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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: NOVEMBER 30, 1998
OR
[X] 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 (I. R. S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
4310 PARADISE ROAD, LAS VEGAS, NEVADA 89109
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(702) 737-3700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of January 11, 1999, there were 21,009,506 shares of Common Stock,
$.01 par value per share, of the Registrant outstanding.
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MEGO FINANCIAL CORP. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at
November 30, 1998 and August 31, 1998.....................................1
Condensed Consolidated Statements of Operations for the Three Months
Ended November 30, 1998 and 1997 ........................................2
Condensed Consolidated Statements of Stockholders' Equity for the
Three Months Ended November 30, 1998 .....................................3
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended November 30, 1998 and 1997 .........................................4
Notes to Condensed Consolidated Financial Statements.......................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................7
Item 3. Quantitative and Qualitative Disclosures About Market Risk................15
PART II OTHER INFORMATION
Item 1. Legal Proceedings.........................................................16
Item 4. Submission of Matters to a Vote of Security Holders.......................16
Item 6. Exhibits and Reports on Form 8-K..........................................17
SIGNATURE ...........................................................................18
</TABLE>
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PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(thousands of dollars, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
NOVEMBER 30, AUGUST 31,
1998 1998
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,293 $ 1,813
Restricted cash 1,797 1,694
Notes receivable, net of allowance for cancellations and discounts of
$12,917 at November 30, 1998 and $12,403 at August 31, 1998 52,207 47,789
Interest only receivables, at fair value 3,232 3,367
Timeshare interests held for sale 34,922 35,798
Land and improvements inventory 7,672 7,965
Other investments 4,356 4,395
Property and equipment, net of accumulated depreciation of $14,709 at
November 30, 1998 and $14,119 at August 31, 1998 23,794 23,950
Deferred selling costs 3,881 3,719
Prepaid debt expenses 1,468 1,431
Other assets 10,230 10,155
-------- --------
TOTAL ASSETS $145,852 $142,076
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes and contracts payable $ 87,021 $ 81,986
Accounts payable and accrued liabilities 20,416 19,098
Reserve for notes receivable sold with recourse 6,008 6,620
Deposits 4,267 4,877
Accrued income taxes 3,954 4,468
-------- --------
Total liabilities before subordinated debt 121,666 117,049
-------- --------
Subordinated debt 4,247 4,348
Redeemable preferred stock, Series A, 12% cumulative preferred stock, $.01 par
value, $10 redemption value, 0 shares issued and outstanding
at November 30, 1998 and August 31, 1998 -- --
Stockholders' equity:
Preferred stock, $.01 par value (authorized--5,000,000 shares) -- --
Common stock, $.01 par value (authorized--50,000,000 shares); 21,009,506
shares issued and outstanding 210 210
Additional paid-in capital 12,789 12,789
Retained earnings 6,940 7,680
-------- --------
Total stockholders' equity 19,939 20,679
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $145,852 $142,076
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands of dollars, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NOVEMBER 30,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
REVENUES
Timeshare interest sales, net $ 9,050 $ 8,835
Land sales, net 3,491 3,026
Interest income 1,992 1,624
Financial income 309 1,018
Gain on sale of investments 513 --
Incidental operations 690 761
Other 820 823
------------ ------------
Total revenues 16,865 16,087
------------ ------------
COSTS AND EXPENSES
Direct cost of:
Timeshare interest sales 1,754 1,847
Land sales 580 399
Incidental operations 651 700
Marketing and sales 8,833 7,790
Depreciation 520 579
Interest expense 2,088 1,716
General and administrative 3,560 4,421
------------ ------------
Total costs and expenses 17,986 17,452
------------ ------------
LOSS BEFORE INCOME TAXES (1,121) (1,365)
INCOME TAXES (BENEFIT) (381) --
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK $ (740) $ (1,365)
============ ============
LOSS PER COMMON SHARE
Basic:
Net loss applicable to common stock $ (0.04) $ (0.06)
============ ============
Weighted-average number of common shares 21,009,506 21,009,506
============ ============
Diluted:
Net loss applicable to common stock $ (0.04) $ (0.06)
============ ============
Weighted-average number of common shares
and common share equivalents outstanding 21,009,506 21,009,506
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
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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 August 31, 1998 21,009,506 $ 210 $12,789 $7,680 $20,679
Net loss for three months ended
November 30, 1998 (740) (740)
----------- ---------- ----------- ----------- -----------
Balance at November 30, 1998 21,009,506 $ 210 $12,789 $6,940 $19,939
=========== =========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
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MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NOVEMBER 30,
-------------------------
1998 1997
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (740) $ (1,365)
-------- --------
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of negative goodwill -- (8)
Charges to allowance for cancellations (1,098) (1,794)
Provision for cancellations 1,183 1,435
Gain on sale of other investments (513) --
Provision for uncollectible Owners' Association advances -- 403
Cost of sales 2,334 2,246
Depreciation 520 579
Amortization of interest only receivables 135 70
Repayments on notes receivable, net 9,402 10,777
Additions to notes receivable (13,905) (13,643)
Purchase of land and timeshare interests (1,165) (2,971)
Additions to other receivables -- (1,857)
Decreases to other receivables -- 3,501
Changes in operating assets and liabilities:
Decrease (increase) in restricted cash (103) 31
Increase in other assets (724) (2,566)
Increase in deferred selling costs (162) (126)
Increase (decrease) in accounts payable and accrued liabilities 1,318 (1,732)
Increase (decrease) in deposits (610) 136
Decrease in accrued income taxes (514) --
-------- --------
Total adjustments (3,902) (5,519)
-------- --------
Net cash used in operating activities (4,642) (6,884)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (364) (921)
Proceeds from sale and property and equipment -- 27
Proceeds from sale of other investments 597 --
Additions to other investments (45) (280)
-------- --------
Net cash provided by (used in) investing activities 188 (1,174)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 14,323 7,466
Reduction of debt (9,288) (4,863)
Payments on subordinated debt (101) (424)
Increase in subordinated debt -- 159
-------- --------
Net cash provided by financing activities 4,934 2,338
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 480 (5,720)
CASH AND CASH EQUIVALENTS--BEGINNING OF PERIOD 1,813 10,376
-------- --------
CASH AND CASH EQUIVALENTS--END OF PERIOD $ 2,293 $ 4,656
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during year for:
Interest, net of amounts capitalized $ 1,841 $ 1,473
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
Reduction of additional paid-in capital due to Spin-off of Mego Mortgage
Corporation $ -- $(21,735)
Reduction of retained earnings due to Spin-off of Mego Mortgage Corporation -- (21,441)
</TABLE>
See notes to condensed consolidated financial statements.
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MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1998 AND 1997
(unaudited)
1. FINANCIAL STATEMENTS
In the opinion of management, when read in conjunction with the audited
Consolidated Financial Statements for the years ended August 31, 1998 and 1997,
contained in the Form 10-K of Mego Financial Corp. (Mego Financial) filed with
the Securities and Exchange Commission for the year ended August 31, 1998, the
accompanying unaudited Condensed Consolidated Financial Statements contain all
of the information necessary to present fairly the financial position of Mego
Financial and Subsidiaries at November 30, 1998, the results of its operations
for the three months ended November 30, 1998 and 1997, the change in
stockholders' equity for the three months ended November 30, 1998 and the cash
flows for the three months ended November 30, 1998 and 1997. All intercompany
accounts between the parent and its subsidiaries have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. In the
opinion of management, all material adjustments necessary for the fair
presentation of these statements have been included herein which are normal and
recurring in nature. The results of operations for the three months ended
November 30, 1998 are not necessarily indicative of the results to be expected
for the full year.
2. NATURE OF OPERATIONS
Mego Financial is a premiere 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. 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.
PEC markets and finances timeshare interests and land in select resort
areas. By providing financing to virtually all of its customers, PEC also
originates consumer receivables that it sells and generally services. In
February 1988, Mego Financial acquired PEC, pursuant to an assignment by the
Assignors (Comay Corp., GRI, RER Corp., and H&H Financial, Inc.) of their
contract right to purchase PEC.
To facilitate its sales of timeshare interests, the Company has entered
into several trust agreements. The trustees administer the collection of the
related notes receivable. The Company has assigned title to certain of its
resort properties in Nevada and its interest in certain related notes receivable
to the trustees.
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.
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MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1998 AND 1997
(unaudited)
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.
On December 24, 1998, Finova Capital Corporation (FINOVA) agreed to make
a loan in the amount of $5,662,000 to PEC, guaranteed by the Company with a
maturity date of June 30, 1999. On that date, FINOVA advanced $3,000,000, less
fees, secured by a pledge of the stock of Central Nevada Utilities Company, a
wholly-owned subsidiary of PEC. In consideration of FINOVA making the advance,
Mego Financial granted to FINOVA a warrant for 150,000 shares of common stock of
the Company at a $1.00 per share exercise price, exercisable within a five-year
period commencing January 1, 1999. Another advance of up to $2,662,000 will be
available in January 1999 and additional collateral will be pledged. As a
condition for this advance, a warrant for up to an additional 350,000 shares of
common stock of the Company at a $1.00 per share exercise price will be issued
to Finova.
3. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" (SFAS 130). SFAS 130 established standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. There are no additional items that would be reported as
Comprehensive Income that are not included in the Company's Statements of
Operations for either of the quarters ended November 30, 1998 and 1997.
4. STOCKHOLDERS' EQUITY
Mego Financial's stock option plan (Stock Option Plan), which was
amended and restated as of September 16, 1998 upon the approval of Mego
Financial's shareholders, provides for non-qualified and qualified incentive
options to officers, key employees and directors. On September 23, 1998, an
additional 111,000 incentive and non-incentive stock options were granted under
the Stock Option Plan by the Stock Option Committee to employees at $1.00 per
share being the fair value. 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations section contains certain forward-looking
statements and information relating to Mego Financial Corp. (Mego Financial)
(Mego Financial and its subsidiaries are referred to herein collectively as the
Company as the context requires) 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 Condensed Consolidated Financial Statements, including the notes thereto,
contained elsewhere herein and in the Company's Form 10-K for the fiscal year
ended August 31, 1998.
GENERAL
The business of the Company is primarily the marketing, financing, and
sale of timeshare interests, retail lots and land parcels, and servicing the
related notes receivable. The Company, through its subsidiary Preferred Equities
Corporation (PEC), provides financing to purchasers of its timeshare interests
and land. This financing is generally evidenced by notes secured by deeds of
trust and mortgages as well as non-recourse installment sale contracts. These
notes receivable are generally payable over a period ranging from two to twelve
years, bear interest at rates ranging from 12.5% to 15.5% and generally require
equal monthly payments of principal and interest.
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
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recognized is deemed to not represent a sale and is accounted for as a reversal
of the revenue with an adjustment to cost of sales. Cancellation of a note
receivable subsequent to the quarter the revenue was recognized is charged to
the allowance for cancellations.
Gain on sale of notes receivable includes the present value of the
differential between contractual interest rates charged to borrowers on notes
receivable sold by PEC and the interest rates to be received by the purchasers
of such notes receivable, after considering the effects of estimated prepayments
and a normal servicing fee. PEC retains certain participations in cash flows
from the sold notes receivable and generally retains the associated servicing
rights. PEC generally sells its notes receivable at par 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 Condensed 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% for the
three months ended November 30, 1998 and 1997. 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.
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
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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
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.
PEC has entered into financing arrangements with certain purchasers of
timeshare interests and land whereby no interest or a 5% interest per annum 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
has discontinued the 0% arrangement, effective during the quarter ended August
31, 1998). Notes receivable of $5.7 million and $7.3 million at November 30,
1998 and August 31, 1998, respectively, were made under this arrangement.
Land sales as of November 30, 1998 exclude $13.9 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 $3.9 million
and cost of sales of $2.0 million.
RESULTS OF OPERATIONS
Three Months Ended November 30, 1998 Compared to Three Months Ended November 30,
1997
PEC
Total revenues for PEC increased 5.0% or $797,000 to $16.8 million
during the three months ended November 30, 1998 from $16.0 million during the
three months ended November 30, 1997. The increase was primarily due to an
increase in land sales, net, to $3.5 million during the three months ended
November 30, 1998 from $3.0 million during the three months ended November 30,
1997 and an increase in interest income to $2.0 million during the three months
ended November 30, 1998 from $1.6 million during the three months ended November
30, 1997.
Timeshare interest and land sales, net, increased to $12.5 million
during the three months ended November 30, 1998 from $11.9 million during the
three months ended November 30, 1997, an increase of 5.7%.
Gross sales of timeshare interests were $10 million during the three
months ended November 30, 1998 and November 30, 1997. Net sales of timeshare
interests increased to $9.1 million from $8.8 million, an increase of 2.4%. The
provision for cancellations represented 9.7% and 11.4% of gross sales of
timeshare interests for the three months ended November 30, 1998 and 1997,
respectively. The decrease in the provision for cancellations for timeshare
interests was primarily due to lower cancellation experience during the first
quarter of fiscal 1998 compared to the first quarter of fiscal 1997 and to an
analysis of the required allowances, including the reserve for notes receivable
sold with recourse, as of November 30, 1998. The Preferred Client Services 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.
Gross sales of land increased to $3.7 million during the three months
ended November 30, 1998 from $3.3 million during the three months ended November
30, 1997, an increase of 11.3%. Net sales of land increased to $3.5 million
during the three months ended November 30, 1998 from $3.0 million during the
three months ended November 30, 1997, an increase of 15.4%, primarily due to
sales at Hartsel Ranch, Colorado in the 1998 period which commenced during the
third quarter of fiscal 1998. The provision for cancellations decreased to 5.6%
of
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gross sales of land for the three months ended November 30, 1998 from 8.9% for
the three months ended November 30, 1997. The decrease in the provision for
cancellation for land was primarily due to lower cancellation experience during
the first quarter of fiscal 1998 compared to the first quarter of fiscal 1997
and to an analysis of the required allowances, including the reserve for notes
receivable sold with recourse, as of November 30, 1998.
A gain on sale of investments of $513,000 was recorded for the three
months ended November 30, 1998. There were no investment sales during the three
months ended November 30, 1997. In October, 1998, PEC sold a vacant parcel of
land containing approximately 40 acres, in Pahrump, NV for $597,000.
Interest income increased to $2.0 million during the three months ended
November 30, 1998 from $1.5 million for the three months ended November 30,
1997, primarily due to increased average notes receivable balances for the
comparative quarters.
Financial income decreased to $309,000 during the three months ended
November 30, 1998 from $1 million during the three months ended November 30,
1997, a decrease of 69.6%. The decrease was primarily a result of the
termination by agreement of loan servicing for a company previously affiliated
with Mego Financial.
