officer
<PAGE> 70
LETTER AGREEMENT
[BILOXI PROPERTY]
March 20, 1998
Preferred Equities Corporation
4310 Paradise Road
Las Vegas, Nevada 89109-6597
Re: 1816 Beach Boulevard, Biloxi, Mississippi
Ladies and Gentlemen:
Reference is made to that certain Second Amended and Restated
and Consolidated Loan and Security Agreement dated as of May 15, 1997 (as
amended and supplemented to date, the "Loan Agreement"), by and between FINOVA
Capital Corporation, a Delaware corporation ("Lender") and Preferred Equities
Corporation, a Nevada corporation ("Borrower"). Unless otherwise defined herein,
all capitalized terms used herein shall have the same meanings as set forth in
the Loan Agreement.
This Letter Agreement is being executed in connection with the
Biloxi Advance described below, to provide to Borrower acquisition financing for
certain property generally described as approximately four and three-tenths
(4.3) acres of land located at 1816 Beach Boulevard, Biloxi, Mississippi (the
"Biloxi Property"), as legally described in the Biloxi Deed of Trust described
in Section 1 below.
This Letter Agreement will confirm certain agreements between
Borrower and Lender concerning the Biloxi Advance, and shall constitute an
amendment and supplement to the Loan Agreement and to the other Documents as
applicable.
1. Biloxi Advance. Upon the terms and subject to the
conditions set forth in this Letter Agreement, Lender shall make a
single-Advance Loan (the "Biloxi Advance") to Borrower in the least amount of:
(a) One Million One Hundred and Seventy-Three Thousand Seven Hundred and Fifty
United States Dollars (U.S. $1,173,750); (b) that amount by which the amount of
Six Million Seven Hundred Thousand United States Dollars (U.S. $6,700,000)
exceeds the unpaid and outstanding principal balance of the Office Note as of
the date hereof; and (c) that amount by which the Maximum Loan Amount exceeds
the unpaid and outstanding principal balance of all Loans as of the date hereof
(prior to giving effect to the Biloxi Advance). The Biloxi Advance shall be
evidenced by a promissory note, in form and substance acceptable to Lender in
its sole discretion, to be dated of even date herewith (the "Biloxi Note"). The
Biloxi Note shall be secured pursuant to, among other things, a Deed of Trust,
Assignment of Rents and Proceeds and Security Agreement with respect to the
Biloxi Property, in priority, form and substance acceptable to Lender in its
sole
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Preferred Equities Corporation
March 20, 1998
Page 2
discretion, to be dated of even date herewith (the "Biloxi Deed of Trust"), as
well as the provisions of the Loan Agreement, and as more fully set forth in
Section 3 below. Borrower shall use the Biloxi Advance to finance the
acquisition of the Biloxi Property and to pay the Biloxi Advance Loan Fee
described in Section 8 below, and to that end Lender shall have no obligation to
make the Biloxi Advance except in connection with Borrower's closing of the
purchase contemplated by that certain Real Estate Purchase and Sale Agreement by
and between Borrower and Biloxi Beach Campground Corp., a Mississippi
corporation, made and entered into as of December 23, 1996, as amended to date
(the "Purchase Agreement").
2. Relationship to Office Note. Lender's consent to the making
of the Biloxi Advance is relying on part upon excess availability under the
Office Note and cross-collateralization of the Biloxi Note with the Headquarters
Property and the FCFC Property. Accordingly, Borrower acknowledges and agrees
that, notwithstanding the provisions of paragraphs 3.10 and 3.11 of the Loan
Agreement, and the applicable provisions in each of the FCFC Deed of Trust and
the Headquarters Deed of Trust, it shall be an additional condition precedent to
the release of the lien of: (a) the lien of the FCFC Deed of Trust on the FCFC
Property and (b) the lien of the Headquarters Deed of Trust on the Headquarters
Property, that in each case the Biloxi Note first shall have been paid in full.
3. Security. Without limitation, as provided in paragraphs
3.1(a) and (b) of the Loan Agreement and the Mortgages now existing or hereafter
arising, the payment and Performance of Borrower's Obligations under or as
evidenced by this Letter Agreement and the Biloxi Note shall be and shall
continue to be secured by the liens and Security Interests granted to Lender
pursuant to the Loan Agreement, as amended and supplemented by this Letter
Agreement, and pursuant to such Mortgages. Furthermore, as security for
Borrower's payment and Performance of all Obligations owed to Lender under the
Documents (as that term is amended by this Letter Agreement), and as further set
forth in the Biloxi Deed of Trust, Borrower hereby grants, transfers and assigns
to Lender a first and prior lien and Security Interest in and to all of
Borrower's right, title and interest in and to all of the following: the Biloxi
Property; all buildings and other improvements now or hereafter erected thereon;
all fixtures, equipment and other personal property now or hereafter located on
or attached or affixed in any manner to the Biloxi Property; all leases, income,
rents, royalties, revenues, issues, accounts receivable, accounts, profits or
proceeds from the Biloxi Property; and other items of collateral in connection
therewith, all as more fully set forth in the Biloxi Deed of Trust. The Biloxi
Deed of Trust shall include, without limitation, prohibitions against further
encumbrances and against subsequent sales, assignments, conveyances or other
transfers of all or any part of the Trust Property therein described.
4. Conditions Precedent. Lender's obligation to make the
Biloxi Advance is subject to the following conditions precedent, all of which
must be satisfied at or prior to
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Preferred Equities Corporation
March 20, 1998
Page 3
the funding of the Biloxi Advance, which in all events must occur on or before
March 20, 1998, and any of which may be waived in writing by Lender at any time
in its sole discretion.
4.1 Borrower shall have executed and delivered to
Lender a fully-executed counterpart of this Letter Agreement.
4.2 Borrower shall have satisfied, as determined by
Lender in its sole discretion, and at Borrower's sole expense, all of
the conditions precedent to an Advance under the Mortgage Loan Facility
set forth in Article V of the Loan Agreement (and to that end, each
reference in such exhibit to a "Project" shall be deemed to refer to
the Biloxi Property, each reference to the "Project Note" shall be
deemed to refer to the Biloxi Note, and each reference to "the Mortgage
Loan Facility" shall be deemed to refer to the Biloxi Advance pursuant
to this Letter Agreement); provided, that the Phase I Environmental
Assessment shall be dated not more than six (6) months prior to the
funding of the Biloxi Advance.
4.3 Lender shall have received from Borrower and
approved a current (dated not more than six (6) months prior to the
funding of the Biloxi Advance) appraisal of the Headquarters Building
and the FCFC Property, performed by a state-certified appraiser,
including without limitation comparable land sales data, indicating
that the FCFC Property and the Headquarters Building have a combined
appraised value of not less than Six Million Seven Hundred Thousand
United States Dollars (U.S. $6,700,000): (a) conforming to MAI
commercial appraisal standards, or (b) in a "restricted" form,
provided, that such appraisal contains supporting market information
confirming the appraised value set forth therein. The appraisal and
appraiser must otherwise be acceptable to Lender in all respects.
4.4 Borrower shall have paid the Biloxi Advance Loan
Fee.
4.5 Borrower and Guarantor shall have provided, and
Lender shall have found satisfactory, updates (covering the period of
time ending not more than ten (10) days prior to the Biloxi Advance) to
the status of litigation matters reported in Exhibit "8.31" to the Loan
Agreement, as well as the status of any new litigation matters not set
forth in such exhibit (or, in the absence of any such new litigation
matters not set forth in such exhibit, an affirmative statement to that
effect). The new litigation matters shall include but shall not be
limited to that certain lawsuit seeking class-action status, filed in
the U.S. Federal District Court for the Northern District of Georgia,
purportedly naming Guarantor among others as a defendant; for this
lawsuit, Lender shall have received a copy of the Complaint, any and
all answers and the
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Preferred Equities Corporation
March 20, 1998
Page 4
docket to date. The status of litigation matters shall also disclose which cases
are covered by insurance.
4.6 Borrower shall have closed the purchase of the
Biloxi Property as contemplated in the Purchase Agreement.
5. Conditions Subsequent.
5.1 On or before Monday, May 4, 1998, Borrower shall
supply documentation to Lender, to the attention of Karen Hrushka at
FINOVA Risk Management, from the Mississippi Power Company ("MPC"),
wherein MPC shall confirm: (a) ownership responsibility for the two
pole-mounted transformers located on the Biloxi Property, and (b)
liability therefor should damage or leakage occur. The contact person
at Borrower with respect to compliance with this condition is Richard
L. Rodriguez.
5.2 On or before Monday, April 20, 1998, Borrower
shall provide to Lender, in form and substance acceptable to Lender in
all respects: (a) an ALTA Survey of the Biloxi Property conforming to
the provisions of paragraph 3 of Exhibit "5.2.2" to the Loan Agreement
and further conforming to the 1997 ALTA/ACSM Minimum Standard Detail
Requirements for an urban-class survey, certified to Lender, including
Table "A" items 1, 2, 3, 4, 7(a), 8, 10, 11, 13, 14, 15 and 16,
together with (b) a revised "survey endorsement" to the Title Policy
required hereunder, with respect to such survey.
5.3 Without limiting any other provision of any
Document, any failure by Borrower to comply with any conditions
subsequent set forth in Section 5.1 or Section 5.2 above shall
constitute an "Event of Default" under and as defined in the Loan
Agreement.
6. Without limiting any other provision of any Document,
Borrower hereby represents, warrants and covenants as follows:
6.1 The fence encroachment disclosed on the survey by
Kenny L. Alston, R.L.S., dated May 26, 1994, revised and corrected
January 14, 1997, and listed as a "Permitted Encumbrance" on Exhibit
"B" of the Biloxi Deed of Trust, will not materially interfere with or
impair in any way Borrower's planned development of the Biloxi Property
for the purpose of selling Units.
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Preferred Equities Corporation
March 20, 1998
Page 5
6.2 The protective covenants of record in that
certain instrument filed for record in the office of the Chancery Clerk
in and for Harrison County, Mississippi and recorded in said office in
Book 284 at Page 408, will not materially interfere with or impair in
any way Borrower's planned development of the Biloxi Property for the
purpose of selling Units.
6.3 Neither Borrower nor Guarantor is a defendant in
that certain lawsuit filed on February 23, 1998, in the United States
District Court for the Northern District of Georgia, Atlanta Division,
Civil Action No. 98-CV-0593, captioned "Robert J. Feeney, individually
and on behalf of all those similarly situated, Plaintiff, v. Mego
Mortgage Corporation, and Jeffrey S. Moore, Defendants." Borrower has
furnished to Lender a true, complete and correct copy of the Complaint.
If at any time during the Term either Borrower and/or Guarantor is
named as a defendant in such lawsuit, Borrower shall notify Lender in
writing within three (3) business days after service of process naming
Borrower and/or Guarantor, as applicable, as a defendant therein, and
furnish Lender by overnight delivery with a true, complete and correct
copy of the Complaint and any other documents so served.
The foregoing representations, warranties and covenants shall be deemed
incorporated into Article VIII of the Loan Agreement for all purposes, and shall
be subject to the provisions of paragraph 8.1 of the Loan Agreement.
7. Incorporation of Other Provisions of Loan Agreement. For
all purposes under the Loan Agreement, including without limitation the
representations, covenants and warranties under Article VIII thereof, the Biloxi
Advance shall be deemed a "transaction made pursuant to this Agreement." The
Biloxi Property shall be deemed a "Project" for the purposes of Article VI of
the Loan Agreement. Each and every right and remedy of Lender with respect to
Advances, Notes and Mortgages shall apply with full force and effect to each of
the Biloxi Advance (which is hereby deemed an "Advance" under the Loan
Agreement), the Biloxi Note (which is hereby deemed a "Note" under the Loan
Agreement), and the Biloxi Deed of Trust (which is hereby deemed a "Mortgage"
under the Loan Agreement).
8. Biloxi Advance Loan Fee. In consideration of Lender's
covenants, agreements and promises under this Letter Agreement, Borrower shall
pay to Lender at the time of the Biloxi Advance the amount of two and one-half
percent (2.50%) of the amount of the Biloxi Advance (the "Biloxi Advance Loan
Fee"). The "good faith" deposit of $5,000 previously paid by Borrower to Lender
in connection with Borrower's application for the Loan contemplated herein shall
be credited toward the Biloxi Advance Loan Fee.
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Preferred Equities Corporation
March 20, 1998
Page 6
9. Lender's Right of First Refusal. During the Receivables
Borrowing Term, Lender shall have the right of first refusal with respect to all
construction financing, hypothecation financing and/or purchase agreements
secured by or in any way relating to the Biloxi Property or any portion thereof,
either solicited by or offered to Borrower. If, while any portion of the Biloxi
Note remains unpaid, Borrower or an affiliate of Borrower wishes to accept an
offer from a third party for such financing or purchase, the entity wishing to
accept the same must give Lender written notice of its intent to do so together
with a copy of the written proposal for the financing or purchase, from the
prospective third party lender in connection with the proposed financing or
purchase. Lender shall have ten (10) business days from receipt of the notice
and the items required to be given to Lender to issue a financing proposal to
either extend such financing or enter into a purchase agreement upon terms
substantially equivalent or better than those contained in the proposal from the
prospective third party lender and failure to do so shall be deemed to be an
election by Lender not to extend such financing or enter into a purchase
agreement. Lender must then issue a commitment within thirty (30) days of
receipt of the financing proposal timely accepted by Borrower. The failure of
Lender to issue a commitment within this period of time shall be deemed to be an
election by Lender not to extend such financing or enter into a purchase
agreement.
10. Definition of "Documents". The definition of "Documents",
as set forth in the Loan Agreement, shall be amended to include this Letter
Agreement, the Biloxi Deed of Trust, and each other document executed and
delivered to Lender in connection with this Letter Agreement. Each reference in
the Loan Agreement to "this Agreement" shall be deemed to refer to the Loan
Agreement as amended and supplemented hereby, and each reference in any other
Document to "the Loan Agreement" shall be deemed to refer to the Loan Agreement
as amended and supplemented hereby.
11. Entire Agreement. This Letter Agreement constitutes the
entire agreement and understanding of the parties with respect to the subject
matter hereof; and the Documents, as amended hereby, supersede all prior written
or oral understandings and agreements between the parties in connection with its
subject matter.
12. Counterparts. This Letter Agreement may be executed in one
or more counterparts, and any number of which having been signed by all the
parties hereto shall be taken as one original.
13. No Novation. Except as expressly provided herein,
Borrower's and Guarantor's respective obligations under the Documents shall
remain in full force and effect and shall not be waived, modified, superseded or
otherwise affected by this Letter Agreement. This Letter Agreement is not a
novation, nor is it to be construed as a release,
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Preferred Equities Corporation
March 20, 1998
Page 7
waiver or modification of any of the terms, conditions, representations,
warranties, covenants, rights or remedies set forth in the Documents, except as
expressly stated herein. To the extent practicable, any provisions of this
Letter Agreement which conflict with any provisions of the Documents shall be
construed to supplement such provisions of the Documents, provided that, in the
event of irreconcilable conflict, the provisions of this Letter Agreement,
construed as narrowly as practicable, shall control.
[SIGNATURE PAGE FOLLOWS]
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Preferred Equities Corporation
March 20, 1998
Page 8
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, a
Delaware corporation
By: /s/ Jeffrey A. Owings
-------------------------------
Name: Jeffrey A. Owings
Its: vice President
Accepted as of March 20, 1998:
PREFERRED EQUITIES CORPORATION,
a Nevada corporation
By: /s/ Charles G. Baltuskonis
Name: Charles G. Baltuskonis
Its: Vice President and Chief Accounting Officer
<PAGE> 1
EXHIBIT 10.145
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (this "Agreement") is made effective as
of the 12th day of August, 1998, by and between DORFINCO CORPORATION, a Delaware
corporation ("Lender"), and PREFERRED EQUITIES CORPORATION, a Nevada corporation
("Borrower").
W I T N E S S E T H :
WHEREAS, Borrower desires to borrow a loan in the amount of up to Four
Million and 00/100 Dollars ($4,000,000.00) (the "Loan") from Lender, and Lender
has agreed to make the Loan to Borrower, all subject to and accordance with the
terms and conditions of this Agreement;
WHEREAS, Borrower's obligations to Lender with respect to the Loan will
be secured by five (5) parcels of undeveloped land located generally in Nye
County, Nevada, and more particularly described in Exhibit "A" attached hereto
and incorporated herein (the "Property").
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and promises of
the parties and subject to the following terms and conditions, Borrower agrees
to borrow from Lender, and Lender agrees to loan to Borrower, the Loan for the
purposes provided herein. The Loan shall be evidenced by a Promissory Note (the
"Note") bearing even date herewith, and repayment thereof shall be secured by a
Deed of Trust, Security Agreement and Fixture Filing (the "Deed of Trust"), this
Agreement and, as described in on Exhibit "B" hereof, that certain loan and
security agreement and that certain deed of trust, pursuant to a First Amendment
to Loan and Security Agreement and a Third Amendment to Deed of Trust,
respectively (collectively, the "Amendments"), and guaranteed by MEGO Financial
Corp., a New York corporation (the "Guarantor"), by the execution of a Guaranty
Agreement in form and content acceptable to Lender (the "Guaranty"). This
Agreement, the Note, the Deed of Trust, the Amendments, the Guaranty, any
assignment of rents or leases, or both, and any and all other documents now or
hereafter executed by Borrower or any other affiliated person or party in
connection with or to evidence or secure payment of the Loan are sometimes
hereafter collectively referred to as the "Loan Documents".
A. DISBURSEMENTS AND MATURITY.
A.1 Conditions to Disbursement. Lender shall disburse the Loan
for the purposes provided herein once Borrower has: (a) provided Lender, at
Borrower's expense, with (w) copies of the recorded plat maps creating the five
(5) parcels of the Property (provided, however, that upon the written request of
Lender at any time prior to the Maturity Date, Borrower shall perform and
deliver to Lender within sixty (60) days of any such request an ALTA survey of
the Property or any one or more parcels thereof), (x) an ALTA lender's policy of
title insurance (the "Title Policy")
1
<PAGE> 2
insuring the lien of the Deed of Trust as a first lien on the Property, in form,
content, and issued by a title insurer acceptable to Lender, (y) an appraisal,
in form, content and performed by a licensed appraiser acceptable to Lender,
showing a combined value of the Property equal to at least $12,000,000.00, and
(z) a phase one environmental assessment report, in form and substance
satisfactory to Lender, for the Property; (b) satisfied all conditions set forth
herein; (c) deposited into escrow (or, in lieu thereof, Lender shall have
disbursed to itself from the Loan proceeds) the following sums: (i) the balance
due and owing on the Closing Date (as hereinafter defined) of the Lender's total
loan commitment fee of $40,000.00; (ii) all closing costs and fees; and (iii)
Lender's reasonable attorney's fees incurred in connection herewith; and (d)
executed and delivered to Lender all Loan Documents except for the Amendments.
The forms of the Amendments are attached hereto as Exhibits "C" and "D",
respectively, and Borrower hereby covenants and agrees that it will execute and
deliver or cause to be executed and delivered the Amendments in substantially
the form and substance of the forms of the Amendments attached hereto, in
recordable form, as applicable, within forty-five (45) days following the
Closing Date.
A.2 Disbursement Amounts. On the Closing Date, the entire amount
of the Loan will be disbursed to Borrower, or, in the event that less than the
entire amount of the Loan is disbursed for any reason, then at least four (4)
business days prior to any requested disbursement date after the Closing Date,
Borrower shall submit to Lender a request for disbursement of Loan proceeds that
shall specify the amount of Loan proceeds Borrower requests be disbursed and the
date on which such disbursement is requested to be made. Lender shall disburse
to Borrower all of the Loan proceeds (or a lesser amount thereof as Borrower may
request) on the Closing Date or the requested Loan proceeds on the requested
disbursement date after the Closing Date, provided, however, that in either
case, the following conditions to disbursement shall have been satisfied:
(a) The requirements set forth in Section A.1 above as to
the conditions for disbursement have been satisfied;
(b) The amount of Loan proceeds requested to be disbursed,
plus the aggregate amount of Loan proceeds previously disbursed by Lender to
Borrower, does not exceed the maximum Loan amount of $4,000,000.00;
(c) The disbursement date is the Closing Date or any date
thereafter requested for any requested disbursement of Loan proceeds, provided,
however, that a disbursement date after the Closing Date must be within the
period commencing on the date (the "Closing Date") that the Deed of Trust is
recorded in the Official Records of the Office of the Recorder of Clark County,
Nevada and ending on the date (the "Final Disbursement Date"), which is the
sixtieth (60th) day after the Closing Date;
(d) No Event of Default, or event which, with the giving of
notice or passage of time or both would become an Event of Default hereunder
shall have occurred and be continuing as of the date of any submission by
Borrower of a request for disbursement or the Closing Date or any other date on
which any disbursement is to be made;
2
<PAGE> 3
(e) The title company issuing the Title Policy shall be
prepared to and shall issue to Lender as beneficiary of the Deed of Trust such
title endorsements as Lender may require in connection with any such
disbursement of Loan proceeds;
(f) Borrower shall have paid to Lender (or, in lieu thereof,
Lender shall have disbursed to itself from the Loan proceeds) a funding fee for
each requested disbursement of Loan proceeds in an amount equal to one percent
(1.0%) of the amount of Loan proceeds requested to be disbursed. Borrower
acknowledges that the aforesaid funding fee is not imposed as a charge for the
use of money, but rather is imposed to permit Lender to recoup its
administrative charges and other costs in disbursing Loan proceeds, and said
funding fee shall in no way be deemed an interest charge; and
(g) After disbursement of any proceeds of the Loan, the
Maximum LTV Ratio would not and shall not exceed 50%. "Maximum LTV Ratio" means
the ratio of the total outstanding principal balance of the Loan to the
appraised values of the five parcels of land comprising the Property. For
purposed of this paragraph (g) only, the appraised values of such five parcels
of land comprising the Property are as follows:
Parcel 1: A 3.76 acre site located generally at the southwest corner of
Calvada Boulevard and Highway 160. Appraised value: $780,000.00.
Parcel 2: A 3.80 acre site located generally at the northwest corner of
Calvada Boulevard and Highway 160. Appraised value: $785,000.00.
Parcel 3: A 31.83 acre site (a circular median) located generally in Calveda
Boulevard between Dandelion Street and Charleston Drive. Appraised
value: $3,760,000.00.
Parcel 4: A 25.45 acre site (irregular shaped) located generally at the
northwest corner of Shoshone Drive and Wheeler Pass Road.
Appraised value: $3,050,000.00.
Parcel 5: A 32.98 acre site (irregular shaped) located between Highway
160 and Pahrump Valley Boulevard, south of Highway 372. Appraised
value: $3,925,000.00.
If Borrower does not request and receive disbursements of Loan proceeds
in the aggregate amount of $4,000,000.00 by the Final Disbursement Date, then
the excess amount of Loan proceeds over the aggregate amount of all
disbursements up to the maximum Loan amount of $4,000,000.00 may not thereafter
be borrowed.
A.3 Use of Proceeds. Borrower shall use the proceeds of the Loan
for general working capital purposes.
A.4 Interest. Interest on the outstanding principal balance of
the Loan will be due and payable as set forth in the Note.
3
<PAGE> 4
A.5 Maturity Date. The outstanding principal balance of the Loan,
together with all accrued and unpaid interest then due and owing and any other
amounts then due and owing under any of the Loan Documents, shall be due and
payable on August 31, 1999 (the "Maturity Date"). The Maturity Date may be
extended for a period of one (1) year (the last day of such extension period is
herein the "Extended Maturity Date"), subject to the payment of an extension fee
in the amount of one and one-half percent (1.5%) of the then outstanding balance
of the Loan, and subject to and in accordance with all other terms and
procedures for the extension of the term of the Loan to the Extended Maturity
Date set forth in the Note.
A.6 Prepayment. The outstanding principal balance of the Loan may
be prepaid in whole or in part at any time prior to the Maturity Date, or, if
Borrower elects to extend the Maturity Date, the Extended Maturity Date, without
penalty or premium, provided, however, that any such prepayment must be
accompanied by the payment of all accrued and unpaid interest on the amount
being prepaid plus any other amounts then due and payable under the Note or any
of the other Loan Documents. Partial prepayments shall be applied to the last
due payment of principal under the Note and shall be in addition to, and not in
lieu of, any other payment then or thereafter due under the Note.
A.7 Non-Revolving Loan. The Loan is a term loan and not a
revolving loan, and amounts borrowed and repaid by Borrower may not be
reborrowed.
A.8 Additional Security. In addition to the Deed of Trust and any
other security document (except the Amendments) given by Borrower or an
affiliate to secure the Loan, the Loan, pursuant to the Amendments, shall also
be cross-collateralized by and cross-defaulted to the promissory notes
evidencing the loans and the deed of trust and other security instruments
described on Exhibit "B" hereto (together with any and all other agreements,
instruments or other documents relating to the documents described on Exhibit
"B" below, collectively, the "Related Loan Documents") securing said loans
(collectively, the "Related Indebtedness") made by Lender or its parent Textron
Financial Corporation to Borrower or its subsidiary corporation Steamboat
Suites, Inc.
A.9 Release of Security. Notwithstanding any other provision of
this Agreement or any other Loan Document to the contrary, and, subject to the
limitation set forth in the proviso below, without regard to whether the Related
Indebtedness has been repaid and satisfied in full, upon the full repayment and
satisfaction of the Loan and any and all other amounts due and owing with
respect to the Loan and any other secured obligations of Borrower to Lender
under the Loan Documents (except for the Related Indebtedness and those arising
under the Amendments), the collateral security in the real and personal property
and property rights and interests encumbered by the Deed of Trust and any other
Loan Document (including the Amendments to the extent of the Loan obligations
secured thereby) shall be released, terminated and reconveyed to the person(s)
entitled thereto, and all other Loan Documents shall be terminated and deemed to
be of no further force and effect without the requirement that any additional
payment of any kind, including a release payment, be made; provided, however and
except that, if there exists with respect to the Related
4
<PAGE> 5
Indebtedness at the time of repayment and performance in full of the Loan a
default or event of default, or any event or circumstance which with the passage
of time or giving of notice would become a default or event of default under the
Related Loan Documents, then the release and reconveyance of the lien of the
Deed of Trust and the release and termination of any other security interest,
encumbrance or collateral assignment or transfer created under any other of the
Loan Documents shall not be granted by Lender for so long as any such default or
event of default or such other event or circumstance is continuing.
B. REPRESENTATIONS, COVENANTS AND WARRANTIES.
Borrower hereby unconditionally represents, covenants and
warrants as follows:
B.l Power. If Borrower or any signatory who signs on its behalf
is a corporation, partnership, limited liability company, or trust, that it is a
corporation duly incorporated, or a partnership, limited liability company, or
trust duly organized, and in any event validly existing under the laws of the
state of its incorporation or origination and duly qualified to do business in
the State of Nevada, with requisite power and authority to (i) incur the
indebtedness evidenced by the Note; (ii) enter into this Agreement and grant the
Deed of Trust; and (iii) enter into any other Loan Documents executed and
delivered to Lender concurrently herewith.
B.2 Authority. That this Agreement, the Note, the Deed of Trust
and all other Loan Documents executed and delivered to Lender concurrently
herewith by Borrower were executed in accordance with the requirements of law,
and, if Borrower or any signatory who signs on its behalf is a corporation,
partnership, limited liability company, or trust, in accordance with any
requirements of its articles of incorporation, articles of partnership, articles
of organization and/or operating agreement, or declaration of trust, and any
amendments thereto, and that the execution of the same, and the full and
complete performance of the provisions thereof, is authorized by its bylaws,
articles of organization, partnership agreement and/or operating agreement, or
declaration of trust, and pursuant to a duly adopted resolution of its board of
directors, partners, members and/or managers or trustees, and will not result in
any breach of, or constitute a default under, or result in the creation of any
lien, charge or encumbrance (other than those contained herein or in any
instrument delivered to Lender concurrently herewith) upon any property or
assets of Borrower under any indenture, mortgage, deed of trust, bank loan or
credit agreement or other instrument or agreement to which Borrower is a party
or by which Borrower is bound or, if applicable, under Borrower's corporate
charter, bylaws, articles of organization, partnership agreement and/or
operating agreement, or declaration of trust.
B.3 Financial Statements. Any and all balance sheets, statements
of income or loss, reconciliation of surplus and financial data of any other
kind heretofore furnished Lender by or on behalf of Borrower and the Guarantor
are true and correct in all material respects, and fairly and accurately present
the financial condition of the subjects thereof as of the dates thereof, and no
material adverse change has occurred in the financial condition reflected
therein since the dates of the most recent financial data submitted to Lender.
During the Loan term, Borrower shall provide
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<PAGE> 6
Lender with such financial information relating to the Borrower, the Guarantor
or the Property as may be required in the Deed of Trust or as Lender may
reasonably request.
B.4 Litigation. Except as disclosed on Exhibit "E" attached
hereto, there are no actions, suits or proceedings (collectively "Proceedings")
pending, or to the knowledge of Borrower threatened, against or affecting
Borrower, the Guarantor, the Property, or involving the validity or
enforceability of the Deed of Trust or the priority of the lien and security
interest thereof, and no event ("Adverse Event") has occurred (including
specifically Borrower's execution of this Agreement, the Note, the Deed of Trust
or any of the other Loan Documents) which will violate in any material respect,
be in conflict with, result in the breach of or constitute (with due notice or
lapse of time, or both) a default under any Legal Requirement (as hereafter
defined), or result in the creation or imposition of any lien, charge or
encumbrance of any nature whatsoever on the Property other than the liens and
security interests created by, or referred to in, the Loan Documents. Borrower
shall give Lender written notice of any pending or threatened Proceeding or any
Adverse Event promptly after Borrower obtains knowledge thereof.
B.5 Permits. In addition to all other conditions to disbursement
set forth in this Agreement, before requesting, or being entitled to, any
disbursement of the Loan, Borrower shall have complied, and shall have caused
the Property to comply, with all Legal Requirements.
B.6 Year 2000 Compliance. Borrower acknowledges that it is aware
of the possible impact of the year 2000 problem (that is, the risk that computer
applications may not be able to properly perform date-sensitive functions after
December 31, 1999) upon its computer applications and on-going business.
Borrower represents that any corrective action reasonably necessary to mitigate
the adverse effects of the year 2000 problem on Borrower's business and
operations will be taken and that Borrower does not currently have any reason to
believe that the year 2000 problem will result in a material adverse change in
Borrower's or any of its affiliates' business condition (financial or
otherwise), operations, properties or prospects, or Borrower's ability to repay
the Loan.
The foregoing representations, covenants and warranties shall
survive until all sums payable pursuant to the Note or this Agreement, or which
are secured by the Deed of Trust or any of the other Loan Documents, have been
paid in full.
C. DEFAULT.
C.l Events of Default. Any of the following shall constitute a
default hereunder (an "Event of Default"):
(a) The occurrence of a default or Event of Default under
the Deed of Trust which continues after any applicable grace or cure period;
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<PAGE> 7
(b) The neglect, failure or refusal of Borrower to keep in
full force and effect any permit, license, consent or approval required
hereunder, or under the Loan Documents, and the failure by Borrower to cure any
such neglect, failure or refusal within twenty (20) days after written notice
thereof is given to Borrower;
(c) The false or misleading nature in any material respect
of any representation or warranty of Borrower contained herein or in any
representation to Lender concerning the financial condition of Borrower or of
the Guarantor, or the reasonable determination by Lender of a material threat to
its security by reason of a material adverse change in the financial condition
of Borrower or the Guarantor;
(d) The occurrence of a default, event of default or other
breach by Borrower, Guarantor, or Borrower's subsidiary corporation, Steamboat
Suites, Inc., under or with respect to any indebtedness or obligations of
Borrower, Guarantor or Steamboat Suites, Inc. to Lender or any of Lender's
affiliates which continues after any applicable grace or cure period; or
(e) The failure of Borrower to execute and deliver or
cause to be executed and delivered the Amendments in substantially the form and
substance as the forms of the Amendments attached hereto, in recordable form
within forty-five (45) days following the Closing Date.
C.2 Acceleration. Upon the occurrence of an Event of Default
hereunder, the entire unpaid balance of the Note including all accrued interest
shall, at the option of Lender, become immediately due and payable and Lender
shall have such rights of enforcement as may be afforded by law, hereunder, or
under the Note, the Deed of Trust or any of the other Loan Documents.
D. REMEDIES.
D.l General. Upon the occurrence of an Event of Default
hereunder, Lender shall have all rights and remedies available to Lender under
the law, hereunder or under the Note (including but not limited to the right to
accelerate the Note), the Deed of Trust or any of the other Loan Documents.
D.2 Right to Advance or Post Funds. Where disputes arise which,
in the good faith opinion of Lender, may endanger the performance of any
covenant contained herein, Lender may, following ten (10) days written notice to
Borrower, enter into such agreements or advance funds for the account of
Borrower without prejudice to Borrower's rights, if any, to recover said funds
from the party to whom paid. Such agreement or agreements may take the form
which Lender, in its discretion, deems proper, including but not limited to
agreements to indemnify a title insurer against possible assertion of lien
claims or to pay disputed amounts to contractors if Borrower is unable or
unwilling to pay the same. All sums paid or agreed to be paid pursuant to any
such undertaking shall be for the account of Borrower, Borrower shall reimburse
Lender for any such
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<PAGE> 8
payments made upon demand therefor, with interest at the rate then applicable
under the Note until date of reimbursement, and such advances and interest shall
be secured by the Deed of Trust.
D.3 Curing of Defaults by Disbursement. Upon the occurrence of an
Event of Default which may be cured by the payment of money, Lender, without
waiving any right of acceleration or foreclosure under the Note or the Deed of
Trust which Lender may have by reason of such default, or any other right Lender
may have against Borrower because of such default, shall have the right to make
such payment from the Loan, thereby curing the default.
D.4 Remedies are Cumulative. All remedies of Lender provided for
herein are cumulative and shall be in addition to any and all other rights and
remedies provided in the Note, the Deed of Trust or any of the other Loan
Documents or by law. The exercise of any rights of Lender hereunder shall not in
any way constitute a cure or waiver of a default hereunder or elsewhere, or
invalidate any act done pursuant to any notice of default, or prejudice Lender
in the exercise of any of its other rights hereunder or elsewhere unless, in the
exercise of said rights, Lender realizes all amounts owed to it hereunder and
under the Note, the Deed of Trust and the other Loan Documents.
D.5 Right of Contest. Borrower shall have the right to contest in
good faith any claim, demand, levy, or assessment by a third party, the
assertion or non-satisfaction of which would constitute an Event of Default
hereunder. Any such contest shall be prosecuted diligently and in a manner not
prejudicial to Lender or the rights of Lender hereunder. In the event that
Lender reasonably determines that such claim, demand, levy or assessment could
adversely affect Lender's interest in the Property, upon demand by Lender,
Borrower shall deposit funds with Lender or obtain and record a bond
satisfactory to Lender in an amount sufficient to cover any amounts which may be
owing in the event the contest may be unsuccessful. Borrower shall make such
deposit or obtain and record such bond, as the case may be, within five (5) days
after demand therefor and, if made by payment of funds to Lender, the amount so
deposited shall be disbursed in accordance with the resolution of the contest to
Borrower or the adverse claimant. The mere fact of any such contest shall not be
deemed prejudicial to Lender or any of its rights hereunder.
E. MISCELLANEOUS.
E.l No Waiver. No waiver of any default or breach by Borrower
hereunder shall be implied from any omission by Lender to take action on account
of such default, and no express waiver shall affect any default other than the
default specified in the waiver and the waiver shall be operative only for the
time and to the extent therein stated. Waivers of any covenant, term, or
condition contained herein shall not be construed as a waiver of any subsequent
breach of the same covenant, term or condition. The consent or approval by
Lender to or of any act by Borrower requiring further consent or approval shall
not be deemed to waive or render unnecessary the consent or approval to or of
any subsequent similar act.
E.2 No Third Parties Benefitted. This Agreement is made
and entered into for the sole protection and benefit of Lender and Borrower. All
conditions of the obligations of Lender
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<PAGE> 9
to make advances hereunder are imposed solely and exclusively for the benefit of
Lender and may be freely modified by Lender with the concurrence of Borrower or
waived by Lender in whole or in part at any time if in its sole discretion it
deems it advisable to do so. No person other than Borrower shall have standing
to require Lender to make any Loan advances or be a beneficiary of this
Agreement or of any of the advances to be made hereunder.
E.3 Intentionally Omitted.