As a result of the foregoing, and notwithstanding the decrease in
financial income, total PEC revenues increased to $16.8 million during the three
months ended November 30, 1998 from $16 million during the three months ended
November 30, 1997.
Total costs and expenses for PEC increased to $17.5 million for the
three months ended November 30, 1998 from $16.6 million for the three months
ended November 30, 1997, an increase of 5.4%. The increase resulted primarily
from an increase in marketing and sales expenses to $8.8 million from $7.8
million, an increase of 13.4%; an increase in direct costs of land sales to
$580,000 from $399,000, an increase of 45.4%; and an increase of $380,000 in
interest expense, an increase of 24.4%, partially offset by a decrease in
general and administrative expenses to $3.2 million from $3.7 million, a
decrease of 13.3%. The increase in marketing and sales expenses resulted
primarily from the expansion of timeshare marketing efforts by PEC and higher
gross sales. The increase in direct costs of land is attributable to increased
sales of higher cost lots sold during the current fiscal quarter compared to the
same quarter last year. The increase in interest expense is due to the increase
in the average outstanding balance of notes and contracts payable. The decrease
in general and administrative expenses is due to the reduction in salaries and
benefits and a decrease in maintenance fees paid by PEC.
As a percentage of gross sales of timeshare interests and land,
marketing and sales expenses relating thereto increased to 65.1% during the
three months ended November 30, 1998 from 58.6% during the three months ended
November 30, 1997, and cost of sales increased to 17.0% during the three months
ended November 30, 1998 from 16.9% during the three months ended November 30,
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. Subsequent to November 30, 1998 the Company has restructured its
marketing and sales programs, which restructuring has included the closing of
unprofitable sales locations, the elimination of certain marketing programs and
the layoff of related personnel.
Interest expense of PEC increased to $1.9 million during the three
months ended November 30, 1998 from $1.6 million during the three months ended
November 30, 1997, an increase of 24.4%. The increase is a result of an increase
in the average outstanding balance of notes and contracts payable during the
three months ended November 30, 1998 compared to the three months ended November
30, 1997.
A pre-tax loss of $719,000 was recorded by PEC during the three months
ended November 30, 1998 compared to pre-tax loss of $612,000 during the three
months ended November 30, 1997. The increase in the pre-tax loss is primarily
due to the increases in direct cost of land sales, interest expense and
marketing and sales expense, together with a decrease in financial income,
partially offset by the a decrease in general and administrative expenses.
10
<PAGE> 13
No income tax provision or benefit for PEC was recorded for the three
months ended November 30, 1998 and 1997, since, as part of an arrangement
between PEC and the Company regarding payment of taxes, PEC generally does not
recognize a tax benefit for periods in which it records a loss.
As a result of the foregoing, PEC reported a net loss of $719,000 during
the three months ended November 30, 1998 compared to a net loss of $612,000
during the three months ended November 30, 1997.
COMPANY (consolidated)
Loss before income taxes decreased $244,000 to a loss of $1.1 million
during the three months ended November 30, 1998 from a loss of $1.4 million
during the three months ended November 30, 1997. The reduction in loss is
attributable to the decrease in Company-only expenses.
On a consolidated basis, the decrease in the pre-tax loss is largely due
to the increases in land sales and interest income, the gain on sale of
investments and by the decreases in general and administrative expenses, offset
by the decrease in financial income. Total costs and expenses during the three
months ended November 30, 1998 were $18.0 million, an increase of 3.1% over
$17.5 million during the three months ended November 30, 1997. Marketing and
sales expenses increased 13.4% for the three months ended November 30, 1998
compared to the three months ended November 30, 1997 due primarily to the
expansion of timeshare marketing efforts by PEC and higher gross sales. Also,
see prior discussion for PEC.
An income tax benefit of $381,000 was recorded for the three months
ended November 30, 1998, and was based on the statutory rate. For the three
months ended November 30, 1997, there was no provision as the facts and
circumstances related to the Company's income tax liability reserves were under
extensive review and analysis, which was subsequently completed during fiscal
1997.
Net loss applicable to common stock was $740,000 during the three months
ended November 30, 1998 compared to net loss applicable to common stock of $1.4
million during the three months ended November 30, 1997, due primarily to an
income tax benefit of $381,000 recognized during the three months ended November
30, 1998 compared to no income tax benefit recognized during the three months
ended November 30, 1997. See prior discussion for PEC.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents for the Company was $2.3 million at November
30, 1998 compared to $1.8 million at August 31, 1998. On December 24, 1998,
FINOVA agreed to make a loan in the amount of $5.7 million to PEC, guaranteed by
the Company with a maturity date of June 30, 1999. On that date, FINOVA advanced
$3.0 million, less fees, secured by a pledge of the stock of Central Nevada
Utilities Company, a wholly-owned subsidiary of PEC. In consideration of FINOVA
making the advance, the Company granted FINOVA a warrant for 150,000 shares of
common stock of the Company at a $1.00 per share exercise price, exercisable
within a five-year period commencing January 1, 1999. Another advance up to
$2,662,000 will be available in January 1999 and additional collateral will be
pledged. As a condition for this advance, a warrant for up to an additional
350,000 shares of common stock of the Company at a $1.00 per share exercise
price will be issued to Finova.
The Company has recently experienced cash flow pressures and has taken
the following steps to alleviate this situation. In addition to the short-term
funding from FINOVA discussed above, subsequent to November 30, 1998, the
Company reduced its work force by 180 employees, resulting in an estimated
savings of $4.85 million of salaries and related benefits on an annualized
basis. Also, certain unprofitable sales office locations have been closed and
PEC plans to sell certain non-producing properties which are not deemed to be
part of the core business. While the Company believes these actions will improve
its cash flow and help return it to profitability, there can be no assurance
that these efforts will be successful.
11
<PAGE> 14
PEC
PEC's cash requirements arise from the acquisition of timeshare
properties and land, payments of operating expenses, payments of principal and
interest on debt obligations, 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 and hypothecations of
receivables, PEC's lines of credit in the aggregate amount of $137.5 million and
cash flows from operations. At November 30, 1998, no commitments existed for
material capital expenditures.
At November 30, 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 November 30, 1998, an aggregate of $82.8 million was outstanding
under such lines of credit, and $54.7 million was available for borrowing. Under
the terms of these lines of credit, PEC may borrow 70% to 90% of the balances of
the pledged timeshare and land receivables. PEC is required to comply with
certain covenants under these agreements, which, among other things, require PEC
to meet certain minimum tangible net worth requirements. The most stringent of
such requirements provides that PEC maintain a minimum tangible net worth of $25
million. At November 30, 1998, PEC's net worth was $26.6 million. Necessary
waivers of compliance with certain covenants related to these agreements have
been received. Summarized lines of credit information and accompanying notes
relating to these six lines of credit outstanding at November 30, 1998, consist
of the following (thousands of dollars):
12
<PAGE> 15
<TABLE>
<CAPTION>
BORROWING
AMOUNT AT MAXIMUM
NOVEMBER 30, BORROWING REVOLVING
1998 AMOUNT EXPIRATION DATE (f) MATURITY DATE INTEREST RATE
- --------------- ------------ --------------------- --------------- ---------------------
<S> <C> <C> <C> <C>
$ 50,287 75,000 (a) May 15, 2000 Various Prime + 2.0-2.25%
3,434 15,000 (b) January 31, 1999 Various Prime + 2.0%
11,833 15,000 (c) February 28, 1999 Various LIBOR + 4.0-4.25%
6,307 15,000 (c) May 1, 1999 Various LIBOR + 4.0-4.25%
4,436 10,000 (d) August 1, 2000 August 1, 2003 Prime + 2.0-2.25%
6,503 7,500 (e) January 31, 1999 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 November 30, 1998, $32.8 million was outstanding related to
financings at prime +2%, of which $24.4 million of loans secured by land
receivables mature May 15, 2010 and $8.4 million of loans secured by
timeshare receivables mature May 15, 2007. The outstanding borrowing
amount includes $.8 million in acquisition and development (A&D)
financing maturing May 20, 1999, $6.4 million maturing July 1, 2003 for
the financing of corporate office buildings, both of which 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 $9.0 million are at prime +2% and mature at various
dates through 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 November 30,
1998, $1.2 million was outstanding under the A&D loan maturing September
1, 1999, and $2.2 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 November 30,
1998, $4.4 million was outstanding under the A&D loans which have
maturity dates of December 31, 2000 and June 30, 2001, and bears
interest at the 90 day London Interbank Offering Rate (LIBOR) + 4.25%.
The available receivable financings, of which $7.4 million was
outstanding at November 30, 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 $2.5 million was outstanding at November
30, 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 debt 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.
(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. The Company is presently negotiating for
extension of the revolving periods expiring in 1999.
A schedule of the cash shortfall arising from recognized and
unrecognized sales for the periods indicated is set forth below (thousands of
dollars):
13
<PAGE> 16
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
NOVEMBER 30,
----------------------------
1998 1997
------------- --------------
<S> <C> <C>
Marketing and sales expenses attributable to
recognized and unrecognized sales $ 8,996 $ 7,915
Less: Down payments (2,732) (3,116)
------- -------
Cash shortfall $ 6,264 $ 4,799
======= =======
</TABLE>
During the three months ended November 30, 1998 and November 30, 1997,
PEC did not sell any notes receivable.
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 November 30, 1998, PEC was contingently liable to
replace or repurchase notes receivable sold with recourse totaling $67.8
million. The repurchase provisions provide for substitution of receivables as
recourse for $49.9 million of sold notes receivable and cash payments for
repurchase relating to $17.9 million of sold notes receivable. At November 30,
1998 and 1997, the undiscounted amounts of the recourse obligations on such
notes receivable were $7.2 million and $7.9 million, respectively. PEC
periodically reviews the adequacy of this liability. These reviews take into
consideration changes in the nature and level of the portfolio, current and
future economic conditions which may affect the obligors' ability to pay,
changes in collateral values, estimated value of inventory that may be
reacquired and overall portfolio quality.
The components of the Company's debt, including lines of credit consist
of the following (thousands of dollars):
<TABLE>
<CAPTION>
NOVEMBER 30, AUGUST 31,
1998 1998
------------- ------------
<S> <C> <C>
Notes collateralized by receivables $47,610 $42,793
Mortgages collateralized by real estate properties 37,698 37,393
Installment contracts and other notes payable 1,713 1,800
------- -------
Total $87,021 $81,986
======= =======
</TABLE>
FINANCIAL CONDITION
November 30, 1998 Compared to August 31, 1998
Cash and cash equivalents increased 26.5% to $2.3 million at November
30, 1998 from $1.8 million at August 31, 1998.
Notes receivable, net, increased 9.2% to $52.2 million at November 30,
1998 from $47.8 million at August 31, 1998 primarily as a result of new
receivables added exceeding reductions while no receivable sales occurred during
the three months ended November 30, 1998.
Changes in the aggregate of the allowance for cancellations, excluding
discounts, and the reserve for notes receivable sold with recourse for the three
months ended November 30, 1998 consists of the following (thousands of dollars):
14
<PAGE> 17
<TABLE>
<S> <C>
Balance at beginning of period $18,488
Provision for cancellations 1,183
Amounts charged to allowance for cancellations and
reserve for notes receivable sold with recourse (1,085)
-------
Balance at end of period $18,586
=======
</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>
NOVEMBER 30, AUGUST 31,
1998 1998
------------- -----------
<S> <C> <C>
Allowance for cancellations, excluding discounts $12,578 $11,868
Reserve for notes receivable sold with recourse 6,008 6,620
------- -------
Total $18,586 $18,488
======= =======
</TABLE>
Timeshare and land sales, net, increased to $12.5 million for the three
months ended November 30, 1998 from $11.9 million for the three months ended
November 30, 1997.
Statement of Financial Accounting Standard (SFAS) No. 125 (SFAS 125)
requires the reclassification of excess servicing rights as interest only
receivables which are carried at fair market value. Interest only receivables
decreased 4.0% to $3.2 million at November 30, 1998 from $3.4 million at August
31, 1998 due to normal amortization.
Notes and contracts payable increased 6.1% to $87.0 million at November
30, 1998 from $82.0 million at August 31, 1998 due to decreased paydowns of debt
with proceeds from receivable sales and borrowings on newly generated
receivables during the three months ended November 30, 1998.
Reserve for notes receivable sold with recourse decreased 9.2% to $6.0
million at November 30, 1998 from $6.6 million at August 31, 1998 due to
paydowns on existing sold loans and no receivable sales occurring during the
period. Recourse to PEC on sales of notes receivable is governed by the
agreements between the purchasers and PEC.
Accrued income taxes decreased 11.5% to $4.0 million at November 30,
1998 from $4.5 million at August 31, 1998. 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 during fiscal 1997.
Stockholders' equity decreased 3.6% to $19.9 million at November 30,
1998 from $20.7 million at August 31, 1998.
YEAR 2000 COMPLIANCE
The status of the Year 2000 compliance issue is substantially the same
as reported in the Company's 1998 Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There was no material change for the quarter ended November 30, 1998 in
the information about the Company's "Quantitative and Qualitative Disclosures
About Market Risk" as disclosed in Form 10-K for the fiscal year ended August
31, 1998.
15
<PAGE> 18
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as hereinafter set forth, there has been no material change in
the status of the litigation reported in the Company's Annual Report on Form
10-K for the year ended August 31, 1998.
As previously reported in the Company's 1998 Form 10-K, on August 27,
1998, an action was filed by Robert and Jocelyn Henry, husband and wife
individually and on behalf of all others similarly situated. On December 17,
1998, counsel for the plaintiffs filed an amended class action complaint which
was served on PEC on December 21, 1998. The amended complaint added a defendant
and two plaintiffs, and in addition to the allegations set forth in the above
referenced Form 10-K, alleges a pattern of fraud in PEC's general lot sales
program including the inability to deliver utility services. The Company
believes it has substantial defenses to the Amended Complaint. Although the
Company presently cannot predict the outcome of this matter, it does not believe
that this matter will have a material adverse affect on the Company's or PEC's
business or financial condition.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders ("Meeting") of the Company was held on
September 16, 1998.
(b) Not applicable because:
(i) Proxies for the Meeting were solicited pursuant to Regulation 14
under the Securities Exchange Act of 1934.
(ii) There was no solicitation in opposition to management's nominees as
listed in the Company's proxy statement dated August 25, 1998; and
(iii) All such nominees were elected.
(c) The matters voted on at the Meeting consisted of the following:
(i) The election of six members to the Company's Board of Directors. The
name of each nominee for election and the number of shares voted for and against
such nominee, are set forth below:
<TABLE>
<CAPTION>
- ----------------------- ------------- --------------
NAME FOR AGAINST
- ----------------------- ------------- --------------
<S> <C> <C>
Robert Nederlander 16,849,183 142,979
Jerome J. Cohen 16,849,108 143,054
Herbert B. Hirsch 16,849,193 142,969
Eugene I. Schuster 16,849,293 142,869
Wilbur L. Ross, Jr 16,849,283 142,879
John E. McConnaughy, Jr 16,849,283 142,879
</TABLE>
16
<PAGE> 19
(ii) A proposal to approve the Company's Amended and Restated Stock
Option Plan. 16,107,114 shares were voted in favor of such proposal, 880,227
shares were voted against the proposal and 4,821 shares abstained from voting on
such proposal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.150 Amended and Restated and Consolidated Loan and Security
Agreement between Finova and PEC & Mego Financial dated
December 23, 1998.
10.151 Common Stock Purchase Warrant issued by Mego Financial to
Finova Capital Corporation dated December 23, 1998.
27.1 Financial Data Schedule (for SEC use only).
</TABLE>
No reports on Form 8-K were filed during the period.
17
<PAGE> 20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEGO FINANCIAL CORP.
By: /s/ Charles G. Baltuskonis
-------------------------------------
Charles G. Baltuskonis
Vice President and Chief Accounting
Officer
Date: January 14, 1999
18
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEGO FINANCIAL CORP.
By:
------------------------------------
Charles G. Baltuskonis
Vice President and Chief Accounting
Officer
Date: January ___, 1999
20
<PAGE> 1
Exhibit 10.150
FORBEARANCE AGREEMENT AND AMENDMENT NO. 5 TO SECOND
AMENDED AND RESTATED AND CONSOLIDATED LOAN AND
SECURITY AGREEMENT
This Forbearance Agreement and Amendment No. 5 to Second Amended and
Restated and Consolidated Loan and Security Agreement ("Amendment") dated as of
December 23, 1998 is entered into by and among FINOVA CAPITAL CORPORATION, a
Delaware corporation ("FINOVA" or "Lender"), PREFERRED EQUITIES CORPORATION, a
Nevada corporation ("Borrower") and MEGO FINANCIAL CORP., a New York
corporation ("Guarantor") and has reference to the following facts:
A. FINOVA and Borrower entered into a Second Amended and Restated
and Consolidated Loan and Security Agreement dated as of May 15, 1997 (the
"Original Loan Agreement") that evidences a loan from FINOVA to Borrower. The
Original Loan Agreement was amended by the Hartsel Springs Side Letter dated
February 18, 1998 (the "First Amendment"), by the Letter Agreement [Biloxi
Property] dated March 20, 1998 (the "Second Amendment"), by the Letter
Agreement [Headquarters Readvance] dated September 29, 1998 (the "Third
Amendment") and by the Amendment No. 4 to Second Amended and Restated and
Consolidated Loan and Security Agreement dated November 6, 1998 (the "Fourth
Amendment and together with the Original Loan Agreement, the First Amendment,
the Second Amendment and the Third Amendment, collectively the "Loan
Agreement").
B. Borrower has advised FINOVA that Borrower may not have performed
each and every term and condition of the Documents, which nonperformance may
constitute an Event of Default. Such events of nonperformance (collectively the
"Existing Events of Default") may allow FINOVA to exercise its rights under the
Loan Agreement. Such events of nonperformance include, without limitation,
Borrower's failure to meet the Sales, General and Administrative Expense to Net
Sales covenant contained in Section 8.23(d) of the Loan Agreement as amended by
the Fourth Amendment.
C. In the event there exists an Existing Event of Default, Borrower
has requested that FINOVA forbear from enforcing its rights and remedies under
the Documents with respect thereto. Borrower has also requested that FINOVA
lend to Borrower the amount of Five Million Six Hundred Sixty Two Thousand
Dollars ($5,662,000) in addition to the amounts already loaned or agreed to be
loaned to Borrower under the Documents. FINOVA has agreed to (i) fund a portion
of such new loan, in the amount of Three Million Dollar ($3,000,000) (the
"Tranche A Loan"), on the terms provided herein, (ii) fund a portion of the new
loan, in the amount of Two Million Six Hundred Sixty Two Thousand Dollars
($2,662,000) (the "Tranche B Loan") on the terms provided herein, and (iii)
forbear from enforcing its rights and remedies as provided herein.
<PAGE> 2
D. Borrower has advised FINOVA that Borrower will be paying its
debts as they mature in the ordinary course with the proceeds of the Additional
Advances.
Now, therefore, in consideration of the foregoing and for the good and
valuable consideration provided herein, FINOVA, Borrower and Guarantor agree as
follows:
1. LOAN AGREEMENT. Unless otherwise defined herein, all capitalized
terms used herein shall have the same meaning set forth in the Loan Agreement.
Provided the conditions precedent described in Section 4 of this Amendment are
met to the satisfaction of FINOVA, which satisfaction will be evidenced by
FINOVA's execution of this Amendment, the Loan Agreement is hereby further
modified as follows:
1.1 The Loan Agreement is hereby amended by adding to Article I the
following definitions:
"Additional Advance Note": that certain Promissory Note (Additional
Advances) of Borrower of even date with the Fifth Amendment, executed and
delivered to FINOVA in the amount of Five Million Six Hundred Sixty Two
Thousand Dollars ($5,662,000) evidencing the Additional Advances, together with
any modifications, amendments, restatements or supplements from time to time
made thereto whether now or hereafter existing.
"Additional Advances": shall have the meaning set forth in the Fifth
Amendment.
"Affiliate": means any Person controlling, controlled by or under
common control with Borrower. For purposes of this definition, "control" means
the possession, directly or indirectly, of the power to direct or cause
direction of the management and policies of any Person, whether through
ownership of common or preferred stock or other equity interests, by contract
or otherwise. Without limiting the generality of the foregoing, each of the
following shall be an Affiliate: Guarantor, any officer or director of
Borrower, any shareholder, member or subsidiary of Borrower, and any other
Person with whom or which Borrower has common shareholders, officers or
directors. This definition shall be applicable only with respect to Section 3.1
of the Fifth Amendment.
"Brigantine Inn": shall mean Ramada Vacation Suites on Brigantine Beach
located in Brigantine, New Jersey and identified in the Business Plan as
"Brigantine Inn".
"Brigantine Villas": shall mean Ramada Vacation Suites on Brigantine
Beach located in Brigantine, New Jersey and identified in the Business Plan as
"Brigantine Villas".
"Business Plan": shall mean that certain Revised Fiscal 1999 Business
Plan (New Plan) submitted by Borrower to FINOVA on December 9, 1998.
2
<PAGE> 3
"Calvada Eye": shall mean that parcel of real property described in the
Business Plan as "Calvada Eye."
"Calvada Land": shall mean all unsold residential Lots as of the date of
this Amendment located in Borrower's Calvada Development in Pahrump, Nevada.
"Calvada Meadows Unit 2 RV Park": shall mean that parcel of real property
described in the Business Plan as "Proposed RV Park in Calvada Meadows Unit 2
along Highway 160."
"Calvada RV Park": shall mean that certain RV Park timeshare project
located in Pahrump, Nevada and identified in the Business Plan as "Calvada RV
Park."
"Calvada Unit 2 Raw Land": shall mean that parcel of real property
described in the Business Plan as "Raw land bordering Calvada North Unit 2."
"Calvada North Unit 5": shall mean that parcel of real property described
in the Business Plan as "Proposed Calvada North Unit 5 (Kissam).
"CNUC/Cottonwood Park": shall mean that certain parcel of real property
described in the Business Plan as "Old CNUC/Cottonwood Park area in Valley
Unit 6."
"Colorado Water Rights": shall mean those water rights located in Huerfano
County, Colorado and described in the Business Plan as "Colorado Water Rights."
"Fifth Amendment": shall mean the Forbearance Agreement and Amendment
No. 5 to Second Amended and Restated and Consolidated Loan and Security
Agreement dated December 23, 1998 among Borrower, Lender and Guarantor.
"Forbearance Collateral Release Conditions": shall mean the occurrence of
all of the following: (i) the principal amount of the Additional Advances and
all accrued interest shall have been paid in full, (ii) there shall then exist
no Event of Default (including the Existing Events of Default) or Incipient
Default and (iii) Borrower has been in compliance, in all material respects,
with the Business Plan for the months of March 1999, April 1999, May 1999 and
June 1999.
"Former STP Site": shall mean that parcel of real property described in
the Business Plan as "Former STP Site below Comstock Park."
"Golf Courses": shall mean that certain golf course development described
in the Business Plan as "Golf Courses."
"Incipient Default": shall mean an act or event which with notice, passage
of time or both would constitute an Event of Default.
3
<PAGE> 4
"NWC Highway 160 Calvada": shall mean that parcel of real property
described in the Business Plan as "Northwest corner of Highway 160 and Calvada
Boulevard."
"Stock Pledge Agreement": shall have the meaning set forth in Section
4.2(b) of the Fifth Amendment.
"SWC Highway 160 Calvada": shall mean that parcel of real property
described in the Business Plan as "Southwest corner of Highway 160 and Calvada
Boulevard."
"RV Park Remainder": shall mean that parcel of real property described
in the Business Plan as "Remainder parcel of existing RV Park."
"White Sands": shall mean that certain time share project known as
Ramada Vacation Suites at White Sands located in Honolulu, Hawaii.
1.2. The definition of the following term in Article I of the Loan
Agreement, including, to the extent applicable, the First Amendment, Second
Amendment, Third Amendment and Fourth Amendment is hereby amended and restated
in its entirety to read as follows:
"Receivables Loan": shall mean that portion of the Loan not to exceed
$75,000,000, less the aggregate outstanding principal balance of (a) all
Advances made under the Mortgage Loan Facility, (b) the Aloha Bay Note, (c) the
Office Note, (d) the Biloxi Note and (e) the Additional Advance Note.
1.3 The provisions of Paragraph 2.1 of the Loan Agreement are hereby
amended and restated in their entirety to read as follows:
"2.1 The Loan. Subject to the terms and conditions of this Agreement,
Lender hereby agrees to make a Loan to Borrower in the amounts and for the
purposes hereinafter described. The Loan shall be constituted of the Receivables
Loan, the Mortgage Loan Facility, a One Million Seven Thousand One Hundred
Dollars ($1,007,100) nonrevolving mortgage loan made with respect to Aloha Bay
(the "Aloha Bay Loan"), a Six Million Five Hundred Eighty Three Thousand Four
Hundred Six and 43/100 Dollar ($6,583,406.43) nonrevolving mortgage loan
previously made with respect to the Headquarters Building and the FCFC Property
(the "Office Loan"), a One Million One Hundred Seventy Three Thousand Seven
Hundred Fifty Dollar ($1,173,750.00) nonrevolving mortgage loan previously made
with respect to the Biloxi Property and the Additional Advances."
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<PAGE> 5
1.4 The provisions of Paragraph 2.2 of the Loan Agreement are hereby
amended and restated in their entirety to read as follows:
"2.2 Receivables Loan. Upon Borrower's request, subject to the
conditions precedent state in Article V hereof and elsewhere in this Agreement
Lender hereby agrees that the Receivables Loan will be disbursed to Borrower,
from time to time, in periodic advances, but in no event after the Receivables
Borrowing Term has expires, in amounts not to exceed those determined by
subtracting (a) the difference between the unpaid principal balance outstanding
under the Loan at the time of each Advance over the outstanding principal
balance of the aggregate of (i) Advances made under the Mortgage Loan Facility,
(ii) the Aloha Bay Loan, (iii) the Office Loan, (iv) the Additional Advances
and (v) the Biloxi Note from (b) the Borrowing Base, determined as of the date
thereof after giving effect to all Eligible Receivables then assigned to (and
not reassigned by) Lender; provided, however, that the outstanding principal
amount of the Loan shall not exceed at any time the Maximum Loan Amount, and;
provided, further, that the principal amount of any and all indebtedness of
Borrower to Lender which is secured by Receivables Collateral encumbering Lots
shall not exceed $35,000,000.00."
1.5 The provisions of Section 2.3.7.5 of the Loan Agreement are hereby
amended to provide that the entire remaining balance of the Towers Note,
together with all accrued and unpaid interest and all other sums due and owing
thereon, shall be due and payable in full on June 30, 1999.
1.6 The provisions of Paragraph 2.6 of the Loan Agreement are hereby
amended and restated in their entirety to read as follows:
"2.6 All Advances of the Loan, whether made under the Receivables Loan
and evidenced by the Receivables Note, or made under the Mortgage Loan Facility
and evidenced by a Project Note, or made under the Aloha Bay Loan and evidenced
by the Aloha Bay Note or made under the Office Loan and evidenced by the
Office Note, and made with respect to the Biloxi Property and evidenced further
by the Biloxi Note or made under the Fifth Amendment and evidenced by the
Additional Advance Note shall be deemed to be a single Loan."
1.7 Paragraph 8.13.(c) of the Loan Agreement is hereby modified to
require that interim financial statements for the Borrower and the Guarantor be
supplied to FINOVA on a monthly basis, rather than a quarterly basis, within
thirty (30) days following the end of each calendar month.
1.8 The Office Note is hereby amended to require the payment of
interest only commencing with the payment due on January 1, 1999 and continuing
for each subsequent payment due thereafter through and including the payment
due June 1, 1999. Commencing on July 1, 1999 and on the first day of each month
thereafter, the Office Note shall be paid in installments of principal and
interest as more fully set forth in the Office Note.
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<PAGE> 6
Such deferred principal payments shall continue to accrue interest at the rate
set forth in the Office Note and shall be payable on the Maturity Date (as that
term is defined in the Office Note) unless the balance of the Office Note is
previously accelerated pursuant to the provisions thereof.
1.9 Paragraph (e) of Exhibit "I-C" of the Loan Agreement (i.e.
Conditions of Eligible Receivables) shall be amended and restated in its
entirety to read as follows:
As of the time the original Advance against such Instrument or
Contract is made, no payment is more than twenty-nine (29) days
overdue or has been deferred.