E.4 Notices, Demands and Requests. All notices, demands or
requests provided for or permitted to be given pursuant to this Agreement must
be in writing and shall be deemed to have been properly given or served by
depositing the same with a nationally recognized overnight courier service or in
the United States Mail, postpaid and registered or certified return receipt
requested, and addressed to the addresses set forth on the signature page
hereof. All notices, demands and requests shall be effective upon being
deposited with a nationally recognized courier service or, on the date that is
two (2) business days after such deposit, upon being deposited in the United
States Mail. Rejection or other refusal to accept or the inability to deliver
because of changed address of which no notice was given shall be deemed to be
receipt of the notice, demand or request sent. By giving at least thirty (30)
days written notice hereof, Borrower or Lender shall have the right from time to
time and at any time during the term of this Agreement to change their
respective addresses.
E.5 Authority to File Notices. Borrower irrevocably appoints,
designates, and authorizes Lender as its agent (said agency being coupled with
an interest) to file for record any notice that Lender deems reasonably
necessary or desirable to protect its interest hereunder or under the Note, the
Deed of Trust or any of the other Loan Documents. Lender shall only file such
notices if Borrower fails, within ten (10) days after written demand by Lender,
to do so.
E.6 Expenses. Borrower shall pay promptly all reasonable costs,
charges, and expenses incurred by Lender in connection with the Loan, including
but not limited to commitment fees, loan fees, service charges, title charges,
tax and lien service charges, costs of inspection, recording fees, processing
fees, appraisal fees, attorneys' fees, real property taxes and assessments and
insurance premiums, and any and all fees in consideration of Lender's commitment
to provide the Loan.
E.7 Actions. Lender shall have the right to commence, appear in
or defend any action or proceeding purporting to affect the Property, or the
rights, duties, or liabilities of the parties hereunder, or the disbursement of
any funds. In connection therewith, Lender may incur and pay costs and expenses,
including reasonable attorneys' fees, and Borrower shall pay to Lender on demand
all such costs and expenses and Lender is authorized to disburse funds from the
Loan for said purpose.
E.8 Commissions and Brokerage Fee. Borrower shall indemnify
Lender from any responsibility and/or liability for the payment of any
commission, charge or brokerage fees to
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<PAGE> 10
anyone which may be payable in connection with the making or refinance of the
Loan, it being understood that any such commission, charge, or brokerage fees
will be paid directly by Borrower to the party or parties entitled thereto.
Neither Lender nor Borrower are aware of any person or entity entitled to a
commission, charge or brokerage fee as a result of the Loan.
E.9 Applicable Law. This Agreement and all of the other Loan
Documents are to be governed by and construed in accordance with the laws of the
State of Rhode Island (and Colorado to the extent of the Amendment applicable to
the property located within Colorado) without regard to conflict of laws
principles; provided, however, that the laws of the State of Nevada shall apply
with respect to the procedural and substantive requirements of Nevada real
property and personal property law with request to any foreclosure or other
action to realize all real and personal property collateral security for the
Loan located within the State of Nevada; and provided further, however, that the
laws of the State of Colorado shall apply with respect to the procedural and
substantive requirements of Colorado real property and personal property law
with respect to any foreclosure or other action to realize all real and personal
property collateral security for the Loan located within Colorado. Subject to
the foregoing provisos, the Borrower hereby consents to the non-exclusive
personal jurisdiction of the federal and state courts located in Providence
County, Rhode Island in any and all actions between the Borrower and the Lender
arising under or in connection with this Note, the Loan or any of the Loan
Documents.
E.10 Heirs, Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of the heirs, successors, assigns and
personal representatives of the parties hereto; provided, however, that Borrower
shall not assign its rights hereunder in whole or in part without the prior
written consent of Lender, which such consent may be granted or withheld in the
sole and absolute discretion of Lender. Any such assignment without said consent
shall be void. Lender shall have the absolute right at any time and from time to
time to assign to all affiliates and subsidiaries of Lender and to participants
or others all or certain of its rights and obligations hereunder but no such
assignment shall, without Borrower's written consent, relieve Lender of its
obligations hereunder.
E.11 Time. Time is of the essence of this Agreement and each and
every provision hereof in which time is an element.
E.12 Supplemental Agreement. The provisions of this Agreement are
not intended to supersede the provisions of the Deed of Trust but shall be
construed as supplemental thereto. This Agreement, and all representations and
warranties contained herein, shall remain in effect until the Loan has been paid
in full.
E.13 Legal Requirements. "Legal Requirements" shall mean (i) any
and all present and future judicial decisions, statutes, rulings, directions,
rules, regulations, permits, certificates or ordinances of any governmental
authority in any way applicable to Borrower or the Property, including the
ownership, use, occupancy, possession, operation, maintenance, alteration,
repair or reconstruction thereof, (ii) Borrower's presently or subsequently
effective bylaws and arti-
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cles of incorporation or partnership, limited partnership, joint venture, trust
or other form of business association agreement, (iii) any and all material
terms, provisions and conditions of any commitment between Lender and Borrower
which are to be performed or observed by Borrower, and (iv) any and all material
terms, provisions and conditions of any leases and other contracts (written or
oral) of any nature that relate, in any way, to the Property and to which
Borrower may be bound, including but not limited to any lease or other contract
pursuant to which Borrower is granted a possessory interest in the Property.
E.14 Relationship of Parties. The relationship between Borrower
and Lender is, and at all time shall remain, solely that of debtor and creditor,
and shall not be, or be construed to be, a joint venture, equity venture,
partnership or other relationship of any nature, and Lender neither undertakes
nor assumes any responsibility or duty to Borrower or to any other person with
respect to the Property or the Loan, except as expressly provided in the Loan
Documents; and notwithstanding any other provision of the Loan Documents: (a)
Lender is not, and shall not be construed as, a partner, joint venturer, alter
ego, manager, controlling person or other business associate or participant of
any kind of Borrower or its partners or members and Lender does not intend to
ever assume such status; (b) Lender shall in no event be liable for any debts,
expenses or losses incurred or sustained by Borrower; (c) Lender does not intend
to ever assume any responsibility to any person for the quality, suitability,
safety or condition of the Property; and (d) Lender shall not be deemed
responsible for or a participant in any acts, omissions or decisions of Borrower
or its partners or members.
E.15 Attorneys' Fees and Costs. If any legal action or any
arbitration or other proceeding is brought for the enforcement of this Agreement
or because of an alleged dispute, breach, default or misrepresentation in
connection with any of the provisions of this Agreement, the successful or
prevailing party shall be entitled to recover reasonable attorneys' fees and
other costs incurred in that action or proceeding, in addition to any other
relief to which he may be entitled.
IN WITNESS WHEREOF, the parties hereto have executed this Loan and
Security Agreement the day and year first above written.
Preferred Equities Corporation PREFERRED EQUITIES CORPORATION,
4310 Paradise Road a Nevada corporation
Las Vegas, Nevada 89109
Attn: General Counsel
Telecopy: (702) 369-3194 By: /s/ FREDERICK H. CONTE
----------------------------
Name: Frederick H. Conte
--------------------------
Its: President
---------------------------
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DORFINCO CORPORATION DORFINCO CORPORATION,
c/o Textron Financial Corporation a Delaware corporation
40 Westminster Street
Providence, Rhode Island 02940
Attn: Division Counsel
Telecopy: (401) 621-5040 By: ______________________________
Name: ______________________________
Its: ______________________________
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<PAGE> 13
EXHIBIT "A"
Legal Description
All that real property situated in the State of Nevada, County of Nye, bounded
and described as follows:
Parcel 1:
Lot One (1) Block One (1) of CALVADA VALLEY UNIT NO. 2 as shown by map recorded
October 5, 1970 as File No. 20291 in the Office of the County Recorder of Nye
County, Nevada.
EXCEPTING THEREFROM all of its right, title and interest in and to all of the
minerals, including gas, coal, oil and oil shales as disclosed by Deed recorded
January 10, 1961 in Book 43, Page 374, Official Records, Nye County, Nevada.
Parcel 2:
Lot One hundred forty-eight (148) in Block Sixteen (16) of CALVADA VALLEY UNIT
NO. 6, as shown by map recorded February 5, 1973 as Document No. 36024 in the
Office of the County Recorder of Nye County, Nevada.
EXCEPTING THEREFROM all of its right, title and interest in and to all of the
minerals, including gas, coal, oil and oil shales as disclosed by Deed recorded
January 10, 1961 in Book 43, Page 374, Official Records, Nye County, Nevada.
Parcel 3:
Parcels One (1) and Three (3) of Parcel Map recorded May 24, 1983 as File No.
81177 and amended by Certificate of Amendment recorded June 14, 1983 as File No.
83144 and by Certificate of Amendment recorded December 12, 1983 as File No.
99135 and by Certificate of Amendment recorded March 16, 1992 as File No. 304864
of Official Records, Nye County, Nevada.
Parcel 4:
Parcel Two (2) as shown by Parcel Map recorded April 26, 1994 as File No. 351410
of Official Records, Nye County, Nevada.
Parcel 5:
Lot Forty (40) in Block Six (6) of AMENDED PLAT OF CALVADA VALLEY UNIT 6,
recorded December 28, 1993 as Document No. 345007 in the Office of the County
Recorder of Nye County, Nevada.
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Lots Nineteen (19) and Nineteen A (19A) (to the extent of Preferred Equities
Corporation's reversionary interest in Lot Nineteen A (19A)) of Block Six (6) of
CALVADA VALLEY UNIT NO. 6, recorded February 5, 1973 as File No. 36024 of
Official Records, Nye County, Nevada, more particularly described as Parcel
Nineteen (19) as shown on Parcel Map recorded January 6, 1983 as File No. 72610
of Official Records, Nye County, Nevada.
Lot One (1) in Block Fifteen (15), Lots One hundred seventy-three (173) and One
hundred seventy-four (174) in Block Eleven (11) and Lot Three hundred
twenty-three (323) in Block Six (6) of CALVADA VALLEY UNIT NO. 6, as shown by
map recorded February 5, 1973 as Document No. 36024 in the Office of the County
Recorder of Nye County, Nevada.
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EXHIBIT "B"
1. A loan made by Lender to Borrower in the amount of up to $7,500,000,
evidenced by a promissory note in such amount dated August 9, 1991, and secured
by, among other things, a Loan and Security Agreement dated as of July 31, 1991,
by and between Borrower as borrower and Lender as lender, and guaranteed by MEGO
Financial Corp.
2. A loan made by Textron Financial Corporation, a Delaware corporation and an
affiliate of Lender's ("Textron"), to Borrower's subsidiary, Steamboat Suites,
Inc. ("SSI"), in the amount of up to $15,000,000, evidenced by a promissory note
in such amount dated November 30, 1995, and secured by, among other things, a
deed of trust from SSI to Textron dated October 5, 1994, as amended or restated,
and recorded in the Routt County Clerk and Recorder's office on October 6, 1994,
in Book 701 at Page No. 1795, a first amendment to deed of trust from SSI to
Textron dated February 27, 1995, and recorded in the Routt County Clerk and
Recorder's office on March 22, 1995 in Book 706 at Page 339, a second amendment
to deed of trust from SSI to Textron dated November 29, 1996, and recorded in
the Routt County Clerk and Recorder's office on December 20, 1996 in Book 728 at
Page 320, and as further amended or restated, and guaranteed by Borrower.
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EXHIBIT "C"
WHEN RECORDED MAIL TO:
DORFINCO CORPORATION
c/o Textron Financial Corporation
40 Westminster Street
Providence, Rhode Island 02940
Attention: Margaret R. Hayes-Cote,
Division Counsel
FIRST AMENDMENT TO
LOAN AND SECURITY AGREEMENT
This First Amendment to Loan and Security Agreement (this "Amendment")
is made and entered into as of August 12, 1998, by and between PREFERRED
EQUITIES CORPORATION, a Nevada corporation ("Borrower"), and DORFINCO
CORPORATION, a Delaware corporation ("Lender").
FACTUAL BACKGROUND
A. Under a Loan and Security Agreement dated as of August 12, 1998,
between Lender as lender and Borrower as borrower (the "Loan Agreement"), Lender
has agreed to make a loan in the principal amount of Four Million and 00/100
Dollars ($4,000,000.00) (as defined in the Loan Agreement and herein, the
"Loan") to Borrower. Capitalized terms used herein without definition have the
meanings given to them in the Loan Agreement.
B. Pursuant to the Loan Agreement, the Loan will be cross-collateralized
by and cross-defaulted with that certain Loan and Security Agreement, dated as
of July 31, 1991, between Lender as lender and Borrower as borrower (herein, the
"Related Loan Agreement"), which secures indebtedness of Borrower to Lender in
an amount of up to Seven Million Five Hundred Thousand Dollars ($7,500,000) (the
"Related Loan"), and other deeds of trust and collateral as described in the
Loan Agreement.
C. Each of the Loan and the Related Loan is guaranteed by Mego Financial
Corp., a New York corporation ("Guarantor"), in accordance with (i) with respect
to the Loan, that certain Guaranty Agreement dated of even date herewith, and
(ii) with respect to the Related Loan, that certain Guaranty Agreement dated as
of July 31, 1991 (collectively, the "Guarantees").
D. Borrower is a wholly-owned subsidiary corporation of Guarantor. It is
of material and substantial benefit to Guarantor that the Loan be made to
Borrower, and each of Guarantor and
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Borrower acknowledges that it has received full and adequate consideration for
the incurrence by it of the additional obligations to Lender as set forth in
this Amendment.
E. This Amendment is a "Loan Document" as defined in the Loan Agreement.
F. Lender and Borrower now wish to amend the Related Loan Agreement to
provide that it is cross-defaulted to and cross-collateralized with the
obligations of Borrower with respect to the Loan and any other indebtedness and
obligations of Borrower to Lender.
AGREEMENT
Therefore, Lender and Borrower agree as follows:
1. Recitals. The recitals set forth above in the Factual Background are
true, accurate and correct.
2. Reaffirmation of Related Loan Agreement. Borrower reaffirms all of
its obligations under the Related Loan Agreement, and Borrower acknowledges that
it has no claims, offset or defenses with respect to the payment of any sum due
under the Related Loan Agreement or any other loan documents, promissory notes
or other agreements of any kind evidencing any indebtedness of Borrower to
Lender to which it is a party.
3. Amendment. The Related Loan Agreement is hereby amended as follows:
(a) The occurrence of a breach, default or event of default under
or with respect to the Loan and any Loan Document after the expiration
of any applicable grace period shall be an Event of Default or Default
under the Related Loan Agreement, as amended.
(b) The lien of the Related Loan Agreement shall secure all
indebtedness and other obligations of Borrower with respect to the Loan
and any other indebtedness and obligations of Borrower to Lender, and to
and with all indebtedness and other obligations of Steamboat Suites,
Inc., a Colorado corporation, to Lender or its affiliate, Textron
Financial Corporation, a Delaware corporation.
4. Conditions Precedent. Before this Amendment becomes effective and any
party becomes obligated under it, all of the following conditions shall have
been satisfied at Lender's sole cost and expense in a manner acceptable to
Lender in the exercise of Lender's sole judgment:
(a) Lender shall have received fully executed and acknowledged
originals of this Amendment, the attached consent signed by Guarantor
and any other documents which Lender may require or request in
accordance with this Amendment or the other Loan Documents.
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(b) Lender shall have received reimbursement (or in lieu thereof,
shall have retained Loan proceeds in a sufficient amount to cover such
costs and expenses), in immediately available funds, of all costs and
expenses incurred by Lender in connection with this Amendment, including
charges for title insurance (including endorsements), recording, filing
and escrow charges, fees for appraisal services, and legal fees and
expenses of Lender's counsel. Such costs and expenses may include the
actual costs for services for Lender's in-house staffs, such as legal
and appraisal services.
5. Borrower's Representation and Warranties. Borrower represents and
warrants to Lender as follows:
(a) Accuracy. All representations and warranties made and given
by Borrower herein are true, accurate and correct.
(b) No Default. No Default or Event of Default has occurred and
is continuing under the Related Loan Agreement or this Amendment, and no
event has occurred and is continuing which, with notice or the passage
of time or both, would be a Default or Event of Default.
(c) Property. Borrower continues to lawfully possess and hold
title to the property encumbered by the Related Loan Agreement, as
amended by this Amendment, and the security interests, collateral
assignments and other collateral transfers made by Borrower in the
Related Loan Agreement as amended constitute a first and prior security
interest encumbering that property, subject to permitted exceptions to
title approved by Lender.
6. No Prejudice: Reservation of Rights. This Amendment shall not
prejudice any rights or remedies of Lender under the Loan Documents. Lender
reserves, without limitation, all rights which it has against any indemnitor,
guarantor, or endorser of the promissory note secured by the Related Loan
Agreement.
7. No Impairment. Except as specifically hereby amended, the Related
Loan Agreement shall remain unaffected by this Amendment, and the Related Loan
Agreement shall remain in full force and effect. Nothing in this Amendment shall
impair the security interests, collateral assignments or other collateral
transfers arising under the Related Loan Agreement, which shall remain a
security agreement, creating a first priority security interest in the property
described therein, subject to permitted exceptions to title approved by Lender.
8. Intentionally Omitted.
9. Miscellaneous. If any court of competent jurisdiction determines any
provision of this Amendment to be invalid, illegal or unenforceable, that
portion shall be deemed severed from this Amendment, which shall remain in full
force and effect as though the invalid, illegal or unenforceable portion had
never been a part hereof. This Amendment shall be governed by the laws
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of the State of Nevada, without regard to the choice of law rules of that State.
As used here, the word "includes(s)" means "Include(s), without limitation", and
the word "including" means "including, but not limited to."
BORROWER:
PREFERRED EQUITIES CORPORATION, a Nevada
corporation
By: /s/ Frederick H. Conte
----------------------------------------
Name: Frederick H. Conte
--------------------------------------
Title: President
-------------------------------------
LENDER:
DORFINCO CORPORATION, a Delaware corporation
By:_________________________________________
Name:_______________________________________
Title:______________________________________
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<PAGE> 20
GUARANTOR'S CONSENT
The undersigned Guarantor hereby consents to the terms, conditions and
provisions of the foregoing First Amendment to Loan and Security Agreement and
the transactions contemplated by it. Guarantor hereby affirms the full force and
effectiveness of the Guarantees (as defined therein) and its obligations
thereunder with respect to any indebtedness and obligations of Borrower to
Lender or any of its affiliates guaranteed by Guarantor.
Dated: August 12, 1998
ACKNOWLEDGED BY GUARANTOR:
MEGO FINANCIAL CORP.,
a New York corporation
By: /s/ Richard L. Rodriguez
------------------------------------
Name: Richard L. Rodriguez
----------------------------------
Title: Vice President
---------------------------------
5
<PAGE> 21
EXHIBIT "D"
WHEN RECORDED MAIL TO:
TEXTRON FINANCIAL CORPORATION
40 Westminster Street
Providence, Rhode Island 02940
Attention: Margaret R. Hayes-Cote,
Division Counsel
THIRD AMENDMENT TO COMBINATION DEED OF TRUST,
SECURITY AGREEMENT AND FIXTURE FILING
This Third Amendment to Combination Deed of Trust, Security Agreement
and Fixture Filing (this "Amendment") is made and entered into as of August 12,
1998, by and between STEAMBOAT SUITES, INC., a Colorado corporation ("Grantor"),
and TEXTRON FINANCIAL CORPORATION, a Delaware corporation ("Beneficiary").
FACTUAL BACKGROUND
A. Under a Loan and Security Agreement dated as of August 12, 1998,
between Dorfinco Corporation, a Delaware corporation and an affiliate of
Beneficiary's, as lender ("Lender") and Preferred Equities Corporation as
borrower ("Borrower") (the "Loan Agreement"), Lender has agreed to make a loan
in the principal amount of up to Four Million and 00/100 Dollars ($4,000,000.00)
(as defined in the Loan Agreement and herein, the "Loan") to Borrower.
Capitalized terms used herein without definition have the meanings given to them
in the Loan Agreement.
B. Pursuant to the Loan Agreement, the Loan will be cross-collateralized
by and cross-defaulted with a deed of trust securing a loan in the original
principal amount of $15,000,000 from Beneficiary to Grantor dated October 5,
1994, as amended or restated, and recorded in the Routt County Clerk and
Recorder's office on October 6, 1994, in Book 701 at Page No. 1795, a first
amendment to deed of trust from Grantor to Beneficiary dated February 27, 1995,
and recorded in the Routt County Clerk and Recorder's office on March 22, 1995
in Book 706 at Page 339, a second amendment to deed of trust from Grantor to
Beneficiary dated November 29, 1996, and recorded in the Routt County Clerk and
Recorder's office on December 20, 1996 in Book 728 at Page 320, and as further
amended or restated (herein, the "Deed of Trust"), and other deeds of trust and
collateral as described in the Loan Agreement.
C. The Loan is guaranteed by Mego Financial Corp., a New York
corporation ("Guarantor"), in accordance with that certain Guaranty Agreement
dated of even date herewith
1
<PAGE> 22
(the "Guaranty"). The indebtedness secured by the Deed of Trust is guaranteed by
Borrower, in accordance with a guaranty agreement dated on or about the date of
the Deed of Trust.
D. Borrower is a wholly-owned subsidiary corporation of Guarantor.
Grantor is a wholly-owned subsidiary corporation of Borrower. It is of material
and substantial benefit to Guarantor and Grantor that the Loan be made to
Borrower, and Grantor acknowledges that it has received full and adequate
consideration for the incurrence by it of the additional obligations to
Beneficiary as set forth in this Amendment.
E. This Amendment is a "Loan Document" as defined in the Loan Agreement.
F. Grantor and Beneficiary now wish to amend the Deed of Trust to
provide that it is cross-defaulted to and cross-collateralized with the
obligations of Borrower with respect to the Loan and any other indebtedness and
obligations of Borrower to Beneficiary or Lender, and to and with the
obligations of Steamboat Suites, Inc., a Colorado corporation, with respect to
all indebtedness and other obligations of Steamboat Suites, Inc. to Beneficiary.
AGREEMENT
Therefore, Grantor and Beneficiary agree as follows:
1. Recitals. The recitals set forth above in the Factual Background are
true, accurate and correct.
2. Reaffirmation of Deed of Trust. Grantor reaffirms all of its
obligations under the Deed of Trust, and Grantor acknowledges that it has no
claims, offset or defenses with respect to the payment of any sum due under the
Deed of Trust or any other loan documents, promissory notes or other agreements
of any kind evidencing any indebtedness of Grantor to Beneficiary to which it is
a party.
3. Amendment. The Deed of Trust is hereby amended as follows:
(a) The occurrence of a breach, default or event of default
under or with respect to the Loan and any Loan Document after expiration
of any applicable grace period shall be an Event of Default under this
Deed of Trust, dated October 5, 1994, as amended or restated, and
recorded in the Routt County Clerk and Recorder's office on October 6,
1994, in Book 701 at Page No. 1795, as amended by a first amendment to
deed of trust from Grantor to Beneficiary dated February 27, 1995, and
recorded in the Routt County Clerk and Recorder's office on March 22,
1995 in Book 706 at Page 339, as further amended by a second amendment
to deed of trust from Grantor to Beneficiary dated November 29, 1996,
and recorded in the Routt County Clerk and Recorder's office on December
20, 1996 in Book 728 at Page 320, and as amended by that certain Third
Amendment to Combination Deed of
2
<PAGE> 23
Trust, Security Agreement and Fixture Filing dated as of August 12,
1998, between Grantor and Beneficiary.
(b) The lien of this Deed of Trust shall secure all indebtedness
and other obligations of Preferred Equities Corporation, with respect to
the Loan and any other indebtedness and obligations of Preferred
Equities Corporation to Beneficiary or Lender, and to and with all
indebtedness and other obligations of Steamboat Suites, Inc., a Colorado
corporation, to Beneficiary.
4. Conditions Precedent. Before this Amendment becomes effective and any
party becomes obligated under it, all of the following conditions shall have
been satisfied at Grantor's sole cost and expense in a manner reasonably
acceptable to Beneficiary:
(a) Beneficiary shall have received fully executed and
acknowledged originals of this Amendment, the attached consents signed
by Guarantor and Borrower, as borrower and guarantor, and any other
documents which Beneficiary may require or request in accordance with
this Amendment or the other Loan Documents.
(b) Beneficiary shall have received reimbursement (or in lieu
thereof, shall have retained Loan proceeds in a sufficient amount to
cover such costs and expenses), in immediately available funds, of all
costs and expenses incurred by Beneficiary in connection with this
Amendment, including charges for title insurance (including
endorsements), recording, filing and escrow charges, fees for appraisal
services, and legal fees and expenses of Beneficiary's or Lender's
counsel. Such costs and expenses may include the actual costs for
services for Beneficiary's or Lender's in-house staffs, such as legal
and appraisal services.
5. Grantor's Representation and Warranties. Grantor represents and
warrants to Beneficiary as follows:
(a) Accuracy. All representations and warranties made and given
by Grantor herein are true, accurate and correct.
(b) No Default. No Default or Event of Default has occurred and
is continuing under the Deed of Trust or this Amendment, and no event
has occurred and is continuing which, with notice or the passage of time
or both, would be a Default or Event of Default.
(c) Property. Grantor continues to lawfully possess and hold fee
simple title to the property encumbered by the Deed of Trust, as amended
by this Amendment, and the Deed of Trust as amended is a first and prior
lien on that property, subject to permitted exceptions to title approved
by Beneficiary.
6. No Prejudice: Reservation of Rights. This Amendment shall not
prejudice any rights or remedies of Beneficiary or Lender under the Loan
Documents. Each of Beneficiary and Lender
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<PAGE> 24
reserves, without limitation, all rights which it has against any indemnitor,
guarantor, or endorser of the promissory note secured by the Deed of Trust.
7. No Impairment. Except as specifically hereby amended, the Deed of
Trust shall remain unaffected by this Amendment, and the Deed of Trust shall
remain in full force and effect. Nothing in this Amendment shall impair the
liens of the Deed of Trust, which shall remain a deed of trust with the power of
sale, creating a first lien(s) encumbering the property described therein,
subject to permitted exceptions to title approved by Beneficiary.
8. Disclosure to Title Company. Without notice to or the consent of
Grantor, Beneficiary may disclose to any title insurance company which insures
any interest of Beneficiary under the Deed of Trust, as amended hereby (whether
as primary insurer, coinsurer or reinsurer) any information, data or material in
Beneficiary's possession relating to Grantor, the indebtedness secured by the
Deed of Trust, as amended hereby, and/or the property secured by the Deed of
Trust.
9. Miscellaneous. If any court of competent jurisdiction determines any
provision of this Amendment to be invalid, illegal or unenforceable, that
portion shall be deemed severed from this Amendment, which shall remain in full
force and effect as though the invalid, illegal or unenforceable portion had
never been a part hereof. This Amendment shall be governed by the laws of the
State of Colorado, without regard to the choice of law rules of that State. As
used here, the word "includes(s)" means "Include(s), without limitation", and
the word "including" means "including, but not limited to."
GRANTOR:
STEAMBOAT SUITES, INC., a Colorado corporation
By: /s/ FREDERICK H. CONTE
------------------------------------------
Name: Frederick H. Conte
----------------------------------------
Title: President
---------------------------------------
BENEFICIARY:
TEXTRON FINANCIAL CORPORATION, a
Delaware corporation
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
4
<PAGE> 25
STATE OF NEVADA
COUNTY OF CLARK
This instrument was acknowledged before me on August 12, 1998 by Frederick H.
Conte as President of Steamboat Suites, Inc., a Colorado corporation.
/s/ MARY A. FAIR
[NOTARY PUBLIC SEAL] ------------------------------------
Notary Public
My commission expires: Oct. 30, 1998
STATE OF ____________
COUNTY OF ___________
This instrument was acknowledged before me on ________________, 1998 by
_______________ as ______________ of Textron Financial Corporation, a Delaware
corporation.
------------------------------------
Notary Public
My commission expires: _____________
<PAGE> 26
CONSENTS
The undersigned hereby consent to the terms, conditions and provisions
of the foregoing Third Amendment to Combination Deed of Trust, Security
Agreement and Fixture Filing and the transactions contemplated by it. Guarantor
hereby affirms the full force and effectiveness of its guaranty agreement and
obligations thereunder with respect to any indebtedness and obligations of
Grantor and Borrower guaranteed by Guarantor. Borrower hereby affirms the full
force and effectiveness of its obligations to Lender under the Loan Documents
and its guaranty agreement and obligations with respect to any indebtedness and
obligations of Grantor to Beneficiary guaranteed by Borrower.
Dated: August 12, 1998
ACKNOWLEDGED:
PREFERRED EQUITIES CORPORATION,
a Nevada corporation
By: /s/ FREDERICK H. CONTE
----------------------------------
Name: Frederick H. Conte
--------------------------------
Title: President
-------------------------------
ACKNOWLEDGED BY GUARANTOR:
MEGO FINANCIAL CORPORATION,
a New York corporation
By: /s/ RICHARD L. RODRIGUEZ
----------------------------------
Name: Richard L. Rodriguez
--------------------------------
Title: Vice President
-------------------------------
6
<PAGE> 27
STATE OF NEVADA
COUNTY OF CLARK
This instrument was acknowledged before me on August 12, 1998 by Frederick H.
Conte as President of Preferred Equities Corporation, a Nevada corporation.
/s/ MARY A. FAIR
[NOTARY PUBLIC SEAL] ------------------------------------
Notary Public
My commission expires: Oct. 30, 1998
STATE OF NEVADA
COUNTY OF CLARK
This instrument was acknowledged before me on August 12, 1998 by Richard L.
Rodriguez as Vice President of Mego Financial Corporation, a New York
corporation.
/s/ MARY A. FAIR
[NOTARY PUBLIC SEAL] ------------------------------------
Notary Public
My commission expires: Oct. 30, 1998
<PAGE> 28
EXHIBIT "E"
LITIGATION REPORT
1. ROBERT J. FEENEY vs. MEGO MORTGAGE CORPORATION, JEFFREY S. MOORE, AND MEGO
FINANCIAL CORP.
United States District Court
Northern District, Atlanta Georgia
Case No. 1:98CV0593-CAM; filed February 23, 1998
On February 23, 1998, an action was filed in the United States District
Court of Georgia, Civil Action No. 1:98CV0593-CAM by Robert J. Feeney,
plaintiff, as a purported class action against Mego Mortgage Corporation
and Jeffrey S. Moore, the former President and Chief Executive Officer of
Mego Mortgage Corporation. The complaint alleges, among other things, that
the defendants violated the federal securities laws in connection with the
preparation and issuance of certain Mego Mortgage Corporation's financial
statements. The named plaintiff seeks to represent a class consisting of
purchasers of the common stock of Mego Mortgage Corporation between April
11, 1997 and December 18, 1997, and seeks other such relief as the Court
may deem just and proper. Mego Financial Corp. ("the Company") was served
on July 30, 1998 with an amended complaint which, among other things, adds
Mego Financial Corp. as a defendant, adds John Cole, Trent Hildebrand,
Burt W. Price and Frank J. Murphy as plaintiffs and alleges an expansion
of the purported class to certain purchaser's of Mego Mortgage
Corporation's common stock from April 11, 1997 through May 20, 1998. The
Company's counsel have not completed their review of the above matter;
however, the Company was not the parent company of Mego Mortgage
Corporation at the time when the matters which are cited in the
above-described action occurred. The Company does not believe that any
judgment obtained will have a material adverse effect on the Company's or
Preferred Equities Corporation's business or financial condition.
2. THOMAS J. MULVEY vs. PREFERRED EQUITIES CORPORATION a.k.a. CALVADA SPRINGS
CORPORATION
District Court, Clark County, Nevada
Case No. A371479; filed March 26, 1997 and served March 31, 1997
The Plaintiff filed this personal injury lawsuit on March 26, 1997 and is
seeking (i) general damages in excess of $10,000 and (ii) special damages
in excess of $10,000 for medical expenses, loss of income/wages,
attorneys' fees, costs of suit and interest allowed by law. The suit is
based on a third party assault and battery upon Plaintiff while entering
upon Defendant's property. The assailant was not an employee, agent or
servant of the Defendant. The Defendant's insurance carrier has accepted
the case for insurance defense, subject to the limits of the Defendant's
comprehensive general liability insurance policy maintained with Reliance
Insurance Company ("Policy"). The Policy provides $1MM coverage per
occurrence and $2MM aggregate coverage for all occurrences. In
1.
<PAGE> 29
this connection, Defendant also maintains a supplemental umbrella liability
insurance policy with Federal Insurance Company ("Umbrella Policy") for
$20MM additional coverage for any amounts exceeding the $2MM Policy limit,
or an aggregate of $22MM combined insurance coverage. The Company is of
opinion that (i) the case is fully insured (ii) the Company has valid
defenses and (iii) any judgement obtained will not have a material adverse
effect on the Company's business or financial condition.
3. ROBERT SANBORN AND ERLINE SANBORN vs. PREFERRED EQUITIES CORPORATION d.b.a.
RAMADA VACATION SUITES
District Court, Clark County, Nevada
Case No. A382124; filed December 9, 1997 and served January 15, 1998.
The Plaintiffs' filed this personal injury lawsuit on December 9, 1997 and
are seeking (i) general damages in excess of $10,000 and (ii) special
damages in excess of $10,000 for medical expenses, loss of income/wages,
emotional distress and (iii) punitive damages in excess of $10,000, plus
attorneys' fees and costs of suit. The suit is based on a third party
assault and battery upon Plaintiff Robert Sanborn in the presence of his
wife, Earline Sanborn, while entering upon Defendant's property. The
assailants were not employees, agents or servants of Defendant. The
Defendant's insurance carrier, Reliance Insurance Company, has accepted the
case for insurance defense, subject to the limits of the comprehensive
general liability policy ("Policy"). In this connection, Defendant also
maintains a supplemental umbrella liability insurance policy with Federal
Insurance Company for $20 MM additional coverage for any amounts exceeding
the $2 MM limits of the Policy or an aggregate of $22 MM combined insurance
coverage. The Company is of opinion that (i) the case is fully insured (ii)
the Company has valid defenses and (iii) any judgement obtained will not
have a material adverse effect on the Company's business or financial
condition.
4. LILLIAN MCGILL vs. PREFERRED EQUITIES CORPORATION
District Court, Washoe County, Nevada
Case No. CV-N-98-00307-HDM; filed June 8, 1998 and served June 15, 1998
Plaintiff filed suit under Title VII of the 1964 Civil Rights Act.
Plaintiff alleges sexual harassment and an offensive work environment.
Plaintiff seeks damages in the amount of $300,000.00. Defense of this
matter has been tendered to the company's insurance carrier. The Company is
of opinion that the case is insured.
5. JAMES BRADLEY and CAROLE BRADLEY vs. WHITE SANDS RAMADA INN RESORTS and
FRANK VILIMORE
First Circuit Court, State of Hawaii
Civil No. 98-1932-04
Plaintiff filed suite alleging negligence. Plaintiff was illegally parked
in a handicapped
2.
<PAGE> 30
parking space. Plaintiff suffered heart pains when told to move his
vehicle and has sued for negligence. Plaintiff has offered to settle for
$5,000.00. The case has been referred to the Company's insurance defense
carrier and is fully insured.
6. GUS CHAFOULEAS vs. PREFERRED EQUITIES CORPORATION d.b.a. RAMADA VACATION
SUITES
District Court, Clark County, Nevada
Case No. A389814; filed June 19, 1998 and served on June 24, 1998
Plaintiff filed suit alleging negligence. After swimming Plaintiff slipped
and fell when exiting the Defendant's swimming pool located at 100 Winnick
Avenue, Las Vegas, Nevada. Plaintiff sustained injury to his shoulder and
has sued Defendant for negligence. Plaintiff seeks general damages in
excess of $10,000. The case has been referred to Defendant's insurance
carrier for insurance defense. The Company is of opinion the case is fully
insured.
3.
<PAGE> 31
PROMISSORY NOTE
$4,000,000.00 Las Vegas, Nevada
Funding Date: The date funds August 12, 1998
are wire transferred by Lender
FOR VALUE RECEIVED and pursuant to the terms of this Promissory Note
("Note"), the undersigned, PREFERRED EQUITIES CORPORATION, a Nevada corporation
("Maker") promises to pay to the order of DORFINCO CORPORATION, a Delaware
corporation ("Lender") (the Lender and all subsequent holders of this Note being
hereinafter referred to as the "Holder") at 40 Westminster Street, Providence,
Rhode Island 02940, Attention: Accounting Department, or at such other place as
the Holder hereof may designate in writing, the principal sum of up to Four
Million and no/100 Dollars ($4,000,000.00), or so much as may be outstanding
hereunder from time to time (the "Loan"), together with interest on the unpaid
principal balance of such indebtedness from time to time outstanding, at the
rate or rates hereinafter set forth.