2. ADDITIONAL ADVANCES.
2.1 FINOVA is willing to make the Tranche A Loan and the Tranche B
Loan (collectively, the "Additional Advances") to Borrower on the terms and
conditions provided herein. The proceeds of the Additional Advances shall be
used solely for the payment of existing accounts payable and employees salaries
and commissions in the ordinary course of business and for the purposes set
forth in the Business Plan. The Documents are hereby modified as follows to
provide for the Additional Advances. The Additional Advances shall reduce,
dollar for dollar, the amount of borrowing availability under the Mortgage Loan
Facility. In no event shall the outstanding principal balance of the Additional
Advances and the outstanding principal balance of the Mortgage Loan Facility
exceed, at any time, the sum of Fifteen Million Dollars ($15,000,000) and in the
event such limitation is exceeded, Borrower shall immediately make a payment to
FINOVA in an amount equal to such excess together with interest thereon. No
prepayment premium shall be payable in connection with the payment of such
excess. The Additional Advances are nonrevolving in nature.
2.2 The Tranche A Loan shall be advanced to Borrower in no more than
two (2) Advances, on or before December 31, 1998. FINOVA's obligation to make
any Advances of the Tranche A Loan are conditioned upon the satisfaction of
both the General Conditions (as hereinafter defined) and the Conditions
Precedent (as hereinafter defined). FINOVA shall have no obligation to make any
Advance of the Tranche B Loan after January 31, 1999 and there shall be no more
than two (2) Advances of the Tranche B Loan proceeds in any one (1) calendar
month. FINOVA's obligation to make any Advances of the Tranche B Loan shall be
subject to the continued satisfaction of the General Conditions and to the
satisfaction of the Conditions Subsequent (as hereinafter defined). Subject to
the foregoing conditions, Additional Advances shall be advanced to Borrower
pursuant to the Request for Advance and Certification in the form attached
hereto as Exhibit 2.2
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<PAGE> 7
3. ASSIGNMENT OF SALES PROCEEDS.
3.1 As additional security for the payment and Performance of all
the Obligations, Borrower hereby grants, transfers and assigns to FINOVA a
Security Interest in and to the Excess Proceeds Collateral. FINOVA's Security
Interest in the Excess Proceeds Collateral shall be absolute, continuing and
applicable to all existing and future Advances and shall secure the repayment
of the Loan (including without limitation the Additional Advances) and the
Performance of all Obligations throughout the Term of the Loan. For purposes
hereof, the term "Excess Proceeds Collateral" shall mean (a) ten percent (10%)
of the gross sales price arising from the sale of a Unit in each of Project
(Towers), Project (Villas) and White Sands and (b) all proceeds received by
Borrower or any Affiliates of Borrower arising from a sale of each of (i)
CNUC/Cottonwood Park, (ii) NWC Highway 160 Calvada, (iii) SWC Highway 160
Calvada, (iv) RV Park Remainder, (v) Calvada Eye, (vi) Calvada North Unit 5,
and (vii) Golf Courses, net, in each instance, in the case of this clause (b),
of the sum of an amount no greater than the following release price, reasonable
brokerage commissions and closing costs:
<TABLE>
<CAPTION>
Property Lien Holder Release Price
-------- ----------- -------------
<S> <C> <C>
CNUC/Cottonwood Park Textron Financial Corp. $1,962,500.00
NWC Highway 160 Calvada Textron Financial Corp. $ 392,500.00
SWC Highway 160 Calvada Textron Financial Corp. $ 390,000.00
RV Park Remainder Textron Financial Corp. $1,525,000.00
Calvada Eye Textron Financial Corp. $1,880,000.00
Calvada North Unit 5 William Kissam $ 100,000.00
Golf Courses BancBoston $ 750,000.00
</TABLE>
Excess Proceeds Collateral shall be paid to FINOVA immediately upon the closing
of the sale of the applicable property. Borrower represents and warrants to
FINOVA that the only persons holding liens against the properties in the
columnar list above are as set forth above (together with real property taxes
and assessments not yet due and payable) and that the above referenced
lienholders will release their respective liens on the applicable parcel of
property upon receipt of an amount no greater than the release price set forth
above. Borrower covenants and agrees that prior to the occurrence of the
Forbearance Collateral Release Conditions, Borrower will not further encumber
the aforementioned properties. Borrower covenants and agrees to sell the
aforementioned properties solely for terms which require payment to Borrower of
the entire purchase price in cash. Furthermore, without the prior written
consent of FINOVA, Borrower shall not sell any of the aforementioned properties
or any of the other assets set forth in the Business Plan for an amount less
than eighty percent (80%) of the "Asking Price" as set forth the Business Plan.
3.2 In the event any of the aforementioned lienholder's liens are
satisfied prior to satisfaction of the Forbearance Collateral Release
Conditions, Borrower agrees to grant to FINOVA a first mortgage or deed of trust
lien on those properties which were previously encumbered by such lien, pursuant
to a deed of trust or mortgage acceptable to
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<PAGE> 8
FINOVA, subject only to such matters as are acceptable to FINOVA, as additional
security for the payment and Performance of the Obligations. Concurrently
therewith, Borrower shall obtain a lender's policy of title insurance from a
title insurance underwriter acceptable to FINOVA with respect to such mortgages
or deeds of trust, in the amount of the Additional Advance Note and in form and
substance and with such endorsements as are acceptable to FINOVA (or any
irrevocable commitment issue such policy) all at the sole cost and expense of
the Borrower. Such deeds of trust or mortgages shall be accompanied by an
Environmental Certificate with Representations. Covenants and Warranties in a
form acceptable to FINOVA with respect to the property encumbered by such
mortgage or deed of trust. The security interest granted to FINOVA pursuant to
the aforementioned mortgages or deeds of trust shall be absolute, continuing
and applicable to all existing and future Advances and secure the repayment of
the Loan (including without limitation the Additional Advances) and the
Performance of all Obligations throughout the Term of the Loan.
4. CONDITIONS PRECEDENT: FINOVA's obligations under this Amendment
are subject to the satisfaction of the General Conditions, the Conditions
Precedent and the Conditions Subsequent, as defined below:
4.1 The General Conditions are as follows:
(a) There shall exist no Event of Default or Incipient Default,
after giving effect to the then applicable provisions of this Amendment and
other than the Existing Events of Default.
(b) This Amendment shall have been fully signed by Borrower and
Guarantor.
(c) Borrower shall have executed the Additional Advance Note and
delivered the same to FINOVA.
(d) Borrower shall have paid to FINOVA the full Additional Advance
Fee as defined below:
(e) There shall have occurred no material adverse change in any real
property or in the business or financial condition of Borrower and Guarantor
since the date of the last financial statements submitted to FINOVA.
(f) FINOVA has received:
(i) Current updates of the opinion letters received by FINOVA
in connection with the Loan Agreement.
(ii) Such resolutions and authorizations and such other
documents as FINOVA may require relating to the existence and good standing
of Borrower and
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<PAGE> 9
Guarantor, and the authority of any person executing this Amendment and
other documents on behalf of Borrower and Guarantor.
(iii) Evidence that Borrower has good and marketable title to the
collateral pledged to FINOVA pursuant to this Amendment and that there are
no other financing statements, liens, claims or encumbrances against
Borrower or the property of Borrower except those that have been disclosed
to FINOVA and are otherwise approved by FINOVA.
(iv) Such other documents or instruments are required by FINOVA
so as to fully perfect the liens and security interest of FINOVA granted
hereunder.
(g) Neither Borrower nor Guarantor shall have failed to disclose to
FINOVA any material information and no material information supplied by
Borrower or Guarantor shall be found to be misleading, misrepresented or
incorrect in any material respect.
(h) All representations and warranties by Borrower and Guarantor
shall remain true and correct, in all material respects, and all agreements of
Borrower and Guarantor that are to have been performed or complied with at such
time shall have been performed or complied with.
(i) Borrower shall have reimbursed FINOVA for all of FINOVA's
out-of-pocket costs and expenses including, without limitation, attorneys',
engineers' and other consultants' fees and costs, incurred in connection with
the documentation and closing of this Amendment.
(j) Borrower shall have obtained such public liability, casualty and
other insurance policies as FINOVA may require, written by insurers and in an
amount and form satisfactory to FINOVA.
(k) Borrower shall have executed and delivered to FINOVA such UCC
financing statements and amendments as FINOVA deems necessary and appropriate.
4.2 The Conditions Precedent are as follows:
(a) Guarantor shall have granted to FINOVA a warrant to purchase One
Hundred Fifty Thousand (150,000) shares of common stock of Guarantor pursuant
to the form of agreement attached hereto as Exhibit 4.2(a).
(b) Borrower shall have pledged to FINOVA as additional security for
the payment and Performance of the Obligations, one hundred percent (100%) of
the issued and outstanding stock of Central Nevada Utilities Company, a Nevada
corporation ("CNUC") pursuant to a Stock Pledge Agreement in form and substance
satisfactory to FINOVA (the
9
<PAGE> 10
"Stock Pledge Agreement") and in connection therewith shall have delivered to
FINOVA satisfactory opinions of counsel with respect to such pledge together
with the original share certificates representing such ownership interest which
shall have been endorsed to FINOVA "in blank" pursuant to an assignment apart
from certificate. Such opinion of counsel shall indicate that no public utility
commission approval is required in order for Borrower to pledge the shares of
stock of CNUC as set forth above or in order for CNUC to grant to FINOVA the
liens and security interests contemplated pursuant to Section 4.3(d) hereof and
that public utility commission approval is only required in the event FINOVA
desires to realize upon the aforementioned stock pledge from Borrower or the
aforementioned assignments and security interest from CNUC. The security
interest granted to FINOVA pursuant to the Stock Pledge Agreement shall be
absolute, continuing and applicable to all existing and future Advances and
shall secure the repayment of the Loan (including without limitation the
Additional Advances) and the Performance of all Obligations throughout the term
of the Loan.
4.3 The Conditions Subsequent as follows:
(a) Borrower has executed and recorded with the appropriate county
recorders office a Notice of Assignment of Proceeds, in a form acceptable to
FINOVA, against each of (i) the CNUC/Cottonwood Park, (ii) NWC Highway 160
Calvada, (iii) SWC Highway 160 Calvada, (iv) RV Park Remainder, (v) Calvada
North Unit 5, (vii) Golf Courses, (viii) Project (Towers), (ix) Project
(Villas) and (x) White Sands so as to place of public record Borrower's
agreement with respect to such properties as more fully set forth in Section
3.1 hereof.
(b) Borrower shall have granted to FINOVA, as additional security for
the payment and Performance of the Obligations, a first deed of trust or
mortgage lien, pursuant to a deed of trust or mortgage acceptable to FINOVA, and
shall have delivered to FINOVA an Environmental Certificate and Indemnity and
(subject to the provisions of Section 4.4 hereof) ALTA certified survey, in a
form acceptable to FINOVA, on each of (i) Calvada Meadows Unit 2 RV Park, (ii)
Calvada Unit 2 Raw Land, (iii) Former STP Site, (iv) Colorado Water Rights, (v)
the unsold Units within Fountains, (vi) the unsold Units within Project
(Terraces - Phase 1), (vii) the unsold Units within Project (Terraces - Phase
2), (viii) the unsold Units within Winnick, (ix) the unsold Units within
Brigantine Inn, (x) the unsold Units within Brigantine Villas, (xi) the unsold
Units with Project (Reno), (xii) the unsold Lots and other land within Calvada
RV Park and (xiii) the unsold Lots and other land within Calvada Land, subject,
in each instance, to such exceptions to title as are acceptable to FINOVA. The
security interest granted to FINOVA pursuant to the aforementioned deeds of
trust and mortgages shall be absolute, continuing and applicable to all
existing and future Advances and shall secure the repayment of the Loan
(including without limitation the Additional Advances) and the Performance of
all Obligations throughout the Term of the Loan.
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<PAGE> 11
(c) FINOVA shall have obtained a lender's policy of title insurance from
a title insurance underwriter acceptable to FINOVA with respect to each of the
mortgages and deeds of trust referenced in the immediately previous section
(other than with respect to the mortgage or deed of trust encumbering the
Colorado Water Rights) in the amount of the Additional Advance Note and in form
and substance and with such endorsement as are acceptable to FINOVA (or an
irrevocable commitment to issue such policy), all at the sole cost and expense
of Borrower.
(d) Borrower and Guarantor shall have caused CNUC to have assigned to
FINOVA as additional security for the payment and Performance of the
Obligations, all proceeds (net of reasonable closing costs) received from the
sale of any assets of CNUC and shall have caused CNUC to have executed and
recorded against the real property owned by CNUC a Notice of Assignment of
Proceeds, all in form and substance satisfactory to FINOVA. In the alternative,
Borrower and Guarantor shall have caused CNUC to have granted to FINOVA a first
priority lien on and security interest in all of the assets of CNUC as security
for the payment and Performance of the Obligations, pursuant to documents and
instruments acceptable to FINOVA. In connection therewith, Borrower and
Guarantor shall have caused CNUC to deliver to FINOVA mortgages, deeds of trust,
security agreements, financing statements, environmental certificates, (subject
to the provisions of Section 4.4 hereof) surveys and opinions of counsel,
acceptable to FINOVA with regard to such security interest. The aforementioned
assignment and security granted to FINOVA by CNUC shall be absolute, continuing
and applicable to all existing and future Advances and shall secure the
repayment of the Loan (including without limitation the Additional Advances) and
the Performance of all Obligations throughout the term of the Loan. Borrower
covenants and agrees that if any assets of CNUC are sold, such assets shall be
sold solely under terms which require the payment to CNUC of the entire purchase
price in cash.
(e) Guarantor shall have granted to FINOVA a warrant, in the form of the
attached Exhibit 4.3(e), to purchase the number of shares of common stock of
Guarantor calculated pursuant to the formula set forth below, rounded to the
next whole share. If the Tranche B Loan proceeds are advanced to Borrower in
more than one (1) installment, such Advances shall be conditioned upon
Guarantor granting to FINOVA an additional warrant in the form of attached
Exhibit 4.3(e) to purchase additional shares of common stock of Guarantor
calculated pursuant to the formula set forth below, rounded to the next whole
share, in addition to the satisfaction of all other conditions precedent to
the making of such Advance.
[350,000 x A ] less B
----
2,662,000
Where:
A = Total aggregate advances of the Tranche B Loan proceeds made to Borrower
B = Number of warrants previously issued to FINOVA as a result of a prior
advance of Tranche B Loan proceeds
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<PAGE> 12
4.4 Even if no portion of the Tranche B Loan proceeds are borrowed by
Borrower, Borrower shall cause each of the Conditions Subsequent to be
satisfied, to FINOVA's satisfaction, no later than January 29, 1999, other than
the Condition Subsequent set forth in Section 4.3(e) above which shall be
satisfied only concurrently with advances of the Tranche B Loan proceeds and
other than the Condition Subsequent set forth in Sections 4.3(a) which shall be
satisfied no later than January 15, 1999 and except to the extent set forth
below with regard to title insurance policies or commitments. Lender shall be
entitled to the additional warrants set forth in Section 4.3(e) above upon any
advance of the Tranche B Loan proceeds, regardless of the unpaid balance of the
Tranche A Loan and even if the Tranche A Loan has a zero balance. In the event
Borrower obtains an agreement from its title insurer to delete the survey
exception from a particular lender's policy of title insurance required to be
obtained under this Agreement, FINOVA will waive the requirement that a survey
be obtained as to the property which is the subject matter of such insurance
policy. In the event Borrower is unable to obtain a waiver of the survey
exception with regard to a particular parcel of property, then a survey shall
be required as to such property as outlined above. In the event Borrower is
unable to obtain a particular title policy (or irrevocable title commitment)
which is a Condition Subsequent by January 29, 1999, solely because of the fact
that a survey was required and has not yet been obtained, despite Borrower's
best efforts, such Condition Subsequent shall be satisfied no later than
February 26, 1999.
5. APPLICATION OF PROCEEDS. In the absence of an Incipient Default or an
Event of Default (excluding Existing Events of Default), Excess Proceeds
Collateral, Project Release Fees and other release fees payable pursuant to
Section 6 hereof, proceeds derived from the Stock Pledge Agreement, proceeds
from the assignments and security interests granted by CNUC pursuant to Section
4.3(d) hereof and proceeds from the sale of the real properties which are
subject to the deeds of trust or mortgage interests described in Sections 3.2
and 4.3(b) hereof, shall be applied first against fees, costs and expenses due
to FINOVA and then against the unpaid principal balance of the Additional
Advance Note and accrued interest. Thereafter any such proceeds shall be made
available to Borrower for working capital purposes to be used strictly in
accordance with the Business Plan. However, if there exists an Incipient
Default or an Event of Default (in addition to the Existing Events of Default)
at the time such proceeds are available, such proceeds shall be applied against
the Obligations in such order and manner as FINOVA shall deem appropriate.
6. PROJECT RELEASE FEES. The Project Release Fees with respect to each
of Fountains, Project (Terraces - Phase 1), Project (Terraces - Phase 2),
Winnick, Project (Reno), Brigantine Inn, Brigantine Villas, Calvada RV Park and
Calvada Land shall equal ten percent (10%) of the gross sales price of a Lot or
Unit sold with such Project. Such Units or Lots shall be released from FINOVA's
lien upon satisfaction of the Release Conditions. The Project Release Fees
shall be paid to FINOVA concurrently with the closing of such sale. Project
Release Fees and the release fees payable pursuant to the following sentence
shall be applied in the manner set forth in Section 5. FINOVA agrees to release
its lien on the stock
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<PAGE> 13
of CNUC granted pursuant to the Stock Pledge Agreement together with the
assignment of sales proceeds and other security interests granted by CNUC
pursuant to Section 4.3(d) provided that (i) FINOVA has received a release fee
in an amount equal to the greater of Two Million Dollars ($2,000,000) or the
then unpaid principal balance of the Tranche A Loan, together with interest on
such payment at the rate set forth in the Additional Advance Note, (ii) there
shall exist no Incipient Default or Event of Default (excluding the Existing
Events of Default) and (iii) each of the Conditions Subsequent shall have been
satisfied with the exception of the Condition Subsequent contained in Section
4.3(e) hereof which is to be satisfied only in connection with advances of the
Tranche B Loan proceeds.
7. RELEASE OF FORBEARANCE COLLATERAL. FINOVA agrees to release and
reconvey to Borrower, without warranty or representation, the assignments of
sales proceeds and other liens granted pursuant to Sections 3 and 4.3(d)
hereof. FINOVA's lien on the stock of CNUC as evidenced by the Stock Pledge
Agreement and FINOVA's mortgage and deed of trust liens granted pursuant to
Sections 3.2 and 4.3(b) hereof, upon and on the condition that all of the
Forbearance Collateral Release Conditions have been satisfied. No release or
satisfaction of any security interest granted to FINOVA shall impair or affect
FINOVA's remaining security interest or any term or provision of the Loan
Agreement.
8. EARLY RELEASE OF COLLATERAL. Notwithstanding any contrary provisions
contained in the Documents, FINOVA shall not have the obligation of releasing
its lien on any collateral pledged to FINOVA pursuant to the Documents,
including this Amendment (other than the periodic release of Units and Lots
upon a sale thereof pursuant to the provisions of the Documents as amended by
this Amendment and other than as specifically provided in this Amendment) until
the later to occur of (i) the full satisfaction of the Forbearance Collateral
Release Conditions or (ii) the full satisfaction of the events set forth in the
particular Document that are conditions precedent to such collateral release.
Prior to the full satisfaction of the Forbearance Collateral Release
Conditions, any amount received by Borrower resulting from the sale of the
Headquarters Building or the FCFC Property, in excess of the amounts set forth
in paragraphs 3.10 and 3.11 of the Loan Agreement, shall be applied against the
outstanding principal balance of the Additional Advance Note.
9. MINIMUM SALES PRICE. FINOVA agrees to release the deeds of trust or
mortgages contemplated pursuant to Sections 3.2, 4.3(b) and 4.3(d) hereof upon
a sale of the real property encumbering such mortgages or deeds of trust
provided that there does not then exist an Event of Default or Incipient Default
(other than the Existing Events of Default) and such properties are sold solely
for cash at a purchase price acceptable to FINOVA. FINOVA agrees that a purchase
price of no less than eighty percent (80%) of the "Asking Price" for such
property as set forth in the Business Plan is an acceptable purchase price.
Proceeds from such sales less reasonable closing costs shall be applied as set
forth in Section 5 hereof.
10. READVANCE FEE. In consideration of FINOVA's covenants, agreements and
promises under this Amendment, Borrower shall pay to FINOVA at the time of the
first Advance made pursuant to this Amendment a fee in the amount of Fifty Six
Thousand Six
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<PAGE> 14
Hundred Twenty Dollars ($56,620) (the "Additional Advance Fee") which may be
withheld from the proceeds of the Advance made pursuant to this Amendment.
11. REPRESENTATIONS, WARRANTIES AND COVENANTS.
11.1 For all purposes under the Loan Agreement, the Additional
Advances shall be deemed a "transaction made pursuant to this Agreement," as
contemplated in Section 8.1 of the Loan Agreement, except that for purposes of
the representations, covenants and warranties under Article VIII thereof, the
current status of all litigation matters affecting the Borrower and Guarantor
is as set forth on the attached Exhibit 11.1 and the current financial
condition (including, without limitation, compliance with financial covenants)
of the Borrower and Guarantor is reflected on the most recent financial
statements delivered by Borrower and Guarantor to FINOVA prior to the date
hereof.
11.2 Guarantor represents and warrants that all financial information
and other documents provided to FINOVA by Guarantor in connection with this
Amendment are true, complete and correct as of the date provided and the date
hereof. Borrower represents and warrants that all financial information and
other documents provided to FINOVA by Borrower in connection with this Amendment
are true, complete and correct as of the date provided and the date hereof.
11.3 Borrower represents and warrants that the assets of CNUC are
unencumbered other than liens for real property taxes and assessments not yet
due and payable (and Borrower hereby covenants with FINOVA to cause such assets
to remain unencumbered at all times while the Stock Pledge Agreement is in
effect other than any liens granted in favor of FINOVA) and further represents
and warrants that CNUC owes no indebtedness other than usual customary trade
debt incurred in the ordinary course of its business (and Borrower hereby
covenants with FINOVA that Borrower will cause CNUC to incur no other
indebtedness while the Stock Pledge Agreement is in effect).
11.4 On or before January 29, 1999, the Loan Agreement shall be further
amended in order to incorporate within its terms financial covenants acceptable
to FINOVA and consistent with the Business Plan.
11.5 Promptly following request by FINOVA, Borrower will give FINOVA
an update concerning the progress being made by Borrower in complying with the
Business Plan.
12. GUARANTOR CONSENT. Guarantor acknowledges and agrees that (i) the
Guarantee shall remain in full force and effect, (ii) 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 and shall include the
obligations of the Borrower under this Amendment, the Additional Advance Note,
the Stock Pledge Agreement, and other documents and instruments executed
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<PAGE> 15
by Borrower in connection with this Amendment and each of the other Documents,
as amended through the date hereof and (iv) all terms, conditions and
provisions set forth in this Amendment, the Additional Advance Note, the Stock
Pledge Agreement, any other documents and instruments executed by Borrower in
connection with this Amendment and each of the other Documents, as amended
through the date hereof, are hereby ratified, approved and confirmed.
13. FORBEARANCE BY FINOVA.
13.1 Subject to the conditions set forth in this Amendment and the
termination provisions of the following paragraph, during the period from the
date this Amendment is fully executed and delivered by FINOVA, Borrower, and
Guarantor to and including June 30, 1999 ("End Date") FINOVA shall forbear from
exercising FINOVA's remedies under the Documents by reason of the Existing
Events of Default described herein and during the period of forbearance, FINOVA
shall make Advances of the Receivables Loan and Additional Advances, under the
conditions set forth in the Loan Agreement and this Amendment and shall
partially release Units and Lots from FINOVA's Security Interest, as more fully
provided in the Documents and in this Amendment without requiring that the
Existing Events of Default described herein be cured as a condition precedent
to making any such Advances or to such partial releases. FINOVA is not however
waiving such Existing Events of Default. During such period of forbearance,
Borrower may operate its business in the ordinary course. However, during such
period of forbearance, Borrower shall be prohibited from taking any of the
following actions; (i) the repayment of indebtedness required to be
subordinated, (ii) the making of distributions or loans to its shareholders
other than to the extent contemplated in the tax sharing arrangement between
Borrower and Guarantor, (iii) the payment of directors' fees, (iv) the payment
of officers' salaries other than in accordance with previous practice or (v)
the operation of its business other than in material accordance with the
Business Plan. So long as Borrower is in compliance with this Amendment and the
other Documents and FINOVA's forbearance as set forth above remains in effect,
the Existing Events of Default shall not be deemed Events of Default.
13.2 FINOVA's agreement to so forbear and to make Advances under the
Loan Agreement or this Amendment shall automatically terminate, without further
act or instrument, upon the occurrence of any of the following events:
(a) Borrower or Guarantor repudiates or asserts a defense to any
obligation or liability under the Documents or makes or pursues a claim against
FINOVA;
(b) Borrower fails to timely perform any of its obligations (other than
the Existing Events of Default) set forth in the Documents (after giving effect
to the then applicable provisions of this Amendment), including, without
limitation, this Amendment;
(c) Borrower or Guarantor makes an assignment for the benefit of
creditors, or generally admits its inability to pay its obligations as they
come due or files a
15
<PAGE> 16
petition in bankruptcy or an involuntary petition in bankruptcy is filed naming
either Borrower or Guarantor as debtors; or
(d) FINOVA hereafter becomes aware of (i) any fact or circumstance that
FINOVA believes in good faith is reasonably likely to impair FINOVA's security
or (ii) any Incipient Defaults (other than those described in this Amendment)
or Event of Default under the Documents after giving effect to the then
applicable provisions of this Amendment and other than Existing Events of
Default, whether now or existing or hereafter occurring, which would give rise
to a right by FINOVA to exercise any rights or remedies under the Documents.
14. PROTECTIONS AFFORDED TO FINOVA.
14.1 This Amendment is intended to be a further accommodation by FINOVA
to Borrower. In consideration of all such accommodations, AND ACKNOWLEDGING
THAT FINOVA WILL BE SPECIFICALLY RELYING ON THE FOLLOWING AGREEMENT AS A
MATERIAL INDUCEMENT IN ENTERING INTO THIS AMENDMENT AND IN MAKING THE TRANCHE A
LOAN AND TRANCHE B LOAN PROVIDED HEREIN, so that FINOVA will not be further
delayed for an additional period of time under any circumstances, effective
immediately upon (i) execution of this Amendment by Borrower and Guarantor and
(ii) the funding of any portion of the Tranche A Loan by FINOVA, and provided
that FINOVA makes Advances in accordance with the Documents as modified by the
then applicable provisions of this Amendment and partially releases Units and
Lots from its Security Interest in accordance with the Documents without
requiring that the Existing Events of Default be cured above, Borrower and
Guarantor hereby agree, in addition to and without limiting any of FINOVA's
other rights or remedies under the Documents and related documents, to the
following:
(a) In connection with a bankruptcy or other similar proceeding
initiated by or against Borrower or Guarantor, (i) FINOVA will be entitled to
immediate relief from the automatic stay and all other stays and injunctions
without further notice, hearing or order of court so that FINOVA will be able
to immediately exercise all or any of its rights and remedies (A) as provided
herein. (B) in the Documents, as modified by this Amendment, including, but not
limited to, the commencement and consummation of a foreclosure on any and all
of its collateral and the appointment of a receiver, or (C) under applicable
law; (ii) neither Borrower nor Guarantor will seek or support an effort by any
other party to obtain an injunction, judgment or any other type of order of any
court staying or delaying FINOVA from proceeding with any one or more of its
options or remedies under the Documents, as modified by this Amendment; (iii)
neither Borrower nor Guarantor will contest any motion, application or other
pleadings filed by or on behalf of FINOVA in any court of competent
jurisdiction seeking enforcement of the terms of this Section 14 or otherwise
seeking enforcement of this Amendment or termination of such automatic stay or
other injunction; (iv) Borrower and Guarantor will cooperate with FINOVA so
that FINOVA can promptly enforce its rights as set forth in the Documents, as
modified by this Amendment; and (v) neither Borrower nor Guarantor will request
or consent to (A) the imposition of any lien
16
<PAGE> 17
superior to those of FINOVA in the collateral given to FINOVA under any of the
Documents, as modified by this Amendment, whether pursuant to 11 U.S.C. Section
364 or otherwise, (B) a "cramdown" of the Loan pursuant to 11 U.S.C. Section
1129(b) or (C) the impairment of FINOVA's claims, liens, rights under the
Documents or otherwise affect FINOVA's rights or any collateral given to FINOVA
under any of the Documents.