1. SECURITY.
The payment of this Note and all interest, fees and charges herein is
evidenced and/or secured by (a) a first lien Deed of Trust, Security Agreement
and Fixture Filing ("Deed of Trust") by Maker for the benefit of Lender, of even
date herewith encumbering certain real property (the "Property") located in the
County of Nye, State of Nevada, and described more particularly on Exhibit "A"
to the Deed of Trust; (b) certain other real and personal property and owned by
Maker or its subsidiaries, encumbered by certain deeds of trust, or security
agreements, as amended, described on Exhibit "B" to the Loan Agreement (as
defined herein); (c) a Loan and Security Agreement ("Loan Agreement") of even
date herewith between Maker as borrower and Lender as lender; and (d) such other
documents which recite that they evidence, relate to or have been given as
security for this Note (all the aforementioned documents shall herein be
referred to as "Security Documents").
2. INTEREST RATE.
1. On and after the Funding Date (until maturity or default as hereinafter
provided), interest shall accrue and be due monthly in arrears at the rate per
annum of three percent (3%) above the "Prime Rate" as announced by Chase
Manhattan Bank, N.A. or the successor thereto (the "Basic Interest Rate"), with
the Basic Interest Rate for any given calendar month being calculated by using
the Prime Rate in effect on the first (1st) day of each month during the term
hereof, provided, however, the Basic Interest Rate shall not be less than ten
and one-half percent (10.5%) per annum at any time during the original term of
this Note and any extension. In the event Chase Manhattan Bank, N.A., or any
successor thereto, shall discontinue announcement of said Prime Rate, a
comparable index designated by Holder shall be used in calculating the Basic
Interest Rate. Interest
1
<PAGE> 32
under this Note shall be calculated based on the actual number of days of
interest accrual using a year of 360 days.
2. (a) Interest that will accrue for the period commencing with the
Funding Date and continuing through August 31, 1998 at the Basic Interest Rate
on the principal sum advanced shall be paid on the first day of the first full
month after the Funding Date.
(b) Commencing on the first (1st) day of September, 1998 and
continuing on the first (1st) day of each and every month thereafter through and
including the Maturity Date or the Extended Maturity Date (as defined below), as
applicable, all interest accrued at the Basic Interest Rate shall be due and
payable monthly in arrears.
(c) Unless the term of this Note is extended as provided below, on
August 31, 1999 (the "Maturity Date"), or on such earlier date as this Note
becomes due and payable, whether by acceleration or otherwise, the entire
outstanding principal balance hereof, together with accrued but unpaid interest
thereon, and all other sums owing to Holder hereunder or under the Security
Documents, shall be due and payable in full.
3. APPLICATION OF PAYMENT.
All principal, interest and any other amounts due under this Note shall be
payable in lawful money of the United States of America at the place or places
above stated. All payments shall be credited first to costs and expenses, if
any, incurred by Holder in collecting any amounts due hereunder, second to any
Late Charges (as hereinafter defined) and interest accrued at the Default Rate,
third to past due interest, and fourth to principal and any other amounts due
hereunder or under the Security Documents.
4. EXTENSION.
The term of the Loan may be extended at the option of the Maker for an
additional one (1) year period (the "Extended Term") (the last day of the
Extended Term shall be the "Extended Maturity Date") in accordance with and
subject to the following terms and conditions: (a) there shall have been no
monetary default whatsoever of any kind that extended beyond any cure period
during the initial term of the Loan (including, but not limited to, non-payment
of taxes and insurance premiums) and there shall have been no non-monetary
default which remains uncured at the time of Maker's election to extend the term
of the Loan; (b) there has been no material adverse change in the Property or in
the business or financial condition of Maker that would adversely affect its
ability to perform according to the Security Documents; (c) Maker may only
exercise the option to extend the term of the Loan by giving written notice to
Holder not less than thirty (30) days prior to the expiration of the initial
term of the Loan, together with the payment of an extension fee in the amount of
one and one-half percent (1.5%) of the then outstanding balance of the Loan; (d)
interest will accrue on all principal outstanding hereunder throughout the
Extended Term at the Basic Interest Rate; (e) during the Extended Term, monthly
payments shall be made in arrears equal to the interest
2
<PAGE> 33
accrued at the Basic Interest Rate plus fixed principal payments in the
following amounts and on the following dates:
(i) On November 30, 1999, an installment of principal in an
amount necessary and sufficient to cause the total outstanding
principal balance remaining under the Note to be Three Million
Dollars ($3,000,000.00) or less;
(ii) On February 28, 2000, an installment of principal in an
amount necessary and sufficient to cause the outstanding
principal balance remaining under the Note to be Two Million
Dollars ($2,000,000.00) or less;
(iii) On May 31, 2000, an installment of principal in an
amount necessary and sufficient to cause the outstanding
principal balance remaining under the Note to be One Million
Dollars ($1,000,000.00); and
(iv) On the Extended Maturity Date, which is August 31, 2000,
the entire outstanding principal balance of the Loan, plus all
accrued and unpaid interest thereon and any other amounts then
due and payable under the Note or any of the Loan Documents
shall be due and payable;
(f) Maker shall provide Holder with an updated title insurance endorsement and
such other documentation and evidence reasonably requested by Holder, to confirm
Holder's lien position and other interests under the Security Documents; and (g)
Maker shall pay, prior to the commencement of the Extended Term, all expenses
incurred by Holder for which Maker is billed prior and in connection with the
extension, whether or not it is consummated, unless failure to consummate the
extension is attributable to the sole fault of Holder.
5. LATE PAYMENT CHARGES.
In the event that any monthly payment is not received at the above said
address (or at such other place as is designated pursuant to the terms hereof)
before the tenth (10th) day after the due date thereof, in addition to any other
permitted charges hereunder, a one-time late payment fee ("Late Charge") shall
be due and owing to Holder in the amount of five percent (5%) of each monthly
payment as it becomes past due and, if the Note has been accelerated, an
additional five percent (5%) of the accelerated balance if not paid when due.
Holder shall have no obligation to accept any payments hereunder not accompanied
by all outstanding late payment fees. Notwithstanding anything contained herein
or in any Security Document, this paragraph is not intended to, and shall not,
create any grace period or indulgence by Holder with respect to the punctual
payment by Maker of all sums owed Holder, nor shall this paragraph in any way
hinder, prevent or delay Holder from exercising any remedy which it may have
hereunder or under any Security Document, or at law or in equity, with respect
to Maker's failure timely to make any payment when due. Maker acknowledges that
the Late Charge is not imposed as a charge for the use
3
<PAGE> 34
of money, but rather is imposed to permit Holder to recoup its administrative
charges and other costs in dealing with loans not paid on time, and the Late
Charge shall in no way be deemed an interest charge.
6. INTEREST UPON DEFAULT.
In the event that any payment of principal, interest, Late Charge or any
prepayment premium under this Note is not paid before the tenth (10th) day after
its due date, whether or not by reason of acceleration, and/or if there occurs a
default under the Security Documents, or in or under any other document or
instrument evidencing, securing, or otherwise relating to the indebtedness
evidenced hereby, which default is not cured within the applicable notice and/or
grace period, if any, expressly provided therefor, such failure shall constitute
a default hereunder, and such amount shall bear interest from the due date
thereof until paid at the rate of five percent (5%) per annum in excess of the
Basic Interest Rate (the "Default Rate").
7. ACCELERATION.
In the event of any default by Maker hereunder or under the Security
Documents, and after the expiration of any applicable cure periods specified
hereunder or under the Security Documents, Holder may at its option, in addition
to any other remedies to which it may be entitled, declare the total unpaid
principal balance of the indebtedness evidenced hereby, together with all
accrued but unpaid interest thereon and all other sums owing, immediately due
and payable and all such amounts shall thereafter bear interest at the Default
Rate; provided, however, the Default Rate shall not accrue on any Late Charges.
All such interest shall be paid at the time of and as a condition precedent to
the curing of any default should Holder, in its sole discretion, allow such
default to be cured. Time is of the essence in this Note.
8. PREPAYMENT.
(a) The Loan may be prepaid at any time, in whole or in part, without
penalty or premium, upon thirty (30) days prior written notice to Holder, and
upon payment, in addition to such outstanding principal amount, all accrued and
unpaid interest and all other amounts due hereunder shall be paid.
(b) Notwithstanding anything in this Note or any Security Document to the
contrary, no prepayment premium shall be charged with respect to the proceeds of
any insurance policy or condemnation which are applied by Holder to the
principal balance of this Note and any such application of insurance or
condemnation proceeds shall be deemed a permitted prepayment hereunder.
9. LIMIT OF VALIDITY.
All agreements between the Maker and the Holder hereof are expressly
limited so that in no contingency or event whatsoever, whether by reason of
advancement of the proceeds hereof,
4
<PAGE> 35
acceleration of maturity of the unpaid principal balance hereof, or otherwise,
shall the amount paid or agreed to be paid to the Holder hereof for the use,
forbearance or detention of the money to be advanced hereunder exceed the
highest lawful rate permissible under applicable usury laws. If, from any
circumstances whatsoever fulfillment of any provision hereof or of the Security
Documents shall involve transcending the limit of validity prescribed by any law
which a court of competent jurisdiction may deem applicable hereto, then, ipso
facto, the obligation to be fulfilled shall be reduced to the limit of such
validity, and, if from any circumstance the Holder hereof shall ever receive as
interest an amount which would exceed the highest lawful rate, such amount which
would be excessive interest shall be applied to the reduction of the unpaid
principal balance due hereunder and not to the payment of interest. This
provision shall control every other provision of all agreements between the
Maker and the Holder hereof.
10. MISCELLANEOUS.
(a) Any remittances hereunder by check or draft shall be credited on the
date of receipt subject to the condition that such check or draft may be handled
for collection in accordance with the practice of the collecting bank or banks
and any receipt issued therefore shall be void unless the amount due is actually
received by Holder hereof.
(b) If interest, principal or other sum owing under this Note is not paid
when due, after giving effect to any applicable grace period, whether at
maturity or by acceleration, the Maker promises to pay all reasonable costs of
collection, including but not limited to, attorneys' fees and all expenses
incurred by the Holder in connection with the collection of this Note, the
protection or realization of the collateral and enforcement of any guaranty on
account of such collection, whether or not suit is filed hereon. Such fees shall
include, without limitation, costs and attorneys' fees incurred in any appeal.
(c) Maker and all sureties, endorsers, guarantors and all other parties
now or hereafter liable for the payment of this Note, in whole or in part,
hereby severally waive presentment for payment, demand and protest and notice of
protest, acceleration, or dishonor and non-payment of this Note, and expressly
consent to any extension of time of payment hereof or of any installment hereof,
to the release of any party liable for this obligation, to the release, change
or modification of any collateral posted as security for the payment of this
Note, and any such extension, modification or release may be made without notice
to any of said parties and without in any way affecting or discharging this
liability, provided Maker must consent to any change or modification of
collateral.
(d) No single or partial exercise of any power hereunder shall preclude
other or further exercise thereof or the exercise of any other power. The Holder
hereof shall at all times have the right to proceed against any portions of
security held herefor in such order and in such manner as the Holder may deem
fit, without waiving any rights with respect to any other security. No delay or
omission on the part of Holder hereof in exercising any right or remedy
hereunder or the acceptance of one or more installments from any person after a
default hereunder or under the Security Documents shall operate as a waiver of
such right or remedy or of any other right or remedy under this Note nor as a
waiver of such right or remedy in connection with any future default.
5
<PAGE> 36
(e) If more than one person has executed this Note or becomes obligated
under this Note, the obligations and covenants of each such person shall be
joint and several. The release by Holder of any party liable on this Note shall
not operate to release any other party liable hereon.
(f) In the event any one or more of the provisions contained in this Note
shall for any reason be held to be invalid, illegal, or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision of this Note, but this Note shall be construed as if such
invalid, illegal or unenforceable provision had never been contained herein.
(g) All notices hereunder shall be deemed to have been duly given if
delivered in accordance with the provisions set forth in Paragraph 3.07 of the
Deed of Trust; references to notice provisions contained therein relating to (i)
the Grantor thereunder shall be applicable to Maker, and (ii) the Beneficiary
thereunder shall be applicable to Holder.
(h) This Note may not be waived, changed, modified or discharged orally,
except by an agreement in writing signed by the party against whom the
enforcement of waiver, change, modification or discharge is sought.
(i) The underlined words appearing at the commencement of the paragraphs
are included only as a guide to the contents thereof and are not to be
considered as controlling, enlarging or restructuring the language or meaning of
those paragraphs.
(j) As used herein, the terms "Maker" and "Holder" shall be deemed to
include their respective heirs, successors, legal representatives and assigns,
whether voluntary, by action of the parties, or involuntary by operation of law.
(k) This Note is to be governed by and construed in accordance with the
laws of the State of Rhode Island without regard to conflict of laws principles;
provided, however, that the laws of the State of Nevada shall apply with respect
to the procedural and substantive requirements of Nevada real property and
personal property law with request to any foreclosure or other action to realize
all real and personal property collateral security for the Loan. Subject to the
foregoing proviso, the Maker hereby consents to the non-exclusive personal
jurisdiction of the federal and state courts located in Providence County, Rhode
Island in any and all actions between the Maker and the Holder arising under or
in connection with this Note, the Loan or any of the Security Documents.
FOR AND IN CONSIDERATION OF HOLDER'S ADVANCEMENT OF THE PRINCIPAL SUM HEREUNDER
IN THE AMOUNT OF $4,000,000.00, THE MAKER, BEING AN EXPERIENCED DEVELOPER AND
PARTICIPANT IN SOPHISTICATED REAL ESTATE VENTURES, AND HAVING CONSULTED WITH
COUNSEL OF ITS CHOOSING, HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT
TO ANY ACTION OR PROCEEDING (I) BROUGHT BY THE MAKER, THE HOLDER OR ANY OTHER
PERSON RELATING TO (A) THE LOAN OR (B) THE SECURITY DOCUMENTS, OR (II) TO WHICH
THE HOLDER IS A PARTY. THE MAKER HEREBY AGREES THAT THIS NOTE CONSTITUTES A
WRITTEN CONSENT TO WAIVER OF TRIAL BY JURY, AND THE MAKER DOES HEREBY CONSTITUTE
AND
6
<PAGE> 37
APPOINT THE HOLDER ITS TRUE AND LAWFUL ATTORNEY-IN-FACT, WHICH APPOINTMENT IS
COUPLED WITH AN INTEREST, AND THE MAKER DOES HEREBY AUTHORIZE AND EMPOWER THE
HOLDER, IN THE NAME, PLACE AND STEAD OF THE MAKER, TO FILE THIS NOTE WITH THE
CLERK OR JUDGE OF ANY COURT OF COMPETENT JURISDICTION AS A STATUTORY WRITTEN
CONSENT TO WAIVER OF TRIAL BY JURY. THE MAKER ACKNOWLEDGES THAT ITS WAIVER OF
TRIAL BY JURY HAS BEEN MADE KNOWINGLY, INTENTIONALLY AND WILLINGLY BY MAKER AS
PART OF A BARGAINED FOR LOAN TRANSACTION.
EXECUTED as a sealed document as of the day and year first above written.
PREFERRED EQUITIES CORPORATION,
a Nevada corporation
By: /s/ FREDERICK H. CONTE
------------------------------------------
Name: Frederick H. Conte
----------------------------------------
Title: President
---------------------------------------
7
<PAGE> 38
STATE OF NEVADA
UNIFORM COMMERCIAL CODE -- FINANCING STATEMENT -- FORM UCC-1
This FINANCING STATEMENT is presented for filing pursuant to the
Nevada Uniform Commercial Code
IMPORTANT: Read Instructions on back before filling out form Receipt No.___
- --------------------------------------------------------------------------------
1. DEBTOR (ONE NAME ONLY)
[X] LEGAL BUSINESS NAME Preferred Equities Corporation
[ ] INDIVIDUAL (LAST NAME FIRST)
- --------------------------------------------------------------------------------
1A. SOCIAL SECURITY OR FEDERAL TAX NO.
- --------------------------------------------------------------------------------
1B. MAILING ADDRESS 1C. CITY, STATE 1D. ZIP CODE
4310 Paradise Road Las Vegas, Nevada 89109
- --------------------------------------------------------------------------------
1E. RESIDENCE ADDRESS 1F. CITY, STATE 1G. ZIP CODE
- --------------------------------------------------------------------------------
2. ADDITIONAL DEBOT (IF ANY) (ONE NAME ONLY)
[ ] LEGAL BUSINESS NAME
[ ] INDIVIDUAL (LAST NAME FIRST)
- --------------------------------------------------------------------------------
2A. SOCIAL SECURITY OR FEDERAL TAX NO.
- --------------------------------------------------------------------------------
2B. MAILING ADDRESS 2C. CITY, STATE 2D. ZIP CODE
- --------------------------------------------------------------------------------
2E. RESIDENCE ADDRESS 2F. CITY, STATE 2G. ZIP CODE
- --------------------------------------------------------------------------------
3. [ ] ADDITION DEBTOR(S) ON ATTACHED SHEET
- --------------------------------------------------------------------------------
4. SECURED PARTY
NAME DORFINCO CORPORATION
MAILING ADDRESS 40 Westminster Street
CITY Providence STATE Rhode Island ZIP CODE 02940
- --------------------------------------------------------------------------------
4A. SOCIAL SECURITY NO. FEDERAL TAX NO.
OR BANK TRANSIT AND A.B.A. NO.
- --------------------------------------------------------------------------------
5. ASSIGNEE OF SECURED PARTY (IF ANY)
NAME
MAILING ADDRESS
CITY STATE ZIP CODE
- --------------------------------------------------------------------------------
5A. SOCIAL SECURITY NO. FEDERAL TAX NO.
OR BANK TRANSIT AND A.B.A. NO.
- --------------------------------------------------------------------------------
6. This FINANCING STATEMENT covers the following types of items of property (if
crops or timber, include description of real property on which growing or to
be growing and name of record owner of such real estate; if fixtures,
description of real property to which affixed or to be affixed and name of
record owner of such real estate; if oil, gas or minerals, include
description of real property from which to be extracted).
See Exhibit "A" and "B" attached hereto and hereby incorporated herein
by this reference.
6A. ______________________________ 6C. $________________________________
SIGNATURE OF RECORD OWNER MAXIMUM AMOUNT OF INDEBTEDNESS
TO BE SECURED AT ANY ONE TIME
6B. ______________________________ (OPTIONAL)
(TYPE) RECORD OWNER OF
REAL PROPERTY
- --------------------------------------------------------------------------------
7. CHECK IF APPLICABLE [X]
A. [X] Proceeds of collateral are also covered
B. [ ] Products of collateral are also covered
C. [ ] Proceeds of above described original collateral in which a
security interest was perfected (Debtor's Signature Not Required)
D. [ ] Collateral was brought into this State subject to security interest
in another jurisdiction (Debtor's Signature Not Required)
- --------------------------------------------------------------------------------
8. CHECK IF APPLICABLE [X]
[ ] DEBTOR IS A "TRANSMITTING UTILITY" IN ACCORDANCE WITH NRS 704.205
AND NRS 104.9403.
- --------------------------------------------------------------------------------
9. (Date) August 12 1998
-----------------------------
Preferred Equities Corporation
By /s/ [SIG] President
---------------------------------------------------------------------------
SIGNATURE(S) OF DEBTOR(S) (TITLE)
---------------------------------------------------------------------------
DORFINCO CORPORATION TYPE NAME(S)
By
---------------------------------------------------------------------------
SIGNATURE(S) OF SECURED PARTY(IES) (TITLE)
---------------------------------------------------------------------------
TYPE NAME(S)
- --------------------------------------------------------------------------------
10. Return Copy to:
NAME Margaret R. Hayes-Cote, Division Counsel TRUST
ADDRESS Textron Financial Corporation ACCOUNT
CITY, STATE 40 Westminster Street NUMBER
AND ZIP Providence, Rhode Island 02940 (If Applicable)
----------
- --------------------------------------------------------------------------------
11. This Space for Use of Filing Officer: (Date, Time, File Number
and Filing Officer)
- --------------------------------------------------------------------------------
<PAGE> 39
Debtor: Preferred Equities Corporation
Secured Party: DORFINCO CORPORATION
Item 6 - continued
EXHIBIT "A"
This Financing Statement covers all of Debtor's interest in and to the
following, whether now existing or hereafter coming into existence, and all
substitutions, replacements, renewals and additions thereto or thereof:
(a) all interests in land, estates, easements, rights, improvements,
property, fixtures, equipment, furniture, furnishings, appliances
and appurtenances, of every nature whatsoever (collectively, the
"Premises") now or hereafter situated on the real estate described
on Exhibit "B" hereto (the "Land");
(b) all construction materials, vaults, gas, electric and other utility
fixtures, radiators, heaters, engines, machinery, boilers, ranges,
elevators, plumbing and heating fixtures, draperies, carpeting and
other floor coverings, fire extinguishers and any other safety
equipment, washers, dryers, water heaters, water fountains, mirrors,
mantels, air conditioning apparatus, refrigerating plants,
refrigerators, cooking apparatus and appurtenances, window screens,
awnings and storm sashes, which are or shall be attached to said
buildings, structures or improvements and all other furnishings,
furniture, goods which are or are to become fixtures, machinery,
equipment, inventory, supplies, appliances, and tangible personal
property of every kind and nature whatsoever now or hereafter owned
by Debtor and located in, on or about, or used or intended to be
used with or in connection with the use, operation or enjoyment of
the Land and the improvements thereon, and all attachments,
additions, improvements, after-acquired property, renewals, proceeds
and replacements of any of the foregoing and all the right, title
and interest of Debtor in any of the foregoing property which is
subject to or covered by any conditional sales contract, chattel
mortgage or similar lien or claim, together with the benefit of any
deposits or payments now or hereafter made by Debtor or on behalf of
Debtor with respect thereto, all of which are hereby declared and
shall be deemed to be fixtures and accessions to the freehold and a
part of the Premises as between the parties hereto and all persons
claiming by, through or under them, and which shall be deemed to be
a portion of the security for the indebtedness described in and to
be secured by, among other things, that certain Loan and Security
Agreement (the "Loan Agreement") dated as of August 12, 1998,
between Secured Party as lender and Debtor as borrower, and that
certain Deed of Trust and Security Agreement and Fixture Filing (the
"Deed") dated as of August 12, 1998, by and among Debtor, as
grantor, United Title of Nevada, a Nevada corporation, as trustee
and Secured Party, as beneficiary;
1
<PAGE> 40
(c) all now owned or hereafter acquired easements, rights-of-way,
strips, gores of land, streets, ways, alleys, passages, sewer
rights, waters, water courses, water rights and powers, and all
estates, rights, titles, interests, privileges, liberties,
tenements, hereditaments and appurtenances whatsoever, in any way
belonging, relating or appertaining to the Premises or any part
thereof, or which hereafter shall in any way belong, relate or be
appurtenant thereto, and the reversions, remainders, rents, issues,
profits, revenues, accounts, contract rights and general intangibles
of or arising from the Premises (including without limitation all
payments under room occupancy agreements, all leases or tenancies,
proceeds of insurance, prepaid insurance premiums, condemnation
payments, tenant security deposits, escrow funds and payments from
motel guests), and all the estate, right, title, interest, property,
possession, claim and demand whatsoever at law, as well as in
equity, of Debtor of, in and to the same;
(d) any and all leases, subleases, rental agreements, occupancy
agreements, licenses, concessions, entry fees, other agreements
which grant a possessory interest in all or any part of the
Premises, together with all rents, issues, profits, revenues,
proceeds, awards, accounts, security deposits and other benefits now
or hereafter arising from the use and enjoyment of the Land and
improvements thereon or any part thereof;
(e) all other personal property in any way connected with the use or
enjoyment of the Premises; and
(f) all proceeds of any of the foregoing.
2
<PAGE> 41
Debtor: Preferred Equities Corporation
Secured Party: DORFINCO CORPORATION
Item 6 - continued
EXHIBIT "B"
Legal Description of Land
All that real property situated in the State of Nevada, County of Nye, bounded
and described as follows:
Parcel 1:
Lot One (1) Block One (1) of CALVADA VALLEY UNIT NO. 2 as shown by map recorded
October 5, 1970 as File No. 20291 in the Office of the County Recorder of Nye
County, Nevada.
EXCEPTING THEREFROM all of its right, title and interest in and to all of the
minerals, including gas, coal, oil and oil shales as disclosed by Deed recorded
January 10, 1961 in Book 43, Page 374, Official Records, Nye County, Nevada.
Parcel 2:
Lot One hundred forty-eight (148) in Block Sixteen (16) of CALVADA VALLEY UNIT
NO. 6, as shown by map recorded February 5, 1973 as Document No. 36024 in the
Office of the County Recorder of Nye County, Nevada.
EXCEPTING THEREFROM all of its right, title and interest in and to all of the
minerals, including gas, coal, oil and oil shales as disclosed by Deed recorded
January 10, 1961 in Book 43, Page 374, Official Records, Nye County, Nevada.
Parcel 3:
Parcels One (1) and Three (3) of Parcel Map recorded May 24, 1983 as File No.
81177 and amended by Certificate of Amendment recorded June 14, 1983 as File No.
83144 and by Certificate of Amendment recorded December 12, 1983 as File No.
99135 and by Certificate of Amendment recorded March 16, 1992 as File No. 304864
of Official Records, Nye County, Nevada.
Parcel 4:
Parcel Two (2) as shown by Parcel Map recorded April 26, 1994 as File No. 351410
of Official Records, Nye County, Nevada.
3
<PAGE> 42
Parcel 5:
Lot Forty (40) in Block Six (6) of AMENDED PLAT OF CALVADA VALLEY UNIT 6,
recorded December 28, 1993 as Document No. 345007 in the Office of the County
Recorder of Nye County, Nevada.
Lots Nineteen (19) and Nineteen A (19A) (to the extent of Preferred Equities
Corporation's reversionary interest in Lot Nineteen A (19A)) of Block Six (6) of
CALVADA VALLEY UNIT NO. 6, recorded February 5, 1973 as File No. 36024 of
Official Records, Nye County, Nevada, more particularly described as Parcel
Nineteen (19) as shown on Parcel Map recorded January 6, 1983 as File No. 72610
of Official Records, Nye County, Nevada.
Lot One (1) in Block Fifteen (15), Lots One hundred seventy-three (173) and One
hundred seventy-four (174) in Block Eleven (11) and Lot Three hundred
twenty-three (323) in Block Six (6) of CALVADA VALLEY UNIT NO. 6, as shown by
map recorded February 5, 1973 as Document No. 36024 in the Office of the County
Recorder of Nye County, Nevada.
4
<PAGE> 43
<TABLE>
<S> <C>
Las Vegas, Nevada 89102 STATE OF NEVADA 18315
Phone 800-945-0092
UNIFORM COMMERCIAL CODE -- FINANCING STATEMENT -- FORM UCC-1
THIS FINANCING STATEMENT IS PRESENTED FOR FILING PURSUANT TO THE
NEVADA UNIFORM COMMERCIAL CODE
IMPORTANT: READ INSTRUCTIONS ON BACK BEFORE FILLING OUT FORM. RECEIPT NO. ____________________
====================================================================================================================================
1. DEBTOR 1A. SOCIAL SECURITY OR FEDERAL TAX NO.
[X] LEGAL BUSINESS NAME Preferred Equities Corporation
[ ] INDIVIDUAL (LAST NAME FIRST)
- ------------------------------------------------------------------------------------------------------------------------------------
1B. MAILING ADDRESS 1C. CITY, STATE 1D. ZIP CODE
4310 Paradise Road Las Vegas, Nevada 89109
- ------------------------------------------------------------------------------------------------------------------------------------
1E. RESIDENCE ADDRESS 1F. CITY, STATE 1G. ZIP CODE
- ------------------------------------------------------------------------------------------------------------------------------------
2. ADDITIONAL DEBTOR (IF ANY) (ONE NAME ONLY) 2A. SOCIAL SECURITY OR FEDERAL TAX NO.
[ ] LEGAL BUSINESS NAME
[ ] INDIVIDUAL (LAST NAME FIRST)
- ------------------------------------------------------------------------------------------------------------------------------------
2B. MAILING ADDRESS 2C. CITY, STATE 2D. ZIP CODE
- ------------------------------------------------------------------------------------------------------------------------------------
2E. RESIDENCE ADDRESS 2F. CITY, STATE 2G. ZIP CODE
====================================================================================================================================
3. [ ] ADDITIONAL DEBTOR(S) ON ATTACHED SHEET
====================================================================================================================================
4. SECURED PARTY 4A. SOCIAL SECURITY NO. FEDERAL TAX NO.
NAME DORFINCO CORPORATION OR BANK TRANSIT AND A.B.A. NO.
MAILING ADDRESS 40 Westminster Street
CITY Providence STATE Rhode Island ZIP CODE 02940
====================================================================================================================================
5. ASSIGNEE OF SECURED PARTY (IF ANY) 5A. SOCIAL SECURITY NO. FEDERAL TAX NO.
NAME OR BANK TRANSIT AND A.B.A. NO.
MAILING ADDRESS
CITY STATE ZIP CODE
====================================================================================================================================
6. This FINANCING STATEMENT covers the following types or items of property (if crops or timber, include description of real
property on which growing or to be growing and name of record owner of such real estate; if fixtures, include description of
real property to which affixed or to be affixed and name of record owner of such real estate; if oil, gas or minerals, include
description of real property from which to be extracted).
See Exhibit "A" and "B" attached hereto and hereby incorporated herein by this reference
[THIS SPACE FOR USE OF FILING OFFICER]
6a. _________________________________________________________ 6C. $________________________________________________________
SIGNATURE OF RECORD OWNER MAXIMUM AMOUNT OF INDEBTEDNESS TO
BE SECURED AT ANY ONE TIME (OPTIONAL)
6B. _________________________________________________________
(TYPE) RECORD OWNER OF REAL PROPERTY
====================================================================================================================================
7. Check A. [X] Proceeds of B. [ ] Products of C. [ ] Proceeds of above described D. [ ] Collateral was brought
if collateral collateral original collateral in which into this State subject
Applicable are also are also a security interest was to security interest in
[X] covered covered perfected (Debtor's Signature another jurisdiction
Not Required) (Debtor's signature Not
Required)
====================================================================================================================================
8. Check
if [ ] DEBTOR IS A "TRANSMITTING UTILITY" IN ACCORDANCE WITH NRS 704.205 AND NRS 104.9403.
Applicable
[X]
====================================================================================================================================
9. (Date) August 12, 1998 11. This Space for Use of Filing Officer: (Date, Time,
PREFERRED SECURITIES CORPORATION File Number and Filing Officer)
PRESIDENT
By /s/ [SIG]
________________________________________________________________
SIGNATURE(S) OF DEBTOR(S) TITLE
___________________________________________________________________
DORFINCO CORPORATION TYPE NAME(S)
By ________________________________________________________________
SIGNATURE(S) OF SECURED PARTY(IES) (TITLE)
___________________________________________________________________
TYPE NAME(S)
========================================================================
RETURN COPY TO:
NAME Margaret R. Hayes-Cote, Division Counsel TRUST
ADDRESS Textron Financial Corporation ACCOUNT
CITY, STATE 40 Westminster Street NUMBER
AND ZIP Providence, Rhode Island 02940 (IF APPLICABLE)
WHITE -- Alphabetical; PINK -- Acknowledgement;
_______________ GREEN -- Secured Party; BLUE -- Debtor.
</TABLE>
<PAGE> 44
ENVIRONMENTAL INDEMNITY AGREEMENT
THIS ENVIRONMENTAL INDEMNITY AGREEMENT (this "Agreement") is entered into
as of the 12th day of August, 1998 by and between DORFINCO CORPORATION, a
Delaware corporation ("Indemnitee") and PREFERRED EQUITIES CORPORATION, a Nevada
corporation ("Indemnitor"). The parties hereto enter into this contract with
reference to the following facts:
A. Indemnitee has agreed to make a loan to Indemnitor in the amount of
Four Million and 00/100 Dollars ($4,000,000.00) (the "Loan"). The Loan is to be
evidenced by a Promissory Note (the "Note"), and the Note is to be secured by a
Deed of Trust, Security Agreement and Fixture Filing (the "Deed of Trust")
encumbering certain property located in the County of Nye, State of Nevada (such
property or any parcel or portion thereof is herein the "Property") as more
particularly described on Exhibit "A" attached hereto and incorporated herein by
this reference. The making of the Loan is subject to a condition precedent that
Indemnitor make and deliver this Indemnity Agreement to Indemnitee.
B. Indemnitor acknowledges that Indemnitee would not make the Loan in the
absence of this Agreement.
C. Indemnitor acknowledges that Indemnitee may sustain Losses (as defined
herein) both prior to and following a foreclosure of Indemnitee's security
interest in the Property pursuant to the Deed of Trust.
D. Indemnitor acknowledges and agrees that any amounts owed to Indemnitee
by Indemnitor pursuant to the provisions of this Agreement are not secured by
the Deed of Trust nor are they related in any manner to any amounts owed to
Indemnitee pursuant to the Note and that said liabilities shall survive and
continue to be of full force and effect notwithstanding a sale or foreclosure
conducted pursuant to the Deed of Trust, the making of a deed in lieu of
foreclosure in favor of Indemnitee or a transfer of any other interest in the
Property, whether by Indemnitor or Indemnitee or by any successor or assignee of
Indemnitor or Indemnitee.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the parties
hereto agree as follows:
1. Hazardous Substances. As used herein, "Hazardous Substance" means any
substance, material, element, compound, mixture, solution, waste, pollutant or
matter that may give rise to liability under (i) the Resource Conservation
Recovery Act, as amended by the Hazardous and Solid Waste Amendments of 1984
(RCRA, 42 U.S.C. Sections 6901 et seq.); (ii) the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended by the Superfund
Amendments and Reauthorization Act of 1986 (CERCLA, 42 U.S.C. Sections 9601 et.
seq.); (iii) the Clean Water Act (CWA, 33 U.S.C. Sections 1251, et seq.); (iv)
the Safe Drinking Water Act (14 U.S.C. Sections 1401, et seq.); (v) the Toxic
Substances Control Act (TSCA, 15 U.S.C. Sections 2601 et seq.); (vi) the
Hazardous Materials Transportation Act (49 U.S.C. Sections 1801, et seq.); (vii)
the Emergency Planning and Community Right to Know Act of 1986 (42 U.S.C.,
Sections 11001, et seq.);
1
<PAGE> 45
(viii) the Clean Air Act (42 U.S.C. Sections 7401, et seq.); (ix) the Endangered
Species Act (16 U.S.C. Sections 1531, et seq.); (x) any regulations promulgated
pursuant to Items (i) - (ix) above; (xi) any similar local, state or federal
laws, rules, ordinances or regulations either in existence as of the date
hereof, or enacted or promulgated after the date of this Agreement, that concern
the management, control, storage, discharge, treatment, containment, removal
and/or transport of substances or materials that are or may become a threat to
public health or the environment; or (xii) any common law theory involving
materials or substances which are (or alleged to be) hazardous to human health
or the environment, based on nuisance, trespass, negligence, strict liability or
other tortious conduct (items (i) through (xi) are collectively referred to
herein as "Environmental Laws").