(b) Upon the occurrence of an Event of Default under the Documents,
(after giving effect to the then applicable provisions of this Amendment and
other than the Existing Events of Default), Borrower and Guarantor consent to
the appointment of a receiver by FINOVA. Borrower or FINOVA shall execute a
Stipulation for the Appointment of a receiver over any property and the
operation and business of Borrower (the "Stipulation"), which allows the court,
upon the conditions set forth below, and without notice to anyone, including
notice to Borrower or Guarantor to enter an Order for Appointment of Receiver
over any property of Borrower and the operation and business of Borrower
("Receivership Order"). The selection of the receiver and the amount of the
receiver's fee shall be determined by FINOVA in its discretion. Only a nominal
bond not more than Five Thousand Dollars ($5,000) will be required by FINOVA or
the receiver. The original executed Stipulation and form of Receivership Order
shall be delivered to FINOVA within the five (5) business days after the same
are provided to Borrower for execution, and held by FINOVA's attorneys and not
filed with the court, unless and until there is such an Event of Default (i.e.,
a default upon the occurrence of which a receiver may be appointed pursuant to
the first sentence of this Section) by Borrower under this Amendment or the
Documents. Borrower agrees that if Borrower fails to execute and deliver the
Stipulation as required herein, Borrower hereby appoints FINOVA as its
attorney-in-fact to execute the Stipulation for and on behalf of the Borrower.
Such power of attorney is coupled with an interest and is irrevocable. The
Stipulation and Receivership Order may be filed and the Receivership Order may
be immediately signed and entered by the court, solely upon the declaration made
to the Court by FINOVA or its counsel that an Event of Default has occurred. The
failure by Borrower to execute and deliver the Stipulation and Receivership
Order as required herein shall, at FINOVA's election without notice to Borrower,
constitute an Event of Default under the Documents.
(c) For the good and valuable consideration provided herein, Borrower
and Guarantor hereby release and discharge FINOVA and FINOVA Portfolio Services,
Inc. ("FPSI"), and each of their respective agents, servants, employees,
directors, officers, attorneys, accountants, affiliates, representatives,
receivers, trustees, subsidiaries, predecessors, successors and assigns
(collectively, the "Released Parties") from all claims, damages, losses,
demands, liabilities, obligations, actions and causes of action whatsoever
(whether arising in contract or in tort, and whether at law or in equity), which
Borrower and Guarantor may now have or claim to have against the Released
Parties, whether known or unknown, matured or contingent, liquidated or
unliquidated, arising from, in connection with, or in any way concerning or
relating to the Loan or the Documents except acts first arising after the
execution and delivery of this Amendment and which are caused solely by FINOVA's
or FPSI's respective gross negligence or willful misconduct, FPSI is hereby made
17
<PAGE> 18
a third party beneficiary of this Amendment and shall be entitled to enforce
the same against Borrower and Guarantor in the same manner as if FPSI were a
party hereto.
14.2 Borrower and Guarantor hereby acknowledge and agree that,
notwithstanding anything contained in this Amendment or the other Documents to
the contrary, the terms, provisions and agreements of Borrower and Guarantor
set forth in this Section 14 shall be immediately in full force and effect upon
its execution and delivery by FINOVA, Borrower and Guarantor and shall not be
vacated, modified, released or its validity or binding nature subject to attack
for any reason because of the failure of third party consents to be obtained.
15. DEFENSES. As of December 22, 1998 the unpaid principal balances
of the Notes are as set forth below. Borrower and Guarantor acknowledge and
agree that there are no defenses, counterclaims, setoffs, recoupments or other
adverse claims or causes of action of any kind existing against FINOVA or with
respect to the Documents, including without limitation, claims regarding the
amount, validity, perfection, priority and enforceability of the Documents.
<TABLE>
<CAPTION>
Note Unpaid Principal Balance
---- ------------------------
<S> <C>
Receivables Note $34,321,481.00
Aloha Bay Note $ 786,675.00
Office Note $ 6,407,998.32
Ida Building Addition Note $ 2,050,970.80
Winnick Building Addition Note $ 2,360,000.00
Second Winnick Building Addition Note $ 1,742,383.04
Towers Note $ 730,676.00
Note executed in connection with the First $ 1,869,200.00
Amendment (the so-called Hartsel Springs Note)
Biloxi Note $ 1,173,750.00
</TABLE>
16. GENERAL.
16.1 Borrower shall pay all of FINOVA's fees, expenses and costs,
including those of any attorneys, engineers and other consultants, in
connection with the Existing Events of Default and the Documents, including
this Amendment.
16.2 The Documents shall be deemed amended by the provisions of this
Amendment, as and when applicable and any conflict or inconsistency between
this Amendment and the Documents shall be resolved in favor of this Amendment.
Except as so amended, all other consistent terms and conditions of the Documents
will remain in full force and effect.
18
<PAGE> 19
16.3 Except as may be expressly provided herein, Borrower's obligations
under the Documents shall remain in full force and effect and shall not be
waived, modified, superseded or otherwise affected by this Amendment. This
Amendment is not a novation, nor is it be construed as a release, waiver,
extension of forbearance or modification of any of the terms, conditions,
representations, warranties, covenants, rights or remedies set forth in any of
the Documents, except as expressly stated herein.
16.4 Borrower's failure to timely comply with any of the foregoing
agreements, covenants, terms and conditions contained in this Amendment,
without further notice or cure period, constitute an Event of Default under the
Documents. Borrower and FINOVA agree that time is of the essence in all of its
covenants and agreements under this Amendment and the Documents.
16.5 Neither the failure nor delay by FINOVA to exercise its remedies
under (i) the Documents (whether before or after the date of this Amendment) or
(ii) any provision of this Amendment, shall be deemed to amend, modify,
supplement, extend, delay, renew, terminate, waive, release or otherwise limit
or prejudice FINOVA's rights and remedies or Borrower's or Guarantor's
obligations under the Documents (after giving effect to the then applicable
provisions of this Amendment and other than Existing Events of Default)
(including, but not limited to, FINOVA's right to receive full payment of
principal and interest as well as late charges, delinquent interest),
attorneys' fees and expenses and other charges to the extent provided in the
Documents, except as specifically provided in a written agreement between the
parties that is fully executed and delivered, nor shall it affect the relative
priority of FINOVA's security interest in the collateral for the Obligations
under the Documents. Borrower understands that, except to the extent that
FINOVA has agreed to this Amendment to forbear with respect to an Existing
Event of Default, nothing referred to above shall operate to prohibit, restrict
or to otherwise inhibit FINOVA from exercising any right or remedy it may have
under the Documents or constitute a cure of any existing Event of Default or
Incipient Default and, without limitation, shall not extend any applicable
reinstatement or redemption period. In the event that there is an Event of
Default now existing or hereafter arising other than an Existing Event of
Default, FINOVA shall not be obligated to forbear and may immediately enforce
any and all of its rights and remedies.
16.6 Borrower and Guarantor acknowledge that FINOVA has performed, and
is not in default of, its obligations under the Documents; that there are no
offsets, defenses or counterclaims with respect to any of Borrower's or
Guarantor's or other party's obligations under the Documents; and that FINOVA
has not directed Borrower to pay or not pay any of Borrower's payables.
16.7 Borrower and Guarantor will execute and deliver such further
instruments and do such things as in the judgment of FINOVA are necessary or
desirable to effect the intent of this Amendment and to secure to FINOVA the
benefits of all rights and remedies conferred upon FINOVA by the terms of this
Amendment and any other documents executed in connection herewith.
19
<PAGE> 20
16.8 If any provision of this Amendment is held to be unenforceable under
present or future laws effective while this Amendment is in effect (all of
which invalidating laws are waived to the fullest extent possible), the
enforceability of the remaining provisions of this Amendment shall not be
affected thereby. In lieu of each such unenforceable provision, there shall be
added automatically as part of this Amendment a provision that is legal, valid
and enforceable and is similar in terms to such unenforceable provisions as may
be possible.
16.9 Any further discussions by and among Borrower, Guarantor and FINOVA,
if any, and all such discussions in the past, together with any other actions
or inactions taken by and among Borrower, Guarantor and FINOVA, shall not cause
a modification of the Documents, establish a custom or waive (unless FINOVA
made such express waiver in writing), limit or condition the rights and
remedies of FINOVA under the Documents, all of which rights and remedies are
expressly reserved. All of the provisions of the Documents, including, without
limitation, the time of the essence provision, are hereby reiterated and if
ever waived are hereby reinstated (unless FINOVA made such express waiver in
writing), except as expressly provided herein.
16.10 FINOVA acknowledges that it had access to the books and records of
Borrower. There has been or will be delivered to FINOVA by Borrower in
connection with this Amendment, the Business Plan and certain estimates of
income and expense and related financial projections concerning the property
owned by Borrower and repayment of the Loan. The Business Plan and such books,
records, financial material and projections have been prepared solely by or
under the direction of Borrower. Borrower and the Guarantor acknowledge and
agree FINOVA will not be deemed, directly or indirectly, whether by any action,
failure to respond thereto or otherwise, in any way to have approved, consented
to, ratified or adopted said books, records, financial material or projections.
16.11 This Amendment shall not be binding upon FINOVA until accepted by
Borrower and Guarantor as provided for below. This Amendment may be executed in
counterpart, and any number of which have been executed by all parties shall be
deemed to constitute one original. FINOVA, its attorneys and agents, may also
integrate into a single Amendment signature pages from separate counterpart
Amendments. The telecopied signature of a person shall be deemed an original
signature, may be relied upon by others and shall be binding upon the signer
for all purposes provided however that Borrower, Guarantor or any person
otherwise consenting hereto by telecopied signature shall confirm its
telecopied signature by signing and returning to FINOVA a copy of this
Amendment with an original signature.
16.12 Borrower's and Guarantor's representatives are experienced and
knowledgeable business people and have been represented by independent legal
counsel who are experienced in all matters relevant to this Amendment,
including, but not limited to, bankruptcy and insolvency law. The parties
hereto have accepted and agreed to this
20
<PAGE> 21
Amendment after being fully aware and advised of the effect and significance of
all of its terms, conditions, and provisions.
16.13 Unless otherwise specifically stipulated elsewhere in the Documents,
if a matter is left in the Documents or this Amendment to the decision, right,
requirement, request, determination, judgment, opinion, approval, consent,
waiver, satisfaction, acceptance, agreement, option or discretion of FINOVA,
its employees, FINOVA's counsel or any agent for or contractor of FINOVA, such
action shall be deemed to be exercisable by FINOVA or such other person in its
sole and absolute discretion and according to standards established in its sole
and absolute discretion. Without limiting the generality of the foregoing,
"option" and "discretion" shall be implied by use of the words "if" or "may."
16.14 The Recitals in this Amendment are incorporated into the body hereof
as fully set forth herein.
16.15 THIS AMENDMENT HAS BEEN EXECUTED AND DELIVERED AND SHALL BE
PERFORMED IN THE STATE OF ARIZONA. THE PROVISIONS OF THIS AMENDMENT 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. EACH OF
BORROWER, GUARANTOR AND FINOVA: (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 THE DISTRICT OF ARIZONA, FOR THE PURPOSES OF SUIT, ACTION
OR OTHER PROCEEDINGS ARISING OUT OF OR RELATING TO ANY DOCUMENT OR THE SUBJECT
MATTER THEREOF, OR, IF FINOVA SHALL INITIATE SUCH ACTION, IN THE COURT IN WHICH
SUCH ACTION IS INITIATED PROVIDED THAT SUCH COURT HAS JURISDICTION, AND THE
CHOICE OF SUCH VENUE SHALL IN ALL INSTANCES BE AT FINOVA'S ELECTION; 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 IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF
THE ABOVE-NAMED COURTS, THAT SUCH SUIT, ACTION OF PROCEEDING IS BROUGHT IN ANY
INCONVENIENT FORUM OR THAT THE VENUE OF SUCH SUIT, ACTION OR PROCEEDING IS
IMPROPER. EACH OF BORROWER, GUARANTOR AND FINOVA HEREBY WAIVE THE RIGHT TO
COLLATERALLY ATTACH ANY JUDGMENT OR ACTION IN ANY OTHER FORUM.
21
<PAGE> 22
STATE OF ARIZONA, MARICOPA COUNTY, AND TO THE PROCESS, JURISDICTION, AND VENUE
OF THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA, FOR THE
PURPOSES OF SUIT, ACTION OR OTHER PROCEEDINGS ARISING OUT OF OR RELATING TO ANY
DOCUMENT OR THE SUBJECT MATTER THEREOF, OR, IF FINOVA SHALL INITIATE SUCH
ACTION, IN THE COURT IN WHICH SUCH ACTION IS INITIATED PROVIDED THAT SUCH COURT
HAS JURISDICTION, AND THE CHOICE OF SUCH VENUE SHALL IN ALL INSTANCES BE AT
FINOVA'S ELECTION; 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 IT IS NOT PERSONALLY SUBJECT
TO THE JURISDICTION OF THE ABOVE-NAMED COURTS, THAT SUCH SUIT, ACTION OR
PROCEEDING IS BROUGHT IN ANY INCONVENIENT FORUM OR THAT THE VENUE OF SUCH SUIT,
ACTION OR PROCEEDING IS IMPROPER. EACH OF BORROWER, GUARANTOR AND FINOVA HEREBY
WAIVE THE RIGHT TO COLLATERALLY ATTACH ANY JUDGMENT OR ACTION IN ANY OTHER
FORUM.
FINOVA:
FINOVA CAPITAL CORPORATION,
a Delaware corporation
By:
------------------------------
Its:
-------------------------
BORROWER:
PREFERRED EQUITIES CORPORATION,
a Nevada corporation
By: /s/ JON A. JOSEPH
------------------------------
Jon A. Joseph
Its: VICE PRESIDENT
-------------------------
Signed in the presence of:
/s/ [SIG]
------------------------------
22
<PAGE> 23
GUARANTOR:
MEGO FINANCIAL CORP.,
a New York corporation
By: /s/ JON A. JOSEPH
------------------------------
Jon A. Joseph
Its: VICE PRESIDENT
-------------------------
Signed in the presence of:
/s/ [SIG]
------------------------------
23
<PAGE> 24
STATE OF ARIZONA )
) ss.
County of Maricopa )
The foregoing instrument was acknowledged before me this 23rd day of
December 23, 1998 by Jon A. Joseph as Vice President of PREFERRED EQUITIES
CORPORATION, a Nevada corporation, on behalf of the corporation.
/s/ SANDRA L. IRONS
--------------------------------------
Notary Public
My Commission Expires: [NOTARY PUBLIC SEAL]
1-29-2002
- ----------------------
STATE OF ARIZONA )
) ss.
County of Maricopa )
The foregoing instrument was acknowledged before me this 23rd day of
December 23, 1998 by Jon A. Joseph as Vice President of MEGO FINANCIAL
CORP., a New York corporation, on behalf of the corporation.
/s/ SANDRA L. IRONS
--------------------------------------
Notary Public
My Commission Expires: [NOTARY PUBLIC SEAL]
1-29-2002
- ----------------------
<PAGE> 25
LIST OF EXHIBITS
Exhibit 2.2 Request for Advance and Certification
Exhibit 4.2(a) Form of Warrant Agreement - Tranche A
Exhibit 4.3(e) Form of Warrant Agreement - Tranche B
Exhibit 11.1 Litigation Schedule
<PAGE> 26
EXHIBIT 2.2
FORM OF
REQUEST FOR ADVANCE AND CERTIFICATION
The undersigned ("Borrower") requests that FINOVA Capital Corporation
("Lender") advance the sum of _______________ and ___/100 United States Dollars
(U.S. $_________) upon receipt hereof, pursuant to the Second Amended and
Restated and Consolidated Loan and Security Agreement between such parties
dated effective as of May 15, 1997 (with any amendments, the "Agreement").
Advances made pursuant to this Request for Advance and Certification shall
constitute Additional Advances.
Borrower hereby certifies to Lender that (i) all representations and
warranties contained in the Agreement are true and correct as of the date
hereof; (ii) after giving effect to the Fifth Amendment there is no condition
or event, which, after notice or lapse of time or both, would constitute an
Event of Default (other than the Existing Events of Default); and (iii)
Borrower has performed and complied with all agreements and conditions required
by the Agreement to be performed and complied with prior to or at the date of
the requested disbursement of the Additional Advance.
Except as otherwise defined herein or the context otherwise requires, all
capitalized terms used herein have the meaning given to them in the Agreement.
"BORROWER"
DATED: __________, 199___. PREFERRED EQUITIES CORPORATION,
a Nevada corporation.
By: ______________________________
Its: _________________________
<PAGE> 1
EXHIBIT 10.151
Number W-1
NEITHER THIS WARRANT NOR THE STOCK FOR WHICH IT MAY BE EXERCISED HAS BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("SECURITIES ACT"), OR
ANY OTHER FEDERAL OR STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF, EXCEPT AS PROVIDED IN ARTICLE III, UNLESS SO REGISTERED
OR UNLESS SOLD PURSUANT TO AN EXEMPTION THEREFROM.
MEGO FINANCIAL CORP.
COMMON STOCK PURCHASE WARRANT
This certifies that, for value received, FINOVA CAPITAL CORPORATION, a
_____________ corporation, and any registered assignee ("Holder"), is entitled
to subscribe for and purchase from Mego Financial Corp. ("Company"), a
corporation organized and existing under the laws of the State of New York, One
Hundred Fifty Thousand (150,000) shares (subject to adjustment as set forth in
Article II below, "Warrant Shares") of Common Stock of the Company, par value
$.01 per share ("Common Stock"), at the exercise price of $1.00 per share
(subject to adjustment as set forth in Article II below, "Exercise Price"), at
any time and from time to time beginning on December 31, 1998, ("Exercise
Date"), and ending on December 31, 2003 ("Expiration Date"), upon written
notice from the Holder to the Company ("Notice") and subject to the terms
provided herein.
Capitalized terms used herein, and not otherwise defined, shall have the
meanings specified in Article IV. This Warrant is subject to the following
provisions, terms and conditions:
ARTICLE I.
EXERCISE; RESERVATIONS OF SHARES
Section 1.01 Warrant Exercise. The rights represented by this Warrant may
be exercised by the Holder at any time and from time to time prior to the
expiration of this Warrant and after December 31, 1998, as to a minimum of
25,000 Warrant Shares, upon Notice, by the surrender at the principal office of
the Company of this Warrant together with a duly executed subscription in the
form annexed ("Subscription Form") and accompanied by payment, in certified or
immediately available funds, of the Exercise Price for the number of Warrant
Shares specified in the Subscription Form. The shares so purchased shall be
deemed to be issued to the Holder (unless contrary instructions are provided on
the Subscription Form) as the record owner of such shares as of the close of
business on the date on which this Warrant shall be exercised as hereinabove
provided. No fractional shares or scrip representing fractional shares shall be
issued upon exercise of this Warrant and the number of shares that shall be
issued upon such exercise shall be rounded to the nearest whole share without
the payment or receipt of any additional consideration.
<PAGE> 2
Section 1.02 Certificates. Certificates for the shares purchased pursuant
to Section 1.01 shall be delivered to the Holder within a reasonable time, not
exceeding ten (10) business days, after the rights represented by this Warrant
shall have been so exercised, and a new Warrant in the name of the Holder
representing the rights, if any, that shall not have been exercised prior to the
Expiration Date with respect to this Warrant shall also be delivered to such
Holder within such time, with such new Warrant to be identical in all other
respects to this Warrant. The term "Warrant," as used herein, includes any
Warrants into which this Warrant may be divided or combined and any subsequent
Warrants issued upon the transfer or exchange or reissuance upon loss hereof.
Section 1.03 Reservation of Shares. The Company represents, warrants,
covenants and agrees;
(a) That all shares of Common Stock that may be issued upon exercise
of this Warrant will, upon issuance, be validly issued, fully paid and
nonassessable and free from all taxes, liens and charges with respect to
the issue thereof;
(b) That during the period the rights represented by this Warrant may
be exercised, the Company will at all times have authorized, and reserved
for the purpose of issue and delivery upon exercise of the rights evidenced
by this Warrant, a sufficient number of shares of Common Stock to provide
for the exercise of the rights represented by this Warrant; and
(c) If the Common Stock is listed on any national securities exchange
or similar trading market, the shares of Common Stock that may be issued
upon exercise of this Warrant will, prior to or on the date that a
Registration Statement covering the Warrant Shares is effective, also be
listed on such exchange subject to notice of issuance.
ARTICLE II
ADJUSTMENTS
SECTION 2.01 Reorganization, Reclassification, Consolidation, Merger or
Sale.
(a) Capital Events. If any reorganization or reclassification of the
capital stock of the Company, or any consolidation or merger of the Company
with another corporation, or the sale of all or substantially all of its
assets to another corporation (in any instance, a "Capital Event") shall be
effected in such a way that holders of Common Stock shall be entitled to
receive stock, securities or assets (including cash) with respect to or in
exchange for their Common Stock, then, as a condition of such Capital
Event, lawful and adequate provisions shall be made whereby the Holder
hereof shall thereafter have the right to purchase and receive upon the
basis and upon the terms and conditions specified in this Warrant and in
lieu of the shares of the Common stock of the Company immediately
theretofore purchasable and receivable upon the exercise of the rights
represented hereby, an amount of such shares of stock, securities or assets
(including
2
<PAGE> 3
cash) as may have been issued or payable with respect to or in exchange
for a number of outstanding shares of such Common Stock equal to the
number of shares of such stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby had such
Capital Event not taken place.
(b) Preservation of Value. In the case of any Capital Event,
appropriate provision shall be made with respect to the rights and
interests of the Holder of this Warrant to the end that the provisions
hereof (including, without limitation provisions for adjustment of the
number of shares that may be issued upon exercise of this Warrant and the
Exercise Price hereof) shall thereafter be applicable, as nearly as may
be, in relation to any shares of stock, securities or assets (including
cash) thereafter deliverable upon the exercise of the rights represented
hereby.
(c) Obligation Expressly Assumed. The Company shall not effect any
consolidation, merger or sale of all or substantially all of its assets,
unless prior to the consummation thereof the successor corporation (if
other than the Company) resulting from such consolidation or merger, or
the corporation into or for the securities of which the previously
outstanding stock of the Company shall be changed in connection with such
consolidation or merger, or the corporation purchasing such assets, as the
case may be, shall assume by written instrument executed and mailed or
delivered to the registered Holder at the last address of such Holder
appearing on the books of the Company, the obligation to deliver to such
Holder, upon exercise of this Warrant, such shares of stock, securities or
assets (including cash) as, in accordance with the foregoing provisions,
such Holder may be entitled to purchase.
Section 2.02 Subdivision or Combination of Stock. In the event that the
Company shall at any time subdivide or split its outstanding shares of Common
Stock into a greater number of shares, the number of Warrant Shares subject to
issuance upon exercise of this Warrant at the opening of business on the day
upon which such subdivision becomes effective shall be proportionately
increased. In the event that the outstanding shares of Common Stock of the
Company shall be combined into a smaller number of shares, the number of shares
subject to issuance upon exercise of this Warrant at the opening of business on
the day upon which such subdivision becomes effective shall be proportionately
decreased. Any such increase or decrease, as the case may be, shall become
effective immediately after the opening of business on the day following the day
upon which such subdivision or combination, as the case may be, becomes
effective.
Section 2.03 Stock Dividends. In the event that the Company shall at any
time declare any dividend or distribution upon its Common Stock payable in
stock, the number of Warrant Shares subject to issuance upon exercise of this
Warrant shall be increased by the number (and the kind) of shares which would
have been issued to the holder of this Warrant if this Warrant were exercised
immediately prior to such dividend. Such increase shall become effective
immediately after the opening of business on the day following the record date
for such dividend or distribution.
3
<PAGE> 4
Section 2.04 Cash or Other Non-Stock Dividends. In the event that the
Company shall at any time declare any dividend or distribution upon its Common
Stock payable in cash, assets or other property, (a "Non-Stock Dividend") the
number of Warrant Shares subject to issuance upon the exercise of this Warrant
shall be increased to a number obtained by multiplying (a) the number of
Warrant Shares for which this Warrant is exercisable immediately prior to such
dividend by (b) a fraction (i) the numerator of which shall be the Market Value
per share of Common Stock at the date of the taking of the record holders of
Common Stock entitled to such dividend or distribution and (ii) the denominator
of which shall be such Market Value per share of Common Stock minus the
Non-Stock Dividend paid per one share of Common Stock as determined for
purposes of accounting for such transaction on the books of the Company. Such
increase shall become effective immediately after the opening of business on
the day following the record date for such dividend or distribution.
Section 2.05 Additional Common Stock, Options, Convertible Securities.
In the event the Company shall (a) issue any additional shares of Common Stock
(other than through a stock subdivision or split covered by Section 2.02 or a
dividend upon the Company's Common Stock payable in stock covered by Section
2.03) for a consideration (but in no event shall said consideration be rendered
except in cash) per share less than the Market Value thereof, (b) grant any
options or warrants for the purchase of Common Stock where the Price per Share
(as hereinafter defined) of Common Stock issuable upon conversion, exchange or
exercise is less than the Market Value thereof immediately prior to the time of
issuance or grant thereof ("Options"), or (c) issue or sell any convertible
securities that are convertible into or exchangeable for Common Stock at a
Price per Share less than the Market Value thereof immediately prior to the
time of issuance or grant thereof ("Convertible Securities"), the number of
Warrant Shares subject to issuance upon exercise of this Warrant shall be
increased to a number obtained by multiplying (i) the number of Warrant Shares
for which this Warrant is exercisable immediately prior to such issuance, grant
or sale by (ii) a fraction (A) the numerator of which shall be the sum of the
Outstanding Section 2.05 Shares (as defined below) plus the Deemed Additional
Shares resulting from such issuance, grant, sale or payment and (B) the
denominator of which shall be the number of shares ("Outstanding Section 2.05
Shares") of Common Stock exercisable or outstanding immediately prior to such
issuance, grant, sale or payment (as if all Options, warrants and rights to
convert or exchange Convertible Securities outstanding immediately prior to
such issuance, grant or sale had been exercised, whether or not actually
exercisable on such date). Such increase shall become effective immediately
after the opening of business on the day following such issuance, grant or
sale, as the case may be.
Section 2.06 Phantom Stock and Similar Compensation Plans. In the event
the Company pays compensation to any employees, consultants or any other person
pursuant to any phantom stock option, stock appreciation right, or other
similar plan whereby the compensation paid is triggered by the settlement of a
right (the "Right") to receive the difference between (i) a pre-established
Price per Share that is less than the Market Value of the Common Stock
immediately prior to the time of issuance or grant of the Right and (ii) the
Market Value per share of the Common Stock on the settlement date of the Right,
the number of Warrant Shares subject to issuance upon exercise of this Warrant
shall be increased to a number obtained by multiplying (a) the number of
Warrant Shares for which this Warrant is exercisable immediately
4
<PAGE> 5
prior to the date such compensation is paid by (b) a fraction (i) the numerator
of which shall be the exercise price per share of Common Stock on the date of
grant and (ii) the denominator of which shall be the exercise price per share
of Common Stock on the date of grant minus the amount of compensation paid
allocable to one share of Common Stock. Such increase shall become effective
immediately after the opening of business on the day following such grant.
Section 2.07 Equitable Adjustment. In the event the Company shall
participate in any extraordinary corporate event or transaction not otherwise
provided for herein, including a so-called issuer self-tender, there shall be
made an equitable and proportionate adjustment in the number of shares issuable
upon exercise of this Warrant and the Exercise Price consistent with the
principles of other such adjustments provided for in this Article II.
Section 2.08 Treasury Shares. The number of shares of Common Stock
outstanding at any given time shall not include shares owned or held by or for
the account of the Company or any subsidiary of the Company except for shares
presently held by the Company's subsidiary, Preferred Equities Corporation, for
distribution to shareholders of Vacation Spa Resorts, Inc., and the disposition
of any such shares (other than between the Company and any such subsidiary or
between any such subsidiaries) shall be considered an issue or sale of Common
Stock for purposes of this Article II.
Section 2.09 Minimum Adjustment. No adjustment in the number of shares
that may be issued upon exercise of this Warrant as provided in this Article II
shall be required unless such adjustment would require an increase or decrease
in such number of shares of at least one percent (1%) of the then adjusted
number of shares of Common Stock that may be issued upon exercise of this
Warrant; provided, however, that any such adjustments that by reason of the
foregoing are not required to be made shall be carried forward and taken into
account and included in determining the amount of any subsequent adjustment;
and provided further, that if the Company shall at any time subdivide or
combine the outstanding shares of Common Stock or issue additional shares of
Common Stock as a dividend, said percentage shall forthwith be proportionately
adjusted so as to appropriately reflect the same.
Section 2.10 Adjustment of Exercise Price. Whenever the number of
shares of Common Stock that may be issued upon exercise of this Warrant is
adjusted and effective at the time such adjustment is effective, as provided in
Sections 2.01, 2.02 and 2.03 of this Article II, the Exercise Price shall be
adjusted (to the nearest whole cent) by multiplying each such Exercise Price
immediately prior to such adjustment by a fraction (x) the numerator of which
shall be the number of shares of Common Stock which may be issued upon the
exercise of each such Warrant immediately prior to such adjustment, and (y) the
denominator of which shall be the number of shares of Common Stock so
purchasable immediately thereafter. The Company may retain a firm of
independent certified public accountants (which may not be the regular
accountants employed by the Company) to make any required computation, and a
certificate signed by such firm shall be conclusive evidence of the correctness
of such adjustment.