2. Indemnity. Indemnitor hereby agrees to indemnify, save, defend (at
Indemnitor's sole cost and expense) and hold harmless Indemnitee, Textron
Financial Corporation and Textron, Inc., and their respective officers,
directors, agents, and employees, and the successors and assigns of each of the
foregoing (all of such persons or entities being collectively referred to herein
as "Indemnified Persons" and each such reference shall refer jointly and
severally to each such person), from and against the full amount of any and all
Losses, except, however, to the extent that any such Losses are caused by the
gross negligence or wilful misconduct of Indemnitee, Textron Financial
Corporation and/or Textron, Inc. "Losses" shall mean any and all liabilities,
obligations, losses, damages, penalties, claims, actions, suits, costs, expenses
and disbursements (including, but not limited to, all attorneys' fees and all
other professional or consultants' expenses incurred in investigating, preparing
for, serving as a witness in or defending against any action or proceeding,
whether actually commenced or threatened, which may be asserted against any
Indemnified Person), arising from, in respect of, as a consequence of, or in
connection with any of the following: (a) the removal of any Hazardous Substance
on or released from the Property, whether such removal is done or completed by
Indemnitor, Indemnitee, or any other person or entity and regardless of whether
or not such removal is rendered pursuant to a court order or the order of an
administrative agency; (b) claims asserted by any person or entity (including,
without limitation, any governmental agency or quasi-governmental authority,
board, bureau, commission, department, instrumentality or public body, court, or
administrative tribunal (a "Governmental Agency")), in connection with or in any
way arising out of the presence, storage, use, disposal, generation,
transportation, or treatment of any Hazardous Substance on, in or under the
Property, either prior to or after the date of this Agreement and either prior
to, during, or after the time that Indemnitor became owner of the Property; (c)
the violation or claimed violation of any Environmental Laws in regard to the
Property, whether such violation or claimed violation occurred prior to or after
the date of this Agreement and regardless of whether such violation occurred
prior to, during, or after the time that Indemnitor became owner of the
Property; or (d) the preparation of an environmental audit on the Property,
whether conducted or authorized by Indemnitor, Indemnitee, or a third party or
the implementation of any environmental audit's recommendations, provided,
however, that Indemnitee shall have had reasonable grounds to believe that an
environmental audit was justified due to such Indemnitee's reasonable belief as
to the presence or probable presence of any Hazardous Substance on the Property
and that such presence could give rise to a material adverse effect on the
Property or the ability of Indemnitor to
2
<PAGE> 46
repay the Loan or perform its obligations with respect thereto. Nothing in this
Agreement shall be deemed to imply a right by Indemnitee to go onto the Property
except as specifically set forth herein or in any of the Security Documents.
3. Payments. Payments under this indemnity in respect of all Losses shall
be due and payable as such Losses are incurred. The Indemnified Person shall
provide Indemnitor notice of any claim that may result in a Loss with reasonable
promptness, and Indemnitor shall have the right to defend the same; provided,
however, that failure by an Indemnified Person to give such notice shall not
relieve Indemnitor from any liability, duty or obligation hereunder, except to
the extent Indemnitor has been prejudiced by any delay or failure to provide
such notice. Indemnitor will pay interest on any amount not paid from the time
such Losses are incurred prior to the date of notice at the non-Default Rate
described in the Note and shall pay interest on any such amount not paid within
ten (10) days of notice from Indemnitee to Indemnitor that such amount is due
and payable at the Default Rate, but in no event to exceed the maximum interest
rate allowed by law. The Indemnified Persons shall be entitled to recover the
full amount of all items to be indemnified or reimbursed pursuant to this
Agreement, regardless of whether (i) such items are incurred or suffered
pursuant to an order of any Governmental Agency relating to the cleaning up,
remedying or other responsive action required by applicable law, or (ii) any
Indemnified Person now or hereafter has or should have had actual knowledge of
any environmental condition giving rise to an indemnification or reimbursement
obligations under this Agreement.
4. Obligation to Defend.
(a) Assumption of Defense. Indemnitor is bound to defend any and all
actions or proceedings that may be brought against any Indemnified Person in
connection with or arising out of the matters covered by this Agreement upon
receipt of written notice from any Indemnified Person that a claim of a nature
described in this indemnity has been asserted against such Indemnified Person.
In the event that Indemnitor is defending an Indemnified Person, Indemnitor may
settle the claim only with the Indemnified Person's prior written consent, said
consent or the denial thereof to be in the Indemnified Person's reasonable
discretion.
(b) Delivery of Acknowledgment. Within thirty (30) days from the
date of receipt by Indemnitor from Indemnified Person of a notice of claim
pursuant to the foregoing Paragraph 4(a), Indemnitor must acknowledge in a
writing satisfactory to the Indemnified Person its duty to defend (the
"Acknowledgment"); provided, however, that until the Indemnified Person receives
the Acknowledgment, the Indemnified Person shall be entitled to defend such
claim and Indemnitor shall be bound in the manner set forth in subparagraph 4(d)
hereof.
(c) Conduct of Defense; Participation by Indemnified Person. In the
event that Indemnitor is defending an Indemnified Person, such defense shall be
conducted by reputable attorneys retained by Indemnitor, satisfactory to said
Indemnified Person in its reasonable discretion, at Indemnitor's sole cost and
expense. In addition, said Indemnified Person shall have the right to
participate in such proceedings and to be represented by attorneys of its own
choosing. The Indemnified Person shall be responsible for the costs of such
participation unless the Indemnified
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<PAGE> 47
Person shall have concluded in its reasonable discretion that the interests of
the Indemnified Person and of Indemnitor in the action conflict in such a manner
and to such an extent as to require, consistent with applicable standards of
professional responsibility, retention of separate counsel for the Indemnified
Person, in which case Indemnitor shall pay for separate counsel chosen by the
Indemnified Person.
(d) Indemnitor's Failure to Defend. If Indemnitor fails to deliver
the Acknowledgment or fails to choose counsel satisfactory to the Indemnified
Person, Indemnitor shall not thereafter be entitled to elect to defend, and
Indemnitor shall be bound by and shall be conclusively liable for the results
obtained by the Indemnified Person, including without limitation the amount of
any judgment or good faith out-of-court settlement or compromise and all costs
and fees of counsel incurred by the Indemnified Person in connection therewith.
5. Intentionally Omitted.
6. Notification by Indemnitor. Indemnitor agrees promptly, upon its
receipt of notice thereof, to notify Indemnitee of the commencement of any
litigation or proceedings pending, threatened or commenced (whether or not
served) against Indemnitor or any other party in connection with Hazardous
Substances and the Property and of the receipt of any notice from any
Governmental Agency in regard to Hazardous Substances and the Property.
Indemnitor shall immediately upon receipt provide the Indemnified Person with
true, complete and correct copies of all such notices and other documentation
related to said notices, litigation or proceedings.
7. Invalidity. If any terms of this Agreement shall be held invalid,
illegal or unenforceable, such provisions shall be severable from the rest of
this Agreement and the validity, legality, or enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
8. Attorneys' Fees. In any action to enforce or interpret this Agreement,
the prevailing party shall be entitled to receive from the losing party its
attorneys' fees and costs incurred in connection therewith.
9. No Time Limit. There is no time limitation on Indemnitor' obligations
hereunder, and the Indemnitor waives all present and future statutes of
limitations as a defense to any action to enforce the provisions of this
Agreement.
10. Notice. All notices, demands or requests provided for or permitted to
be given pursuant to this Agreement must be in writing and shall be deemed to
have been properly given or served by depositing the same with a nationally
recognized overnight courier service or in the United States Mail, postpaid and
registered or certified return receipt requested, and addressed to the addresses
specified below. All notices, demands and requests shall be effective upon being
deposited with a nationally recognized courier service or, on the date that is
two (2) business days after such deposit, upon being deposited in the United
States Mail. Rejection or other refusal to accept or the inability to deliver
because of changed address of which no notice was given shall be deemed to be
receipt of the notice, demand or request sent. By giving at least thirty (30)
days written notice hereof,
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<PAGE> 48
Indemnitor or the Indemnitee shall have the right from time to time and at any
time during the term of this Agreement to change their respective addresses.
"Indemnitee" and "Indemnified Persons"
DORFINCO CORPORATION
c/o Textron Financial Corporation
40 Westminster Street
Providence, Rhode Island 02940
Attn: Division Counsel
"Indemnitor"
PREFERRED EQUITIES CORPORATION
4310 Paradise Road
Las Vegas, Nevada 89109
Attn: President and General Counsel
11. Captions, Gender, and Number. Any section or paragraph, title or
caption contained in this Agreement is for convenience only and shall not be
deemed a part of this Agreement. As used in this Agreement, the masculine,
feminine or neuter gender, and the singular or plural number, shall each be
deemed to include the others whenever the context so allows.
12. Indemnified Persons' Rights. The parties hereto expressly acknowledge
that this Agreement is made expressly only for the benefit of the Indemnified
Persons.
13. Successors and Assigns. This Agreement shall be binding upon, and
inure to the benefit of, the parties named herein and their respective
successors and assigns. Indemnitor's obligations hereunder shall survive and
continue to be of full force and effect notwithstanding a foreclosure conducted
pursuant to the Deed of Trust, the making of a deed in lieu of foreclosure by
Indemnitor in favor of Indemnitee or a transfer of any other interest in the
Property, whether by Indemnitor or Indemnitee or by any successor or assignee of
Indemnitor or Indemnitee.
14. Failure or Indulgence Not Waiver. No failure or delay on the part of
an Indemnified Person in the exercise of any power, right or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any power, right or privilege preclude any other or further exercise of any such
power, right or privilege. All powers, rights and privileges hereunder are
cumulative to, and not exclusive of, any powers, rights or privileges otherwise
available.
15. Governing Law. This Agreement is to be governed by and construed in
accordance with the laws of the State of Rhode Island without regard to conflict
of laws principles; provided, however, that the laws of the State of Nevada
shall apply with respect to the procedural and substantive requirements of
Nevada real property and personal property law with respect to any
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<PAGE> 49
foreclosure or other action to realize all real and personal property collateral
security for the Loan located within the State of Nevada.
16. Joint and Several Obligation. If more than one person has executed
this Agreement as Indemnitor or becomes obligated under this Agreement as
Indemnitor, the obligations and covenants of each such person shall be joint and
several. The release by Indemnitee of any party liable under this Agreement
shall not operate to release any other party liable hereunder.
17. Effect of this Agreement. This Agreement shall remain in full force
and effect and continue to be effective should any petition be filed by or
against the Indemnitor under the Bankruptcy Code, as the same may be amended,
for liquidation or reorganization, or should Indemnitor become insolvent or make
an assignment for the benefit of creditors or should a receiver or trustee be
appointed for the benefit of creditors or should a receiver or trustee be
appointed for all or any significant part of the Indemnitor's assets. This
Agreement shall continue to be effective if at any time payment or performance
of the Indemnitor's obligations (or any part thereof) under the Deed of Trust or
the other Security Documents (as defined in the Deed of Trust) is, pursuant to
applicable law, rescinded or reduced in amount, or must otherwise be restored or
returned by Indemnitee, whether as a "preferential transfer," "voidable
preference," "fraudulent conveyance," or otherwise, as if the portion of such
payment rescinded, reduced, restored, or returned had never been made.
18. Jury Trial; Jurisdiction. Indemnitor hereby waives the right to trial
by jury in any litigation arising out of, relating to, or connected with this
Agreement, it being acknowledged by Indemnitor that Indemnitor is a professional
developer engaged and knowledgeable in sophisticated commercial real estate
transactions and that Indemnitor makes this waiver of trial by jury knowingly
and voluntarily and only after consultation with sophisticated legal counsel of
Indemnitor's choosing. Indemnitor hereby consents to the non-exclusive personal
jurisdiction of the federal and state courts located in Providence County, Rhode
Island in any and all actions between the Indemnitor and the Indemnitee arising
under or in connection with this Agreement, the Loan or any of the Security
Documents.
IN WITNESS WHEREOF, Indemnitor has executed this Agreement as of the date
and year first written above.
"Indemnitor"
PREFERRED EQUITIES CORPORATION,
a Nevada corporation
By: /s/ FREDERICK H. CONTE
-----------------------------------
Name: Frederick H. Conte
----------------------------------
Title: President
---------------------------------
<PAGE> 50
"Indemnitee"
DORFINCO CORPORATION,
a Delaware corporation
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
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<PAGE> 51
EXHIBIT "A"
LEGAL DESCRIPTION OF PROPERTY
All that real property situated in the State of Nevada, County of Nye, bounded
and described as follows:
Parcel 1:
Lot One (1) Block One (1) of CALVADA VALLEY UNIT NO. 2 as shown by map recorded
October 5, 1970 as File No. 20291 in the Office of the County Recorder of Nye
County, Nevada.
EXCEPTING THEREFROM all of its right, title and interest in and to all of the
minerals, including gas, coal, oil and oil shales as disclosed by Deed recorded
January 10, 1961 in Book 43, Page 374, Official Records, Nye County, Nevada.
Parcel 2:
Lot One hundred forty-eight (148) in Block Sixteen (16) of CALVADA VALLEY UNIT
NO. 6, as shown by map recorded February 5, 1973 as Document No. 36024 in the
Office of the County Recorder of Nye County, Nevada.
EXCEPTING THEREFROM all of its right, title and interest in and to all of the
minerals, including gas, coal, oil and oil shales as disclosed by Deed recorded
January 10, 1961 in Book 43, Page 374, Official Records, Nye County, Nevada.
Parcel 3:
Parcels One (1) and Three (3) of Parcel Map recorded May 24, 1983 as File No.
81177 and amended by Certificate of Amendment recorded June 14, 1983 as File No.
83144 and by Certificate of Amendment recorded December 12, 1983 as File No.
99135 and by Certificate of Amendment recorded March 16, 1992 as File No. 304864
of Official Records, Nye County, Nevada.
Parcel 4:
Parcel Two (2) as shown by Parcel Map recorded April 26, 1994 as File No. 351410
of Official Records, Nye County, Nevada.
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Parcel 5:
Lot Forty (40) in Block Six (6) of AMENDED PLAT OF CALVADA VALLEY UNIT 6,
recorded December 28, 1993 as Document No. 345007 in the Office of the County
Recorder of Nye County, Nevada.
Lots Nineteen (19) and Nineteen A (19A) (to the extent of Preferred Equities
Corporation's reversionary interest in Lot Nineteen A (19A)) of Block Six (6) of
CALVADA VALLEY UNIT NO. 6, recorded February 5, 1973 as File No. 36024 of
Official Records, Nye County, Nevada, more particularly described as Parcel
Nineteen (19) as shown on Parcel Map recorded January 6, 1983 as File No. 72610
of Official Records, Nye County, Nevada.
Lot One (1) in Block Fifteen (15), Lots One hundred seventy-three (173) and One
hundred seventy-four (174) in Block Eleven (11) and Lot Three hundred
twenty-three (323) in Block Six (6) of CALVADA VALLEY UNIT NO. 6, as shown by
map recorded February 5, 1973 as Document No. 36024 in the Office of the County
Recorder of Nye County, Nevada.
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<PAGE> 53
GUARANTY AGREEMENT
This GUARANTY AGREEMENT ("Guaranty") made as of the 12th day of August,
1998, by the undersigned party ("Guarantor") to, with, and for the benefit of
DORFINCO CORPORATION ("Lender"), a Delaware corporation, having its principal
office at 40 Westminster Street, Providence, Rhode Island 02940.
WITNESSETH:
WHEREAS, PREFERRED EQUITIES CORPORATION, a Nevada corporation
("Borrower") desires to obtain a $4,000,000.00 loan ("Loan") from Lender;
WHEREAS, Lender is unwilling to make the Loan to Borrower unless
Guarantor guarantees to Lender the full and timely payment and satisfaction of
the Obligations (as hereinafter defined) of Borrower; and
WHEREAS, Guarantor acknowledges that the making of the Loan by Lender to
Borrower provides direct benefits to Guarantor;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained and of other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and in order to induce Lender to
make the Loan to Borrower, and intending to be legally bound, Guarantor does
hereby warrant, represent and covenant unto Lender as follows:
1. GUARANTY AND SURETY.
Guarantor hereby absolutely and unconditionally guarantees, and becomes
surety for, the full and timely payment and performance of the Obligations.
2. OBLIGATIONS.
2.1 The word "Obligations" as used throughout this Guaranty means
all debts, obligations, and liabilities of Borrower arising out
of or relating to the following documents each of even date
herewith:
2.1.1. Promissory Note ("Note") made by Borrower to the order
of Lender in an original face amount of $4,000,000.00;
2.1.2. Loan and Security Agreement (the "Loan Agreement") by
and between Borrower and Lender;
2.1.3 Environmental Indemnity Agreement given by Borrower to
Lender; and
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<PAGE> 54
2.1.4 The other documents, instruments and agreements
described in the Loan Agreement as loan or security
documents.
(All of the foregoing, including any future modifications thereto, are
hereinafter collectively referred to as the "Loan Documents"). Without limiting
the generality of the foregoing, "Obligations" is used herein in its most
comprehensive sense to include all debts, obligations and indebtedness described
in the Loan Documents, whether now or hereafter made, incurred, or created,
voluntary or involuntary, due to not due, absolute or contingent, liquidated or
unliquidated, determined or undetermined, and regardless of whether there is any
recourse with respect to any portion of such Obligations as against Borrower.
3. SUBSEQUENT ACTS BY LENDER.
Lender may, at its sole discretion and without notice to
Guarantor, take any action permitted under the Loan Documents which might
otherwise be deemed a legal or equitable release or discharge of Guarantor's
obligations hereunder without either impairing or affecting the liability of
Guarantor for payment of the Obligations, which actions might include, by way of
illustration and not limitation:
3.1 the renewal or extension of any of the Obligations or
any payments hereunder;
3.2 the acceptance of partial payment of the Obligations;
3.3 the settlement, release, compounding, compromise,
cancellation, rearrangement or consolidation of any of
the Obligations;
3.4 the collection of or other liquidation of any claims
Lender may have in respect to the Obligations;
3.5 the granting of indulgences, forebearances, compromises,
extensions or adjustments in respect to any covenant or
agreement under the Loan Documents;
3.6 the release from liability of any Guarantor and/or any
additional parties who may guarantee payment of the
Obligations or any portion thereof;
3.7 the release, surrender, exchange or compromise to or
with Borrower of any lien, security or collateral held
by Lender as security for the Obligations; or
3.8 the release or compromise of any lien or security held
by Lender as security for the liability of any person
who is guarantying the Obligations.
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<PAGE> 55
4. EXPENSES.
Guarantor agrees to reimburse Lender for all reasonable expenses
that are not reimbursed by Borrower (including without limitation reasonable
attorneys' fees and expenses) incurred in good faith by Lender in enforcing the
Obligations, pursuing any remedies set forth in the Loan Documents, and
enforcing this Guaranty. Guarantor shall not have any obligation for payment of
reimbursement of any cost or expense incurred by Lender, Textron Financial
Corporation or any assignee of this Guaranty for salaries or wages of their
respective officers or employees or for any fixed overhead expenses.
5. PAYMENT BY GUARANTOR.
Upon the occurrence and during the continuance of an Event of
Default under the Loan Documents, Guarantor agrees to pay or perform on written
demand all the Obligations. Lender shall not be required to liquidate any lien
or any other form of security, instrument, or note held by Lender prior to
making such demand. THIS IS A GUARANTY OF PAYMENT AND PERFORMANCE AND NOT OF
COLLECTION, and Guarantor hereby waives all rights that Guarantor may have, if
any, to require that any action be brought against Borrower (or any other
person) or to require that resort be first made against any security prior to
demanding payment or performance hereunder.
6. CUMULATIVE REMEDIES.
Guarantor hereby agrees that all rights and remedies that Lender
is afforded by reason of this Guaranty are separate and cumulative and may be
pursued separately, successively, or concurrently, as Lender deems advisable. In
addition, all such rights and remedies are non-exclusive and shall in no way
limit or prejudice Lender's ability to pursue any other legal or equitable
rights or remedies that may be available. Without limiting the generality of the
foregoing, Guarantor agrees that in any action by Lender by reason of the
Obligations, Lender at its election may proceed (a) against Guarantor together
with Borrower, (b) against Guarantor and Borrower individually, or (c) against
Guarantor only without having commenced any action against or having obtained
any judgment against Borrower.
7. WAIVERS BY GUARANTOR.
7.1 Guarantor hereby waives:
7.1.1. notice of acceptance of this Guaranty and of
creation of the Obligations;
7.1.2. presentment and notice of non-payment;
7.1.3. protest, notice of protest, and notice of
dishonor to Guarantor or to
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<PAGE> 56
any other party with respect to any of the
Obligations;
7.1.4. all other notices to which Guarantor might
otherwise be entitled;
7.1.5. any defense or circumstance (including, without
limitation, disability, insolvency, lack of
authority or power, insanity, minority, death or
dissolution) which might otherwise constitute a
legal or equitable discharge of Guarantor's
liability hereunder other than a defense based
on the gross negligence or wilful misconduct of
Lender;
7.1.6. any defense of Borrower to the Obligations other
than a defense based on the gross negligence or
wilful misconduct of Lender or satisfaction of
the Obligations;
7.1.7. any rights to extension, composition or
otherwise under the Bankruptcy Code or any
amendments thereof, or under any state or other
federal statute;
7.1.8. the right to trial by jury in any litigation
arising out of, relating to, or connected with
this Guaranty, if being acknowledged by
Guarantor that Guarantor is knowledgeable in
sophisticated commercial real estate
transactions, and that Guarantor makes this
waiver of trial by jury knowingly and
voluntarily and only after consultation with
sophisticated legal counsel of Guarantor's
choosing; and
7.1.9. the benefits of Nevada's "one-action rule" under
Nev. Rev. Stat. Section 40.430.
/s/ [SIG]
--------------------
Guarantor's Initials
7.2 It is expressly agreed that Guarantor shall remain
liable hereon regardless of whether Borrower is held to
be not liable on the Obligations (other than in the case
of satisfaction thereof) and regardless of whether all
or any portion of the Obligations are "non-recourse" or
"limited recourse". It is agreed between Guarantor and
Lender that the foregoing waivers are of the essence of
the Loan transaction and that, but for this Guaranty and
such waivers, Lender would decline to make the Loan.
8. WAIVER AND RELEASE OF SUBROGATION AND PARTICIPATION.
Except as otherwise provided in NRS 40.475 and 40.485, Guarantor
shall have no right of subrogation in or under the Loan Documents, and no rights
of reimbursement, indemnity or
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<PAGE> 57
contribution from the Borrower or any other rights by law, equity, statute or
contract that would give rise to a creditor-debtor relationship between
Guarantor and the Borrower. Except as otherwise provided in NRS 40.475 and
40.485, Guarantor shall have no right to participate in any way in any of the
collateral which is conveyed under the Loan Documents as security for the
Obligations. Guarantor hereby explicitly waives and releases any of the
above-described rights of subrogation, reimbursement, indemnity, contribution,
participation, and any right to require the marshaling of Borrower's assets
under any circumstances to the extent Guarantor is legally permitted to do so.
/s/ [SIG]
--------------------
Guarantor's Initials
9. INDEMNIFICATION.
Guarantor expressly agrees that if either Borrower or the
Guarantor makes any payment under any Loan Documents (as defined in the Loan
Agreement) to Lender, which payment or any part thereof is subsequently
invalidated, declared to be fraudulent or preferential, or otherwise required to
be repaid to a trustee, receiver or any other party under any bankruptcy act,
state or federal law, common law or equitable cause, then to the extent of such
repayment, the indebtedness or any part thereof intended to be satisfied, the
liens securing the same and this Guaranty shall be revived and continued in full
force and effect as if said payment had not been made.
10. REPRESENTATIONS AND WARRANTIES.
Guarantor hereby represents and warrants to Lender that:
10.1 Guarantor is a corporation duly organized, validly
existing and in good standing under the laws of the
State of New York, and has all requisite power,
corporate or otherwise, to conduct its business and to
execute and deliver, and to perform its obligations
under, this Guaranty.
10.2 The execution, delivery and performance by Guarantor of
this Guarantor has been duly authorized by all necessary
corporate action by Guarantor and does not and will not
(i) violate any provisions of the certificate or
articles of incorporation, bylaws, or any agreement,
law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award presently in
effect to which Guarantor is a party or is subject; (ii)
result in, or require the creation or imposition of, any
lien upon or with respect to any asset of Guarantor; or
(iii) result in a breach of, or constitute a default by
Guarantor under, any indenture, loan or credit agreement
or any other agreement, document, instrument or
certificate to which Guarantor is a party or by which it
or any of its assets are bound or affected.
10.3 No approval, authorization, order, license, permit,
franchise or consent of, or
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<PAGE> 58
registration, declaration, qualification or filing with,
any governmental authority is required in connection
with the execution, delivery and performance by
Guarantor of this Guaranty.
10.4 Guarantor's last annual financial statements were
prepared in accordance with generally accepted
accounting principles ("GAAP") and fairly present the
financial condition and results of operation of
Guarantor as of the date or dates thereof and for the
periods covered thereby. There were no material
liabilities, direct or indirect, fixed or contingent, of
Guarantor as of the dates of such financial statements
which were not reflected therein or in the notes
thereto, which have not otherwise been disclosed to
Lender in writing. Except for any such changes
heretofore expressly disclosed in writing to Lender,
there has been no material adverse change in the
financial condition of Guarantor from the financial
conditions shown in the foregoing financial statements,
nor has Guarantor incurred any material liabilities,
direct or indirect, fixed or contingent, which are not
shown in its financial statements. Guarantor is able to
pay all of its debts as they become due. Guarantor shall
maintain such solvent financial condition, giving effect
to this Guaranty, as long as Guarantor is obligated to
Lender hereunder. Guarantor's obligations under this
Guaranty will not render Guarantor unable to pay its
total liabilities.
10.5 Except as otherwise disclosed in the financial
statements referred to in Section 10.4 above or in
Exhibit "E" to the Loan Agreement, there are no actions,
suits, proceedings, orders or injunctions pending or
threatened against or affecting Borrower, at law or in
equity, or before or by any governmental authority,
which could have a material adverse effect on Guarantor.
10.6 No information, exhibit or written report furnished by
or on behalf of Borrower to Lender in connection with
the Loan contains any material misstatement of fact or
omits the statement of a material fact necessary to make
any statements contained herein or therein not
misleading.
10.7 Guarantor now has no defense whatever to any action,
suit or proceeding whatsoever that may be instituted on
this Guaranty.
10.8 No other agreement exists between Guarantor and Lender
regarding the liability of Guarantor hereunder.
10.9 This Guaranty constitutes a valid obligation of
Guarantor.
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<PAGE> 59
11. STRICT PERFORMANCE; WAIVERS.
No failure, delay or omission by Lender to exercise any of the
rights, powers, remedies and privileges hereunder shall be deemed a waiver
thereof and every such right, power, remedy and privilege may be exercised
repeatedly. No notice to or demand on Guarantor shall be deemed to be a waiver
of the right of Lender to take further action without notice or demand as
provided herein. In no event shall any modification or waiver of the provisions
of this Guaranty be effective unless in writing executed by Lender. Any waiver
granted shall be applicable only in the specific instance for which it is given.
Failure of Lender to insist upon strict performance or observance of any of the
terms, provisions and covenants hereof or to exercise any right herein contained
shall not be construed as a waiver or relinquishment of the right to demand
strict performance on the Obligations and shall not be deemed a waiver of the
breach of any provision hereof or of any of the Loan Documents.
12. CAPTIONS.
The captions appearing herein are used for reference only and
shall not be construed as limiting anything set forth herein.
13. SEVERABILITY.
The invalidity or unenforceability of any provision of this
Guaranty shall not affect the other provisions hereof, and this Guaranty shall
be construed as if the invalid or unenforceable provision had never been a part
of this Guaranty.
14. GOVERNING LAW.
All questions with respect to the construction of this Guaranty
and the rights and liabilities of the parties hereto shall be determined in
accordance with the applicable provisions of the internal laws of the State of
Nevada without regard to the principles of conflicts of laws.
15. ASSIGNMENT; DELEGATION; BINDING EFFECT.
After funding of the Loan by Lender, this Guaranty is assignable
and transferable by Lender. Each reference herein to Lender shall be deemed to
include its successors and assigns, in whose favor the rights and privileges of
this Guaranty shall also run. The duties and obligations of Guarantor may not be
transferred by Guarantor without the prior written consent of Lender. The duties
and obligations of Guarantor shall bind Guarantor's heirs, personal
representatives, executors, successors and assigns.
16. TERMINATION; REINSTATEMENT.
16.1 Guarantor's obligations hereunder shall terminate, and
this Guaranty shall be
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<PAGE> 60
released, upon payment and performance in full of the
Obligations; provided, however and except that, if there
exists with respect to the Related Indebtedness (as
defined in the Loan Agreement at the time of repayment
and performance in full of the Obligations a default or
event of default, or any event or circumstance which
with the passage of time or giving of notice would
become a default or event of default under the Related
Loan Documents (as defined in the Loan Agreement), then
the release and termination of this Guaranty shall not
be granted by Lender for so long as any such default or
event of default or such other event or circumstance is
continuing.
16.2 This Guaranty shall remain in full force and effect and
continue to be effective should any petition be filed by
or against Borrower under the Bankruptcy Code, as at any
time amended, for liquidation or reorganization, or
should Borrower become insolvent or make an assignment
for the benefit of creditors or a receiver or trustee be
appointed for all or any significant part of Borrower's
assets, and this Guaranty shall continue to be effective
or be reinstated, as the case may be, if at any time
payment of the Obligations, or any part thereof, is,
pursuant to applicable law, rescinded or reduced in
amount, or must otherwise be restored or returned by
Lender, whether as a "preferential transfer," "voidable
preference," "fraudulent conveyance," or otherwise, as
if the portion of such payment rescinded, reduced,
restored or returned had never been made.
17. NOTICES.
All notices, demands or requests provided for or permitted to be
given pursuant to this Agreement must be in writing and shall be deemed to have
been properly given or served by depositing the same with a nationally
recognized overnight courier service or in the United States Mail, postpaid and
registered or certified return receipt requested, and addressed to the addresses
specified below. All notices, demands and requests shall be effective upon being
deposited with a nationally recognized courier service or, on the date that is
two (2) business days after such deposit, upon being deposited in the United
States Mail. Rejection or other refusal to accept or the inability to deliver
because of changed address of which no notice was given shall be deemed to be
receipt of the notice, demand or request sent. By giving at least thirty (30)
days written notice hereof, Guarantor and Lender shall have the right from time
to time and at any time during the term of this Agreement to change their
respective addresses.
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The addresses are:
Lender: Dorfinco Corporation
40 Westminster Street
Providence, Rhode Island 02940
Attention: Division Counsel
Telecopy No. (401) 621-5040
Guarantor: 4310 Paradise Road
Las Vegas, NV 89109
Attention: President and General Counsel
Telecopy No. (702) 369-4398
w/copy to: Mr. Jerome J. Cohen, President
1125 N.E. 125th Street
Suite 206
North Miami, FL 33161
Telecopy No. (305) 899-1824
18. JURISDICTION.
Guarantor hereby consents to the non-exclusive personal
jurisdiction of the federal and state courts located in Clark County, Nevada in
any and all actions between the Guarantor and Lender arising under or in
connection with this Guaranty, the Loan or any of the Loan Documents.
IN WITNESS WHEREOF, Guarantor has duly executed this Guaranty the
day and year first above written.
MEGO FINANCIAL CORP.,
a New York corporation
By /s/ RICHARD L. RODRIGUEZ
--------------------------------
Name: Richard L. Rodriguez
------------------------------
Its: Vice President
------------------------------
9
<PAGE> 62
SUBORDINATION AGREEMENT
TO: DORFINCO CORPORATION
40 Westminster Street
Providence, Rhode Island 02940
Ladies and Gentlemen:
The undersigned Mego Financial Corp., a New York corporation
("Creditor") is or may be a creditor of Preferred Equities Corporation, a Nevada
corporation ("Debtor"). Creditor understands that Debtor has requested you to
extend credit to Debtor, but that you are unwilling to do so unless you first
receive Creditor's subordination agreement as herein contained.
In order to induce you at any time or from time to time at your option,
to make loans or extend credit or other accommodation or benefit to or for the
account of Debtor, under the Loan Agreement (as hereinafter defined), or to
grant such renewals or extensions as you may deem advisable, it is agreed as
follows:
1. Creditor and Debtor represent and warrant to you that,
(a) At May 31, 1998, the total PEC Indebtedness owing by Debtor
to Creditor is $961,000.00. "PEC Indebtedness" as used herein shall mean present
indebtedness and any future indebtedness of Debtor to Creditor which may be from
time to time directly or indirectly incurred, including any negotiable
instruments evidencing same, all debts, demands, monies, indebtedness,
liabilities and obligations owed or to become owing including interest,
principal, costs and other charges, and all claims, rights, causes of action,
judgments, decrees or other obligations of any kind whatsoever; provided,
however, that the term "PEC Indebtedness" does not include any sums
1
<PAGE> 63
payable by Debtor to Creditor from time to time under income tax sharing
arrangements between Debtor and Creditor.
(b) there is no default in the PEC Indebtedness from Debtor to
Creditor.
2. Creditor agrees with you that the PEC Indebtedness and all security
therefor shall be and hereby is subordinated to the obligations of Debtor to you
with respect to the Loan (as defined in the Loan Agreement) and all other
obligations of Debtor to you under any and all of the Loan Documents (as defined
in the Loan Agreement) (collectively, the "Obligations") to the extent (and only
to the extent) hereinafter provided. After the occurrence and during the
continuance of an Event of Default under, and as defined in, that certain Loan
and Security Agreement (the "Loan Agreement"), of even date herewith between
you, as lender, and Debtor, as borrower:
(a) the payment of the PEC Indebtedness shall be deferred until
the full payment of the Obligations (including all interest accruing after the
date of filing of a petition by or against Debtor under any bankruptcy act or
code) of any nature whatsoever now due to you from Debtor or which may hereafter
be incurred and become due to you from Debtor.
(b) Creditor will not, without your prior written consent,
assert, collect, enforce or release the PEC Indebtedness or any part thereof or
take any action to foreclose, realize upon or release any collateral securing
the PEC Indebtedness or enforce any security agreements, real estate mortgages,
lien instruments, or other encumbrances securing the PEC Indebtedness.
(c) Creditor will hold in trust and immediately pay to you in the
same form of payment received from application upon the amount now or hereafter
owing to you by Debtor, any amount Debtor pays to Creditor on the PEC
Indebtedness.
2
<PAGE> 64
(d) Creditor will forthwith assign, deliver or cause to be
delivered to you any collateral for the PEC Indebtedness now held by Creditor or
anyone on its behalf, or in the future received by it or anyone on its behalf.
(e) Creditor, in its capacity hereunder as Creditor, agrees that
it will not, without your prior written consent, commence, prosecute or
participate in any administrative, legal, or equitable action against Debtor for
collection of the PEC Indebtedness or in any administrative, legal, or equitable
action for collection of the PEC Indebtedness that might adversely affect Debtor
or its properties.
3. If Creditor in violation of this Agreement shall commence, prosecute
or participate in any suit, action or proceeding against Debtor, Debtor may
interpose as a defense or plea the making of this Agreement and you may
intervene and interpose such defense or plea in your name or in the name of
Debtor. If after the occurrence and during the continuance of an Event of
Default, Creditor shall attempt to enforce any security agreements, real estate
mortgages or deeds of trust or any lien instruments or other encumbrances
securing payment of any PEC Indebtedness, you or Debtor may by virtue of this
Agreement restrain the enforcement thereof in your name or in the name of
Debtor. If after the occurrence and during the continuance of an Event of
Default, Creditor obtains any assets of Debtor for application to any PEC
Indebtedness as a result of any administrative, legal, or equitable action, or
otherwise, Creditor agrees to forthwith pay, deliver, and assign to you any such
assets for application upon the Obligations.
4. As additional security for the Obligations due you and in furtherance
hereof, upon the occurrence of and during the continuance of an Event of
Default, Creditor:
3
<PAGE> 65
(a) shall assign to you the PEC Indebtedness as security for any
and all of the Obligations now and hereafter owing by Debtor to you; and
(b) irrevocably authorizes you or any person you may designate
to, after the security for the Obligations has been exhausted, collect and
receive the proceeds of the PEC Indebtedness and to do any and all things with
the same power and authority that Creditor might or could have done if this
Agreement had not been executed, including the filing and proving of claims in
your name or in the name of Creditor, in receiverships, bankruptcies, and
proceedings under any bankruptcy act or any amendments thereto. The net amount
received by you from the PEC Indebtedness shall be applied to the payment of the
Obligations due and to become due from Debtor to you, and the excess, if any,
shall be returned to Creditor.
5. Upon the occurrence of and during the continuance of an Event of
Default, Debtor agrees with you that it will not, without your prior written
consent, pay to Creditor any sum on account of the PEC Indebtedness, or execute
or delivery any negotiable instruments as evidence of the PEC Indebtedness or
any part thereof.
6. Creditor agrees that you may grant extensions of the time of payment
or performance to and make compromises, including releases of collateral, and
settlements with Debtor and all other persons without the consent of Creditor
and without affecting the agreements of Creditor or Debtor hereunder.
7. If, at any time hereafter, you shall, pursuant to the Loan Agreement
determine to discontinue the extension of credit to Debtor, you may do so. This
Agreement shall continue in full force and effect until Debtor shall have
satisfied all of the Obligations and you shall have been paid
4
<PAGE> 66
in full all Obligations that may be due to you from Debtor under the Loan
Agreement and the other Loan Documents. Upon the full payment and satisfaction
by Debtor of all of the Obligations under the Loan Agreement and the other Loan
Documents, this Agreement shall automatically terminate and be of no further
force and effect.
8. This Agreement shall be binding upon the successors and assigns of
Creditor and Debtor, and shall inure to the benefit of your successors and
assigns.
9. This Agreement and the Obligations which it secures and all rights
and liabilities of the parties shall be governed as to validity, interpretation,
enforcement and effect by the laws of the State of Nevada.
10. Unless an Event of Default shall have occurred and be continuing,
nothing in this Agreement is intended or shall be construed to prohibit,
restrict or otherwise limit any payment to or remedy by Creditor at any time so
long as Debtor's cash flow and working capital are sufficient. In addition,
nothing in this Agreement is intended or shall be construed to interfere with
Debtor's payment or Creditor's collection at any time of amounts due by Debtor
under the tax sharing arrangements between Debtor and Creditor; provided,
however, (i) that Creditor shall promptly advise Lender of any change in such
tax sharing arrangements and (ii) that Debtor's cash flow and working capital
shall remain sufficient following any change in such tax sharing arrangement.
11. In the event Creditor received any cash or other property in payment
of PEC Indebtedness which is not permitted under the provisions of Paragraph 10
or other provisions of this Agreement, you shall have the right to recover such
payment from Creditor and apply the same to the Obligations. In the event
Creditor receives any cash or other property in payment of PEC Indebtedness
which is permitted under the provisions of this Agreement, including, without
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<PAGE> 67
limitation, Paragraph 10 hereof, Creditor shall not be required to make any
payment to or reimbursement of yourself or Debtor as a result of such payment.
IN WITNESS WHEREOF, Creditor and Debtor have severally duly executed
this Agreement as of the 12th day of August, 1998.
DEBTOR:
PREFERRED EQUITIES CORPORATION,
a Nevada corporation
By: /s/ FREDERICK H. CONTE
------------------------------------
Its: President
-----------------------------------
CREDITOR:
MEGO FINANCIAL CORP.,
a New York corporation
By: /s/ RICHARD L. RODRIGUEZ
------------------------------------
Its: Vice President
-----------------------------------
ACCEPTED BY:
DORFINCO CORPORATION
By:
------------------------------
Its:
----------------------------
6
<PAGE> 68
BORROWER'S CERTIFICATE
Re: $4,000,000 loan by Dorfinco Corporation, a Delaware corporation, to
Preferred Equities Corporation, a Nevada corporation. Borrower's address: 4310
Paradise Blvd., Las Vegas, Nevada 89109. Real property security located in Nye
County, Nevada (the "Real Property").
* * * * * *
In order to induce DORFINCO CORPORATION ("Lender") to make the
above-referenced loan (the "Loan") to Preferred Equities Corporation, a Nevada
corporation ("Borrower"), Borrower hereby certifies and represents as of the
date of the funding of the Loan, and warrants as follows:
(a) Except as set forth on Exhibit "E" to the Loan and Security
Agreement dated August 12, 1998 (the "Loan Agreement"), between Borrower and
Lender, there are no actions, suits or proceedings pending, and, to the best
knowledge and belief of Borrower, there are no actions, suits, claims,
investigations or proceedings threatened, against or affecting Borrower, or the
business, operations, properties or assets of Borrower, before or by any
governmental department, commission, board, regulatory authority, bureau, agency
or instrumentality, domestic, foreign, Federal, state or municipal (herein
collectively called "governmental agency"), or any court, arbitrator or grand
jury, which may result in any material adverse change in the business
operations, properties or assets or in the condition, financial or otherwise, of
Borrower, or in the ability of Borrower to perform its obligations under the
documents to be executed in connection with the Loan (the "Loan Documents").
Borrower is not in default with respect to any judgment, order, writ,
injunction, decree, demand, rule or regulation of any court, arbitrator, grand
jury or of any governmental agency, default under which might have consequences
which would materially and adversely affect the business, operations, properties
or assets or the condition, financial or otherwise, of Borrower.
(b) Neither the execution and delivery by Borrower of the Loan
Documents, nor the consummation of the transaction contemplated therein, nor
compliance with the terms and conditions thereof will conflict with or result in
a breach of, or constitute a breach under any of the terms, obligations,
covenants, conditions or provisions of Borrower's articles of incorporation or
bylaws or of any indenture, mortgage, lease, deed of trust, pledge, bank loan or
credit agreement, or any other agreement or instrument to which Borrower is now
a party or by which its properties may be bound or affected, or any judgment,
order, writ, injunction, decree or demand of any court, arbitrator, grand jury
or governmental agency, or result in the creation or imposition of any lien,
charge or encumbrance of any nature whatsoever upon any property or asset of
Borrower under the terms or provisions of any of the foregoing. Borrower is not
in default in the performance or observance of any of the terms, obligations,
covenants, conditions or provisions contained in any indenture or other
agreement creating, evidencing or securing an indebtedness of Borrower or
pursuant to which Borrower is a party or by which Borrower or its properties may
be bound or affected.
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<PAGE> 69
(c) To the best of Borrower's knowledge after diligent inquiry,
Borrower has obtained all required consents and releases in order to enter into
the loan transaction and execute the Loan Documents and has complied with and is
not in violation of all applicable statutes, laws, ordinances and regulations of
any kind or nature in order to effectively vest in Lender a valid first lien in
the Real Property pursuant to the Loan Documents.
(d) Borrower has the power and authority to enter into the Loan
and execute the Loan Documents and the parties executing the Loan Documents on
behalf of Borrower have been authorized to do so. The Loan is a valid obligation
of Borrower.
(e) To Borrower's best knowledge after diligent inquiry, except
as may be set forth in Exhibit "E" to the Loan Agreement, Borrower has complied
in all material respects with all applicable statutes, rules, regulations,
orders, restrictions, licenses and permits of any domestic or foreign government
or any instrumentality or agency thereof, having jurisdiction over the conduct
of its business and ownership of its properties (including, without limitation,
applicable statutes, rules, regulations, orders and restrictions relating to
equal employment opportunities, zoning, building, fire, health and safety and
environmental standards or controls) and Borrower has no knowledge of any event
or condition that would cause any of the above to be violated in any material
respect.
(f) Borrower has filed all United States income tax returns and
all state and municipal tax returns which are required to be filed, and has
paid, or made provision for the payment of, all taxes which have become due
pursuant to said returns or pursuant to any assessment received by Borrower,
except such filings and taxes, if any, as are being contested in good faith and
as to which adequate reserves have been provided.
(g) Subject to the Permitted Encumbrances described on Exhibit
"B" to the Deed of Trust (as defined in the Loan Agreement), Borrower has good
and marketable title in fee simple absolute to all of the Real Property (except
Parcel 19A thereof) free and clear of any interest which could divest Borrower's
interest therein, divest Lender's interest therein or which could adversely
affect the validity and/or priority of the lien of the Deed of Trust given as
security for the Loan.
(h) Borrower is not a foreign corporation, foreign partnership,
foreign trust, foreign estate or foreign person (as those terms are defined in
the Internal Revenue Code of 1986, as amended) and Borrower's U.S. Federal Tax
I.D. Number is 88-0106662. Borrower's address is as set forth on page 1 hereof.
Borrower is a Nevada corporation duly formed and validly existing under the laws
of the State of Nevada.
(i) To the best of Borrower's knowledge after diligent inquiry,
the Real Property and soil and ground water thereof are free from any toxic
and/or hazardous materials including asbestos, PCBs, pesticides, herbicides and
any other material(s) defined as "hazardous substances," "hazardous materials,"
or "toxic substances" in the Comprehensive Environmental Response, Compensation
and Liability act of 1980 as Amended, the Hazardous Materials Transportation
Act, The Resource Conservation and Recovery Act, and those substances defined as
hazardous or toxic wastes under
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<PAGE> 70
applicable state law (other than any landscaping or maintenance products of a
type or quantity typically used at a location having a use consistent with
Borrower's use of the Real Property as of the Loan closing). Further, the
Borrower agrees that it will not permit the storage of any toxic and/or
hazardous material, as described above, in, on and/or around the Real Property
now or at any future time. Borrower will indemnify and save Lender harmless from
any and all claims, judgments, damages, penalties, fines, costs, liabilities or
losses (including, without limitation, diminution in value of the Real Property)
which may result from contamination of the Real Property by hazardous and/or
toxic material(s), except to the extent that any such claim, judgment, damage,
penalty, fine, cost, liability or loss arises from the gross negligence or
wilful misconduct of Lender.
(j) All work, labor, services and materials, if any, furnished to
or in connection with the Real Property have been fully paid for, with the
exception of any work currently in progress as to which Borrower has properly
posted a Notice of Nonresponsibility and as to which no mechanic's,
materialman's or other liens have been previously filed, so that no mechanic's,
materialman's or other lien may properly be filed against the Real Property or
any portion thereof for work done up to the funding of the Loan, except as to
unpaid items which the title policy will insure over.
(k) Neither Borrower nor Guarantor is the subject of any
insolvency or bankruptcy proceeding or the subject of any suit or proceeding at
law or in equity or otherwise, the result of any of which might affect the title
to the Real Property or the improvements thereon or Borrower's ability to
perform its obligations and agreements under the Loan Documents or under
Borrower's articles of incorporation or bylaws.
(l) Borrower has no actual knowledge of any violations in
connection with the use and operation of the Real Property, whether filed or
threatened, or of any restriction against the sale of the Real Property or any
portion thereof; all required permits and licenses have been obtained for the
Real Property.
(m) At the time of disbursement of the funds in connection with
the Loan:
(i) The Real Property has not been taken, in whole or in
part, in condemnation or any other similar proceedings, and
no such proceedings were pending; and
(ii) The representations made in the materials submitted in
connection with the application for the Loan by Borrower,
including but not limited to the type of development, income
and expenses of the Real Property and the financial condition
and credit of Borrower are as represented in said materials
without material adverse change, except such change as has
been approved in writing by Lender.
3
<PAGE> 71
DATED as of August 12, 1998.
PREFERRED EQUITIES CORPORATION,
a Nevada corporation
By: /s/ FREDERICK H. CONTE
------------------------------------
Name: Frederick H. Conte
---------------------------------
Title: President
--------------------------------
4
<PAGE> 72
GUARANTOR'S CERTIFICATE
Re: $4,000,000 loan by Dorfinco Corporation, a Delaware corporation, to
Preferred Equities Corporation, a Nevada corporation, to be guaranteed by Mego
Financial Corp., a New York corporation. Guarantor's address: 4310 Paradise
Blvd., Las Vegas, Nevada 89109.
* * * * * *
In order to induce DORFINCO CORPORATION ("Lender") to make the
above-referenced loan (the "Loan") to Preferred Equities Corporation, a Nevada
corporation ("Borrower") and to accept the Guaranty Agreement of Mego Financial
Corp. ("Guarantor") in connection therewith, Guarantor hereby certifies and
represents as of the date of the funding of the Loan, and warrants as follows:
(a) Except as set forth on Exhibit "E" to the Loan and Security
Agreement dated August 12, 1998 (the "Loan Agreement"), between Borrower and
Lender, there are no actions, suits or proceedings pending, and, to the best
knowledge and belief of Guarantor, there are no actions, suits, claims,
investigations or proceedings threatened, against or affecting Guarantor, or the
business, operations, properties or assets of Guarantor, before or by any
governmental department, commission, board, regulatory authority, bureau, agency
or instrumentality, domestic, foreign, Federal, state or municipal (herein
collectively called "governmental agency"), or any court, arbitrator or grand
jury, which may result in any material adverse change in the business
operations, properties or assets or in the condition, financial or otherwise, of
Guarantor, or in the ability of Guarantor to perform its obligations under the
Guaranty Agreement (the "Guaranty") to be executed by Guarantor in connection
with the Loan. Guarantor is not in default with respect to any judgment, order,
writ, injunction, decree, demand, rule or regulation of any court, arbitrator,
grand jury or of any governmental agency, default under which might have
consequences which would materially and adversely affect the business,
operations, properties or assets or the condition, financial or otherwise, of
Guarantor.
(b) Neither the execution and delivery by Guarantor of the Guaranty,
nor the consummation of the transaction contemplated therein, nor compliance
with the terms and conditions thereof will conflict with or result in a breach
of, or constitute a breach under any of the terms, obligations, covenants,
conditions or provisions of Guarantor's articles of incorporation or bylaws or
of any indenture, mortgage, lease, deed of trust, pledge, bank loan or credit
agreement, or any other agreement or instrument to which Guarantor is now a
party or by which its properties may be bound or affected, or any judgment,
order, writ, injunction, decree or demand of any court, arbitrator, grand jury
or governmental agency, or result in the creation or imposition of any lien,
charge or encumbrance of any nature whatsoever upon any property or asset of
Guarantor under the terms or provisions of any of the foregoing. Guarantor is
not in default in the performance or observance of any of the terms,
obligations, covenants, conditions or provisions contained in any indenture or
other
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<PAGE> 73
agreement creating, evidencing or securing an indebtedness of Guarantor or
pursuant to which Guarantor is a party or by which Guarantor or its properties
may be bound or affected.
(c) To the best of Guarantor's knowledge after diligent inquiry,
Guarantor has obtained all required consents and releases in order to execute
the Guaranty.
(d) Guarantor has the power and authority to enter into and execute
the Guaranty, and the parties executing the Guaranty on behalf of Guarantor have
been authorized to do so. The Guaranty is a valid obligation of Guarantor.
(e) To Guarantor's best knowledge after diligent inquiry, except as
may be set forth in Exhibit "E" to the Loan Agreement, Guarantor has complied in
all material respects with all applicable statutes, rules, regulations, orders,
restrictions, licenses and permits of any domestic or foreign government or any
instrumentality or agency thereof, having jurisdiction over the conduct of its
business and ownership of its properties (including, without limitation,
applicable statutes, rules, regulations, orders and restrictions relating to
equal employment opportunities, zoning, building, fire, health and safety and
environmental standards or controls) and Guarantor has no knowledge of any event
or condition that would cause any of the above to be violated in any material
respect.
(f) Guarantor has filed all United States income tax returns and all
state and municipal tax returns which are required to be filed, and has paid, or
made provision for the payment of, all taxes which have become due pursuant to
said returns or pursuant to any assessment received by Guarantor, except such
filings and taxes, if any, as are being contested in good faith and as to which
adequate reserves have been provided.
(g) Guarantor is not a foreign corporation, foreign partnership,
foreign trust, foreign estate or foreign person (as those terms are defined in
the Internal Revenue Code of 1986, as amended) and Guarantor's U.S. Federal Tax
I.D. Number is 13-5629885. Guarantor's address is as set forth on page 1 hereof.
Guarantor is a New York corporation duly formed and validly existing under the
laws of the State of New York and in good standing and qualified as a foreign
corporation in all jurisdictions in which such good standing and/or
qualification is required.
(h) Guarantor is not the subject of any insolvency or bankruptcy
proceeding or the subject of any suit or proceeding at law or in equity or
otherwise, the result of any of which might affect Guarantor's ability to
perform its obligations and agreements under the Guaranty or under Guarantor's
articles of incorporation or bylaws.
(i) The representations made in the materials submitted by Guarantor
in connection with the application for the Loan by Borrower, including but not
limited to the financial condition and credit of Guarantor are as represented in
said materials without material adverse change, except such change as has been
approved in writing by Lender.
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<PAGE> 74
DATED as of August 12, 1998.
MEGO FINANCIAL CORP.,
a New York corporation
By: /s/ RICHARD L. RODRIGUEZ
------------------------------------
Name: Richard L. Rodriguez
--------------------------------
Title: Vice President
--------------------------------
3
<PAGE> 75
DEED OF TRUST,
SECURITY AGREEMENT AND FIXTURE FILING
Dated as of August 12, 1998
in the amount of: $4,000,000.00
PREFERRED EQUITIES CORPORATION,
a Nevada corporation
having its principal office at 4310 Paradise Road
Las Vegas, Nevada 89109
(the "Grantor");
UNITED TITLE OF NEVADA,
a Nevada corporation
having its principal office at 2389-A Renaissance Drive
Las Vegas, Nevada 89119
(the "Trustee"); and
DORFINCO CORPORATION,
a Delaware corporation
having an office at 40 Westminster Street
Providence, Rhode Island 02940.
(the "Beneficiary").
LOCATION OF PREMISES
Nye County
State of Nevada
-------------------------------------------
After recording, please return to:
DORFINCO CORPORATION
c/o Textron Financial Corporation
40 Westminster Street
Providence, Rhode Island 02940
Attention: Margaret R. Hayes-Cote,
Division Counsel
<PAGE> 76
STATE OF NEVADA )
) ss.
COUNTY OF NYE )
DEED OF TRUST AND SECURITY AGREEMENT AND FIXTURE FILING
KNOW ALL MEN BY THESE PRESENTS:
THIS DEED OF TRUST (hereinafter referred to as this "Deed") is made and
entered into as of the 12th day of August, 1998, by and among PREFERRED EQUITIES
CORPORATION, a Nevada corporation, having as a mailing address 4310 Paradise
Road, Las Vegas, Nevada 89109 (hereinafter referred to as Grantor"), UNITED
TITLE OF NEVADA, a Nevada corporation, having as a mailing address 2389-A
Renaissance Drive, Las Vegas, Nevada 89119 (hereinafter referred to as the
"Trustee") and DORFINCO CORPORATION, a Delaware corporation, having a mailing
address of 40 Westminster Street, Providence, Rhode Island 02940 (hereinafter
referred to as the "Beneficiary").
In order to secure the payment, performance and observance of the
indebtedness and other obligations of Grantor hereinafter set forth, Grantor has
granted and conveyed, and does by these presents mortgage, grant, warrant,
assign, convey, pledge and set over unto the Trustee, IN TRUST, WITH POWER OF
SALE, all of the following described land and interests in land, estates,
easements, rights, improvements, property, fixtures, equipment, furniture,
furnishings, appliances and appurtenances (hereinafter collectively referred to
as the "Premises"):
(a) All those certain tracts, or parcels of land more particularly
described in Exhibit "A" attached hereto and by this reference made
a part hereof (hereinafter referred to as the "Land").
(b) All buildings, structures and improvements (the "Improvements") of
every nature whatsoever now or hereafter situated on the Land.
(c) All construction materials, vaults, gas, electric and other utility
fixtures, radiators, heaters, engines, machinery, boilers, ranges,
elevators, plumbing and heating fixtures, draperies, carpeting and
other floor coverings, fire extinguishers and any other safety
equipment, washers, dryers, water heaters, water fountains, mirrors,
mantels, air conditioning apparatus, refrigerating plants,
refrigerators, cooking apparatus and appurtenances, window screens,
awnings and storm sashes, which are or shall be attached to said
buildings, structures or improvements and all other furnishings,
furniture, goods which are or are to become fixtures, machinery,
equipment, inventory, supplies, appliances, and tangible personal
property of every kind and nature whatsoever
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<PAGE> 77
now or hereafter owned by Grantor and located in, on or about, or
used or intended to be used with or in connection with the use,
operation or enjoyment of the Land and Improvements, and all
attachments, additions, improvements, after-acquired property,
renewals, proceeds and replacements of any of the foregoing and all
the right, title and interest of Grantor in any of the foregoing
property which is subject to or covered by any conditional sales
contract, chattel mortgage or similar lien or claim, together with
the benefit of any deposits or payments now or hereafter made by
Grantor or on behalf of Grantor with respect thereto, all of which
are hereby declared and shall be deemed to be fixtures and
accessions to the freehold and a part of the Premises as between the
parties hereto and all persons claiming by, through or under them,
and which shall be deemed to be a portion of the security for the
indebtedness herein described and to be secured by this Deed.
(d) All now owned or hereafter acquired easements, rights-of-way,
strips, gores of land, streets, ways, alleys, passages, sewer
rights, waters, water courses, water rights and powers, and all
estates, rights, titles, interests, privileges, liberties,
tenements, hereditaments and appurtenances whatsoever, in any way
belonging, relating or appertaining to the Premises or any part
thereof, or which hereafter shall in any way belong, relate or be
appurtenant thereto, and the reversions, remainders, rents, issues,
profits, revenues, accounts, contract rights and general intangibles
of or arising from the Premises (including without limitation all
payments under room occupancy agreements, all leases or tenancies,
proceeds of insurance, prepaid insurance premiums, condemnation
payments, tenant security deposits, escrow funds and payments from
motel guests), and all the estate, right, title, interest, property,
possession, claim and demand whatsoever at law, as well as in
equity, of Grantor of, in and to the same.
(e) Any and all leases, subleases, rental agreements, occupancy
agreements, licenses, concessions, entry fees, other agreements
which grant a possessory interest in all or any part of the Land and
Improvements, together with all rents, issues, profits, revenues,
proceeds, awards, accounts, security deposits and other benefits now
or hereafter arising from the use and enjoyment of the Land and
Improvements or any part thereof.
TO HAVE AND TO HOLD the Premises, with all privileges and appurtenances
thereunto belonging, unto the Trustee, forever. Grantor covenants that Grantor
is lawfully seized and possessed of the Premises as aforesaid, and has all
requisite right and authority to convey the same, that the same is unencumbered
except for those matters expressly set forth in Exhibit "B" attached hereto and
by this reference made a part hereof, and that Grantor does warrant and will
forever defend the title thereto to the Trustee and the Beneficiary against the
claims of all persons whomsoever, except as to those matters set forth in said
Exhibit "B" or otherwise permitted in the Security Documents (as hereinafter
defined).
This Deed is given to secure the following described indebtedness
(collectively the "Indebtedness"):
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(a) All sums evidenced by that certain Promissory Note (hereinafter
referred to as the "Note" dated of even date herewith, made by
Grantor, payable to the order of the Beneficiary in the principal
face amount of up to FOUR MILLION AND NO/100 U.S. DOLLARS
($4,000,000.00), together with interest thereon, with the final
payment being due on August 31, 1999, unless extended as provided in
the Note; together with any and all modifications, renewals and/or
extensions of the Note.
(b) Any and all additional advances made by the Beneficiary to protect
or preserve the Premises or the lien hereof on the Premises, or for
taxes, assessments or insurance premiums as hereinafter provided
(whether or not the original Grantor remains the owner of the
Premises at the time of such advances).
(c) Any and all other sums owed by Grantor to the Beneficiary hereunder,
under the Note, or any and all other indebtedness, liabilities, or
obligations of Grantor to the Beneficiary, of any nature whatsoever,
whether now existing or hereafter created, whether direct, indirect
or secondary, and any and all modifications, extensions or renewals
thereof, including without limitation sums owed under any other
instrument evidencing, securing or in any way concerning the debt
evidenced by the Note. Without limiting the foregoing, this Deed
shall also secure the following indebtedness:
(i) A loan made by Beneficiary to Grantor in the amount of up to
$7,500,000, evidenced by a promissory note in such amount
dated August 9, 1991, and secured by, among other things, a
Loan and Security Agreement dated as of July 31, 1991, by and
between Grantor as borrower and Beneficiary as lender, and
guaranteed by Mego Financial Corp.; and
(ii) A loan made by Beneficiary's affiliate, Textron Financial
Corporation, a Delaware corporation ("Lender") to Grantor's
subsidiary, Steamboat Suites, Inc. ("SSI"), in the amount of
up to $15,000,000, evidenced by a promissory note in such
amount dated November 30, 1995, guaranteed by Grantor, and
secured by, among other things, a deed of trust from SSI to
Textron dated October 5, 1994, as amended or restated, and
recorded in the Routt County Clerk and Recorder's office on
October 6, 1994, in Book 701 at Page No. 1795, a first
amendment to deed of trust from SSI to Textron dated February
27, 1995, and recorded in the Routt County Clerk and
Recorder's office on March 22, 1995 in Book 706 at Page 339, a
second amendment to deed of trust from SSI to Textron dated
November 29, 1996, and recorded in the Routt County Clerk and
Recorder's office on December 20, 1996 in Book 728 at Page
320, and as further amended or restated.
The indebtedness described in the foregoing clauses (i) and (ii) is
herein defined as the "Related Indebtedness", and the documents
described in the foregoing clauses (i) and (ii), together with the
referenced guaranties and any and all other documents or instruments
evidencing, securing or executed in connection with any of the
Related Indebtedness are herein collectively defined as the "Related
Loan Documents".
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The Note, this Deed and the following instruments which evidence, secure
and/or relate to the loan evidenced by the Note are hereinafter referred to as
the "Security Documents:"
(a) Loan and Security Agreement dated of even date herewith by and
between Grantor as Borrower and Beneficiary as Lender (the "Loan
Agreement");
(b) Guaranty Agreement dated of even date herewith by Mego Financial
Corp. as guarantor (the "Guarantor") in favor of the Beneficiary
(the "Guaranty"); and
(c) All other documents, instruments or agreements now or hereafter
securing, evidencing and/or relating to the debt secured by the
Note, except for the Environmental Indemnity Agreement of even date
herewith from Grantor to Beneficiary.
Should the Indebtedness be paid according to the tenor and effect thereof
when the same shall become due and payable, and should Grantor perform all
covenants, terms and conditions herein contained in a timely manner, then this
conveyance shall be released, terminated and reconveyed to the persons entitled
thereto of record at the request and the expense of Grantor.
Grantor hereby further covenants and agrees as follows:
ARTICLE I
1.01 Payment of Indebtedness. Grantor will pay the Note according to the tenor
thereof and all other sums now or hereafter secured hereby promptly as the same
shall become due.
1.02 Taxes, Liens and Other Charges.
(a) In the event of the passage of any state, federal, municipal or
other governmental law, order, rule or regulation, subsequent to the
date hereof, in any manner changing or modifying the laws now in
force governing the taxation of the Indebtedness or this Deed or the
manner of collecting taxes with respect thereto so as to adversely
affect the Beneficiary (exclusive of any tax on Beneficiary's
income), Grantor will promptly pay any such tax. If Grantor fails to
make such prompt payment or if, in the reasonable opinion of the
Beneficiary, any such state, federal, municipal, or other
governmental law, order, rule or regulation prohibits Grantor from
making such payment or would penalize the Beneficiary if Grantor
makes such payment or if, in the reasonable opinion of the
Beneficiary, the making of such payment might result in the
imposition of interest beyond the maximum amount permitted by
applicable law, then the entire balance of the principal sum secured
by this Deed and all interest accrued thereon shall, at the option
of the Beneficiary, become immediately due and payable.
(b) Grantor will pay (to the extent same are not paid from the escrowed
funds provided for in Paragraph 1.04), before the same become
delinquent, all taxes, liens, assessments and charges of every
character including all utility charges, now or hereafter levied or
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assessed upon the Premises; and upon demand will furnish the
Beneficiary receipted bills evidencing such payment.
(c) Grantor will not suffer or permit any mechanic's, materialman's,
laborer's, statutory or other lien to remain outstanding upon all or
any part of the Premises.
(d) Grantor, at its expense, may contest, after prior written notice to
Beneficiary, by appropriate legal proceedings conducted in good
faith and with due diligence, the amount, validity or application,
in whole or in part, of any taxes, liens, assessments or charges
levied or assessed upon the Premises or any mechanic's,
materialman's, laborer's, statutory or other lien filed against the
Premises, so long as such proceedings operate to prevent the
collection or other realization thereon, the sale or forfeiture of
the Premises or any part thereof to satisfy the same or the
impairment of Beneficiary's lien; provided that (i) during such
contest the Grantor shall, at the option of the Beneficiary, provide
Beneficiary with security satisfactory to the Beneficiary, assuring
the payment of any additional interest, charge, penalty or expense
arising from or incurred as a result of such contest, and (ii) if at
any time payment of any obligation imposed upon the Grantor under
this Paragraph 1.02 shall become necessary to prevent the sale or
forfeiture of the Premises or any part thereof to satisfy the same,
then Grantor shall pay the same in sufficient time to prevent sale
or forfeiture.
1.03 Insurance.
(a) Grantor shall deliver to and maintain for the benefit of the
Beneficiary during the term of this Deed, original paid up insurance
policies (or certified copies thereof) of acceptable insurance
companies, in amounts, in form and in substance, and with expiration
dates all reasonably acceptable to the Beneficiary and containing a
waiver of subrogation rights by the insuring company,
non-contributory standard mortgage benefit clause, or their
equivalents, and a mortgage loss payable endorsement in favor of and
satisfactory to the Beneficiary and breach of warranty coverage,
providing the following types of insurance on the Premises:
(i) unless waived in writing by Beneficiary, insurance against
loss or damage by hazards as are customarily insured against
with respect to unimproved land (or, if the Land is
subsequently improved, then as are customarily insured against
with respect to improved land) as are presently included in
so-called "all risk extended coverage" and against other such
insurable hazards as, under good insurance practices, from
time to time are insured against for properties of similar
character and location. The amount of the foregoing insurance
shall not be less than the greater of (a) the full replacement
value of the Premises including any or all improvements and
personal property now or hereafter thereon, or (b) the
aggregate of the face amount of the Indebtedness plus any
other debt encumbering the Premises, provided, however, that
nothing herein shall be deemed to require insurance in excess
of amounts available from one or more insurance companies
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acceptable to Beneficiary pursuant to Section 1.03(a); and
said policies of insurance shall provide for a deductible
acceptable to the Beneficiary, provide for breach of warranty
coverage, replacement cost endorsements satisfactory to the
Beneficiary, and shall not permit co-insurance;
(ii) such other insurance on the Premises or any replacements or
substitutions therefor, including public/general liability
and, if the Land is subsequently improved, property damage
insurance in an amount reasonably satisfactory to the
Beneficiary, and flood insurance (if the Premises are or
become located in an area which is considered a flood risk by
the U.S. Department of Housing and Urban Development), and in
such amounts as may from time to time be reasonably required
by the Beneficiary against other insurable casualties which at
the time are commonly insured against in the case of premises
similarly situated, due regard being given to the height and
type of the improvements, their construction, location, use
and occupancy, or any replacements or substitutions therefor.
(b) The Beneficiary is hereby authorized and empowered, at its option,
to adjust or compromise any loss under any insurance policies
maintained pursuant to this Paragraph 1.03, and to collect and
receive the proceeds from any such policies. Each insurance company
is hereby authorized and directed to make payment for all such
losses directly to the Beneficiary, instead of to Grantor and the
Beneficiary jointly. In the event any insurance company fails to
disburse directly and solely to the Beneficiary but disburses
instead either solely to Grantor or to Grantor and the Beneficiary
jointly, Grantor agrees immediately to endorse and transfer such
proceeds to the Beneficiary. Upon the failure of Grantor to endorse
and transfer such proceeds as aforesaid, the Beneficiary may execute
such endorsements or transfers for and in the name of Grantor and
Grantor hereby unconditionally and irrevocably appoints the
Beneficiary as Grantor's agent and attorney-in-fact, coupled with an
interest to endorse and transfer such proceeds to Beneficiary. After
deducting from said insurance proceeds all of its expenses incurred
in the collection and administration of such sums, including
attorneys' fees, the Beneficiary may apply the net proceeds or any
part thereof, at its option (i) to the payment of the Indebtedness,
whether or not due and in whatever order the Beneficiary elects,
(ii) to the repair and/or restoration of the Premises or (iii) for
any other purposes or objects for which the Beneficiary is entitled
to advance funds under this Deed; all without affecting the lien of
this Deed. The Beneficiary shall not be held responsible for any
failure to collect any insurance proceeds due under the terms of any
policy regardless of the cause of such failure.
(c) All insurance policies required pursuant to this Deed shall provide
that the coverage afforded thereby shall not expire or be amended,
canceled or otherwise terminated without at least thirty (30) days
prior written notice to the Beneficiary. At least thirty (30) days
prior to the expiration date of each policy maintained pursuant to
this Paragraph 1.03, a renewal or replacement thereof satisfactory
to the Beneficiary shall be delivered to the Beneficiary. Grantor
shall deliver to the Beneficiary receipts
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evidencing the payment for all such insurance policies and renewals
or replacements. The delivery of any insurance policies hereunder
shall constitute an assignment of all unearned premiums as further
security hereunder. In the event of the foreclosure of this Deed or
any other transfer of title to the Premises in full or partial
extinguishment of the Indebtedness, all right, title and interest of
Grantor in and to all insurance policies then in force, to the
extent applicable to the Premises, shall pass to the purchaser or
grantee.
1.04 Monthly Deposits. From and after the occurrence of one or more Events of
Default under this Deed (subject to all applicable cure or grace periods), and
upon the written request of Beneficiary to Grantor, Grantor will deposit with
the Beneficiary, on the due date of each monthly installment under the Note, a
sum which, in the estimation of the Beneficiary, shall be equal to one-twelfth
(1/12) of the annual taxes, assessments and insurance premiums on or with
respect to the Premises. Said deposits shall be held by the Beneficiary, free of
interest, and free of any liens or claims on the part of creditors of Grantor
and as part of the security of the Beneficiary, and to be used by the
Beneficiary to pay current taxes, assessments and insurance premiums on the
Premises as the same are due. Said deposits shall not be trust funds but may be
commingled with the general funds of the Beneficiary. If said deposits are
insufficient to pay the taxes, assessments and insurance premiums in full as the
same become due, Grantor will deposit with the Beneficiary such additional sum
or sums as may be required in order for the Beneficiary to pay such taxes,
assessments and insurance premiums in full, in accordance with all applicable
law. Upon the occurrence of any default or Event of Default at any time when the
Beneficiary is in possession of such deposits, the Beneficiary may, at its
option, apply any of said deposits to the payment of the Indebtedness in such
manner as it may elect.
1.05 Condemnation. If all or any portion of the Premises shall be damaged or
taken through condemnation (which term when used in this Deed shall include any
damage or taking by any governmental authority and any transfer by private sale
in lieu thereof), either temporarily or permanently, then the entire
Indebtedness shall, at the option of the Beneficiary, become immediately due and
payable. The Beneficiary shall be entitled to receive all compensation, awards
and other payments or relief thereof, provided, however, that Grantor may
participate in any such condemnation proceedings to the extent of its interest
in the Premises and retain any such payments only to the extent of its interest
in the Premises remaining after the Beneficiary has received full compensation
for its interest in the Premises. The Beneficiary is hereby authorized, at its
option, to commence, appear in and prosecute, in its own or, subject to the
foregoing sentence, in Grantor's name, any action or proceeding relating to any
condemnation, and to settle or compromise any claim in connection therewith. All
such compensation, awards, damages, claims, rights of action and proceeds and
the right thereto are hereby assigned by Grantor to the Beneficiary. After
deducting from said condemnation proceeds all of its expenses incurred in the
collection and administration of such sums, including attorneys' fees, the
Beneficiary may apply the net proceeds or any part thereof, at its option:
(a) to the payment of the Indebtedness, whether or not due and in
whatever order the Beneficiary elects,
(b) to the repair and/or restoration of the Premises, or
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(c) for any other purposes for which the Beneficiary is entitled to
advance funds under this Deed, all without affecting the lien or
priority of this Deed, and any balance of such moneys then remaining
shall be paid to Grantor. Grantor agrees to execute such further
assignment of any such compensation, awards, damages, claims, rights
of action and proceeds as the Beneficiary may require.
1.06 Care of Premises.
(a) Grantor will keep the buildings, parking areas, roads and walkways,
recreational facilities, landscaping and all other improvements of
any kind now or hereafter erected on the Land or any part thereof,
and the fixtures, furnishings and equipment therein and thereon, in
good condition and repair, will not commit or suffer any waste and
will not do or suffer to be done anything which will increase the
risk of fire or other hazard to the Premises or any part thereof.
(b) Grantor will not remove or demolish or alter the structural
character of any improvement located on the Land without the written
consent of the Beneficiary.
(c) If the Premises or any part thereof is damaged by fire or any other
cause, Grantor will give immediate written notice thereof to the
Beneficiary.
(d) The Beneficiary, Trustee or their respective representatives are
hereby authorized to enter upon and inspect the Premises at any time
during normal business hours or, upon an occurrence of an Event of
Default, at any time.
(e) Subject to Grantor's right of contest set forth in Section D.5 of
the Loan Agreement, Grantor will promptly comply with all present
and future laws, ordinances, rules and regulations of any
governmental authority affecting the Premises or any part thereof.
Grantor will deliver to the Beneficiary within ten (10) days after
Grantor's receipt thereof copies of any additional governmental
permits or approvals or disapprovals or notices that relate to any
matter that would materially adversely affect the Premises issued
with regard to the Premises or any portion thereof.