5
<PAGE> 6
Section 2.11 Common Stock Buy Back. In the event the Company shall
commence a buy back program for the acquisition by the Company of Common Stock,
the Company agrees to purchase at Market Value all Warrant Shares from the
Holder.
Section 2.12 Record Date. In the event that the Company shall not take a
record of the holders of its Common Stock for the purpose of entitling them to
receive a dividend payable in Common Stock, then such record date shall be
deemed for the purposes of this Article II to be the date of the issue or sale
of the shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend.
Section 2.13 Officer's Certificate. Whenever the Exercise Price shall be
adjusted as provided in this Article II, the Company shall forthwith file with
its Secretary and retain in the permanent records of the Company, an officer's
certificate showing the adjusted Exercise Price determined as provided in this
Article II, setting forth in reasonable detail the facts requiring such
adjustment, including a statement of the number of additional or fewer shares
of Common Stock, and such other facts as may be reasonably necessary to show
the reason for and the method of computing such adjustment. Each such officer's
certificate shall be made available at all reasonable times for inspection by
the Holder.
Section 2.14 Notice of Adjustment. Upon any adjustment of the number of
shares that may be issued upon exercise of this Warrant or the Exercise Price,
the Company shall give notice thereof to the Holder, which notice shall state
the increase or decrease, if any, in the number of shares that may be issued
upon the exercise of this Warrant and the Exercise Price, setting forth in
reasonable detail the method of calculation and the facts upon which such
calculation is based.
Section 2.15 Definition of "Common Stock". As used in this Article II,
the term "Common Stock" shall mean and include all of the Company's authorized
Common Stock of any class as constituted on the effective date hereof, and
shall also include any capital stock of any class of the Company thereafter
authorized that shall not be limited to a fixed sum or stated value in respect
of the rights of the holders thereof to participate in dividends or the
distribution of assets upon the voluntary or involuntary liquidation,
dissolution or winding up of the Company.
Section 2.16 Exclusion of Certain Stock. Notwithstanding anything in
this Article II, no adjustment of the Exercise Price or the number of shares to
be issued upon exercise of this Warrant shall be made upon, (i) the grant of
options under any stock option plan of the Company now existing or hereafter
adopted by the Company (as any such plan may be amended from, time to time),
provided that the option price per share is not less than 100% of Market Value
per share on the date of grant, (ii) the issuance of shares of Common Stock
upon the exercise of options granted under any such plan or (iii) the issuance
of approximately 9,500 shares of Common Stock to former shareholders of Mego
International Corp.
ARTICLE III.
TRANSFER RESTRICTIONS: REGISTRATION RIGHTS
6
<PAGE> 7
Section 3.01 Securities Law Transfer Restrictions. By taking and holding
this Warrant, the Holder (i) acknowledges that neither this Warrant nor any
shares of Common Stock that may be issued upon exercise of this Warrant have
been registered under the Securities Act or any applicable state securities or
blue sky law (collectively, "Securities Laws"); (ii) agrees not to sell,
transfer or otherwise dispose of this Warrant or any such shares of Common Stock
without such registration unless the sale, transfer or disposition can be
effected without such registration and in compliance with the Securities Laws;
and (iii) agrees not to transfer this Warrant or any portion thereof or interest
therein except to a Permitted Assignee, as hereinafter defined. Any certificate
for shares of Common Stock issued upon exercise of this Warrant shall bear an
appropriate legend describing the foregoing restrictions, unless such shares of
Common Stock have been effectively registered under the applicable Securities
Laws.
Section 3.02 Provision of Information by Holder. The Holder shall make
available to the Company such written information, presented in form and
content satisfactory to the Company, as the Company may reasonably request,
from time to time, in order to make the determination provided for in Section
3.01.
Section 3.03 Registration Rights. The following provisions shall apply
irrespective of whether the Holder holds this Warrant or has exercised this
Warrant and holds Warrant Shares, and shall apply during the period beginning
on the Issue Date and continuing until the Expiration Date:
(a) The Company shall, within one year from the Issue Date, include
the Warrant Shares in a registration statement ("Registration Statement") filed
with the Securities and Exchange Commission under the Securities Act, and have
such Registration Statement declared effective no later than the first
anniversary after the Exercise Date so that upon issuance the Warrant Shares
will be freely tradeable, provided that the holder shall furnish to the Company
all appropriate information in connection therewith as the Company may
reasonably request. Such registration statement shall remain continuously
effective until the Expiration Date.
(b) The Company shall (i) bear the costs, expenses and fees incurred
in connection with any such registration, excluding any broker fees, selling
commissions, and out-of-pocket costs and expenses of the Holder, (ii) use its
best efforts to keep any such registration statement effective through the
Effective Date, as amended from time to time, as necessary (iii) supply
prospectuses and other documents as the Holder may reasonably request; (iv) use
its best efforts to register and qualify the Warrant Shares for sale in such
states as the Holder designates; (v) do any and all other acts and things that
may be necessary or desirable to enable Holder to consummate the public sale or
other disposition of the Warrant Shares; and (vi) enter into
cross-indemnification arrangements with the Holder with respect to matters
arising from such Registration Statement and public offering.
7
<PAGE> 8
ARTICLE IV.
DEFINITIONS
As used herein, the following terms shall have the meanings specified
below:
"DEEMED ADDITIONAL SHARES" shall mean (i) in the case of the issuance of
Common Stock for a consideration per share less than the Market Value thereof, a
number of shares of Common Stock equal to the number obtained by subtracting (x)
the number of shares of Common Stock that would have been issued for the total
consideration being paid in connection with such issuance, if the price per
share of the Common Stock issued equalled the Market Value thereof immediately
prior to such issuance from (y) the number of shares of Common Stock so issued;
or (ii) in the case of the grant or issuance of an Option or Convertible
Security, a number of shares of Common Stock equal to the number obtained by
subtracting (x) the number of shares of Common Stock that would be issuable
under such exercise, conversion or exchange if the Price per Share payable
thereon equalled the Market Value of shares of Common Stock immediately prior to
such grant or issuance, from (y) the number of shares of Common Stock issuable
upon the exercise, conversion or exchange thereof.
"INDEPENDENT APPRAISAL" shall mean an evaluation of the price that would be
paid if the Company were sold at the time on an orderly basis as a going
concern, which evaluation shall be made by an Independent Financial Expert.
"INDEPENDENT FINANCIAL EXPERT" shall mean an independent financial expert
selected by the Company's Board of Directors on not less than ten (10) days
prior written notice to the Holder but shall not include any independent
financial expert to whom the Holder shall object in writing not later than ten
(10) days after the Board's delivery of notice of selection.
"MARKET VALUE" of a share of Common Stock of the Company shall be:
(i) if the Common Stock is listed on a national securities exchange,
the closing price of such Common Stock on the principal national
securities exchange on which such Common Stock is traded on the date for
which any determination of Market Value is made for any purpose hereunder
("Determination Date"), or, if there shall have been no sales on any such
exchange on the Determination Date, the average of the highest bid and
lowest asked prices on such principal exchange on such Determination Date;
or
(ii) if the Common Stock is not listed on a national securities
exchange, the closing price on the NASD's National Market System, or, if
there shall have been no sales on the Determination Date on the National
Market System, the average of highest bid and lowest asked prices on the
Determination Date on the National Market System, as applicable; or
(iii) if the Common Stock is not listed on a securities exchange or
the National Market System, the average of the representative bid and asked
prices of the Stock as of the close of trading on the Determination Date as
quoted in the NASDAQ System; or
8
<PAGE> 9
(iv) if the Common Stock is not quoted in the NASDAQ System, the average
of the high and low bid and asked prices on the Determination Date in the
over-the-counter market as reported by the NASD Bulletin Board, the National
Quotation Bureau, Incorporated, or any similar successor organization; or
(v) if the Common Stock is not listed on or traded in any recognized
securities market, such value as the Company and the Holder may agree upon; or
(vi) if the Company and the Holder cannot agree on a value for the Common
Stock within thirty (30) days after the Company or the Holder has made a
written proposal with respect to such value to the other party, the fair market
value of the Stock as of the Determination Date as determined by an Independent
Appraisal. The fees and expenses incurred by the Independent Financial Expert
in rendering its Independent Appraisal shall be paid by the Company. The
determination of the Market Value of the Common Stock shall be based solely
upon the value of the Company and shall be computed by dividing the amount that
represents the value of the Company by the number of outstanding shares of
Common Stock. In making such a valuation, items such as discounts for minority
interests, lack of marketability of the Common Stock or blockage shall not be
considered.
"PERMITTED ASSIGNEE" shall mean any individual or entity who receives
valid title and interest to this Warrant or any portion thereof and who
additionally accepts by written instrument each of the terms and conditions
that govern the ownership of this Warrant.
"PRICE PER SHARE" for shares of Common Stock issuable upon the conversion
of Convertible Securities or the exercise of Options shall be determined by
dividing (i) the sum of (A) the total amount of consideration, if any, received
or receivable by the Company as consideration for the granting of such Options
or the issuance of such Convertible Securities plus (B) the minimum aggregate
amount of additional consideration payable to the Company upon the exercise of
all such Options or the conversion or exchange of such Convertible Securities
into Common Stock plus (C) in the case of all such Options that relate to
Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable upon the issuance of all such Convertible
Securities and upon conversion or exchange of all such Convertible Securities
into Common Stock, by (ii) the total number of shares of Common Stock issuable
upon the exercise of such Options or upon the conversion or exchange of all
such Convertible Securities.
ARTICLE V.
MISCELLANEOUS
Section 5.01 Transfer of Warrants. Subject to Article III, this Warrant
and any shares of any Stock obtained upon exercise of this Warrant may be
transferred at the principal office of the Company by registration in the stock
books of the Company maintained for such purpose upon delivery to the Company
of a duly executed assignment in the form annexed ("Assignment Form").
9
<PAGE> 10
Section 5.02 Notices. Any notice or communication to be given
pursuant to this Warrant shall be in writing and shall be delivered in person or
by certified mail, return receipt requested, in the United States mail, postage
prepaid. Notices to the Company shall be addressed to the Company's principal
office. Notices to the Holder shall be addressed to the Holder's address as
reflected in the records of the Company. Notices shall be effective upon
delivery in person, or, if mailed, at midnight on the fifth business day after
mailing.
Section 5.03 Issue Tax. The issuance of certificates for shares of
Common Stock upon the exercise of this Warrant shall be made without charge to
the Holder for any issuance tax in respect thereof, provided that the Company
shall not be required to pay any tax that may be payable in respect of any
transfer involved in the issuance and delivery of any certificate in a name
other than that of the Holder of the Warrant exercised.
Section 5.04 No Shareholder rights. This Warrant shall not entitle
the Holder to any voting rights or other rights as a shareholder of the Company.
Section 5.05 Current Information. The Company shall cause copies of
all financial statements and reports, proxy statements and other documents that
are provided to its shareholders to be sent by first class mail, postage
prepaid, on the date of mailing to such shareholders, to the Holder at the
address reflected in the records of the Company.
Section 5.06 Governing Law. This Warrant shall be governed by and
construed in accordance with the laws of the State of New York.
Section 5.07 Headings: Interpretation. The section headings used
herein are for convenience of reference only and are not intended to define,
limit or describe the scope or intent of any provision of this Warrant. When
used in this Warrant, the term "including" shall mean "including, without
limitation by reason or enumeration".
Section 5.08 Successors. The covenants, agreements and provisions of
this Warrant shall bind the parties hereto and their respective successors and
permitted assigns.
10
<PAGE> 11
IN WITNESS WHEREOF, the Company has caused this Warrant to be issued as of
the 23rd of December, 1998.
<TABLE>
<S> <C>
ATTEST: MEGO FINANCIAL CORP.
By: [SIG] By: [SIG]
---------------------------------- ------------------------------------
Title: Secretary Title: President
------------------------------ ---------------------------------
</TABLE>
11
<PAGE> 12
SUBSCRIPTION FORM
TO BE EXECUTED ONLY UPON EXERCISE OF WARRANT
The undersigned registered owner of this Warrant irrevocably exercises
this Warrant for and purchases __________ shares of Common Stock MEGO FINANCIAL
CORP. that may be issued under this Warrant and herewith delivers the sum of
$_________ in full payment of the Exercise Price for such shares, all on the
terms and conditions specified in this Warrant. Such shares are to be registered
in the name of the registered holder of this Warrant unless contrary
instructions are herein given and certificates evidencing such shares are to be
delivered to it/him/her at the address reflected in the records of the Company
unless contrary instructions are herein given.
Register shares in the name of
_______________________________________________________________________________
Deliver certificates to
_______________________________________________________________________________
Dated:______________________ _______________________________
(Signature of Registered Owner)
_______________________________
(Street Address)
_______________________________
(City) (State) (Zip Code)
12
<PAGE> 13
ASSIGNMENT FORM
TO BE EXECUTED ONLY UPON ASSIGNMENT OF WARRANT
For value received, the undersigned registered owner,
____________________________________ hereby sells, assigns and transfers unto
___________________________________________, whose address is
_______________________________________, the right to purchase Common Stock of
MEGO FINANCIAL CORP. represented by this Warrant to the extent of _________
shares, as to which such right is exercisable and does hereby irrevocably
constitute and appoint ______________________, Attorney-in-Fact, to transfer the
same on the books of the Company with full power of substitution in the
premises. The assignee hereby agrees to assume the obligations of the Warrant
Holder contained in this Warrant to the extent any such obligations are
applicable to it. The registered owner and the assignee each warrant and
represent to Mego Financial Corp. that the assignee is a Permitted Assignee as
defined in the Warrant.
Dated:______________________ _______________________________
(Signature of Registered Owner)
_______________________________
(Street Address)
_______________________________
(City) (State) (Zip Code)
Dated:______________________ _______________________________
(Signature of Assignee)
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 4,090
<SECURITIES> 0
<RECEIVABLES> 65,124
<ALLOWANCES> 12,917
<INVENTORY> 42,594
<CURRENT-ASSETS> 0
<PP&E> 38,503
<DEPRECIATION> 14,709
<TOTAL-ASSETS> 145,852
<CURRENT-LIABILITIES> 0
<BONDS> 87,021
0
0
<COMMON> 210
<OTHER-SE> 19,729
<TOTAL-LIABILITY-AND-EQUITY> 145,852
<SALES> 12,541
<TOTAL-REVENUES> 16,865
<CGS> 2,334
<TOTAL-COSTS> 11,818
<OTHER-EXPENSES> 6,168
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,088
<INCOME-PRETAX> (1,121)
<INCOME-TAX> (381)
<INCOME-CONTINUING> (740)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (740)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> 0
</TABLE>