(f) If all or any part of the Premises shall be damaged by fire or other
casualty, Grantor will promptly restore the Premises to the
equivalent of its original condition; and if a part of the Premises
shall be damaged through condemnation, Grantor will promptly
restore, repair or alter the remaining portions of the Premises in a
manner satisfactory to the Beneficiary. Notwithstanding the
foregoing, Grantor shall not be obligated to so restore unless in
each instance, the Beneficiary agrees to make available to Grantor
(pursuant to a procedure satisfactory to the Beneficiary) any net
insurance or condemnation proceeds actually received by the
Beneficiary hereunder in connection with such casualty loss or
condemnation, to the extent such proceeds are required to defray the
expense of such restoration; provided, however, that the
unavailability or insufficiency of any such insurance or
condemnation proceeds to defray the entire expense of
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restoration shall in no way relieve Grantor of its obligation to
restore. In the event all or any portion of the Premises shall be
damaged or destroyed by fire or other casualty or by condemnation,
Grantor shall promptly deposit with the Beneficiary a sum equal to
the amount by which an architect's estimate (acceptable to
Beneficiary) of cost of the restoration of the Premises exceeds the
actual net insurance or condemnation proceeds received by the
Beneficiary in connection with such damage or destruction.
1.07 Leases and Other Agreements Affecting Property. Grantor will duly and
punctually perform all terms, covenants, conditions and agreements binding upon
it under any lease, sublease, rental agreement, occupancy agreement or any other
agreement of any nature whatsoever which involves or affects the Premises or any
part thereof if such failure to perform would have a materially adverse effect
on the Premises or Grantor's ability to repay or perform the Indebtedness.
Grantor will furnish the Beneficiary with executed copies of all leases,
subleases, rental agreements or occupancy agreements now or hereafter created
upon the Premises or any part thereof. Grantor will not, without the express
written consent of the Beneficiary, enter into any lease, sublease or occupancy
agreements with respect to the Premises or any portion thereof; provided,
however, that the Beneficiary's prior written consent shall not be required with
respect to the entering into, modification or termination of any occupancy
agreement for any of the Premises consisting of a portion of any legally
subdivided parcel and having a term of less than sixty (60) days. Grantor will
not, without the express written consent of the Beneficiary, terminate or modify
either orally or in writing, any lease, sublease, rental agreement or occupancy
agreement now existing or hereafter created upon the Premises or any part
thereof, nor will Grantor permit any assignment or a subletting by any Tenant
without the prior express written consent of the Beneficiary. Grantor will not
accept payment of rent more than one (1) month in advance without the prior
express written consent of the Beneficiary. In order to further secure payment
of the Note and the observance, performance and discharge of Grantor's
obligations, Grantor hereby assigns, transfers and sets over unto the
Beneficiary, and grants the Beneficiary a security interest in, all of Grantor's
right, title and interest in, to and under all leases, subleases, rental
agreements, occupancy agreements, licenses, concessions, entry fees, other
agreements which grant a possessory interest and other contracts now or
hereafter affecting the Premises or any part thereof and in and to all of the
rents, issues, profits, revenues, proceeds, awards and other benefits now or
hereafter arising from the use and enjoyment of the Premises or any part
thereof; provided, however, that Beneficiary hereby licenses back to Grantor the
right to collect the same unless and until an Event of Default has occurred
hereunder.
1.08 Security Agreement and Fixture Filing. Insofar as (i) any of the property
listed in paragraphs (b) through (e) on pages 1 and 2 hereof and, (ii) all other
personal property in any way connected with the use or enjoyment of the Premises
(hereinafter all collateral defined in Sections (i) and (ii) hereof shall be
collectively referred to as "Collateral") this Deed, in compliance with the
provisions of the Uniform Commercial Code as enacted in the State of Nevada as
it may be amended from time to time (the "UCC"), is hereby made and declared to
be: (x) a security agreement, encumbering the Collateral and (y) a fixture
filing. Grantor does hereby grant to the Beneficiary a continuing lien and
security interest in and to all of said Collateral and all replacements,
substitutions, additions and proceeds thereof and all after-acquired property
relating thereto. A financing statement or statements reciting this Deed to be a
security agreement, affecting all of said
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Collateral aforementioned, shall be executed by Grantor and the Beneficiary and
appropriately filed. Grantor covenants and agrees that, prior to changing its
name, identity or structure, it will so notify the Beneficiary and will promptly
execute any financing statements or other instruments deemed necessary by the
Beneficiary to prevent any filed financing statement from becoming seriously
misleading or losing its perfected status. The remedies for any violation of the
covenants, terms and conditions of the security agreement herein contained shall
be (i) as prescribed herein, or (ii) as prescribed by general law, or (iii) as
prescribed by the specific statutory consequences now or hereafter enacted and
specified in the UCC, all at the Beneficiary's sole election. Grantor and the
Beneficiary agree that the filing of such financing statement(s) in the records
normally having to do with personal property shall never be construed in anywise
derogating from or impairing this declaration and hereby stated intention of
Grantor and the Beneficiary that everything used in connection with the
production of income from the Premises, adapted for use therein, and/or which is
described in this Deed, is, and at all times and for all purposes and in all
proceedings both legal or equitable shall be, regarded as part of the real
estate irrespective of whether (a) any such item is physically attached to the
improvements, (b) serial numbers are used for the better identification of
certain items capable of being thus identified in a recital contained herein, or
(c) any such item is referred to or reflected in any such financing statement(s)
so filed at any time. Similarly, the mention in any such financing statement(s)
of the rights in and to (aa) the proceeds of any insurance policy relating to
the Premises, or (bb) any award in eminent domain proceedings for a taking or
for loss of value, or (cc) Grantor's interest as lessor in any present or future
lease, sublease, or rights to income growing out of the use and/or occupancy of
the Premises, whether pursuant to lease, sublease, or otherwise, shall never be
construed as in anywise altering any of the rights of the Beneficiary as
determined by this instrument or impugning the priority of the Beneficiary's
lien granted hereby or by any other recorded document, but such mention in such
financing statement(s) is declared to be for the protection of the Beneficiary
in the event any court shall at any time hold with respect to the foregoing
(aa), (bb) or (cc), that notice of the Beneficiary's priority of interest to be
effective against a particular class of persons, must be filed in the UCC
records. The information contained herein is provided in order that this Deed
shall comply with the requirements of the UCC for instruments to be filed as
financing statements. The "Debtor" is the Grantor hereunder; the "Secured Party"
is the Beneficiary herein, the principal place of business of the "Debtor" is as
set forth on Page 1 of this Deed, the mailing addresses of the "Debtor and
"Secured Party" are as set forth on Page 1 of this Deed, and the types or items
of collateral are as described hereinabove.
1.09 Further Assurances; After Acquired Property. At any time, and from time to
time, upon request by the Beneficiary, Grantor will make, execute and deliver or
cause to be made, executed and delivered, to the Beneficiary and, where
appropriate, cause to be recorded and/or filed and from time to time thereafter
to be re-recorded and/or refiled at such time and in such offices and places as
shall be deemed desirable by the Beneficiary, any and all such other and further
deeds to secure debt, security agreements, financing statements, continuation
statements, instruments of further assurance, certificates and other documents
as may, in the reasonable opinion of the Beneficiary, be necessary or desirable
in order to effectuate, complete, or perfect, or to continue and preserve (a)
the obligation of Grantor under the Note and under this Deed, and (b) the lien
of this Deed as a lien upon and security title in and to all of the Premises,
whether now owned or hereafter acquired by Grantor. Upon any failure by Grantor
so to do, the Beneficiary may make, execute, record, file, re-record
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and/or refile any and all such deeds to secure debt, deeds of trust, security
agreements, financing statements, continuation statements, instruments,
certificates, and documents for and in the name of Grantor and Grantor hereby
irrevocably appoints the Beneficiary the agent and attorney-in-fact of Grantor
so to do. The lien hereof will automatically attach, without further act, to all
after acquired property attached to and/or used in the operation of the Premises
or any part thereof.
1.10 Expenses.
(a) If any action or proceeding is commenced regarding the Premises or
the Loan and to which action or proceeding the Beneficiary or the
Trustee is made a party or in which it becomes necessary to defend
or uphold the lien of this Deed, the Grantor shall, on demand,
reimburse the Beneficiary and the Trustee for all expenses
(including, without limitation, reasonable attorneys' fees and
appellate attorneys' fees) incurred by the Beneficiary and/or the
Trustee in any such action or proceeding. In any action or
proceeding to foreclose this Deed or to recover or collect all or
any portion of the Indebtedness, the provisions of law relating to
the recovering of costs, disbursements and allowances shall remain
unaffected by this covenant.
(b) Subject to the contest rights of Grantor set forth in Section D.5 of
the Loan Agreement, the Grantor shall pay when due all payments and
charges on all liens, encumbrances, ground and other leases, and
security interests which may be or become superior or inferior to
the lien of this Deed, and, if Grantor shall not make such payments
within five (5) days following receipt of written notice of
Grantor's failure to pay from Beneficiary (unless circumstances
require that the Beneficiary make any such payment(s) immediately in
order to protect its secured interest and/or lien in any of the
Premises), the Beneficiary shall have the right, but shall not be
obligated, to pay such payments and charges and the Grantor shall,
on demand, reimburse the Beneficiary for amounts so paid. In
addition, upon default of the Grantor in the performance of any
other terms, covenants, conditions or obligations by it to be
performed under any such prior or subordinate lien, encumbrance,
lease or security interest, the Beneficiary shall have the right,
but shall not be obligated, to cure such default in the name and on
behalf of the Grantor. All sums advanced and reasonable expenses
incurred at any time by the Beneficiary pursuant to this Paragraph
1.10 or as otherwise provided under the terms and provisions of this
Deed or under applicable law shall bear interest from the date that
such sum is advanced or expense incurred, to and including the date
of reimbursement, computed at an interest rate equal to the lesser
of the Default Rate under the Note, or the highest lawful contract
rate.
(c) The Grantor agrees to bear and pay all expenses (including
reasonable attorneys' fees and appellate attorneys' fees actually
incurred) of or incidental to the enforcement of any provision
hereof, or the enforcement, compromise or settlement of this Deed or
the Indebtedness, and for the curing thereof, or for defending or
asserting the rights and claims of the Beneficiary in respect
thereof, by litigation or otherwise. All rights and remedies of the
Beneficiary shall be cumulative and may be exercised singly or
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concurrently. Notwithstanding anything herein contained to the
contrary, the Grantor, being an experienced developer and
participant in sophisticated real estate ventures, and having
consulted with counsel of its choosing: (a) hereby waives trial by
jury in any action brought by Beneficiary to enforce any provisions
of this Deed; (b) will not (i) 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 exemption from execution or
sale of the Premises or any part thereof, wherever enacted, now or
at any time hereafter in force, which may affect the covenants and
terms of performance of this Deed, nor (ii) 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 Premises, 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, nor (iii)
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; (c) hereby expressly waives all benefit or
advantage of any such law or laws referred to in subparagraph (b)
above; and (d) covenants not to hinder, delay or impede the
execution of any power herein granted or delegated to the
Beneficiary, but to suffer and permit the execution of every power
as though no such law or laws had been made or enacted. The Grantor,
for itself and all who may claim under it, waives, to the extent
that it lawfully may, all right to have the Premises marshaled upon
any foreclosure hereof.
1.11 Estoppel Affidavits. Grantor, upon fifteen (15) days prior written notice,
shall furnish to the Beneficiary a written statement, duly acknowledged, setting
forth the unpaid principal of, and interest on, the Indebtedness and whether or
not any offsets or defenses are claimed to exist against such principal and
interest, and such other information as may be reasonably requested by the
Beneficiary.
1.12 Subrogation. The Beneficiary shall be subrogated to the claims and liens of
all parties whose claims or liens are discharged or paid with the proceeds of
the Indebtedness.
1.13 Books, Records, Accounts and Annual Reports. Grantor covenants and agrees
to deliver to Beneficiary such books, records, accounts and annual reports in
the form, at the times and containing such information as may be required to be
delivered by Grantor or SSI to Beneficiary pursuant to the terms and provisions
of any Related Loan Documents.
1.14 Limit of Validity. All agreements between the Grantor and the Beneficiary
are expressly limited so that in no contingency or event whatsoever, whether by
reason of advancement of the proceeds of the Note, acceleration of maturity of
the unpaid principal balance of the Note or otherwise, shall the amount paid or
agreed to be paid to the Beneficiary for the use, forbearance or detention of
the money to be advanced hereunder exceed the highest lawful rate permissible
under applicable usury laws. If, from any circumstances whatsoever, fulfillment
of any provision hereof or of the Security Documents shall involve transcending
the limit of validity prescribed by any law which a court of competent
jurisdiction may deem applicable hereto, then ipso facto, the obligation to be
fulfilled shall be reduced to the limit of such validity, and, if from any
circumstance the
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Beneficiary shall ever receive as interest an amount which would exceed the
highest lawful rate, such amount which would be excessive interest shall be
applied to the reduction of the unpaid principal balance due under the Note and
not to the payment of interest. This provision shall control every other
provision of all agreements between the Grantor and the Beneficiary.
1.15 No Further Encumbrances. Grantor shall not, directly or indirectly
(including, without limitation, by equipment leasing or similar arrangements, or
by pledging or hypothecation of partnership interests in Grantor), further
encumber the Premises, or any part thereof, it being understood by Grantor that
the Premises, and all parts thereof, shall remain free and clear of any and all
debt instruments or other obligations for repayment of money except those given
in connection with the loan evidenced by the Note.
1.16 Restrictions on Transfers. Grantor shall comply with the following
restrictions on transfers, provided, however, that nothing in Paragraph 1.15
hereof or this Paragraph 1.16 shall be deemed to apply to, restrict or otherwise
limit to any degree any sale, transfer, encumbrance, hypothecation or other
assignment or transfer of any of the publicly traded stock of Mego Financial
Corp.:
(a) Grantor shall not, without first obtaining the prior written consent
of the Beneficiary (which consent may be given or withheld by the
Beneficiary in the Beneficiary's sole discretion), whether
voluntarily or involuntarily by operation of law or otherwise (i)
transfer, sell, convey or assign all or any portion of the Premises,
or contract to do any of the foregoing, including, without
limitation, options to purchase and installment sales contracts,
land contracts, real estate contracts or contracts for deed, (ii)
lease all or any portion of the Premises or change the legal
possession or use thereof, except as otherwise permitted pursuant to
Paragraph 1.07 hereof, or (iii) except as provided in this
Paragraph, permit the dilution, transfer, pledge, hypothecation or
encumbrance of any partnership interest of Grantor, or of any stock,
partnership or beneficial interests in any partner of Grantor which
is a corporation, partnership or a trust (exclusive of Grantor
limited partner transfers). Without limiting the generality of the
preceding sentence, the prior written consent of the Beneficiary
shall be required for (i) any transfer made to a subsidiary or
affiliate entity of Grantor, (ii) any transfer made to a
reconstituted general or limited partnership, (iii) transfers by any
partnership to its individual partners or vice versa, (iv) any
transfer by any corporation to its stockholders or vice versa, and
(v) any corporate merger or consolidation. In the event that the
Beneficiary, in the Beneficiary's sole discretion, is willing to
consent to a transfer which would otherwise be prohibited by this
Paragraph 1.16(a), the Beneficiary may condition its consent on such
terms as it desires, including, without limitation, an increase in
the interest rate of the Note (and recalculation of the amortization
provisions thereof), and the requirement that Grantor pay a transfer
fee, together with any expenses incurred by the Beneficiary in
connection with the granting of such consent (including, without
limitation, attorneys' fees).
(b) Notwithstanding anything contained in this Paragraph 1.16 to the
contrary, in the event that Grantor requests, prior to the maturity
or other repayment in full of the Indebtedness, that Beneficiary
consent to the transfer of and the release of the lien of this
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<PAGE> 89
Deed on any one or more of the five (5) parcels of Land, then, in
addition to the conditions that Beneficiary must grant its prior
written consent to such transfer and that no Event of Default or
circumstance that with the passage of time or giving of notice or
both would constitute an Event of Default shall then exist and be
continuing, Grantor shall also satisfy the following conditions to
any such release:
(i) Grantor shall pay to Beneficiary a release payment equal to at
least the greater of (x) fifty percent (50%) of the total
stated purchase price for the applicable parcel of Land
(including any deferred, contingent or earn-out portions
thereof or any additional consideration to be paid by the
purchaser or transferee subsequent to the closing of the
acquisition of the applicable parcel of Land); or (y) fifty
percent (50%) of the following appraised values of such
parcels of Land:
<TABLE>
<S> <C>
Parcel 1 on Exhibit "A": $ 780,000.00
Parcel 2 on Exhibit "A": 785,000.00
Parcel 3 on Exhibit "A": 3,760,000.00
Parcel 4 on Exhibit "A": 3,050,000.00
Parcel 5 on Exhibit "A": 3,925,000.00
</TABLE>
Notwithstanding the foregoing, if an Event of Default or
circumstance that with the passage of time or giving of notice
or both would constitute an Event of Default shall then exist
and be continuing, Beneficiary may in its sole discretion
require that any such release payment be increased. No
additional release payment shall be payable upon the repayment
and satisfaction in full of the Indebtedness.
(ii) The Maximum LTV Ratio (as defined in Section A.2(g) of the
Loan Agreement) shall not, after any such transfer and release
payment to Beneficiary, exceed 50%.
(c) If Grantor violates the terms of Paragraph 1.16 hereof, in addition
to any other rights or remedies which Grantor may have herein, in
any other Security Document, or at law or in equity, Beneficiary may
increase the interest rate charged on the Indebtedness up to the
Default Rate, such interest being due on demand and being secured by
this Deed.
1.17 Representations and Warranties. As a special inducement to the Beneficiary
to make the loan evidenced by the Note, and with knowledge that the Beneficiary
will rely thereon, Grantor represents and warrants to the Beneficiary as
follows:
(a) There exist no leases or subleases, occupancy agreements or similar
arrangements affecting all or any portion of the Premises other than
those identified on Exhibit "C" attached hereto and by this
reference made a part hereof;
(b) There are no license, franchise, commission, management, service,
maintenance, or other contracts or agreements in existence affecting
in any way the operation,
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maintenance or conduct of business at the Premises other than those
identified on Exhibit "C".
(c) There are no equipment leases, rental agreements or similar
arrangements affecting in any way the operating, maintenance or
conduct of business at the Premises other than those identified on
Exhibit "C".
(d) All licenses, permits and other approvals necessary or appropriate
for conduct of the business carried out at the Premises have been
obtained by Grantor and same are current and in full force and
effect.
(e) All sales and payroll tax obligations of Grantor which are due and
payable have been satisfied.
(f) There are no UCC Financing Statements which affect or encumber any
portion of the Premises or any other security for the Indebtedness
other than those in favor of Beneficiary or its affiliates.
1.18. Environmental Matters. Grantor warrants that (a) to the best of Grantor's
knowledge, the Premises do not contain any Hazardous Material the presence of
which would violate any Environmental Law, as hereinafter defined, (b) Grantor
has not received any notice from any governmental agency, entity or other person
with regard to Hazardous Materials on or affecting the Premises, and (c) to the
best of Grantor's knowledge, neither Borrower nor the Premises, or any portion
thereof are in violation of any applicable Environmental Laws, as hereinafter
defined, relating to or affecting the Premises or Grantor. Grantor hereby
indemnifies and agrees to defend and hold the Beneficiary harmless from and
against any and all liens, damages, losses, liabilities, obligations, fines,
penalties, claims, litigation, demands, judgments, suits, proceedings, costs,
disbursements, response costs, or expenses of any kind or nature whatsoever
(including, without limitation, attorneys', consultants' and experts' fees and
expenses) (except to the extent that any of the foregoing are caused by any
gross negligence or wilful misconduct of Beneficiary) which may at any time
(whether prior to or after foreclosure of this Deed and whether prior to or
after payment of the Note) be imposed upon, incurred by or asserted or awarded
against Grantor, the Beneficiary or the Premises and arising directly or
indirectly from or out of (i) the presence of any Hazardous Materials at any
time on, in, under or affecting all or any portion of the Premises, regardless
of whether or not caused by or within the control of Grantor, (ii) the violation
or alleged violation of any Environmental Law with respect to the Premises or
any portion thereof, and (iii) any attempts by the Beneficiary to enforce the
foregoing rights. The foregoing rights shall include, without limitation, the
cost of removal of any and all Hazardous Materials from all or any portion of
the Premises or any surrounding areas, additional costs required to take
necessary precautions to protect against the discharge, spillage, emission,
leakage, seepage or release of Hazardous Materials on, in, under or affecting
the Premises or into the air, water, or soil, and costs incurred to comply with
Environmental Laws in connection with all or any portion of the Premises or any
surrounding areas. For purposes of this Deed, "Hazardous Material" or "Hazardous
Materials" means and includes petroleum products, flammable explosives,
radioactive materials, asbestos or any material containing
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asbestos, polychlorinated biphenyls, and/or any hazardous, toxic or dangerous
waste, substance, element, compound, mixture, solution, pollutant or material
now or hereafter defined as such, or as a hazardous substance, or any similar
term, by or in any Environmental Law. For purposes of this Deed, "Environmental
Law" or "Environmental Laws" shall mean any law commonly referred to or
generally known as "Superfund" or "Superlien" law, or any other federal, state
or local statute, law, ordinance, code, rule, regulation, order or decree,
regulating, relating to or imposing liability or standards of conduct
concerning, any hazardous materials as may now or at any time hereafter be in
effect, including without limitation, the following as the same may be amended
or replaced from time to time, and all regulations promulgated thereunder or in
connection therewith: the Superfund Amendments and Reauthorization Act of 1986;
the Comprehensive Environmental Response, Compensation and Liability Act of
1980; the Clean Air Act; the Clean Water Act; the Toxic Substances Control Act;
the Resource Conservation and Recovery Act as amended by the Solid Waste
Disposal Act; the Safe Drinking Water Act; the Emergency Planning and Community
Right to Know Act of 1986; the Hazardous Materials Transportation Act; and the
Endangered Species Act.
1.19 Use of Premises. Grantor represents and warrants that as of the date of
this Deed, the Premises are vacant (except for any occupancy agreement permitted
pursuant to Paragraph 1.07 hereof), and consist of undeveloped land. Grantor
covenants that Grantor will not allow any other uses on the Premises unless
Beneficiary has given its prior written consent thereto.
ARTICLE II
2.01 Events of Default. The terms "Event of Default" or "Events of Default",
wherever used in this Deed, shall mean any one or more of the following events:
(a) Failure by Grantor to pay any sum within five (5) days after its due
date and, upon the first occurrence only of any such failure to pay,
written notice from Beneficiary that payment is due under the Note,
this Deed, or any payment of tax or insurance premium when due; or
(b) Failure by Grantor to duly observe, comply with or perform within
twenty (20) days after written notice of such failure is given to
Grantor, any other term, covenant, condition or agreement of this
Deed not requiring the payment of money by Grantor except Paragraphs
1.15 and 1.16; or
(c) The occurrence of a default or event of default under or failure by
Grantor or any Guarantor to perform any of its or their obligations
under any of the Security Documents, which is not cured within any
applicable cure period; or
(d) Any warranty or representation of Grantor contained in this Deed or
in any other instrument, document, transfer, conveyance, assignment,
loan agreement or financial statement given by Grantor with respect
to the Indebtedness secured hereby, is incomplete, untrue or
misleading in any material respect; or
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(e) The filing by Grantor, its general partners (if any) or any
Guarantor of a voluntary petition in bankruptcy or adjudication of
Grantor or any Guarantor as a bankrupt or insolvent, or the filing
by Grantor or any Guarantor of any petition or answer seeking or
acquiescing in any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief for itself
under any present or future federal, state or other law or
regulation relating to bankruptcy, insolvency or other relief for
debtors, or the seeking or consenting to or acquiescing in the
appointment of any trustee, receiver or liquidator of Grantor or any
Guarantor or of all or any substantial part of the Premises or of
any or all of the rents, issues, profits or revenues thereof, or the
making by Grantor or any Guarantor of any general assignment for the
benefit of creditors, or the admission in writing by Grantor or any
Guarantor of its inability to pay its debts generally as they become
due; or
(f) The entry by a court of competent jurisdiction of an order, judgment
or decree approving a petition, filed against Grantor or any
Guarantor, seeking any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or other relief under any
present or future federal, state or other law or regulation relating
to bankruptcy, insolvency or other relief for debtors, which order,
judgment or decree remains unvacated and unstayed for an aggregate
of sixty (60) days (whether or not consecutive) from the date of
entry thereof, or the appointment of any trustee, receiver or
liquidator of Grantor, or any Guarantor, or of all or any
substantial part of the Premises or of any or all of the rents,
issues, profits or revenues thereof without the consent or
acquiescence of Grantor, which appointment shall remain unvacated
and unstayed for an aggregate of sixty (60) days (whether or not
consecutive); or
(g) Failure by Grantor to comply with the terms of Paragraphs 1.15 or
1.16 hereof; or
(h) The termination, liquidation or dissolution of Grantor; or
(i) Failure to maintain or cause any occupant of any portion of the
Premises to maintain, any license, permit, or contract necessary or
appropriate for conduct of any business now or hereafter being
operated at the Premises which would have a material adverse effect
on the Premises or any business conducted thereon by Grantor; or
(j) Any default or event of default occurs under any Related Loan
Documents or otherwise with respect to the Related Indebtedness, and
the same is continuing after lapse of any applicable grace or cure
period; or
(k) Any default continuing after the expiration of any applicable cure
or grace period under any other note or mortgage, evidencing or
securing indebtedness of an entity affiliated with Grantor in favor
of the Beneficiary or its affiliates.
2.02 Acceleration of Maturity. If any Event of Default shall have occurred
(subject to any applicable grace or cure period), then the entire Indebtedness
shall, at the option of the Beneficiary,
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immediately become due and payable without notice or demand, time being of the
essence of this Deed; and no omission on the part of the Beneficiary to exercise
such option when entitled to do so shall be construed as a waiver of such right.
2.03 Beneficiary's Right to Enter and Take Possession, Operate and Apply
Revenues.
(a) If any Event of Default shall have occurred (subject to any
applicable grace or cure period), Grantor upon demand of the
Beneficiary, shall forthwith surrender to the Beneficiary the actual
possession of the Premises, and if, and to the extent, permitted by
law, the Beneficiary itself, or by such officers or agents as it may
appoint, may enter and take possession of all the Premises without
the appointment of a receiver, or an application therefor, and may
exclude Grantor and its agents and employees wholly therefrom, and
may have joint access with Grantor to the books, papers and accounts
of Grantor regarding the Premises.
(b) If Grantor shall for any reason fail to surrender or deliver the
Premises or any part thereof after such demand by the Beneficiary,
the Beneficiary may obtain a judgment or decree conferring upon the
Beneficiary the right to immediate possession or requiring Grantor
to deliver immediate possession of the Premises to the Beneficiary,
to the entry of which judgment or decree Grantor hereby specifically
consents. Grantor will pay to the Beneficiary, upon demand, all
expenses of obtaining such judgment or decree, including reasonable
compensation to the Beneficiary, its attorneys and agents; and all
such expenses and compensation shall, until paid, be secured by the
lien of this Deed.
(c) Upon every such entering upon or taking of possession, the
Beneficiary may hold, store, use, operate, manage and control the
Premises and conduct the business thereof, and, from time to time
(i) make all necessary and proper maintenance, repairs, renewals,
replacements, additions, and improvements thereto and thereon and
purchase or otherwise acquire additional fixtures, personalty and
other property; (ii) insure or keep the Premises insured; (iii)
manage and operate the Premises and exercise all the rights and
powers of Grantor to the same extent as Grantor could in its own
name or otherwise with respect to the same; and (iv) enter into any
and all agreements with respect to the exercise by others of any of
the powers herein granted the Beneficiary, all as the Beneficiary
from time to time may determine to be in its best interest. In such
event, the Beneficiary may collect and receive all the rents,
issues, profits and revenues from the Premises, including those past
due as well as those accruing thereafter, and shall have the benefit
of all operating expenses and deposits prepaid by Grantor, and,
after deducting (aa) all out-of-pocket and administrative expenses
of taking, holding, managing and operating the Premises (including
compensation for the services of all persons employed for such
purposes); (bb) the cost of all such maintenance, repairs, renewals,
replacements, additions, improvements, purchases and acquisitions;
(cc) the cost of such insurance; (dd) such taxes, assessments and
other similar charges as the Beneficiary may at its option pay; (ee)
other proper charges upon the Premises or any part thereof; and (ff)
the reasonable compensation, expenses and disbursements of the
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attorneys and agents of the Beneficiary, and (gg) the payment of
deposits required in Paragraph 1.04, the Beneficiary shall apply the
remainder of the moneys so received by the Beneficiary as set forth
in the Note.
(d) Whenever all Events of Default have been cured pursuant to the terms
and conditions of any applicable Loan Document, and if the
Beneficiary in the Beneficiary's sole discretion shall have accepted
such cure, the Beneficiary shall surrender possession of the
Premises to Grantor, its successors or assigns. The same right of
taking possession, however, shall exist if any subsequent Event of
Default shall occur and be continuing.
2.04 Performance by the Beneficiary of Defaults by Grantor. If Grantor shall
default in the payment, performance or observance of any term, covenant or
condition of this Deed, the Beneficiary may, at its option, without waiving the
right to accelerate the maturity of the Indebtedness, pay, perform or observe
the same if Grantor shall not make such payment or perform or observe any such
term, covenant or condition within five (5) days following receipt of written
notice of Grantor's failure to pay, perform or observe from Beneficiary (unless
circumstances require that the Beneficiary make any such payment or perform or
observe any such term, covenant or condition immediately in order to protect its
secured interest and/or lien in any of the Premises). The Beneficiary shall
determine in its reasonable discretion the necessity for any such actions and of
the amounts to be paid. The Beneficiary is hereby empowered to enter and to
authorize others to enter upon the Premises or any part thereof for the purpose
of performing or observing any such defaulted term, covenant or condition
without thereby becoming liable to Grantor or any person in possession holding
under Grantor.
2.05 Receiver. If an Event of Default shall have occurred, the Beneficiary, upon
application to a court of competent jurisdiction, shall be entitled without
notice and without regard to the occupancy or value of any security for the
Indebtedness or the solvency of any party bound for its payment, to the
appointment of a receiver to take possession of and to operate the Premises and
to collect, apply and use the rents, issues, profits and revenues thereof,
including those past due as well as those accruing thereafter, and said receiver
shall have the benefit of all operating expenses and deposits prepaid by Grantor
it being acknowledged by Grantor that if an Event of Default shall have
occurred, that Beneficiary shall have the right to the Premises and that the
Premises and the rents and profits therefrom in such event will be in danger of
being lost, or materially injured or impaired. The receiver shall have all of
the rights and powers permitted under the laws of the state wherein the Land is
situated. Grantor will pay to the Beneficiary upon demand all reasonable
expenses, including receiver's fees, attorney's fees, costs and agent's
compensation, incurred pursuant to the provisions of this Paragraph 2.05; and
all such expenses shall be secured by this Deed.
2.06 Enforcement.
(a) Upon the occurrence of an Event of Default, the Beneficiary may take
such action in accordance with all applicable law, without notice or
demand, as it deems advisable to protect and enforce its rights
against the Grantor and to the Premises, including, but not limited
to, the following actions, each of which may be pursued concurrently
or
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otherwise, at such time and in such order as the Beneficiary may
determine, in its sole discretion, and to the fullest extent
permitted by applicable law, without impairing or otherwise
affecting the other rights and remedies of the Beneficiary: (1)
exercise the rights granted in Paragraphs 2.02 through 2.05 hereof,
(2) exercise the power of sale and/or institute proceedings for the
complete judicial foreclosure of this Deed; (3) with or without
entry, to the extent permitted and pursuant to the procedures
provided by applicable law, institute proceedings for the partial
foreclosure of this Deed for the portion of the Indebtedness then
due and payable, subject to the continuing lien of this Deed for the
balance of the Indebtedness not then due; (4) institute an action,
suit or proceeding in equity for the specific performance of any
covenant, condition or agreement contained herein or in the Note to
the extent permitted by applicable law; or (5) pursue such other
remedies as Beneficiary may have under applicable law.
(b) Upon the occurrence of an Event of Default and the election of the
Beneficiary to effect a trustee's sale of the Premises in lieu of
judicial foreclosure, then the Beneficiary may instruct the Trustee
to commence such sale and consummate such sale in the following
manner:
The Trustee shall sell the Premises at public auction for
cash, after having first given such notice of hearing as to
the commencement of foreclosure proceedings and obtaining such
findings or leave of court as may be then required by law in
giving such notice and advertising the time and place of such
sale in such manner as may be provided by law, and upon such
and any resales and upon compliance with the law then relating
to foreclosure proceedings, to convey title to purchaser as
hereinafter set forth.
The Trustee shall deliver to the purchaser at any such
Trustee's sale its deed, without warranty, which shall convey
to the purchaser the interest in the Premises which the
Grantor has or has the power to convey at the time of the
execution of this Deed, and such as it may have acquired
hereafter. The Trustee's deed shall recite the facts showing
that the sale was conducted in compliance with all the
requirements of law and of this Deed, which recital shall be
prima facie evidence of such compliance and conclusive
evidence thereof in favor of bona fide purchasers and
encumbrances.
(c) The proceeds of any sale made under this Article II, together with
any other sums which then may be held by the Beneficiary under this
Deed, whether under the provisions of this Article II or other
otherwise, shall be applied as follows, subject to the requirements
of all applicable law:
First: To the payment of the cost and expenses of any such sale,
including reasonable compensation to the Beneficiary, its agents and
counsel, of the cost and expenses of any judicial proceedings
wherein the same may be made, of any reasonable trustee's
commission, and a reasonable auctioneer's fee if such expense has
been incurred.
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Second: To payment of taxes due and unpaid on the property sold,
unless the notice of sale provided that the property be sold subject
to taxes thereon and the property was so sold.
Third: To payment of all reasonable expenses, liabilities and
advances made or incurred by the Beneficiary under this Deed,
together with interest as provided herein on all advances made by
the Beneficiary.
Fourth: To the payment of the whole amount then due, owing or unpaid
under the Indebtedness.
Fifth: To the payment of the surplus, if any, to whomever may be
lawfully entitled to receive the same.
The Beneficiary and any receiver of the Premises, or any part
thereof, shall be liable to account for only those rents, issues,
profits and proceeds actually received by it.
(d) In case of a sale under this Deed, the Premises, real, personal and
mixed, may be sold in one parcel or more than one parcel.
(e) The purchaser of the Premises sold pursuant to this Deed may, during
any redemption period allowed to Grantor or any other party, make
such repairs or alterations on said property as may be reasonably
necessary for the proper operation, care, preservation, protection
and insuring thereof. Any sums so paid together with interest
thereon from the time of such expenditure at the rate of the lesser
of the Default Rate under the Note or the highest lawful contract
rate shall be added to and become a part of the amount required to
be paid for redemption from such sale.
(f) Upon any sale made under this Deed, the Beneficiary may bid for and
acquire the Premises or any part thereof and in lieu of paying cash
therefor may make settlement for the purchase price by crediting
upon the Indebtedness the net sale price after deducting therefrom
the expenses of the sale and the costs of the action and any other
sums which the Beneficiary is authorized to deduct under this Deed.
(g) No recovery of any judgment by the Beneficiary and no levy of an
execution under any judgment upon the Premises or upon any other
property of the Grantor shall affect in any manner or to any extent,
the lien of this Deed upon the Premises or any part thereof, or any
liens, rights, powers or remedies of the Beneficiary hereunder, but
such liens, rights, powers, and remedies of the Beneficiary shall
continue unimpaired as before.
(h) In the event of any sale made under or by virtue of this Deed the
entire Indebtedness secured hereby, if not previously due and
payable, immediately thereupon shall,
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anything in the Note or in this Deed to the contrary
notwithstanding, become due and payable.
2.07 Interest After Default. If any payment due hereunder is not paid when due,
subject to any applicable grace or cure periods, then and in such event, the
Grantor shall pay interest thereon from and after the date on which such payment
first becomes due at the Default Rate provided in the Note and such interest
shall be due and payable, on demand, whether or not any action shall have been
taken or proceeding commenced to recover the same or to foreclose this Deed.
Nothing in this Paragraph 2.07 or in any other provision of this Deed shall
constitute an extension of the time of payment of the Indebtedness.
2.08 Grantor's Actions After Default. After the happening of any Event of
Default and immediately upon the commencement of any action, suit or other legal
proceeding by the Beneficiary to obtain judgment for the Indebtedness, or any
portion thereof, or of any other nature in and of the enforcement of the Note or
of this Deed, the Grantor will, if required by the Beneficiary, consent to the
appointment of a receiver or receivers of the Premises and of all the earnings,
revenues, rents, issues, profits and income thereof.
2.09 Control By Beneficiary After Default. Notwithstanding the appointment of
any receiver, liquidator or trustee of the Grantor, or of any of its property,
or of the Premises or any part thereof, the Beneficiary shall be entitled to
retain possession and control of all property now and hereafter covered by this
Deed.
2.10 Waiver of Appraisement, Valuation, Stay, Execution and Redemption Laws.
Grantor agrees to the full extent permitted by law, that in the case of a
default on the part of Grantor hereunder, neither Grantor nor anyone claiming
through or under it shall or will set up, claim or seek to take advantage of any
appraisement, valuation, stay, extension, homestead, exemption or redemption
laws now or hereafter in force, in order to prevent or hinder the enforcement or
foreclosure of this Deed, or the absolute sale of the Premises, or the final and
absolute putting into possession thereof, immediately after such sale, of the
purchasers thereof, and Grantor, for itself and all who may at any time claim
through or under it, hereby waives to the full extent that it may lawfully so
do, the benefit of all such laws, and any and all right to have the assets
comprised in the security intended to be created hereby marshaled upon any
foreclosure of the lien hereof.
2.11 Remedies Cumulative. No right, power or remedy conferred upon or reserved
to the Beneficiary by this Deed is intended to be exclusive of any other right,
power or remedy, but each and every right, power and remedy shall be cumulative
and concurrent and shall be in addition to any other right, power and remedy
given hereunder now or hereafter existing at law or in equity or by statute to
the fullest extent permitted by law.
2.12 Waiver.
(a) No delay or omission of the Beneficiary or of any holder of the Note
to exercise any right, power or remedy accruing upon any default
shall exhaust or impair any such right,
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power or remedy or shall be construed to be a waiver of any such
default, or acquiescence therein; and every right, power and remedy
given by this Deed to the Beneficiary may be exercised from time to
time and as often as may be deemed expedient by the Beneficiary. No
consent or waiver, express or implied, by the Beneficiary to or of
any breach or default by Grantor in the performance of the
obligations hereunder shall be deemed or construed to be a consent
or waiver to or of any other breach or default in the performance of
the same or any other obligations of Grantor hereunder. Failure on
the part of the Beneficiary to complain of any act or failure to act
or to declare an Event of Default, irrespective of how long such
failure continues, shall not constitute a waiver by the Beneficiary
of its rights hereunder or impair any rights, powers or remedies
arising by virtue of any breach or default by Grantor.
(b) If the Beneficiary (i) grants forbearance or an extension of time
for the payment of any sums secured hereby; (ii) takes other or
additional security for the payment of any sums secured hereby;
(iii) waives or does not exercise any right granted herein or in the
Note; (iv) releases any part of the Premises from the lien of this
Deed or otherwise changes any of the terms, covenants, conditions or
agreements of the Note or this Deed; (v) consents to the filing of
any map, plat or replat affecting the Premises; (vi) consents to the
granting of any easement or other right affecting the Premises; or
(vii) makes or consents to any agreement subordinating the lien
hereof, any such act or omission shall not release, discharge,
modify, change or affect the original liability under the Note, this
Deed or any other obligation of Grantor or any subsequent purchaser
of the Premises or any part thereof, or any maker, co-signer,
endorser, surety or guarantor except to the extent of any such
waiver, release or modification actually given; nor shall any such
act or omission preclude the Beneficiary from exercising any right,
power or privilege herein granted or intended to be granted in the
event of any default then made or of any subsequent default; nor,
except as otherwise expressly provided in an instrument or
instruments executed by the Beneficiary, shall the lien of this Deed
be altered thereby. In the event of the sale or transfer by
operation of law or otherwise of all or any part of the Premises,
the Beneficiary, without notice, is hereby authorized and empowered
to deal with any such vendee or transferee with reference to the
Premises or the Indebtedness, or with reference to any of the terms,
covenants, conditions or agreements hereof, as fully and to the same
extent as it might deal with the original parties hereto and without
in any way releasing or discharging any liabilities or obligations.
2.13 Suits to Protect the Premises. Beneficiary shall have the power, with at
least ten (10) days' prior written notice to Grantor (unless circumstances
require that Beneficiary act immediately without any such notice, as
determined by Beneficiary in its sole discretion):
(a) to institute and maintain such suits and proceedings as it may deem
expedient to prevent any impairment of the Premises by any acts
which may be unlawful or any violation of this Deed,
23
<PAGE> 99
(b) to preserve or protect its interest in the Premises and in the
rents, issues, profits and revenues arising therefrom, and
(c) to restrain the enforcement of or compliance with any legislation or
other governmental enactment, rule or order that may be
unconstitutional or otherwise invalid, if the enforcement of or
compliance with such enactment, rule or order would impair the
security hereunder or be prejudicial to the interest of the
Beneficiary.
2.14 Beneficiary May File Proofs of Claim. In the case of any receivership,
insolvency, bankruptcy, reorganization, arrangement, adjustment, composition or
other proceedings affecting Guarantor, Grantor, or any of them or any of their
creditors or property, the Beneficiary, to the extent permitted by law, shall be
entitled to file such proofs of claim and other documents as may be necessary or
advisable in order to have the claims of the Beneficiary allowed in such
proceedings for the entire amount due and payable by Grantor under this Deed at
the date of the institution of such proceedings and for any additional amount
which may become due and payable by Grantor hereunder after such date.
ARTICLE III
3.01 Credits Waived. Grantor will not claim nor demand nor be entitled to any
credit or credits against the Indebtedness for the taxes assessed against the
Premises or any part thereof, and no deductions shall otherwise be made or
claimed from the taxable value of the Premises or any part thereof by reason of
this Deed or the Indebtedness.
3.02 No Release. Grantor agrees that in the event the Premises are sold and the
Beneficiary enters into any agreement with the then owner of the Premises
extending the time of payment of the Indebtedness, or otherwise modifying the
terms hereof, Grantor shall continue to be liable to pay the Indebtedness
according to the tenor of any such agreement unless expressly released and
discharged in writing by the Beneficiary. Nothing in this Paragraph 3.02 shall
be deemed to be a waiver of Paragraph 1.16 hereof.
3.03 Successors and Assigns. The provisions and covenants of this Deed shall run
with the land, shall be binding on Grantor, and shall inure to the benefit of
and be binding upon Grantor and the Beneficiary and their respective heirs,
executors, legal representatives, successors and permitted assigns. Whenever a
reference is made in this Deed to Guarantor, the Trustee, Grantor or the
Beneficiary such reference shall be deemed to include a reference to the heirs,
executors, legal representatives, successors and permitted assigns thereof.
3.04 Terminology. All personal pronouns used in this Deed whether used in the
masculine, feminine or neuter gender, shall include all other genders; the
singular shall include the plural, and vice versa. Titles and Articles are for
convenience only and neither limit nor amplify the provisions of this Deed
itself.
3.05 Severability. If any provision of this Deed or the application thereof to
any person or circumstance shall be invalid or unenforceable to any extent, the
remainder of this Deed and the
24
<PAGE> 100
application of such provisions to other persons or circumstances shall not be
affected thereby and shall be enforced to the greatest extent permitted by law.
3.06 Applicable Law. Grantor agrees that this Deed shall be construed,
interpreted and enforced in accordance with the laws of the State of Nevada;
provided, however, that if any applicable conflict or choice of law rules would
choose the law of another state, Grantor waives such rules and agrees that
Nevada substantive, procedural and constitutional law shall nonetheless govern.
Notwithstanding any provision of this Deed, Note or any other agreement between
Grantor or Beneficiary, nothing in this Deed shall require the Grantor to pay,
or the Beneficiary to accept, interest in an amount which would subject the
Beneficiary to any penalty under applicable law. In the event that the payment
of any interest due hereunder would subject the Beneficiary to any penalty under
applicable law, then ipso facto the obligations of the Grantor to make payment
shall be reduced to the highest rate authorized under applicable law.
3.07 Notices, Demands and Requests. All notices, demands or requests provided
for or permitted to be given pursuant to this Deed must be in writing and shall
be deemed to have been properly given or served by depositing the same with a
nationally recognized overnight courier service or in the United States Mail,
postpaid and registered or certified return receipt requested, and addressed to
the addresses set forth on the first page hereof. All notices, demands and
requests shall be effective upon being deposited with a nationally recognized
courier service or, on the date that is two (2) business days after such
deposit, upon being deposited in the United States Mail. Rejection or other
refusal to accept or the inability to deliver because of changed address of
which no notice was given shall be deemed to be receipt of the notice, demand or
request sent. By giving at least thirty (30) days written notice hereof, Grantor
or the Beneficiary shall have the right from time to time and at any time during
the term of this Deed to change their respective addresses.
3.08 Time of the Essence. Time is of the essence with respect to each and every
covenant, agreement and obligation of Grantor under this Deed.
3.09 Title Acts by Trustee. At any time upon written request of the Beneficiary,
payment of its fees and presentation of this Deed and the Note for endorsement
(in case of full reconveyance, for cancellation and retention) without affecting
the liability of any person for the payment of the Indebtedness secured by this
Deed, the Trustee may (a) consent to the making of any map or plat of the
Premises, (b) join in granting any easement or creating any restriction thereon,
(c) join in any subordination or other agreement affecting this Deed or the lien
or charge thereof, (d) reconvey, without warranty, all or any part of the
Premises. The grantee in any reconveyance may be described as the "person or
persons legally entitled thereto", and the recitals therein of any matters of
facts shall be conclusive proof of the truthfulness thereof. The Grantor agrees
to pay a reasonable Trustee's fee for full or partial reconveyance, together
with a recording fee for said reconveyance.
3.10 Successor Trustee. At the option of the Beneficiary, with or without any
reason, a successor or substitute trustee may be appointed by the Beneficiary
without any formality other than a designation in writing of a successor or
substitute trustee, who shall thereupon become vested with and succeed to all
the powers and duties given to the Trustee herein named, the same as if the
25
<PAGE> 101
successor or substitute trustee had been named original Trustee herein; and such
right to appoint a successor or substitute trustee shall exist as often and
whenever the Beneficiary desires.
3.11 Acknowledgments by Grantor. Grantor acknowledges that the information set
forth on the cover hereof is incorporated herein by reference and that Grantor
has received a true copy of this Deed.
3.12 Releases. Section A.9 of the Loan Agreement provides for the release and
reconveyance of the lien of this Deed encumbering the Premises upon the
repayment and performance in full of the Indebtedness, subject to the conditions
set forth in said Section A.9, prior to the full repayment and performance of
the Related Indebtedness; provided, however and except that, if there exists
with respect to the Related Indebtedness at the time of repayment and
performance in full of the Indebtedness a default or event of default, or any
event or circumstance which with the passage of time or giving of notice would
become a default or event of default under the Related Loan Documents, then the
release and reconveyance of the lien of the Deed hereof shall not be granted by
Beneficiary for so long as any such default or event of default or such other
event or circumstance is continuing.
IN WITNESS WHEREOF, Grantor has executed this Deed under seal, as of
the day and year first above written.
PREFERRED EQUITIES CORPORATION,
a Nevada corporation
By : /s/ FREDERICK H. CONTE
------------------------------------
Name: Frederick H. Conte
---------------------------------
Title: President and COO
--------------------------------
26
<PAGE> 102
STATE OF NEVADA )
) .ss
COUNTY OF CLARK )
This instrument was acknowledged before me on August 12, 1998 by Frederick
H. Conte as President & COO of PREFERRED EQUITIES CORPORATION, a Nevada
corporation.
/s/ MARY A. FAIR
---------------------------------
NOTARY PUBLIC
[NOTARY PUBLIC SEAL]
My Commission Expires: Oct. 30, 1998
27
<PAGE> 103
EXHIBIT "A"
LEGAL DESCRIPTION
All that real property situated in the State of Nevada, County of Nye, bounded
and described as follows:
Parcel 1:
Lot One (1) Block One (1) of CALVADA VALLEY UNIT NO. 2 as shown by map recorded
October 5, 1970 as File No. 20291 in the Office of the County Recorder of Nye
County, Nevada.
EXCEPTING THEREFROM all of its right, title and interest in and to all of the
minerals, including gas, coal, oil and oil shales as disclosed by Deed recorded
January 10, 1961 in Book 43, Page 374, Official Records, Nye County, Nevada.
Parcel 2:
Lot One hundred forty-eight (148) in Block Sixteen (16) of CALVADA VALLEY UNIT
NO. 6, as shown by map recorded February 5, 1973 as Document No. 36024 in the
Office of the County Recorder of Nye County, Nevada.
EXCEPTING THEREFROM all of its right, title and interest in and to all of the
minerals, including gas, coal, oil and oil shales as disclosed by Deed recorded
January 10, 1961 in Book 43, Page 374, Official Records, Nye County, Nevada.
Parcel 3:
Parcels One (1) and Three (3) of Parcel Map recorded May 24, 1983 as File No.
81177 and amended by Certificate of Amendment recorded June 14, 1983 as File No.
83144 and by Certificate of Amendment recorded December 12, 1983 as File No.
99135 and by Certificate of Amendment recorded March 16, 1992 as File No. 304864
of Official Records, Nye County, Nevada.
Parcel 4:
Parcel Two (2) as shown by Parcel Map recorded April 26, 1994 as File No. 351410
of Official Records, Nye County, Nevada.
Parcel 5:
Lot Forty (40) in Block Six (6) of AMENDED PLAT OF CALVADA VALLEY UNIT 6,
recorded December 28, 1993 as Document No. 345007 in the Office of the County
Recorder of Nye County, Nevada.
1
<PAGE> 104
Lots Nineteen (19) and Nineteen A (19A) (to the extent of Preferred Equities
Corporation's reversionary interest in Lot Nineteen A (19A)) of Block Six (6) of
CALVADA VALLEY UNIT NO. 6, recorded February 5, 1973 as File No. 36024 of
Official Records, Nye County, Nevada, more particularly described as Parcel
Nineteen (19) as shown on Parcel Map recorded January 6, 1983 as File No. 72610
of Official Records, Nye County, Nevada.
Lot One (1) in Block Fifteen (15), Lots One hundred seventy-three (173) and One
hundred seventy-four (174) in Block Eleven (11) and Lot Three hundred
twenty-three (323) in Block Six (6) of CALVADA VALLEY UNIT NO. 6, as shown by
map recorded February 5, 1973 as Document No. 36024 in the Office of the County
Recorder of Nye County, Nevada.
2
<PAGE> 105
EXHIBIT "B"
PERMITTED ENCUMBRANCES
All Permitted Encumbrances are those items set forth in that certain
Commitment for Title Insurance dated July 8, 1998 as issued by Chicago Title
Insurance Company as items 1 and 2 (as to non-delinquent amounts), 3, 4, 5, 6,
7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17 and 18.
1
<PAGE> 106
EXHIBIT "C"
LEASES, SUBLEASES, CONTRACTS AND AGREEMENTS
None.
1
<PAGE> 107
[PEC LOGO]
PREFERRED EQUITIES CORPORATION
4310 Paradise Road, Las Vegas, NV 89109-6597 o 702.737.3700 o
Toll Free 1.800.634.6431 o Fax 702.369.3194
August 12, 1998
Dorfinco Corporation
c/o Textron Financial Corporation
40 Westminster Street
Providence, Rhode Island 02940
Ladies and Gentlemen:
I have acted as Nevada counsel for Preferred Equities Corporation, a Nevada
corporation ("Borrower"), in connection with certain matters related to a Four
Million and no/100 Dollar ($4,000,000.00) loan ("Loan") dated as August 12,
1998, from Dorfinco Corporation, ("Lender"), to Borrower. I have also acted as
Nevada counsel for Mego Financial Corp., guarantor of the Loan ("Guarantor").
The Loan is secured by the Deed (as hereinafter defined) in favor of Dorfinco
on certain parcels of land in Pahrump, Nevada as described in said Deed ("the
Property"). This opinion is being delivered in accordance with certain
requirements of the Loan.
I have reviewed the following documents, all of which are dated August 12, 1998:
a. Loan and Security Agreement, between Lender and Borrower;
b. Promissory Note, in the stated principal amount of $4,000,000.00,
executed by Borrower;
c. Deed of Trust, Security Agreement and Fixture Filing (the "Deed"),
from Borrower, as grantor, to United Title of Nevada, as trustee, and
for the benefit of Lender as beneficiary;
d. County and Secretary of State of Nevada UCC-1 financing statement
(the "UCC Financing Statements") executed by Borrower;
e. Guaranty Agreement (the "Guaranty"), executed by Guarantor;
f. Environmental Indemnity Agreement, executed by the Borrower;
<PAGE> 108
g. Subordination Agreement, executed by Borrower, as debtor, and
Guarantor, as creditor, in favor of and accepted by Lender;
h. Borrower's Certificate, executed by Borrower; and
i. Guarantor's Certificate, executed by Guarantor.
For the purpose of this opinion, the foregoing documents listed in paragraphs
a. through i. are referred to herein as the "Loan Documents". It is the opinion
of the undersigned that:
1. Borrower is a corporation, duly formed, validly existing and in good
standing under the laws of the State of Nevada. Borrower has full right,
power and authority to carry out and consummate all transactions
contemplated by the Loan Documents and has duly authorized the taking of
any and all action necessary to carry out and consummate the transactions
contemplated to be performed on its part by the Loan Documents. Borrower
has executed and delivered each Loan Document.
2. Guarantor has the right, power, authority and capacity to execute the
Guaranty. Guarantor has duly authorized, executed and delivered the
Guaranty. The Guaranty constitutes the legal, valid and binding obligations
of Guarantor, enforceable against Guarantor, subject to the limiting
conditions of 8. infra of this opinion, in accordance with its terms.
3. No consent, approval, order, authorization, registration, declaration or
designation of or filing with any governmental authority of the United
States or the State of Nevada, or any subdivision thereof, is required in
connection with the authorization, execution, delivery or performance by
Borrower and Guarantor, as applicable, of the Loan Documents or the
consummation of any of the transactions contemplated thereby, except for
the recordation or filing of the Deed and the UCC Financing Statements.
4. Other than as shown on Exhibit "A" attached hereto there are no suits,
actions, proceedings or investigations pending or, to the best of my
knowledge, threatened against or involving Borrower, Guarantor or the
Property before any court, arbitrator or administrative or governmental
body. None of the matters shown on Exhibit "A" including but not limited to
Robert J. Feeney vs. Mego Mortgage Corporation, Jeffrey S. Moore and Mego
Financial Corp., shall, to the best of my knowledge after reasonable
inquiry, result in any material adverse change in the contemplated
business, condition or operation of Borrower, Guarantor or the Property.
2
<PAGE> 109
5. The execution, delivery and performance of the Loan Documents and the
documents, instruments and agreements provided for therein will not result
in a breach of or default under (i) any other document, instrument or
agreement to which Borrower is a party or to which Guarantor is a party or
by which Borrower or Guarantor or any of Borrower's or Guarantor's property
is subject or bound; or (ii) any law, statute, ordinance, judgement, order,
writ, injunction, decree, rule or regulation of any court, administrative
agency or other governmental authority, or any determination or award of
any arbitrator, of the United States or the State of Nevada, or any
subdivision thereof, by which Borrower or Guarantor or any of Borrower's or
Guarantor's property is subject or bound.
6. All certificates, licenses, permits or approvals which must be issued by
any federal, state or municipal authority as a condition for the present
use or occupancy of the Property have been duly issued and are in full
force and effect.
7. Assuming the collection of interest and other charges provided for in the
Loan Documents is undertaken strictly in accordance with the terms thereof,
the Loan Documents will not violate the usury laws of the State of Nevada.
8. If governed by Nevada law, the Loan Documents are legal, valid, binding and
enforceable against Borrower in accordance with their terms, subject to
bankruptcy, insolvency, moratorium and similar laws affecting the rights of
creditors generally and to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at
law), and except that certain provisions of the Loan Documents may not be
enforceable in whole or in part under the laws of the State of Nevada, but
the inclusion of such provisions does not affect the validity of the Loan
Documents, and the Loan Documents contain adequate provisions for enforcing
payment of the monetary obligations of Borrower under the Promissory Note,
and for the practical realization of the rights and benefits afforded by
the Loan Documents, provided such enforcement is conducted in accordance
with the procedures established by the laws of the State of Nevada.
9. Without limiting the opinion expressed in 5 supra, to the best of my
knowledge, the execution and delivery of and performance by Borrower and
Guarantor under the Loan Documents do not and will not violate any state
statute, rule or regulation. As used herein, the term "to the best of my
knowledge" means to my Actual Knowledge as the term "Actual Knowledge" is
defined in the Legal Opinion Accord of the ABA Section of Business Law
(1991).
3
<PAGE> 1
EXHIBIT 10.146
Exhibit F-1
PURCHASE MONEY
PROMISSORY NOTE
U.S. $ 1,439,750.00 Denver, Colorado
February 20, 1998
1. FOR VALUE RECEIVED, the undersigned (the "Borrower") promises to pay
to MERCANTILE EQUITIES CORPORATION, a Nevada Corporation and HARTSEL
SPRINGS RANCH OF COLORADO, INC., a Colorado Corporation, or order
(collectively the "Noteholder"), the principal sum of One million
four hundred thirty nine thousand seven hundred fifty DOLLARS
($1,439,750.00) with interest on the unpaid principal balance from
the date hereof until paid at a rate per annum equal at all times to
2% of the "Prime Rate" (as hereinafter defined). The principal balance
shall be paid in 20 equal, consecutive, quarterly installments of
$71,987.50 payable on the last day of each March, June, September and
December, with the first such payment due on the first of such dates
to occur after the "Closing Date" (as defined in that certain Amended
and Restated Real Estate Purchase and Sale Agreement dated as of
November 25, 1997 (the "Purchase Agreement")). Accrued interest shall
be due and payable on each principal installment due date and
shall be calculated on the actual number of days elapsed on the basis
of a year consisting of 360 days. In the event any installment due
date is not a business day, than such payment shall be made on the next
business day and interest shall continue to accrue during any such
extension. For the purposes hereof: (1) the "Prime Rate" shall mean
the rate of interest indicated in the Wall Street Journal as the prime
rate. Any change in the Prime Rate shall take effect on the date
announced by the Wall Street Journal as the effective date of such
change. The Noteholder shall furnish to Borrower no later than five days
before each installment due date a statement satisfying the amount
due on the next installment due date; provided, however, that any failure
to timely furnish such statement shall not affect the Borrower's
obligations hereunder other than to extend the date payment is due until
the fifth day after such statement is furnished. All such extensions
shall be taken into account in calculating interest hereunder. All
payments shall be made by wire transfer of immediately available
funds to such account as the Noteholder shall specify in writing.
2. If an "Event of Default" (as hereinafter defined) occurs, than, upon
written notice to the Borrower, the Noteholder shall have the option to
declare the entire unpaid principal balance hereof, together with all
interest accrued hereon, to be immediately due and payable, whereupon the
same shall at once become due and payable (an "Acceleration"). Upon an
Acceleration, the unpaid principal balance hereof shall automatically
accrue interest until paid in full at a default rate equal to the Prime
Rate plus 5%. For purposes hereof, each of the following shall constitute
an "Event of Default": (1) the failure to make, within five (5) days of the
date due, any payment required to be made by the terms of Note, that
certain Deed of Trust dated as of the date hereof and securing the
Borrower's obligations hereunder (the "Deed of Trust"), and the Purchase
Agreement; (2) the Borrower fails to comply with, breaches any
representation or warranty contained in, or is otherwise in default under
any other provision of, this Note, the Deed of Trust, the Purchase
Agreement, or any other promissory note, deed of trust, or other instrument
or document between the Borrower and the Noteholder (or any one of them),
including, without limitation, that certain "Post-72 Lots Purchase Money
Note" and the "Post-72 Lots Purchase Money Mortgage" (both as defined in
the Purchase Agreement); (3) the Borrower becomes insolvent or commences or
has commenced against it any bankruptcy, reorganization, receivership, or
like proceeding. The Noteholder shall be entitled to collect all
reasonable costs and expense of collection and/or suit, including, but not
limited to, reasonable attorney fees.
<PAGE> 2
3. The Borrower may prepay the principal amount outstanding under this Note,
in whole or part, at any time without penalty. All such payments shall be
applied to principal installments in the inverse order of maturity. In
addition, the Borrower shall be required to prepay the principal amount
outstanding hereunder at the times and in the manner set forth in the Deed
of Trust securing this Note. Without limiting the foregoing, as a condition
to releasing each "Lot" (as defined in the Deed of Trust), the
Borrower shall be required to prepay $5,000 of this Promissory Note. All
payments made on account of any release shall (provided no Event of
Default has occurred and is continuing) be applied to principal
installments next maturing (and not to installments in the inverse order
of maturity).
4. The Borrower and all other makers, sureties, guarantors, and endorsers
hereby waiver presentment, notice of dishonor and protest, and they hereby
agree to any extension of time of payment and partial payments before, at
or after maturity. This Note shall be joint and several obligations of
Borrower and all other makers, sureities, guarantors and endorsers, and
their successors and assigns.
5. Any notice to Borrower or the Noteholder provided for in this Note shall be
in writing and shall be deemed to have been given if delivered by hand,
sent by recognized overnight courier (such as Federal Express), sent by
facsimile transmission, or mailed by certified or registered mail, return
receipt requested, in a postage prepaid envelope, and addressed as follows
(or to such address as may be specified by like notice):
If to the borrower at: Preferred Equities Corporation
4310 Paradise Road
Las Vegas, Nevada 89109
Attn: Frederick H. Conte and
Jon Joseph
Fax: (702) 369-4398
If to Noteholder at: Hartsel Springs Ranch
P. O. Box 5
Hartsel, Colorado 80449
Attn: Richard Grumet
Fax No. (719) 836-0321
With a copy to: Gregory Lattimer
2870 Juniper Drive
Golden, Colorado 80401
Fax No. (303) 215-1204
6. The indebtedness evidenced by this Note is secured by the Deed of Trust,
and, until released, said Deed of Trust contains additional rights of the
Noteholder. Reference is made to said Deed of Trust for such additional
terms. Such Deed of Trust covers the property identified to Exhibit A
hereto which is incorporated by reference herein.
7. Payments received for application of this Note shall be applied first to
all reasonable out of pocket costs and expenses to which the Noteholder is
entitled to reimbursement (whether under this Note, the Deed of Trust or
otherwise), next to accrued and unpaid interest, and finally to the unpaid
principal balance hereof. Payments made to release Lots from the Deed of
Trust shall be applied as provided in paragraph 3 above.
8. The Noteholder may sell the Note and assign Deed of Trust or may otherwise
assign the Note and the Deed of Trust to a bank or finanical institution as
collateral security for a loan. In the event it does so, the Borrower
agrees to execute such acknowledgement as to amounts owing under the Note
<PAGE> 3
as the Noteholder may request and will, provided all release and any other
obligations of Noteholder under the Deed of Trust are met, agree to make
all payments under the Note without offset, deduction or counterclaim of
any type or nature whatsoever.
9. This Note shall be governed by and construed in accordance with the
internal laws of the State of Colorado.
ATTEST:
/s/ JON A. JOSEPH PREFERRED EQUITIES CORPORATION
By: /s/ RICHARD L. RODRIGUEZ
It: Vice President
<PAGE> 1
EXHIBIT 10.147
Exhibit G-1
POST-72 LOTS PURCHASE MONEY
PROMISSORY NOTE
U.S. $847,800.00 Denver, Colorado
February 20, 1998
1. FOR VALUE RECEIVED, the undersigned (the "Borrower") promises to pay to
MERCANTILE EQUITIES CORPORATION, a Nevada Corporation, and HARTSEL SPRINGS
RANCH OF COLORADO, INC., a Colorado corporation, or order (collectively,
the "Noteholder"), and amount equal to the difference between: (1) Eight
hundred forty seven thousand eight hundred dollars (U.S.$847,800.00); and
(2) the adjustments permitted under Section 9-A of that certain Amended and
Restated Real Estate Purchase and Sales Agreement dated as of November 25,
1997, between Noteholder and the Borrower (the "Purchase Agreement").
Without limiting the foregoing, in the event:
(a) a "Plan of Augmentation" (as defined in the Purchase Agreement) is
approved by a final non-appealable order of the Water Court (or any
court to which a decision of the Water Court has been appealed) on or
before two (2) years and six (6) months from the "Closing Date" (as
defined in the Purchase Agreement), then the principal balance of this
Note shall be reduced by the Borrower's costs and expenses expended in
obtaining approval of the Plan of Augmentation (such costs and
expenses to included but not be limited to engineering fees, legal
fees and court costs, but exclude all internal costs and expenses of
Borrower for its staff personnel or otherwise). The Borrower shall,
within ten (10) days of the date the order becomes final, furnish to
Noteholder a written statement of the qualifying expenses incurred by
the Borrower in obtaining approval of the Plan of Augmentation and
Noteholder shall agree within ten (10) days of receipt of such written
expenses. Failure of Noteholder to disagree within such ten (10) day
period shall constitute the Noteholder's agreement with such expenses.
(b) a Plan of Augmentation is not so approved, then: (1) in the event the
Borrower elects, pursuant to Section 9-A of the Purchase Agreement, to
proceed with the purchase, the principal balance of this Note shall be
reduced to $640,874.00; or (2) in the event the Borrower elects,
pursuant to Section 9-A of the Purchase Agreement, to reconvey the
"Post-72 Lots" (as defined in the Purchase Agreement), then upon such
reconveyance this Note shall (provided all payments of accrued
interest are made to the date of reconveyance) be deemed paid in full.
Notwithstanding the foregoing or any provision of the Purchase
Agreement: (i) the Borrower shall not be obligated to reconvey any
Post-72 Lost which the Borrower sold prior to the date the Borrower
elects to reconvey the Lots (provided the Borrower has remitted the
release price to the Noteholder as provided herein); (ii) any such
reconveyance shall be subject to the provisions of Section 14 of the
Purchase Agreement; and (iii) the Noteholder's obligation to accept a
reconveyance shall be subject to the condition that Noteholder receive
an Owner's ALTA Form B Marketability Policy effective as of the date
of reconveyance at minimum promulgated risk rate premiums, without any
guarantees and without any exceptions, standard or otherwise, other
than the "Title Exceptions" (as defined in the Purchase Agreement).
Except with respect to the obligation to pay accrued interest, this Post-72
Lots Purchase Money Promissory Note shall be recourse only to the Post-72
Lots as defined in the Purchase Agreement. Notwithstanding the foregoing,
in the event a Plan of Augmentation is so approved or the Borrower elects
to proceed with the purchase notwithstanding the fact that no such Plan of
Augmentation has
<PAGE> 2
been approved or the Borrower's option to reconvey is terminated, then
the Noteholder shall have full recourse to the Borrower (for principal
and interest) and the adjusted principal of this Post-72 Lots Purchase
Money Promissory Note shall be payable as follows:
(1) In the event an Augmentation Plan has been approved, the
adjusted principal balance hereof shall be payable in
twenty (20) equal consecutive quarterly installments. Such
installments shall be due and payable the last day of each
March, June, September, and December, with the first such
installment due on the first of such dates to occur after
the Augmentation Plan becomes final and nonappealable. The
principal amount of each installment shall be determined
after the Augmentation Plan becomes final by dividing the
adjusted balance of this Post-72 Lots Purchase Money
Promissory Note by twenty (20).
(2) In the event an Augmentation Plan has not been approved but
the Borrower desires to purchase the Post 72 Lots, then the
adjusted balance hereof shall be payable in twenty (20)
equal consecutive quarterly installments of principal
payable on the last day of each calendar quarter with the
first such payment due on 9/30/2000 and the last such
payment due on 6/30/2005.
2. In addition to the foregoing, the Borrower promises to pay interest on the
unpaid principal balance hereof at a rate per annum equal at all times to
2% above the "Prime Rate" (as hereinafter defined). Accrued interest shall
be due and payable quarterly in arrears on the last day of each March,
June, September and December, with the first such payment due on the first
of such dates to occur after the Closing Date. For purposes hereof, the
"Prime Rate" shall mean the rate of interest indicated in the Wall Street
Journal as the prime rate. Any change in the Prime Rate shall take effect
on the date announced by the Wall Street Journal as the effective date of
such change. Interest shall be calculated on the actual number of days
elapsed on the basis of a year consisting of 360 days. However, for
purposes of calculating interest, until a Plan of Augmentation is approved,
or the Borrower elects to proceed with the purchase notwithstanding the
fact that no Plan of Augmentation has occurred, or the Post-72 Lots are
reconveyed, the unpaid principal balance of this Note shall be deemed to be
$640,874.00 (less the aggregate amount remitted to the Noteholder to
release any Lot or Lots).
3. Notwithstanding the foregoing: (a) in the event that any day on which
principal or interest is due and payable is not a business day, then such
payment shall be made on the next business day; and (b) the Noteholder
shall furnish to the Borrower not later than five (5) days before the date
of each payment is due hereunder a statement specifying the amount due on
the next payment date (provided, however, that any failure to timely
furnish such statement shall not affect the Borrower's obligations
hereunder other than to extend the date payment is due until the fifth day
after such statement is furnished). Interest shall continue to accrue
during each extension contemplated in (a) and (b) of this paragraph. All
payments shall be made by wire transfer of immediately available funds to
such account as the Noteholder shall specify in writing.
4. If an "Event of Default" (as hereinafter defined) occurs, than, upon
written notice to the Borrower, the Noteholder shall have the option to
declare the entire unpaid principal balance hereof, together with all
interest accrued hereon, to be immediately due and payable, whereupon the
same shall at once become due and payable (an "Acceleration"). Upon an
Acceleration, the unpaid principal balance hereof shall automatically
accrue interest until paid in full at a default rate equal to the Prime
Rate plus 5%. For purposes hereof, each of the following shall constitute
an "Event of Default": (1) the failure to make, within five (5) days of the
date due, any payment required to be made by the terms of this Post-72 Lots
Purchase Money Promissory Note, that certain Post-72 Lots Deed of Trust
dated as of the date hereof and securing the Borrower's obligations
hereunder (the "Deed of Trust"), and the Purchase Agreement; (2) the
Borrower fails to comply with, breaches any representation or warranty
contained in, or is otherwise in default under any other provision of, this
Note, the Deed of Trust, the Purchase Agreement, or any other promissory
note, deed of trust, or other instrument or document between the Borrower
and the Noteholder (or any one of them), including, without limitation,
that
<PAGE> 3
certain "Purchase Money Note" and the "Purchase Money Mortgage" (both as
defined in the Purchase Agreement); (3) the Borrower becomes insolvent or
commences or has commenced against it any bankruptcy, reorganization,
receivership, or like proceeding. The Noteholder shall be entitled to
collect all reasonable costs and expense of collection and/or suit,
including, but not limited to, reasonable attorney fees.
5. The Borrower shall prepay this Post-72 Lots Purchase Promissory Note at the
times and in the amounts set forth in the Deed of Trust. without limiting
the foregoing, the Borrower shall prepay $3,000 of this Post-72 Lots
Purchase Money Promissory Note each time a Lot is sold. In addition, the
Borrower may prepay the principal amount outstanding under this Post-72
Lots Purchase Money Prommisory Note, in whole or in part at any time. No
penalties shall be assessed on any prepayment. Until the number and the
amount of the installments have been established, prepayments will be
applied to amounts ultimately determined, prepayment (other than
prepayments arising from the sale of Lots) will be applied to principal
installments in the inverse order of maturity. Prepayments arising as a
result of the sale of Lots will (as long as no Event of Defaul shall have
occurred and be continuing) be applied to installments in the order of
maturity. All prepayments shall be irrevocable.
6. The Borrower and all other makers, sureties, guarantors, and endorsers
hereby waiver presentment, notice of dishonor and protest, and they hereby
agree to any extension of time of payment and partial payments before, at
or after maturity. This Note shall be joint and several obligations of
Borrower and all other makers, surities, guarantors and endorsers, and
their successors and assigns.
7. Any notice to Borrower or the Noteholder provided for in this Post-72 Lots
Purchase Money Promissory Note shall be in writing and shall be deemed to
have been given if delivered by hand, snet by recognized overnight courier
(such as Federal Express), sent by facsimile transmission, or mailed by
certified or registered mail, return receipt requested, in a postage
prepaid envelope, and addressed as follows (or to such address as may be
specified by like notice):
If to the borrower at: Preferred Equities Corporation
4310 Paradise Road
Las Vegas, Nevada 89109
Attn: Frederick H. Conte and
Jon Joseph
Fax: (702) 369-4398
If to Noteholder at: Hartsel Springs Ranch
P. O. Box 5
Hartsel, Colorado 80449
Attn: Richard Grumet
Fax No. (719) 836-0321
With a copy to: Gregory Lattimer
2870 Juniper Drive
Golden, Colorado 80401
Fax No. (303) 215-1204
8. The indebtedness evidenced by this Note is secured by the Deed of Trust,
and, until released, said Deed of Trust contains additional rights of the
Noteholder. Reference is made to said Deed of Trust for such additional
terms. Such Deed of Trust covers the property identified to Exhibit A
hereto which is incorporated by reference herein.
<PAGE> 4
9. Payments received for application of this Note shall be applied first to
all out of pocket costs and expenses to which the Noteholder is entitled to
reimbursement (whether under this Note, the Deed of Trust or otherwise),
next to accrued and unpaid interest, and finally to the unpaid principal
balance hereof. Payments made to release Post-72 Lots from the Deed of
Trust shall be applied as provided in paragraph 5 above.
10. Once adjusted principal amount of this Note has been determined, the
Noteholder may sell the Note and assign Deed of Trust or may otherwise
assign the Note and the Deed of Trust to a bank or financial institution as
collateral security for a loan. In the event it does so, the Borrower
agrees to execute such acknowledgement as to amounts owing under the Note
(or restate this Note with the proper amount owing) as the Noteholder may
request and will, provided all release and any other obligation under the
Deed of Trust are met, agree to make all payments under the Note without
offset, deduction or counterclaim of any type or nature whatsoever.
11. This Note shall be governed by and construed in accordance with the internal
laws of the State of Colorado.
ATTEST:
/s/ JON A. JOSEPH PREFERRED EQUITIES CORPORATION
By: /s/ RICHARD L. RODRIGUEZ
It: Vice President
<PAGE> 1
EXHIBIT 10.148
COMPENSATION AGREEMENT
THIS COMPENSATION AGREEMENT ("Agreement") dated as of September 1,
1998, is entered into by and between Frederick H. Conte ("Conte"), an individual
residing at 1117 Nawkee Drive, North Las Vegas, Nevada, 89031 and Preferred
Equities Corporation, ("PEC") a Nevada corporation with its principal address
being 4310 Paradise Road, Las Vegas, Nevada 89109.
RECITAL
Conte currently is employed as the President and Chief Operating
Officer of PEC. In his role as President, Conte is responsible for the
supervision of all of the Executive Officers and employees of PEC. Conte reports
to the Chairman of the Board and Chief Executive Officer of PEC, Jerome J.
Cohen. Conte and PEC desire to enter into this Agreement in order to reduce to
writing Conte's compensation arrangement with PEC for such period of time as
Conte is employed by PEC as President or until modified by mutual agreement of
the parties. In consideration of the foregoing, the parties hereto agree as
follows.
1. EMPLOYEE AT WILL. Conte recognizes and acknowledges that he is an
employee-at-will. PEC may terminate Conte at any time with or without Cause as
that term is hereinafter defined.
2. BASE SALARY. Conte shall be paid a base salary of two hundred forty thousand
dollars ($240,000) per annum payable bi-weekly as part of the regular PEC
payroll. Base salary payments shall be subject to ordinary withholding for taxes
and withholding for items designated by Conte such as for 401(k) contributions.
3. INCENTIVE BONUS. In addition to his base salary due under this Agreement,
Conte shall be paid a bonus (the "Incentive Bonus") as hereinafter set forth and
defined. For each full (but not partial) fiscal year of PEC during Conte's
employment commencing with fiscal 1999, Conte shall receive a sum of money
(herein called the "Incentive Bonus") in an amount equal to three-quarters of
one percent (0.75%) of the Incentive Income of PEC's parent, Mego Financial
Corp. ("Mego") as defined in and calculated pursuant to, Mego's Executive
Incentive Compensation Plan, adopted by Mego's Board of Directors on June 22,
1994, a copy of which is attached hereto as Exhibit "A". Such amount shall be
due and payable whether or not Mego's Executive Compensation Plan shall be in
effect for such fiscal year, and shall be paid no later than ninety days after
the amount of Incentive Income can be calculated.
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<PAGE> 2
4. AUTOMOTIVE ALLOWANCE. Conte shall have the use of a PEC car including al gas,
oil, repairs and insurance paid by PEC.
5. STOCK OPTIONS. Conte shall receive stock options under the Stock Option Plan
of PEC's parent, Mego Financial Corp., at the discretion of the Board of
Directors of Mego Financial Corp.
6. TRAVEL AND BUSINESS EXPENSE. Conte shall be reimbursed for usual business and
travel expenses. Conte shall be entitled to fly first class on any flight or
combination of flights longer than two hours in scheduled duration.
7. BENEFITS. Conte shall be eligible for all benefits afforded to PEC executives
from time to time provided Conte meets any eligibility requirements set forth
for employees participating therein.
8. VACATION. Conte shall have four (4) weeks paid vacation during each PEC
fiscal year.
9. SEVERANCE. If Conte's employment is terminated by PEC for any reason other
than for Cause, Conte shall receive his base salary as set forth in Section 2.
to the date of termination, and a severance payment in the amount of two hundred
thousand dollars ($200,000), payable fifty thousand dollars ($50,000) at the
time of termination, and in three payments of fifty thousand dollars ($50,000)
three months, six months and nine months thereafter. If Conte resigns or
terminates his employment by PEC for any reason, or his employment terminates
due to he death or permanent disability, he will only be entitled to his base
salary through the date of such termination.
10. DEFINITION OF CAUSE. "Cause" shall mean any one of the following acts of, or
omissions by, or actions of others relating to, Conte:
(a) Conviction of a felony, whether or not such conviction is appealed.
(b) Deliberate and premeditated acts against the best interests of PEC.
(c) Conte is found guilty of or is enjoined from violation of any
state or federal security law, state or federal laws governing the business of
PEC, or rules or regulations of any state or federal agency regulating
any of the business of PEC.
(d) Misappropriation of PEC funds or property.
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<PAGE> 3
(e) Habitual use of alcohol or drugs to a degree that such use
interferes in any way with Conte's performance of his duties.
11. COVENANT NOT TO SOLICIT. Conte agrees that so long as he is employed by PEC
and or a period of one year after termination of his employment by PEC with or
without Cause, or resignation or termination of his employment by Conte, Conte
shall not solicit or encourage other employees or officers of PEC to terminate
their employment by PEC for any purpose whatsoever.
12. MISCELLANEOUS.
(a) This Agreement is personal to Conte and the duties and
responsibilities hereunder may not be assigned by Conte except as approved by
the Chairman of the Board of PEC.
(b) This Agreement shall terminate except, to the extent applicable,
for the provisions of Sections 9 and 11 hereof, on the date of termination of
Conte's employment by PEC, or Conte's resignation, his termination of
employment, death or permanent disability.
(c) This Agreement may only be modified by mutual written agreement of
the parties.
(d) The headings to this Agreement are for convenience of reference
only and are not to be considered in the interpretation of this Agreement.
(e) This Agreement shall be governed by the laws of the state of
Nevada.
Entered into in Las Vegas, Nevada, as of the date set forth above.
Preferred Equities Corporation
/s/ JEROME J. COHEN /s/ FREDERICK H. CONTE
- -------------------------- ---------------------------
Jerome J. Cohen Frederick H. Conte
Chairman of the Board
3
<PAGE> 1
EXHIBIT 10.149
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT, dated as of the 23rd day of September,
1998, between MEGO FINANCIAL CORP., a New York corporation (the "Company"), and
[NAME] (the "Indemnitee").
RECITALS
A. The Indemnitee is currently serving as a director and/or executive
officer of the Company and/or its subsidiaries and the Company desires to
continue to retain the services of the Indemnitee as a director and/or executive
officer of the Company and/or its subsidiaries and/or as a consultant to the
Company.
B. The Company and the Indemnitee recognize the increased risk of
litigation and other claims being asserted against directors, officers and/or
employees of, and consultants to, public companies and the subsidiaries of such
companies.
C. The Certificate of Incorporation and By-laws of the Company require
the Company to indemnify its directors and officers to the fullest extent
permitted by law and the Indemnitee has been serving and continues to serve as a
director and/or officer of the Company and/or its subsidiaries, in part, in
reliance on such provisions of the Certificate of Incorporation and By-laws.
D. The Indemnitee has indicated that he does not regard the indemnities
available under the Company's Certificate of Incorporation and By-laws and
available insurance, if any, as adequate to protect him against the risks
associated with his services to the Company and/or its subsidiaries. As a
condition to the Indemnitee's agreement to continue to serve as such, the
Indemnitee requires that he be indemnified from liability in accordance with the
provisions of this Agreement to the fullest extent permitted by law.
E. The Company recognizes that the Indemnitee needs substantial
protection against personal liability in order to maintain the Indemnitee's
continued service to the Company and/or its subsidiaries in an effective manner
and is willing to indemnify the Indemnitee in accordance with the provisions of
this Agreement to the fullest extent permitted by law in order to continue to
retain the services of the Indemnitee.
F. The Company desires to provide in this Agreement for indemnification
of, and the advance of expenses to, Indemnitee to the fullest extent (whether
partial or complete) permitted by law, as set forth in this Agreement and, to
the extent officers' and directors' liability insurance is maintained by the
Company, to provide for the continued coverage of the Indemnitee under the
Company's officers' and directors' liability insurance policies, in part to
provide the Indemnitee with specific contractual assurance that the protection
promised by the indemnification provisions of the Certificate of Incorporation
and By-laws will be available to the Indemnitee
<PAGE> 2
(regardless of, among other things, any amendment to or revocation of such
provisions of the Certificate of Incorporation or By-laws or any change in the
composition of the Company's Board of Directors or any acquisition transaction
relating to the Company).
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants contained herein and the Indemnitee's past and continued service to
the Company, the Company and the Indemnitee agree as follows:
SECTION 1. MANDATORY INDEMNIFICATION IN PROCEEDINGS OTHER THAN THOSE BY
THE COMPANY. Subject to Section 4 hereof, the Company shall indemnify and hold
harmless the Indemnitee from and against any and all claims, damages, expenses,
costs (including attorneys' fees and costs of other professionals), judgments,
penalties, fines (including excise taxes assessed with respect to an employee
benefit plan), settlements, and all other liabilities incurred or paid by him in
connection with the investigation, defense, prosecution, settlement or appeal
of, or being or preparing to be a witness in, or participating in, any
threatened, pending or completed action, suit, investigation that the Indemnitee
in good faith believes might lead to the institution of such action, or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by the Company) and to which the Indemnitee was or is a party or is
threatened to be made a party or was or is a witness or participates or may
participate in by reason of the fact that the Indemnitee is or was an officer,
director, manager, consultant, stockholder, employee or agent of the Company or
any of its subsidiaries, or is or was serving at the request of the Company or
any of its subsidiaries as an officer, director, consultant, partner, trustee,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, or by reason of anything done or not
done by the Indemnitee in any such capacity or capacities, provided that the
Indemnitee acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, did not know his conduct was unlawful.
SECTION 2. MANDATORY INDEMNIFICATION IN PROCEEDINGS BY THE COMPANY.
Subject to Section 4 hereof, the Company shall indemnify and hold harmless the
Indemnitee from and against any and all expenses (including attorneys' fees) and
amounts actually and reasonably incurred or paid by him in connection with the
investigation, defense, prosecution, settlement or appeal of, or being or
preparing to be a witness in, or participating in, any threatened, pending or
completed action, suit, investigation that the Indemnitee in good faith believes
might lead to the institution of such action, or proceeding by the Company to
procure a judgment in its favor, whether civil, criminal, administrative or
investigative, and to which the Indemnitee was or is a party or is threatened to
be made a party or was or is a witness or participate or may participate in by
reason of the fact that the Indemnitee is or was an officer, director, manager,
consultant, stockholder, employee or agent of the Company or any of its
subsidiaries, or is or was serving at the request of the Company or any of its
subsidiaries as an officer, director, consultant, partner, trustee, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, or by reason of anything done or not done by
the Indemnitee in any such capacity or capacities, provided that (i) the
Indemnitee acted in good faith and in a manner he reasonably believed to be in
or not
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<PAGE> 3
opposed to the best interests of the Company and (ii) no indemnification shall
be made under this Section 2 in respect of any claim, issue or matter as to
which the Indemnitee shall have been adjudged to be liable to the Company
unless, and only to the extent that, the court in which such proceeding was
brought (or any other court of competent jurisdiction) shall determine upon
application that, despite the adjudication of such liability but in view of all
the circumstances of the case, the Indemnitee is fairly and reasonably entitled
to indemnity for such expenses which such court shall deem proper.
SECTION 3. REIMBURSEMENT OF EXPENSES FOLLOWING ADJUDICATION FOR OTHER
THAN WILLFUL MISCONDUCT. The Company shall reimburse the Indemnitee for any
expenses (including attorney's fees) and amounts actually and reasonably
incurred or paid by him in connection with the investigation, defense,
settlement or appeal of any action, suit or proceeding described in Section 2
hereof that results in an adjudication that the Indemnitee was liable other than
for willful misconduct in the performance of his duty to the Company; provided,
however, that the Indemnitee acted in good faith and in a manner he believed to
be in the best interests of the Company.
SECTION 4. AUTHORIZATION OF INDEMNIFICATION.
4.1. Determination of Indemnification. Any indemnification under
Sections 1 and 2 hereof (unless ordered by a court) and any reimbursement made
under Section 3 hereof shall be made by the Company only as authorized in the
specific case upon a determination (the "Determination") that indemnification or
reimbursement of the Indemnitee is proper in the circumstances because the
Indemnitee has met the applicable standard of conduct set forth in subsection 1,
2 or 3 hereof, as the case may be. Subject to Sections 5.6, 5.7 and 8 of this
Agreement, the Determination shall be made in the following order of preference:
(1) first, by the Company's Board of Directors (the "Board")
by majority vote or consent of a quorum consisting of directors ("Disinterested
Directors") who are not, at the time of the Determination, named parties to such
action, suit or proceeding; or
(2) next, if such a quorum of Disinterested Directors cannot
be obtained or, even if obtainable, a quorum of Disinterested Directors so
directs, by the Board upon the opinion in writing of independent legal counsel
selected in accordance with Section 5.5, or
(3) next, if the Board declines or fails to make a
Determination within the time specified in Section 5.2, by any independent legal
counsel selected in accordance with Section 5.5.
4.2. No Presumptions. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the Indemnitee
did not act in good faith and in a manner that he reasonably believed to be in
or not opposed to the best interests of the Company, and with respect to any
criminal action or proceeding, knew that his conduct was unlawful.
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<PAGE> 4
4.3. Benefit Plan Conduct. The Indemnitee's conduct with respect to an
employee benefit plan for a purpose he reasonably believed to be in the
interests of the participants in and beneficiaries of the plan shall be deemed
to be conduct that the Indemnitee reasonably believed to be not opposed to the
best interests of the Company.
4.4. Reliance as Safe Harbor. For purposes of any Determination
hereunder, the Indemnitee shall be deemed to have acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Company, or, with respect to any criminal action or proceeding, to have had
no reasonable cause to believe or did not know his conduct was unlawful, if his
action is based on (i) the records or books of account of the Company or another
enterprise, including financial statements, (ii) information supplied to him by
the officers of the Company or another enterprise in the course of their duties,
(iii) the advice of legal counsel for the Company or another enterprise, or (iv)
information or records given or reports made to the Company or another
enterprise by an independent certified public accountant or by an appraiser or
other expert selected with reasonable care by the Company or another enterprise.
The term "another enterprise" as used in this Section 4.4 shall mean any other
corporation or any partnership, joint venture, trust, employee benefit plan or
other enterprise of which the Indemnitee is or was serving at the request of the
Company or any of its subsidiaries as an officer, director, consultant, partner,
trustee, employee or agent. The provisions of this Section 4.4 shall not be
deemed to be exclusive or to limit in any way the other circumstances in which
the Indemnitee may be deemed to have met the applicable standard of conduct set
forth in Sections 1, 2 or 3 hereof, as the case may be.
4.5. Success on Merits or Otherwise. Notwithstanding any other
provision of this Agreement, to the extent that the Indemnitee has been
successful on the merits or otherwise in defense of any action, suit or
proceeding described in Section 1 or 2 hereof, or in defense of any claim, issue
or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection with the
investigation, defense, settlement or appeal thereof. For purposes of this
Section 4.5, the term "successful on the merits or otherwise" shall include, but
not be limited to, (i) any termination, withdrawal, or dismissal (with or
without prejudice) of any claim, action, suit or proceeding against the
Indemnitee without any express finding of liability or guilt against him, (ii)
the expiration of 120 days after the making of any claim or threat of an action,
suit or proceeding without the institution of the same and without any promise
or payment made to induce a settlement, or (iii) the settlement of any action,
suit or proceeding under Section 1, 2 or 3 hereof pursuant to which the
Indemnitee pays less than $100,000.
4.6. Partial Indemnification or Reimbursement. If the Indemnitee is
entitled under any provision of this Agreement to indemnification and/or
reimbursement by the Company for some or a portion of the claims, damages,
expenses (including attorneys' fees and costs of other professionals),
judgments, fines or amounts paid in settlement by the Indemnitee in connection
with the investigation, defense, settlement or appeal of any action specified in
Section 1, 2 or 3 hereof, but not, however, for the total amount thereof, the
Company shall nevertheless indemnify and/or reimburse the Indemnitee for the
portion thereof to which the Indemnitee is entitled. The party or parties making
the Determination shall determine the portion (if less than all) of such
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<PAGE> 5
claims, damages, expenses (including attorneys' fees), judgments, fines or
amounts paid in settlement for which the Indemnitee is entitled to
indemnification and/or reimbursement under this Agreement.
4.7. Subsidiary Conduct. The Indemnitee's conduct with respect to any
subsidiary of the Company for a purpose he reasonably believed to be in the
interests of the Company and/or any of its subsidiaries shall be deemed to be
conduct that the Indemnitee reasonably believed to be not opposed to the best
interests of the Company.
SECTION 5. PROCEDURES FOR DETERMINATION OF WHETHER STANDARDS HAVE BEEN
SATISFIED.
5.1. Costs. All costs of making any Determination required by Section 4
or 5 hereof shall be borne solely by the Company, including, but not limited to,
the costs of legal counsel and judicial determinations. The Company shall also
be solely responsible for paying (i) all reasonable expenses incurred by the
Indemnitee to enforce this Agreement, including, but not limited to, the costs
incurred by the Indemnitee to obtain court-ordered indemnification pursuant to
Section 8 hereof, regardless of the outcome of any such application or
proceeding, and (ii) all costs of defending any suits or proceedings challenging
payments to the Indemnitee under this Agreement.
5.2. Timing of the Determination. The Company shall use its best
efforts to make the Determination contemplated by Section 4 or 5 hereof
promptly. In addition, the Company agrees:
(a) if the Determination is to be made by the Board pursuant
to subsection (1) of Section 4.1, such Determination shall be made not later
than 15 days after a written request for a Determination (a "Request") is
delivered to the Company by the Indemnitee; and
(b) if the Determination is to be made by the Board pursuant
to Sections 5.6 or 5.7 or subsection (2) of Section 4.1, such Determination
shall be made not later than 30 days after a Request is delivered to the Company
by the Indemnitee; and
(c) if the Determination is to be made by independent legal
counsel pursuant to subsection (3) of Section 4.1, such Determination shall be
made not later than 30 days after a Request is delivered to the Company by the
Indemnitee.
The failure to make a Determination within the above-specified time period shall
constitute a Determination approving full indemnification or reimbursement of
the Indemnitee. Notwithstanding anything herein to the contrary, the
Determination may be made in advance of (i) the Indemnitee's payment (or
incurring) of expenses with respect to which indemnification or reimbursement is
sought, and/or (ii) final disposition of the action, suit or proceeding with
respect to which indemnification or reimbursement is sought.
5.3. Reasonableness of Expenses. The evaluation and finding as to the
reasonableness of expenses incurred by the Indemnitee for purposes of this
Agreement shall be made (in the
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following order of preference) within 15 days of the Indemnitee's delivery to
the Company of a Request that includes a reasonable accounting of expenses
incurred:
(a) first, by the Board by a majority vote of a quorum
consisting of Disinterested Directors; or
(b) next, if a quorum cannot be obtained under subdivision
(a), by majority vote or consent of a committee duly designated by the Board (in
which designation all directors, whether or not Disinterested Directors, may
participate), consisting solely of two or more Disinterested Directors; or
(c) next, if such a committee cannot be designated, by any
independent legal counsel.
All expenses shall be considered reasonable for purposes of this Agreement if
the finding contemplated by this Section 5.3 is not made within the prescribed
time. The finding required by this Section 5.3 may be made in advance of the
payment (or incurring) of the expenses for which indemnification or
reimbursement is sought.
5.4. Payment of Indemnified Amount. Immediately following a
Determination that the Indemnitee has met the applicable standard of conduct set
forth in Section 1, 2 or 3 hereof, as the case may be, and the finding of
reasonableness of expenses contemplated by Section 5.3 hereof, or the passage of
time prescribed for making such determination(s), the Company shall pay to the
Indemnitee in cash the amount to which the Indemnitee is entitled to be
indemnified and/or reimbursed, as the case may be, without further authorization
or action by the Board; provided, however, that the expenses for which
indemnification or reimbursement is sought have actually been incurred by the
Indemnitee.
5.5. Selection of Independent Legal Counsel. If the Determination
required under Section 4 or 5 is to be made by or based upon the written opinion
of independent legal counsel, such counsel shall be selected by the Indemnitee
with the approval of the Board, which approval shall not be unreasonably
withheld. The fees and expenses incurred by counsel in making any Determination
(including Determinations pursuant to Sections 5.6 and 5.7 hereof) shall be
borne solely by the Company regardless of the results of any Determination and,
if requested by counsel, the Company shall give such counsel an appropriate
written agreement with respect to the payment of their fees and expenses and
such other matters as may be reasonably requested by counsel.
5.6. Right of Indemnitee to Appeal an Adverse Determination by Board.
If a Determination is made by the Board or a committee thereof that the
Indemnitee did not meet the applicable standard of conduct set forth in Section
1, 2 or 3 hereof or that the Indemnitee's expenses are not reasonable as set
forth in Section 5.3 hereof, upon the written request of the Indemnitee and the
Indemnitee's delivery of $500 to the Company, the Company shall cause a new
Determination to be made by independent legal counsel, which independent legal
counsel shall be selected in accordance with Section 5.5. Subject to Section 8
hereof, such Determination
6
<PAGE> 7
by such independent legal counsel shall be binding and conclusive for all
purposes of this Agreement.
5.7. Right of Indemnitee To Select Forum For Determination. If, at any
time subsequent to the date of this Agreement, "Continuing Directors" do not
constitute a majority of the members of the Board, or there is otherwise a
change in control of the Company (as contemplated by Item 403(c) of Regulation
S-K), then the Determination required by Section 4 or 5 hereof shall be made by
independent legal counsel selected by the Indemnitee and approved by the Board
(which approval shall not be unreasonably withheld), which counsel shall be
deemed to satisfy the requirements of clause (3) of Section 4 and clause (c) of
Section 5.3 hereof. If none of the legal counsel selected by the Indemnitee are
willing and/or able to make the Determination, then the Company shall cause the
Determination to be made by a majority vote or consent of a Board committee
consisting solely of Continuing Directors. For purposes of this Agreement, a
"Continuing Director" means either a member of the Board at the date of this
Agreement or a person nominated to serve as a member of the Board by a majority
of the then Continuing Directors.
5.8. Access by Indemnitee to Determination. The Company shall afford to
the Indemnitee and his representatives ample opportunity to present evidence of
the facts upon which the Indemnitee relies for indemnification or reimbursement,
together with other information relating to any requested Determination.
5.9. Judicial Determinations in Suits by the Company. In each action or
suit described in Section 2 hereof, the Company shall cause its counsel to use
its best efforts to obtain from the Court in which such action or suit was
brought (i) an express adjudication whether the Indemnitee is liable for willful
misconduct in the performance of his duty to the Company, and, if the Indemnitee
is so liable, (ii) a determination whether and to what extent, despite the
adjudication of liability but in view of all the circumstances of the case
(including this Agreement), the Indemnitee is fairly and reasonably entitled to
indemnification.
5.10. Burden of Proof. In the event of any claim by the Indemnitee for
indemnification hereunder, there shall be a presumption that the Indemnitee is
entitled to indemnification hereunder and the Company shall have the burden of
proving that the Indemnitee is not entitled to such indemnification.
SECTION 6. SCOPE OF INDEMNITY. The actions, suits and proceedings
described in Sections 1 and 2 hereof shall include, for purposes of this
Agreement, any actions that involve, directly or indirectly, activities of the
Indemnitee both in his official capacities as a director or officer of, or
consultant to, the Company and/or any of its subsidiaries and actions taken in
another capacity while serving as director, officer or consultant, including,
but not limited to, actions or proceedings involving (i) compensation paid to
the Indemnitee by the Company and/or its subsidiaries, (ii) activities by the
Indemnitee on behalf of the Company, including actions in which the Indemnitee
is plaintiff, (iii) actions alleging a misappropriation of a "corporate
opportunity," (iv) responses to a takeover attempt or threatened takeover
attempt of the Company, (v) transactions by the Indemnitee in Company
securities, and (vi) the Indemnitee's
7
<PAGE> 8
preparation for and appearance (or potential appearance) as a witness in any
proceeding relating, directly or indirectly, to the Company. In addition, the
Company agrees that, for purposes of this Agreement, all services performed by
the Indemnitee on behalf of, in connection with or related to any subsidiary of
the Company, any employee benefit plan established for the benefit of employees
of the Company or any subsidiary, any corporation or partnership or other entity
in which the Company or any subsidiary has a 5% ownership interest, any
homeowners or similar association on which the Indemnitee is serving at the
request of the Company or any of its subsidiaries, or any other affiliate shall
be deemed to be at the request of the Company.
SECTION 7. ADVANCE FOR EXPENSES.
7.1. Mandatory Advance. Expenses (including attorneys' fees) incurred
by the Indemnitee in investigating, defending, settling or appealing, or being
or preparing to be a witness in, any action, suit or proceeding described in
Section 1 or 2 hereof shall be paid by the Company in advance of the final
disposition of such action, suit or proceeding. The Company shall promptly pay
the amount of such expenses to the Indemnitee, but in no event later than 5 days
following the Indemnitee's delivery to the Company of a written request for an
advance pursuant to this Section 7, together with a reasonable accounting of
such expenses.
7.2. Undertaking to Repay. The Indemnitee hereby undertakes and agrees
to repay to the Company any advances made pursuant to this Section 7 if and to
the extent that it shall ultimately be found that the Indemnitee is not entitled
to be indemnified by the Company for such amounts.
7.3. Miscellaneous. The Company shall make the advances contemplated by
this Section 7 regardless of the Indemnitee's financial ability to make
repayment, and regardless whether indemnification of the Indemnitee by the
Company will ultimately be required. Any advances and undertakings to repay
pursuant to this Section 7 shall be unsecured and interest-free.
SECTION 8. COURT-ORDERED INDEMNIFICATION. Regardless of whether the
Indemnitee has met the standard of conduct set forth in Sections 1, 2 or 3
hereof, as the case may be, and notwithstanding the presence or absence of any
Determination whether such standards have been satisfied and notwithstanding any
other provision hereof, the Indemnitee may apply for indemnification (and/or
reimbursement pursuant to Section 3 or 12 hereof) to the court conducting any
proceeding to which the Indemnitee is a party or a witness or to any other court
of competent jurisdiction. On receipt of an application, the court, after giving
any notice the court considers necessary, may order indemnification (and/or
reimbursement) if it determines the Indemnitee is fairly and reasonably entitled
to indemnification (and/or reimbursement) in view of all the relevant
circumstances (including this Agreement).
SECTION 9. CONTRIBUTION. If and to the extent that a final adjudication
shall specify that the Company is not obligated to indemnify Indemnitee under
this Agreement for any reason (by reason of public policy, as a matter of law or
otherwise), then in respect of any threatened, pending or completed action, suit
or proceeding in which the Company is jointly
8
<PAGE> 9
liable with Indemnitee (or would be so liable if joined in such action, suit or
proceeding), the Company shall contribute to the amount of expenses (including
attorneys' fees and costs of other professionals), judgments, penalties, fines
(including excise taxes assessed), settlements and all other liabilities
incurred and paid or payable by Indemnitee in connection with such action, suit
or proceeding in such proportion as is appropriate to reflect (i) the relative
benefits received by the Company on the one hand and Indemnitee on the other
hand from the transaction with respect to which such action, suit or proceeding
arose, and (ii) the relative fault of the Company on the one hand and of
Indemnitee on the other hand in connection with the circumstances which resulted
in such expenses, judgments, fines or settlement amounts, as well as any other
relevant equitable considerations. The relative fault of the Company on the one
hand and of Indemnitee on the other hand shall be determined by reference to
among other things, the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent the circumstances resulting in
such expense, judgments, fines or settlement amounts. The Company agrees that it
would not be just and equitable if contribution pursuant to this Section 9 were
determined by pro rata allocation or any other method of allocation which does
not take account of the foregoing equitable considerations.
SECTION 10. NONDISCLOSURE OF PAYMENTS. Except as expressly required by
Federal securities laws, neither party shall disclose any payments under this
Agreement unless prior approval of the other party is obtained. Any payments to
the Indemnitee that must be disclosed shall, unless otherwise required by law,
be described only in Company proxy or information statements relating to special
and/or annual meetings of the Company's shareholders, and the Company shall
afford the Indemnitee the reasonable opportunity to review all such disclosures
and, if requested, to explain in such statement any mitigating circumstances
regarding the events reported.
SECTION 11. COVENANT NOT TO SUE, LIMITATION OF ACTIONS AND RELEASE OF
CLAIMS. No legal action shall be brought and no cause of action shall be
asserted by or on behalf of the Company (or any of its subsidiaries) against the
Indemnitee, his spouse, heirs, executors, personal representatives or
administrators after the expiration of 2 years from the date the Indemnitee
ceases (for any reason) to serve as either an officer or a director of the
Company and/or its subsidiaries, and any claim or cause of action of the Company
(or any of its subsidiaries) shall be extinguished and deemed released unless
asserted by filing of a legal action within such 2-year period.
SECTION 12. INDEMNIFICATION OF INDEMNITEE'S ESTATE. Notwithstanding any
other provision of this Agreement, and regardless whether indemnification of the
Indemnitee would be permitted and/or required under this Agreement, if the
Indemnitee is deceased, the Company shall indemnify and hold harmless the
Indemnitee's estate, spouse, heirs, administrators, personal representatives and
executors (collectively the "Indemnitee's Estate") against, and the Company
shall assume, any and all claims, damages, expenses, costs (including attorneys'
fees and costs of other professionals), penalties, judgments, fines and amounts
paid in settlement actually incurred by the Indemnitee or the Indemnitee's
Estate in connection with the investigation, defense, settlement or appeal of
any action described in Section 1 or 2 hereof. Indemnification of the
Indemnitee's Estate pursuant to this Section 12 shall be mandatory and not
9
<PAGE> 10
require a Determination or any other finding that the Indemnitee's conduct
satisfied a particular standard of conduct.
SECTION 13. REIMBURSEMENT OF ALL LEGAL EXPENSES. Notwithstanding any
other provision of this Agreement, and regardless of the presence or absence of
any Determination, the Company promptly (but not later than 10 days following
the Indemnitee's submission of a reasonable accounting) shall reimburse the
Indemnitee for all attorneys' fees and related court costs and other expenses
incurred by the Indemnitee in connection with the investigation, defense,
settlement or appeal of or preparation to be a witness in or participating in
(including an appeal) or preparing to defend any action described in Section 1
or 2 hereof (including, but not limited to, the matters specified in Section 6
hereof).
SECTION 14. MAINTENANCE OF INSURANCE. The Company represents that a
copy of the policies of directors and officers liability insurance that are in
effect are set forth as Exhibit A hereto. The Company hereby agrees that during
the period commencing on the date hereof and ending six years from the date the
Indemnitee ceases to serve the Company and/or its subsidiaries, the Company
shall purchase and maintain in effect for the benefit of the Indemnitee such
insurance providing coverage at least as favorable to the Indemnitee as that
presently provided, if such insurance can be purchased for premiums not in
excess of 200% of the amount of the current premiums, adjusted from time to time
in accordance with the Consumer Price Index, or, if such coverage cannot be
obtained, the maximum coverage that can be obtained for 200% of the amount of
the current premiums adjusted from time to time in accordance with the Consumer
Price Index.
SECTION 15. CHANGES IN THE LAW. If any change after the date of this
Agreement in any applicable law, statute or rule or the Company's Certificate of
Incorporation or By-laws expands the power of the Company to indemnify the
Indemnitee, such change shall be within the purview of the Indemnitee's rights
and the Company's obligations under this Agreement. If any change in any
applicable law, statute or rule or the Company's Certificate of Incorporation or
By-laws narrows the right of the Company to indemnify a person such as the
Indemnitee, such change, to the extent not otherwise required by such law,
statute or rule to be applied to this Agreement, shall have no effect on this
Agreement or the parties' rights and obligations thereunder.
SECTION 16. MISCELLANEOUS.
16.1. Notice Provision. Any notice, payment, demand or communication
required or permitted to be delivered or given by the provisions of this
Agreement shall be deemed to have been effectively delivered or given and
received on the date personally delivered to the respective party to whom it is
directed, or when deposited by registered or certified mail, with postage and
charges prepaid and addressed to the parties at the addresses set forth below
opposite their signatures to this Agreement.
16.2. Entire Agreement. Except for the Company's Certificate of
Incorporation and By-laws solely to the extent that such instruments expand the
rights of the Indemnitee, this
10
<PAGE> 11
Agreement constitutes the entire understanding of the parties and supersedes all
prior understandings, whether written or oral, between the parties with respect
to the subject matter of this Agreement. Without limiting the foregoing, it is
expressly agreed that the Indemnification Agreement dated as of March 26, 1998
between the Company and the Indemnitee is hereby terminated and superseded by
this Agreement. Nothing in this Agreement shall be deemed to limit any other
indemnification to which the Indemnitee may be entitled, including under the
Company's Certificate of Incorporation and By-laws, without duplication of
payment.
16.3. Severability of Provisions. If any provision of this Agreement is
held to be illegal, invalid, or unenforceable under present or future laws
effective during the term of this Agreement, such provision shall be fully
severable; this Agreement shall be construed and enforced as if such illegal,
invalid, or unenforceable provision had never comprised a part of this
Agreement; and the remaining provisions of this Agreement shall remain in full
force and effect and shall not be affected by the illegal, invalid, or
unenforceable provision or by its severance from this Agreement. Furthermore, in
lieu of each such illegal, invalid, or unenforceable provision there shall be
added automatically as a part of this Agreement a provision as similar in terms
to such illegal, invalid or unenforceable provision as may be possible and be
legal, valid, and enforceable.
16.4. Applicable Law. This Agreement shall be governed by and construed
under the laws of the State of New York.
16.5. Execution in Counterparts. This Agreement and any amendment may
be executed simultaneously or in counterparts, each of which together shall
constitute one and the same instrument.
16.6. Cooperation and Intent. The Company shall cooperate in good faith
with the Indemnitee and use its best efforts to ensure that the Indemnitee is
indemnified and/or reimbursed for liabilities described herein to the fullest
extent permitted by law.
16.7. Amendment. No amendment, modification or alteration of the terms
of this Agreement shall be binding unless in writing, dated subsequent to the
date of this Agreement, and executed by the parties.
16.8. Binding Effect. The obligations of the Company to the Indemnitee
hereunder shall survive and continue as to the Indemnitee even if the Indemnitee
ceases to be a director, officer, consultant, employee and/or agent of the
Company and/or its subsidiaries. Each and all of the covenants, terms and
provisions of this Agreement shall be binding upon and inure to the benefit of
the successors to the Company and, upon the death of the Indemnitee, to the
benefit of the estate, heirs, executors, administrators and personal
representatives of the Indemnitee.
16.9. Nonexclusivity. The rights of indemnification and reimbursement
provided in this Agreement shall be in addition to any rights to which the
Indemnitee may otherwise be entitled by statute, bylaw, agreement, vote of
shareholders or otherwise.
11
<PAGE> 12
16.10. Effective Date. The provisions of this Agreement shall cover
claims, actions, suits and proceedings whether now pending or hereafter
commenced and shall be retroactive to cover acts or omissions or alleged acts or
omissions which heretofore have taken place.
EXECUTED AS OF THE DATE FIRST ABOVE WRITTEN.
ADDRESS: THE COMPANY:
4310 Paradise Road MEGO FINANCIAL CORP.
Las Vegas, Nevada 89109
Attention: [ATTENTION]
By:
----------------------------------
Name:
-------------------------------
Title:
-------------------------------
ADDRESS: THE INDEMNITEE:
- ------------------------------- -------------------------------------
Name: [NAME]
- -------------------------------
- -------------------------------
12
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